Insulet Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Insulet develops and sells its Omnipod tubeless insulin delivery system and supplies drug-delivery devices to pharmaceutical partners. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $109.8 million | $87.3 million | $211.5 million | $168.5 million |
| Gross profit / margin | $64.6 million / 58.9% | $50.5 million / 57.8% | $124.0 million / 58.7% | $94.5 million / 56.1% |
| Operating loss | $(3.4) million | $(1.3) million | $(8.7) million | $(9.0) million |
| Net loss | $(7.8) million | $(4.2) million | $(17.7) million | $(16.7) million |
| Net loss per share | $(0.13) | $(0.08) | $(0.31) | $(0.29), including discontinued operations |
- Q2 revenue grew 26%; six-month revenue grew 25%. Q2 revenue comprised U.S. Omnipod $65.4 million, international Omnipod $26.6 million and drug delivery $17.8 million.
- Growth reflected a larger U.S. user base, increased international distributor sales, and demand for the drug-delivery device used in Amgen’s Neulasta Onpro kit. International Omnipod revenue rose 60% in Q2 and 62% for the six-month period.
- Gross margin improved, which management attributed mainly to supply-chain improvements, partly offset by a less favorable mix from higher European distributor sales. Q2 operating loss widened as operating expenses grew faster than gross profit; six-month operating loss improved slightly. Net losses increased in both comparisons, partly reflecting higher interest expense.
- Operating expenses increased across R&D, sales and marketing, and general and administrative functions. R&D investment included mobile application and artificial pancreas development; commercial spending supported sales-force, customer-support and marketing expansion.
Cash, debt and liquidity
- At June 30, 2017, cash and cash equivalents were $73.5 million and short-term investments were $185.1 million, totaling $258.6 million. Current assets were $338.7 million and current liabilities $48.0 million.
- Long-term convertible debt, net of discount and issuance costs, was $340.8 million; principal outstanding was $412.1 million: $345.0 million of 1.25% notes due 2021 and $67.1 million of 2% notes due 2019. The notes’ carrying value is reduced by unamortized discounts and financing costs.
- For the first six months, operating cash use was $3.9 million, investing cash use $64.3 million and financing cash provided $4.2 million. Capital expenditures were $39.1 million, including approximately $26.1 million for equipment under construction for U.S. manufacturing initiatives. Cash and cash equivalents declined by $63.7 million from year-end; purchases and maturities of investments also affected investing cash flows.
- Management said current liquidity and expected cash generated from sales should cover projected operating and debt-service requirements for at least the next 12 months, including planned manufacturing-facility spending.
Outlook, changes and risks
- Management expected strong 2017 revenue growth across product lines and higher gross margin, while also expecting increased R&D, sales and marketing, and general and administrative spending. It anticipated near-term net losses as it invests for growth; the filing gives no specific full-year revenue or earnings target.
- Insulet plans to take over European distribution, sales, marketing, training and support on July 1, 2018, after the Ypsomed agreement expires June 30, 2018. Management expects higher European revenue and gross margins from direct sales, but higher operating costs during the buildout. It estimated a possible approximately $50 million per-unit fee to Ypsomed for sales to qualifying former Ypsomed customers during the following 12 months; the actual amount depends on customer retention and sales volumes.
- The company plans a highly automated U.S. manufacturing facility, with production planned to begin in 2019. Increased capital spending is expected. Manufacturing is substantially concentrated in China, inventory in Massachusetts, and Flex is the company’s single-source contract manufacturer for Omnipod Systems.
- Key risks include dependence on Omnipod, reimbursement and competitive pressures, supplier and manufacturing concentration, product quality or recall risks, and execution of the European transition. The remaining shareholder securities class action alleges misleading statements; Insulet said it could not reasonably estimate a possible loss or range. A previously accrued $0.3 million Medicaid-related settlement was paid in July 2017.
- Management reported disclosure controls were effective at a reasonable assurance level as of June 30, 2017, with no material changes in internal control over financial reporting during the six months.
Important facts for investors to verify
- Whether revenue growth and margin improvement continue, and how much reflects durable customer adoption versus distributor and product mix.
- Progress and total cost of the U.S. manufacturing project, including capital requirements and the planned 2019 production start.
- European transition execution, customer retention, incremental operating costs, and the eventual Ypsomed fee, which could vary significantly from management’s estimate.
- Cash burn, capital spending and debt-service capacity; assess convertible-note maturities, conversion terms and potential dilution alongside reported net debt carrying value.
- Updates on the shareholder litigation and any material changes in supplier concentration, product quality, reimbursement, or other disclosed risks.