Insulet Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company develops and sells the Omnipod insulin-management system and also supplies devices based on its technology for pharmaceutical drug delivery. Neighborhood Diabetes was sold in February 2016 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First six months 2016 | First six months 2015 |
|---|---|---|---|---|
| Revenue | $87.3 million | $60.6 million | $168.5 million | $108.7 million |
| Gross profit / margin | $50.5 million / 57.8% | $30.5 million / 50.4% | $94.5 million / 56.1% | $59.7 million / 54.9% |
| Operating loss | $1.3 million | $14.1 million | $9.0 million | $21.3 million |
| Net loss | $4.2 million | $15.4 million | $16.7 million | $27.3 million |
| Net cash used in operating activities | Not separately shown for the quarter | $6.8 million | $2.7 million |
- Q2 revenue rose 44%; first-half revenue rose 55%. Q2 revenue comprised U.S. Omnipod $56.3 million, international Omnipod $16.6 million, and drug delivery $14.4 million.
- Q2 gross margin improved mainly through manufacturing efficiency and higher production volumes. First-half margin improvement was partly offset by $1.9 million of costs related to a voluntary Field Safety Notification initiated in November 2015.
- Operating expenses increased 16% in Q2 and 28% in the first half, reflecting commercial expansion, incentive compensation, development programs, and growth-support costs.
- At June 30, cash and cash equivalents were $75.7 million and short-term investments were $35.6 million, down from year-end cash of $122.7 million; the company had invested $35.6 million in short-term securities during the half. Current assets were $181.3 million and current liabilities $55.2 million.
- Long-term debt, net of discount, was $175.7 million, representing $201.3 million principal of 2% convertible senior notes due June 2019. Capital lease obligations were $2.3 million current; the leases carry effective rates of 13%–17%.
Changes and unusual items
- Revenue growth reflected expansion of the U.S. customer base, international market entry and adoption, and higher demand for the drug-delivery device. Prior-year distributor inventory-ordering patterns also affected comparisons.
- Neighborhood Diabetes was sold for approximately $6.2 million cash, including a $1.2 million closing adjustment paid in June. The six-month discontinued-operations result included a $1.3 million loss on sale; Q2 discontinued operations reported $0.2 million income.
- First-half operating cash use increased from $2.7 million to $6.8 million, mainly due to timing of receipts and disbursements and higher inventory investment. Inventory rose to $24.5 million from $12.0 million at year-end.
Outlook, risks and contingencies
- Management expects strong 2016 revenue growth across continuing product lines and approximately 20% growth in the worldwide Omnipod installed base. Drug-delivery revenue is expected to represent a higher share of overall growth.
- Management expects 2016 gross margin to increase through manufacturing improvements, while research and development, sales and marketing, and general and administrative expenses are expected to rise. The company expects near-term net losses as it invests in growth.
- Management said existing liquidity and expected sales cash generation should cover projected operating and debt-service needs for at least 12 months; the filing reports no substantial doubt about going concern under the then-applicable assessment.
- Key risks include dependence on Omnipod and a single-source Pod supplier, manufacturing concentration in China and inventory concentration in Massachusetts, reimbursement and competitive pressures, product/regulatory risks, and the ability to generate cash to service debt.
- A shareholder securities class action remains pending; the company said it could not reasonably estimate a possible loss or range. A Medicaid audit matter had a $0.4 million accrued liability at June 30; a separate Connecticut audit settled for $0.5 million, consistent with the prior accrual. A Massachusetts sales-and-use-tax settlement generated a $0.2 million expense credit in Q1.
- Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the first half.
Most important facts for investors to verify
- Whether revenue growth and the approximately 20% installed-base outlook are sustained, particularly across international Omnipod and drug delivery.
- Whether gross-margin gains persist after the field-safety-notification-related costs and as production scales.
- Cash burn, inventory growth, and liquidity adequacy relative to ongoing losses and the 2019 convertible-note maturity.
- Exposure to the single-source manufacturer, concentrated production and inventory locations, and any follow-on costs from the voluntary field safety notification.
- Potential outcomes of the shareholder litigation and Medicaid-related matters, including any indemnification obligations associated with the Neighborhood Diabetes divestiture.