Insulet Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Insulet develops, manufactures and sells the OmniPod insulin management system and other diabetes-related products.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $72.0 million | $60.1 million | $141.2 million | $117.4 million |
| Gross profit | $35.8 million | $26.8 million | $68.6 million | $52.0 million |
| Gross margin | 49.7% | 44.7% | 48.6% | 44.3% |
| Operating loss | $5.3 million | $5.8 million | $7.2 million | $12.0 million |
| Net loss | $29.1 million | $10.5 million | $35.3 million | $21.2 million |
| Net loss per share | $0.53 | $0.20 | $0.64 | $0.40 |
- Revenue increased 20% in both the quarter and first half, primarily from greater OmniPod adoption in the U.S. and internationally. Growth was partly offset by reduced Medicare mail-order testing-supply sales following the DMEPOS competitive bidding program.
- Gross margin improved as lower OmniPod unit costs, supplier discounts and increased production volumes partly offset higher sales-related costs. Operating losses narrowed despite higher operating expenses.
- Net loss was worsened by a $18.9 million debt-extinguishment loss and other debt-related expense. The company also recorded approximately $7 million of expense for the BD settlement and related legal fees.
- At June 30, cash and cash equivalents were $175.5 million, versus $149.7 million at year-end 2013. Current assets were $231.8 million and current liabilities $71.2 million.
- First-half operating cash flow was negative $0.5 million, investing cash flow was negative $5.7 million, and financing cash flow was positive $32.1 million. Financing included $194.6 million net proceeds from debt issuance and $160.7 million of debt repayment. Capital expenditures were $5.7 million.
- Convertible-note principal totaled approximately $230.1 million at quarter-end; carrying value of long-term debt was $189.7 million after debt discount, with $23.9 million classified as current. Capital lease obligations were $6.8 million.
Material changes and unusual items
- In June, Insulet issued $201.3 million principal amount of 2% convertible notes due 2019 and repurchased approximately $114.9 million principal amount of 3.75% notes for $160.7 million, a $45.8 million premium. The transaction generated the $18.9 million extinguishment loss.
- After quarter-end, holders converted $28.5 million principal amount of the remaining 3.75% notes. Insulet paid cash for principal and issued 348,535 shares for the conversion premium; it paid cash to settle the remaining $0.3 million principal.
- The BD patent litigation was settled in June through a one-time payment and cross-license; the case was dismissed with prejudice on July 15, 2014.
- Accounts receivable rose to $41.8 million from $33.1 million at year-end. Two customers represented 16% and 15% of gross receivables at June 30.
Outlook, commentary and risks
- Management expects 2014 revenue to increase as the customer base expands in the U.S. and internationally, subject to sales execution, manufacturing capacity and other risks. It expects near-term net losses to continue and says available cash, together with expected product-sale cash generation, should cover projected operating and debt-service needs for at least 12 months.
- Management expects R&D spending to rise in 2014, including work on manufacturing improvements, device and sensing technology, a new PDM, a Type 2 pump with Eli Lilly, and drug-delivery applications. Sales and marketing spending is expected to increase. G&A was expected to remain consistent with 2013 overall, with second-half 2014 expense expected to decrease from the first half due to the one-time litigation costs.
- Key risks include dependence on the OmniPod and successful cost reductions; reliance on Flextronics as the single-source supplier of complete OmniPods; reimbursement and payor access; competition, regulation, product liability and intellectual-property claims; and the ability to service debt and manage growth. The company says current manufacturing capacity is sufficient for expected 2014 OmniPod demand.
- A Massachusetts Attorney General inquiry concerns Neighborhood Diabetes’ historical automatic prescription-refill practices for MassHealth patients. The company could not assess the outcome but did not believe material financial exposure existed at June 30. A separate Massachusetts sales-tax audit relates to a pre-acquisition period and is covered by an indemnification from former owners.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement persist, and how much growth comes from OmniPod sales versus other diabetes products.
- Receivables collection, customer concentration and the effect of the Medicare bidding-related sales reduction.
- Cash use, debt-service requirements and the impact of the 2% note conversion terms, dilution and remaining debt obligations.
- Whether manufacturing-cost reductions, supplier arrangements and expected 2014 demand support the company’s path toward profitability.
- Resolution of the Massachusetts inquiry and sales-tax audit, and any further legal, reimbursement or regulatory developments.