Insulet Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Insulet develops and sells its OmniPod insulin-management system and other diabetes products. During the quarter, it completed the production transition to the newer, smaller OmniPod and continued converting U.S. customers.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $61.1 million | $54.8 million | $178.6 million | $153.5 million |
| Gross profit (margin) | $27.4 million (44.8%) | $24.4 million (44.5%) | $79.4 million (44.5%) | $67.0 million (43.6%) |
| Operating loss | $17.3 million | $8.5 million | $29.3 million | $29.9 million |
| Net loss | $21.3 million | $12.4 million | $42.5 million | $41.7 million |
| Operating cash flow | Not separately presented for the quarter | $6.9 million | $(23.5) million |
- Q3 revenue grew 12% year over year; nine-month revenue grew 16%, principally from greater OmniPod adoption in the U.S. and internationally.
- Q3 gross margin was approximately 44.8%, compared with 44.5%; nine-month margin was approximately 44.5%, compared with 43.6%.
- Q3 operating expenses rose 36% to $44.7 million, with general and administrative expense up 85% to $23.5 million. The quarter’s operating loss approximately doubled and net loss increased 71% year over year. For the nine months, operating loss improved slightly, while net loss increased modestly.
- Nine-month operating cash flow improved to $6.9 million from cash use of $23.5 million. This reflected, among other items, lower inventories and higher accounts payable, accrued expenses and other current liabilities; the filing also reports $33.8 million of non-cash adjustments.
Financial position and material changes
- At September 30, cash and cash equivalents were $153.9 million, versus $57.3 million at December 31, 2012. Current assets were $199.7 million and current liabilities $48.3 million.
- Balance-sheet long-term debt, net of discount, was $111.1 million; the remaining 3.75% convertible notes had $143.75 million principal and mature in June 2016. The 5.375% notes were repaid in June 2013. Capital lease obligations totaled approximately $8.7 million, including $2.6 million current.
- Cash increased substantially following a January 2013 stock offering that generated approximately $92.8 million in net proceeds. Shares issued and outstanding rose to 54.5 million from 48.4 million at year-end 2012.
- Inventory declined to $5.4 million from $14.9 million; deferred revenue declined to $0.6 million from $5.4 million. Accumulated deficit was $524.0 million.
Outlook, commentary and risks
- Management expected 2013 revenue to continue increasing, supported by customer conversion and expansion in the U.S. and international markets, but provided no numeric revenue or earnings guidance. It expected near-term net losses while investing in growth and said cash, together with expected product-sale cash generation, should cover operating and debt-service needs for at least 12 months.
- Management expected R&D spending to remain near current levels for the remainder of 2013, G&A to decrease from current levels as one-time costs abated, and sales and marketing expense to decrease slightly.
- Starting July 1, 2013, Neighborhood Diabetes could no longer supply certain mail-order diabetes testing products to Medicare beneficiaries under the DMEPOS competitive bidding program, weighing on related revenue.
- Q3 G&A included a $2.5 million charge for manufacturing equipment no longer expected to be used. The company also recorded approximately $10 million of expense for the Medtronic settlement payment and associated legal fees; the patent case was dismissed with prejudice on October 2, 2013.
- Other patent litigation from Becton Dickinson and Rydex remained unresolved; the company said it did not believe either posed material financial exposure, while acknowledging litigation uncertainty. In October, the Massachusetts Attorney General raised allegations about prior prescription refill practices at Neighborhood Diabetes. The company could not estimate a possible loss and said a negative outcome was not probable as of September 30.
- Key business exposures include reimbursement and competitive-bidding changes, dependence on the OmniPod, reliance on Flextronics as the single-source complete-Pod supplier, manufacturing concentration in China, and the ability to control costs and achieve profitability. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track OmniPod adoption, customer conversions, production volumes, unit costs and gross-margin progress.
- Assess whether positive operating cash flow persists, particularly given working-capital movements and non-cash adjustments.
- Review liquidity against the $143.75 million note principal due in 2016 and capital-lease payment obligations.
- Monitor the revenue and cash-flow effects of Medicare competitive bidding and changes in reimbursement or payor access.
- Follow outcomes and potential costs of the BD and Rydex cases and the Massachusetts Attorney General inquiry, and confirm the final financial effects of the Medtronic settlement.