Insulet Corporation — Q1 2013 Form 10-Q
Business context and period: Insulet develops, manufactures and sells the tubeless OmniPod insulin delivery system and other diabetes products. This unaudited filing covers the three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. The company began selling its smaller, lighter, FDA-cleared new OmniPod to new U.S. customers in Q1 2013.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $57.4 million | $47.8 million |
| Gross profit / gross margin | $25.2 million / 43.9% | $20.3 million / 42.5% |
| Operating expenses | $31.4 million | $31.2 million |
| Operating loss | $6.2 million | $10.9 million |
| Net loss | $10.7 million | $14.8 million |
| Net loss per share, diluted | $0.20 | $0.31 |
| Cash used in operations | $1.2 million | $8.9 million |
| Cash used in investing | $1.1 million | $1.7 million |
Revenue rose 20%, attributed to continued U.S. and international OmniPod adoption and sales of other diabetes supplies. Cost of revenue increased 17% with higher sales volume; gross margin improved about 1.4 percentage points. Research and development fell 19% to $4.4 million, while sales and marketing rose 9% to $13.9 million, primarily reflecting customer-support service costs. General and administrative expense was nearly flat at $13.1 million. Net interest expense increased, mainly from non-cash accretion of debt discounts.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $148.1 million at March 31, 2013, versus $57.3 million at year-end 2012. The increase included $93.0 million of net financing cash, principally from the January public offering.
- In January, Insulet sold 4.715 million shares at $20.75 per share, receiving approximately $92.8 million net proceeds.
- Debt carrying value was $120.9 million, net of $37.8 million in unamortized discount; principal outstanding was approximately $158.8 million. The $15.0 million 5.375% notes mature in June 2013; $143.8 million of 3.75% notes mature in June 2016. The filing says the company intends to settle principal on the latter notes in cash.
- Current assets were $194.8 million and current liabilities $43.0 million. Management said cash, together with expected cash generated from sales, should cover projected operating and debt-service requirements for at least the next 12 months.
- Accumulated deficit was $492.2 million. Insulet reported losses every quarter since inception and expected near-term losses to continue.
Outlook, risks and notable items
- Management expected 2013 revenue to continue increasing through customer transition to the new OmniPod, U.S. customer growth and international expansion. No numerical revenue or earnings guidance was provided.
- Management expected R&D spending to decrease slightly versus 2012, while general and administrative and sales and marketing expenses were expected to increase. It said manufacturing capacity was sufficient for expected 2013 OmniPod demand; profitability depends in part on higher volume and lower per-unit production costs.
- In April 2013, Neighborhood Diabetes was not awarded a contract in the CMS national mail-order competitive bidding program. Insulet expected to become ineligible to provide certain mail-order diabetic testing supplies, including test strips and lancets, to Medicare beneficiaries from July 1, 2013. The company reported that its analysis found the acquired customer-relationship and tradename intangible assets recoverable, with no impairment recorded in Q1.
- Patent litigation remained pending with Becton, Dickinson and Medtronic. A new lawsuit by Rydex Technologies was filed in April 2013. Insulet disputed infringement and did not expect the cases to have a material adverse financial impact, but noted litigation outcomes are uncertain.
- Other stated risks include reliance on the OmniPod and a single-source OmniPod supplier, reimbursement and competitive-bidding changes, manufacturing cost reductions, product transition and adoption, and the ability to service debt. The $15.0 million notes due June 2013 are a near-term financing consideration.
Most important facts for investors to verify
- How the June 2013 maturity of the $15.0 million notes was addressed, and the company’s capacity to meet future debt service.
- Whether the new OmniPod transition supports continued revenue growth and the anticipated manufacturing-cost and margin improvements.
- The financial and customer impact of losing access to the affected Medicare mail-order testing-supply business beginning July 1, 2013.
- Cash burn, operating losses and progress toward profitability, including whether the stated 12-month liquidity expectation remains supportable.
- Developments in the BD, Medtronic and Rydex patent cases and any resulting operational or financial exposure.