Insulet Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited quarterly data; figures below are in U.S. dollars unless stated otherwise. The 2011 comparative figures are restated.
Business context
Insulet develops and sells the OmniPod tubeless insulin delivery system. Its Neighborhood Diabetes business, acquired in June 2011, distributes diabetes testing supplies, pumps, pump supplies and pharmaceuticals. The next-generation OmniPod received FDA 510(k) clearance in December 2012; it is approximately one-third smaller and one-quarter lighter than the prior system.
Financial performance and liquidity
| Metric | FY2012 | FY2011 restated |
|---|---|---|
| Revenue | $211.4 million | $152.3 million |
| Gross profit / margin | $92.3 million / 43.7% | $66.7 million / 43.8% |
| Operating loss | $36.0 million | $42.5 million |
| Net loss | $51.9 million | $45.8 million |
| Net loss per share | $1.08 | $0.98 |
| Cash used in operating activities | $29.1 million | $25.5 million |
| Cash and cash equivalents at year-end | $57.3 million | $94.0 million |
| Working capital | $61.7 million | $104.6 million |
| Debt carrying value | $118.2 million | $108.5 million |
- Revenue increased 39%, reflecting growth in OmniPod adoption and a full year of Neighborhood Diabetes revenue. Gross profit increased 38%; lower OmniPod unit costs partly offset the acquired distributor business’s lower margins.
- Operating loss narrowed, but net loss increased, in part because FY2011 included an $11.2 million income tax benefit arising from the Neighborhood Diabetes acquisition. Interest expense was $15.8 million in FY2012.
- Year-end total debt principal was approximately $158.8 million: $15.0 million of 5.375% convertible notes due June 2013 and $143.8 million of 3.75% notes due June 2016. The balance sheet classified $14.4 million as current debt.
- In January 2013, Insulet raised approximately $92.8 million net by issuing 4.715 million shares. Management said cash, together with expected product-sale proceeds, would cover projected operating and debt-service needs for at least the next 12 months.
- FY2012 fourth-quarter revenue was $57.8 million, gross profit $25.3 million and net loss $10.2 million, compared with $47.2 million, $20.1 million and $14.3 million, respectively, in FY2011’s fourth quarter.
Outlook, material developments and risks
- Management expected revenue to continue increasing in 2013, driven by the next-generation OmniPod launch, customer growth and international expansion. It expected research and development spending to remain broadly consistent with 2012, and general and administrative and sales and marketing expenses to increase. The company expected near-term net losses to continue.
- Management considered manufacturing capacity sufficient for expected 2013 OmniPod demand, while noting that growth depends on a successful product transition, adequate production volumes, reimbursement and sales execution.
- CMS announced average payment reductions of approximately 72% for certain mail-order diabetes testing supplies, expected to take effect July 1, 2013. Neighborhood Diabetes’s participation in the resulting supplier contracts was uncertain; the change was expected to hurt 2013 operating results.
- Insulet restated 2011 financial statements and amended 2012 quarterly reports after identifying errors in income-tax accounting for the Neighborhood Diabetes acquisition and a convertible-debt modification. The 2011 restatement increased reported tax benefit by $11.3 million. The company reported a material weakness in income-tax controls, said it had not remediated it by year-end, and concluded that disclosure controls and internal control over financial reporting were ineffective. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements.
- Medtronic filed a patent-infringement lawsuit in October 2012 involving patents the company described as material to its business; BD’s patent suit, filed in 2010, also remained pending. Insulet asserted defenses and did not believe either matter presented material financial exposure at year-end, but outcomes are uncertain.
- Other significant exposures include dependence on Flextronics’ China facility and sole-source suppliers, reimbursement and collection risks, competition, FDA compliance, and the possibility that product issues or regulatory action could disrupt sales. The company reported no 2012 restructuring or impairment charge.
Investor verification priorities
- Review the tax-accounting restatement, the specific control deficiencies, remediation progress and any subsequent filings or auditor updates.
- Assess liquidity after the January 2013 equity raise, cash burn, and repayment or refinancing of the $15 million notes due in June 2013.
- Track next-generation OmniPod launch execution, manufacturing costs and volumes, customer adoption, and gross-margin trends.
- Verify the impact of the CMS competitive-bidding reductions and whether Neighborhood Diabetes received supplier contracts.
- Monitor the Medtronic and BD litigation, reimbursement coverage, receivable concentration and collections, and supplier continuity.