Business context and reporting period
Insulet Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company sells its OmniPod insulin management system and other diabetes supplies, including products added through its 2011 acquisition of Neighborhood Diabetes.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $51.0 | $32.2 | $98.8 | $60.5 |
| Gross profit | $22.3 | $14.5 | $42.6 | $28.1 |
| Gross margin | 43.8% | 45.1% | 43.1% | 46.4% |
| Operating loss | $(10.5) | $(14.9) | $(21.4) | $(22.2) |
| Net loss | $(14.5) | $(19.4) | $(29.3) | $(29.3) |
| Net loss per share | $(0.30) | $(0.42) | $(0.61) | $(0.64) |
- For the six months ended June 30, operating cash outflow was $20.0 million, versus $16.9 million a year earlier. Investing cash outflow was $4.2 million; financing provided $0.5 million. Cash declined $23.8 million from year-end 2011 to $70.1 million.
- At June 30, current assets were $115.6 million and current liabilities were $43.1 million. Accounts receivable was $25.6 million and inventory was $16.4 million.
- Debt had $158.8 million aggregate principal outstanding: $15.0 million of 5.375% convertible notes due June 2013 and $143.8 million of 3.75% notes due June 2016. Balance-sheet carrying debt was $113.2 million after unamortized discount, including $13.8 million classified as current.
- Total assets were $191.9 million, total liabilities $144.2 million, and stockholders’ equity $47.8 million. Accumulated deficit was $470.3 million.
Material changes versus the prior comparable period
- Revenue rose 58% in Q2 and 63% for the first six months, reflecting continued OmniPod adoption and additional diabetes-supply sales, including Neighborhood Diabetes products.
- Cost of revenue grew faster than revenue in both periods; gross margin declined by about 1.4 percentage points in Q2 and 3.3 points for the six-month period.
- Sales and marketing expense increased 42% in both comparisons, reflecting higher personnel, stock compensation, customer-support costs and Neighborhood Diabetes operations. Six-month G&A rose 27%, including higher amortization, shipping, bad debt, personnel and consulting costs.
- Operating loss narrowed in Q2 and modestly for the six months. Six-month net loss was essentially unchanged; reported interest expense and operating cash use remained significant.
Outlook, risks and unusual items
- Management expected 2012 revenue to continue increasing, but gave no numerical revenue forecast. It expected R&D spending to decrease slightly from 2011 and G&A and sales and marketing expense to increase. Management expected near-term net losses while investing in the next-generation OmniPod, sales expansion and cross-selling.
- Management stated that cash, together with cash expected from product sales, should cover projected operating and debt-service requirements for at least 12 months. This outlook depends on sales, manufacturing volumes, product approval and other uncertainties.
- Near-term priorities included regulatory approval and production capacity for the next-generation OmniPod, followed by a U.S. launch. The company said existing manufacturing capacity was sufficient for expected 2012 demand.
- Key risks include reliance on the OmniPod and third-party manufacturers and suppliers, reimbursement and payor access, product and regulatory approvals, competition, and the ability to generate cash to service debt. The company noted manufacturing concentration in China and inventory concentration in Massachusetts.
- A Becton, Dickinson patent lawsuit alleges infringement of three patents and seeks injunctive relief and unspecified damages. Insulet disputes the claims and did not expect a material adverse impact, while acknowledging litigation uncertainty.
- Unusual or notable items include the 2011 Neighborhood Diabetes acquisition (approximately $62.4 million purchase price) and related amortization; the 2011 debt modification and repurchase generated a premium and financing-related interest costs. No goodwill impairment was recorded in the first half of 2012.
Important facts for investors to verify
- Whether revenue growth can be sustained while recovering gross margin and reducing operating cash burn.
- Progress and timing of regulatory approval, manufacturing validation and launch of the next-generation OmniPod.
- Liquidity and refinancing or repayment plans for the $15.0 million notes due in June 2013 and the larger 2016 maturity; contractual debt obligations including interest totaled $180.9 million.
- Cash conversion and working-capital trends, particularly receivables and inventory growth, and whether the stated 12-month liquidity outlook remains supportable.
- Developments in the BD patent litigation, third-party reimbursement, supplier arrangements and other risks described in the filing.