Business context and reporting period
Insulet Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The company develops and sells the OmniPod insulin delivery system. Results also include Neighborhood Diabetes, a diabetes-supplies distributor acquired on June 1, 2011, and its results are consolidated from that date.
Financial performance and position
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $44.6 | $25.5 | $105.1 | $69.2 |
| Gross profit | $18.6 | $11.6 | $46.6 | $29.9 |
| Gross margin | 41.6% | 45.7% | 44.4% | 43.2% |
| Operating loss | $(9.8) | $(8.3) | $(32.0) | $(28.9) |
| Net loss | $(13.6) | $(12.1) | $(42.8) | $(40.3) |
| Net loss per share, basic and diluted | $(0.29) | $(0.30) | $(0.92) | $(1.04) |
- Q3 revenue rose 75% year over year; nine-month revenue rose 52%. Neighborhood Diabetes contributed $10.4 million of Q3 revenue and $14.1 million for the nine-month period.
- Operating expenses increased 42% in Q3 and 34% year to date. Q3 G&A included acquired-intangible amortization and higher personnel and legal costs; nine-month G&A also included $3.2 million of acquisition transaction costs.
- Cash and cash equivalents were $103.8 million at September 30, versus $113.3 million at December 31, 2010. Current assets were $137.9 million and current liabilities $24.8 million.
- For the first nine months, operating cash use was $17.8 million, compared with $27.9 million a year earlier; investing cash use was $46.7 million, including $37.9 million paid for Neighborhood Diabetes; financing provided $55.0 million. Ending cash was $103.8 million.
- Debt principal totaled $158.8 million: $15.0 million of 5.375% convertible notes due in 2013 and $143.8 million of 3.75% notes due in 2016. After $52.4 million of unamortized discounts, balance-sheet debt was $106.3 million. The notes are unsecured; the company expects principal repayments at maturity.
- Stockholders’ equity was $83.4 million; accumulated deficit was $426.7 million. The company has incurred losses every quarter since inception.
Material changes versus the prior comparable period
- Revenue growth reflects continued OmniPod adoption and international sales, as well as the acquisition of Neighborhood Diabetes; reported growth is therefore not solely organic.
- Gross margin fell to 41.6% in Q3 from 45.7% a year earlier. Management attributed cost-of-revenue growth to increased sales volume and the lower-margin Neighborhood Diabetes business, partly offset by OmniPod production efficiencies. Nine-month gross margin improved to 44.4% from 43.2%.
- Operating and net losses widened in absolute terms in Q3 and year to date, despite higher revenue. Higher operating expenses contributed; nine-month net loss per share improved partly alongside a larger weighted-average share count.
- In June 2011, Insulet issued $143.8 million of 3.75% convertible notes and repurchased $70 million principal amount of 5.375% notes for $85.1 million, a 21.5% premium. The transaction replaced part of the nearer-term debt with longer-maturity notes but increased reported principal outstanding.
- The Neighborhood Diabetes acquisition cost approximately $62.4 million, funded with approximately $37.9 million cash, $24.4 million in shares, and contingent consideration. Preliminary allocation included $26.7 million goodwill and $32.9 million of identifiable intangible assets.
Outlook, management commentary, risks and unusual items
- Management expected revenue to continue increasing through new patients, repeat orders, additional international markets and Neighborhood Diabetes. Ypsomed distribution in additional contracted markets was expected to begin in 2012, subject to reimbursement approval; GSK began Canadian distribution in Q3 2011.
- Management expected gross margins of 42%–45% for the remainder of 2011, higher R&D spending than in 2010, and higher G&A and sales and marketing expenses, partly reflecting the acquisition. It anticipated improved gross margins from the next-generation OmniPod, subject to FDA clearance.
- The company expected near-term losses and further investment. Management believed cash, together with cash expected from product sales, would cover projected operating and debt-service requirements for at least the next 12 months.
- Key risks include dependence on OmniPod adoption and reimbursement, manufacturing and supplier concentration (including production in China), regulatory clearance for the next-generation product, competition, integration and performance of Neighborhood Diabetes, and the ability to generate cash to service debt.
- BD litigation alleges infringement of three patents and seeks injunctive and monetary relief. Insulet said it believed it had meritorious defenses and did not expect a material adverse impact, while noting litigation outcomes are uncertain.
- Unusual items include $3.2 million of acquisition transaction costs, acquisition-related goodwill and intangible assets, and a debt repurchase at a premium. No off-balance-sheet financing arrangements were reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue growth reflects underlying OmniPod demand versus Neighborhood Diabetes and other distribution channels.
- Whether OmniPod manufacturing efficiencies and the next-generation product can deliver the expected margin improvement, including the timing of FDA clearance.
- Neighborhood Diabetes’ integration, customer and partner retention, reimbursement economics, and ability to achieve satisfactory gross margins.
- Cash burn, liquidity needs, and capacity to meet debt service and the $15.0 million 2013 and $143.8 million 2016 note maturities.
- Developments in the BD patent litigation and any changes to reimbursement, regulatory, supplier or manufacturing risks.