Insulet Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Insulet develops, manufactures and sells the Omnipod insulin-management system and customized drug-delivery devices.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $124.3m | $109.8m | $247.8m | $211.5m |
| Gross profit / margin | $82.1m / 66.0% | $64.6m / 58.9% | $157.9m / 63.7% | $124.0m / 58.7% |
| Operating income (loss) | $4.3m | $(3.4)m | $4.3m | $(8.7)m |
| Net loss | $(1.7)m | $(7.8)m | $(8.3)m | $(17.7)m |
| Net loss per share | $(0.03) | $(0.13) | $(0.14) | $(0.31) |
Q2 revenue rose 13% year over year; U.S. Omnipod revenue increased 19%, international Omnipod 7%, while drug-delivery revenue was approximately flat. For the first half, revenue grew 17%; U.S. Omnipod rose 19%, international Omnipod 29%, and drug delivery declined 6%. Gross-margin improvement reflected supply-chain improvements and, to a lesser extent, sales mix.
For the six months, operating cash use was $10.4m versus $3.9m in 2017. Investing cash use was $117.1m, primarily reflecting capital spending and investment purchases; financing cash use was $8.2m. Cash, cash equivalents and restricted cash fell $136.3m to $136.2m. At June 30, cash and cash equivalents were $136.2m and short- and long-term investments totaled $319.6m.
Convertible notes had $747.5m principal outstanding and $577.1m carrying value, net of unamortized discounts and issuance costs. The company repaid the remaining 2% notes for $6.7m during the period. Current liabilities were $76.1m; total liabilities were $659.7m.
Material changes and unusual items
- Insulet adopted ASC 606 on January 1, 2018 using the modified retrospective method. 2018 results use ASC 606, while 2017 results use prior revenue guidance, so reported comparisons are not fully like-for-like. Under prior guidance, pro forma Q2 2018 revenue would have been $115.2m and net loss $10.2m; for the first half, revenue would have been $237.2m and net loss $20.7m. ASC 606 chiefly changed timing of drug-delivery revenue and accounting for customer-acquisition commissions; adoption had no net cash-flow impact.
- International Q2 growth was affected by fewer shipments to the former European distributor and a $7.4m Omnipod inventory repurchase to reduce channel conflict at contract expiry.
- The company assumed direct commercial activities in Europe on July 1, 2018. It expects a per-unit fee on qualifying sales to certain former distributor customers over the following 12 months, estimated at $10m–$55m; the actual amount depends on qualifying sales.
- Construction-in-progress for the Acton, Massachusetts manufacturing facility was approximately $146m at June 30. Insulet expects facility-related capital expenditures to approach $200m when production begins in 2019.
Outlook, management commentary and risks
- Management expects strong 2018 revenue growth from U.S. and international expansion and direct European distribution, partly offset by lower drug-delivery revenue. It expects gross margin to increase versus 2017.
- Management expects higher 2018 R&D, sales and marketing, and general and administrative expenses as it develops products and expands European operations. It cautions that near-term net losses may continue while it invests.
- The Acton facility is expected to begin production in early 2019. The company says current liquidity should cover projected operating, investing and debt-service needs for at least the next 12 months.
- The FDA cleared the DASH system in June 2018; a limited U.S. release began in Q3 2018, ahead of a planned full launch in early 2019. Medicare Part D coverage guidance may enable broader access; Insulet estimates potential access for approximately 450,000 additional U.S. individuals with Type 1 diabetes.
- Key business exposures include reliance on Flex as the single-source Omnipod contract manufacturer and customer concentration: Amgen represented 14% of Q2 revenue. European commercial transition, foreign-exchange exposure as international business grows, and execution of manufacturing expansion are also relevant risks.
- A securities class-action settlement was awaiting final court approval, scheduled for August 2, 2018; related derivative actions had settlement agreements subject to court approval. Insulet accrued expected uninsured amounts and said these were not material. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Investor verification points
- Track underlying growth and profitability using comparable ASC 606 revenue-recognition periods, especially drug-delivery timing effects.
- Monitor European direct-operation ramp, customer retention, margins, and the eventual qualifying-sales fee within the disclosed $10m–$55m range.
- Verify Acton construction spending, commissioning milestones, production timing, and funding against liquidity and operating cash use.
- Review convertible-debt terms, carrying value versus principal, and potential dilution if notes become convertible.
- Follow DASH adoption and the timing and scope of Medicare Part D and Medicaid coverage.