Insulet Corporation — Q3 2017 Form 10-Q
Business and period. Insulet develops, manufactures and sells the Omnipod tubeless insulin delivery system and supplies drug-delivery devices to pharmaceutical customers. This unaudited report covers the three and nine months ended September 30, 2017, compared with the same 2016 periods.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $121.8 million | $94.9 million | $333.2 million | $263.4 million |
| Gross profit | $73.6 million | $55.6 million | $197.7 million | $150.1 million |
| Gross margin | 60.5% | 58.6% | 59.3% | 57.0% |
| Operating income (loss) | $2.0 million | $2.4 million | $(6.6) million | $(6.6) million |
| Net loss | $(2.2) million | $(3.1) million | $(20.0) million | $(19.8) million |
| Net loss per share | $(0.04) | $(0.05) | $(0.34) | $(0.35), including discontinued operations |
Q3 revenue growth was led by international Omnipod sales, up 70% to $32.5 million; U.S. Omnipod revenue rose 17% to $70.1 million; drug-delivery revenue rose 19% to $19.2 million. For the nine-month period, those businesses grew 65%, 17% and 18%, respectively. Management attributed growth to a larger Omnipod customer base, adoption in international markets including France, and greater demand for Amgen’s Neulasta Onpro kit.
Operating expenses rose 34% in Q3 to $71.6 million, including higher research and development, sales and marketing, and general and administrative costs. Q3 operating income remained positive, but interest and other expense led to a net loss. Nine-month interest and other expense was $13.0 million, versus $11.3 million a year earlier.
Liquidity, cash flow and debt
- At September 30, 2017, cash and cash equivalents were $102.2 million and short-term investments were $173.5 million. Current assets were $366.0 million and current liabilities were $74.9 million.
- Nine-month operating cash flow was positive $19.4 million, compared with cash use of $4.2 million in 2016. Investing activities used $61.5 million, including $47.8 million of property, equipment and software purchases. Financing activities provided $6.7 million. Cash and cash equivalents declined $34.9 million from year-end 2016.
- Long-term debt, net of discounts and issuance costs, was $345.0 million; principal outstanding was approximately $412.1 million. The debt comprises 2% convertible notes due 2019 and 1.25% convertible notes due 2021. Nine-month interest expense includes substantial non-cash amortization of debt discounts and issuance costs.
- The company was constructing a U.S. manufacturing facility in Acton, Massachusetts, with production planned to begin in 2019. Management expected capital expenditures to remain above historical levels and believed available liquidity would cover projected operating, debt-service and facility needs for at least the next 12 months.
Changes, outlook and risks
- Gross margin improved year over year, primarily from supply-chain improvements, partly offset by a less favorable mix from higher European distributor sales. Management expected 2017 revenue to show strong growth across product lines and gross margin to increase versus 2016; it also expected 2017 R&D, sales and marketing, and G&A expenses to rise. No specific full-year revenue or margin target is provided.
- Management expects near-term net losses as it invests in customer growth, product development and operating capacity.
- Insulet plans to take over European distribution, sales, marketing, training and support from Ypsomed on July 1, 2018, after the agreement expires June 30, 2018. It expects higher European revenue and gross margins from direct distribution, but higher 2018 operating expenses. It estimated a potential per-unit payment to Ypsomed of approximately $50 million, subject to customer retention and sales volumes; it expects the arrangement to be accretive after operations are established, excluding nonrecurring transition costs. The filing identifies execution, customer-retention and transition-period sales risks.
- Amgen, Ypsomed and RGH Enterprises each accounted for at least 10% of Q3 revenue. Flex was the company’s single-source contract manufacturer. The filing also notes concentration of manufacturing in China and inventory in Massachusetts.
- Insulet expected adoption of ASC 606 in 2018 to accelerate recognition of some drug-delivery revenue and capitalize certain contract-acquisition costs. The amount of the transition adjustment was not stated clearly in the filing.
- Pending matters include a securities class action and two related derivative actions; the company said it could not reasonably estimate possible losses. A $0.3 million Medicaid-related settlement was paid in July 2017. Management stated other pending matters were not expected to be material to financial condition or business.
Important facts for investors to verify
- Whether revenue and gross-margin growth continue, and how much is attributable to distributor sales, customer growth and supply-chain improvements.
- Cash generation and capital spending as the Acton facility is built, alongside the company’s convertible debt service and maturities.
- European customer retention, transition costs, operating-expense ramp and the ultimate Ypsomed per-unit payments after the 2018 handover.
- Exposure to major customers and the single-source manufacturer, as well as the possible financial impact of pending litigation.
- The final accounting impact of ASC 606 and whether expected near-term investments translate into sustainable profitability.