Business context and reporting period
Insulet Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. The company develops, manufactures and sells the Omnipod insulin-delivery system and also supplies drug-delivery products, principally for Amgen’s Neulasta Onpro kit.
Financial performance
Amounts are in millions of dollars except per-share data. Year-over-year comparisons are with the corresponding 2019 period.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $226.3 (+27.8%) | $177.1 | $424.3 (+26.0%) | $336.7 |
| Gross profit / margin | $142.5 / 63.0% | $116.4 / 65.7% | $269.4 / 63.5% | $223.1 / 66.3% |
| Operating income / margin | $27.5 / 12.2% | $7.6 / 4.3% | $35.0 / 8.2% | $14.9 / 4.4% |
| Net income / diluted EPS | $14.4 / $0.22 | $1.4 / $0.02 | $12.3 / $0.19 | $5.8 / $0.09 |
| Operating cash flow | Not presented by quarter | $22.8 | $20.4 |
- Revenue mix: Q2 U.S. Omnipod revenue was $128.8 (+31.3%), international Omnipod $73.2 (+16.7%; +19.7% constant currency), and Drug Delivery $24.3 (+49.1%). For the first half, the respective figures were $245.4 (+33.2%), $146.3 (+22.3%; +25.5% constant currency), and $32.6 (-0.9%).
- Cash flow and investment: First-half capital expenditures were $51.7, versus $91.9 a year earlier. Operating cash flow less capital expenditures was negative $28.9, compared with negative $71.5 in the prior-year period.
- Liquidity: At June 30, cash and cash equivalents were $779.1 and marketable investments were $88.8. Current assets were $1,085.7 and current liabilities $134.4. Management said liquidity should meet projected operating, investing and debt-service needs for at least 12 months. Capital commitments were $78.7.
- Debt: Convertible notes had $1,202.5 principal outstanding: $402.5 of 1.375% notes due 2024 and $800.0 of 0.375% notes due 2026. Their net carrying amount was $910.2. Q2 net interest expense rose to $11.1 from $5.8; first-half expense rose to $21.2 from $10.6, largely reflecting non-cash discount accretion on the 2019 notes.
Material changes versus prior period
- Revenue increased 27.8% in Q2, led by Omnipod volume growth and, in the U.S., pharmacy-channel sales. Management also attributed some sales to increased distributor inventory associated with COVID-19 and DASH adoption.
- Q2 net income rose to $14.4 from $1.4; operating income improved to $27.5 from $7.6. However, gross margin fell 270 basis points to 63.0%. First-half gross margin declined 280 basis points to 63.5%.
- Cash and cash equivalents increased from $213.7 at year-end 2019, principally reflecting $477.5 of net proceeds from a May common-stock offering. The company issued approximately 2.4 million shares; shares outstanding were 65.6 million at June 30, versus 62.7 million at December 31, 2019.
- First-half operating cash flow rose modestly, but working-capital movements consumed $46.9. They included higher receivables and prepaid/other assets and lower payables and accrued liabilities.
Outlook, commentary and risks
- Management expected strong 2020 Omnipod revenue growth from market penetration and DASH, partly offset by fewer new patient starts due to COVID-19. It expected higher full-year Drug Delivery revenue on a higher demand forecast related to the pandemic.
- Management forecast full-year 2020 gross margin of approximately 63%, including an estimated $7–$10 million of pandemic-related costs, as well as U.S. manufacturing start-up costs and inefficiencies. R&D and SG&A were expected to increase versus 2019.
- The Omnipod DASH rollout in Europe and Canada and entry into five additional markets shifted to early 2021, primarily because of COVID-19; management said the timing shift was not expected to materially affect 2020 revenue. The Omnipod 5 pivotal U.S. trial and a first-half 2021 launch remained key priorities. A third U.S. manufacturing line was planned for installation in the second half of 2020, with production expected in 2021.
- COVID-19 caused reduced production at the Chinese contract manufacturer during the first two months of 2020, with added shipping, manufacturing-incentive, screening and other costs. Production returned to normal capacity from March, but renewed disruption, clinical-trial delays, lower new starts and supply-chain interruption remained risks.
- In June, Roche sued Insulet in Delaware over an expired U.S. patent, seeking monetary damages and fees but no injunction; Insulet said it would defend the case and could not estimate potential loss. In July, Insulet filed a U.K. patent claim against Roche seeking an injunction and damages.
- An arbitration concerning fees owed to a former European distributor remains unresolved. The company estimated the aggregate fee at $5–$55 million and had accrued $2.7 million at June 30; $5.1 million had been paid as of that date.
- Management reported effective disclosure controls as of June 30, 2020. The filing does not provide a precise estimate of the ultimate outcome of the Roche litigation or the final distributor fee.
Most important facts for investors to verify
- Whether revenue growth reflects sustained customer adoption or, in part, temporary distributor inventory increases and pandemic-related Drug Delivery demand.
- Whether new U.S. manufacturing lines can ramp efficiently enough to restore gross margins and support the planned Omnipod 5 launch.
- How COVID-19 affects new patient starts, clinical-trial timelines, manufacturing, suppliers and the revised international rollout schedule.
- The potential cash and dilution implications of the convertible notes, including their conversion terms, and the company’s financing and share-count trajectory after the 2020 equity offering.
- Developments in Roche’s patent case and the former-distributor arbitration, including any change to the company’s loss estimates or accruals.