Insulet Corporation (10-Q): First Quarter 2017
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016, unless stated otherwise. Insulet develops, manufactures and sells the Omnipod tubeless insulin delivery system and provides drug-delivery devices using its technology platform. It reports as one operating segment.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $101.7 million | $81.2 million | +25% |
| Gross profit / margin | $59.4 million / 58.4% | $44.1 million / 54.2% | Margin +4.2 percentage points |
| Operating expenses | $64.7 million | $51.8 million | +25% |
| Operating loss | $(5.3) million | $(7.7) million | Loss narrowed |
| Net loss | $(10.0) million | $(12.5) million | Loss narrowed 20% |
| Net loss per share, diluted | $(0.17) | $(0.22) | Improved |
| Operating cash flow | $(21.8) million | $(10.5) million | Cash use increased |
| Capital purchases | $25.7 million | $3.2 million | Increased substantially |
- Revenue by product: U.S. Omnipod $59.7 million (+18%); International Omnipod $25.1 million (+63%); Drug Delivery $16.9 million (+12%). Management attributed growth to a larger U.S. installed base, international market adoption and demand for the drug-delivery device used with Amgen’s Neulasta Onpro kit.
- Research and development was $17.5 million (+35%), sales and marketing $28.1 million (+17%), and general and administrative $19.1 million (+30%). Higher spending reflected product development and increased personnel and growth-support costs.
- Interest expense, net rose to $4.6 million from $2.9 million, primarily reflecting the 1.25% convertible notes issued in 2016. The 2016 net loss also included $1.8 million from discontinued operations; Insulet sold Neighborhood Diabetes in February 2016.
Balance sheet, debt and liquidity
- At March 31, 2017, cash and cash equivalents were $76.0 million and short-term investments were $178.0 million, totaling $254.0 million. Cash and equivalents declined $61.1 million from year-end 2016; short-term investments increased to $178.0 million from $161.4 million.
- Long-term debt, net of discount and financing costs, was $336.8 million; principal outstanding was $412.1 million across the 2% notes due 2019 and 1.25% notes due 2021. The notes are convertible into common stock. The company reported total liabilities of $381.4 million and stockholders’ equity of $63.6 million.
- Investing cash use was $42.3 million, including $25.7 million in property, equipment and software purchases; about $18 million of the capital spending related to equipment in process for U.S. manufacturing initiatives. Financing provided $2.9 million, principally reflecting stock-option exercises, partly offset by tax withholding on vested restricted stock.
- Management said current liquidity and expected cash generated from sales should cover projected operating and debt-service requirements for at least 12 months. It expects capital spending above historical levels for a planned U.S. manufacturing facility, with production targeted to begin in 2019.
Outlook, risks and contingencies
- Management expected strong 2017 revenue growth across product lines and higher gross margin, citing anticipated supply-chain improvements. It also expected R&D, sales and marketing, and G&A expenses to rise. Management anticipated continued near-term net losses while investing in growth, product development and capacity.
- Key risks include dependence on Omnipod and a single-source contract manufacturer, manufacturing concentration in China and inventory concentration in Massachusetts, reimbursement and payor changes, competition, product development and regulatory risks, and the ability to service debt and execute the U.S. facility plan.
- A shareholder securities class action remained outstanding; the company said it could not reasonably estimate a possible loss or range. A Medicaid-claims audit liability related to the former Neighborhood Diabetes business remained estimated at $0.3 million. The filing states other pending proceedings were not expected to have a material outcome.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It had no off-balance-sheet financing arrangements.
Important facts for investors to verify
- Whether revenue growth, especially international Omnipod and drug-delivery demand, is sustained and sufficiently diversified; three customers each represented at least 10% of quarterly revenue.
- Whether gross-margin improvement continues and offsets planned higher operating expenses and investment needs.
- Actual cash burn, capital spending and funding requirements as the U.S. manufacturing facility progresses, alongside debt service and potential dilution from convertible notes.
- Developments in the shareholder lawsuit, Medicaid-related matters, reimbursement conditions, and supply-chain and manufacturing concentration risks.