Insulet Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Insulet develops, manufactures and sells the Omnipod insulin management system and also supplies drug-delivery devices. Neighborhood Diabetes was sold in February 2016; its results are presented as discontinued operations.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $94.9 million | $71.4 million | $263.4 million | $180.1 million |
| Gross profit / margin | $55.6 million / 58.6% | $31.6 million / 44.2% | $150.1 million / 57.0% | $91.3 million / 50.7% |
| Operating income (loss) | $2.4 million | $(14.8) million | $(6.6) million | $(36.1) million |
| Net loss | $(3.1) million | $(18.9) million | $(19.8) million | $(46.2) million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(4.2) million | $6.0 million |
Q3 revenue grew 33%; nine-month revenue grew 46%. Q3 revenue included U.S. Omnipod sales of $59.6 million, international Omnipod sales of $19.1 million and drug-delivery revenue of $16.1 million. Management attributed growth to a larger U.S. customer base, international distributor adoption and increased demand for drug-delivery devices.
Gross margin improved primarily because 2015 included non-recurring product-related costs ($7.7 million in Q3 and $10.2 million for the first nine months) and because of manufacturing efficiency improvements. Operating expenses rose 15% in Q3 and 23% for the first nine months, including higher R&D and commercial investment.
Financial position, cash flow and debt
- At September 30, cash and cash equivalents were $215.4 million and short-term investments were $67.3 million. Current assets were $361.8 million against current liabilities of $54.3 million.
- Net cash increased $92.7 million in the first nine months. Operating activities used $4.2 million; investing activities used $80.8 million, including $76.2 million invested in short-term securities and $19.2 million of property and equipment purchases; financing activities provided $177.6 million.
- In September, Insulet issued $345 million of 1.25% convertible notes due 2021, receiving $333.9 million net of issuance costs, and repurchased approximately $134.2 million principal of its 2% notes for $153.6 million, excluding accrued interest. Gross principal outstanding on the 2% and 1.25% notes was $412.1 million; reported net carrying value was $329.0 million after discounts and financing costs.
- Management said available liquidity and expected cash generated from sales should cover projected operating and debt-service requirements for at least the next 12 months. The filing identifies the ability to generate cash to service debt as a risk.
Outlook, commentary and risks
- For 2016, management expected strong revenue growth across product lines, approximately 20% growth in the worldwide Omnipod installed base, and gross-margin improvement versus 2015. It expected drug-delivery devices to contribute a higher relative share of growth.
- Management expected R&D, sales and marketing, and general and administrative expenses to increase in 2016 as the company invests in product development, commercial expansion and operating capacity; it cautioned that near-term net losses may continue.
- Key disclosed risks include reliance on Omnipod and a single-source supplier, manufacturing concentration in China and inventory concentration in Massachusetts, reimbursement and competition, product quality and regulation, and debt-service requirements. Amgen represented 17% of Q3 revenue and 29% of accounts receivable at quarter-end.
- A shareholder securities class action remained pending; Insulet said it could not reasonably estimate a possible loss. The filing also discusses Medicaid and tax matters, including settlements, and states that the outcome of the shareholder case cannot yet be quantified.
- The Neighborhood Diabetes sale generated approximately $6.2 million in cash. The company recorded a $2.6 million debt-extinguishment loss in Q3 related to the 2% note repurchase.
Investor verification priorities
- Check whether revenue growth and the approximately 20% installed-base growth outlook were achieved, including the durability of drug-delivery growth.
- Track gross-margin progress and manufacturing efficiency, distinguishing ongoing improvements from the non-recurring 2015 costs.
- Assess operating cash generation, inventory levels and capital spending; first-nine-month operating cash flow was negative despite lower net losses.
- Review debt terms, potential dilution from convertible notes, future debt-service capacity and liquidity relative to operating needs.
- Monitor supplier and customer concentration, reimbursement exposure, product-quality or regulatory developments, and the unresolved shareholder litigation.