Insulet Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Insulet develops, manufactures and sells the OmniPod insulin management system and other diabetes-related products. The financial statements are unaudited.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $75.6 million | $72.0 million | $136.8 million | $141.2 million |
| Gross profit | $34.4 million | $35.8 million | $67.2 million | $68.6 million |
| Gross margin | 45.5% | 49.7% | 49.1% | 48.6% |
| Operating loss | $(12.4) million | $(5.3) million | $(21.0) million | $(7.2) million |
| Net loss | $(15.4) million | $(29.1) million | $(27.3) million | $(35.3) million |
| Net loss per share | $(0.27) | $(0.53) | $(0.48) | $(0.64) |
- Q2 revenue increased 5%, reflecting U.S. OmniPod adoption and growth in on-body drug-delivery device sales. First-half revenue fell 3%, primarily because international OmniPod revenue declined about $12.9 million, partly offset by approximately $9.9 million of growth in drug-delivery device revenue.
- Operating expenses rose 14% in Q2 and 16% in the first half. R&D and sales and marketing spending increased; Q2 G&A declined chiefly because 2014 included patent-litigation and other legal costs.
- Net loss improved year over year, largely because 2014 included an $18.9 million debt-extinguishment loss. Operating losses worsened in both 2015 comparison periods.
- Cash from operations was $(2.7) million for the first half, compared with $(0.5) million in 2014. Capital expenditures were $4.6 million; cash and cash equivalents decreased by $6.1 million to $145.1 million.
- At June 30, cash was $145.1 million, current assets $203.8 million and current liabilities $52.7 million. Working capital was approximately $151.1 million.
- Long-term convertible notes had $201.3 million principal and $172.2 million carrying value, net of discount; the notes bear 2% interest and mature in June 2019. Capital-lease obligations totaled $8.6 million. Total liabilities were $230.1 million.
Outlook, commentary and material items
- Management expected 2015 revenue to continue increasing through U.S. customer growth, international expansion and commercial sales with drug-delivery partners. No specific revenue or earnings target was provided.
- Management expected near-term net losses while investing in growth. It anticipated higher R&D and sales and marketing expenses in 2015, and slightly higher G&A than in 2014. It stated that cash and expected product-sale proceeds should cover projected operating and debt-service needs for at least 12 months.
- Approximately $4.7 million of Q2 and first-half R&D expense resulted from a change in estimate: software costs previously capitalized were expensed after project design no longer supported technological feasibility.
- Higher scrap and warranty charges weighed on Q2 cost of revenue. Management estimated about $2.5 million of incremental charges in Q2 and the first half were non-recurring. Gross margin nevertheless declined in Q2.
- An FDA warning letter concerned lots of OmniPods that did not meet final acceptance criteria. Insulet voluntarily recalled the identified lots, recorded $0.2 million of warranty expense against estimated replacement costs of $0.2–$0.4 million, and reported that the FDA considered corrective actions apparently adequate.
- Insulet settled a Massachusetts sales-and-use-tax audit, recording a $0.8 million liability, down from a previously recorded $3.7 million. It also settled a separate Massachusetts Attorney General matter for approximately $1.5 million in Q1.
- Medicaid audit matters in New York and Connecticut remained unresolved; the company could not estimate a possible loss range. A remaining shareholder securities class action was also pending; the company could not assess the outcome and stated it did not expect a material adverse effect.
- Insulet identified dependence on its principal product and a single-source OmniPod supplier, reimbursement and payor risks, manufacturing and product-quality risks, competition, and its history of losses among key business risks. International revenue was approximately 10% of Q2 revenue and 8% of first-half revenue, versus 16% and 17% in the prior-year periods.
- On July 7, 2015, after quarter-end, Insulet acquired the OmniPod distribution business in Canada for approximately $5 million.
Important facts for investors to verify
- Whether revenue growth, particularly U.S. OmniPod adoption and drug-delivery sales, can offset continuing weakness in international OmniPod revenue.
- Whether higher manufacturing costs, scrap, warranty claims and quality controls affect future gross margins, including any further impact from the FDA-related recall.
- How the New York and Connecticut Medicaid audits and the remaining shareholder lawsuit develop, and whether any loss becomes estimable or material.
- Cash burn, capital spending and liquidity relative to management’s 12-month sufficiency statement; also monitor the $201.3 million convertible-note principal due in 2019 and capital-lease payments.
- Execution and financial contribution of the Canadian distribution acquisition and planned investments in sales, product development and manufacturing.