Insulet Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. Insulet develops, manufactures and markets the OmniPod insulin infusion system. Results include Neighborhood Diabetes from its June 1, 2011 acquisition.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $32.2 million | $22.9 million | $60.5 million | $43.7 million |
| Gross profit | $14.5 million | $9.9 million | $28.1 million | $18.3 million |
| Gross margin | 45.1% | 43.1% | 46.4% | 41.8% |
| Operating loss | $(14.9) million | $(9.9) million | $(22.2) million | $(20.6) million |
| Net loss | $(19.4) million | $(13.7) million | $(29.3) million | $(28.2) million |
| Loss per share, diluted | $(0.42) | $(0.36) | $(0.64) | $(0.74) |
- Revenue rose 40% in Q2 and 38% for the six-month period, driven mainly by OmniPod adoption and, from June, Neighborhood Diabetes sales. The acquired business contributed about $2.7 million of reported revenue in the period. Management also provided unaudited pro forma six-month revenue of $85.4 million for 2011 and $71.9 million for 2010 assuming the acquisition occurred January 1 of each year.
- Q2 gross margin improved year over year, while management said Neighborhood Diabetes’ lower-margin product mix would reduce combined margins. Six-month operating loss widened despite higher gross profit; Q2 net loss increased substantially.
- For the six months, operating cash use was $16.9 million versus $15.1 million; investing cash use was $43.4 million, including $37.9 million for the acquisition; financing provided $53.8 million. Cash declined $6.5 million to $106.7 million.
- At June 30, current assets were $147.8 million and current liabilities $26.6 million. Total assets were $226.2 million; stockholders’ equity was $94.1 million. Accumulated deficit was $413.1 million.
- Convertible-note principal outstanding totaled $158.75 million: $15.0 million of 5.375% notes due 2013 and $143.75 million of 3.75% notes due 2016. Balance-sheet long-term debt was $104.2 million after unamortized debt discounts. Cash and operating cash generation were expected by management to cover operating and debt-service needs for at least 12 months.
Material changes and unusual items
- Insulet acquired Neighborhood Diabetes for approximately $62.4 million: $37.9 million cash, 1,197,631 shares valued at $24.4 million, and approximately $0.1 million contingent consideration. The preliminary allocation included $30.1 million of customer relationships, $2.8 million of tradenames and $26.7 million of goodwill; the allocation remained subject to revision.
- Acquisition transaction costs of $3.2 million were expensed in general and administrative costs. Q2 G&A increased 110% to $13.0 million, partly reflecting these costs, acquired-asset amortization and higher personnel expenses.
- In June, Insulet issued $143.75 million of 3.75% convertible notes and repurchased $70 million principal of its 5.375% notes for $85.1 million, a 21.5% premium. Approximately $2.0 million of transaction fees related to the modification was expensed. The 3.75% notes are unsecured; management intended to settle their principal in cash.
- Common shares outstanding were 47.25 million at June 30, up from 45.44 million at year-end, including shares issued for the acquisition.
Outlook, commentary and risks
- Management expected revenue to continue increasing during 2011 as the patient base and reorders grow, international distribution expands, and Neighborhood Diabetes contributes. Revenue growth depends on sales execution, manufacturing volumes and other risks.
- Management expected gross margins for the remainder of 2011 to be 43%–45%; OmniPod unit costs were expected to remain consistent. It anticipated higher 2011 R&D, G&A and sales and marketing expenses than in 2010, and expected near-term net losses while investing in growth.
- Priorities included developing and obtaining regulatory clearance for the next-generation OmniPod, validating its manufacturing line, expanding sales and integrating Neighborhood Diabetes. Insulet had filed for FDA 510(k) clearance; approval was not assured.
- Key risks include reimbursement levels and coverage, competition, execution and integration of the acquisition, Neighborhood Diabetes’ reliance on Medicare and a limited number of suppliers and payors, possible supplier contract terminations following the acquisition, and debt-service and future financing needs. Insulet also cited manufacturing concentration at one site in China and OmniPod inventory concentration in Massachusetts.
- Becton, Dickinson and Company’s patent-infringement lawsuit sought injunctive relief and unspecified damages. Insulet said it believed it had meritorious defenses and did not expect a material adverse impact, while acknowledging litigation uncertainty.
Important facts for investors to verify
- Whether OmniPod growth, international launches and Neighborhood Diabetes cross-selling support the revenue outlook, and how much growth is organic versus acquisition-related.
- Whether combined gross margins stay within management’s 43%–45% remainder-of-year range, given the acquired business’s lower-margin mix.
- Whether cash burn and debt-service requirements remain consistent with management’s stated 12-month liquidity expectation; review the notes’ maturities, conversion and repurchase terms.
- Whether the acquisition’s preliminary purchase-price allocation changes and whether key supplier, payor and Medicare relationships are retained on viable terms.
- Progress and timing of next-generation OmniPod regulatory clearance and manufacturing validation, as well as the outcome and potential consequences of the BD litigation.