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OFFON

INSULET CORPORATION

(PODD)
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INSULET CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/05/2021 | 05:05am EST
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes included in this quarterly report. The
following discussion may contain forward-looking statements that reflect our
plans, estimates and beliefs, which are subject to risks, uncertainties and
assumptions. Our actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to
these differences include those discussed under the headings "Risk Factors" and
"Forward-Looking Statements" in both our annual report on Form 10-K for the year
ended December 31, 2020 and in this quarterly report.
Overview
We are primarily engaged in the development, manufacture and sale of our
proprietary Omnipod® System ("Omnipod"), a continuous insulin delivery system
for people with insulin-dependent diabetes. The Omnipod System features a small,
lightweight, self-adhesive disposable tubeless Omnipod device ("Pod") that is
worn on the body for up to three days at a time; and its wireless companion, the
handheld Personal Diabetes Manager ("PDM"). The Omnipod System, which features
discreet and easy-to-use devices communicates wirelessly, provides for virtually
pain-free automated cannula insertion and eliminates the need for traditional
multiple daily injection therapy, using syringes or insulin pens, or the use of
traditional pump and tubing.
In addition to the diabetes market space, we have partnered with pharmaceutical
and biotechnology companies to tailor the Omnipod System technology platform for
the delivery of subcutaneous drugs across other therapeutic areas. Most of our
drug delivery revenue currently consists of sales of pods to Amgen for use in
the Neulasta® Onpro® kit, a delivery system for Amgen's white blood cell booster
to help reduce the risk of infection after intense chemotherapy.
Our mission is to improve the lives of people with diabetes. To assist in
achieving this mission, we are focused on the following key strategic
imperatives:
•expanding access and awareness;
•delivering consumer-focused innovation;
•growing our global addressable market; and
•driving operational excellence.
Our long-term financial objective is to sustain profitable growth. To achieve
this goal, we expect our efforts in 2021 to focus primarily on our planned
launch of the Omnipod® 5 Automated Insulin Delivery System ("Omnipod 5"), which
is currently under review with the U.S. Food and Drug Administration ("FDA"). As
previously reported in our Form 10-Q for the quarter ended June 30, 2021, we
expect to receive FDA clearance and launch our limited commercial release late
in the fourth quarter. This shift in timing from our original expectation is not
expected to have a material impact on 2021 revenue.
In addition, we continue our efforts to expand the Omnipod 5 indication to
preschoolers ages two to six, however the timing of our FDA submission is
contingent upon the timing of Omnipod 5 clearance. We are planning for this
expanded indication in 2022. In addition, we completed enrollment in our type 2
feasibility study and plan to conduct additional studies with the goal to
further expand Omnipod 5's indication to type 2 users.
In order to support our continued growth and the planned launch of Omnipod 5, we
continue to focus on adding capacity to our U.S. manufacturing plant. During the
second quarter of 2021, we began producing salable product on our third highly
automated manufacturing line.
In 2021, we launched Omnipod DASH® Insulin Management System ("Omnipod DASH"),
our next generation digital mobile Omnipod platform, in Canada. We are also
continuing to expand internationally in a targeted and strategic manner. During
the first quarter of 2021, we increased our global footprint by expanding into
Turkey and during the third quarter of 2021, we expanded into Australia.
Further, we are working on our strategy to enter additional markets in new
regions.
Finally, we plan to continue our product development efforts and expand
awareness of and access to our products. Achieving the above strategic
imperatives is expected to require additional investments in certain initiatives
and personnel, as well as enhancements to our supply chain operation capacity,
efficiency and effectiveness.
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Results of Operations
Revenue
                                      Three Months Ended September 30,
                                                                                   Percent                 Currency                   Constant
(dollars in millions)                      2021                2020                Change                   Impact                  Currency (1)
U.S. Omnipod                          $     167.2          $   132.3                    26.4  %                     -  %                      26.4  %
International Omnipod                        93.1               79.8                    16.7  %                   2.6  %                      14.1  %
Total Omnipod                               260.3              212.1                    22.7  %                   1.0  %                      21.7  %
Drug Delivery                                15.3               21.9                   (30.1) %                     -  %                     (30.1) %
Total revenue                         $     275.6          $   234.0                    17.8  %                   0.9  %                      16.9  %


                                       Nine Months Ended September 30,
                                                                                   Percent                 Currency                   Constant
(dollars in millions)                      2021                2020                Change                   Impact                  Currency (1)
U.S. Omnipod                          $     461.0          $   377.7                    22.1  %                     -  %                      22.1  %
International Omnipod                       274.6              226.1                    21.5  %                   7.9  %                      13.6  %
Total Omnipod                               735.6              603.8                    21.8  %                   2.9  %                      18.9  %
Drug Delivery                                55.5               54.5                     1.8  %                     -  %                       1.8  %
Total revenue                         $     791.1          $   658.3                    20.2  %                   2.7  %                      17.5  %


(1) Constant currency revenue growth is a non-GAAP financial measure which
should be considered supplemental to, and not a substitute for, our reported
financial results prepared in accordance with GAAP. See "Management's Use of
Non-GAAP Measures."
Total revenue for the three months ended September 30, 2021 increased $41.6
million, or 17.8%, to $275.6 million, compared with $234.0 million for the three
months ended September 30, 2020. Constant currency revenue growth of 16.9% was
primarily driven by higher volume.
Total revenue for the nine months ended September 30, 2021 increased $132.8
million, or 20.2%, to $791.1 million, compared with $658.3 million for the nine
months ended September 30, 2020. Constant currency revenue growth of 17.5% was
primarily driven by higher volume and, to a lesser extent, favorable sales
channel mix.
U.S. Omnipod
U.S. Omnipod revenue for the three months ended September 30, 2021 increased
$34.9 million, or 26.4%, to $167.2 million, compared with $132.3 million for the
three months ended September 30, 2020. This increase was primarily due to higher
volumes driven by growing our customer base, a benefit from the normalization of
inventory levels at distributors in the prior year, and to a lesser extent, an
increase due to growth through the pharmacy channel, where Pods have a higher
average selling price due in part to the fact that we offer the PDM for no
charge. U.S. Omnipod revenue for the three months ended September 30, 2021
includes $13.8 million of related party revenue. Additional information
regarding our related party transactions is provided in Note 16 to the
consolidated financial statements.
U.S. Omnipod revenue for the nine months ended September 30, 2021 increased
$83.3 million, or 22.1%, to $461.0 million, compared with $377.7 million for the
nine months ended September 30, 2020. This increase was primarily due to higher
volumes driven by growing our customer base, and to a lesser extent, an increase
due to growth through the pharmacy channel, where Pods have a higher average
selling price due in part to the fact that we offer the PDM for no charge. U.S.
Omnipod revenue for the nine months ended September 30, 2021 includes $19.3
million of related party revenue.
For full year 2021, we expect strong U.S. Omnipod revenue growth driven by
volume growth of Omnipod DASH, primarily in the pharmacy channel, benefits of
our efforts to drive expanded access and awareness, and further growth in our
Omnipod customer base. This growth is expected to be partially offset by the
lagging impact of COVID-19 on new customer starts and competition from automated
insulin delivery systems.
International Omnipod
International Omnipod revenue for the three months ended September 30, 2021
increased $13.3 million, or 16.7%, to $93.1 million, compared with $79.8 million
for the three months ended September 30, 2020. Excluding the 2.6% favorable
impact of currency exchange, the remaining 14.1% increase in revenue was
primarily driven by higher volumes as we continue to expand awareness and
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access to the Omnipod, partially offset by the normalization of inventory levels
at distributors, which were elevated in the prior year due to the launch of
Omnipod DASH.
International Omnipod revenue for the nine months ended September 30, 2021
increased $48.5 million, or 21.5%, to $274.6 million, compared with $226.1
million for the nine months ended September 30, 2020. Excluding the 7.9%
favorable impact of currency exchange, the remaining 13.6% increase in revenue
was primarily driven by higher volumes as we continue to expand awareness and
access to the Omnipod, partially offset by the normalization of inventory levels
at distributors, which were elevated in the prior year due to COVID-19 and the
launch of Omnipod DASH.
For full year 2021, we expect higher International Omnipod revenue due to
continued volume growth and market penetration aided by the ongoing adoption of
Omnipod DASH throughout our international markets. We expect this revenue growth
to be partially offset by the lagging impact of COVID-19 across several key
international markets and competition from automated insulin delivery systems.
Drug Delivery
Drug Delivery revenue for the three months ended September 30, 2021 decreased
$6.6 million, or 30.1%, to $15.3 million, compared with $21.9 million for the
three months ended September 30, 2020. Drug Delivery sales volume was elevated
in the prior year due to increased demand for Amgen's Neulasta® Onpro® kit
stemming from COVID-19.
Drug Delivery revenue for the nine months ended September 30, 2021 of $55.5
million was relatively level compared with the nine months ended September 30,
2020. For full year 2021, we expect drug delivery revenue to grow based on
forecasted demand.
Operating Expenses
                                                  Three Months Ended September 30,                                           Nine Months Ended September 30,
                                              2021                                 2020                                 2021                                  2020
                                                    Percent of                          Percent of                            Percent of                           Percent of
(dollars in millions)              Amount             Revenue          
Amount            Revenue            Amount             Revenue            Amount            Revenue
Cost of revenue                 $    86.9                31.5  %       $ 82.2                35.1  %       $  252.2                31.9  %       $ 237.1                36.0  %
Research and development
expenses                        $    37.5                13.6  %       $ 38.8                16.6  %       $  118.3                15.0  %       $ 108.5                16.5  %
Selling, general and
administrative expenses         $   117.5                42.6  %       $ 89.2                38.1  %       $  344.3                43.5  %       $ 253.9                38.6  %


Cost of Revenue
Cost of revenue for the three months ended September 30, 2021 increased $4.7
million, or 5.7%, to $86.9 million, compared with $82.2 million for the three
months ended September 30, 2020. Gross margin was 68.5% for the three months
ended September 30, 2021, compared with 64.9% for the three months ended
September 30, 2020. The 360 basis point increase in gross margin was primarily
driven by improved manufacturing efficiencies and higher average selling price
due to growth in the pharmacy channel, partially offset by the decrease in Drug
Delivery revenue and the expected higher production costs as we continue to
scale U.S. manufacturing.
Cost of revenue for the nine months ended September 30, 2021 increased $15.1
million, or 6.4%, to $252.2 million, compared with $237.1 million for the nine
months ended September 30, 2020. Gross margin was 68.1% for the nine months
ended September 30, 2021, compared with 64.0% for the nine months ended
September 30, 2020. The 410 basis point increase in gross margin was primarily
driven by improved manufacturing efficiencies, higher average selling price due
to growth in the pharmacy channel, 90 basis points of favorable foreign currency
exchange and a decrease in COVID-19 related costs, as the prior year period
included two months of higher depreciation expense for under-utilized plant
capacity, recruiting and screening expenses, expedited shipping costs and
manufacturing incentives associated with our contract manufacturer in China.
These increases were partially offset by expected higher production costs as we
continue to scale U.S. manufacturing. For full year 2021, we expect gross margin
to be in the range of 68% to 69%, which reflects the benefits of continued
manufacturing improvements and revenue growth through the U.S. pharmacy channel.
Research and Development Expenses
Research and development expenses for the three months ended September 30, 2021
decreased $1.3 million, or 3.4%, to $37.5 million, compared with $38.8 million
for the three months ended September 30, 2020. This decrease was primarily due
to a shift in resources and certain costs from our Omnipod 5 clinical efforts to
our commercial strategy, partially offset by year-over-year headcount additions
to support our continued investment in development of Omnipod products.
Research and development expenses for the nine months ended September 30, 2021
increased $9.8 million, or 9.0%, to $118.3 million, compared with $108.5 million
for the nine months ended September 30, 2020. This increase was primarily due to
year-over-year headcount additions to support our continued investment in
development of Omnipod products. We expect research and development spend for
the full year 2021 to increase compared with 2020 as we continue to invest in
advancing our innovation and clinical pipeline.
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Selling, General and Administrative Expenses
Selling general and administrative expenses for the three months ended September
30, 2021 increased $28.3 million, or 31.7%, to $117.5 million, compared with
$89.2 million for the three months ended September 30, 2020. This increase was
primarily attributable to year-over-year headcount additions, mainly to support
international expansion, information technology, sales, and customer service
personnel, an increase in direct to consumer advertising spend, as well as a
shift in resources and certain costs from our Omnipod 5 clinical efforts to our
commercial strategy.
Selling general and administrative expenses for the nine months ended September
30, 2021 increased $90.4 million, or 35.6%, to $344.3 million, compared with
$253.9 million for the nine months ended September 30, 2020. This increase was
primarily attributable to year-over-year headcount additions to support our
growth, an increase in direct to consumer advertising spend, a shift in
resources and certain costs from our Omnipod 5 clinical efforts to our
commercial strategy, as well as costs related to international expansion. We
expect selling, general and administrative expenses to increase in 2021 compared
with 2020 due to expansion of our sales force, direct-to-consumer advertising,
investments to expand market acceptance and access for our products, and
investments in our operating structure to facilitate operational efficiencies
and continued growth.
Non-Operating Items
Interest Expense, Net
Net interest expense increased $4.9 million to $16.3 million for the three
months ended September 30, 2021, compared with $11.4 million for the three
months ended September 30, 2020. This increase was primarily driven by $6.3
million of cash interest expense associated with the $500 million senior secured
term loan B (the "Term Loan") entered into in May 2021, partially offset by a
$3.1 million decrease in the accretion of debt discount primarily due to the
repurchase and conversion of a portion of our 1.375% Convertible Senior Notes
due November 2024 ("1.375% Notes").
Net interest expense increased $13.5 million to $46.1 million for the nine
months ended September 30, 2021, compared with $32.6 million for the nine months
ended September 30, 2020. This increase was primarily driven by $12.5 million of
cash interest expense associated with the Term Loan entered into in May 2021.
Loss on Extinguishment of Debt
During the three months ended September 30, 2021, we incurred a $1.5 million
loss on extinguishment of debt related to the conversion of a portion of our
1.375% Notes. During the nine months ended September 30, 2021, we incurred a
$41.6 million loss on extinguishment of debt related to the repurchase and
conversion of a portion of our 1.375% Notes. Refer to Note 8 to the consolidated
financial statements for additional information.
Other Income (Expense), Net
During the three months ended September 30, 2021, we had other expense of $0.7
million, compared with other income of $1.0 million for the three months ended
September 30, 2020. The $1.7 million decrease in other income was primarily
driven by unrealized and realized foreign currency losses due to the change in
exchange rates.
During the nine months ended September 30, 2021, we had other expense of $1.5
million, compared with other income of $2.0 million for the nine months ended
September 30, 2020. The $3.5 million decrease in other income was primarily
driven by unrealized foreign currency losses due to the change in exchange
rates.
Income Tax Expense, Net
Income tax expense was $2.6 million and $1.8 million for the three months ended
September 30, 2021 and 2020, respectively, resulting in effective tax rates of
16.9% and 13.3%. The increase in the effective tax rate was primarily driven by
the jurisdictional distribution of profits and losses.
Income tax benefit was $0.5 million for the nine months ended September 30,
2021, compared with an income tax expense of $4.3 million for the nine months
ended September 30, 2020, resulting in effective tax rates of 4.4% and 15.3% for
the nine months ended September 30, 2021 and 2020, respectively. The decrease in
the effective tax rate was primarily driven by the jurisdictional distribution
of profits and losses.
In the United States, we have net operating loss carryforwards that reduce
taxable profits and a full valuation allowance against net deferred tax assets.
Additionally, we have not recorded tax benefits for current year losses in the
United Kingdom due to valuation allowance requirements following a transfer of
intellectual property that occurred during the first quarter of 2021.
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Adjusted EBITDA
The table below presents reconciliations of Adjusted EBITDA, a non-GAAP
financial measure, to net income (loss), the most directly comparable financial
measure prepared in accordance with accounting principles generally accepted in
the United States of America ("GAAP"):
                                              Three Months Ended September 30,         Nine Months Ended September 30,
(in millions)                                      2021                2020                2021                2020
Net income (loss)                             $      12.6          $    11.6          $     (12.4)         $    23.9
Interest expense, net                                16.3               11.4                 46.1               32.6
Income tax expense (benefit)                          2.6                1.8                 (0.5)               4.3
Depreciation and amortization                        14.5               10.9                 42.5               29.7
Stock-based compensation expense                      8.2                6.6                 25.8               20.3
Loss on extinguishment of debt                        1.5                  -                 41.6                  -
Adjusted EBITDA                               $      55.7          $    42.3          $     143.1          $   110.8


Non-GAAP Financial Measures
Management uses the following non-GAAP financial measures:
Constant currency revenue growth represents the change in revenue between
current and prior year periods using a constant currency, the exchange rate in
effect during the applicable prior year period. We present constant currency
revenue growth because we believe it provides meaningful information regarding
our results on a consistent and comparable basis. Management uses this non-GAAP
financial measure, in addition to financial measures in accordance with
accounting principles generally accepted in the United States ("GAAP"), to
evaluate our operating results. It is also one of the performance metrics that
determines management incentive compensation.
Adjusted EBITDA represents net income (loss) plus net interest expense, income
tax expense (benefit), depreciation and amortization, stock-based compensation
and other significant unusual items, as applicable. We present Adjusted EBITDA
because management uses it as a supplemental measure in assessing our operating
performance, and we believe that it is helpful to investors, and other
interested parties as a measure of our comparative operating performance from
period to period. Adjusted EBITDA is a commonly used measure in determining
business value and we use it internally to report results.
These non-GAAP financial measures should be considered supplemental to, and not
a substitute for, our reported financial results prepared in accordance with
GAAP. In addition, the above definitions may differ from similarly titled
measures used by others. Non-GAAP financial measures exclude the effect of items
that increase or decrease our reported results of operations; accordingly, we
strongly encourage investors to review our consolidated financial statements in
their entirety.
Liquidity and Capital Resources
As of September 30, 2021, we had $856.6 million in cash and cash equivalents.
Additionally, we have a $60 million three year senior secured revolving credit
facility ("Revolving Credit Facility"), which expires in 2024. At September 30,
2021, no amount was outstanding under the Revolving Credit Facility. The
Revolving Credit Facility contains a covenant to maintain a specified leverage
ratio under certain conditions when there are amounts outstanding under the
facility. It also contains other customary covenants, none of which are
considered restrictive to our operations. We believe that our current liquidity
will be sufficient to meet our projected operating, investing and debt service
requirements for at least the next twelve months.
Debt
To finance our operations and global expansion, we have periodically issued
convertible senior notes, which are convertible into our common stock. As of
September 30, 2021, the following notes were outstanding:
                                                               Principal                                                                    Conversion Price
                                                              Outstanding                                                                     per Share of
Issuance Date                               Coupon           (in millions)              Due Date              Conversion Rate (1)             Common Stock
November 2017                               1.375%          $        12.1            November 2024                  10.7315                $         93.18
September 2019                              0.375%                  800.0            September 2026                  4.4105                $        226.73
Total                                                       $       812.1


(1) Per $1,000 face value of notes.
In October 2021, we issued a notice of redemption for all of our outstanding
1.375% Notes. On November 15, 2021, we will redeem any 1.375% Notes that have
not been converted, redeemed or repurchased prior to that date at a redemption
price in cash equal to
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100% of the principal amount of the 1.375% Notes to be redeemed. We intend to
satisfy our conversion obligation of each $1,000 principal amount by delivering
shares of our common stock, and cash in lieu of any fractional shares.
During the nine months ended September 30, 2021, we obtained a $500 million
seven year Term Loan for net proceeds of $489.5 million, which we used to fund
the cash portion of the repurchase of the 1.375% Notes due November 2024.
Additional information regarding our debt is provided in Note 8 to the
consolidated financial statements.
Revision to Nine Months Ended September 30, 2020 Condensed Consolidated Cash
Flow Statement
In February 2021, we identified an error in the presentation of certain cash
flow activity that impacted several line items within our previously issued
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 2020. While these items affected cash flows from operating and
investing activities, they had no impact on the net increase (decrease) in cash
and cash equivalents or net income. We assessed the materiality of the
misstatement in accordance with ASC 250-10, Accounting Changes and Error
Corrections, and concluded that this misstatement was not material to our
previously issued consolidated financial statements. We have restated the
accompanying Condensed Consolidated Statement of Cash Flow from amounts
previously reported to correct this matter. The following table presents a
summary of the impact of the restatement on our Condensed Consolidated Statement
of Cash Flows for the nine months ended September 30, 2020.

                                             Previously             

Restatement

(in millions)                                 Reported              Adjustment             Reclassification (1)           Restated
Prepaid and other assets                   $      (16.8)         $          4.1          $                   -          $    (12.7)
Accounts payable, accrued expenses and
other current liabilities                  $       36.1          $        (22.1)         $               (14.0)         $        -
Other long-term liabilities                $       (2.4)         $            -          $                 2.4          $        -
Accounts payable                           $          -          $            -          $                 1.8          $      1.8

Accrued expenses and other liabilities $ - $

   -          $                 9.8          $      9.8

Net cash provided by operating activities $ 85.0 $ (18.0) $

                   -          $     67.0

Capital expenditures                       $      (88.5)         $         10.3          $                   -          $    (78.2)
Acquisition of intangible assets           $       (8.3)         $          7.7          $                   -          $     (0.6)

Net cash provided by investing activities $ 65.3 $ 18.0 $

                   -          $     83.3


(1) Certain prior period amounts have been reclassified to conform to the current period cash flow statement presentation.

© Edgar Online, source Glimpses

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