INSULET CORPORATION 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 endedDecember 31, 2021 and in this quarterly report.
Overview
We are primarily engaged in the development, manufacture and sale of our proprietary Omnipod System, a continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device that is worn on the body for up to three days at a time; and its wireless companion, the handheld PDM/Controller. 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 MDI therapy or the use of pump and tubing. We believe that the Omnipod System's unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience and ease. 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 Neulasta 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, our efforts have been focused on the launch of Omnipod 5, which inJanuary 2022 , received FDA clearance for individuals aged six years and older with type 1 diabetes. Our limited market release of Omnipod 5 began in February and we expect a full market release this year. We are also working to bring Omnipod 5 to our international markets. Our submission for CE Mark approval inEurope is under review and we are currently focused on further building our international teams and advancing our regulatory, reimbursement and market development efforts. Additionally, we continue to increase our presence within our existing markets and expand internationally in a targeted and strategic manner. We recently opened an office inDubai to serve as our primary local presence and regional infrastructure in theMiddle East and launched Omnipod inSaudi Arabia . We also plan to expand intoUnited Arab Emirates this year. In addition, we have been taking steps to further strengthen our global manufacturing capabilities. We have optimized our operations inChina by consolidating our production in that region into one location. We also plan to invest in a new manufacturing plant inMalaysia to support our international expansion strategy, further ensure product supply and drive higher gross margins over time. Finally, we plan to continue to expand awareness of and access to our products, while also focusing on our product development efforts. Our direct to consumer advertising programs continue to drive increased awareness of Omnipod. To accelerate our efforts to secure reimbursement for Omnipod 5, we plan to begin a randomized control trial this year. Our product development efforts include enhancing the customer experience through digital product offerings. 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.
Results of Operations
Factors Affecting Operating Results
Our Pods are intended to be used continuously for up to three days, after which it may be replaced with a new disposable Pod. The Omnipod System's unique patented design allow us to provide pump therapy at a relatively low or no up-front investment, which reduces the risk to third-party payors in theU.S. , compared to tubed insulin pumps. As we grow our customer base, we expect to generate an increasing portion of our revenues through recurring sales of our disposable Pods, which provides predictable recurring revenue. We continue to experience constrained supply and supply chain disruption; however, to date we have been able to successfully mitigate this disruption and ensure uninterrupted supply to our customers by increasing our inventory levels and taking other 17
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measures. While our mitigation efforts and inflation are expected to negatively
impact gross margins and net income throughout the year, we intend to continue
to work to improve productivity to help offset these costs.
Revenue
Three Months Ended March 31,
Percent Currency Constant
(dollars in millions) 2022 2021 Change Impact Currency (1)
U.S. Omnipod $ 174.1 $ 143.3 21.5 % - % 21.5 %
International Omnipod 95.4 89.9 6.1 % (6.4) % 12.5 %
Total Omnipod 269.5 233.2 15.6 % (2.4) % 18.0 %
Drug Delivery 25.9 19.1 35.6 % - % 35.6 %
Total revenue $ 295.4 $ 252.3 17.1 % (2.2) % 19.3 %
(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 March 31, 2022 increased $43.1 million ,
or 17.1%, to $295.4 million , compared with $252.3 million for the three months
ended March 31, 2021 . Constant currency revenue growth of 19.3% was primarily
driven by higher volume, favorable sales channel mix and, to a lesser extent
increased drug delivery revenue.
U.S. Omnipod revenue for the three months endedMarch 31, 2022 increased$30.8 million , or 21.5%, to$174.1 million , compared with$143.3 million for the three months endedMarch 31, 2021 . 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 three months endedMarch 31, 2022 includes$48.4 million of related party revenue, compared with$2.8 million for the three months endedMarch 31, 2021 . The$45.6 million increase primarily resulted from a shift in certain revenues from one distributor to another.
For full year 2022, we expect strong
International Omnipod International Omnipod revenue for the three months endedMarch 31, 2022 increased$5.5 million , or 6.1%, to$95.4 million , compared with$89.9 million for the three months endedMarch 31, 2021 . Excluding the 6.4% unfavorable impact of currency exchange, the remaining 12.5% increase in revenue was primarily due to higher volumes as we continue to expand awareness and access to Omnipod DASH, partially offset by increased competition from automated insulin delivery ("AID") systems and the impact of the pandemic on our recurring revenue.
For full year 2022, 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, partially offset by competition from AID systems.
Drug Delivery
Drug Delivery revenue for the three months endedMarch 31, 2022 increased$6.8 million , or 35.6%, to$25.9 million , compared with$19.1 million for the three months endedMarch 31, 2021 . This increase was primarily due to a shift in timing of production. For full year 2022, we expect Drug Delivery revenue to decline as production levels were elevated during the pandemic.
Operating Expenses
Three Months Ended
2022 2021
Percent of Percent of
(dollars in millions) Amount Revenue Amount Revenue
Cost of revenue $ 85.7 29.0 % $ 84.8 33.6 %
Research and development expenses $ 43.1 14.6 % $ 40.7 16.1 %
Selling, general and administrative expenses $ 128.7 43.6 % $ 110.5 43.8 %
Cost of Revenue
Cost of revenue for the three months ended March 31, 2022 increased $0.9
million , or 1.1%, to $85.7 million , compared with $84.8 million for the three
months ended March 31, 2021 . Gross margin was 71.0% for the three months ended
March 31, 2022 , compared
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with 66.4% for the three months ended
For full year 2022, we expect gross margin to be in the range of 67% to 68%. We anticipate gross margin will be negatively impacted by unfavorable product mix, higher costs associated with Omnipod 5 production, and continued higher production costs as we increaseU.S. manufacturing and contend with inflation and global supply chain disruptions. We believe these higher costs will be partially offset by the benefits of continued improvements in global manufacturing and supply chain operations and increased volumes in the pharmacy channel.
Research and Development Expenses
Research and development expenses for the three months endedMarch 31, 2022 increased$2.4 million , or 5.9%, to$43.1 million , compared with$40.7 million for the three months endedMarch 31, 2021 . This increase was primarily due to year-over-year headcount additions to support our continued investment in development of Omnipod products, partially offset by lower outside services used for clinical activities. We expect research and development spending in 2022 to increase compared with 2021 as we continue to invest in advancing our innovation and contend with inflation.
Selling, General and Administrative Expenses
Selling general and administrative expenses for the three months endedMarch 31, 2022 increased$18.2 million , or 16.5%, to$128.7 million , compared with$110.5 million for the three months endedMarch 31, 2021 . This increase was primarily attributable to year-over-year headcount additions, mainly to support information technology, international expansion and commercial operations, an increase in investments to expand market acceptance and access to the Omnipod, and higher travel and entertainment expenses due to increased activity as COVID-19 restrictions have lifted. We expect selling, general, and administrative expenses to increase in 2022 compared with 2021 due to expansion of our sales force and customer support personnel, investments to expand market acceptance and access for the Omnipod System, including direct-to-consumer advertising, and investments in our operating structure to facilitate operating efficiencies and continued growth.
Non-Operating Items
Interest Expense, Net
Net interest expense decreased$4.5 million to$8.9 million for the three months endedMarch 31, 2022 , compared with$13.4 million for the three months endedMarch 31, 2021 . This decrease was primarily driven by the adoption of Accounting Standards Update 2020-06, Accounting for Convertible Debt Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which eliminated most of the non-cash interest expense associated with our convertible notes. Refer to Recently Adopted Accounting Standard in Note 1 to the consolidated financial statements for additional information.
Other Income (Expense), Net
During the three months endedMarch 31, 2022 , we had other income of$0.3 million , compared with other expense of$2.6 million for the three months endedMarch 31, 2021 . The$2.9 million decrease in other expense was primarily driven by a decrease in unrealized foreign currency losses and an increase in realized gains. Income Tax Expense, Net Income tax expense was$1.5 million and$0.3 million for the three months endedMarch 31, 2022 and 2021, respectively, resulting in effective tax rates of 5.1% and 114.3%. The decrease in the effective tax rate was primarily driven by an increase in pre-tax income in theU.S. where we have net operating loss carryforwards to reduce taxable profits and a full valuation allowance against deferred tax assets. 19
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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 inthe United States of America ("GAAP"): Three Months Ended March 31, (in millions) 2022 2021 Net income $ 27.8 $ - Interest expense, net 8.9 13.4 Income tax expense 1.5 0.3 Depreciation and amortization 15.3 12.8 Stock-based compensation expense 9.5 8.6 Adjusted EBITDA $ 63.0$ 35.1 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 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 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 ofMarch 31, 2022 , we had$709.6 million in cash and cash equivalents. Additionally, we have a$60 million three-year senior secured revolving credit facility (the "Credit Facility"), which expires in 2024. AtMarch 31, 2022 , no amount was outstanding under the Credit Facility. The 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
Conversion Price
Principal Outstanding per Share of
Issuance Date Coupon (in millions) Due Date Conversion Rate (1) Common Stock
September 2019 0.375% 800.0 September 2026 4.4105 $ 226.73
(1) Per
Additional information regarding our debt is provided in Note 10 to the consolidated financial statements.
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