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 in August we launched our full market release. Accordingly, Omnipod 5 is now available through retail pharmacies. 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 expanded into theUnited Arab Emirates during the quarter. In addition, we have been taking steps to further strengthen our global manufacturing capabilities. We are optimizing our operations inChina by consolidating our production in that region into one location. We also broke ground on 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 are currently enrolling individuals in a randomized control trial inFrance and theU.S. 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. 18
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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 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 June 30, Percent Currency Constant (dollars in millions) 2022 2021 Change Impact Currency (1) U.S. Omnipod$ 196.4 $ 150.5 30.5 % - % 30.5 % International Omnipod 89.4 91.6 (2.4) % (11.3) % 8.9 % Total Omnipod 285.8 242.1 18.1 % (4.2) % 22.3 % Drug Delivery 13.6 21.1 (35.5) % - % (35.5) % Total revenue$ 299.4 $ 263.2 13.8 % (3.9) % 17.7 % Six Months Ended June 30, Percent Currency Constant (dollars in millions) 2022 2021 Change Impact Currency (1) U.S. Omnipod$ 370.5 $ 293.8 26.1 % - % 26.1 % International Omnipod 184.8 181.5 1.8 % (8.9) % 10.7 % Total Omnipod 555.3 475.3 16.8 % (3.4) % 20.2 % Drug Delivery 39.5 40.2 (1.7) % - % (1.7) % Total revenue$ 594.8 $ 515.5 15.4 % (3.1) % 18.5 % (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 endedJune 30, 2022 increased$36.2 million , or 13.8%, to$299.4 million , compared with$263.2 million for the three months endedJune 30, 2021 . Constant currency revenue growth of 17.7% was primarily driven by higher volume and favorable sales channel mix, partially offset by a decrease in Drug Delivery revenue. Total revenue for the six months endedJune 30, 2022 increased$79.3 million , or 15.4%, to$594.8 million , compared with$515.5 million for the six months endedJune 30, 2021 . Constant currency revenue growth of 18.5% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix.
U.S. Omnipod revenue for the three months endedJune 30, 2022 increased$45.9 million , or 30.5%, to$196.4 million , compared with$150.5 million for the three months endedJune 30, 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/Controller for no charge, as well as an increase in inventory at distributors due to the launch of Omnipod 5.U.S. Omnipod revenue for the three months endedJune 30, 2022 includes$55.5 million of related party revenue, compared with$3.3 million for the three months endedJune 30, 2021 . The$52.2 million increase primarily resulted from a shift in certain revenues from one distributor to another.U.S. Omnipod revenue for the six months endedJune 30, 2022 increased$76.7 million , or 26.1%, to$370.5 million , compared with$293.8 million for the six months endedJune 30, 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/Controller for no charge. 19
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U.S. Omnipod revenue for the six months endedJune 30, 2022 includes$103.9 million of related party revenue, compared with$5.5 million for the six months endedJune 30, 2021 . The$98.4 million increase primarily resulted from a shift in certain revenues from one distributor to another. For full year 2022, we expect strongU.S. Omnipod revenue growth in the pharmacy channel, primarily driven by the continued increase in Omnipod DASH sales volume and the full market release of Omnipod 5.
International Omnipod
International Omnipod revenue for the three months endedJune 30, 2022 decreased$2.2 million , or 2.4%, to$89.4 million , compared with$91.6 million for the three months endedJune 30, 2021 . Excluding the 11.3% unfavorable impact of currency exchange, the remaining 8.9% 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. International Omnipod revenue for the six months endedJune 30, 2022 increased$3.3 million , or 1.8%, to$184.8 million , compared with$181.5 million for the six months endedJune 30, 2021 . Excluding the 8.9% unfavorable impact of currency exchange, the remaining 10.7% 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 endedJune 30, 2022 decreased$7.5 million , or 35.5%, to$13.6 million , compared with$21.1 million for the three months endedJune 30, 2021 . This decrease was primarily due to elevated volume in the prior year due to the pandemic. Drug Delivery revenue for the six months endedJune 30, 2022 of$39.5 million was relatively level compared with$40.2 million for the six months endedJune 30, 2021 . For full year 2022, we expect Drug Delivery revenue to decline as production levels were elevated during the pandemic. Operating Expenses Three Months Ended June 30, 2022 2021 Percent of Percent of (dollars in millions) Amount Revenue Amount Revenue Cost of revenue$ 109.1 36.4 %$ 80.5 30.6 % Research and development expenses$ 42.6 14.2 %$ 40.1 15.2 % Selling, general and administrative expenses$ 174.4 58.2 %$ 116.3 44.2 % Six Months Ended June 30, 2022 2021 Percent of Percent of (dollars in millions) Amount Revenue Amount Revenue Cost of revenue$ 194.8 32.8 %$ 165.3 32.1 % Research and development expenses$ 85.7 14.4 %$ 80.8 15.7 % Selling, general and administrative expenses$ 303.1 51.0 %$ 226.8 44.0 % Cost of Revenue Cost of revenue for the three months endedJune 30, 2022 increased$28.6 million , or 35.5%, to$109.1 million , compared with$80.5 million for the three months endedJune 30, 2021 . Gross margin was 63.6% for the three months endedJune 30, 2022 , compared with 69.4% for the three months endedJune 30, 2021 . The 580 basis point decrease in gross margin was primarily driven by higher expected production costs and manufacturing inefficiencies asU.S. manufacturing continues to ramp and become a larger portion of our total production and we transition product lines between manufacturing facilities to ensure redundancy. An increase in warranty costs driven by aging battery lives in Omnipod DASH PDMs and higher costs associated with Omnipod 5 production also contributed to the decline in margin. These decreases were partially offset by higher average selling price due to growth in the pharmacy channel. Cost of revenue for the six months endedJune 30, 2022 increased$29.5 million , or 17.8%, to$194.8 million , compared with$165.3 million for the six months endedJune 30, 2021 . Gross margin of 67.2% for the six months endedJune 30, 2022 was relatively level 20
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with the prior year as higher expected production costs in theU.S. were mostly offset by improved manufacturing efficiencies and higher average selling price due to growth in the pharmacy channel. For full year 2022, we expect gross margin to be in the range of 65% to 66%. We anticipate gross margin will be negatively impacted by unfavorable product line mix, higher costs associated with Omnipod 5 and Drug Delivery production, increased component costs due to inflation, and higher warranty expense. We believe these higher costs will be partially offset by increased volume in the pharmacy channel.
Research and Development Expenses
Research and development expenses for the three months endedJune 30, 2022 increased$2.5 million , or 6.2%, to$42.6 million , compared with$40.1 million for the three months endedJune 30, 2021 . Research and development expenses for the six months endedJune 30, 2022 increased$4.9 million , or 6.1%, to$85.7 million , compared with$80.8 million for the six months endedJune 30, 2021 . The increases for both the three and six months endedJune 30, 2022 were 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 endedJune 30, 2022 increased$58.1 million , or 50.0%, to$174.4 million , compared with$116.3 million for the three months endedJune 30, 2021 . Selling general and administrative expenses for the six months endedJune 30, 2022 increased$76.3 million , or 33.6%, to$303.1 million , compared with$226.8 million for the six months endedJune 30, 2021 . The increases for both the three and six months endedJune 30, 2022 were primarily attributable to$27.3 million of legal costs related to the settlement of a patent infringement lawsuit, associated legal fees, and an estimated liability to settle a contract dispute. To a lesser extent, the increases were due to year-over-year headcount additions, mainly to support information technology, commercial operations, and international expansion, 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. Additionally, selling, general and administrative expenses for both the three and six months endedJune 30, 2022 includes$3.4 million of costs associated with the retirement and advisory services of our former chief executive officer.
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$8.1 million to$8.3 million for the three months endedJune 30, 2022 , compared with$16.4 million for the three months endedJune 30, 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. Net interest expense decreased$12.6 million to$17.2 million for the six months endedJune 30, 2022 , compared with$29.8 million for the six months endedJune 30, 2021 . This decrease was primarily driven by the adoption of ASU 2020-06 as discussed above.
Loss on Extinguishment of Debt
During the three and six months endedJune 30, 2021 , we incurred a$40.1 million loss on extinguishment of debt related to the repurchase of a portion of our 1.375% Convertible Senior Notes.
Other (Expense) Income, Net
During the three months endedJune 30, 2022 , we had other expense of$1.1 million , compared with other income of$1.8 million for the three months endedJune 30, 2021 . The$2.9 million increase in other expense was primarily driven by an increase in unrealized foreign currency losses.
During both the six months ended
Income Tax Expense, Net Income tax benefit was$1.1 million for the three months endedJune 30, 2022 , compared with an income tax benefit of$3.4 million for the three months endedJune 30, 2021 , resulting in effective tax rates of 2.9% and 12.1%, respectively. Income tax expense was$0.4 million for the six months endedJune 30, 2022 , compared with an income tax benefit of$3.1 million for the six months endedJune 30, 2021 , resulting in effective tax rates of (6.5)% and 11.2%, respectively. The decreases in the effective tax rates for both the three and six months endedJune 30, 2022 were primarily driven by the jurisdictional distribution of profits and losses. Additionally, 21
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the valuation allowance recorded against current year losses in the
Adjusted EBITDA
The table below presents reconciliations of Adjusted EBITDA, a non-GAAP financial measure, to net income (loss), the most directly comparable financial measure prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"): Three Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 2022 2021 Net loss$ (35.0) $ (25.0) $ (7.2) $ (25.0) Interest expense, net 8.3 16.4 17.2 29.8 Income tax (benefit) expense (1.1) (3.4) 0.4 (3.1) Depreciation and amortization 15.8 15.2 31.1 28.0 Stock-based compensation expense 8.9 9.0 18.4 17.6 Legal costs(1) 27.3 - 27.3 - CEO transition costs(2) 3.4 - 3.4 - Loss on extinguishment of debt - 40.1 - 40.1 Adjusted EBITDA $ 27.6$ 52.3 $ 90.6 $ 87.4 (1) Includes a$20.0 million charge to settle patent infringement litigation withRoche Diabetes Care, Inc. , associated legal fees, and an estimated liability to settle a contract dispute. Refer to Note 12 to the consolidated financial statements for additional information.
(2) Represents costs associated with the retirement and advisory services of our
former chief executive officer, including
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 ofJune 30, 2022 , we had$708.6 million in cash and cash equivalents. Additionally, we have a$70.0 million three-year senior secured revolving credit facility (the "Credit Facility"), which expires in 2024. AtJune 30, 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. 22
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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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