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, 2022 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 (the "Pod") device that the user fills with insulin and wears directly on the body for up to three days at a time, which delivers personalized doses of insulin, and the PDM or Controller, a wireless handheld device that programs the Pod with the user's personalized insulin-delivery instructions and wirelessly monitors the Pod's operation. The Omnipod System includes: Classic Omnipod, its next generation Omnipod DASH, and the most recent generation Omnipod 5, all of which eliminate the need for multiple daily injections using syringes or insulin pens or the use of pump and tubing. We have also tailored the Omnipod System technology platform for the delivery of subcutaneous drugs in 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 long-term financial objective is to sustain profitable growth. To achieve this goal, we launched Omnipod 5 in 2022 inthe United States and we are working to bring Omnipod 5 to our international markets. We received CE Mark approval under the European MDR inSeptember 2022 , and we are currently focused on further building our international teams and advancing our regulatory, reimbursement, and market development efforts. We plan to launch Omnipod 5 in theU.K. andGermany in 2023 and to continue our international roll out more broadly in 2024. We also have begun enrolling individuals in a pivotal trial for Omnipod 5 with the goal of expanding Omnipod 5's indication to type 2 users. Additionally, to accelerate our efforts to secure reimbursement for Omnipod 5, we have fully enrolled individuals in a randomized control trial in theU.S. and have enrolled the majority of the individuals inFrance . We also continue to expand market access and awareness of Omnipod through our direct to consumer advertising programs and through growing our presence in theU.S. pharmacy channel, where access to Omnipod 5 and Omnipod DASH is simpler and affordable, as no up-front investment is required. As we continue our growth in the pharmacy channel, we plan to phase-out our Classic Omnipod in theU.S. in 2023, since the vast majority of our customer base is no longer using this product. We also continue to take steps to strengthen our global manufacturing capabilities. We are currently constructing a new manufacturing plant inMalaysia to support our international expansion strategy, further ensure product supply, and drive higher gross margins over time. We expect to begin production at this new manufacturing facility in 2024.
Finally, we continue to focus on our product development efforts, including
automated insulin delivery ("AID") offerings, such as choice of continuous
glucose monitor and smartphone integration, and enhancing the customer
experience through digital product and data capabilities. In
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 in regions where reimbursement allows for it and our
pay-as-you-go pricing model reduces the risk to third-party payors. 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 recurring
revenue.
During 2022, we issued two voluntary Medical Device Corrections ("MDCs"), one in
October for our Omnipod DASH PDM related to its battery and the other in
November for our Omnipod 5 Controller related to its charging port and cable. In
addition to the estimated liability we recorded in 2022, we have a performance
obligation to replace Omnipod DASH PDMs and Omnipod 5 Controllers sold
subsequent to the MDC issuances, which is expected to negatively impact gross
margins and net income in 2023, most notably in the first half of the year.
However, during the three months ended March 31, 2023 , we recorded $8.0 million
of income associated with a change in our estimated liability for the MDCs
primarily due to lower shipping costs for replacement DASH
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PDMs and lower expected distribution costs for Omnipod 5 Controllers, which is expected to offset the negative impact to gross margin.
We continue to experience challenges stemming from the global supply chain
disruption; however, while there is no guarantee of future performance, 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 March 31,
Percent Currency Constant
(dollars in millions) 2023 2022 Change Impact Currency (1)
U.S. Omnipod $ 259.0 $ 174.1 48.8 % - % 48.8 %
International Omnipod 98.6 95.4 3.4 % (6.2) % 9.6 %
Total Omnipod 357.6 269.5 32.7 % (2.2) % 34.9 %
Drug Delivery 0.5 25.9 (98.1) % - % (98.1) %
Total revenue $ 358.1 $ 295.4 21.2 % (2.1) % 23.3 %
(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, 2023 increased $62.7 million ,
or 21.2%, to $358.1 million , compared with $295.4 million for the three months
ended March 31, 2022 . Constant currency revenue growth of 23.3% was primarily
driven by higher volume and, to a lesser extent, favorable sales channel mix,
partially offset by decreased drug delivery revenue.
U.S. Omnipod
U.S. Omnipod revenue for the three months ended March 31, 2023 increased
$84.9 million , or 48.8%, to $259.0 million , compared with $174.1 million for the
three months ended March 31, 2022 . This increase was primarily due to higher
volumes driven by growing our customer base and, to a lesser extent, 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. This
increase was also driven by conversions to Omnipod 5 as users generally fill
both their starter kit and their first month of refills simultaneously. These
increases were partially offset by a reduction in inventory days-on-hand at our
distributors due to higher-than-expected consumption of Omnipod 5 and sales
returns for Omnipod DASH and Omnipod Classic as retail pharmacies convert their
inventory to Omnipod 5.
U.S. Omnipod revenue for the three months ended March 31, 2023 includes $96.8
million of related party revenue, compared with $48.4 million for the three
months ended March 31, 2022 . The $48.4 million increase primarily resulted from
growth through the pharmacy channel.
For full year 2023, we expect strong U.S. Omnipod revenue growth driven by
continued volume growth of Omnipod 5 in the pharmacy channel, continued sales of
Omnipod DASH, and the benefits of our recurring revenue model. We expect these
increases to be partially offset by lower conversions to Omnipod 5 in the second
half of the year compared to 2022.
International Omnipod
International Omnipod revenue for the three months endedMarch 31, 2023 increased$3.2 million , or 3.4%, to$98.6 million , compared with$95.4 million for the three months endedMarch 31, 2022 . Excluding the 6.2% unfavorable impact of currency exchange, the remaining 9.6% 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 AID systems.
For full year 2023, we expect higher International Omnipod revenue due to continued volume growth driven by the ongoing adoption of Omnipod DASH, partially offset by competition from AID systems.
Drug Delivery
Drug Delivery revenue for the three months endedMarch 31, 2023 was nominal compared with$25.9 million for the three months endedMarch 31, 2022 . For full year 2023, we expect Drug Delivery revenue to decline$26 million to$32 million due to a lower demand forecast from our partner. 17
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Operating Expenses
Three Months Ended March 31,
2023 2022
Percent of Percent of
(dollars in millions) Amount Revenue Amount Revenue
Cost of revenue $ 117.6 32.8 % $ 85.7 29.0 %
Research and development expenses $ 50.1 14.0 % $ 43.1 14.6 %
Selling, general and administrative
expenses $ 162.7 45.4 % $ 128.7 43.6 %
Cost of Revenue
Cost of revenue for the three months ended March 31, 2023 increased $31.9
million , or 37.2%, to $117.6 million , compared with $85.7 million for the three
months ended March 31, 2022 . Gross margin was 67.2% for the three months ended
March 31, 2023 , compared with 71.0% for the three months ended March 31, 2022 .
The 380 basis point decrease in gross margin was primarily driven by higher
costs associated with Omnipod 5 production, higher production costs in the U.S.
as manufacturing continues to ramp and become a larger portion of our total
production, and lower production of Drug Delivery pods. To a lesser extent,
increased costs associated with warranty, inventory reserves, inflation also
contributed to the decline in margin. These decreases were partially offset by
higher average selling price due to growth in the pharmacy channel and an
approximate 220 basis point adjustment to our estimated warranty accrual for the
voluntary MDCs issued in 2022.
For full year 2023, we expect gross margin to be in the range of 65% to 66%. We
anticipate gross margin to increase due to significant costs associated with the
MDCs in 2022, most of which we do not expect to recur in 2023, higher volume in
the pharmacy channel and favorable geographical sales mix. We believe these
increases will be partially offset by higher production costs as we further
scale U.S. manufacturing, unfavorable product line mix due to higher costs
associated with Omnipod 5 production, and higher costs as we contend with
inflation.
Research and Development Expenses
Research and development expenses for the three months endedMarch 31, 2023 increased$7 million , or 16.2%, to$50.1 million , compared with$43.1 million for the three months endedMarch 31, 2022 . The 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 spending in 2023 to increase compared with 2022 as we continue to invest in advancing our innovation and clinical pipeline and contend with inflation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months endedMarch 31, 2023 increased$34.0 million , or 26.4%, to$162.7 million , compared with$128.7 million for the three months endedMarch 31, 2022 . The increase was primarily attributable to higher third-party customer service costs to support Omnipod 5 adoption, year-over-year headcount additions, mainly in information technology and commercial operations, and an increase in software license fees driven by investments in new systems due to our growing business and increased headcount. To a lesser extent, the increase was due to higher consulting costs and higher direct-to-consumer advertising spend. We expect selling, general and administrative expenses to increase in 2023 compared with 2022 primarily due to investments in our operating structure, primarily headcount additions, to facilitate operational efficiencies and continued growth, including customer support and a new enterprise resource planning system. Additionally, we plan to make additional investments to support the Omnipod System, including market acceptance and access, and the phased launch of Omnipod 5 in our international markets. We expect these increases to be partially offset by$25.2 million of legal charges incurred in 2022, related to the settlement of patent infringement lawsuit, associated legal fees, and the settlement of a contract dispute, that are not expected to recur.
Non-Operating Items
Interest Expense, Net
Net interest expense decreased$6.0 million to$2.9 million for the three months endedMarch 31, 2023 , compared with$8.9 million for the three months endedMarch 31, 2022 . This decrease was primarily driven by an increase in interest income resulting from higher interest rates. Income Tax Expense Income tax expense was$0.8 million for the three months endedMarch 31, 2023 , compared with$1.5 million for the three months endedMarch 31, 2022 , resulting in relatively consistent effective tax rates of 3.4% and 5.1%, respectively. 18
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Adjusted EBITDA
The table below presents reconciliations of Adjusted EBITDA, a non-GAAP
financial measure, to net income, the most directly comparable financial measure
prepared in accordance with accounting principles generally accepted in
Three Months Ended March 31,
(in millions) 2023 2022
Net income $ 23.8 $ 27.8
Interest expense, net 2.9 8.9
Income tax expense 0.8 1.5
Depreciation and amortization 17.2 15.3
Stock-based compensation 12.1 9.5
Voluntary MDCs (1) (8.0) -
Adjusted EBITDA $ 48.8 $ 63.0
(1) Represents income resulting from an adjustment to estimated costs associated with
the voluntary MDC notices issued in the fourth quarter of 2022, which is included in
cost of revenue. Refer to Note 8 to the consolidated financial statements for additional
information.
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 plus net interest expense, income tax expense, depreciation and amortization, stock-based compensation and other significant transactions or events, such as legal settlements, medical device corrections, and loss on extinguishment of debt, that affect the period-to-period comparability of our performances, as applicable. We present Adjusted EBITDA because management uses it as a supplemental measure in assessing our performance, and we believe that it is helpful to investors, and other interested parties as a measure of our comparative 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
We believe that our current liquidity as further described below will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.
Capitalization
The following table contains several key measures to gauge our financial condition and liquidity:
(in millions) March 31, 2023 December 31, 2022 Cash and cash equivalents$ 620.7 $ 674.7 Current portion of long-term debt $ 27.8 $ 27.5 Long-term debt, net$ 1,368.8 $ 1,374.3 Total debt, net$ 1,396.6 $ 1,401.8 Total stockholders' equity$ 502.8 $ 476.4 Debt-to-total capital ratio 74 % 75 % Net debt-to-total capital ratio 41 % 39 % 19
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Convertible Debt
To finance our operations and global expansion, we have periodically issued
convertible senior notes, which are convertible into our common stock. As of
Principal Conversion Price
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 9 to the consolidated financial statements.
Credit Agreement
We have a$100.0 million three-year senior secured revolving credit facility (the "Credit Facility"), which expires in 2024. AtMarch 31, 2023 , 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.
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