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 and involve 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, 2019 and in this quarterly report.
Overview
We are primarily engaged in the development, manufacture and sale of our
proprietary Omnipod® System ("Omnipod"), an innovative, continuous insulin
delivery system for people with insulin-dependent diabetes. There are two
primary types of insulin therapy practiced today: multiple daily injection
("MDI") therapy using syringes or insulin pens; and pump therapy using insulin
pumps. Insulin pumps are used to perform continuous subcutaneous insulin
infusion, or insulin pump therapy, and typically use a programmable device and
an infusion set to administer insulin into a person's body. Insulin pump therapy
has been shown to provide people with insulin-dependent diabetes with numerous
advantages relative to MDI therapy. 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. 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
MDI therapy or the use of traditional 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 non-insulin 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, an innovative 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:
• delivering consumer-focused innovation;


• ensuring the best customer experience globally;

• expanding our global footprint; and

• driving operational excellence.




Our long-term financial objective is to sustain profitable growth. To achieve
this goal, we expect our efforts in 2020 to focus primarily on the pivotal trial
for Omnipod, powered by Horizon™, in the United States. In order to support our
continued growth and the expected launch of Omnipod, powered by Horizon in the
first half 2021, we continue to focus on adding capacity to our U.S.
manufacturing plant. During the first quarter of 2020, we began producing
salable product on our second manufacturing line in the U.S. and we plan to
install a third line in the second half of 2020, on which production is expected
in 2021.
Additionally, in 2020, we had planned to further roll out our Omnipod DASHTM
Insulin Management System ("Omnipod DASH"), our next generation digital mobile
Omnipod platform, in Europe and Canada and enter five new countries in Western
Europe and the Middle East to expand the commercial sale of Omnipod and our
global footprint. We are still committed to the further roll out of Omnipod DASH
and to entering new countries, although the timing has shifted to early 2021
primarily due to the coronavirus pandemic discussed under Recent Developments
below. This change in expected timing will not have a material impact on our
2020 revenues since we did not expect these actions to have a meaningful
contribution in 2020, although they are expected to contribute to our long-term
growth.
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.
Recent Developments
A novel strain of coronavirus (COVID-19) was identified in China in December
2019, and subsequently declared a pandemic by the World Health Organization in
March 2020. The COVID-19 outbreak in China resulted in abnormally low production
at our contract manufacturer in China during the first two months of the
quarter. As a result, we incurred incremental depreciation expense for under-
utilized plant capacity for the first two months of the quarter. In response to
this outbreak, we took measures to ensure our ability to continue to provide
product to our customers, including providing manufacturing incentives to our
contract manufacturer in China and utilizing expedited, but more costly,
shipping measures to transport product from China. In addition, we implemented
strict screening and additional sanitation measures.

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China, where we manufacture a significant portion of our products, has begun to
experience recovery from COVID-19 and we have been able to produce at normal
capacity since March. Additionally, our second highly automated manufacturing
line in our U.S. manufacturing plant has provided additional manufacturing
redundancy to help mitigate manufacturing risks stemming from COVID-19. Once
fully ramped, we expect the two highly-automated lines in our U.S. manufacturing
plant to provide us with capacity in the U.S. that is equivalent to all our
current lines in China. Refer to Item 1A. Risk Factors for a discussion of
COVID-19 risks.
Results of Operations
                           Three Months Ended March 31,
                                                                                                     Constant
(dollars in millions)          2020              2019       Percent Change    Currency Impact      Currency (1)
Revenue:
U.S. Omnipod             $         116.6     $     86.1           35.4  %              -  %           35.4  %
International Omnipod               73.1           56.9           28.5  %           (3.4 )%           31.9  %
Total Omnipod                      189.7          143.0           32.7  %           (1.3 )%           34.0  %
Drug Delivery                        8.3           16.6          (50.0 )%              -  %          (50.0 )%
Total                    $         198.0     $    159.6           24.1  %           (1.2 )%           25.3  %


(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."
Revenue
Total revenue for the three months ended March 31, 2020 increased $38.4 million,
or 24.1%, to $198.0 million, compared with $159.6 million for the three months
ended March 31, 2019. Excluding the 1.2% unfavorable impact of currency
exchange, the remaining 25.3% increase in revenue was primarily driven by higher
volume and, to a lesser extent, favorable sales channel mix. These increases
were partially offset by a decline in Drug Delivery revenue.
U.S. Omnipod
U.S. Omnipod revenue for the three months ended March 31, 2020 increased $30.5
million, or 35.4%, to $116.6 million, compared with $86.1 million for the three
months ended March 31, 2019. This increase was primarily due to higher volumes
driven by growing our customer base, the launch of Omnipod DASH at the end of
the first quarter of 2019 and growth through the pharmacy channel. Pod prices in
the pharmacy channel have higher average selling prices due in part to the fact
that we offer the PDM for no charge. For full year 2020, we expect strong
Omnipod revenue growth driven by continued market penetration and volume growth
of Omnipod DASH, primarily in the pharmacy channel.
International Omnipod
International Omnipod revenue for the three months ended March 31, 2020
increased $16.2 million, or 28.5%, to $73.1 million, compared with $56.9 million
for the three months ended March 31, 2019. Excluding the 3.4% unfavorable impact
of currency exchange, the remaining 31.9% increase in revenue was primarily
driven by higher volumes as we continue to expand awareness and access to the
Omnipod. Similar to in the U.S, for the full year 2020, we expect higher
International Omnipod revenue due to continued volume growth and market
penetration.
Drug Delivery
Drug Delivery revenue for the three months ended March 31, 2020 decreased $8.3
million, or 50.0%, to $8.3 million, compared with $16.6 million for the three
months ended three months ended March 31, 2019, due to a shift in the timing of
production between the first and second quarter. For full year 2020, we expect
Drug Delivery revenue to decline due to a lower demand forecast.

Operating Expenses
                                                        Three Months Ended March 31,
                                                    2020                               2019
                                                           Percent of                       Percent of
(dollars in millions)                     Amount            Revenue          Amount          Revenue
Cost of revenue                      $      71.1              35.9 %      $      52.9          33.1 %
Research and development expenses    $      35.5              17.9 %      $      32.5          20.4 %
Selling, general and administrative
expenses                             $      83.9              42.4 %      $      66.9          41.9 %



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Cost of Revenue
Cost of revenue for the three months ended March 31, 2020 increased $18.2
million, or 34.4%, to $71.1 million, compared with $52.9 million for the three
months ended March 31, 2019. Gross margin was 64.1% for the three months ended
March 31, 2020, compared with 66.9% for the three months ended March 31, 2019.
The 280 basis point decrease in gross margin was primarily due to two months of
higher depreciation expense for under-utilized plant capacity, expedited
shipping costs and manufacturing incentives totaling $3.1 million associated
with our contract manufacturer in China and the coronavirus pandemic as well as
start-up costs and inefficiencies related to our new U.S. manufacturing
operations. We expect full year 2020 gross margin to be approximately 63%, which
reflects an estimated $5 to $10 million of costs resulting from the coronavirus
pandemic, in addition to start-up costs and inefficiencies as we continue to
ramp up our U.S. manufacturing operations, partially offset by continued
improvements in our global manufacturing and supply chain operations and the
move into the pharmacy channel in the United States.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2020
increased $3.0 million, or 9.2%, to $35.5 million, compared with $32.5 million
for the three months ended March 31, 2019. This increase was primarily due to
spend related to Omnipod, powered by Horizon, our automated insulin delivery
system. We expect research and development spending for the full year 2020 to
increase compared with 2019.
Selling, General and Administrative Expenses
Selling general and administrative expenses for the three months ended March 31,
2020 increased $17.0 million, or 25.4%, to $83.9 million, compared with $66.9
million for the three months ended March 31, 2019. This increase was primarily
attributable to an increase in headcount year over year, primarily associated
with the expansion of our U.S. sales force, as well as investments in customer
support initiatives to support our growth. These increases were partially offset
by severance-related charges for certain executives that were incurred in the
prior period. We expect selling, general and administrative expenses for the
full year 2020 to increase compared with 2019 due to expansion of our U.S. sales
force and customer support personnel and investments in our operating structure
to facilitate our continued growth.
Non-Operating Items
Interest Expense, Net
Interest expense, net, increased $5.3 million to $10.1 million for the three
months ended March 31, 2020, compared with $4.8 million for the three months
ended March 31, 2019. This increase was driven by a $3.5 million increase in
non-cash interest expense associated with our 0.375% Notes issued in September
2019 and a $1.9 million decrease in capitalized interest primarily due to the
placement of our first U.S. manufacturing line into service during the second
quarter of 2019.
Other Income, Net
During the three months ended March 31, 2019, we had other income, net of $2.2
million, driven by a $1.8 million insurance recovery for damaged inventory in
excess of our cost.
Income Tax Expense, Net
We had an income tax benefit of $0.5 million on loss before income taxes of $2.6
million for the three months ended March 31, 2020, compared with income tax
expense of $0.3 million on income before income taxes of $4.7 million for the
three months ended March 31, 2019. This resulted in effective tax rates of 18.4%
and 6.9% for the three months ended March 31, 2020 and 2019, respectively. The
increase in the effective tax rate was driven by a shift in expected geographic
mix of income.

Adjusted EBITDA
The table below presents reconciliations of Adjusted EBITDA, a non-GAAP
financial measure, to net (loss) income, the most directly comparable financial
measure prepared in accordance with accounting principles generally accepted in
the United States of America ("GAAP"):
                                   Three Months Ended March 31,
(in millions)                        2020                 2019
Net (loss) income             $         (2.1 )       $          4.4
Interest expense, net                   10.1                    4.8
Income tax (benefit) expense            (0.5 )                  0.3
Depreciation and amortization            8.9                    5.1
Stock-based compensation                 7.9                    5.8
Adjusted EBITDA               $         24.3         $         20.4



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Non-GAAP Financial Measures
Management uses the following non-GAAP financial measures:
Constant currency revenue growth, which measures 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, which 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, securities analysts and other interested parties as a measure of our
comparative operating performance from period to period. We recognize Adjusted
EBITDA as a commonly used measure in determining business value and as such, use
it internally to report results. It is also one of the performance metrics that
determines management incentive compensation.
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 March 31, 2020, we had $201.4 million in cash and cash equivalents and
$181.0 million of investments in marketable securities. 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. As of
March 31, 2020, we had $76.5 million in capital commitments.
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
March 31, 2020, the following notes were outstanding:
                                                                              Initial
                                                                             Conversion
                                                                              Rate per
                                            Principal                         Share of     Conversion Price
                                           Outstanding                         Common     per Share of Common

Issuance Date                 Coupon      (in millions)        Due Date        Stock             Stock
November 2017                 1.375%     $        402.5     November 2024     10.7315     $            93.2
September 2019                0.375%              800.0     September 2026     4.4105     $           226.7
Total                                    $      1,202.5

Additional information regarding our debt issuances is provided in Note 8 to the consolidated financial statements.

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