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 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 endedDecember 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 inthe United States for Omnipod 5, powered by Horizon™ ("Omnipod 5"), our automated insulin delivery system. In order to support our continued growth and the expected launch of Omnipod 5 in the first half 2021, we continue to focus on adding capacity to ourU.S. manufacturing plant. During the first quarter of 2020, we began producing salable product on our second manufacturing line in theU.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, inEurope andCanada and enter five new countries inWestern Europe and theMiddle 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 inChina inDecember 2019 , and subsequently declared a pandemic by theWorld Health Organization inMarch 2020 . The COVID-19 outbreak inChina resulted in abnormally low production at our contract manufacturer inChina during the first two months of the year, which resulted in incremental depreciation expense for under-utilized plant capacity for those two months. 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 inChina and utilizing expedited, but more costly, shipping measures to transport product fromChina . In addition, we implemented strict screening and additional sanitation measures. 17 -------------------------------------------------------------------------------- Table of ContentsChina , 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 ourU.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 ourU.S. manufacturing plant to provide us with capacity in theU.S. that is equivalent to all our current lines inChina . Refer to Item 1A. Risk Factors for a discussion of COVID-19 risks. Results of Operations Three Months Ended June 30, Percent Currency Constant (dollars in millions) 2020 2019 Change Impact Currency (1) Revenue: U.S. Omnipod$ 128.8 $ 98.1 31.3 % - % 31.3 % International Omnipod 73.2 62.7 16.7 % (3.0) % 19.7 % Total Omnipod 202.0 160.8 25.6 % (1.2) % 26.8 % Drug Delivery 24.3 16.3 49.1 % - % 49.1 % Total$ 226.3 $ 177.1 27.8 % (1.0) % 28.8 % Six Months Ended June 30, Percent Currency Constant (dollars in millions) 2020 2019 Change Impact Currency (1) Revenue: U.S. Omnipod$ 245.4 $ 184.2 33.2 % - % 33.2 % International Omnipod 146.3 119.6 22.3 % (3.2) % 25.5 % Total Omnipod 391.7 303.8 28.9 % (1.3) % 30.2 % Drug Delivery 32.6 32.9 (0.9) % - % (0.9) % Total$ 424.3 $ 336.7 26.0 % (1.1) % 27.1 % (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 endedJune 30, 2020 increased$49.2 million , or 27.8%, to$226.3 million , compared with$177.1 million for the three months endedJune 30, 2019 . Constant currency revenue growth of 28.8% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix. Total revenue for the six months endedJune 30, 2020 increased$87.6 million , or 26.0%, to$424.3 million , compared with$336.7 million for the six months endedJune 30, 2019 . Constant currency revenue growth of 27.1% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix.U.S. OmnipodU.S. Omnipod revenue for the three months endedJune 30, 2020 increased$30.7 million , or 31.3%, to$128.8 million , compared with$98.1 million for the three months endedJune 30, 2019 . This increase was primarily due to higher volumes driven by growing our customer base, and to a lesser extent, an increase in days-on-hand inventory at distributors due to both continued growth of DASH adoption and COVID-19. The increase was also 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 six months endedJune 30, 2020 increased$61.2 million , or 33.2%, to$245.4 million , compared with$184.2 million for the six months endedJune 30, 2019 . This increase was primarily due to higher volumes driven by growing our customer base, and to a lesser extent, an increase in days-on-hand inventory at distributors due to both continued growth of DASH adoption and COVID-19. The increase was also 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. 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. We expect this revenue growth to be partially offset by the impact of lower new Omnipod starts stemming from COVID-19. International Omnipod International Omnipod revenue for the three months endedJune 30, 2020 increased$10.5 million , or 16.7%, to$73.2 million , compared with$62.7 million for the three months endedJune 30, 2019 . Excluding the 3.0% unfavorable impact of currency exchange, 18 -------------------------------------------------------------------------------- Table of Contents the remaining 19.7% increase in revenue was primarily driven by higher volumes as we continue to expand awareness and access to the Omnipod and, to a lesser extent, an increase in days-on-hand inventory at distributors due to COVID-19. International Omnipod revenue for the six months endedJune 30, 2020 increased$26.7 million , or 22.3%, to$146.3 million , compared with$119.6 million for the six months endedJune 30, 2019 . Excluding the 3.2% unfavorable impact of currency exchange, the remaining 25.5% increase in revenue was primarily driven by higher volumes as we continue to expand awareness and access to the Omnipod and, to a lesser extent, an increase in days-on-hand inventory at distributors due to COVID-19. Similar to in theU.S , for the full year 2020, we expect higher International Omnipod revenue due to continued volume growth and market penetration. We expect this revenue growth to be partially offset by the impact of lower new Omnipod starts stemming from COVID-19. Drug Delivery Drug Delivery revenue for the three months endedJune 30, 2020 increased$8.0 million , or 49.1%, to$24.3 million , compared with$16.3 million for the three months endedJune 30, 2019 , due to increased demand driven by COVID-19 and shift in the timing of production between the first and second quarter. Drug Delivery revenue for the six months endedJune 30, 2020 was relatively level compared with the six months endedJune 30, 2019 . For full year 2020, we expect Drug Delivery revenue to increase due to a higher demand forecast resulting from COVID-19. Operating Expenses Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Percent of Percent of Percent of Percent of (dollars in millions) Amount Revenue Amount Revenue Amount Revenue Amount Revenue Cost of revenue$ 83.8 37.0 %$ 60.7 34.3 %$ 154.9 36.5 %$ 113.6 33.7 % Research and development expenses$ 34.2 15.1 %$ 33.0 18.6 %$ 69.7 16.4 %$ 65.5 19.5 % Selling, general and administrative expenses$ 80.8 35.7 %$ 75.8 42.8 %$ 164.7 38.8 %$ 142.7 42.4 % Cost of Revenue Cost of revenue for the three months endedJune 30, 2020 increased$23.1 million , or 38.1%, to$83.8 million , compared with$60.7 million for the three months endedJune 30, 2019 . Gross margin was 63.0% for the three months endedJune 30, 2020 , compared with 65.7% for the three months endedJune 30, 2019 . The 270 basis point decrease in gross margin was primarily due to start-up costs and inefficiencies related to our newU.S. manufacturing operations, and$3.4 million for recruiting and screening expenses, expedited shipping costs and manufacturing incentives associated with our contract manufacturer inChina as a result of the coronavirus pandemic. This decrease was partially offset by a higher average selling price due to growth in the pharmacy channel. Cost of revenue for the six months endedJune 30, 2020 increased$41.3 million , or 36.4%, to$154.9 million , compared with$113.6 million for the six months endedJune 30, 2019 . Gross margin was 63.5% for the six months endedJune 30, 2020 , compared with 66.3% for the six months endedJune 30, 2019 . The 280 basis point decrease in gross margin was primarily due to start-up costs and inefficiencies related to our newU.S. manufacturing operations as well as two months of higher depreciation expense for under-utilized plant capacity, recruiting and screening expenses, expedited shipping costs and manufacturing incentives totaling$6.5 million associated with our contract manufacturer inChina as a result of the coronavirus pandemic. This decrease was partially offset by higher average selling price due to growth in the pharmacy channel. We expect full year 2020 gross margin to be approximately 63%, which reflects an estimated$7 to$10 million of costs resulting from the coronavirus pandemic, in addition to start-up costs and inefficiencies as we continue to ramp up ourU.S. manufacturing operations, partially offset by continued improvements in our global manufacturing and supply chain operations and the move into the pharmacy channel inthe United States . Research and Development Expenses Research and development expenses for the three months endedJune 30, 2020 increased$1.2 million , or 3.6%, to$34.2 million , compared with$33.0 million for the three months endedJune 30, 2019 . This increase was primarily due to spend related to Omnipod 5, partially offset by reduced spend on Omnipod DASH, which was launched in the prior year period. Research and development expenses for the six months endedJune 30, 2020 increased$4.2 million , or 6.4%, to$69.7 million , compared with$65.5 million for the six months endedJune 30, 2019 . This increase was primarily due to spend related to Omnipod 5, partially offset by reduced spend on Omnipod DASH, which was launched in the prior year period. We expect research and development spending for the full year 2020 to increase compared with 2019. 19 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses Selling general and administrative expenses for the three months endedJune 30, 2020 increased$5.0 million , or 6.6%, to$80.8 million , compared with$75.8 million for the three months endedJune 30, 2019 . This increase was primarily attributable to investments in initiatives to support our growth, as well as headcount year over year, primarily associated with the expansion of ourU.S. sales force. These increases were partially offset by a decrease in travel and entertainment expenses due to reduced activity resulting from COVID-19. Selling general and administrative expenses for the six months endedJune 30, 2020 increased$22 million , or 15.4%, to$164.7 million , compared with$142.7 million for the six months endedJune 30, 2019 . This increase was primarily attributable to investments in customer support and other initiatives to support our growth, as well as headcount year over year, primarily associated with the expansion of ourU.S. sales force. These increases were partially offset by a decrease in travel and entertainment expenses due to reduced activity resulting from COVID-19. We expect selling, general and administrative expenses for the full year 2020 to increase compared with 2019 due to expansion of ourU.S. sales force and customer support personnel and investments in our operating structure to facilitate our continued growth. Non-Operating Items Interest Expense,Net Net interest expense increased$5.3 million to$11.1 million for the three months endedJune 30, 2020 , compared with$5.8 million for the three months endedJune 30, 2019 . This increase was driven by a$3.4 million increase in non-cash interest expense associated with our 0.375% Notes issued inSeptember 2019 , a$1.2 million decrease in interest income due to lower market rates and a shift in a portion of our investment portfolio to more liquid investments and a$1.0 million decrease in capitalized interest primarily due to the placement of our firstU.S. manufacturing line into service during the second quarter of 2019. Net interest expense increased$10.6 million to$21.2 million for the six months endedJune 30, 2020 , compared with$10.6 million for the six months endedJune 30, 2019 . This increase was driven by a$6.9 million increase in non-cash interest expense associated with our 0.375% Notes issued inSeptember 2019 and a$2.8 million decrease in capitalized interest primarily due to the placement of our firstU.S. manufacturing line into service during the second quarter of 2019, as well as a$1.5 million decrease in interest income due to lower market rates and a shift in a portion of our investment portfolio to more liquid investments. Other Income, Net During the three months endedJune 30, 2020 , we had other income, net of$1.0 million , compared with$0.1 million for the three months endedJune 30, 2019 . The increase in other income was primarily driven by unrealized foreign currency gains due to the change in exchange rates. During the six months endedJune 30, 2020 , we had other income, net of$1.0 million , compared with$2.3 million for the six months endedJune 30, 2019 , The decrease in other income was primarily driven by a$1.8 million insurance recovery for damaged inventory in excess of our cost received during the six months endedJune 30, 2019 . Income Tax Expense, Net Income tax expense was$3.0 million and$0.5 million for the three months endedJune 30, 2020 and 2019, respectively. This resulted in effective tax rates of 17.2% and 25.6% for the three months endedJune 30, 2020 and 2019, respectively. The decrease in the effective tax rate was driven by a shift in expected geographic mix of income. Income tax expense was$2.5 million and$0.8 million for the six months endedJune 30, 2020 and 2019, respectively. This resulted in effective tax rates of 17.0% and 12.3% for the six months endedJune 30, 2020 and 2019, respectively. The increase in the effective tax rate was driven by a shift in expected geographic mix of income. Adjusted EBITDA The table below presents reconciliations of Adjusted EBITDA, a non-GAAP financial measure, to net income, the most directly comparable financial measure prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"): Six Months Ended June Three Months Ended June 30, 30, (in millions) 2020 2019 2020 2019 Net income$ 14.4 $ 1.4 $ 12.3 $ 5.8 Interest expense, net 11.1 5.8 21.2 10.6 Income tax expense 3.0 0.5 2.5 0.8 Depreciation and amortization 9.9 5.9 18.8 11.0 Stock-based compensation 5.8 8.3 13.7 14.1 Adjusted EBITDA$ 44.2 $ 21.9 $ 68.5 $ 42.3 20
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Non-GAAP Financial Measures Management uses the following non-GAAP financial measures: Constant currency revenue growth 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 inthe 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, 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 ofJune 30, 2020 , we had$779.1 million in cash and cash equivalents and$88.8 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 ofJune 30, 2020 , we had$78.7 million in capital commitments. Convertible Debt To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock. As ofJune 30, 2020 , the following notes were outstanding: Initial Principal Conversion Rate Outstanding per Share of Conversion Price per Issuance Date Coupon (in millions) Due Date Common Stock Share of Common Stock November 2017 1.375%$ 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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