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PODD > SEC Filings for PODD > Form 10-K on 28-Feb-2013All Recent SEC Filings

Show all filings for INSULET CORP

Form 10-K for INSULET CORP


28-Feb-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes and the other financial information appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading "Risk Factors."

Restatement of Previously Issued Financial Statements

Financial data when presented throughout the MD&A includes the effect of the restatement, as described in Notes 2, 3, 16, 17 and 18 to our consolidated financial statements, of our results for the year ended December 31, 2011, and for the quarterly periods ended June 30, 2011, September 30, 2011, December 31, 2011, March 31, 2012, June 30, 2012, and September 30, 2012.

The following tables summarize the effect of the restatement by major financial statement line item for the three and six months ended June 30, 2011, the nine months ended September 30, 2011 and the year ended December 31, 2011 (in thousands). The restatement resulted in an increase in current deferred tax assets (which are presented as a component of prepaid expenses and other current assets) of $1.2 million at June 30, 2011 and September 30, 2011 and an increase of $0.9 million at December 31, 2011, an increase in goodwill of $11.3 million at June 30, 2011 and September 30, 2011 and $10.9 million at December 31, 2011, and an increase to non-current deferred tax liabilities (which are presented as a component of other long-term liabilities) of $1.2 million at June 30, 2011 and September 30, 2011 and $0.4 million at December 31, 2011. The restatement resulted in an increase in tax benefit of $11.3 million in the three and six months ended June 30, 2011, the nine months ended September 30, 2011 and the year ended December 31, 2011. The restatement had no effect on any amounts reported in periods prior to the quarter ended June 30, 2011.


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Consolidated Balance Sheet



                                            June 30, 2011                             September 30, 2011                            December 31, 2011
                                 As  Previously                               As  Previously                               As  Previously
                                    Reported             As Restated             Reported             As Restated             Reported             As Restated
                                             (unaudited)                                  (unaudited)
Prepaid expenses and other
current assets                  $          4,770        $       5,991        $          3,653        $       4,874        $          2,802        $       3,652
Total current assets                     147,834              149,055                 137,857              139,078                 131,785              132,635
Goodwill                                  26,727               38,066                  26,164               37,503                  26,647               37,536
Total assets                             226,190              238,750                 215,780              228,340                 209,583              221,322
Other long-term liabilities                1,303                2,524                   1,260                2,481                   1,652                2,052
Total liabilities                        132,091              133,312                 132,340              133,561                 138,187              138,587
Accumulated deficit                     (413,122 )           (401,783 )              (426,684 )           (415,345 )              (441,023 )           (429,684 )
Total stockholders' equity                94,099              105,438                  83,440               94,779                  71,396               82,735
Total liabilities and
stockholders' equity                     226,190              238,750                 215,780              228,340                 209,583              221,322

Consolidated Statement of Operations



                                              Three Months Ended                      Six Months Ended                      Nine Months Ended                           Year Ended
                                                 June 30, 2011                         June 30, 2011                        September 30, 2011                      December 31, 2011
                                         As Previously           As            As  Previously           As            As  Previously           As            As  Previously             As
                                           Reported           Restated            Reported           Restated            Reported           Restated            Reported             Restated
                                                  (unaudited)                           (unaudited)                            (unaudited)
Income tax benefit (expense)            $             -       $  11,339       $              -       $  11,339       $              -       $  11,339       $           (127 ) $        11,212
Net loss                                        (19,423 )        (8,084 )              (29,269 )       (17,930 )              (42,831 )       (31,492 )              (57,170 )         (45,831 )
Net loss per share basic and diluted              (0.42 )         (0.17 )                (0.64 )         (0.39 )                (0.92 )         (0.68 )                (1.22 )           (0.98 )

Consolidated Statement of Cash Flows



                                      Six Months Ended                   Nine Months Ended                       Year Ended
                                       June 30, 2011                     September 30, 2011                  December 31, 2011
                                As Previously          As           As Previously          As           As Previously          As
                                  Reported          Restated          Reported          Restated          Reported          Restated
                                        (unaudited)                         (unaudited)
Net loss                       $       (29,269 )    $ (17,930 )    $       (42,831 )    $ (31,492 )    $       (57,170 )    $ (45,831 )
Deferred tax provision                       -        (11,339 )                  -        (11,339 )                  -        (11,289 )
Changes in operating assets
and liabilities:
Prepaid expenses and other
current assets                            (434 )       (1,655 )                851           (370 )              1,703            853
Other long-term liabilities               (316 )          905                 (359 )          862                 (417 )          383

The restatement had no effect on the previously reported amounts of operating, investing, and financing cash flows in our consolidated statement of cash flows for the six months ended June 30, 2011, the nine months ended September 30, 2011, and the year end December 31, 2011.

The following tables summarize the effect of the restatement by major financial statement line item at March 31, 2012, June 30, 2012, and September 30, 2012 (in thousands). The restatement resulted in an increase in current deferred tax assets (which are presented as a component of prepaid expenses and other current assets) of $0.9 million at March 31, 2012, June 30, 2012, and September 30, 2012, an increase in goodwill of $10.9 million at March 31, 2012, June 30, 2012, and September 30, 2012 and an increase in non-current deferred tax liabilities (which are presented as a component of other long-term liabilities) of $0.4 million at March 31, 2012, June 30, 2012, and September 30, 2012. The restatement had no effect on the consolidated statement of operations during these periods.


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Consolidated Balance Sheet



                                        March 31, 2012                            June 30, 2012                         September 30, 2012
                                As Previously             As             As Previously             As             As Previously             As
                                  Reported             Restated            Reported             Restated            Reported             Restated
                                          (unaudited)                              (unaudited)                              (unaudited)
Prepaid expenses and other
current assets                 $         3,463        $    4,313        $         3,454        $    4,304        $         4,717        $    5,567
Total current assets                   127,369           128,219                115,615           116,465                113,394           114,244
Goodwill                                26,647            37,536                 26,647            37,536                 26,647            37,536
Total assets                           203,942           215,681                191,940           203,679                191,642           203,381
Other long-term
liabilities                              1,640             2,040                  1,668             2,068                  1,670             2,070
Total liabilities                      145,064           145,464                144,190           144,590                152,529           152,929
Accumulated deficit                   (455,803 )        (444,464 )             (470,279 )        (458,940 )             (482,696 )        (471,357 )
Total stockholders' equity              58,878            70,217                 47,750            59,089                 39,113            50,452
Total liabilities and
stockholders' equity                   203,942           215,681                191,940           203,679                191,642           203,381

Overview

We are primarily engaged in the development, manufacturing and sale of our proprietary OmniPod Insulin Management System (the "OmniPod System"), an innovative, discreet and easy-to-use insulin infusion system for people with insulin-dependent diabetes. The OmniPod System is the only commercially-available insulin infusion system of its kind. The OmniPod System features a unique disposable tubeless OmniPod which is worn on the body for approximately three days at a time and our handheld, wireless Personal Diabetes Manager ("PDM"). Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to 42 inches of tubing. In contrast, the OmniPod System features only two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provides for virtually pain-free automated cannula insertion, communicates wirelessly and integrates a blood glucose meter. We believe that the OmniPod System's unique proprietary design offers significant lifestyle benefits to people with insulin-dependent diabetes.

To support our sales of the OmniPod System, in June 2011, we acquired Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, "Neighborhood Diabetes") in order to expand our full suite diabetes management product offerings and obtain access to a larger number of insulin dependent patients. Through Neighborhood Diabetes, we are able to provide customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals and have the ability to process claims as either durable medical equipment or through pharmacy benefits.

The U.S. Food and Drug Administration ("FDA") approved the original OmniPod System in January 2005, and we began commercial sale in the United States in October 2005. We received CE Mark approval for the original OmniPod System in April 2009. Since the commercial launch of the OmniPod System, we have progressively expanded our marketing efforts to provide availability of the OmniPod System in the entire United States. We have also expanded the availability of the OmniPod System internationally through our partnerships with Ypsomed Distribution AG ("Ypsomed") and GlaxoSmithKline Inc. ("GSK"). In January 2010, we entered into a distribution agreement with Ypsomed pursuant to which Ypsomed became the exclusive distributor of the OmniPod System in multiple countries. In February 2011, we entered into a distribution agreement with GSK pursuant to which GSK became the exclusive distributor of the OmniPod System in Canada. Under these distribution agreements, we supply OmniPods and PDMs to Ypsomed and GSK, and they are responsible for the sale to the customer, including distribution, reimbursement and customer support. In August 2011, we received CE Mark approval, and in December 2012, we received 510(k) clearance for our next generation OmniPod System by the FDA.

We sell our proprietary OmniPod System as well as blood glucose testing supplies, traditional insulin pumps, pump supplies, pharmaceuticals and other products for the management and treatment of diabetes to


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people with diabetes. Through our infrastructure in the reimbursement, billing and collection areas, we are able to provide for adjudication of claims as either durable medical equipment or through pharmacy benefits. Claims are adjudicated under private insurers, Medicaid or Medicare. We are aligning third-party payor contracts to be able to better leverage our cross-selling initiatives. As we expand our sales and marketing focus, increase our manufacturing capacity, expand to additional international markets and broaden our high-touch patient model, we will need to maintain and expand available reimbursement for our product offerings.

Our sales and marketing effort is focused on generating demand and acceptance of the OmniPod System among key diabetes practitioners, academic medical centers, clinics, people with insulin-dependent diabetes, third-party payors, government agencies, and third-party distributors. Our marketing strategy is to build awareness for the benefits of the OmniPod System as well as our high-touch patient model through a wide range of education programs, social networking, patient demonstration programs, support materials, media advertisements and events at the national, regional and local levels. We use third-party distributors to improve our access to managed care and government reimbursement programs, expand our commercial presence and provide access to additional potential patients. Our total revenue was $211.4 million, $152.3 million and $97.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.

As a medical device manufacturer and distributor, reimbursement from third-party payors is an important element of our success. If patients are not adequately reimbursed for the costs of using the OmniPod System or our other diabetes supplies, it will be much more difficult for us to penetrate the market. We continue to negotiate contracts establishing reimbursement for the OmniPod System with national and regional third-party payors. As part of the integration of Neighborhood Diabetes, we are aligning third-party payor contracts, both ours and those of Neighborhood Diabetes, to be able to better leverage our cross-selling initiatives. As we expand our sales and marketing focus, increase our manufacturing capacity, expand to international markets and leverage the Neighborhood Diabetes model, we will need to maintain and expand available reimbursement for our product offerings.

We currently produce the OmniPod System on partially automated manufacturing lines at a facility in China operated by a subsidiary of Flextronics International Ltd. ("Flextronics"). We purchase complete OmniPods pursuant to our agreement with Flextronics. Under the agreement, Flextronics has agreed to supply us with OmniPods at agreed upon prices per unit pursuant to a rolling forecast that we provide. The current term of the agreement expires in December 2017 and is automatically renewed for one-year terms subsequently. It may be terminated upon prior written notice given no less than a specified number of days prior to the date of termination. The specified number of days is intended to provide the parties with sufficient time to make alternative arrangements in the event of termination.

To achieve profitability, we continue to seek to increase manufacturing volume and reduce the per-unit production cost for the OmniPod. By increasing production volumes of the OmniPod, we have been able to reduce our per-unit raw material costs and improve absorption of manufacturing overhead costs. Our next generation OmniPod was designed to lower the cost of the product further through component sourcing, volume discounts and efficient manufacturing. The cost reductions are important as we strive to achieve profitability. We believe our current manufacturing capacity is sufficient to meet our expected 2013 demand for OmniPods.

We purchase certain other diabetes management supplies from manufacturers at contracted rates and supply these products to our customers. Based on market penetration, payor plans and other factors, certain manufacturers provide rebates based on product sold. We record these rebates as a reduction to cost of goods sold as they are earned.

Since our inception in 2000, we have incurred losses every quarter. In the years ended December 31, 2012, 2011 and 2010, we incurred net losses of $51.9 million, $45.8 million and $61.2 million, respectively. As of December 31, 2012, we had an accumulated deficit of $481.6 million. We have financed our operations through private placements of debt and equity securities, public offerings of our common stock, issuances of convertible


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debt and borrowings under certain other debt agreements. As of December 31, 2012, we had $158.8 million of convertible debt outstanding. Of the $158.8 million of convertible debt outstanding, $15.0 million matures in June 2013 and approximately $143.8 million matures in June 2016. Since our inception, we have received net proceeds of $597.0 million from the issuance of redeemable convertible preferred stock, common stock and debt.

Our long-term financial objective is to achieve and sustain profitable growth. Our efforts in the beginning of 2013 will be focused primarily on the production and commercial launch of our next generation OmniPod System as well as the expansion of our customer base in the United States and internationally. We also plan to focus on development projects such as the integration of our OmniPod System with the LifeScan, Inc. ("LifeScan") OneTouch® blood glucose monitoring technology, the feasibility of enhancing our OmniPod System to incorporate continuous sensing technology into the OmniPod System, and the ability to use our OmniPod System as a delivery platform for other pharmaceuticals. Achieving these objectives and increasing our penetration in the United States and international markets is expected to require additional investments in certain personnel and initiatives. We believe that we will continue to incur net losses in the near term in order to achieve these objectives. However, we believe that the accomplishment of our near term objectives will have a positive impact on our financial condition in the future.

In January 2013, we sold 4.7 million shares of our common stock at a price of $20.75 per share, resulting in net proceeds to us of $92.8 million. We believe that our cash and cash equivalents, together with the cash to be generated from expected product sales, will be sufficient to meet our projected operating and debt service requirements for the next twelve months.

Acquisition of Neighborhood Diabetes

On June 1, 2011, we acquired all of the outstanding shares of Neighborhood Diabetes, a durable medical equipment distributor specializing in direct to consumer sales of diabetes supplies, including pharmaceuticals, and support services. Neighborhood Diabetes serves more than 60,000 customers with Type 1 and Type 2 diabetes primarily in the northeast and southeast regions of the United States with blood glucose testing supplies, traditional insulin pumps, pump supplies, pharmaceuticals, as well as other products for the management and treatment of diabetes. Neighborhood Diabetes is based in Massachusetts, with additional offices in New York and Florida. At the time of the acquisition, Neighborhood Diabetes employed approximately 200 people across its three locations. The acquisition of Neighborhood Diabetes provides us with full suite diabetes management product offerings, accelerates our sales force expansion, strengthens our back office support capabilities, expands our access to insulin dependent patients, and provides pharmacy adjudication capabilities to drive incremental sales higher. The aggregate purchase price of approximately $62.4 million consisted of approximately $37.9 million in cash paid at closing, 1,197,631 shares of our common stock valued at approximately $24.4 million, or $20.40 per share based on the closing price of our common stock on the acquisition date, and contingent consideration with a fair value of approximately $0.1 million. Of the $37.9 million of cash, $6.6 million is being held in an escrow account to reimburse us and our affiliates for certain claims for which we are entitled to be indemnified pursuant to the terms of the agreement and plan of merger with Neighborhood Diabetes.

We have accounted for the acquisition of Neighborhood Diabetes as a business combination. Under business combination accounting, the assets and liabilities of Neighborhood Diabetes were recorded as of the acquisition date, at their respective fair values, and consolidated with our results. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. The operating results of Neighborhood Diabetes have been included in the consolidated financial statements since June 2011, the period in which the acquisition was completed. The purchase price allocation, including an independent appraisal for intangible assets, has been prepared based on the information that was available to management at the time the consolidated financial statements were prepared. The allocation of the purchase price was finalized during the year ended December 31, 2011.


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The purchase price (restated) has been allocated as follows (in thousands):

               Cash                                        $ 37,855
               Common stock                                  24,432
               Contingent consideration obligations              61

               Total allocable purchase price              $ 62,348

               Allocation of purchase price:
               Accounts receivable                            5,897
               Inventories                                    2,336
               Prepaid expenses and other current assets        242
               Property and equipment                           391
               Customer relationships                        30,100
               Tradenames                                     2,800
               Goodwill                                      37,536
               Other assets                                     253
               Accounts payable                               4,109
               Accrued expenses                               1,700
               Deferred tax liabilities                      11,339
               Other long-term liabilities                       59

                                                           $ 62,348

In connection with the acquisition of Neighborhood Diabetes, we incurred transaction costs of approximately $3.2 million, which consisted primarily of banking, legal, accounting and other administrative fees. These costs have been recorded as general and administrative expense in the year ended December 31, 2011.

Financial Operations Overview

Revenue. We derive most of our revenue from the sale of the OmniPod System and other diabetes related products including blood glucose testing supplies, traditional insulin pumps, pump supplies and other pharmaceuticals to customers and third-party distributors who resell the product to customers. The OmniPod System is comprised of two devices: the OmniPod, a disposable insulin infusion device that the patient wears for up to three days and then replaces; and the PDM, a handheld device much like a personal digital assistant that wirelessly programs the OmniPod with insulin delivery instructions, assists the patient with diabetes management and incorporates a blood glucose meter. We received FDA approval for the original OmniPod System in January 2005 and began commercial sale in the U.S. in October 2005. We received CE Mark approval for the original OmniPod System in April 2009. We are currently selling our OmniPod System through our partnership with Ypsomed in multiple countries in Europe and through our partnership with GSK in Canada. In August 2011 we received CE Mark approval and in December 2012 we received 510(k) clearance for the next generation OmniPod System by the FDA.

In June 2011, we entered into a development agreement with a U.S. based pharmaceutical company (the "Development Agreement"). Under the Development Agreement, we are required to perform design, development, regulatory, and other services to support the pharmaceutical company as it works to obtain regulatory approval to use our drug delivery technology as a delivery method for its pharmaceutical. Over the term of the Development Agreement, we have and expect to continue to invoice amounts as we meet certain defined deliverable milestones. Revenue on the development agreement is recognized using a proportional performance methodology based on efforts incurred and total payments under the agreement.

As of December 31, 2012 and 2011, we had deferred revenue of $5.4 million and $2.7 million, respectively. These amounts primarily include product-related revenue and unrecognized amounts related to the development agreement. For the year ending December 31, 2013, we expect our revenue to continue to increase as we introduce our next generation OmniPod System, leverage our high touch patient model to gain new customers in


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the United States and continue expansion in Europe, Canada, and certain other international markets. Increased revenue will be dependent upon the success of our sales efforts, our ability to produce our next generation OmniPods in sufficient volumes as our patient base grows, the successful launch and transition to our next generation OmniPod System, the impact of competitive bidding on certain durable medical equipment items including mail-order diabetes testing supplies, and other risks and uncertainties.

Cost of revenue. Cost of revenue consists primarily of raw material, labor, warranty and overhead costs such as freight, depreciation, and packaging costs, related to the OmniPod System, the cost of products we acquire from third party suppliers, and costs incurred related to the development agreement. Cost of revenue will continue to increase in line with an increase in revenues.

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