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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-26 · 180 added, 187 removed, 116 unchanged (76% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our selected financial data and our consolidated financial statements and the accompanying notes included in this annual report.

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 annual report.

The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions.

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Factors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements.”

We are primarily engaged in the development, manufacture and sale of our proprietary Omnipod System, an innovative, continuous insulin delivery system for people with insulin-dependent diabetes.

There are two primary types of insulin therapy practiced today:

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 that is worn on the body for up to three days at a time and its wireless companion, the handheld PDM.

The Omnipod System, which features two 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 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.

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.

The Omnipod is currently available in the United States, Canada and certain countries in Europe and the Middle East.

We sell the Omnipod through direct sales to consumers or through our distribution partners and most recently in the U.S.

through the pharmacy channel.

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, an innovative delivery system for Amgen’s white blood cell booster to help reduce the risk of infection after intense chemotherapy.

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 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 strategic objectives:

To assist in achieving this mission, we are focused on the following key strategic imperatives:

• driving access and awareness;

• delivering consumer-focused innovation;

ensuring the best customer experience globally;

expanding our global footprint;

• expanding our global addressable market;

• driving operational excellence.

In the first half of 2019, we began production at our new highly automated manufacturing facility in Acton, Massachusetts, which also serves as our new global headquarters.

We expect that, following start up related activities, the new facility will allow us to lower our manufacturing costs, increase supply redundancy, add capacity closer to our largest customer base and support growth.

As of December 31, 2019 , we had made cumulative investments of approximately $320 million in property, plant and infrastructure related to the new facility.

We expect to continue to expand our investment in this facility in 2020 to support the growth of our business.

Additionally, in the first half of 2019, we completed a full market launch of Omnipod DASH in the United States.

Omnipod DASH is our next-generation digital mobile Omnipod platform, featuring a secure Bluetooth enabled Pod and PDM with a color touch screen user interface supported by smartphone connectivity.

In December of 2019, we introduced DASH to select European markets.

In late 2019, we completed our pre-pivotal trial for Omnipod Horizon, a closed loop control system that utilizes the DASH mobile platform to allow the Pod to communicate with a continuous glucose monitor and help control insulin delivery utilizing an algorithm located on the Pod.

In December 2019, we began patient enrollment in our pivotal trial.

We expect to launch Omnipod Horizon in the second half of 2020.

While we expect Horizon to contribute to our long-term revenue growth, we do not expect it to meaningfully contribute to growth in 2020.

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 launch of Omnipod Horizon in the United States.

In order to support our continued growth and the expected launch of Omnipod Horizon, in 2020 we also plan to focus on the startup of our second manufacturing line in our Acton facility and the installation of a third U.S.

manufacturing line, which we expect to begin production on in 2021.

Additionally, in 2020, we

expect to enter five new countries in Western Europe and the Middle East and further roll out DASH in Europe and Canada to expand the commercial sale of Omnipod and our global footprint.

While we expect these new countries to contribute to our long-term revenue growth, we do not expect them to have a meaningful contribution in 2020.

To achieve this goal, our efforts are focused on the launch of Omnipod 5, powered by Horizon™ (“Omnipod 5”), our AID system.

We completed the first phase of our Omnipod 5 pivotal trial in October.

We also recently completed our Omnipod 5 clinical study of pediatric users ages two to six years old and are planning for an expanded indication by the end of 2021.

In addition, we have begun enrolling individuals with Type 2 diabetes in an Omnipod 5 feasibility study.

Based on the results of the feasibility work, we plan to conduct additional studies with the goal to further expand Omnipod 5’s indications.

During 2020, we began producing salable product on our second highly automated manufacturing line in the U.S.

and secured a second contract manufacturer in China, which increased our capacity and redundancy.

Additionally, in order to support our continued growth and the expected launch of Omnipod 5 in the first half of 2021, we recently installed a third highly automated manufacturing line in the U.S.

on which salable product is expected in 2021.

In 2020, we completed the roll out of Omnipod DASH, our digital mobile Omnipod platform, in the countries we serve in Europe.

In January 2021, we completed our full commercial launch of Omnipod DASH internationally with our roll out in Canada.

The majority of our global customers start on Omnipod DASH.

We expect the introduction of Omnipod DASH throughout our international markets to be a growth driver as we increase our presence within our existing markets and enter into new countries over the long term.

In 2020, we entered five new countries in Western Europe and the Middle East to expand the commercial sale of Omnipod and our global footprint.

While this expansion into additional countries did not have a material impact on our 2020 revenues, it is expected to contribute to our long-term growth.

We are continuing to expand internationally in a targeted and strategic manner.

In the first quarter of 2021, we expanded into Turkey and we expect to launch Omnipod DASH in Australia in 2021.

Additionally, we are working on our strategy to enter larger markets, such as Asia Pacific and Latin America.

Finally, we plan to continue our product development efforts and expand awareness of and access to our products.

Achieving these objectives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.

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.

Results of Operations

Years Ended December 31,

The discussion of our results of operations for 2018 has been omitted from this Form 10-K but can be found in Item 7.

Management’s Discussion and Analysis and Results of Operations in our Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission on February 26, 2020.

Comparison of the Years Ended December 31, 2020 and December 31, 2019

Years Ended December 31,

(In millions)

(In millions) 2020 2019 % Change Currency Impact Constant Currency (1)

Omnipod $ 526.9 $ 420.4 25.3 % — % 25.3 %

International Omnipod 308.0 253.1 21.7 % 1.8 % 19.9 %

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Drug Delivery 69.5 64.7 7.4 % — % 7.4 %

Total revenue

Cost of revenue

Total $ 904.4 $ 738.2 22.5 % 0.6 % 21.9 %

(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 2020 increased $166.2 million, or 22.5%, to $904.4 million, compared with $738.2 million in 2019.

Constant currency revenue growth of 21.9% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix.

The COVID-19 pandemic negatively impacted global new customer starts throughout 2020, largely beginning in the second quarter.

We expect our revenues in 2021 to continue to be impacted by the global pandemic's effect on both 2020 and 2021 new customer starts, particularly in our international markets.

Omnipod revenue for 2020 increased $106.5 million, or 25.3%, to $526.9 million, compared with $420.4 million in 2019.

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 for no charge.

In 2021, 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 customer starts in 2020 stemming from COVID-19.

International Omnipod

International Omnipod revenue for 2020 increased $54.9 million, or 21.7%, to $308.0 million, compared with $253.1 million in 2019.

Excluding the 1.8% favorable impact of currency exchange, the remaining 19.9% increase was primarily due to higher volumes as we continue to expand awareness and access to the Omnipod.

Similar to in the U.S., in 2021, we expect higher International Omnipod revenue due to continued volume growth and market penetration aided by the full launch of Omnipod DASH throughout our international markets and our virtual training capabilities.

We expect this revenue growth to be partially offset by the impact of lower new customer starts in 2020 stemming from COVID-19 and continued lockdowns in Europe.

Drug Delivery

Drug Delivery revenue for 2020 increased $4.8 million, or 7.4%, to $69.5 million, compared with $64.7 million in 2019.

This increase was primarily due to increased demand for Amgen’s Neulasta ® Onpro ® kit which includes our pods.

In 2021, we expect Drug Delivery revenue to decline or grow slightly dependent upon forecasted demand.

Operating Expenses

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating income (loss)

Interest expense, net of portion capitalized

Loss on extinguishment of debt

Interest and other income, net

Income (loss) before income taxes

Income tax expense

Net income (loss)

NM = Not meaningful

Comparison of the Years Ended December 31, 2019 and December 31, 2018

Total revenue for 2019 increase d $174.4 million , or 31% , to $738.2 million , compared with $563.8 million in 2018 due to strong growth in our U.S.

and International Omnipod revenue.

Omnipod revenue increase d $96.9 million , or 30% , to $420.4 million , primarily due to higher volumes as we continue to expand awareness of and access to the Omnipod, and increased sales through the pharmacy channel, which has higher average selling prices due in part to the fact that we offer the PDM for no charge.

International Omnipod revenue increase d $81.1 million , or 47% , to $253.1 million , primarily due to the continued adoption of our product and more favorable pricing as a result of our shift to direct sales of the Omnipod in Europe in July 2018.

Drug Delivery revenue decreased $3.6 million , or 5% , to $64.7 million , compared with 2018 .

For 2020, we expect strong Omnipod revenue growth driven by continued market penetration and continued volume growth of Omnipod DASH, primarily in the U.S.

pharmacy channel, partially offset by lower Drug Delivery revenue, due to a lower demand forecast.

Internationally, we expect higher revenues primarily due to increasing sales volume as a result of greater awareness and availability of the Omnipod and further roll out of Omnipod DASH in Europe and Canada.

In the U.S., we expect higher revenues primarily due to an increase in sales volume as a result of expanded payor coverage, greater awareness and availability of the Omnipod, commercial expansion strategies and the move into the pharmacy channel.

Gross margin was 65.1% of revenue in 2019 , compared with 65.7% in 2018 .

The decrease in gross margin was primarily due to start-up costs and inefficiencies related to our new U.S.

manufacturing operations and product mix, which more than offset favorable distribution channel mix, favorable pricing following the expiration of our former distribution agreement in Europe and favorable geographic mix.

We expect full year 2020 gross margin to be relatively consistent with 2019, which reflects the benefits of continued

improvements in manufacturing and supply chain operations and the move into the pharmacy channel in the U.S., offset by start-up costs and inefficiencies as we continue to ramp up our U.S.

manufacturing operations.

Years Ended December 31,

(In millions) Amount Percent of Revenue Amount Percent of Revenue

Cost of revenue $ 322.1 35.6 % $ 257.9 34.9 %

Research and development expenses $ 146.8 16.2 % $ 132.3 17.9 %

Selling, general and administrative expenses $ 384.0 42.5 % $ 298.0 40.4 %

Cost of Revenue

Cost of revenue for 2020 increased $64.2 million, or 24.9%, to $322.1 million, compared with $257.9 million in 2019.

Gross margin was 64.4% in 2020, compared with 65.1% in 2019.

The 70 basis point decrease in gross margin was primarily due to start-up costs and inefficiencies driven by the addition of the second line at our U.S.

manufacturing facility, 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 $8.5 million, primarily associated with our contract manufacturer in China as a result of COVID-19.

This decrease was partially offset by higher average selling price due to growth in the U.S.

pharmacy channel.

We expect gross margin for 2021 to increase to 67% to 70%, which reflects expected revenue growth both in the U.S.

and internationally, including in the pharmacy channel, and the benefits of continued improvements in manufacturing and supply chain operations.

Research and Development

Research and development expenses for 2020 increased $14.5 million, or 11.0%, to $146.8 million, compared with $132.3 million in 2019.

This increase was primarily due to an increase in research and development expenses related to Omnipod DASH and our Omnipod Horizon automated insulin delivery system.

Research and development expenses also increased due to engineering and operational costs, such as training and start up activities, associated with our newly constructed U.S.

manufacturing facility.

We expect research and development spending for the full year 2020 to increase compared with 2019.

Sales and Marketing

Sales and marketing expenses for 2019 increased $38.9 million , or 27% , to $185.1 million , compared with $146.2 million in 2018 .

This increase was primarily attributable to investments to support our mid-2018 transition to direct sales of Omnipod in Europe, the expansion of our U.S.

sales force and investments in customer support.

We expect sales and marketing expenses for the full year 2020 to increase compared with 2019 due to additional expansion of our U.S.

sales force and customer support personnel to facilitate our continued growth and expected entry into five new countries.

General and Administrative

General and administrative expenses for 2019 increased $9.4 million , or 9% , to $115.5 million , compared with $106.1 million in 2018 .

This increase was primarily attributable to increased personnel-related costs related to 2018 hires to support the establishment of our direct operations in Europe and increased depreciation related to our new headquarters facility, partially offset by $12.6 million of severance charges in 2018 related to the retirement of our former CEO, including stock-based compensation expense for the accelerated vesting of equity awards.

We expect general and administrative expenses for 2020 to increase compared with 2019 as we continue to grow our business and make investments in our operating structure to support growth.

Interest Expense, Net of Portion Capitalized

Interest expense, net for 2019 increased $5.7 million , or 20% , to $34.6 million , compared with 2018 .

Interest expense, net for 2019 includes $9.5 million of cash interest expense and $ 35.6 million of non-cash interest expense associated with our convertible debt, partially offset by $10.5 million of interest capitalized as part of the cost of our U.S.

manufacturing facility.

The increase in interest expense, net primarily resulted from a $ 6.3 million increase in non-cash interest expense resulting from net impact of the issuance of $800.0 million of 0.375% convertible notes and the repayment of $402.5 million principal amount of 1.25% convertible notes.

We expect interest expense for 2020 to increase compared with 2019 due to the annualized impact of the higher non-cash interest expense associated with the 0.375% convertible notes, compared with the 1.25% convertible notes.

This increase was primarily due to year-over-year headcount additions as we focus on driving innovation, particularly Omnipod 5, partially offset by reduced spend on Omnipod DASH, which was launched in the prior year period.

We expect research and development spending in 2021 to increase compared with 2020 as we continue to invest in advancing our innovation and clinical pipeline.

Selling, General and Administrative

Selling, general and administrative expenses for 2020 increased $86.0 million, or 28.9%, to $384.0 million, compared with $298.0 million in 2019.

This increase was primarily attributable to investments in customer support and other initiatives to support our growth, including year-over-year headcount additions, mainly sales and customer service personnel, $18.8 million increase in advertising expense driven by the pilot of our direct-to-consumer advertising campaign and online advertising, $14.6 million of cumulative amortization expense related to the resolution of a purchase price contingency associated with the acquisition of customer relationships from a former European distributor on July 1, 2018, as well as $4.8 million of stock-based compensation expense from a company-wide 20th anniversary equity grant, a significant portion of which vested immediately.

These increases were partially offset by a $9.7 million decrease in travel and entertainment expenses due to reduced activity resulting from COVID-19.

We expect selling, general and administrative expenses to increase in 2021 compared with 2020 due to expansion of our U.S.

sales force and customer support personnel, investments to expand market acceptance and access for Omnipod 5, including direct-to-consumer advertising, and investments in our operating structure to facilitate operational efficiencies and continued growth.

Non-Operating Items

Interest Expense, Net

Interest expense, net for 2020 increased $17.4 million, or 62.8%, to $45.1 million, compared with $27.7 million in 2019.

This increase was primarily due to a $9.6 million increase in non-cash interest expense resulting from the net impact of the issuance of $800.0 million of 0.375% convertible notes and the repayment of $402.5 million principal amount of 1.25% convertible notes, a $3.9 million decrease in capitalized interest, primarily due to U.S.

manufacturing line 2 being placed in service in the first quarter of 2020, and a $3.9 million decrease in interest income due to lower market rates and a shift in a portion of our investment portfolio to more liquid investments.

Loss on Extinguishment of Debt

During 2019, we incurred an $8.7 million loss on extinguishment of debt related to the repurchase of our 1.25% Notes.

Interest and Other Income, Net

Other Income, Net

Other income, net for 2020 increased $2.4 million, to $3.3 million, compared with $0.9 million in 2019.

This increase was primarily due to a $1.8 million insurance settlement received, partially offset by a decrease in interest income on our investment portfolio.

This increase was primarily driven by unrealized foreign currency gains due to the change in exchange rates, partially offset by a $1.8 million insurance recovery for damaged inventory in excess of our cost received during the year ended December 31, 2019.

Income Tax Expense

Income tax expense was $2.9 million and $1.9 million on pre-tax income of $14.5 million and $5.2 million for 2019 and 2018 , respectively.

Income tax expense was $2.9 million on pre-tax income of $9.7 million and $14.5 million for both 2020 and 2019, respectively.

Our effective tax rate was 29.6% and 19.8% for 2020 and 2019, respectively.

The decrease in our effective tax rate primarily resulted from an increase in earnings in the U.S., which has a full valuation allowance.

The increase in our effective tax rate primarily resulted from a decrease to pre-tax income in the U.S., which has a valuation allowance.

See Note 18 to the consolidated financial statements for additional information on our income tax expense.

Comparison of the Years Ended December 31, 2018 and December 31, 2017

Total revenue for 2018 increased $100.0 million , or 22% , to $563.8 million , compared with $463.8 million in 2017 , primarily due to continued growth in our International and U.S.

Omnipod revenue.

International Omnipod revenue increased $52.0 million , or 43% , to $172.0 million , primarily due to both higher volumes and pricing as a result of our shift to direct sales of the Omnipod in Europe in July 2018.

Omnipod revenue increased $51.9 million , or 19% , to $323.5 million due to expanded access to and awareness of the Omnipod System.

Our Drug Delivery revenue decreased $3.9 million , or 5% , to $68.3 million , primarily reflecting a lower number of shipments during the year, partially offset by the favorable impact of adoption of new accounting guidance that requires our drug delivery revenue to be recognized as the product is produced rather than at time of shipment as further described in Note 2 to the consolidated financial statements.

Cost of revenue was 65.7% of revenue in 2018 , compared with 59.8% in 2017 .

The significant increase in gross margin was primarily due to favorable pricing resulting from our shift to direct sales in Europe following the expiration of our former distributor agreement and lower product cost as a result of continued improvements in manufacturing and supply chain operations.

Research and Development

Research and development expenses for 2018 increased $14.8 million , or 20% , to $90.5 million , compared with $75.7 million in 2017 .

This increase in research and development expenses was primarily due to an increase in expenses related to Omnipod DASH and our Omnipod Horizon automated insulin delivery system.

Research and development expenses also increased due to engineering and operational costs, such as training and start up activities, associated with our newly constructed U.S.

manufacturing facility at which production began in 2019.

Sales and Marketing

Sales and marketing expenses for 2018 increased $22.0 million , or 18% to $146.2 million in 2018 , compared with $124.2 million in 2017 .

This increase in sales and marketing expenses was primarily due to investments to support our mid-2018 transition to direct sales of Omnipod in Europe as well as the expansion of our U.S.

sales force and customer support personnel.

These increases were partially offset by the capitalization of commission costs related to new customer contracts in connection with the adoption of new revenue recognition guidance described in Note 2 to the consolidated financial statements.

General and Administrative

General and administrative expenses for 2018 increased $21.4 million , or 25% , to $106.1 million , compared with $84.7 million in 2017 .

This increase in general and administrative expenses was primarily due to $12.6 million of severance charges associated with the retirement of our former CEO, of which $8.2 million related to stock-based compensation expense for the accelerated vesting of equity awards.

General and administrative expenses also increased due to personnel costs to support the establishment of our direct commercial operations in Europe.

Interest Expense, Net of Portion Capitalized

Interest expense, net for 2018 increased $7.7 million , or 36% , to $28.9 million , compared with to 2017 .

Interest expense, net for 2018 includes $9.8 million of cash interest expense and $29.3 million of non-cash interest expense associated with our convertible debt, partially offset by $10.2 million of interest capitalized as part of the cost of our U.S.

manufacturing facility.

The increase in interest expense, net was primarily due to the full year effect of interest expense associated with our 1.375% Notes, which were issued in November 2017, partially offset by a $7.1 million increase in capitalized interest.

Interest and Other Income, Net

Interest and other income, net increased $4.1 million , to $6.7 million for 2018 , compared with 2017 .

This increase was primarily due to an increase in interest income on our investment portfolio.

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 the United States of America (“GAAP”):

Years Ended December 31,

(in millions) 2020 2019

Net income $ 6.8 $ 11.6

Interest expense, net 45.1 27.7

Income tax expense 2.9 2.9

Income tax expense was $1.9 million in 2018 , compared with $0.2 million in 2017 .

The increase of $1.7 million in income tax expense was primarily due to growth in our international operations where we do not have net operating loss carryforwards.

See Note 18 to the consolidated financial statements for additional information on our income tax expense.

Depreciation and amortization (1)

Stock-based compensation (2)

Loss on extinguishment of debt — 8.7

Adjusted EBITDA $ 146.1 $ 107.5

(1) The year ended December 31, 2020 includes $14.6 million of cumulative amortization expense associated with customer relationships that were acquired on July 1, 2018.

For more information see Note 13 to the consolidated financial statements.

(2) The year ended December 31, 2020 includes $7.3 million of stock-based compensation expense related to a company-wide 20th anniversary equity grant, a significant portion of which immediately vested.

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 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 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

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To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock.

In September 2019, we issued $800.0 million aggregate principal amount of 0.375% Convertible Senior Notes due September 2026.

The net proceeds of $780.2 million were used to partially fund the redemption of our 1.25% Convertible Senior Notes due September 2021 and for the purchase of capped call options (“Capped Calls”) on our common stock.

By entering into the Capped Calls, we expect to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Convertible Senior Notes.

The Capped Calls have an initial strike price of $335.90 per share and cover 3.5 million shares of our common stock.

As of December 31, 2020, the following notes were outstanding:

Issuance Date

Principal Outstanding

(in millions)

Initial Conversion Rate per Share of Common Stock

Issuance Date Coupon Principal Outstanding

(in millions) Due Date Conversion Rate (1)

Conversion Price

per Share of Common Stock

November 2017

November 2024

September 2019

September 2026

Additional information regarding our debt issuances is provided in Note 12 to the consolidated financial statements.

November 2017 1.375% $ 402.5 November 2024 10.7315 $93.18

September 2019 0.375% 800.0 September 2026 4.4105 $226.73

Total $ 1,202.5

(1) Per $1,000 face value of notes.

In connection with the issuance of the 0.375% Convertible Senior Notes, we purchased capped call options (“Capped Calls”) on our common stock.

By entering into the Capped Calls, we expect to reduce the potential dilution to our common stock (or, in

the event the conversion is settled in cash, to provide a source of cash to settle a portion of our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Convertible Senior Notes.

The Capped Calls have an initial strike price of $335.90 per share and cover 3.5 million shares of our common stock.

Additional information regarding our debt is provided in Note 12 to the consolidated financial statements.

Summary of Cash Flows

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Effect of exchange rate changes on cash 4.8 1.5

Net increase (decrease) in cash and cash equivalents

The discussion of our operating, financing and investing activities for 2017 has been omitted from this Form 10-K but can be found in Item 7.

Management’s Discussion and Analysis and Results of Operations in our Form 10-K/A for the fiscal year ended December 31, 2018 filed with the Securities and Exchange Commission on February 28, 2019.

Net increase in cash and cash equivalents $ 708.3 $ 99.8

Operating Activities

Net cash provided by operating activities of $84.0 million in 2020 was primarily attributable to net income, as adjusted for depreciation and amortization, non-cash interest, and stock-based compensation, and a $63.4 million working capital cash outflow.

The working capital outflow was driven by a $50.5 million increase in inventories, a $32.2 million increase in prepaid expenses and other assets and a $15.6 million increase in accounts receivable, partially offset by a $27.8 million increase in accrued expenses and other liabilities, primarily driven by manufacturing operations costs associated with the addition of our new contract manufacturer, as well as an increase in pharmacy rebates due to growth in the pharmacy channel.

The increase in inventories was primarily driven by a planned inventory build associated with the further roll out of Omnipod DASH and an increase in work in progress inventory due to additional capacity from our new contract manufacturer.

The increase in prepaid expenses and other assets was primarily driven by an increase in software licenses due to head count additions, and an increase in software-as-a-service to support our strategic initiatives.

The increase in accounts receivable was primarily driven by revenue growth.

Net cash provided by operating activities of $98.4 million in 2019 was primarily attributable to net income, as adjusted for non-cash interest, stock-based compensation, depreciation and amortization, partially offset by a $19.7 million working capital cash outflow.

The working capital outflow was driven by a $30.2 million increase in inventories and a $21.9 million increase in prepaid expenses and other assets, partially offset by a $36.2 million increase in accounts payable, accrued expenses and other current liabilities, primarily driven by timing of payments.

The working capital outflow was driven by a $30.2 million increase in inventories and a $22.0 million increase in prepaid expenses and other assets, offset by a $25.6 million increase in accounts payable and a $17.7 million increase in accrued expenses and other liabilities, primarily driven by timing of payments.

The increase in inventories was primarily due to an increase in raw materials and finished goods related to the startup of our U.S.

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The increase in prepaid expenses and other assets was primarily driven by an increase in operating lease assets resulting from new leases entered into during the year and an increase in deferred commissions.

Net cash provided by operating activities of $35.9 million in 2018 was primarily attributable to net income, as adjusted for stock-based compensation, non-cash interest, depreciation and amortization, partially offset by a $52.8 million working capital cash outflow.

The working capital outflow was driven by a $38.8 million increase in inventories to support higher demand for our product and a $22.9 million increase in accounts and unbilled receivables driven by our shift to direct sales of the Omnipod in Europe and the adoption of new revenue guidance on January 1, 2018, which resulted in recording $13.4 million of unbilled revenue at December 31, 2018 .

Investing Activities

Net cash used in investing activities was $73.6 million and $184.5 million in 2019 and 2018 , respectively.

Capital Spending —Capital expenditures were $163.7 million and $157.4 million for 2019 and 2018 , respectively, primarily associated with the construction of our manufacturing and corporate headquarters facility in Acton, Massachusetts.

We expect capital expenditures for 2020 to be relatively consistent with 2019 as we continue to expand manufacturing capacity to support our growth and the launch of Omnipod Horizon.

Net cash provided by investing activities was $14.0 million in 2020, compared with net cash used in investing activities of $73.6 million in 2019.

Capital Spending —Capital expenditures were $129.0 million in 2020 and primarily related to equipment to increase our manufacturing capacity.

Capital expenditures were $163.7 million in 2019 and primarily related to the construction of our manufacturing and corporate headquarters facility in Acton, Massachusetts.

We expect capital expenditures for 2021 to increase compared with 2020 as we continue to expand manufacturing capacity to support our growth and the launch of Omnipod 5.

We expect to fund our capital expenditures using a combination of existing cash and investments as well as cash generated from operations.

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The increase in net sales of marketable securities was driven by a shift in a portion of our investment portfolio to investments that are classified as cash equivalents in order to satisfy future cash needs.

Acquisition of Intangible Assets —In 2020, following the resolution of a purchase price contingency associated with our 2018 acquisition of customer relationships from a former European distributor, we paid the distributor an additional $36.2 million for a total purchase price of $41.2 million.

We had previously paid the distributor $3.8 million in 2019 and the remainder in 2018.

Financing Activities

Net cash provided by financing activities was $73.5 million in 2019 , compared with net cash used in financing activities of $8.7 million in 2018 .

Debt Issuance and Repayment —As previously discussed under “Convertible Debt” during 2019 , we received net proceeds of $ 780.2 million from the issuance of our 0.375% Notes.

We used $663.6 million of the proceeds to partially fund the redemption of our 1.25% Notes and $85.4 million to purchase Capped Calls.

During 2018 , we paid $6.7 million to settle all our outstanding 2% Notes.

Option Exercises and Issuance of Shares Under Employee Stock Purchase Plan (“ESPP”) —Total proceeds from option exercises and the issuance of common stock under our ESPP increased $35.1 million to $50.9 million in 2019 , compared with $15.8 million in 2018 .

This increase was primarily driven by option exercises stemming from the retirement of our former CEO and the departure of other executives, partially offset by a $9.2 million decrease in payments of withholding taxes related to net restricted share settlements.

The decrease in tax payments was driven by a reduction in the vesting of restricted shares in 2019, compared with 2018, which was also due to the retirement of our former CEO and departure of other executives in 2018 and 2019, respectively.

Net cash provided by financing activities was $605.5 million in 2020, compared with $73.5 million in 2019.

Issuance of Common Stock —In 2020, we sold 2.4 million common shares for $478.7 million in an underwritten registered offering.

Net proceeds from the offering were $477.5 million.

The proceeds provide us with additional liquidity to mitigate risk and allow us to continue investing in the growth of our business and our strategic initiatives.

Debt Issuance and Repayment —In 2020, we received proceeds of $70.0 million upon entering into a mortgage of our Acton facility.

Additionally, we received proceeds of $60.0 million upon entering into two equipment financing transactions.

Refer to Note 12 to our consolidated financial statements for additional information regarding these transactions.

Option Exercises and Payment of Taxes for Restricted Stock Net Settlements —Total proceeds from option exercises decreased 20.9 million to $25.7 million in 2020, compared with $46.6 million in 2019.

This decrease was primarily driven by less option exercises in 2020 from the retirement of our former CEO in the prior year period.

Payments for taxes related to net restricted and performance stock unit settlements increased $21.2 million to $29.8 million in 2020, compared with $8.6 million in 2019.

The increase in payments for taxes related to restricted stock net settlements was driven by increased vesting of restricted shares in 2020, compared with 2019, including the immediate vesting of a significant portion of a company-wide 20th anniversary equity grant in the fourth quarter 2020.

Revision to Nine Months Ended September 30, 2020 Condensed Consolidated Cash Flow Statement

In February 2021, we identified an error in the presentation of certain cash flow activity that impacted several line items within the previously issued Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020.

While these items affected cash flows from operating and investing activities, they had no impact on the net increase (decrease) in cash and cash equivalents or net income.

We have assessed the materiality of the misstatement in accordance with ASC 250-10, Accounting Changes and Error Corrections, and concluded that this misstatement was not material to our previously issued consolidated financial statements.

Accordingly, our Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020 will be corrected prospectively in our Form 10-Q for the quarterly period ended September 30, 2021 as shown below.

(in millions) Previously Reported Adjustment As Adjusted

Prepaid and other assets $ (16.8) $ 4.1 $ (12.7)

Accounts payable, accrued expenses and other current liabilities $ 36.1 $ (22.1) $ 14.0

Net cash provided by operating activities $ 85.0 $ (18.0) $ 67.0

Capital expenditures $ (88.5) $ 10.3 $ (78.2)

Acquisition of intangible assets $ (8.3) $ 7.7 $ (0.6)

Net cash provided by investing activities $ 65.3 $ 18.0 $ 83.3

Commitments and Contingencies

Contractual Obligations —A summary of our contractual obligations and commitments for debt, operating lease obligations and other obligations at December 31, 2020 is presented in the following table:

(in millions)

(in millions) Short Term Long Term Total

Operating lease obligations $ 5.6 $ 13.1 $ 18.7

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Purchase obligations (1)

257.3 36.7 294.0

Total contractual obligations $ 293.2 $ 1,410.7 $ 1,703.9

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These commitments are derived from purchase orders, supplier contracts and open orders based on projected demand information.

Following the expiration of an agreement with a former European distributor on June 30, 2018, we were required to pay a quarterly per-unit fee for Omnipod sales to certain customers of the former European distributor for a one-year period through June 30, 2019.

The methodology applicable for determining the total fee under the distribution agreement is subject to an active arbitration proceeding in Switzerland.

The final amount of the fee could vary significantly depending on the number of customers who count for purposes of calculating the fee under the terms of the agreement;

accordingly, this fee has been excluded from the contractual obligations table above.

We estimate that the final aggregate fee for the applicable twelve-month period could be in the range of $5 million to $55 million .

We paid $3.8 million and $1.3 million of this fee during 2019 and 2018, respectively.

Legal Proceedings —Roche Diabetes Care, Inc.

(“Roche”) filed a patent infringement lawsuit against us and is seeking monetary damages and attorneys’ fees and costs.

Since the patent expired in 2019, Roche is not seeking injunctive relief and the lawsuit will have no impact on ongoing sales of our products.

We believe that we have meritorious defenses to Roche’s claims and intend to vigorously defend against them.

At this time, based on available information regarding this litigation, we are unable to reasonably assess the ultimate outcome of this case or determine an estimate, or range of estimates, of potential losses, which could be material;

accordingly, we have excluded this exposure from the contractual obligations table above.

Refer to Note 13 to our consolidated financial statements for additional information regarding this matter.

Off-Balance Sheet Arrangements

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Rebates are based on contractual arrangements, which may vary.

Our estimates are based on products

sold, historical experience, trends and, as available, channel inventory data.

Our estimates are based on products sold, historical experience, trends and, as available, channel inventory data.

Rebates charged against gross sales amounted to $82.5 million, $59.1 million and $34.1 million in 2020, 2019 and 2018, respectively.

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Changes from quarter to quarter in quantity and stage of production of in-process inventory could have a significant quarterly impact on revenue.

Product Warranty

We provide a four-year warranty on our PDMs sold in the United States and Europe and a five-year warranty on PDMs sold in Canada and may replace Pods that do not function in accordance with product specifications.

We estimate our warranty obligation at the time the product is shipped based on historical experience and the estimated cost to service the claims.

Warranty expense is recorded in cost of goods sold in the consolidated statements of operations.

Costs to service the claims reflect the current product cost.

Since we continue to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves.

Changes to the actual replacement rates, which are evaluated quarterly, could have a material impact on our estimated warranty reserve.

Accounts Receivable and Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.

We evaluate the collectability of our accounts receivable based on a combination of factors.

We regularly analyze customer accounts, review the length of time receivables are outstanding, review historical loss rates and assess current economic trends that may impact the level of credit losses in the future.

Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses.

However, since we cannot reliably predict future changes in the financial stability of our customers, we may need to increase our reserves if the financial conditions of our customers deteriorate.

Contingencies

We are involved in various legal proceedings that arise in the ordinary course of business as further discussed in Note 13 to our consolidated financial statements, including an ongoing arbitration proceeding with a former European distributor.

We are involved in various legal proceedings that arise in the ordinary course of business as further discussed in Note 13 to our consolidated financial statements, including a patent infringement case with Roche.

Accruals recorded for various contingencies including legal proceedings, self-insurance and other claims, are based on judgment, both regarding the probability of losses and range of loss, and, where applicable, include the consideration of opinions of internal and/or external legal counsel.

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An estimate is often initially developed substantially earlier than the ultimate loss is known and is reevaluated each accounting period.

As information becomes known, additional loss provision is recorded when either a best estimate can be made, or the minimum loss amount is increased.

As information becomes known, additional loss provision is recorded when either a best estimate can be made, or the

minimum loss amount is increased.

When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount.

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The guidance is effective for us beginning in the first quarter of 2021 with early adoption permitted.

We are currently evaluating the impact of this guidance on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”).

ASU 2017-04 requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting unit’s fair value.

The guidance is effective for us beginning in the first quarter of 2020.

Early adoption is permitted.

We do not expect the adoption of this guidance to impact our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326) (“ASU 2016-13”).

ASU 2016-13 requires financial assets measured at amortized cost, such as our trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions and future expectation for each pool of similar financial assets.

The new guidance also requires enhanced disclosures related to trade receivables and associated credit losses.

The guidance is effective for us beginning in the first quarter of 2020.

The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Debt Instruments and Contracts in an Entity's Own Equity , which simplifies the accounting for convertible instruments by eliminating certain separation models.

Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features.

Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate.

In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method.

The guidance is effective for us beginning in the first quarter of 2022 with early adoption permitted.

Early adoption of ASU 2020-06 as of January 1, 2021, would result in an approximate $330 million decrease in additional paid in capital from the derecognition of the bifurcated equity component, $250 million increase in debt from the derecognition of the discount associated with the bifurcated equity component and $80 million decrease to the opening balance of accumulated deficit, representing the cumulative interest expense recognized related to the amortization of the bifurcated conversion option.

Additionally, we expect to write-off the related deferred tax liabilities with a corresponding adjustment to the valuation allowance, resulting in no net impact to the cumulative adjustment to retained earnings.

Adoption of this standard will have no impact on our diluted earnings per share as we calculate earnings per share using the if-converted method.

We are still evaluating whether we will early adopt this guidance.

Forward-Looking Statements

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What changed 10-K

Item 7. Management’s Discussion and Analysis