Item 1. Business

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 continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device which is worn on the body for approximately three days at a time and its wireless companion, the handheld 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 and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience, and ease.

We began commercial sale of the Omnipod System in the United States in 2005. We sell the Omnipod System in the United States through direct sales to customers or through our distribution partners. The Omnipod System is currently available in multiple countries in Europe, Canada and Israel.

In addition to using the Omnipod for insulin delivery, we also partner with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across multiple therapeutic areas.

In June 2011, we acquired Neighborhood Holdings, Inc. and its wholly-owned subsidiaries (collectively, “Neighborhood Diabetes”). Through Neighborhood Diabetes, we provided customers with blood glucose testing supplies, traditional insulin pumps, pump supplies and pharmaceuticals, processing claims as either durable medical equipment or through pharmacy benefits. In February 2016, we sold Neighborhood Diabetes to Liberty Medical LLC ("Liberty Medical"). Additional information regarding the sale of Neighborhood Diabetes is provided in note 3 to the consolidated financial statements included under Item 8 of this Form 10-K.

Insulet Corporation is a Delaware corporation formed in 2000. Our principal offices are located at 600 Technology Park Drive, Suite 200, Billerica, Massachusetts 01821, and our telephone number is (978) 600-7000. Our website address is http://www.insulet.com. We make available, free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The information on our website is not part of this Annual Report on Form 10-K for the year ended December 31, 2016.

Our Market

Diabetes is a chronic, life-threatening disease for which there is no known cure. Diabetes is caused by the body’s inability to produce or effectively utilize the hormone insulin. This inability prevents the body from adequately regulating blood glucose levels. Glucose, the primary source of energy for cells, must be maintained at certain concentrations in the blood in order to permit optimal cell function and health. In people with diabetes, blood glucose levels fluctuate between very high levels, a condition known as hyperglycemia, and very low levels, a condition called hypoglycemia. Hyperglycemia can lead to serious short-term complications, such as confusion, vomiting, dehydration and loss of consciousness and long-term complications, such as blindness, kidney disease, nervous system disease, occlusive vascular diseases, stroke and cardiovascular disease, or death. Hypoglycemia can lead to confusion, loss of consciousness or death.

Diabetes is typically classified as either Type 1 or Type 2:

•	Type 1 diabetes is characterized by the body’s nearly complete inability to produce insulin. It is frequently diagnosed during childhood or adolescence. Individuals with Type 1 diabetes require daily insulin therapy, typically administered via injections or continuous infusion through pump therapy, to survive.

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Type 2 diabetes, the more common form of diabetes, is characterized by the body’s inability to either properly utilize insulin or produce enough insulin. Historically, Type 2 diabetes has occurred in later adulthood, but its incidence is increasing among the younger population, due primarily to increasing childhood obesity. Initially, many people with Type 2 diabetes attempt to manage their diabetes with improvements in diet, exercise and/or oral medications. As their diabetes advances, some patients progress to multiple drug therapy, which often includes insulin therapy.

Throughout this Annual Report on Form 10-K, we refer to both Type 1 diabetes and insulin-requiring Type 2 diabetes as insulin-dependent diabetes.

In addition to the diabetes market space, we have partnered with multiple pharmaceutical and biotechnology companies that utilize a customized form of the Omnipod System to deliver a drug over a specified interval of time, at a certain administered volume.

Managing Diabetes

Diabetes Management Challenges

Diabetes is often frustrating and difficult for patients to manage. Blood glucose levels can be affected by the carbohydrate and fat content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin absorption and changes in the effects of insulin on the body. For people with insulin-dependent diabetes, many corrections, consisting of the administration of additional insulin or ingestion of additional carbohydrates, are needed throughout the day in order to maintain blood glucose levels within normal ranges. Achieving this result can be very difficult without multiple daily injections of insulin or the use of continuous subcutaneous insulin infusion (“CSII”) therapy. Patients attempting to control their blood glucose levels tightly to prevent the long-term complications associated with fluctuations in blood glucose levels are at greater risk for overcorrection and the resultant hypoglycemia. As a result, many patients have difficulty managing their diabetes optimally. Additionally, the time spent in managing diabetes, the swings in blood glucose levels and the fear of hypoglycemia can all render diabetes management overwhelming to patients and their families.

Current Insulin Therapy

People with insulin-dependent diabetes need a continuous supply of insulin, known as basal insulin, to provide for background metabolic needs. In addition to basal insulin, people with insulin-dependent diabetes require supplemental insulin, known as bolus insulin, to compensate for carbohydrates ingested during meals or snacks or for a high blood glucose level.

There are three primary types of insulin therapy practiced today: conventional therapy; multiple daily injection (“MDI”) therapy using syringes or insulin pens; and CSII therapy using insulin pumps. Both MDI and CSII therapies are considered intensive insulin management therapies.

Many healthcare professionals believe that intensive insulin management therapies are superior to conventional therapies in delaying the onset and reducing the severity of diabetes-related complications. As a result, we believe that the use of intensive insulin management therapies has significantly expanded over the past decade, and that many Type 1 patients manage their diabetes using an intensive insulin management therapy. A significantly smaller percentage of people with insulin-requiring Type 2 diabetes manage their diabetes using an intensive insulin management therapy.

The Omnipod System

The Omnipod Insulin Management System is an innovative continuous insulin delivery system that provides all the proven benefits of CSII therapy in a way no conventional insulin pump can. The Omnipod System's innovative design and features allows people with insulin-dependent diabetes to live their life, and manage their diabetes, with unprecedented freedom, comfort, convenience, and ease.

The long-term health benefits of better blood glucose control are well known. Maintaining near-normal blood glucose levels can help people with insulin-dependent diabetes live a longer, healthier life with fewer diabetes-related complications. The Omnipod System also has many practical, everyday benefits, including convenience, freedom, flexibility and ease of use.

Continuous insulin delivery at preset rates eliminates the need for injections and the interruptions that come with them. In addition, with the Omnipod System, insulin delivery can be changed with the press of a button to adapt to snacks or unexpected changes in daily routine.

The Omnipod System works much like the pancreas of a person without diabetes by delivering insulin in two ways:

•	A small, constant background supply of insulin (called a basal rate) is delivered automatically at a programmed rate, all day and night.

•	An extra dose of insulin (called a bolus) can be delivered when a patient needs it to match the carbohydrates in a meal or snacks or to correct high blood glucose.

The Omnipod System is a discreet two part design, the Omnipod device ("Omnipod" or "Pod") and the PDM, that eliminates the need for the external tubing required with conventional pumps.

•	The Pod is a small, lightweight, self-adhesive device that the patient fills with insulin and wears directly on the body. The Pod delivers precise, personalized doses of insulin into the body through a small flexible tube (called a cannula), based on instructions that the patient programs into the Pod's wireless companion, the PDM.

•	The PDM is a wireless, handheld device that programs the Pod with the patient's personalized insulin-delivery instructions, wirelessly monitors the Pod's operation and includes a FreeStyle® blood glucose meter.

We have designed the Omnipod System to fit within the normal daily routines of patients. The Omnipod System consists of just two devices, as opposed to up to seven for conventional insulin pumps. As a result, the Omnipod System is easy for patients to use, which reduces the training burden on healthcare professionals. We believe that the Omnipod System’s overall ease of use makes it very attractive to people with insulin-dependent diabetes. We also believe that the Omnipod System’s ease of use and substantially lower training burden helps to redefine which diabetes patients are appropriate for CSII therapy, enabling healthcare professionals to prescribe CSII therapy to a broader pool of patients.

The Omnipod System’s unique patented design and proprietary manufacturing process have enabled us to provide CSII therapy at a relatively low up-front investment compared to conventional insulin pumps. We believe that our pricing model reduces the risk of investing in CSII therapy for third-party payors and makes CSII therapy much more accessible for people with insulin-dependent diabetes.

In 2016 there were three publications in peer-reviewed, scientific journals demonstrating the clinical and quality of life benefits associated with use of the Omnipod System. Two publications reported results of a retrospective study of patients with Type 1 and Type 2 diabetes. The study demonstrated clinically meaningful and statistically significant improvements in HbA1c (an important measure of blood glucose control), reduction in total daily dose of insulin and reduction in the frequency and severity of self-reported hypoglycemic episodes after three months of Omnipod System use compared to previous treatment with either multiple daily injections or traditional tubed insulin pumps. The third publication reported results of a second study that surveyed current adult Omnipod System users of which the majority reported positive changes in quality of life including perceived control over their diabetes, reduced diabetes distress, improved overall well-being and sense of hypoglycemic safety since initiating treatment with the Omnipod System. In addition, the majority of patients also reported significant improvement in glycemic control with more than one-third reporting a decrease in severe hypoglycemic episodes.

Research and Development

Our current research and development efforts are primarily focused on the development of mobile applications for the Omnipod System, including:

•	Omnipod Dash Insulin Management System. Development of a secured Bluetooth Low Energy enabled Pod and PDM with a touch screen color user interface supported by web application and smart phone connectivity.

•	Omnipod Horizon Automated Glucose Control. Development of a hybrid closed loop control system that will utilize the Dash mobile platform. Our Pod will communicate with a continuous glucose monitor and help control insulin delivery utilizing an algorithm located on the Pod.

•	Concentrated Insulin Delivery. Development to support the use of concentrated insulins for Type 1 and Type 2 patients with higher insulin-requirements, utilizing the same form factor as our existing Pod.

In addition to insulin delivery, we continue to work with multiple pharmaceutical and biotechnology companies on alternative uses for our Omnipod System technology as a delivery platform for a range of different pharmaceuticals.

Manufacturing and Quality Assurance

We believe a key contributing factor to the overall attractiveness of the Omnipod System is the disposable Omnipod continuous insulin delivery device. In order to manufacture sufficient volumes and achieve a cost-effective per unit production price for the Omnipod, we have designed the Omnipod to be manufactured through a semi-automated process.

We are currently producing our devices on varying degrees of semi-automated manufacturing lines at a facility in China, operated by a subsidiary of Flex Ltd. (formerly Flextronics International Ltd.) (“Flex”). We purchase our devices pursuant to our agreement with Flex. The current term of the agreement expires in September 2021 and is subject to an automatic renewal thereafter, unless otherwise canceled by the parties under the contract terms. The contract may be terminated by either party upon compliance with certain advance written notice provisions that are intended to provide the parties with sufficient time to make alternative arrangements.

We continue to invest in our supply chain operations to increase manufacturing capacity and reduce the per-unit production cost for the Omnipod System. As part of our investment strategy, in 2016 we announced our plan to establish a highly automated manufacturing operation in the United States and expect to begin production through this operation in 2019. In December 2016, we entered into an agreement to purchase property for the planned facility in Acton, Massachusetts for a total purchase price of $9.3 million. Of the total purchase price, $0.5 million was paid as of December 31, 2016 and the remaining $8.8 million was subsequently paid upon closing in February 2017. The new U.S. operation is intended to provide manufacturing redundancy and additional production capacity to support growth and new product launches. The new operation will enable further improvements of manufacturing reliability and the lowering of production costs.

We rely on outside vendors for the supply of components, sub-assemblies, and various services used in the manufacture of the Omnipod System. Although a number of these suppliers are sole-source suppliers, we continue to focus on identifying alternate supply sources and duplicate custom tooling.

Our outside vendors produce the components to our specifications and they are audited periodically by our Quality Assurance Department to ensure conformity with the specifications, policies and procedures for the Omnipod System. Our Quality Assurance Department also inspects and tests the Omnipod System at various steps in the manufacturing cycle to facilitate compliance with our stringent specifications. We have received approval of our Quality Management System from the BSI Group London, U.K., an accredited Notified Body for CE Marking and the International Standards Organization (“ISO”). Processes utilized in the manufacture, test and release of the Omnipod System have been verified and validated as required by the U.S. Federal Food and Drug Administration ("FDA") and other regulatory bodies. As a medical device manufacturer and distributor, our manufacturing facilities and the facilities of our suppliers are subject to periodic inspection by the FDA, our notified body and certain corresponding state agencies.

Intellectual Property

We believe that to maintain a competitive advantage, we must develop and preserve the proprietary aspect of our technologies. We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, non-disclosure agreements and other measures to protect our proprietary rights. Currently, we require our employees, consultants and advisors to execute non-disclosure agreements in connection with their employment, consulting or advisory relationships with us, where appropriate. We also require our employees, consultants and advisors who we expect to work on our current or future products to agree to disclose and assign to us all inventions conceived during their work with us that are developed using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of the Omnipod System or to obtain and use information that we regard as proprietary.

Patents. As of December 31, 2016, we had obtained 23 issued United States patents with expiration dates ranging from 2020 through 2034, and had 32 additional pending United States patent applications. We believe it will take up to four years, and possibly longer, for the most recent of these U.S. patent applications to result in issued patents. We are also seeking patent protection for our proprietary technology in other countries and regions throughout the world. The issued patents and pending patent applications cover, among other things:

•	the basic architecture of the Omnipod System, including the pump and the PDM;

•	the Omnipod shape memory alloy drive system;

•	the Omnipod System cannula insertion system;

•	communication features between system components for the Omnipod System and next generation products;

•	software for controlling the Omnipod System and next generation products; and

•	various novel aspects of the Omnipod System, potential future generations of Omnipod Systems, and other mechanisms for the delivery of pharmaceuticals.

Trademarks. We have registered various trademarks associated with our business, including INSULET, OMNIPOD, DASH and the OMNIPOD design with the United States Patent and Trademark Office on the Principal Register and in other appropriate jurisdictions.

Markets and Distribution Methods

We sell our Omnipod System through a combination of direct sales representatives and independent distributors in both the United States and outside of the United States. Independent distributors represent approximately 40% of our total revenue in the United States. We sell the Omnipod System in certain countries in Europe through our independent distributor, Ypsomed Distribution AG ("Ypsomed"). Our exclusive distribution agreement with Ypsomed expires in mid-2018.

Comprehensive approach across three interrelated constituencies. Our sales and marketing effort for the Omnipod System is focused on patient retention and growing patient, clinician and payor demand for the Omnipod System. We have a uniform sales and marketing approach, aligned across patients, physicians and providers, to capitalize on the unique benefits of our Omnipod System technology. We have three areas of focus:

•	First, build patient awareness about the features and benefits that the Omnipod System provides.

•	Second, build physician support by increasing the clinical evidence that clearly demonstrates the benefits that the Omnipod System provides.

•	Third, provide payors with the clinical and economic justification of why the Omnipod System is a greater benefit for the patients whom they insure.

Training. We believe that patient training is critical to ensure successful outcomes and retain patients on the Omnipod System. We have streamlined our new patient training by developing improved online resources, a standardized approach as well as increasing our field clinician team to directly train our new patients.

Customer Support. We seek to provide our customers with high quality customer support, from product ordering to insurance investigation, order fulfillment and ongoing support. We have integrated our customer support systems with our sales, reimbursement and billing processes and also offer support by telephone and through our website to provide customers with seamless and reliable customer support.

Competition

The medical device industry is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The majority of our patients have previously undertaken MDI therapy, which is substantially less expensive than CSII therapy. The Omnipod System competes with a number of existing insulin delivery devices as well as other methods for the treatment of diabetes. Medtronic MiniMed, a division of Medtronic, has historically held the majority share of the conventional insulin pump market in the United States. Other significant competitors in the United States are Animas Corporation, a division of Johnson & Johnson, and Tandem Diabetes Care, Inc. We also compete with drug delivery device companies such as West Pharmaceuticals.

Several of our competitors are large, well-capitalized companies with significantly more market share and resources than we have. They are able to spend aggressively on product development, marketing, sales and other product initiatives. Some of these competitors have:

•	significantly greater name recognition;

•	established relations with healthcare professionals, customers and third-party payors;

•	larger and more established sales forces and distribution networks;

•	greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory approval for products; and

•	greater financial and human resources for product development, sales and marketing and patent litigation.

In addition to the established insulin pump competitors, several companies are working to develop and market new insulin “patch” pumps and other methods for the treatment of diabetes, such as inhaled insulin. These companies are at various stages of development and the number of such companies continuously change as they enter or exit the market on an ongoing basis.

Government Regulation

Domestic Regulation. The Omnipod System is a medical device subject to extensive and ongoing regulation by the FDA and other federal, state, and local regulatory bodies. FDA regulations govern, among other things, product design and development, pre-clinical and clinical testing, manufacturing, labeling, post-market adverse event reporting, post-market surveillance, complaint handling, repair or recall of products, product storage, record keeping, pre-market clearance or approval, advertising and promotion, and sales and distribution.

FDA’s Pre-Market Notification (510(k)) and Pre-Market Approval Requirements. Unless an exemption applies, each medical device we seek to commercially distribute in the United States will require either prior 510(k) clearance or pre-market approval (“PMA”) from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose low to moderate risk are placed in either class I or II, which, absent an exemption, requires the manufacturer to submit to the FDA a premarket notification requesting permission for commercial distribution. This process is known as 510(k) clearance. Some low risk devices are exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring approval of a PMA application. We have obtained 510(k) clearance for the Omnipod System and expect that PMA approval will be needed for some of our future products. We may be required to obtain a new 510(k) clearance or pre-market approval for significant post-market modifications to the Omnipod System. Both the 510(k) clearance and PMA processes can be expensive and lengthy and entail significant user fees, unless an exemption is available.

In order to obtain pre-market approval and, in some cases, a 510(k) clearance, a product sponsor must conduct well-controlled clinical trials designed to test the safety and effectiveness of the product. Conducting clinical trials generally entails a long, costly and uncertain process that is subject to delays and failure at any stage. The data obtained from clinical trials may be inadequate to support approval or clearance of a submission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval or clearance. If we conduct clinical trials, they may be delayed or halted, or be inadequate to support approval or clearance.

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510(k) Clearance. To obtain 510(k) clearance for any of our potential future devices (or for certain modifications to devices that have previously received 510(k) clearance), we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a pre-amendment device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA application. The FDA’s 510(k) clearance pathway generally takes from three to twelve months from the date the application is completed, but can take significantly longer. After a medical device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a significant change in its intended use, requires a new 510(k) clearance or, depending on the modification, could require a PMA application. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination.

If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for the modification of an existing device, the FDA can, at its discretion, require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is obtained. In addition, in these circumstances, we may be subject to significant regulatory fines or penalties for failure to submit the requisite PMA application(s).

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PMA. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, devices deemed not substantially equivalent to a previously cleared 510(k) device or devices in commercial distribution before May 28, 1976 for which PMAs have not been required, generally require a PMA before they can be commercially distributed. A PMA application must be supported by extensive data, including technical information, pre-clinical and clinical trials, manufacturing and labeling to demonstrate the safety and effectiveness of the device to the FDA’s satisfaction. After a PMA application is complete, the FDA begins an in-depth review of the submitted information, which generally takes between one and three years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with Quality System Regulations, or QSRs, which impose elaborate design development, testing, control, documentation and other quality assurance procedures in the design and manufacturing process. The FDA may approve a PMA application with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical study that supported approval. Failure to comply with the conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval. After any pre-market approval, a new pre-market approval application or application supplement may be required in the event of modifications to the device, its labeling, intended use or indication or its manufacturing process. PMA supplements often require submission of the same type of information as a PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application, and may not require as extensive clinical data or the convening of an advisory panel.

Ongoing Regulation by FDA. Even after a device is placed on the market, regardless of its classification or premarket pathway, numerous regulatory requirements apply. These include, but are not limited to:

•	establishment registration and device listing;

•	quality system regulation, or QSR, which requires manufacturers, including third party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

•	labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses, and other requirements related to promotional activities;

•	medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;

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corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug and Cosmetic Act that may present a risk to health. In addition, FDA may order a mandatory recall if there is a reasonable probability that the device would cause serious adverse health consequences or death; and

•	post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

Failure to comply with applicable regulatory requirements can result in enforcement actions by the FDA and other regulatory agencies, which may include any of the following sanctions: untitled letters or warning letters, fines, injunctions, consent decrees, civil or criminal penalties, recall or seizure of our current or future products, operating restrictions, partial suspension or total shutdown of production, refusal of or delay in granting 510(k) clearance or PMA approval of new products or modified products, rescinding previously granted 510(k) clearances or withdrawing previously granted PMA approvals, or refusal to grant export approval of our products.

We are subject to announced and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors. If, as a result of these inspections, the FDA determines that our equipment, facilities, laboratories or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek civil, criminal or administrative sanctions and/or remedies against us, including the suspension of our manufacturing operations. Since approval of the Omnipod System, we have been subject to FDA inspections of our facility on multiple occasions. We cannot assure you that our facilities or our contract manufacturer or component suppliers’ facilities would pass any future quality system inspection.

Our facility located at 600 Technology Park Drive, Suite 200, Billerica, MA 01821 was inspected by the FDA in March 2015, which resulted in four inspectional observations (FDA Form 483) and a subsequent Warning Letter dated June 5, 2015. We have completed all of the commitments from the FDA Form 483 and Warning Letter responses. Our facility located in Billerica, MA was re-inspected by the FDA in November to December 2015. This inspection also resulted in four inspectional observations. We responded to these inspectional observations on December 31, 2015. Our facility was again re-inspected in October 2016 and this FDA inspection focused on corrections to previous FDA inspections and resulted in one inspectional observation. In January 2017, the FDA officially closed the FDA inspection that was conducted in October 2016.

In July 2015 we implemented a field removal of certain lots of our product due to the possibility that some Omnipod Systems had a higher rate of failure than our current manufacturing standards. In January 2017, the FDA officially terminated this field action. In September 2015, as part of our product quality monitoring process, we identified that certain lots of the Omnipod System had a slight increase (1% - 2%) in the reported cases in which the Pod’s cannula failed to deploy. On October 29, 2015, we implemented a field correction to advise patients of the possibility of a needle deployment failure and provided recommendations on how to manage such an event. Both field actions were initiated with the knowledge of the FDA and were reported to the agency in accordance with the requirements of 21 C.F.R. Part 806.

International Regulation. International sales of medical devices are subject to foreign government regulations, which may vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various other industrialized countries. In April 2009, we received CE Mark approval for the original Omnipod System, and in August 2011, we received CE Mark approval for our new Omnipod System. The CE Mark gives us authorization to distribute the Omnipod System throughout the European Union and in other countries that recognize the CE Mark. In September 2009, we received Health Canada approval to distribute the original Omnipod System throughout Canada, and in March 2013, we received Health Canada approval for our new Omnipod System. We have been distributing the Omnipod System in certain countries in Europe, through Ypsomed, since 2010.

Licensure. Several states require that durable medical equipment (“DME”) providers be licensed in order to sell products to patients in that state. Certain of these states require, among other things, that DME providers maintain an in-state location. Although we believe we are in compliance with all applicable state regulations regarding licensure requirements, if we were found to be noncompliant, we could lose our licensure in that state, which could prohibit us from selling our current or future products directly to patients in that state.

In addition, we are subject to certain state laws regarding professional licensure. We believe that our certified diabetes educators are in compliance with all such state laws. However, if our educators or we were to be found non-compliant in a given state, we may need to modify our approach to providing education, clinical support and customer service.

Federal Anti-Kickback and Self-Referral Laws. The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce:

•	the referral of an individual;

•	furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other federal health care programs; or

•	the purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid or other federal health care programs.

The Federal Anti-Kickback Statute has been interpreted to apply to arrangements between drug and medical device manufacturers and suppliers on one hand and prescribers, purchasers and formulary managers on the other,

and liability may be established without a person or entity having actual knowledge of the statute or specific intent to violate it. In addition, claims resulting from a violation of the Federal Anti-Kickback Statute constitute false or fraudulent claims for purposes of the Federal False Claims Act, which is addressed below. We provide the initial training to patients necessary for appropriate use of the Omnipod System either through our own diabetes educators or by contracting with outside diabetes educators that have completed a Certified Pod Trainer training course. Outside diabetes educators are reimbursed for their services at contracted rates deemed to be consistent with the market. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common business practices from prosecution and administrative sanctions, and we have structured our arrangements with diabetes educators and other business practices to comply with these exemptions and safe harbors whenever possible, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration that may be perceived as inducing the prescription, purchase, or recommendation of the Omnipod System may be subject to scrutiny under the law. In addition, because we may provide some coding and billing information to purchasers of the Omnipod System, and because we cannot assure that the government will regard any billing errors that may be made as inadvertent, the federal anti-kickback legislation may apply to us. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental programs, restrictions on operating in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations.

Federal law also includes a provision commonly known as the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” including a company that furnishes durable medical equipment, in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. Although there are a number of statutory exemptions protecting certain common business practices from prosecution under the Stark Law, and we have structured our arrangements with physicians and other providers to comply with these exemptions whenever possible, these arrangements may not expressly meet the requirements for applicable exceptions from the law.

Federal False Claims Act. The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies under the Federal False Claims Act. Penalties include fines up to approximately $22,000 per false claim or statement, plus three times the amount of damages that the federal government sustained because of the act of that person. In any event, we believe that we are in compliance with the federal government’s laws and regulations concerning the filing of reimbursement claims. However, many drug and medical device manufacturers have been investigated or subject to lawsuits by whistleblowers and have reached substantial financial settlements with the federal government under the False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; or causing submission of false claims by providing inaccurate coding or billing information to actual or prospective purchasers, and our business practices could be subject to scrutiny and enforcement under the Federal False Claims Act. We also may be subject to other federal false claim laws, including federal criminal statutes that prohibit making a false statement to the federal government.

Civil Monetary Penalties Law. We are also subject to the Federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil money penalties of up to $10,000 for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs.

Federal Health Care Fraud Statutes. We are also subject to a federal health care fraud statute that, among other things, imposes criminal and civil liability for executing a scheme to defraud any health care benefit program including non-governmental programs, and prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false or fraudulent statement or representation, or making or using any false writing or document with knowledge that it contains a materially false or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.

State Fraud and Abuse Provisions. Many states have also adopted some form of anti-kickback and anti-referral laws and a false claims act analogous to the Federal Anti-Kickback Statute and Federal False Claims Act, and in some cases these state laws apply regardless of the payer, including private payers. We believe that we are in conformance with such laws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.

Administrative Simplification of the Health Insurance Portability and Accountability Act of 1996. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) mandated the adoption of standards for the exchange of electronic health information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the healthcare industry. Ensuring privacy and security of patient information is one of the key factors driving the legislation. We believe we are in substantial compliance with the applicable HIPAA regulations.

Patient Protection and Affordable Care Act. The Patient Protection and Affordable Care Act (“ACA”) enacted significant changes to the provision of and payment for healthcare in the United States. Under the ACA and related laws and regulations, federal and state government initiatives are focused on limiting the growth of healthcare costs and implementing changes to healthcare delivery structures. These reforms are intended in part to put increased emphasis on the delivery to patients of more cost-effective therapies and could adversely affect our business. Legislative changes to the ACA remain possible and appear likely in the 115th United States Congress and under the Trump Administration, which could include changes that adversely affect our business. While some uncertainty exists regarding the future aspects of the ACA, we expect that the ACA will continue to have a significant impact on the delivery of healthcare in the United States and on our business in the near term.

Physician Payments Sunshine Act. The Physician Payments Sunshine Act, which is being implemented as the Open Payments program, requires manufacturers of drugs and devices for which Medicare or Medicaid payment is available to track and publicly report many types of payments made and items of value provided to physicians and teaching hospitals. Moreover, several states have imposed similar or more restrictive requirements, including requirements to disclose payments to HCPs, restrictions on marketing and other expenditures, and requirements to adopt a code of conduct or compliance program with specific elements. Our failure to adhere to these requirements could materially adversely impact our business and financial results.

Additionally, as some of these laws are still evolving, we lack definitive guidance as to the application of certain key aspects of these laws as they relate to our arrangements with providers with respect to patient training. We cannot predict the final form that these regulations will take or the effect that the final regulations will have on us. As a result, our provider and training arrangements may ultimately be found not to be in compliance with applicable federal law. Even if we are not found to have violated the law, responding to lawsuits, government investigations or enforcement actions, defending any claims raised, and paying any resulting settlement amounts would be expensive and time-consuming, and could have a material adverse effect on our reputation and business operations.

Third-Party Reimbursement

In the United States, our products are generally reimbursed by third-party payors, and we bill those payors for products provided to patients. Our fulfillment and reimbursement systems are fully integrated such that product is generally shipped only after confirmation of a physician’s valid statement of medical necessity and current health insurance information. We maintain an insurance benefits investigation department that works to simplify and expedite claims processing and to assist patients in obtaining third-party reimbursement.

We continue to work with third-party payors in the United States to establish coverage and payment for the Omnipod System and other diabetes management supplies. Our coverage contracts with third-party payors typically have a term of between one and three years and set coverage amounts during that term. Typically, coverage contracts automatically renew for specified incremental periods upon expiration, unless one of the parties terminates the contract.

Third-party payors may decline to reimburse for procedures, supplies or services determined not to be “medically necessary” or “reasonable.” In a limited number of cases, some third-party payors have declined to reimburse us for a particular patient because such patient failed to meet its criteria, most often because the patient already received reimbursement for an insulin pump from that payor within the warranty period, which is generally four years, or because the patient did not meet their medical criteria for an insulin infusion device. Common medical criteria for third-party payors approving reimbursement for CSII therapy include a patient having elevated A1c levels, a history of recurring hypoglycemia, fluctuations in blood glucose levels prior to meals or upon waking or, severe glycemic variability. Reimbursement may also be declined by insurers based upon language in the contract between the insurer and the insured group. An example of this is certain employer self-insurance plans that may choose to decline coverage based on specific provisions within those individual plans.

As part of our international distribution agreements, our distribution partners establish appropriate reimbursement contracts with third-party payors in countries and provinces in which they distribute the Omnipod System prior to distributing the Omnipod System in each territory.

Currently, there is not an established mechanism for Medicare or broad Medicaid coverage for the majority of the Omnipod System. However, we are continuing a dialogue with Centers for Medicare & Medicaid Services ("CMS") about Medicare coverage and with other public payors for Medicaid coverage.

Employees

As of December 31, 2016, we had 640 full-time employees. None of our employees are represented by a collective bargaining agreement, and we have never experienced any work stoppage. We believe that our employee relations are good.