Insulet 2019 10-K Annual Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 001-33462

INSULET CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (978) 600-7000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the last reported sale price of the Common Stock as reported on The NASDAQ Global Market on June 30, 2019 was approximately $7.2 billion.

The number of shares of common stock outstanding as of February 20, 2020 was 62,863,402.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2019. Portions of such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I

Overview

Insulet Corporation (“we” or the “Company”) is primarily engaged in the development, manufacture and sale of its proprietary Omnipod® System, an innovative, discreet and easy-to-use continuous insulin delivery system for people with insulin-dependent diabetes, which we have been selling since 2005. The Omnipod System consists of the following: the Omnipod Insulin Management System (“Omnipod”) and the Omnipod DASHTM Insulin Management System (“Omnipod DASH” or “DASH”), our next generation digital mobile Omnipod platform.

There are two primary types of insulin therapy practiced today: multiple daily injection (“MDI”) therapy using syringes or insulin pens; and pump therapy using insulin pumps. Insulin pumps are used to perform continuous subcutaneous insulin infusion and typically use a programmable device and an infusion set to administer insulin into the person’s body. Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages relative to MDI therapy. We estimate that approximately one-third of the Type 1 diabetes population in the United States and even less of the Type 1 diabetes population outside the United States use insulin pump therapy. An even smaller portion of the Type 2 diabetes population in and outside of the United States who are insulin-dependent use insulin pump therapy. We believe these factors present a significant available market for the Omnipod System globally. The Omnipod System features two discreet and easy-to-use devices: a small, lightweight, self-adhesive disposable tubeless Omnipod device (“Pod”) that is worn on the body for up to three days at a time, and its wireless companion, the handheld Personal Diabetes Manager (“PDM”). The Pod can be worn in multiple locations, including the abdomen, hip, back of upper arm, upper thigh or lower back and, because it is waterproof, there is no need to remove it when showering, swimming or performing other activities. The Omnipod System 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. Omnipod DASH, launched in 2019, features a secure Bluetooth enabled Pod and PDM with a color touch screen user interface supported by smartphone connectivity.

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 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.

Market Opportunity: Management of Diabetes

Diabetes is a chronic, life-threatening disease for which there is no known cure. It is caused by the body’s inability to produce or effectively utilize the hormone insulin, which 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:

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.

Diabetes Management Challenges

Diabetes is often frustrating and difficult for people 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 insulin pump therapy. Individuals with diabetes 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 people have difficulty managing their diabetes. Additionally, the time spent managing fluctuations in blood glucose levels and the fear associated with hypoglycemia can be incredibly stressful for individuals with diabetes 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.

MDI therapy involves the administration of fast-acting insulin before meals (bolus) to lower blood glucose levels to a healthy range. MDI therapy may also require a separate injection of a long-acting (basal) insulin, to control glucose levels between meals; typically, once or twice per day. By comparison, insulin pump therapy uses only fast-acting insulin to fulfill both mealtime (bolus) and background (basal) requirements. Insulin pump therapy allows individuals to customize their bolus and basal insulin doses to meet their insulin needs throughout the day and is intended to more closely resemble the physiologic function of a healthy pancreas.

Insulin pump therapy has been shown to provide numerous advantages relative to MDI therapy. For example, insulin pump therapy eliminates individual insulin injections (approximately five per day), delivers insulin more accurately and precisely than injections, often improves HbA1c (a common measure of blood glucose levels) over time, provides greater flexibility with meals, exercise and daily schedules, and can reduce severe low blood glucose levels.

We believe that these distinct advantages, including technological advancements and increased awareness of insulin pump therapy as compared to other available insulin therapies will continue to generate demand for insulin pump devices.

Our Solution: The Omnipod System

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

Pod	Omnipod PDM	Omnipod DASH PDM

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

The Omnipod System provides continuous insulin delivery at preset rates, eliminating the need for individual insulin injections and the interruptions that come with them. In addition, 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:

We have designed the Omnipod System to fit within the normal daily routines of users. The Omnipod System consists of just two devices as opposed to up to seven for conventional tubed insulin pumps. As a result, the Omnipod System is easy to use, which reduces the training burden on healthcare professionals and end-users. We believe that the Omnipod System’s overall ease of use, flexibility and substantially lower training burden make it very attractive to people with insulin-dependent diabetes and helps redefine persons for whom insulin pump therapy is appropriate, allowing healthcare professionals to prescribe pump therapy to a broader group of people with diabetes.

The Omnipod System’s unique patented design and proprietary manufacturing process allow us to provide pump therapy at a relatively low or no up-front investment compared to conventional tubed insulin pumps. Our pricing model, which includes little or no initial investment, reduces the risk to third-party payors of significant up-front investments commonly associated with traditional tubed insulin pumps.

Several publications over the past decade have found that compared to multiple daily injections therapy, the use of the Omnipod System by individuals with both Type 1 and Type 2 diabetes across all age groups is associated with good glycemic control and reduced frequency and severity of hypoglycemic episodes. These results are consistent with other published literature of other continuous subcutaneous insulin infusion devices like the Omnipod System. In addition, research in adults with Type 1 diabetes has found that compared to prior treatment modality, the use of the Omnipod System is associated with improved quality of life. We believe that this data is clinically meaningful to healthcare providers and provides support for the use of the Omnipod System in the treatment of both Type 1 and Type 2 diabetes.

We have partnered with Glooko Inc. (“Glooko”) to connect our Omnipod System user data with Glooko’s comprehensive diabetes data management system (including Glooko and Diasend in selected regions). Glooko provides a cloud-based application for clinicians and users accessible through a kiosk, home computer or a mobile application on the user’s smartphone that provides users and their health care providers access to insulin delivery trends, blood glucose levels and other integrated data.

Third-Party Reimbursement

In the United States, our products are sold directly to wholesalers, private healthcare organizations, healthcare facilities, mail order pharmacies and independent retailers. These entities, and the Company in some cases, seek reimbursement from health insurance companies and/or government administrative payors. The Omnipod System is also marketed and sold through distributors, as well as marketed to physicians and consumers. Our products are subject to regulatory changes and competition in technological innovation, price, convenience of use, service and product performance. Consumers generally have commercial insurance, Medicare or Medicaid coverage that pays for the product.

In Europe, in connection with of our assumption of direct operations in 2018, we have worked with local healthcare systems to transition coverage and payment processes for the Omnipod System as required. In certain non-U.S. locations in which we sell through a distributor or intermediary, our distribution partners and local intermediaries establish appropriate reimbursement contracts with healthcare systems in those countries and provinces.

Markets and Distribution Methods

The Omnipod System is currently available in the United States, Canada and in certain countries in Europe and the Middle East. We sell the Omnipod System directly to consumers, through distribution partners and most recently in the U.S. through the pharmacy channel. For the year ended December 31, 2019, approximately 65% of our Omnipod System sales were through intermediaries.

Revenue for customers comprising more than 10% of total revenue was as follows:

• Represents less than 10% of revenue for the period.

Our sales and marketing efforts are focused on customer retention and growing user, clinician and payor demand for the Omnipod System. We have a uniform sales and marketing approach, aligned across users, physicians and providers, to capitalize on the unique benefits of our Omnipod System technology. We have three areas of focus:

Training

We believe that training consumers how to use the Omnipod System is an important factor to promote successful outcomes and customer retention. We have streamlined and standardized our training by developing improved online resources and increased our field clinician team to directly train new Omnipod System users.

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 offer support by telephone and through our website to provide customers with seamless and reliable support.

Competition

The diabetes medical device market is highly competitive, subject to rapid change and significantly affected by new product introductions. The Omnipod System competes for consumers in the insulin delivery market. Because most new Omnipod System end-users come from MDI therapy, which currently is the most prevalent method of insulin delivery, we believe that we primarily compete with companies that provide products and supplies for MDI therapy. To a smaller extent, we also compete with companies in the insulin pump market, which today consists of conventional tubed pump companies, including Medtronic MiniMed, a division of Medtronic public limited company (“Medtronic”), and Tandem Diabetes Care Inc. (“Tandem”). In addition, we compete with Roche Holdings Ltd. (“Roche”) and The Ypsomed Group (“Ypsomed”) outside the United States. Medtronic historically has held the majority share of the conventional tubed insulin pump market in the United States. The competitive landscape in our industry continues to undergo significant change. In addition to the established insulin pump competitors, several companies are working to develop and market new insulin pumps and smart pens. These companies are at various stages of development and the number of such companies often changes as they enter or exit the market. Our non-insulin drug delivery product line also competes with drug delivery device companies such as West Pharmaceutical Services, Inc.

Research and Development

Our research and development efforts are primarily focused on making improvements to the Omnipod System, including adding features and functionality that will deliver economic value, convenience and simplicity to users, and improving our supply chain operations. These efforts include:

Omnipod Horizon****TM Automated Insulin Delivery System (“Omnipod Horizon”)

We are developing an automated insulin delivery system that utilizes the DASH mobile platform to allow the Pod, our automated insulin delivery algorithm located on the Pod and the glucose sensor values obtained directly from a third party’s continuous glucose monitor to predict glucose levels into the future and automatically adjust the insulin dose required to help reduce the occurrence of blood glucose highs and lows. We plan to launch Omnipod Horizon with a continuous glucose monitor manufactured by Dexcom, Inc.; however, we have signed a development agreement to integrate Abbott Diabetes Care, Inc.’s continuous glucose monitor in the future. Omnipod Horizon is intended to be controllable through a secure mobile app on the user’s smartphone (i.e.

“phone control”). In July 2018, we announced positive results from a clinical trial finding that Omnipod Horizon performed well and was safe for over five days of use in adults, adolescents and children with Type 1 diabetes and in December 2019, we began patient enrollment in our pivotal trial. Omnipod Horizon was granted designation in the U.S. Food and Drug Administration’s (“FDA”) breakthrough device program, which is a program intended to help people have more timely access to certain medical devices and device-led combination products that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions by expediting the development and review process. We believe that recent and ongoing developments in the use of Continuous Glucose Monitoring technology and Automated Insulin Delivery algorithms in conjunction with insulin pump therapy will continue to provide people with insulin-dependent diabetes benefits that will make insulin pump therapy an even more attractive treatment alternative to existing MDI therapy.

Paramount to our ability to deliver phone control is our commitment to cyber and information security. Omnipod DASH is the first FDA-cleared insulin pump certified under the Diabetes Technology Society’s “Standard for Wireless Diabetes Device Security” cybersecurity assurance standard and program, known as DTSec. This certification is a cybersecurity standard intended to raise confidence in the security of network connected medical devices through independent expert evaluation. In addition, Omnipod DASH is International Standards Organization (“ISO”) 27001 certified, which is the international standard for best practice in an information security management system globally. With the DTSec and ISO 27001 certifications, Omnipod DASH is globally recognized for incorporating the highest standards for cyber and information security and safety, including secure data transfer between the Pod and PDM, as well as secure cloud storage.

Manufacturing and Quality Assurance

We believe a key contributing factor to the overall attractiveness and success of the Omnipod System is the disposable nature of the Pod. In order to manufacture sufficient volumes and achieve a cost-effective per unit production price for the Omnipod, we have designed the Omnipod System to be manufactured through automation.

During 2019, we began producing product from our new highly automated manufacturing facility in Acton, Massachusetts. 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 North American customer base and support growth. To date, we have invested approximately $320 million in property, equipment 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.

We also continue to produce our devices on varying degrees of semi-automated manufacturing lines at a facility in China, operated by a subsidiary of Flex Ltd. (“Flex”) pursuant to a multi-year materials supply agreement. The agreement expires in December 2022 and is subject to an automatic renewal thereafter, unless otherwise canceled by the parties under the contract terms.

We continue to invest in improvements and efficiencies to our entire supply chain, including improvements in automation at our suppliers and contract manufacturer.

Raw Materials

We use a diverse and broad range of raw materials in the assembly and manufacturing of the Omnipod System. We purchase all our raw materials and select components used in the manufacturing of our products from external suppliers. In addition, we purchase some supplies from a single or limited number of sources for reasons of proprietary know-how, quality assurance, cost-effectiveness, or constraints resulting from regulatory requirements. We work closely with our suppliers to ensure continuity of supply while maintaining high quality and reliability.

We rely on a limited number of suppliers for certain of the components and sub-assemblies used in the manufacture of the Omnipod System, including with respect to application-specific integrated circuit chips, bluetooth low-energy chips and other specialized parts. The design of certain of these components and sub-assemblies (including, in some instances, the raw materials used to manufacture the same) is proprietary and the intellectual property rights with respect thereto may be owned exclusively by one party. Where such ownership exists, we are sole sourced with the supplier controlling such intellectual property rights. These sole sourced components are critical to the design and functionality of the Omnipod System. In the case of sole sourced parts, we manage risk through holding inventory ourselves and at the supplier to ensure continuity of supply and low risk of disruption. We purchase other components and sub-assemblies from manufacturers with whom we are at least dual sourced.

Quality Assurance

We utilize outside vendors for the supply of components, sub-assemblies and various services used in the manufacture of the Omnipod System. Our outside vendors produce the components to our specifications, and they are audited periodically by our Quality Assurance Department to confirm 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 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 ISO. Processes utilized in the manufacture, test and release of the Omnipod System have been verified and validated as required by the 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 and certain corresponding state agencies.

Intellectual Property

To maintain a competitive advantage, we believe 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. We require our employees, consultants and advisers to execute non-disclosure agreements in connection with their employment, consulting or advisory relationships with us, where appropriate. We also require employees, consultants and advisers who work on our products to agree to disclose and assign to us all inventions conceived during their work with us that are developed using our property or 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, 2019, we had over 200 patents in the United States and in certain other countries, with expiration dates ranging from 2021 through 2042, and had over 100 patent applications pending. The issued patents and pending patent applications cover, among other things:

Trademarks

We have registered various trademarks associated with our business with the United States Patent and Trademark Office on the Principal Register and in other appropriate jurisdictions. Our trademarks include OMNIPOD®, DASHTM, Omnipod CONTROLTM, Omnipod DISPLAYTM, Omnipod VIEWTM, OMNIPOD U-200TM, OMNIPOD U-500TM, HORIZONTM, Pod PalsTM and PodderTM.

Government Regulation

United States FDA 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, preclinical and clinical testing, manufacturing, labeling, product storage, pre-market clearance or approval, advertising and promotion, sales and distribution, post-market adverse event reporting, post-market surveillance, complaint handling, repair or recall of products and record keeping.

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. We have obtained 510(k) clearance for the Omnipod and Omnipod DASH Systems and expect that PMA approval may 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 our products. Both the 510(k) clearance and PMA processes can be expensive and lengthy and entail significant user fees, unless an exemption is available.

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. The FDA’s 510(k) clearance pathway generally takes 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 pre-market

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 PMA is obtained. In addition, in these circumstances, we may be subject to significant regulatory fines or penalties for failure to submit the requisite 510(k) or PMA application(s).

PMA. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, and devices deemed not substantially equivalent to a previously cleared 510(k) device 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 information 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. The FDA conducts a pre-approval inspection of the manufacturing facility to ensure compliance with Quality System Regulations (“QSR”), 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 people 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 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.

Clinical Trials. Clinical trials are almost always required to support a PMA application and may also be required to support 510(k) submissions. If the device presents a “significant risk” to human health as defined by the FDA, the FDA requires the device sponsor to submit an investigational device exemption (“IDE”) to the FDA and obtain IDE approval prior to commencing the human clinical trials. The IDE must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number of people, unless the product is deemed a “non-significant risk” device, in which case IDE approval from the FDA would not be required, although the clinical trial would need to meet other requirements including Institutional Review Board (“IRB”) approval. Clinical trials for a significant risk device may begin once an IDE is approved by the FDA and the appropriate IRB at each clinical trial site.

Our clinical trials must be conducted in accordance with FDA regulations and federal and state regulations concerning human subject protection, including informed consent and healthcare privacy. A clinical trial may be suspended by the FDA or at a specific site by the relevant IRB at any time for various reasons, including a belief that the risks to the trial participants outweigh the benefits of participation in the clinical trial. Even if a clinical trial is completed, the results of our clinical testing may not demonstrate the safety and efficacy of the device or may be equivocal or otherwise not be sufficient for us to obtain approval of our product.

Ongoing Regulation by the FDA. 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:

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 of new products or modified products, rescinding previously granted 510(k) clearances or withdrawing previously granted PMAs, or refusal to grant import or 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.

International Product Regulations

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.

The primary regulatory body in Europe is that of the European Union, which includes most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices, including the Medical Device Directive (“MDD”) and the Medical Device Regulation (“MDR”), which will replace MDD in May 2020. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body.” This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within the European Union is required for a manufacturer to commercially distribute the product throughout the European Union. Outside of the European Union, regulatory approval needs to be sought on a country-by-country basis for us to market our products.

We have obtained the right to affix the CE Mark to the Omnipod and Omnipod DASH Systems. The CE Mark gives us authorization to distribute these products throughout the European Union and in other countries that recognize the CE Mark. We have been distributing the Omnipod in certain countries in Europe through intermediaries or directly to end-users since 2010 and have been distributing Omnipod throughout Canada since receiving Health Canada approval in 2009.

Other Regulations

Licensure. Several states require that durable medical equipment (“DME”) providers be licensed in order to sell products in that state. Certain of these states require, among other things, that DME providers maintain an in-state location. In order to sell our product through the pharmacy channel in the United States, we are required to work with intermediaries who have the appropriate pharmacy license for the applicable market in which we provide consumers with access to our product through the pharmacy.

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, we may need to modify our approach to providing education, clinical support and customer service.

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

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, patients, purchasers and formulary managers on the other. Liability under the statute 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 civil False Claims Act, which is addressed below. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common business practices from prosecution and administrative sanctions, 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. For example, we provide the initial training to users 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. We compensate outside diabetes educators for their services at contracted rates deemed to be consistent with the market. We have structured our arrangements with diabetes educators and other business practices to comply with statutory exemptions and regulatory safe harbors whenever possible, but our practices may be subject to scrutiny if they fail to strictly comply with the criteria in the exemption or regulatory safe harbor. Moreover, there are no safe harbors for many common practices such as providing reimbursement assistance, coding and billing information or other customer assistance and product support programs. If any of our practices, arrangements or programs are found not to be in compliance with the federal Anti-Kickback Statute, we could be subject to significant criminal, civil and administrative penalties, including imprisonment, fines, damages, and exclusion from Medicare, Medicaid or other governmental programs, any of which could have a material 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 for the furnishing of certain “designated health services,” including 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 for items and services referred by a physician with a noncompliant arrangement, civil damages and penalties, and exclusion from Medicare, Medicaid or other governmental programs. Although there are a number of statutory and regulatory exceptions protecting certain common business practices implicating the Stark Law, and we have structured our arrangements with physicians and other providers to comply with these exceptions, these arrangements may not expressly meet the requirements for applicable exceptions from the law.

Federal Civil False Claims Act. The federal civil False Claims Act imposes penalties against any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act are subject to the imposition of significant per claim penalties, three times the amount of damages that the federal government sustained and possible exclusion from participation in federal health care programs like Medicare and Medicaid. We believe that we are in compliance with the federal government’s laws and regulations concerning the filing of claims for reimbursement. 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. 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 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 significant civil monetary penalties 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. Violations of these statutes can result in significant civil, criminal and administrative penalties, fines, damages, and exclusion from federal health care programs.

State Fraud and Abuse Laws and Marketing Restrictions. Many states have also adopted anti-kickback, anti-referral laws, and false claims laws and regulations analogous to the federal civil Anti-Kickback Statute and federal False Claims Act. In some cases, these state laws apply regardless of the payor, including private payors. We believe that we are in conformance with such laws. Moreover, several states have imposed requirements to disclose payments to health care providers, restrictions on marketing and other expenditures, and requirements to adopt a code of conduct or compliance program with specific elements. 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 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. If we are found to be in violation of HIPAA, we could be subject to civil or criminal penalties.

General Data Protection Regulation. The General Data Protection Regulation (“GDPR”) is a comprehensive update to the data protection regime in the European Economic Area that imposes requirements relating to, among other things, consent to process personal data of individuals, the information provided to individuals regarding the processing of their personal data, the security and confidentiality of personal data, notifications in the event of data breaches and use of third party processors. If we fail to comply with these standards, we could be subject to criminal penalties and civil sanctions, including fines and penalties for noncompliance.

California Consumer Privacy Act. The California Consumer Privacy Act (“CCPA”) is a consumer privacy law, which provides certain privacy rights and consumer protection for residents of the state of California that became effective in January 2020. These consumer rights include the right to know what personal information is collected, the right to know whether the data is sold or disclosed and to whom, the right to request a company to the delete personal information collected, the right to opt-out of the sale of personal information and the right to non-discrimination in terms of price or service when a consumer exercises a privacy right. If we fail to comply with these regulations, we could be subject to civil sanctions, including fines and penalties for noncompliance.

Patient Protection and Affordable Care Act. The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (“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. Some of the provisions of the ACA have yet to be fully implemented, and certain provisions have been subject to judicial and Congressional challenges. In addition, there have been efforts to repeal or replace certain aspects of the ACA and to alter the implementation of the ACA and related laws. It is unclear how the ACA and its implementation, as well as efforts to repeal or replace, or invalidate, the ACA, or portions thereof, will affect our business. Additional legislative changes, regulatory changes, and judicial challenges related to the ACA remain possible. 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, implemented as the Open Payments program, requires manufacturers of drugs and devices for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related to direct or indirect payments and other transfers of value provided to physicians and teaching hospitals, as well as ownership and investment interests held by physician and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report information regarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists and certified nurse-midwives. Our failure to disclose reportable payments could subject us to penalties and materially adversely impact our business and financial results.

As these laws and regulations continue to evolve, we lack definitive guidance as to the application of certain key aspects of these laws and regulations as they relate to certain of our arrangements and programs, including those with providers with respect to user training. We cannot predict the final form of these federal and state regulations or the effect their application 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. Moreover, these laws continue to evolve. The Bipartisan Budget Act of 2018 increased the criminal and civil penalties that can be imposed for violating certain federal health care laws, including the Anti‑Kickback Statute. Additionally, in 2019, the United States Department of Health and Human Services’ Office of the Inspector General (“OIG”) issued a proposed rule to remove protection from the discount safe harbor to the federal healthcare Anti-Kickback Statute for manufacturers rebates to pharmacy benefit managers (or “PBMs”), Medicare Part D plans and Medicaid managed care organizations (“MCOs”). The rule also proposes a new safe harbor for point-of sale-reductions offered by manufacturers to Part D plans, Medicaid MCOs and their PBMs, and a

new safe harbor for certain fees manufacturers pay to PBMs for services to the manufacturers. If finalized, the rule will be one of the most significant amendments to the Anti-Kickback Statute regulatory safe harbors in decades and likely will transform manufacturer interactions with Part D plans, Medicaid MCOs and their PBMs.

Ensuring that our business arrangements and interactions with healthcare professionals, third‑party payors, customers and others comply with applicable healthcare laws and regulations requires substantial resources. Because of the breadth of these laws and the narrowness of the exceptions or safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations. 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.

U.S. Foreign Corrupt Practices Act (“FCPA”). We are also subject to FCPA and similar anti-bribery laws in non-U.S. jurisdictions, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, our customer relationships outside of the United States may be with governmental entities and therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our training and compliance programs, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees or agents.

Employees

As of December 31, 2019, we had 1,350 full-time employees.

Company Information

Insulet Corporation is a Delaware corporation formed in 2000. Our principal office is located at 100 Nagog Park, Acton, Massachusetts, 01720 and our website address is http://www.insulet.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). We have also posted the charters for our Audit Committee, Compensation Committee and Nominating, Governance and Risk Committee, as well as our Code of Business Conduct and Ethics, under the heading “Corporate Governance” in the Investors section of our website. The information on our website is not incorporated in this report by reference. In addition, the SEC maintains a website (http//www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Risks Relating to Our Business

Although we achieved profitability in 2018, we previously incurred significant losses since inception and cannot assure you that we will sustain profitability.

Prior to 2018 and since our inception in 2000, we incurred significant losses. Our losses from continuing operations for the years ended December 31, 2017, 2016 and 2015 were $26.8 million, $27.2 million and $61.6 million, respectively. The extent of any future losses and the timing of profitability are uncertain, and we may not sustain profitability. As of December 31, 2019, we had an accumulated deficit of $672.0 million.

We may experience significant fluctuations in our quarterly results of operations.

The fluctuations in our quarterly results of operations have resulted, and may continue to result, from numerous factors, including:

These factors, some of which are not within our control, may cause the price of our stock to fluctuate substantially. If our quarterly results of operations fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons of our financial results should not be the only indication of our future performance.

We currently rely on sales of the Omnipod System, and tailored versions of the Omnipod System in our drug delivery product line, to generate nearly all our revenue. The failure of the Omnipod System to achieve and maintain significant market acceptance or any factors that negatively impact sales of this product will adversely affect our business, financial condition and results of operations.

Our main product is the Omnipod System, which we introduced to the market in 2005. We expect to continue to derive nearly all our revenue from the sale of this product. Accordingly, our ability to continue to generate revenue is highly reliant on our ability to market and sell the Omnipod System and to retain consumers who currently use the product. Our sales of the Omnipod System may be negatively impacted by many factors, including:

If any of these events occurs, our ability to generate revenue could be significantly reduced.

Our ability to sustain profitability may depend on our ability to sustain or further reduce the per unit cost of producing the Omnipod System by increasing customer orders, increasing manufacturing volume and productivity and reducing raw material and overhead costs per unit.

To sustain profitability, we may need to, among other things, sustain or further reduce the per unit cost of the Omnipod System. If we are unable to sustain or further reduce raw material and manufacturing overhead costs through volume purchase discounts, negotiation of improved pricing and increased productivity and production capacity, our ability to sustain profitability could be negatively affected. The occurrence of one or more factors that negatively impact the manufacturing or sales of the Omnipod System or increase our raw material costs could prevent us from sustaining our desired increase in manufacturing volume, which would prevent us from sustaining and further increasing profitability.

Adverse changes in general economic conditions in the United States and outside of the United States, predominantly in Europe, could adversely affect us.

We are subject to the risks arising from adverse changes in general economic market conditions. A U.S. or global recession, could negatively impact our current and prospective customers, adversely affect the financial ability of health insurers to pay claims, adversely impact our ability to pay our expenses and ability to obtain financing of our operations, cause delays or other problems with key suppliers and increase the risk of counterparty failures.

Healthcare spending in the United States, Canada and Europe could be negatively affected in the event of a downturn in economic conditions. For example, U.S. consumers who have lost their jobs or healthcare coverage may no longer be covered by an employer-

sponsored health insurance plan and consumers reducing their overall spending may eliminate purchases requiring co-payments. Since the sale of the Omnipod System to a new user is generally dependent on the availability of third-party reimbursement and may require the user to make a significant co-payment, an economic downturn could reduce the referrals generated by our sales force and thereby reduce our sales orders. Similarly, existing users could cease purchasing the Omnipod System and return to MDI or other less-costly therapies, which would cause our consumer attrition rate to increase. Any decline in new orders or increase in our consumer attrition rate would reduce our revenue, which in turn would make it more difficult to achieve our per-unit cost-savings goals, which we are attempting to attain in part through increases in our manufacturing volume.

Healthcare reform laws could adversely affect our revenue and financial condition.

During the past several years, the U.S. healthcare industry has been subject to an increase in governmental regulation at both the federal and state levels. Efforts to control healthcare costs, including limiting access to care, alternative delivery models and changes in the methods used to determine reimbursement scenarios and rates, are ongoing at the federal and state government levels. There are provisions of law that provide for the creation of a new public-private Patient-Centered Outcomes Research Institute tasked with identifying comparative effectiveness research priorities, including establishing a research project agenda and contracting with entities to conduct the research. Research findings publishe

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None.

Our owned global headquarters, which encompasses our U.S. manufacturing and office facility in Acton, Massachusetts is approximately 300,000 square feet. We also lease a total of approximately 200,000 square feet of office, research and development and warehousing space and other related facilities primarily in the U.S., Europe and Canada.

The information required by this Item is provided under “Legal Proceedings” in Note 13 to the consolidated financial statements included under Item 8 of this Form 10-K and is incorporated herein by reference.

Not applicable.

PART II

MARKET FOR REGISTRANT’S COMMON EQUITY

Our common stock is listed on The NASDAQ Global Market (“NASDAQ”) under the trading symbol PODD.

As of February 20, 2020, there were 9 registered holders of record of our common stock. The number of beneficial stockholders of our shares is greater than the number of stockholders of record.

Performance Graph

The following graph shows the cumulative total return on $100 invested in each of our common stock, the NASDAQ Composite Index and the NASDAQ Health Care Index for the five-year period beginning on December 31, 2014, and ending on December 31, 2019, assuming reinvestment of all dividends. The historical stock price performance on the graph below is not necessarily indicative of future stock price performance.

The material in this performance graph is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of Insulet Corporation under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing.

Dividends

We currently intend to retain any earnings to finance research and development and the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future.

Issuer Purchases of Equity Securities

None.

The following table presents selected financial and other data for Insulet Corporation. The consolidated statement of operations data set forth below for 2019, 2018 and 2017, and the consolidated balance sheet data as of December 31, 2019 and December 31, 2018, are derived from our audited consolidated financial statements included elsewhere in this annual report. The consolidated statement of operations data for 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017, December 31, 2016 and December 31, 2015 are derived from our audited consolidated financial statements that are not included in this annual report.

The selected historical financial data presented below should be read in conjunction with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.

(1) 2018 includes a charge of $12.6 million for severance costs associated with the retirement of the Company’s former CEO, of which $8.2 million represented stock-based compensation expense resulting from the accelerated vesting of equity awards.

(2) 2019 includes an $8.7 million loss on extinguishment of debt.

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 may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements.”

Overview

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 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.

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:

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. 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.

Results of Operations

NM = Not meaningful

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

Revenue

Total revenue for 2019 increased $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. U.S. Omnipod revenue increased $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 increased $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

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.

Research and Development

Research and development expenses for 2019 increased $39.2 million, or 43%, to $129.7 million, compared with $90.5 million in 2018. 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.

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 for 2019 increased $1.1 million, to $7.8 million, compared with $6.7 million in 2018. 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.

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. Our effective tax rate was 19.8% and 37.0% for 2019 and 2018, 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. 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

Revenue

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. U.S. 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.

Gross Margin

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.

Income Tax Expense

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.

Liquidity and Capital Resources

As of December 31, 2019, we had $213.7 million in cash and cash equivalents and $220.8 million of investments in marketable securities. We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months.

Convertible Debt

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, 2019, the following notes were outstanding:

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

Summary of Cash Flows

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.

Operating Activities

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 increase in inventories was primarily due to an increase in raw materials and finished goods related to the startup of our U.S. manufacturing plant and an increase in work-in-process to support demand for our product. 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. We expect to fund our capital expenditures using a combination of existing cash and investments as well as cash generated from operations.

Purchases and Sales of Investments—During 2019, net sales of marketable securities were $97.3 million, compared with net purchases of marketable securities of $22.1 million for 2018. 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.

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.

Commitments and Contingencies

Contractual Obligations—A summary of our contractual obligations and commitments for debt, operating lease obligations and other obligations at December 31, 2019 is presented in the following table:

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.

Off-Balance Sheet Arrangements

As of December 31, 2019, we had various outstanding letters of credit and bank guarantees totaling $2.9 million, none of which are individually significant. The Company has restricted cash that serves as collateral for these outstanding letters of credit and bank guarantees that is included in cash and cash equivalents on the consolidated balance sheet.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period.

Revenue Recognition

We recognize revenue when a customer obtains control of the promised products in an amount that reflects the net consideration to which we expect to be entitled. We sell products both direct to consumers and through distributors who resell the products to consumers. Transaction price is typically based on contracted rates less any estimates of claim denials and historical reimbursement experience, guidelines and payor mix, and less estimated variable consideration adjustments including rebates. Recognizing revenue requires us to exercise judgment and use estimates that can have a significant impact on the amount and timing of revenue we report. We exercise significant judgment when we determine the transaction price, including variable consideration adjustments. The amount of variable consideration that is included in the transaction price is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We estimate reductions to our revenues for rebates paid to distributors in the United States and Canada and pharmacy benefit managers (“PBM”) in the United States. 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. Rebates charged against gross sales amounted to $59.1 million, $34.1 million and $16.1 million in 2019, 2018 and 2017, respectively. Provisions for rebates, sales discounts and returns, are accounted for as a reduction of sales when revenue is recognized and are included within accounts receivable trade or accrued expenses and other current liabilities on our consolidated balance sheets, based upon the recipient of the rebate. If the actual amounts of consideration that we receive differ from our estimates, we would adjust our estimates and that would affect reported revenue in the period that such variances become known.

Our drug delivery product line includes sales of a modified version of the Omnipod to pharmaceutical and biotechnology companies who use our technology as a delivery method for their drugs. Revenue from the drug delivery product was $64.7 million for 2019. Revenue for this product line is recognized as the product is produced. Accounting for drug delivery revenue requires us to select a method to measure progress towards the satisfaction of the performance obligation. This election of the most meaningful measure of progress by which to recognize drug delivery revenue requires the application of judgment. We elected the input method and selected a blend of cost and time to produce as the measure of progress. Accordingly, revenue is recognized over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of our performance obligations. We believe that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer. Contract costs include third party costs as well as an allocation of manufacturing overhead. 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. 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. When a range is established but a best estimate cannot be made, we record the minimum loss contingency amount, which could be zero. 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. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount. We record receivables from third-party insurers up to the amount of the related liability when we have determined that existing insurance policies will provide reimbursement. In making this determination, we consider applicable deductibles, policy limits and the historical payment experience of the insurance carriers.

Accounting Standards Issued and Not Yet Adopted as of December 31, 2019

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions in the current guidance regarding the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This new guidance also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies such things as the accounting for transactions that result in a step up in the tax basis of goodwill. 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.

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements.

The risk factors discussed in “Risk Factors” could cause our results to differ materially from those expressed in forward-looking statements. In addition, there may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. We expressly disclaim any obligation to update these forward-looking statements other than as required by law.

Interest Rate Risk

The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in cash equivalents and short-term investments in a variety of securities, including money market funds, U.S. Treasury debt and corporate debt securities. Due to the short-term nature of our investments, we believe that we have no material exposure to interest rate risk.

Market Price Sensitive Instruments

As of December 31, 2019, we had outstanding debt related to our convertible senior notes recorded on our consolidated balance sheet of $887.9 million, net of unamortized discount and issuance costs totaling $314.6 million. Changes in the fair value of our outstanding debt, which could be impacted by changes in interest rates, are not recorded in these consolidated financial statements as the debt is accounted for at cost less unamortized discount and issuance costs. The fair value of the debt, which was $1.35 billion as of December 31, 2019, is also impacted by changes in our stock price.

In order to reduce potential equity dilution, in connection with the issuance of $800.0 million aggregate principal amount of 0.375% Notes, we entered into capped call options “Capped Calls”. We expect the Capped Calls 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 0.375% Notes. The Capped Calls have an initial strike price of $335.90 per share and cover 3.5 million shares of common stock.

Foreign Currency Exchange Risk

Foreign currency risk arises from our investments in subsidiaries owned and operated in non-U.S. countries. Such risk is also a result of transactions with customers in countries outside the United States. Approximately 34% of our revenue was denominated in foreign currencies for the year ended December 31, 2019. As our business in regions outside of the United States continues to increase, we will be increasingly exposed to foreign currency exchange risk related to our foreign operations. The cost of revenue related to revenue generated outside of the United States is primarily denominated in U.S. dollars; however, operating costs related to these revenues are largely denominated in the same respective currencies, thereby partially limiting our transaction risk exposure. Fluctuations in the rate of exchange between the United States dollar and foreign currencies, primarily the Euro, British Pound and Canadian Dollar, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.

We have intercompany receivables and payables from our foreign subsidiaries that are denominated in foreign currencies, principally the Euro, the British pound and the Canadian dollar. Fluctuations from the beginning to the end of a reporting period result in the revaluation of our foreign currency-denominated intercompany receivables and payables, generating currency translation gains or losses. Net realized and unrealized gains (losses) from foreign currency transactions are included in interest and other income, net in the consolidated statement of operations and amounted to $0.6 million for the year ended December 31, 2019.

Our financial statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019, and the Report of the Registered Independent Public Accounting Firm are included in this report as listed in the index.

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Insulet Corporation

Opinions on the financial statements and internal control over financial reporting

We have audited the accompanying consolidated balance sheets of Insulet Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedule (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

Basis for opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and

we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition - Drug Delivery

As described in Note 4 to the consolidated financial statements, the Company’s revenue from drug delivery was $64.7 million for the year ended December 31, 2019. Drug delivery revenue is recognized over time based on the Company’s determination of the pattern over which control transfers to the customer. This transfer of control begins during the manufacturing process and continues through the fi

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None.

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management’s assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 (“COSO”) in Internal Control — Integrated Framework (the COSO criteria). Based on our assessment, we believe that our internal controls over financial reporting were effective as of December 31, 2019.

The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Grant Thornton LLP, an independent registered public accounting firm. Their report is included in Item 8 of this Form 10-K.

None.

PART III

The information required by this Item will be set forth in our definitive proxy statement for our 2020 Annual Meeting of Stockholders (the “Proxy Statement”) and is incorporated herein by reference.

The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.

Other than as set forth below, the information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information regarding securities authorized for issuance under our equity compensation plans as of December 31, 2019.

(1) Includes our 2017 Stock Option and Incentive Plan and our Amended and Restated 2007 Stock Option and Incentive Plan. Outstanding restricted stock units convert to common stock without the payment of consideration. As of December 31, 2019, 651,443 restricted stock units were outstanding. The weighted-average exercise price of outstanding options as of such date issued under these Plans (excluding restricted stock units) was $49.19. For more information relating to our equity compensation plans, see Note 14 to our consolidated financial statements.

(2) Includes 3,936,268 shares available for future issuance under our 2017 Stock Option and Incentive Plan.

(3) Consists of the following inducement grants made to certain executive officers upon their initial hire by the Company:

These non-qualified stock option awards were granted outside of our Amended and Restated 2007 Stock Option and Incentive Plan in compliance with Nasdaq Listing Rule 5635.

The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.

The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference.

PART IV

(a) Financial Statements and Schedules

(1) and (2) The required information is set forth in Item 8—“Financial Statements and Supplementary Data.”

(3) Exhibit Index:

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers and directors of Insulet Corporation, hereby severally constitute and appoint Shacey Petrovic and Wayde McMillan, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, on all amendments to this Report, and generally to do all things in our names and on our behalf in such capacities to enable Insulet Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities on February 25, 2020.