Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our 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, a continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device that is worn on the body for up to three days at a time; and its wireless companion, the handheld PDM. The Omnipod System, which features discreet and easy-to-use devices, communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for traditional MDI therapy or the use of traditional pump and tubing. We believe that the Omnipod System’s unique proprietary design and features allow people with insulin-dependent diabetes to manage their diabetes with unprecedented freedom, comfort, convenience and ease.

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

Our mission is to improve the lives of people with diabetes. To assist in achieving this mission, we are focused on the following key strategic imperatives:

• driving access and awareness;

• delivering consumer-focused innovation;

• expanding our global addressable market; and

• driving operational excellence.

Our long-term financial objective is to sustain profitable growth. To achieve this goal, our efforts are focused on the launch of Omnipod 5, powered by Horizon™ (“Omnipod 5”), our AID system. We completed the first phase of our Omnipod 5 pivotal trial in October. We also recently completed our Omnipod 5 clinical study of pediatric users ages two to six years old and are planning for an expanded indication by the end of 2021. In addition, we have begun enrolling individuals with Type 2 diabetes in an Omnipod 5 feasibility study. Based on the results of the feasibility work, we plan to conduct additional studies with the goal to further expand Omnipod 5’s indications.

During 2020, we began producing salable product on our second highly automated manufacturing line in the U.S. and secured a second contract manufacturer in China, which increased our capacity and redundancy. Additionally, in order to support our continued growth and the expected launch of Omnipod 5 in the first half of 2021, we recently installed a third highly automated manufacturing line in the U.S. on which salable product is expected in 2021.

In 2020, we completed the roll out of Omnipod DASH, our digital mobile Omnipod platform, in the countries we serve in Europe. In January 2021, we completed our full commercial launch of Omnipod DASH internationally with our roll out in Canada. The majority of our global customers start on Omnipod DASH. We expect the introduction of Omnipod DASH throughout our international markets to be a growth driver as we increase our presence within our existing markets and enter into new countries over the long term.

In 2020, we entered five new countries in Western Europe and the Middle East to expand the commercial sale of Omnipod and our global footprint. While this expansion into additional countries did not have a material impact on our 2020 revenues, it is expected to contribute to our long-term growth.

We are continuing to expand internationally in a targeted and strategic manner. In the first quarter of 2021, we expanded into Turkey and we expect to launch Omnipod DASH in Australia in 2021. Additionally, we are working on our strategy to enter larger markets, such as Asia Pacific and Latin America.

Finally, we plan to continue our product development efforts and expand awareness of and access to our products. Achieving the above strategic imperatives is expected to require additional investments in certain initiatives and personnel, as well as enhancements to our supply chain operation capacity, efficiency and effectiveness.

Results of Operations

The discussion of our results of operations for 2018 has been omitted from this Form 10-K but can be found in Item 7. Management’s Discussion and Analysis and Results of Operations in our Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission on February 26, 2020.

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

Revenue

			Years Ended December 31,
(In millions)			2020						2019						% Change						Currency Impact						Constant Currency**(1)**
U.S. Omnipod			$	526.9					$	420.4					25.3		%				—		%				25.3		%
International Omnipod			308.0						253.1						21.7		%				1.8		%				19.9		%
Total Omnipod			834.9						673.5						24.0		%				0.7		%				23.3		%
Drug Delivery			69.5						64.7						7.4		%				—		%				7.4		%
Total			$	904.4					$	738.2					22.5		%				0.6		%				21.9		%

(1) Constant currency revenue growth is a non-GAAP financial measure which should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. See “Management’s Use of Non-GAAP Measures.”

Total revenue for 2020 increased $166.2 million, or 22.5%, to $904.4 million, compared with $738.2 million in 2019. Constant currency revenue growth of 21.9% was primarily driven by higher volume and, to a lesser extent, favorable sales channel mix. The COVID-19 pandemic negatively impacted global new customer starts throughout 2020, largely beginning in the second quarter. We expect our revenues in 2021 to continue to be impacted by the global pandemic's effect on both 2020 and 2021 new customer starts, particularly in our international markets.

U.S. Omnipod

U.S. Omnipod revenue for 2020 increased $106.5 million, or 25.3%, to $526.9 million, compared with $420.4 million in 2019. This increase was primarily due to higher volumes driven by growing our customer base and, to a lesser extent, an increase due to growth through the pharmacy channel, where Pods have a higher average selling price due in part to the fact that we offer the PDM for no charge. In 2021, we expect strong Omnipod revenue growth driven by continued market penetration and volume growth of Omnipod DASH, primarily in the pharmacy channel. We expect this revenue growth to be partially offset by the impact of lower new customer starts in 2020 stemming from COVID-19.

International Omnipod

International Omnipod revenue for 2020 increased $54.9 million, or 21.7%, to $308.0 million, compared with $253.1 million in 2019. Excluding the 1.8% favorable impact of currency exchange, the remaining 19.9% increase was primarily due to higher volumes as we continue to expand awareness and access to the Omnipod. Similar to in the U.S., in 2021, we expect higher International Omnipod revenue due to continued volume growth and market penetration aided by the full launch of Omnipod DASH throughout our international markets and our virtual training capabilities. We expect this revenue growth to be partially offset by the impact of lower new customer starts in 2020 stemming from COVID-19 and continued lockdowns in Europe.

Drug Delivery

Drug Delivery revenue for 2020 increased $4.8 million, or 7.4%, to $69.5 million, compared with $64.7 million in 2019. This increase was primarily due to increased demand for Amgen’s Neulasta® Onpro® kit which includes our pods. In 2021, we expect Drug Delivery revenue to decline or grow slightly dependent upon forecasted demand.

Operating Expenses

			Years Ended December 31,
			2020												2019
(In millions)			Amount						Percent of Revenue						Amount						Percent of Revenue
Cost of revenue			$	322.1					35.6		%				$	257.9					34.9		%
Research and development expenses			$	146.8					16.2		%				$	132.3					17.9		%
Selling, general and administrative expenses			$	384.0					42.5		%				$	298.0					40.4		%

Cost of Revenue

Cost of revenue for 2020 increased $64.2 million, or 24.9%, to $322.1 million, compared with $257.9 million in 2019. Gross margin was 64.4% in 2020, compared with 65.1% in 2019. The 70 basis point decrease in gross margin was primarily due to start-up costs and inefficiencies driven by the addition of the second line at our U.S. manufacturing facility, as well as two months of higher depreciation expense for under-utilized plant capacity, recruiting and screening expenses, expedited shipping costs and manufacturing incentives totaling $8.5 million, primarily associated with our contract manufacturer in China as a result of COVID-19. This decrease was partially offset by higher average selling price due to growth in the U.S. pharmacy channel. We expect gross margin for 2021 to increase to 67% to 70%, which reflects expected revenue growth both in the U.S. and internationally, including in the pharmacy channel, and the benefits of continued improvements in manufacturing and supply chain operations.

Research and Development

Research and development expenses for 2020 increased $14.5 million, or 11.0%, to $146.8 million, compared with $132.3 million in 2019. This increase was primarily due to year-over-year headcount additions as we focus on driving innovation, particularly Omnipod 5, partially offset by reduced spend on Omnipod DASH, which was launched in the prior year period. We expect research and development spending in 2021 to increase compared with 2020 as we continue to invest in advancing our innovation and clinical pipeline.

Selling, General and Administrative

Selling, general and administrative expenses for 2020 increased $86.0 million, or 28.9%, to $384.0 million, compared with $298.0 million in 2019. This increase was primarily attributable to investments in customer support and other initiatives to support our growth, including year-over-year headcount additions, mainly sales and customer service personnel, $18.8 million increase in advertising expense driven by the pilot of our direct-to-consumer advertising campaign and online advertising, $14.6 million of cumulative amortization expense related to the resolution of a purchase price contingency associated with the acquisition of customer relationships from a former European distributor on July 1, 2018, as well as $4.8 million of stock-based compensation expense from a company-wide 20th anniversary equity grant, a significant portion of which vested immediately. These increases were partially offset by a $9.7 million decrease in travel and entertainment expenses due to reduced activity resulting from COVID-19. We expect selling, general and administrative expenses to increase in 2021 compared with 2020 due to expansion of our U.S. sales force and customer support personnel, investments to expand market acceptance and access for Omnipod 5, including direct-to-consumer advertising, and investments in our operating structure to facilitate operational efficiencies and continued growth.

Non-Operating Items

Interest Expense, Net

Interest expense, net for 2020 increased $17.4 million, or 62.8%, to $45.1 million, compared with $27.7 million in 2019. This increase was primarily due to a $9.6 million increase in non-cash interest expense resulting from the net impact of the issuance of $800.0 million of 0.375% convertible notes and the repayment of $402.5 million principal amount of 1.25% convertible notes, a $3.9 million decrease in capitalized interest, primarily due to U.S. manufacturing line 2 being placed in service in the first quarter of 2020, and a $3.9 million decrease in interest income due to lower market rates and a shift in a portion of our investment portfolio to more liquid investments.

Loss on Extinguishment of Debt

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

Other Income, Net

Other income, net for 2020 increased $2.4 million, to $3.3 million, compared with $0.9 million in 2019. This increase was primarily driven by unrealized foreign currency gains due to the change in exchange rates, partially offset by a $1.8 million insurance recovery for damaged inventory in excess of our cost received during the year ended December 31, 2019.

Income Tax Expense

Income tax expense was $2.9 million on pre-tax income of $9.7 million and $14.5 million for both 2020 and 2019, respectively. Our effective tax rate was 29.6% and 19.8% for 2020 and 2019, respectively. The increase in our effective tax rate primarily resulted from a decrease to pre-tax income in the U.S., which has a valuation allowance. See Note 18 to the consolidated financial statements for additional information on our income tax expense.

Adjusted EBITDA

The table below presents reconciliations of Adjusted EBITDA, a non-GAAP financial measure, to net income, the most directly comparable financial measure prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”):

			Years Ended December 31,
(in millions)			2020						2019
Net income			$	6.8					$	11.6
Interest expense, net			45.1						27.7
Income tax expense			2.9						2.9
Depreciation and amortization(1)			55.4						27.9
Stock-based compensation(2)			35.9						28.7
Loss on extinguishment of debt			—						8.7
Adjusted EBITDA			$	146.1					$	107.5

(1) The year ended December 31, 2020 includes $14.6 million of cumulative amortization expense associated with customer relationships that were acquired on July 1, 2018. For more information see Note 13 to the consolidated financial statements.

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

Non-GAAP Financial Measures

Management uses the following non-GAAP financial measures:

Constant currency revenue growth represents the change in revenue between current and prior year periods using a constant currency, the exchange rate in effect during the applicable prior year period. We present constant currency revenue growth because we believe it provides meaningful information regarding our results on a consistent and comparable basis. Management uses this non-GAAP financial measure, in addition to financial measures in accordance with GAAP, to evaluate our operating results. It is also one of the performance metrics that determines management incentive compensation.

Adjusted EBITDA represents net income (loss) plus net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation and other significant unusual items, as applicable. We present Adjusted EBITDA because management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful to investors, and other interested parties as a measure of our comparative operating performance from period to period. Adjusted EBITDA is a commonly used measure in determining business value and we use it internally to report results.

These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. In addition, the above definitions may differ from similarly titled measures used by others. Non-GAAP financial measures exclude the effect of items that increase or decrease our reported results of operations; accordingly, we strongly encourage investors to review our consolidated financial statements in their entirety.

Liquidity and Capital Resources

As of December 31, 2020, we had $907.2 million in cash and cash equivalents and $40.4 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. As of December 31, 2020, the following notes were outstanding:

Issuance Date						Coupon						Principal Outstanding (in millions)						Due Date						Conversion Rate (1)						Conversion Price per Share of Common Stock
November 2017						1.375%						$	402.5					November 2024						10.7315						$93.18
September 2019						0.375%						800.0						September 2026						4.4105						$226.73
Total												$	1,202.5

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

In connection with the issuance of the 0.375% Convertible Senior Notes, we purchased capped call options (“Capped Calls”) on our common stock. By entering into the Capped Calls, we expect to reduce the potential dilution to our common stock (or, in

the event the conversion is settled in cash, to provide a source of cash to settle a portion of our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Convertible Senior Notes. The Capped Calls have an initial strike price of $335.90 per share and cover 3.5 million shares of our common stock.

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

Summary of Cash Flows

						Years Ended December 31,
(in millions)						2020						2019
Cash provided by (used in):
Operating activities						$	84.0					$	98.4
Investing activities						14.0						(73.6)
Financing activities						605.5						73.5
Effect of exchange rate changes on cash						4.8						1.5
Net increase in cash and cash equivalents						$	708.3					$	99.8

Operating Activities

Net cash provided by operating activities of $84.0 million in 2020 was primarily attributable to net income, as adjusted for depreciation and amortization, non-cash interest, and stock-based compensation, and a $63.4 million working capital cash outflow. The working capital outflow was driven by a $50.5 million increase in inventories, a $32.2 million increase in prepaid expenses and other assets and a $15.6 million increase in accounts receivable, partially offset by a $27.8 million increase in accrued expenses and other liabilities, primarily driven by manufacturing operations costs associated with the addition of our new contract manufacturer, as well as an increase in pharmacy rebates due to growth in the pharmacy channel. The increase in inventories was primarily driven by a planned inventory build associated with the further roll out of Omnipod DASH and an increase in work in progress inventory due to additional capacity from our new contract manufacturer. The increase in prepaid expenses and other assets was primarily driven by an increase in software licenses due to head count additions, and an increase in software-as-a-service to support our strategic initiatives. The increase in accounts receivable was primarily driven by revenue growth.

Net cash provided by operating activities of $98.4 million in 2019 was primarily attributable to net income, as adjusted for non-cash interest, stock-based compensation, depreciation and amortization, partially offset by a $19.7 million working capital cash outflow. The working capital outflow was driven by a $30.2 million increase in inventories and a $22.0 million increase in prepaid expenses and other assets, offset by a $25.6 million increase in accounts payable and a $17.7 million increase in accrued expenses and other liabilities, primarily driven by timing of payments. The increase in inventories was primarily due to an increase in raw materials and finished goods related to the startup of our U.S. 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.

Investing Activities

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

Capital Spending—Capital expenditures were $129.0 million in 2020 and primarily related to equipment to increase our manufacturing capacity. Capital expenditures were $163.7 million in 2019 and primarily related to the construction of our manufacturing and corporate headquarters facility in Acton, Massachusetts. We expect capital expenditures for 2021 to increase compared with 2020 as we continue to expand manufacturing capacity to support our growth and the launch of Omnipod 5. We expect to fund our capital expenditures using a combination of existing cash and investments as well as cash generated from operations.

Purchases and Sales of Investments—During 2020, net sales of marketable securities were $180.5 million, compared with net purchases of marketable securities of $97.3 million for 2019. The increase in net sales of marketable securities was driven by a shift in a portion of our investment portfolio to investments that are classified as cash equivalents in order to satisfy future cash needs.

Acquisition of Intangible Assets—In 2020, following the resolution of a purchase price contingency associated with our 2018 acquisition of customer relationships from a former European distributor, we paid the distributor an additional $36.2 million for a total purchase price of $41.2 million. We had previously paid the distributor $3.8 million in 2019 and the remainder in 2018.

Financing Activities

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

Issuance of Common Stock—In 2020, we sold 2.4 million common shares for $478.7 million in an underwritten registered offering. Net proceeds from the offering were $477.5 million. The proceeds provide us with additional liquidity to mitigate risk and allow us to continue investing in the growth of our business and our strategic initiatives.

Debt Issuance and Repayment—In 2020, we received proceeds of $70.0 million upon entering into a mortgage of our Acton facility. Additionally, we received proceeds of $60.0 million upon entering into two equipment financing transactions. Refer to Note 12 to our consolidated financial statements for additional information regarding these transactions.

Option Exercises and Payment of Taxes for Restricted Stock Net Settlements—Total proceeds from option exercises decreased 20.9 million to $25.7 million in 2020, compared with $46.6 million in 2019. This decrease was primarily driven by less option exercises in 2020 from the retirement of our former CEO in the prior year period. Payments for taxes related to net restricted and performance stock unit settlements increased $21.2 million to $29.8 million in 2020, compared with $8.6 million in 2019. The increase in payments for taxes related to restricted stock net settlements was driven by increased vesting of restricted shares in 2020, compared with 2019, including the immediate vesting of a significant portion of a company-wide 20th anniversary equity grant in the fourth quarter 2020.

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

In February 2021, we identified an error in the presentation of certain cash flow activity that impacted several line items within the previously issued Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020. While these items affected cash flows from operating and investing activities, they had no impact on the net increase (decrease) in cash and cash equivalents or net income. We have assessed the materiality of the misstatement in accordance with ASC 250-10, Accounting Changes and Error Corrections, and concluded that this misstatement was not material to our previously issued consolidated financial statements. Accordingly, our Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020 will be corrected prospectively in our Form 10-Q for the quarterly period ended September 30, 2021 as shown below.

(in millions)			Previously Reported						Adjustment						As Adjusted
Prepaid and other assets			$	(16.8)					$	4.1					$	(12.7)
Accounts payable, accrued expenses and other current liabilities			$	36.1					$	(22.1)					$	14.0
Net cash provided by operating activities			$	85.0					$	(18.0)					$	67.0
Capital expenditures			$	(88.5)					$	10.3					$	(78.2)
Acquisition of intangible assets			$	(8.3)					$	7.7					$	(0.6)
Net cash provided by investing activities			$	65.3					$	18.0					$	83.3

Commitments and Contingencies

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

(in millions)			Short Term						Long Term						Total
Operating lease obligations			$	5.6					$	13.1					$	18.7
Debt obligations			15.6						1,315.1						1,330.7
Interest payments			14.7						45.8						60.5
Purchase obligations (1)			257.3						36.7						294.0
Total contractual obligations			$	293.2					$	1,410.7					$	1,703.9

(1)Purchase obligations include commitments for the purchase of Omnipod System components, commitments related to establishing additional manufacturing capabilities and other commitments for purchases of goods or services in the normal course of business. These commitments are derived from purchase orders, supplier contracts and open orders based on projected demand information.

Legal Proceedings—Roche Diabetes Care, Inc. (“Roche”) filed a patent infringement lawsuit against us and is seeking monetary damages and attorneys’ fees and costs. Since the patent expired in 2019, Roche is not seeking injunctive relief and the lawsuit will have no impact on ongoing sales of our products. We believe that we have meritorious defenses to Roche’s claims and intend to vigorously defend against them. At this time, based on available information regarding this litigation, we are unable to reasonably assess the ultimate outcome of this case or determine an estimate, or range of estimates, of potential losses, which could be material; accordingly, we have excluded this exposure from the contractual obligations table above. Refer to Note 13 to our consolidated financial statements for additional information regarding this matter.

Off-Balance Sheet Arrangements

As of December 31, 2020, we had various outstanding letters of credit and bank guarantees totaling $2.8 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 $82.5 million, $59.1 million and $34.1 million in 2020, 2019 and 2018, 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 $69.5 million for 2020. 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.

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 a patent infringement case with Roche. Accruals recorded for various contingencies including legal proceedings, self-insurance and other claims, are based on judgment, both regarding the probability of losses and range of loss, and, where applicable, include the consideration of opinions of internal and/or external legal counsel. 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, 2020

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

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Debt Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance is effective for us beginning in the first quarter of 2022 with early adoption permitted. Early adoption of ASU 2020-06 as of January 1, 2021, would result in an approximate $330 million decrease in additional paid in capital from the derecognition of the bifurcated equity component, $250 million increase in debt from the derecognition of the discount associated with the bifurcated equity component and $80 million decrease to the opening balance of accumulated deficit, representing the cumulative interest expense recognized related to the amortization of the bifurcated conversion option. Additionally, we expect to write-off the related deferred tax liabilities with a corresponding adjustment to the valuation allowance, resulting in no net impact to the cumulative adjustment to retained earnings. Adoption of this standard will have no impact on our diluted earnings per share as we calculate earnings per share using the if-converted method. We are still evaluating whether we will early adopt this guidance.

Forward-Looking Statements

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.