DexCom, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 2, 2016. Amounts are in millions of dollars except per-share data. DexCom develops and sells continuous glucose monitoring systems and reported as one segment.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $137.3 | $93.2 | $253.5 | $166.0 |
| Gross profit | $85.5 | $66.0 | $160.6 | $112.5 |
| Gross margin | 62.3% | 70.8% | 63.4% | 67.8% |
| Operating expenses | $105.6 | $69.6 | $199.9 | $128.8 |
| Operating loss | $(20.1) | $(3.6) | $(39.3) | $(16.3) |
| Net loss | $(20.2) | $(3.7) | $(39.4) | $(16.6) |
| Basic and diluted loss per share | $(0.24) | $(0.05) | $(0.48) | $(0.21) |
- Q2 product revenue grew 47.8% year over year; six-month product revenue grew 53.0%. Management attributed growth mainly to higher disposable sensor sales as the installed base expanded, alongside durable-system sales. Sensors represented about 70% of revenue and durable systems about 30% in both comparable periods.
- Gross margin declined year over year, which DexCom attributed to lower-margin G5 transmitter mix, higher receiver warranty costs and a $3.5 million obsolete-receiver inventory charge related primarily to a customer notification.
- Research and development and selling, general and administrative expenses rose to $36.3 million and $69.3 million in Q2, respectively, mainly reflecting staffing, share-based compensation, commercialization, marketing and infrastructure spending. Six-month share-based compensation was $52.7 million, versus $36.6 million a year earlier.
- Six-month operating cash flow was $19.9 million, compared with $19.8 million. Investing used $20.8 million, including $22.0 million of capital expenditures; financing provided $2.5 million. Cash and cash equivalents rose to $87.5 million from $86.1 million at year-end.
Balance sheet, liquidity and debt
- At June 30, 2016, cash, cash equivalents and short-term marketable securities totaled $115.6 million; working capital was $167.1 million. Total assets were $332.8 million and total liabilities were $86.4 million.
- DexCom paid off the remaining $2.3 million term-loan balance in June. It entered a new $200 million revolving credit facility, with no borrowings outstanding at quarter-end. The facility matures in June 2021 and is subject to covenants.
- Management expected available resources, projected operating cash contributions and the credit facility to fund anticipated needs through at least June 30, 2017. The company had an accumulated deficit of $594.8 million and said it expected continued losses.
- Contractual obligations included $78.6 million of operating lease payments and $55.5 million of purchase commitments, totaling $134.1 million. A new Mesa manufacturing facility build-out was expected to cost approximately $30 million, with the first phase targeted for completion in mid-2017.
Developments, outlook and risks
- No specific revenue or earnings guidance was provided in the filing. Management anticipated continued losses while expanding commercialization, research and development, manufacturing and corporate infrastructure.
- In February 2016, DexCom notified customers about possible failures of audible alarms and alerts on G4 PLATINUM and G5 Mobile receivers; the FDA classified the action as a voluntary Class I recall. Customers were advised to test alarms periodically. The filing reported increased warranty costs and the related inventory charge.
- On July 21, 2016, after quarter-end, an FDA advisory panel recommended the proposed non-adjunctive G5 Mobile indication. The recommendation was non-binding; DexCom said it remained in discussions with the FDA about formal approval.
- DexCom acquired Nintamed, its distributor in Germany, Switzerland and Austria, on May 2, issuing stock valued at $7.2 million and recording a $1.8 million holdback liability. The acquisition was described as non-material.
- Key risks include continued operating losses; reimbursement limits, including no Medicare national coverage decision for CGM devices; manufacturing scale-up and single-source supplier constraints; regulatory compliance and product quality; competition; and dependence on distribution and collaboration partners. The company also disclosed an Agamatrix patent-infringement suit filed in March 2016, which it said lacked merit; outcome and potential costs could not be assessed and no liability was accrued.
- The FDA issued one Form 483 observation following a March 2016 post-market inspection concerning retrospective medical-device reporting; DexCom responded in April. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth converts to improved margins and profitability as spending, transmitter mix and warranty costs evolve.
- Progress and financial impact of the receiver alarm/alert recall, corrective actions and related warranty or product costs.
- FDA timing and outcome for the G5 Mobile non-adjunctive indication, and any further regulatory findings.
- Manufacturing-facility construction, capacity expansion, supply availability and capital requirements relative to the stated liquidity runway.
- Developments in reimbursement coverage, particularly Medicare, and the Agamatrix litigation, for which exposure was not estimable in the filing.