DexCom, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. Financial amounts are in millions of dollars except per-share data. DexCom develops and sells continuous glucose monitoring (CGM) systems, principally the G4 PLATINUM.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $69.0 | $42.9 | $174.9 | $108.3 |
| Gross profit | $47.2 | $27.6 | $116.9 | $66.0 |
| Gross margin | 68.4% | 64.3% | 66.8% | 60.9% |
| Operating expenses | $52.2 | $33.4 | $140.0 | $92.6 |
| Operating loss | $(5.0) | $(5.8) | $(23.1) | $(26.6) |
| Net loss | $(5.2) | $(6.0) | $(23.7) | $(27.2) |
| Basic net loss per share | $(0.07) | $(0.08) | $(0.32) | $(0.38) |
- Product revenue was $67.9 in Q3, up $25.4 year over year, and $172.8 for the first nine months, up $67.0. Management attributed growth mainly to increased durable-system and sensor sales as the G4 PLATINUM installed base expanded.
- Gross margin improved, which management attributed to higher revenue and a richer mix of the higher-margin G4 PLATINUM versus SEVEN PLUS.
- Research and development expense rose to $18.5 in Q3 and $47.8 year to date, reflecting staffing and product-development costs. Selling, general and administrative expense increased to $33.7 and $92.2, respectively, primarily for commercial headcount and infrastructure. Share-based compensation was $13.8 in Q3 and $35.7 year to date, compared with $6.6 and $18.0 in the prior periods.
- Operating cash flow was $15.2 for the first nine months, versus cash use of $2.0 in 2013. The filing attributes much of the improvement to higher noncash charges, particularly share-based compensation, alongside a lower net loss; working-capital changes partly offset it. Investing used $12.1, including $11.6 for property and equipment; financing provided $16.9, including $18.5 net proceeds from common-stock issuance and $1.6 of debt repayment.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $63.2, short-term marketable securities $11.7, and restricted cash $1.0. Cash, cash equivalents and short-term securities totaled $74.9 excluding restricted cash; working capital was $82.8.
- Total assets were $159.4 and total liabilities $44.4. Debt was $5.2, including $2.3 current and $2.9 long-term. A $15.0 revolving credit facility remained undrawn; the company reported covenant compliance.
- Inventory increased to $14.3 from $9.0 at year-end 2013, and accounts receivable rose to $31.4 from $26.1.
Outlook, developments and risks
- No specific revenue or earnings guidance is provided. Management expects continued losses as it expands commercialization, manufacturing and research and development. It believes available resources, projected operating cash contributions and existing partnership arrangements will fund operations through at least September 30, 2015; further financing may be needed if plans or cash generation fall short.
- DexCom received FDA approval for the U.S. pediatric G4 PLATINUM indication in February 2014 and professional-use indication in June 2014. After quarter-end, FDA approved DexCom SHARE on October 17, 2014. Tandem submitted its CGM-enabled insulin pump to the FDA in July 2014; DexCom recorded a $1.0 milestone in Q3.
- The FDA issued a March 2014 warning letter concerning administrative deficiencies in medical-device reporting. DexCom had responded and the FDA was reviewing that response as of the filing. Manufacturing scale, product quality, regulatory approvals, reimbursement coverage, competition, and reliance on key suppliers remain significant risks. Medicare had not adopted a national coverage decision for CGM devices; private coverage policies could be restrictive.
- Abbott patent litigation was settled in July 2014 through a royalty-free cross-license and mutual covenants not to sue on specified products through March 31, 2021. A change-of-control provision may require a $25.0 continuation fee to the non-acquired party.
- After quarter-end, DexCom amended its San Diego lease, adding 45,000 square feet (with further space contemplated) and committing to $33.0 of rent through the lease term, excluding taxes and operating costs. In November 2014, it agreed to issue 89,300 shares to settle remaining SweetSpot milestone obligations.
- Purchase commitments totaled $26.9 due within one year. The company reported an accumulated deficit of $499.1 and stated that profitability depends on reaching revenue levels adequate to support its cost structure.
Important facts for investors to verify
- Whether CGM sales growth and the improved product mix continue, and whether gross-margin gains persist as volumes scale.
- How much operating cash generation reflects underlying business performance versus noncash share-based compensation and working-capital movements.
- Progress on manufacturing capacity, product quality and the FDA’s review of DexCom’s response to the warning letter.
- Expansion of payer coverage and reimbursement, including any Medicare coverage decision, and the effect of restrictive private-payor requirements.
- Funding needs relative to the stated liquidity runway, including the new lease commitments, purchase commitments and remaining debt obligations.