DexCom, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
DexCom develops and sells continuous glucose monitoring (CGM) systems for people with diabetes, principally its G4 PLATINUM system. Product revenue is the primary business driver. The company also has hospital-monitoring and diabetes data-management activities, but these were limited or developmental. FDA approval for use of G4 PLATINUM in people aged two and older was received on February 3, 2014, after year-end.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $160.0 | $99.9 |
| Product revenue | $157.1 | $93.0 |
| Gross profit | $100.1 | $46.6 |
| Gross margin | 62.6% | 46.6% |
| Operating expenses | $129.0 | $102.3 |
| Operating loss | $(28.9) | $(55.7) |
| Net loss | $(29.8) | $(54.5) |
| Basic and diluted loss per share | $(0.42) | $(0.79) |
| Cash from operating activities | $2.4 | $(33.1) |
Revenue grew 60% year over year, primarily from higher sales volume following the G4 PLATINUM launch. Product gross profit was $99.0 million, implying a 63.0% product gross margin; management attributed the improvement partly to a higher mix of G4 PLATINUM sales. Operating expenses increased 26%, reflecting commercialization, sales, IT and R&D investment. DexCom remained unprofitable, with a 2013 operating margin of approximately negative 18.1%.
Fourth-quarter 2013 revenue was $51.7 million, gross profit $34.1 million, operating expenses $36.4 million and net loss $2.6 million. Cash and cash equivalents were $43.2 million and short-term marketable securities $11.4 million at year-end, totaling $54.6 million; working capital was $61.0 million. Long-term debt, including its current portion, was $6.8 million. No amount was drawn on the $15.0 million revolving line of credit; the loan agreement also provided for up to $13.0 million in additional term-loan funding subject to its terms and draw period. Operating cash flow improved by $35.5 million from 2012 and was positive in 2013.
Material changes and developments
- Product revenue increased $64.1 million; development and other revenue declined $4.0 million to $2.9 million, following the end or reduction of certain collaboration work.
- R&D expense rose $6.5 million to $44.8 million and selling, general and administrative expense rose $20.2 million to $84.2 million.
- Cash and short-term securities rose from $48.7 million to $54.6 million, while total assets increased from $106.0 million to $122.5 million.
- Revenue concentration remained notable: Byram generated 15% and Edgepark 14% of total 2013 revenue. DexCom also reported $70.5 million of revenue from shipments to distributors holding inventory, compared with $30.7 million in 2012; year-end distributor inventory was described as limited.
Outlook, risks and unusual items
- Management expected continued losses but said available liquidity and expected partnership cash flows should fund anticipated needs through at least December 31, 2014. It expected operating cash use to decrease in coming years; this is not a profitability forecast.
- Medicare had no national coverage decision for CGM devices. Major private payors had coverage policies, but eligibility requirements were restrictive; DexCom had contracted rates with six of the seven largest private payors.
- Manufacturing capacity, product quality, single-source suppliers, adoption and reimbursement, regulatory approvals, competition and the ability to scale sales are material business risks. The FDA’s November 2013 facility inspection resulted in Form 483 observations concerning medical-device reporting and complaint reportability; DexCom responded on November 26, 2013.
- Abbott patent litigation continued, including a new December 2013 complaint alleging infringement by DexCom products. The outcome and potential costs were uncertain, and no amounts were accrued at December 31, 2013.
- A $4.0 million Helmsley Trust grant was awarded for Gen 6 sensor development, milestone-based; $0.5 million was received and earned in 2013. Successful commercialization would trigger royalty payments of up to $2.0 million annually for four years or, at DexCom’s election, a one-time $6.0 million payment.
- DexCom reported an accumulated deficit of $475.4 million and losses in every year since inception. It also disclosed $16.2 million of purchase commitments due within one year and $8.0 million of future lease payments.
Important facts for investors to verify
- Whether G4 PLATINUM sales growth and improved gross margins continued, and whether quarterly losses narrowed without relying on working-capital movements.
- Cash conversion, receivables and distributor sell-through, given distributor revenue concentration and increased shipments to stocking distributors.
- Actual Medicare and private-payor coverage expansion, reimbursement terms and resulting customer access.
- Manufacturing capacity and quality developments, including any follow-up to the FDA Form 483 observations and supplier interruptions.
- Developments in Abbott litigation, potential costs or injunction exposure, and any change to the company’s no-accrual position.
- Use of the remaining loan availability, covenant compliance, and whether liquidity remains adequate as commercialization and R&D spending continue.