DexCom, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. DexCom develops and commercializes continuous glucose monitoring systems, principally the SEVEN PLUS for ambulatory use, and is developing hospital and partner-integrated products.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Product revenue | $15.2 | $9.0 | $28.3 | $15.8 |
| Development grant and other revenue | $6.2 | $2.7 | $7.3 | $5.5 |
| Total revenue | $21.4 | $11.8 | $35.6 | $21.3 |
| Gross margin dollars | $11.9 | $4.5 | $17.0 | $8.0 |
| Gross margin percentage | 55.4% | 38.3% | 47.7% | 37.4% |
| Operating expenses | $19.3 | $15.8 | $36.2 | $30.3 |
| Operating loss | $(7.4) | $(11.3) | $(19.3) | $(22.3) |
| Net loss | $(7.4) | $(11.7) | $(19.2) | $(32.0) |
| Basic and diluted loss per share | $(0.11) | $(0.20) | $(0.30) | $(0.59) |
- Q2 total revenue increased 82% year over year; product revenue rose 68%, driven by higher sales volume and average selling prices. Six-month total revenue increased 67%, with product revenue up 79%.
- Management attributed improved product gross margin to revenue growth and improved manufacturing absorption. Operating expenses rose with investment in next-generation products and sales, customer operations and IT.
- Development revenue included a $4.0 million Animas milestone earned in May 2011 following CE Mark approval for the Vibe system. Animas represented 20% of Q2 revenue and 12% of six-month revenue. Edwards collaboration revenue was lower than the prior year, in part reflecting extended revenue-recognition timelines.
- Six-month operating cash use was $11.8 million, versus $19.7 million in 2010. Investing activities used $32.3 million, principally reflecting purchases of marketable securities; financing provided $73.2 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $33.9 million and short-term marketable securities were $71.1 million, totaling approximately $105.0 million. Restricted cash was an additional $1.3 million.
- Working capital was $110.2 million; total assets were $136.4 million and total liabilities were $14.8 million. Accumulated deficit was $365.6 million.
- Long-term debt was approximately $0.1 million, with no remaining borrowing availability; the equipment loan was scheduled for repayment through July 2011.
- A May 2011 follow-on offering of 4.7 million shares generated approximately $70.9 million in net proceeds. Shares issued and outstanding were 67.6 million at June 30.
Outlook, risks and other material items
- Management expected continued losses as DexCom expands commercialization, research and development, clinical trials, and manufacturing capacity. It believed available liquidity and projected partner contributions would fund operations through at least June 30, 2012. No specific revenue or earnings guidance was provided.
- Profitability depends on achieving revenue sufficient to support the cost structure. If operating plans are missed or financing is unavailable, management may need to reduce planned compensation or other operating expenses; further financing could dilute shareholders.
- Reimbursement remains a major commercialization risk: Medicare had no national coverage decision for CGM devices. Private coverage policies existed at the seven largest payors as of August 2011, but often required extensive documentation; DexCom had contracted rates with six.
- Manufacturing capacity, product quality, supplier concentration, regulatory approvals and clinical trial timing could constrain growth. The filing also discusses historical sensor failures, although the FDA notified DexCom in November 2010 that it had adequately addressed the issues in its warning letter.
- Abbott patent litigation and related patent-office proceedings remained unresolved. DexCom stated that the outcome and potential fees could not be assessed and had accrued no amount. The company also cited possible patent interference and reexaminations involving its own patents.
- The filing identifies a 2.3% U.S. medical-device excise tax scheduled to begin in 2013; its application and impact were unclear and were not reflected in forward guidance. Management reported no material interest-rate or foreign-currency exposure and no off-balance-sheet arrangements.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether product revenue growth and gross-margin improvement continue, and distinguish recurring product sales from milestone and partner revenue.
- Verify cash burn, manufacturing and development spending, and whether the stated liquidity runway through June 30, 2012 remains achievable.
- Monitor insurance coverage and reimbursement access, including Medicare policy developments and the durability of distributor and payor channels.
- Check FDA and clinical progress for the next-generation ambulatory system, GlucoClear, and partner products, alongside manufacturing capacity and product-quality updates.
- Follow Abbott litigation and patent proceedings, as well as any quantified changes to legal exposure or contingencies.