DexCom, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. DexCom designs, develops and sells continuous glucose monitoring (CGM) systems; its latest generation, the G6, launched in 2018.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,476.0 million | $1,031.6 million |
| Gross profit / margin | $931.5 million / 63% | $663.9 million / 64% |
| Operating income (loss) | $142.3 million | $(186.3) million |
| Net income (loss) | $101.1 million | $(127.1) million |
| Diluted earnings (loss) per share | $1.10 | $(1.44) |
| Cash from operating activities | $314.5 million | $123.2 million |
- Revenue rose 43%, mainly on higher disposable-sensor sales as the worldwide customer base grew. Sensors and other revenue were 78% of total revenue, compared with 75% in 2018; reusable hardware accounted for the balance.
- Cost of sales increased 48%, faster than revenue, and gross margin declined one percentage point. DexCom attributed margin pressure to channel strategy and product mix, international expansion, capacity investments, and higher warranty, freight, and inventory charges.
- Research and development expense rose 37% to $273.5 million; selling, general and administrative expense rose 19% to $515.7 million. 2018 included a one-time $217.7 million Verily collaboration charge, contributing to the reported year-over-year swing to operating and net income.
- Interest expense was $60.3 million, up from $22.7 million, mainly reflecting the 2023 convertible notes. Cash interest paid was $10.4 million; reported expense includes non-cash debt discount accretion.
- Cash, cash equivalents and short-term marketable securities totaled $1,533.3 million at year-end, versus $1,385.6 million a year earlier. Working capital was $1,609.2 million. Operating cash flow improved to $314.5 million; investing used $1,015.2 million, primarily for net purchases of marketable securities and $180.0 million of capital expenditures.
- Convertible notes had $1.25 billion aggregate principal outstanding ($400 million due 2022 and $850 million due 2023); their net balance-sheet carrying amount was $1,059.7 million. The $200 million revolving facility had no borrowings and $195.6 million available after letters of credit. DexCom reported compliance with its debt covenants.
Fourth quarter: Revenue was $462.8 million, compared with $338.0 million in Q4 2018. Net income was $92.7 million, versus a net loss of $179.7 million, which included the 2018 Verily charge.
Business developments, outlook and risks
- DexCom received FDA authorization for G6 Pro in October 2019. The G6 is an FDA-authorized integrated CGM system and does not require routine finger-stick calibration under its labeling, though confirmatory testing may be needed in specified circumstances.
- Management said it expects existing cash, securities and operating cash flows to fund ongoing core business needs and anticipated liquidity requirements for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Management expects sales to fluctuate seasonally, typically with lower first-quarter sales than the preceding fourth quarter, partly because of U.S. insurance deductible resets and flexible-spending-account balances.
- Strategic priorities include scaling manufacturing, expanding adoption and reimbursement, international growth, developing future CGM products and integrating CGM with partner insulin-delivery systems. DexCom reported that Tandem’s Control-IQ system, which integrates with G6, received FDA approval in December 2019.
- Verily collaboration payments included $3.2 million in 2019; up to $275 million of additional milestone payments may be due, payable in cash or shares at DexCom’s election. The company had previously issued $250 million in shares under the collaboration.
- Key risks include manufacturing capacity and quality, reliance on single-source components, reimbursement restrictions and pricing pressure, competition, product defects or recalls, regulatory approvals, cybersecurity and privacy, and dependence on distribution partners. Three major distributors represented approximately 39% of FY2019 revenue in aggregate. International sales were 21% of revenue.
- Patent litigation involving WaveForm Technologies remained on appeal; DexCom said outcomes and potential losses could not be assessed. The company reported no currently pending proceedings expected to have a material adverse effect. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether sensor volume growth can continue while pricing, channel mix and rising costs weigh on gross margin.
- Whether manufacturing expansion and supplier availability can meet demand without quality problems or interruptions.
- How distributor concentration, reimbursement coverage and payment terms affect revenue, collections and customer access.
- The cash and potential dilution implications of $1.25 billion principal in convertible notes, including conversion provisions and Verily milestone payments.
- Progress, timing and commercial prospects for pipeline products and insulin-delivery collaborations; the filing provides no quantified forward guidance.