DexCom, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; quarterly figures below provide Q4 context.
Business context
DexCom designs, develops and sells continuous glucose monitoring systems for people with diabetes and healthcare providers. It launched its G6 system in 2018 after FDA authorization in March and received CE Mark approval in June. Revenue comes primarily from durable CGM devices and recurring disposable sensor sales. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1,031.6 million | $718.5 million |
| Gross profit / gross margin | $663.9 million / 64% | $492.1 million / 68% |
| Operating loss | $186.3 million | $42.5 million |
| Net loss | $127.1 million | $50.2 million |
| Net loss per share, diluted | $1.44 | $0.58 |
| Cash from operating activities | $123.2 million | $92.0 million |
- Revenue rose 44%, mainly from higher sales of sensors and durable systems as the installed customer base grew. Sensors and other revenue were about 75% of FY 2018 revenue, versus 70% in 2017.
- Gross margin declined four percentage points. The filing attributes the decrease to channel strategy, product mix, new launches and international expansion; a $7.3 million inventory charge related primarily to G6 launch and product changes also affected costs.
- Research and development expense was $199.7 million, up 8%; selling, general and administrative expense was $432.8 million, up 24%. Total operating expenses included a $217.7 million Verily collaboration charge.
- Q4 2018 revenue was $338.0 million and gross profit was $222.8 million. The quarter recorded a $179.7 million net loss, including total operating expenses of $387.4 million. By comparison, Q4 2017 revenue was $221.0 million and net loss was $9.4 million.
- Cash, cash equivalents and short-term marketable securities totaled $1.386 billion at year-end, versus $548.6 million in 2017. Working capital was $1.477 billion; current assets were $1.700 billion and current liabilities $222.4 million.
- Investing cash outflow was $139.8 million, including $67.1 million of capital expenditures. Financing cash inflow was $710.4 million, principally reflecting the 2023 notes and warrant transactions.
Debt, material changes and unusual items
- DexCom issued $850 million principal amount of 0.75% convertible senior notes due 2023 in November 2018; it had previously issued $400 million of 0.75% notes due 2022. Combined principal was $1.250 billion. The notes’ net carrying amount at year-end was $1.010 billion; their combined fair value was $1.400 billion.
- The 2023 note offering generated $836.6 million net proceeds. DexCom also received $183.8 million from warrant sales, paid $218.9 million for a convertible note hedge and repurchased $100 million of stock. The hedge is intended to reduce potential dilution; warrants may dilute shareholders above their $198.38 strike price.
- A December 2018 revolving credit agreement provides up to $200 million; $195.6 million remained available, with no borrowings outstanding and $4.4 million in letters of credit. DexCom said it was in covenant compliance.
- Under its amended Verily collaboration, DexCom issued 1,840,943 shares valued at $250 million upfront and recognized a $217.7 million expense. Up to $280 million in additional development, regulatory, revenue and incentive payments may be due; up to $275 million may be paid in cash or stock.
- Income from equity investments was $80.1 million, comprising $44.1 million of realized gains and $36.0 million of unrealized gains on DexCom’s Tandem Diabetes Care investment. The annual net loss therefore includes this investment gain, while the operating loss does not.
Outlook, risks and contingencies
- Management expected existing cash, projected operating cash flows and available credit to cover anticipated liquidity needs for at least 12 months. The filing does not provide a specific revenue or earnings forecast; it says continued operating losses are likely.
- Key execution risks include scaling manufacturing and maintaining product quality, dependence on single-source components, reimbursement and coverage restrictions, competition, regulatory approvals and product acceptance. Two distributors represented approximately 15% and 12% of FY 2018 revenue, respectively.
- DexCom disclosed patent litigation involving WaveForm/AgaMatrix. It could not assess the outcome or potential loss range and had accrued no contingent loss for those cases, apart from an immaterial amount of attorneys’ fees. The company stated it did not expect ordinary-course matters to have a material adverse effect.
- Other disclosed exposures include product liability and recalls, cybersecurity and privacy compliance, foreign currency movements, and debt repayment, conversion and dilution risks. Firm purchase commitments totaled approximately $204 million, most due within one year.
- The company adopted ASC 606 revenue guidance in 2018 with no material cumulative effect. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether G6 adoption and recurring sensor sales sustain growth while gross margin recovers from 64%.
- How much of the reported loss reflects the Verily charge and other non-cash or investment-related items, and the underlying trajectory of operating expenses and cash generation.
- Progress in manufacturing capacity, yields and supplier diversification, alongside the impact of the $204 million purchase commitments.
- Whether reimbursement access broadens and distributor concentration declines; confirm the latest coverage terms and distributor performance.
- The terms, conversion exposure and potential dilution from the 2022 and 2023 notes, note hedge and warrants, plus the status of Verily milestones and patent litigation.