DexCom, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. DexCom develops and commercializes continuous glucose monitoring (CGM) systems. Its principal products included the G4 PLATINUM and G5 Mobile systems.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $116.2 million | $72.8 million | +59.6% |
| Gross profit / gross margin | $75.1 million / 64.6% | $46.5 million / 63.9% | Margin +0.7 percentage points |
| Operating expenses | $94.3 million | $59.2 million | +59.3% |
| Operating loss | $(19.2) million | $(12.7) million | Loss widened $6.5 million |
| Net loss / diluted loss per share | $(19.2) million / $(0.23) | $(12.9) million / $(0.17) | Loss per share widened |
| Cash from operating activities | $(0.2) million | $3.4 million | Decrease of $3.6 million |
Revenue growth primarily reflected higher disposable sensor sales, as the installed base expanded, and sales of durable systems. Sensors accounted for approximately 72% of revenue, versus 70% a year earlier. Gross profit rose with revenue, partly offset by lower-margin G5 transmitter mix and higher receiver warranty costs. R&D expense rose to $32.2 million from $19.8 million; SG&A rose to $62.1 million from $39.4 million, largely due to growth in staffing, commercialization, marketing and infrastructure. Share-based compensation was $25.1 million, up from $15.9 million.
At March 31, cash and cash equivalents were $77.9 million and short-term marketable securities were $28.6 million, totaling $106.5 million, compared with $115.2 million at year-end 2015. Working capital was $163.3 million. Total assets were $299.4 million and total liabilities were $68.2 million. The balance sheet reported $1.7 million of current long-term debt; the term loan was scheduled to mature in November 2016. The revolving credit line expired unused in November 2015. Investing cash outflow was $11.2 million, including $11.5 million of property and equipment purchases; financing cash inflow was $3.2 million. Cash and cash equivalents declined $8.2 million during the quarter.
Changes, outlook and key risks
- Growth and spending: Revenue increased 59.6% year over year, while operating expenses grew 59.3%; the company remained loss-making. Management expected continued losses as it expanded commercialization, R&D and manufacturing.
- Liquidity outlook: Management believed cash, equivalents, marketable securities and projected commercial cash contributions would fund anticipated needs through at least March 31, 2017. Additional financing might be needed; the company warned it could be unavailable on acceptable terms and could dilute shareholders.
- Seasonality and reimbursement: Management cited first-quarter seasonality, including insurance deductible resets and the use of flexible spending accounts. Medicare had not adopted a national CGM coverage decision; private coverage remained conditional and documentation-intensive, despite coverage policies and contracted rates with the seven largest private payors.
- Product and regulatory matters: A February 2016 customer notification concerning receiver audible alarms and alerts was classified as a voluntary Class I recall. DexCom advised users to test alarms periodically and was working on a solution. A March 2016 FDA inspection resulted in one Form 483 observation concerning retrospective medical-device-report filing; DexCom responded in April. The company also reported an Agamatrix patent lawsuit filed March 28, 2016; it disputed the allegations, had accrued no amount, and said outcome and potential costs could not be assessed.
- Operating commitments and collaboration: Vendor purchase commitments totaled $58.4 million due within one year. The company entered a sublease for additional San Diego space extending through January 2022. Its Verily collaboration includes potential development/regulatory milestone payments of up to $65 million, in addition to the upfront payment made in 2015.
- Other risks: Management highlighted manufacturing capacity and single-source supplier dependencies, clinical and regulatory approval uncertainty, competition, reimbursement constraints and continued losses. It reported no material exposure to interest-rate or foreign-currency risk and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sensor-led growth and the installed base continue to expand, and how product mix affects gross margin.
- Whether operating-expense growth, stock-based compensation and cash use remain consistent with management’s liquidity outlook.
- Progress on the receiver alarm/alert issue, associated warranty costs and any further FDA actions following the Form 483 observation.
- Developments in the Agamatrix litigation and any potential financial or operational consequences.
- Manufacturing capacity, supplier availability, reimbursement access and the timing and funding requirements of product development and the Verily collaboration.