DexCom, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. DexCom develops and commercializes continuous glucose monitoring (CGM) systems, principally its G4 PLATINUM product. Financial amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $58.8 | $35.8 | $105.9 | $65.4 |
| Gross profit | $39.9 | $21.9 | $69.7 | $38.4 |
| Gross margin | 67.9% | 61.2% | 65.8% | 58.7% |
| Operating expenses | $45.7 | $31.8 | $87.8 | $59.2 |
| Operating loss | $(5.8) | $(9.9) | $(18.1) | $(20.8) |
| Net loss | $(6.0) | $(10.1) | $(18.5) | $(21.2) |
| Basic loss per share | $(0.08) | $(0.14) | $(0.25) | $(0.30) |
- Q2 total revenue increased 64% year over year; six-month revenue increased 62%. Product revenue was $58.2 million for Q2 and $104.9 million for the half year, primarily reflecting G4 PLATINUM sales and growth in the installed customer base.
- Management attributed improved gross profit and margins to higher sales and a larger mix of the higher-margin G4 PLATINUM system. Operating losses narrowed despite higher operating expenses, which rose to $45.7 million in Q2 and $87.8 million for six months.
- Operating cash flow was positive $3.8 million for the six months, versus cash use of $3.6 million in 2013. Investing activities used $8.3 million, including $7.9 million of property and equipment purchases; financing activities provided $10.8 million, including common-stock issuance proceeds.
- At June 30, cash and equivalents were $49.5 million and short-term marketable securities were $11.8 million, totaling $61.3 million; restricted cash of $1.0 million is excluded. Working capital was $69.9 million.
- Total debt was $5.8 million, including $2.3 million current and $3.5 million long-term. No borrowings were outstanding on the $15.0 million revolving credit line, which was available to draw. The company reported compliance with loan covenants.
Changes, outlook and notable matters
- Product revenue growth was the main year-over-year change. Product cost of sales also increased with volume, but at a slower rate than product revenue. R&D and SG&A increased substantially, driven in part by hiring and share-based compensation. Six-month share-based compensation was $21.9 million versus $11.4 million.
- Management expects continued losses while it expands commercialization, manufacturing and research and development. It believed available resources and projected cash contributions would fund operations through at least June 30, 2015, while cautioning that additional capital may be needed and could dilute shareholders.
- On July 2, 2014, DexCom settled all pending Abbott patent litigation. The agreement requires no royalties or other financial compensation and includes a limited royalty-free cross-license and covenants through March 31, 2021. A change of control may trigger a $25 million continuation fee payable to the party not acquired.
- The FDA issued a March 2014 warning letter concerning administrative deficiencies in medical-device reporting. DexCom had responded, and the FDA was reviewing that response. The filing also identifies manufacturing capacity, product quality, supplier concentration, regulatory approval and reimbursement as significant risks.
- Medicare had not adopted a national coverage decision for CGM devices; private coverage policies could be restrictive. The company noted that its current ambulatory products were believed exempt from the medical-device excise tax, but it was evaluating whether the G4 PLATINUM Professional system was subject to it.
- The filing describes a planned CEO transition effective January 1, 2015, when Kevin Sayer was to become CEO and Terrance Gregg was to become Executive Chairman.
Investor verification priorities
- Confirm whether revenue growth and the shift toward recurring sensor sales continued, and whether distributor inventory remained limited as reported.
- Assess whether gross-margin improvement persisted alongside rising R&D, SG&A and share-based compensation costs.
- Review cash burn, capital spending, financing needs, credit-line availability and compliance with debt covenants against management’s stated liquidity runway.
- Track FDA follow-up on the medical-device reporting warning letter, manufacturing capacity and product-quality performance.
- Monitor reimbursement developments, the commercial uptake of pediatric and professional-use indications, and execution of the Abbott settlement terms.
- Note that Q2 diluted loss per share was reported as $(0.09), compared with basic loss per share of $(0.08); verify the contingent-consideration accounting and its effect on diluted EPS.