DexCom, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial amounts below are in millions of dollars unless noted. DexCom develops and commercializes continuous glucose monitoring (CGM) systems; its primary ambulatory product was the SEVEN PLUS.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Product revenue | $16.7 | $10.8 | $45.0 | $26.6 |
| Development grant and other revenue | $1.6 | $0.9 | $8.9 | $6.4 |
| Total revenue | $18.3 | $11.7 | $53.8 | $33.0 |
| Gross profit | $8.2 | $3.5 | $25.2 | $11.5 |
| Gross margin | 44.7% | 29.8% | 46.7% | 34.7% |
| Operating expenses | $21.5 | $16.5 | $57.7 | $46.9 |
| Operating loss | $(13.3) | $(13.1) | $(32.6) | $(35.4) |
| Net loss | $(13.3) | $(13.4) | $(32.5) | $(45.4) |
| Net loss per share, basic and diluted | $(0.20) | $(0.23) | $(0.50) | $(0.81) |
- Product revenue growth reflected higher sales volume of durable systems and disposable sensors; management also cited higher average selling prices in Q3. Gross profit improved with higher revenue and manufacturing absorption.
- R&D and SG&A increased as DexCom expanded next-generation product development and supported commercialization. Nine-month R&D was $21.5 million, up from $16.3 million; SG&A was $36.2 million, up from $30.5 million.
- Nine-month development revenue included a $4.0 million Animas milestone payment earned upon regulatory approval outside the United States. The prior-year period included an $8.5 million loss on extinguishment of convertible debt; its absence contributed to the lower 2011 net loss.
- For the first nine months, operating cash use was $18.6 million, versus $29.2 million in 2010. Investing activities used $42.9 million, including net purchases of marketable securities and $4.5 million of capital expenditures. Financing provided $74.1 million, principally reflecting $70.9 million net proceeds from a May 2011 stock offering.
Liquidity, capital and obligations
- At September 30, 2011, cash and cash equivalents were $17.5 million and short-term marketable securities were $79.8 million, totaling $97.3 million; restricted cash was an additional $0.9 million. Working capital was $100.5 million.
- Total assets were $128.8 million, total liabilities $15.7 million, and accumulated deficit $378.9 million. Current liabilities were $14.7 million. The balance sheet reports no current debt at quarter-end; the equipment loan was repaid during the period, and convertible notes had been converted in 2010.
- Management expected available resources and projected partnership contributions to fund operations through at least September 30, 2012. DexCom expected continuing losses and said additional financing might be needed; no specific revenue or earnings guidance was provided.
- Vendor purchase commitments totaled $14.1 million, due within one year. Operating lease obligations totaled $12.9 million, with the lease term for the San Diego facilities extending through November 2016.
Outlook, risks and notable items
- Management cited continued commercialization, R&D, clinical trials and manufacturing expansion as planned uses of cash. Reaching profitability depends on revenue growing enough to support the cost structure; management warned expenses could be reduced if operating plans or financing needs are not met.
- Key risks include uncertain patient and physician adoption, limited reimbursement (Medicare had no national coverage decision for CGM), manufacturing capacity and quality, reliance on single-source suppliers, regulatory and clinical-trial delays, and competition. The company noted that several large private payors had CGM coverage policies, but coverage requirements could be restrictive.
- Abbott patent litigation remained stayed pending patent-office proceedings. DexCom said the outcome and potential costs could not be assessed and recorded no accrual. Abbott’s challenges also included reexamination requests affecting DexCom patents.
- DexCom reported that the FDA’s 2010 follow-up inspection found no Form 483 observations and that the FDA had notified the company it had adequately addressed the prior warning letter. The SEVEN PLUS had an FCC waiver for its wireless operation through March 2013.
- On November 1, 2011, after quarter-end, DexCom entered a non-exclusive Roche development agreement. It provided for up to $1.0 million toward development expenses, an initial $0.5 million milestone and up to $2.5 million in additional milestones.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether product revenue growth and gross-margin improvement persist as volumes scale and product costs evolve.
- Cash use, financing runway and the timing or terms of any additional capital raising.
- Progress toward broader reimbursement, including Medicare coverage and private-payor access.
- Manufacturing capacity, product reliability, supplier continuity and regulatory progress for next-generation products.
- Developments in the Abbott litigation and patent proceedings, and whether any material contingency or cost emerges.
- Partner milestones and commercialization progress, including the post-quarter Roche agreement; also monitor distributor concentration, including Edgepark, which represented approximately 21% of nine-month revenue.