DexCom, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; dollar amounts are in millions except per-share data.
Business context
DexCom develops and commercializes continuous glucose monitoring (CGM) systems for people with diabetes and healthcare providers. Growth was driven mainly by disposable sensor sales and expansion of the installed base for its G4 PLATINUM and G5 Mobile systems. The G5 Mobile received FDA approval in August 2015 and launched in parts of Europe in September.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $105.2 | $69.0 | $271.2 | $174.9 |
| Product revenue | $104.2 | $67.9 | $269.9 | $172.8 |
| Gross profit | $74.7 | $47.2 | $187.2 | $116.9 |
| Gross margin | 71.0% | 68.4% | 69.0% | 66.8% |
| Operating loss | $(42.4) | $(5.0) | $(58.7) | $(23.1) |
| Net loss | $(42.5) | $(5.2) | $(59.1) | $(23.7) |
| Basic net loss per share | $(0.53) | $(0.07) | $(0.75) | $(0.32) |
- Product revenue rose approximately 53% in Q3 and 56% for the nine-month period, primarily on higher sensor and durable-system volumes. Sensors represented about 70% of product revenue in both comparable periods.
- Operating expenses increased substantially. Research and development included a $36.5 non-cash charge for shares issued to Google Life Sciences; higher headcount and share-based compensation also increased costs. Nine-month share-based compensation was $59.2, versus $35.7 a year earlier.
- Operating cash flow was $37.7 for the first nine months, compared with $15.2 in 2014. It included significant non-cash charges, including the Google share issuance and share-based compensation. Investing cash outflow was $38.8, including $21.7 of capital expenditures; financing cash inflow was $14.6.
- At September 30, cash and cash equivalents were $85.3 and short-term marketable securities were $28.0, totaling $113.3. Working capital was $144.9. Total debt was approximately $2.9, including $2.5 current; no revolving-line borrowings were outstanding. The $15.0 revolving facility was scheduled to mature in November 2015.
- Total assets were $256.7 and stockholders’ equity was $193.3. The company reported an accumulated deficit of $556.9.
Material changes and notable items
- Revenue growth lifted gross margin, while losses widened as operating costs increased and the company invested in commercialization and product development.
- The Google Life Sciences agreement provides for joint development of next-generation CGM products and an exclusive license to specified Google intellectual property. DexCom paid the $35.0 upfront fee in shares, recording $36.5 of R&D expense based on the shares’ fair value. Up to $65.0 in additional development and regulatory milestones may be payable in cash or shares. Royalties may apply above $750 million in annual sales of covered products, subject to the agreement’s terms.
- The Edwards collaboration for in-hospital blood-based glucose monitoring was restructured and terminated in September. Edwards received a paid-up, royalty-free license limited to blood-based monitoring in hospitals; DexCom retained rights to market its interstitial CGM technology in all settings. Neither party was required to make a payment.
- The Tandem agreement generated a final $1.0 regulatory-approval milestone in September. The parties also replaced a per-unit royalty with funding for incremental marketing or jointly funded development activities.
- G4 PLATINUM with Share and G5 Mobile upgrade programs affected reported product economics: nine-month results included $2.0 of excess and obsolete inventory and free-product costs, plus a $0.8 revenue deferral and $0.6 of additional cost of sales related to the G5 upgrade program.
Outlook, risks and commitments
Management expected continued losses as DexCom expanded commercialization, research and development, manufacturing, and corporate infrastructure. It stated that available working capital and projected operating cash contributions should fund anticipated needs through at least September 30, 2016; additional financing could be needed and could dilute shareholders or impose restrictive terms. No specific revenue or earnings guidance was provided.
- Key risks include continued losses, dependence on product adoption and reimbursement, and the absence of a Medicare national coverage decision for CGM devices. Private-payor coverage can involve restrictive eligibility and documentation requirements.
- Management cited manufacturing scale-up, product quality, and reliance on single-source suppliers as risks to meeting demand. Clinical, regulatory, and technology delays could also affect future products.
- Purchase commitments totaled $43.2, due within one year. Operating lease obligations totaled $32.6, including the expanded San Diego facilities lease extending through March 2022.
- Ordinary-course claims and lawsuits were disclosed; management did not expect their resolution to have a material adverse effect. The FDA closed its 2014 Warning Letter in May 2015 after an inspection with no observations. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether recurring sensor growth and new product launches can sustain revenue and gross-margin improvement.
- How much of reported operating cash flow reflects sustainable cash generation versus non-cash compensation and other timing effects.
- The status and terms of the revolving credit facility after its November 2015 maturity, and DexCom’s liquidity relative to its stated September 2016 funding horizon.
- Progress on private-payor reimbursement, Medicare coverage, manufacturing capacity, and single-source component availability.
- Future costs and milestone obligations under the Google collaboration, and the commercial prospects and regulatory milestones for the product pipeline.