DexCom, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. DexCom develops and sells continuous glucose monitoring (CGM) systems, principally the G4 PLATINUM and G5 Mobile. Financial statements are unaudited; amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $148.6 | $105.2 | $402.1 | $271.2 |
| Gross profit | $101.1 | $74.7 | $261.7 | $187.2 |
| Gross margin | 68.0% | 71.0% | 65.1% | 69.0% |
| Operating expenses | $119.6 | $117.1 | $319.5 | $245.9 |
| Operating loss | $(18.5) | $(42.4) | $(57.8) | $(58.7) |
| Net loss | $(18.8) | $(42.5) | $(58.2) | $(59.1) |
| Diluted loss per share | $(0.22) | $(0.53) | $(0.70) | $(0.75) |
Revenue grew approximately 41% in Q3 and 48% in the nine-month period, primarily from higher sensor sales as the installed base expanded. Sensors represented about 70% of revenue and durable systems about 30% in both periods. Gross margins declined, which management attributed partly to lower-margin G5 transmitter mix; nine-month cost of sales also included higher warranty expense and $3.5 million of obsolete receiver inventory charges.
Research and development was $43.9 million in Q3 versus $64.8 million, reflecting the prior-year $36.5 million noncash Verily collaboration charge, partly offset by higher staffing and related costs. Nine-month R&D was $112.4 million versus $109.0 million; excluding that prior-year charge, R&D increased. Selling, general and administrative expense rose to $75.7 million from $52.3 million in Q3 and to $207.1 million from $136.9 million for nine months, mainly from hiring, commercialization, marketing, consulting and infrastructure costs.
Cash, liquidity and debt
- Cash and cash equivalents were $97.7 million at September 30, 2016; short-term marketable securities were $29.6 million. Combined cash and securities totaled $127.3 million, and working capital was $172.5 million.
- Nine-month operating cash flow was $42.9 million, compared with $37.7 million in 2015. Investing used $38.6 million, including $38.1 million of property and equipment purchases; financing provided $7.6 million. Cash increased $11.6 million from year-end 2015.
- DexCom paid off its remaining term loan balance of $2.3 million in June. It had no borrowings under its new $200 million revolving credit facility at quarter-end.
- Management said existing resources, projected operating cash contributions and the credit facility were expected to fund anticipated needs through at least September 30, 2017. The company nevertheless expected continued losses and noted that additional capital might be needed.
Material developments, outlook and risks
- Manufacturing expansion: DexCom entered a Mesa, Arizona lease for a planned manufacturing facility. Construction was expected to reach its first-phase completion in mid-2017; anticipated Skanska construction expenditures were about $30 million, of which $4.9 million had been paid by quarter-end. Capital expenditures and expansion commitments are significant.
- Recall and product quality: A February 2016 customer notification concerning receiver audible alarms and alerts was classified as a voluntary FDA Class I recall. The company said it implemented a solution and believed required actions were complete, but was awaiting the FDA’s response. Related warranty accruals were $8.3 million at September 30, 2016.
- Regulatory outlook: In July 2016, an FDA advisory panel recommended the proposed non-adjunctive G5 Mobile indication; the recommendation was non-binding, and DexCom remained in discussions with the FDA. Medicare had not adopted national coverage for CGM devices, although the seven largest private payors had coverage policies and contracted rates for DexCom products.
- Growth initiatives: DexCom acquired Nintamed, its distributor in Germany, Switzerland and Austria, in May 2016 to support international expansion. It also continued its Verily collaboration on next-generation CGM products, which may require milestone payments and could generate royalties if specified sales thresholds are exceeded.
- Contingencies: AgaMatrix sued DexCom over patent infringement; DexCom challenged two asserted patents and separately sued AgaMatrix. The outcomes and potential costs could not be assessed, and no amounts were accrued. DexCom also disclosed $63.2 million of vendor purchase commitments due within one year and $64.9 million of operating lease obligations.
- Principal risks: Continued operating losses; reimbursement limitations and lack of Medicare national coverage; competition and rapid technological change; manufacturing scale-up and dependence on single-source suppliers; product defects, regulatory compliance and recalls; clinical and approval uncertainty; and patent litigation. 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 revenue and recurring sensor sales continue to grow, and whether gross margin stabilizes despite product mix, warranty and recall-related costs.
- Whether operating cash generation can support rising R&D, sales, facility and capital spending while losses continue.
- The FDA’s response on the receiver recall and the timing and outcome of the G5 non-adjunctive indication review.
- Progress, spending and capacity benefits from the Mesa manufacturing facility, alongside the company’s substantial purchase and lease commitments.
- Developments in AgaMatrix litigation, reimbursement access, supplier capacity and the availability of the unused revolving credit facility.