DexCom, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Figures are unaudited and in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
DexCom develops and commercializes continuous glucose monitoring (CGM) systems for people with diabetes and healthcare providers. Its principal product was the G4 PLATINUM system; the G4 PLATINUM with Share launched in the U.S. in Q1 2015. The company submitted the G5 Mobile system to the FDA in February 2015. Revenue is primarily from disposable sensors and durable systems.
Financial highlights
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $93.2 | $58.8 | $166.0 | $105.9 |
| Product revenue | $92.9 | $58.2 | $165.7 | $104.9 |
| Gross profit | $66.0 | $39.9 | $112.5 | $69.7 |
| Gross margin | 70.8% | 67.9% | 67.8% | 65.8% |
| Operating loss | $(3.6) | $(5.8) | $(16.3) | $(18.1) |
| Net loss | $(3.7) | $(6.0) | $(16.6) | $(18.5) |
| Basic loss per share | $(0.05) | $(0.08) | $(0.21) | $(0.25) |
- Q2 product revenue increased 60% year over year, driven mainly by higher sensor sales as the installed customer base grew. Sensors contributed about 70% of product revenue; durable systems about 30%.
- Operating expenses rose to $69.6 in Q2 from $45.7, including R&D of $24.4 and SG&A of $45.2. Higher staffing, commercialization and marketing costs, and share-based compensation contributed to the increases.
- For the six months, operating cash flow was $19.8 versus $3.8 a year earlier. The filing attributes much of the improvement to higher noncash expenses, particularly share-based compensation; cash used by operations was also affected by working-capital growth.
- Cash and cash equivalents were $67.7 at June 30; short-term marketable securities were $29.8. Together they totaled $97.5, excluding $0.7 of restricted cash. Working capital was $126.2.
- Total debt was $3.5, including $2.4 current and $1.1 long-term. No revolving-credit funds had been drawn; up to $15.0 remained available under the facility, whose revolving line matures in November 2015. The term loan matures in November 2016.
Changes, outlook and risks
- Compared with Q2 2014, revenue and gross margin increased, while net loss narrowed. For the first half, revenue growth was partly offset by sharply higher R&D and SG&A spending.
- First-half product cost of sales included $2.7 of additional costs associated with the G4 PLATINUM with Share launch, including $2.0 of excess and obsolete inventory and free product from the upgrade program.
- Management expects continued losses as DexCom expands commercialization, R&D, manufacturing and infrastructure. It believes available liquidity and expected operating cash contributions will fund anticipated needs through at least June 30, 2016; no specific revenue or earnings guidance is provided.
- Key risks include reimbursement limits (Medicare had no national coverage decision for CGM), customer adoption, manufacturing capacity and single-source suppliers, regulatory approval and clinical-trial execution, competition, and continuing operating losses. The company reported an accumulated deficit of $514.4.
- DexCom had $30.2 of vendor purchase commitments due within one year and $32.5 of scheduled lease payments. On successful commercialization of the Gen 6 Sensor, it must pay the Helmsley Trust either royalties of up to $2.0 annually for four years or a one-time $6.0 payment, at its election.
- The FDA completed an inspection with no observations and closed its 2014 warning letter on May 21, 2015. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
- Management did not expect ordinary-course legal matters to have a material adverse effect. The filing also notes that Edwards was not then pursuing commercialization of GlucoClear and DexCom did not expect related royalties.
Investor verification points
- Confirm whether sensor-led growth and the approximately 70% sensor share of product revenue continue, and assess distributor concentration and customer retention.
- Track reimbursement coverage and the effects of documentation requirements, particularly the absence of Medicare national coverage.
- Monitor G5 Mobile regulatory progress, commercialization timing and any associated inventory or launch costs.
- Assess manufacturing capacity, product quality, single-source component exposure and whether purchase commitments support expected demand.
- Reconcile operating cash generation with share-based compensation and working-capital needs; review liquidity against expected losses and the revolving-line maturity.