DexCom, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. DexCom develops and commercializes continuous glucose monitoring (CGM) systems for people with diabetes and hospital use. Results are unaudited. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $23.1 | $18.3 | $66.6 | $53.8 |
| Product revenue | $21.1 | $16.7 | $61.2 | $45.0 |
| Gross profit | $8.4 | $8.2 | $29.0 | $25.2 |
| Gross margin | 36.4% | 44.7% | 43.6% | 46.7% |
| Operating expenses | $25.7 | $21.5 | $76.4 | $57.7 |
| Operating loss | $(17.3) | $(13.3) | $(47.4) | $(32.6) |
| Net loss | $(17.3) | $(13.3) | $(46.0) | $(32.5) |
| Net loss per diluted share | $(0.25) | $(0.20) | $(0.67) | $(0.50) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(22.5) | $(18.6) |
At September 30, 2012, cash and cash equivalents were $4.7 million, short-term marketable securities were $48.6 million, and restricted cash was $1.0 million. Working capital was $55.2 million. Total liabilities were $22.5 million; the balance sheet reported no outstanding debt. Capital expenditures were $8.1 million for the first nine months.
Material changes and notable items
- Q3 total revenue increased about 26% year over year, driven primarily by higher sales volume of durable systems and disposable sensors. Nine-month revenue increased about 24%.
- Gross margin declined year over year in both periods. Q3 included a $2.5 million charge for excess and obsolete hardware related to the G4 PLATINUM launch and $0.6 million of accelerated depreciation on SEVEN PLUS manufacturing equipment.
- Research and development and selling, general and administrative costs rose as DexCom increased product development, commercialization, sales, marketing and information-technology spending. Nine-month R&D increased to $30.8 million from $21.5 million; SG&A increased to $45.6 million from $36.2 million.
- Nine-month development grant and other revenue fell to $5.4 million from $8.9 million, largely because the prior-year period included a $4.0 million Animas milestone payment and because Edwards-related revenue recognition was extended following longer development and regulatory timelines.
- DexCom acquired SweetSpot in March 2012 for an estimated initial purchase price of $6.1 million, including contingent consideration. The purchase-price allocation remained preliminary; $3.2 million was allocated to goodwill.
Outlook, risks and contingencies
- Management expected continued losses as it expanded commercialization, manufacturing and research and development. It believed available working capital resources would fund operations through at least September 30, 2013. No specific revenue or earnings guidance was provided.
- On October 5, 2012, after quarter-end, the FDA approved the G4 PLATINUM system; DexCom began U.S. commercialization in Q4. The company planned to reduce sales and marketing emphasis on SEVEN PLUS. CE Mark approval for the G4 system had been received in June 2012.
- On November 1, 2012, after quarter-end, DexCom entered into a facility providing a $15 million revolving line and term loans of up to $20 million. The term loan includes an initial $7 million advance and up to $13 million available on request during June–September 2013. Borrowings are secured by substantially all assets, with a negative pledge on intellectual property.
- Key risks include continued operating cash burn and potential need for additional financing; limited CGM reimbursement, including no Medicare national coverage decision; market adoption and competition; manufacturing capacity and single-source suppliers; regulatory and clinical development delays; and product reliability and quality.
- Abbott patent litigation and related patent-office proceedings remained unresolved. DexCom stated the outcome and potential costs could not be assessed and had accrued no amounts as of September 30, 2012.
- Purchase commitments with vendors totaled $18.7 million, due within one year. The filing also describes customer return reserves and acquisition-related contingent consideration. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether G4 PLATINUM adoption and recurring sensor sales improve revenue growth and gross margin after launch-related inventory charges.
- Whether cash burn, capital spending and the new secured credit facility provide adequate liquidity without requiring further financing.
- Progress in obtaining broader third-party reimbursement, particularly Medicare coverage, and any effect on patient demand.
- Manufacturing yield, product quality, supplier continuity and regulatory progress for future products and partner integrations.
- Developments in Abbott litigation and patent proceedings, and final valuation and performance outcomes related to the SweetSpot acquisition.