Business context and reporting period
Senseonics Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019; it was signed March 16, 2020. The company develops and commercializes Eversense, an implantable continuous glucose monitoring system. U.S. Eversense was approved for up to 90 days of use; the 180-day Eversense XL was available in select international markets. The FDA’s June 2019 non-adjunctive approval allows U.S. users to make treatment decisions, including insulin dosing, using the system.
Financial performance and condition
- Revenue: $21.3 million in 2019, up 12.6% from $18.9 million in 2018. U.S. revenue was $3.2 million (15.2%); international revenue was $18.1 million (84.8%). Roche accounted for 77% of total revenue and Advanced Diabetes Supply for 12%.
- Gross profit and margins: Gross loss was $19.4 million, versus $8.1 million in 2018. Gross margin deteriorated to (91.3)% from (43.1)%, reflecting, among other factors, inventory charges, scrap, warranty costs and recall-related costs.
- Operating results: Operating loss widened to $130.7 million from $87.6 million. Net loss increased to $115.5 million from $94.0 million; basic and diluted loss per share was $0.61 versus $0.60. A $29.2 million non-cash gain from changes in the fair value of embedded debt derivatives supported 2019 net income relative to the operating loss.
- Fourth quarter: Revenue was $9.0 million, gross loss $8.2 million, operating loss $34.9 million and net loss $35.6 million.
- Cash flow and liquidity: Operating cash use was $136.0 million, up from $90.8 million. Cash and cash equivalents fell to $95.9 million from $136.8 million. Reported working capital was $1.1 million; management also described a projected working capital deficiency and said cash was not expected to fund operations through the first quarter of 2021 without additional financing.
- Debt: At year-end, principal obligations included a $45.0 million Solar term loan, $15.7 million of 2023 notes and $82.0 million of 2025 notes. The Solar loan has a minimum 8.98% interest rate and is secured by substantially all assets. Because management expected a revenue-covenant breach in March 2020, Solar loan and 2025 note balances were classified as current liabilities. Total liabilities were $141.5 million, and stockholders’ equity was negative $8.6 million.
Material changes versus 2018
- Revenue increased modestly, while cost of sales rose to $40.7 million from $27.1 million and gross losses more than doubled.
- Sales and marketing expense rose $21.8 million to $49.6 million as U.S. commercialization expanded; research and development increased $6.6 million to $38.4 million, largely due to the PROMISE trial and other studies.
- Operating cash use increased by $45.3 million. The company raised equity and debt in 2019, including $26.8 million net from a stock offering, issued $82.0 million of 2025 notes and borrowed $45.0 million under the Solar facility; it also repurchased $37.0 million principal of 2023 notes.
- Roche remained the largest customer, but its share of revenue declined from 86% in 2018 to 77% in 2019. The Roche agreement was amended to reduce 2020 minimum purchase volumes and increase pricing for the remaining contract term.
Outlook, risks and unusual items
- Management expected PROMISE trial topline results in the second quarter of 2020. If positive, it planned an FDA submission for 180-day U.S. use, with approval targeted by year-end 2020, and an iCGM submission for the 90-day system, with potential approval in the second half of 2020. These are forward-looking targets, not assured outcomes.
- The company expected Medicare beneficiaries to access Eversense in 2020 following CMS’s finalized payment rate. Management reported positive U.S. payer coverage decisions reaching over 100 million covered lives; elsewhere, the filing cites approximately 120 million.
- In November 2019, the company restructured, reducing its current, open and planned workforce by approximately 30%; it recorded about $0.8 million in severance costs.
- A September 2019 voluntary recall covered 844 unimplanted sensors due to premature loss of function associated with inadequate hydration of the glucose-sensing surface. Management cited related backup, replacement and other costs.
- The independent auditor issued an unqualified opinion on the financial statements but included a going-concern paragraph. The filing states substantial doubt exists about the company’s ability to continue as a going concern without additional financing, a Solar covenant waiver or another financing arrangement. If a waiver is not obtained, debt acceleration could require substantial additional capital and could threaten continued operations.
- Key risks include continuing losses and cash burn, reimbursement and adoption uncertainty, reliance on Roche and outsourced manufacturers, product quality and regulatory requirements, competition from larger CGM companies, and dilution or restrictive terms from further financing. A material weakness in inventory controls identified in the fourth quarter was reported as remediated in that quarter.
Important facts for investors to verify
- Whether Senseonics obtained a Solar covenant waiver or amendment, and whether any related default or cross-default affected the Solar loan or 2025 notes.
- Subsequent financing, cash runway, operating cash use and the company’s ability to meet obligations and continue as a going concern.
- PROMISE trial results and actual FDA decisions and timing for 180-day use and iCGM status.
- Whether Medicare and commercial reimbursement translated into patient adoption and recognized revenue, including the effects of the Bridge Program.
- Roche’s purchases and the status of its distribution agreement, which was scheduled to run through January 31, 2021, as well as customer concentration.
- Recall resolution, sensor reliability, warranty and replacement trends, and whether gross margins improved.