DexCom, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also presents unaudited fourth-quarter results. DexCom develops and sells continuous glucose monitoring (CGM) systems, principally the G4 PLATINUM and G5 Mobile, with revenue from durable devices and recurring disposable sensors.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $718.5 million | $573.3 million |
| Gross profit / gross margin | $492.1 million / 68% | $378.4 million / 66% |
| Operating expenses | $534.6 million | $442.3 million |
| Operating loss | $42.5 million | $63.9 million |
| Net loss / loss per share | $50.2 million / $0.58 | $65.6 million / $0.78 |
| Cash from operating activities | $92.0 million | $56.2 million |
At year-end, cash, cash equivalents and short-term marketable securities totaled $548.6 million; working capital was $605.8 million. Cash and cash equivalents were $441.5 million. The company had $400 million principal amount of 0.75% convertible notes due 2022, carried at $327.6 million net of discount and issuance costs, and no revolving-credit borrowings; $200 million of credit capacity remained available. Capital expenditures were $66.0 million.
Fourth quarter: Revenue was $221.0 million, gross profit $153.5 million, operating expenses $141.5 million, and net loss $9.4 million, or $0.11 per share. In Q4 2016, revenue was $171.2 million and net loss was $7.4 million.
Changes versus prior year
- FY revenue rose 25.3%, mainly from higher sensor sales as the installed customer base expanded, along with durable-system sales. Sensors represented about 70% of revenue and durable systems about 30% in both years.
- Gross margin improved from 66% to 68%, primarily on revenue growth and lower warranty costs following the receiver-alarm recall. The prior-year period included $3.5 million of excess and obsolete receiver inventory charges related to that issue.
- Operating loss narrowed by $21.4 million, although R&D and selling, general and administrative expenses increased. FY 2017 interest expense rose to $12.8 million, principally because of the convertible notes.
- Operating cash flow increased to $92.0 million. Financing cash flow included $389.0 million of net convertible-note proceeds; cash and cash equivalents increased $347.0 million during the year.
Outlook, risks and unusual items
- Management expected continued operating losses while expanding commercialization, R&D, manufacturing and infrastructure. It stated available liquidity, anticipated commercial cash generation and the credit facility were expected to fund requirements through at least February 27, 2019. The filing provides no numerical revenue or earnings guidance.
- The company was building a second manufacturing facility in Mesa, Arizona, and anticipated beginning production of initial components in 2018, subject to FDA approval. Capacity expansion, facility qualification, manufacturing yields and supply constraints remained risks.
- Medicare established a therapeutic CGM durable-medical-equipment classification in 2017, with coverage subject to conditions. Broad reimbursement remained uncertain and private-payor policies could be restrictive. Two distributors accounted for approximately 14% and 17% of FY revenue, respectively.
- A voluntary Class I recall related to receiver audible alarms and alerts was closed by the FDA on August 11, 2017; the company reported implementing a solution. Product reliability, regulatory compliance, competition, and single-source component suppliers remain material risks.
- Patent litigation involving AgaMatrix and a separate patent action by Arbmetrics remained unresolved; the company reported no accrual for these matters at year-end. The filing states outcomes and potential costs could not be assessed.
- The 2017 net loss included a $9.2 million loss on disposal of machinery and equipment, primarily recorded in R&D, associated with changes in the product portfolio. The Tax Cuts and Jobs Act accounting included provisional deferred-tax adjustments offset by a valuation allowance, with no net tax expense from that remeasurement.
- Ernst & Young issued an unqualified opinion on the financial statements; management and the auditor reported effective internal control over financial reporting as of year-end.
Investor verification priorities
- Check the audited financial statements and notes for the distinction between cash and cash equivalents ($441.5 million) and total cash plus marketable securities ($548.6 million), and for the convertible notes’ cash, stock or combination settlement terms.
- Verify that revenue growth and gross-margin improvement persist while operating expenses rise, and assess sensor recurring-sales trends and seasonality.
- Track Medicare and commercial-payor coverage, reimbursement terms, and the contribution and ongoing dependence on the two largest distributors.
- Monitor Mesa facility qualification and ramp-up, product supply, quality and warranty trends, and any further FDA actions or product notifications.
- Follow the patent cases, potential note dilution or cash settlement, and the company’s ability to fund operations beyond management’s stated liquidity horizon.