DexCom, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are to the same periods in 2012. Amounts are in millions of dollars except per-share data. DexCom develops and commercializes continuous glucose monitoring (CGM) systems, principally its G4 PLATINUM ambulatory product.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $35.8 | $23.4 | $65.4 | $43.5 |
| Product revenue | $35.5 | $21.5 | $63.3 | $40.1 |
| Gross profit | $21.9 | $11.2 | $38.4 | $20.6 |
| Gross margin | 61.2% | 47.9% | 58.7% | 47.4% |
| Operating loss | $(9.9) | $(14.7) | $(20.8) | $(30.1) |
| Net loss | $(10.1) | $(14.7) | $(21.2) | $(28.8) |
| Basic and diluted loss per share | $(0.14) | $(0.21) | $(0.30) | $(0.42) |
Product revenue grew 65% in Q2 and 58% in the first half, mainly from higher durable-system and sensor volume, including the G4 PLATINUM launch. Management attributed improved product gross profit to volume and a higher-margin product mix. Total revenue growth was partly offset by lower development and other revenue.
- Expenses: Q2 operating expenses were $31.8, up from $25.9; first-half expenses were $59.2, up from $50.7. Higher selling, general and administrative costs reflected commercialization, sales and IT needs; research and development also increased.
- Cash flow: First-half operating cash use was $3.6, versus $16.5 in 2012. Investing activities provided $18.7, primarily reflecting marketable-security maturities, while financing provided $5.0. Cash and cash equivalents rose to $28.2 from $8.1 at year-end.
- Liquidity: Cash, cash equivalents and short-term securities totaled $46.4, excluding $1.0 of restricted cash; working capital was $53.1. Management believed resources would fund operations through at least June 30, 2014.
- Debt: Long-term debt, including its current portion, was $7.0 at June 30. The $15.0 revolving facility was undrawn. The term loan agreement provided up to $13.0 in additional term-loan availability; an August 2013 amendment moved its draw period to January–March 2014. Debt is secured by substantially all assets, with a negative pledge on intellectual property.
Material changes and business developments
- Q2 development and other revenue fell to $0.3 from $1.9; first-half revenue was $2.1 versus $3.4. The filing cites Roche’s termination of its development agreement and completion of DexCom’s development work under the Edwards collaboration. Roche termination ended further milestone and development payments.
- DexCom continued a limited European launch of the G4 PLATINUM pediatric indication, approved in February 2013 for ages two and older. A U.S. pediatric indication supplement was submitted to the FDA in Q1 2013; approval was not reported in this filing.
- In July 2013, DexCom received a milestone-based $4.0 Helmsley Trust grant for Gen 6 sensor development. Successful commercialization would trigger royalties of up to $2.0 annually for four years, or, at DexCom’s option, a one-time $6.0 payment.
- The Edgepark relationship generated approximately 15% of first-half revenue. Product shipped to distributors that stock inventory represented 40% of revenue in both the quarter and first half, versus 32% and 33%, respectively, a year earlier; DexCom reported limited distributor inventory at period end.
Outlook, risks and contingencies
Management expected continued losses as DexCom expanded commercialization, manufacturing and research and development. The filing gives no specific revenue, earnings or margin guidance. The stated liquidity outlook depends on operating plans and revenue progress; management cautioned that additional capital may be needed and might not be available on acceptable terms. If plans fall short, the company may reduce planned expense increases, potentially affecting business objectives.
- Reimbursement and adoption: Medicare had not adopted a national coverage decision for CGM devices. Private coverage policies could be restrictive, and customers without coverage may bear the cost themselves.
- Manufacturing and supply: Scaling output, maintaining yields and quality, and reliance on single-source suppliers could constrain product availability or raise costs.
- Regulatory and product risks: Further indications and products require regulatory progress; clinical, manufacturing or approval delays could hinder commercialization. The filing also describes possible sensor failures and other product-liability risks.
- Patent litigation: Abbott’s patent dispute and related patent-office proceedings remained unresolved. DexCom had accrued no amount because the outcome and potential fees could not be assessed.
- Other commitments: Vendor purchase commitments totaled $11.6 due within one year. The SweetSpot acquisition contingent-consideration liability was $2.7 at June 30, with up to 267,880 additional shares potentially issuable upon milestone achievement.
Most important facts for investors to verify
- Whether G4 PLATINUM sales and recurring sensor demand can sustain growth while the company expands manufacturing capacity.
- Whether reimbursement coverage broadens, including any Medicare decision, and how coverage requirements affect customer conversion and collections.
- Whether cash use, access to the amended term-loan draw and other funding remain consistent with management’s liquidity outlook.
- Progress on the U.S. pediatric indication and Gen 6 milestones, including the grant’s contingent royalty terms.
- Developments in the Abbott litigation and related proceedings, for which no liability was accrued.
- Whether distributor sales, particularly Edgepark and inventory-stocking distributors, remain durable and reflect underlying end-customer demand.