DexCom, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Financial amounts below are in millions of dollars, except per-share data.
Business context
DexCom develops and sells continuous glucose monitoring systems for people with diabetes and is also developing hospital-use glucose monitoring products. The filing covers its SEVEN PLUS product, the G4 system, development partnerships, and its March 2012 acquisition of diabetes-data software company SweetSpot.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $23.45 | $21.42 | $43.55 | $35.59 |
| Product revenue | $21.52 | $15.18 | $40.14 | $28.32 |
| Development and other revenue | $1.93 | $6.24 | $3.40 | $7.27 |
| Gross profit | $11.24 | $11.87 | $20.63 | $16.99 |
| Operating expenses | $25.89 | $19.26 | $50.68 | $36.25 |
| Operating loss | $(14.65) | $(7.39) | $(30.05) | $(19.26) |
| Net loss | $(14.69) | $(7.37) | $(28.76) | $(19.22) |
| Net loss per share, diluted | $(0.21) | $(0.11) | $(0.42) | $(0.30) |
- Product revenue rose about 42% in both the quarter and first half, primarily on higher sales volume. Total revenue rose 9% in Q2 and 22% in the first half; lower development revenue partly offset product growth.
- Gross margin was about 48% in Q2 2012 versus 55% a year earlier; first-half gross margin was about 47% versus 48%. Q2 product gross profit improved, but lower development revenue contributed to the decline in overall gross profit.
- Operating expenses increased substantially: R&D rose to $10.5 million in Q2 and $20.2 million for the half; SG&A rose to $15.4 million and $30.5 million, respectively. Management cited product development, commercialization, staffing, consulting, commissions, and share-based compensation.
- First-half operating cash use was $16.5 million versus $11.8 million in 2011. Investing activities provided $18.4 million, mainly reflecting marketable-security maturities; financing provided $1.6 million. Cash and cash equivalents ended the period at $6.0 million.
- Cash, cash equivalents, and short-term marketable securities totaled $61.2 million, excluding $1.0 million restricted cash. Working capital was $67.0 million. Total liabilities were $19.2 million; the filing reports no material funded debt balance.
Material changes, outlook, and risks
- SweetSpot was acquired for an estimated initial purchase price of $6.1 million, including $3.9 million in stock and $2.2 million in contingent consideration. The purchase-price allocation remained preliminary. The acquisition added goodwill and intangible assets; contingent consideration was $1.7 million at quarter-end.
- DexCom received CE Mark approval for G4 on June 14, 2012, enabling sales in eligible markets outside the United States. It filed a U.S. FDA premarket approval application for G4 on April 9, 2012; U.S. commercial approval had not yet been obtained.
- Management expected continued losses and stated that existing resources and projected partnership contributions were expected to fund operations through at least June 30, 2013. It warned that additional capital might be needed and could dilute shareholders. No specific revenue or earnings guidance was provided.
- Key risks include limited reimbursement and no Medicare national coverage decision, manufacturing capacity and single-source supplier dependence, regulatory and clinical-development uncertainty, product acceptance and competition, and the possibility of further financing needs.
- The Abbott patent dispute remained stayed pending patent reexaminations. The company said the outcome and potential costs could not be assessed and had accrued no amounts. It also disclosed $11.0 million in vendor purchase commitments due within one year.
- The FDA completed a facility inspection in July 2012 without observations or required corrective action. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether G4 receives FDA approval on a commercially useful timeline and whether the European launch drives incremental sales.
- Whether product revenue growth can outpace operating-expense growth and improve margins and cash burn.
- How reimbursement coverage, distributor concentration, manufacturing capacity, and key supplier availability affect sales and fulfillment.
- Developments in the Abbott litigation and patent proceedings, plus final SweetSpot purchase accounting and contingent payments.
- Whether the stated liquidity runway remains adequate if losses, investment needs, or development timelines differ from plan.