DexCom, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. DexCom develops and sells continuous glucose monitoring (CGM) systems for people with diabetes and healthcare providers.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $142.3 million | $116.2 million; up $26.1 million (22%) |
| Gross profit / margin | $94.1 million / 66% | $75.1 million / 65% |
| Research and development | $48.1 million | $32.2 million |
| Selling, general and administrative | $86.4 million | $62.1 million |
| Operating loss | $40.4 million | $19.2 million |
| Net loss / diluted loss per share | $41.7 million / $0.49 | $19.2 million / $0.23 |
| Cash from operations | $0.3 million | $(0.2) million |
Revenue growth primarily reflected higher disposable sensor sales as the installed base grew, plus sales of durable systems. Sensors and durable systems each represented approximately 70% and 30% of revenue, respectively, in both periods. Gross margin improved by approximately one percentage point. Operating expenses grew substantially, driven by hiring and related compensation, sales and customer support, marketing, infrastructure, clinical trials, and product development.
At March 31, 2017, cash and cash equivalents were $153.5 million, short-term marketable securities were $27.6 million, and working capital was $158.8 million. Total cash, equivalents, and securities were $181.1 million. The company reported $75.0 million of short-term borrowings under its revolving facility, drawn for a six-month term at a weighted average rate of 3.2%; $125.0 million remained available. Current liabilities were $171.7 million and total liabilities were $189.4 million. Capital expenditures were $22.9 million; operating cash flow less capital expenditures was negative $22.6 million. Cash increased by $59.0 million during the quarter, largely reflecting the borrowing.
Changes, outlook, and key risks
- Compared with Q1 2016, revenue and gross profit increased, but operating and net losses more than doubled as operating expenses rose faster than revenue.
- Management expects continued losses as it expands commercialization, research and development, clinical work, and manufacturing capacity. It believes available liquidity, projected operating cash contributions, and the credit facility will fund anticipated needs through at least March 31, 2018. The filing provides no specific revenue or earnings guidance.
- DexCom cites first-quarter seasonality: sales typically ease from Q4 due to insurance deductible resets and use of flexible spending accounts.
- Near-term obligations include $61.8 million of vendor purchase commitments due within one year and $62.5 million of lease payments over all disclosed periods. The $75.0 million borrowing is also classified as due within one year. Mesa manufacturing-facility construction was expected to finish in mid-2017; the company warned that delays in completing and qualifying the facility could constrain future supply.
- Risks include reimbursement coverage and administrative hurdles, competition and product adoption, regulatory approval and clinical-trial delays, manufacturing scale-up and single-source suppliers, product quality and recalls, and continued operating losses or financing needs. The filing notes that Medicare had established a therapeutic CGM category and issued interim claim instructions, but broad reimbursement remained subject to further hurdles.
- AgaMatrix patent litigation remained unresolved: review petitions concerning two patents had been granted and most court activity was stayed pending review; a petition concerning a third patent was pending. DexCom also had a patent suit against AgaMatrix. No litigation amounts were accrued, and outcomes and potential costs could not be assessed.
- The prior voluntary Class I recall concerning receiver audible alarms and alerts had a solution implemented; DexCom said it believed required actions were complete and was awaiting the FDA’s response.
- Share-based compensation was $30.6 million, versus $25.1 million a year earlier. Adoption of ASU 2016-09 included recognition of $161.0 million of deferred tax assets offset by a valuation allowance, with no net financial-statement impact; the company also recorded a $0.6 million cumulative adjustment related to forfeitures.
Important facts for investors to verify
- Whether revenue growth, particularly recurring sensor sales, can outpace growth in operating expenses and improve profitability.
- Whether reimbursement access, including Medicare coverage implementation, expands without materially reducing realized prices.
- Whether manufacturing capacity and the Mesa facility are completed and qualified on schedule, and whether suppliers can support demand.
- The maturity and terms of the $75.0 million short-term borrowing, remaining credit availability, and compliance with facility covenants.
- Developments in the AgaMatrix litigation and the FDA’s response regarding the receiver alarm-and-alert recall actions.
- Cash use, capital spending, purchase commitments, and whether the company’s liquidity outlook remains sufficient to fund operations through at least March 31, 2018.