Business context and reporting period
DexCom, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2013. The company develops and sells continuous glucose monitoring (CGM) systems for people with diabetes and healthcare providers. Results are compared with the three and nine months ended September 30, 2012. Amounts below are in millions of dollars unless stated otherwise.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $42.9 | $23.1 | $108.3 | $66.6 |
| Gross profit | $27.6 | $8.4 | $66.0 | $29.0 |
| Gross margin | 64.3% | 36.4% | 60.9% | 43.5% |
| Operating expenses | $33.4 | $25.7 | $92.6 | $76.4 |
| Operating loss | $(5.8) | $(17.3) | $(26.6) | $(47.4) |
| Net loss | $(6.0) | $(17.3) | $(27.2) | $(46.0) |
| Diluted net loss per share | $(0.08) | $(0.25) | $(0.38) | $(0.67) |
Product revenue was $42.5 million in Q3 and $105.8 million for the first nine months. Cash, cash equivalents and short-term marketable securities totaled $47.6 million at September 30, 2013, excluding $1.0 million of restricted cash; working capital was $54.3 million. Total debt was $7.0 million, comprising $1.8 million current and $5.2 million long-term. The $15 million revolving credit line was undrawn.
For the nine months, operating activities used $2.0 million of cash, versus $22.5 million in 2012; investing activities provided $20.4 million and financing activities provided $6.9 million. Cash and cash equivalents increased by $25.3 million to $33.4 million, in part reflecting maturities of marketable securities.
Material changes versus the prior comparable period
- Q3 revenue rose 85.7%; nine-month revenue rose 62.6%. Product revenue growth was attributed primarily to higher sales volume, including the G4 PLATINUM commercial launch in October 2012.
- Gross margin improved substantially, reflecting higher revenue, a richer mix of the higher-margin G4 PLATINUM system, and, in Q3, favorable manufacturing absorption from building inventory.
- Operating losses narrowed, but operating expenses increased: Q3 R&D was $11.8 million and SG&A was $21.6 million; nine-month R&D was $32.2 million and SG&A was $60.4 million. SG&A growth was primarily tied to sales and IT costs supporting commercialization, including higher payroll, commissions and share-based compensation.
- Development grant and other revenue declined to $0.4 million in Q3 and $2.5 million year to date, mainly following termination of the Roche agreement and completion of Edwards development work.
- Q3 warranty charges were $2.1 million, versus $0.4 million a year earlier. The company attributed the additional accrual to actual and expected warranty costs for G4 PLATINUM; the ending warranty accrual rose to $1.3 million from $0.3 million a year earlier.
Outlook, management commentary, risks and unusual items
- Management expects continued losses as it invests in commercialization, R&D, manufacturing and infrastructure. It believed available working capital, cash resources and projected partnership contributions would fund anticipated needs through at least September 30, 2014. No specific revenue or earnings guidance was provided.
- An amended term-loan draw period makes up to $13 million of additional term-loan funds available by request from January 1 through March 31, 2014. The loan is secured by substantially all assets, with a negative pledge on intellectual property; debt covenants and potential future financing needs are risks.
- The $4.0 million Helmsley Trust grant for Gen 6 sensor development is milestone-based. Only $0.1 million had been earned through September 30, 2013. Upon successful commercialization, DexCom must pay royalties of up to $2.0 million annually for four years or elect a $6.0 million one-time payment.
- Regulatory milestones include U.S. FDA submissions for a pediatric indication and professional-use G4 PLATINUM, and for DexCom SHARE; approvals and timing are uncertain. Medicare had no national coverage decision for CGM, and private-payor policies could impose restrictive eligibility and documentation requirements.
- Distributor-stocked shipments represented 47% of Q3 revenue and 43% of nine-month revenue, compared with 37% and 35% in 2012. DexCom stated distributor inventory was limited at quarter-end; shipment-based revenue recognition nevertheless makes distributor shipments and sell-through worth monitoring.
- The long-running Abbott patent dispute remained stayed pending patent-office proceedings. The company said outcome and potential costs could not be assessed and recorded no accrual. It also disclosed risks to its own patent rights from reexaminations and possible interference proceedings.
- Other notable items include $18.0 million of nine-month share-based compensation and $47.1 million of unrecognized compensation costs expected to be recognized through 2017. The filing states that operating losses have occurred since inception and that additional financing may be needed if plans or cash requirements change.
Important facts for investors to verify
- Whether product growth and margin improvement persist, and whether sales reflect end-customer demand rather than distributor inventory purchasing.
- Whether manufacturing capacity, product quality and warranty costs support continued growth; review the elevated G4 PLATINUM warranty accrual.
- Progress and timing of FDA decisions, private-payor coverage and reimbursement, and any Medicare coverage developments.
- Liquidity and cash burn against management’s funding horizon; confirm availability and terms of the additional term-loan draw and compliance with debt covenants.
- Developments in the Abbott litigation and patent-office proceedings, including any financial or commercial consequences.
- Achievement of Helmsley grant milestones and the potential royalty obligation if Gen 6 is commercialized.