01—Abstract
Summary
Summary of the 10-K filed March 11, 2008. Cited figures are marked; the original filing is the authoritative source.
DexCom's 2007 annual report describes a early-commercialization medical device company focused on continuous glucose monitoring (CGM).
Its second-generation SEVEN system, approved by the FDA on May 31, 2007 for up to seven days of continuous use, began commercial launch in Q3 2007 and became the company's only meaningful revenue driver going forward. Revenue reached $4.6 milliona in 2007, up from $2.2 million in 2006, but cost of sales of $12.7 million produced a negative gross margin of $(8.1) million. Net loss was $45.9 million, with an accumulated deficit of $176.3 million, and management expects operating losses to continue for the foreseeable future as commercialization, clinical development and sales expansion proceed.
The balance sheet and liquidity picture is the central investor concern. Cash, cash equivalents and short-term marketable securities totaled $64.3 millionb at year-end 2007, against working capital of $58.8 million and stockholders' equity of only $7.1 million, down from $56.8 million a year earlier. The drop reflects the $60 million 4.75% convertible senior notes issued in March 2007, which are classified as long-term debt (about $61.0 million on the balance sheet).
Management states current resources are sufficient to fund 2008 needs, but it acknowledges that cash used in operations is expected to rise significantly in coming years and that additional financing may be required, potentially dilutive. The company also notes a proposed FASB accounting change that could materially increase non-cash interest expense on the convertible notes. Key risks extend beyond financing.
Reimbursement is not yet broad: SEVEN is generally not covered by Medicare or private payors, so patients bear the cost until coverage is established. Management has also disclosed field failures, manufacturing scale-up difficulties with periods of backorder, and a patent infringement lawsuit from Abbott Diabetes Care that is currently stayed pending USPTO reexamination, with an adverse outcome including a preliminary injunction a possibility.
The company's FDA labeling is adjunctive rather than a replacement for finger-stick testing, which limits its addressable market and reimbursement prospects. Investors should weigh these against the company's early but growing installed base and its pipeline, including a planned pediatric indication, an in-hospital intravenous sensor, and integration partnerships with Animas (Johnson & Johnson) and Insulet.
02—Key points
Key Highlights
- Revenue grew to $4.6M in 2007 from $2.2M in 2006, but gross margin remained negative at $(8.1)M as cost of sales ($12.7M) exceeded revenue.
- Net loss of $45.9M in 2007 (vs. $46.6M in 2006) and accumulated deficit of $176.3M; management expects continued losses and rising cash burn.
- Cash and short-term securities of $64.3M and working capital of $58.8M at year-end 2007; operating cash outflow was $33.2M.
- $60M 4.75% convertible senior notes due 2027 issued March 2007 (conversion price ~$7.80) drove long-term obligations to $61.0M and cut stockholders' equity to $7.1M.
- SEVEN 7-day CGM approved May 31, 2007 and launched Q3 2007; it is the company's only commercial product going forward and is sold only in the U.S. so far.
- Reimbursement remains limited: HCPCS billing codes took effect January 1, 2008, but SEVEN lacks broad Medicare or private payor coverage, so patients largely self-pay.
- Abbott Diabetes Care patent infringement litigation remains stayed pending USPTO reexamination; an adverse outcome could materially impair the business.
03—Questions
Frequently Asked Questions
Is DexCom close to profitability, and how long can it fund operations?
Not near term. The company lost $45.9M in 2007 and gross margin is negative, so it is far from profitable. Management believes its $64.3M of cash and short-term securities, together with its $3.0M additional equipment-loan availability, will fund 2008 needs. However, it expects operating cash use to increase significantly in coming years and may need to raise additional equity or debt, which could dilute shareholders.
What does the $60M convertible note mean for shareholders?
The 4.75% notes, convertible at about $7.80 per share, could add roughly 7.7 million shares (up to about 9.2 million under adjustment provisions) if converted, diluting existing holders. Holders can require repurchase on specified dates (March 2012, 2017, 2022) or upon a fundamental change, which creates potential cash demands. The company also purchased call spread options to offset dilution, and a proposed FASB rule could require higher non-cash interest expense.
What are the main barriers to SEVEN's commercial growth?
The main barriers are limited reimbursement, since SEVEN is generally not covered by Medicare or private payors; its labeling as an adjunctive device rather than a replacement for finger-stick testing; the invasiveness of sensor insertion; and manufacturing scale-up challenges, including backorders and field failures such as sensor initialization and electronics failures. The company is pursuing payor coverage and the JDRF-sponsored reimbursement trial as potential catalysts.
What legal risks does DexCom face?
Abbott Diabetes Care has sued DexCom for patent infringement, seeking a declaratory judgment that the STS infringes several Abbott patents, and has added further claims. The case is stayed pending USPTO reexamination of the patents, which have received non-final rejections. DexCom intends to contest vigorously, but the outcome and potential fees cannot be assessed, and Abbott could seek a preliminary injunction against sales if the stay is lifted.
04—Continue