Is DexCom close to profitability?

Not on the evidence in this filing. Gross margin was negative in 2008 and 2007, operating losses grew to $52.8M, and management expects operating losses and cash use to rise significantly in coming years as commercialization and clinical programs expand. Development partner payments help offset some costs, but profitability depends on scaling manufacturing and achieving broad reimbursement.

Can the company fund operations without raising more capital?

Management believes that cash of $27.1M at year-end 2008, plus the roughly $45.6M February 2009 offering proceeds and expected partnership payments, will meet needs through 2009. Beyond 2009, the company says it may need additional financing, which could be dilutive or come with restrictive terms. The company's own risk factors emphasize that additional funding may not be available on acceptable terms.

What is the biggest legal risk?

Abbott Diabetes Care's patent infringement suit, combined with reexamination requests and a potential interference proceeding, is the most significant legal risk. The case is stayed pending Patent Office reexaminations, but Abbott could seek a preliminary injunction that would stop sales of the SEVEN, which is the company's only approved product. The company believes Abbott's claims lack merit but cannot estimate potential outcomes or costs.

How dependent is DexCom on reimbursement?

Highly dependent. The company's products are not covered by a Medicare national coverage decision, and private payor coverage policies that do exist are often restrictive and require medical-necessity documentation. Unless payors provide adequate coverage, patients may not use the products, and the company may need to accept lower net prices to secure contracts.

DXCM 10-K FY2008 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 5, 2009. Cited figures are marked; the original filing is the authoritative source.

DexCom's FY2008 10-K describes a early-commercialization medical device company developing continuous glucose monitoring (CGM) systems.

Revenue remains small: total 2008 revenue was $9.8 million^a (product revenue $8.1 million plus $1.7 million of development grant revenue), against product cost of sales of $13.4 million, so gross margin was negative at $(5.5) million. Operating loss widened to $52.8 million and net loss was $55.2 million, with an accumulated deficit of $231.4 million. Stockholders' equity turned negative, at a $(38.6) million deficit, and working capital fell to $17.1 million.

Cash, cash equivalents and short-term securities were $27.1 million^b at year-end, and operating cash burn was $37.5 million. The key near-term catalysts are the February 2009 FDA approval of the third-generation system (expected to be branded SEVEN PLUS), with commercial launch planned for Q1 2009, and a February 2009 follow-on equity offering of about 15.99 million shares that raised roughly $45.6 million. The Edwards Lifesciences collaboration (an $13.0 million upfront payment plus up to $23.5 million in milestones) and development agreements with Animas and Insulet add non-dilutive funding and partnership optionality.

Management states that existing resources should fund operations through 2009, but ongoing losses and rising cash needs mean further financing is likely. The principal risks for investors are concentrated and substantial. Abbott Diabetes Care has sued for patent infringement, and a preliminary injunction could halt sales of the SEVEN, which is the company's only commercially approved product.

Reimbursement remains limited, since there is no Medicare national coverage decision. The company also relies on sole-source suppliers, has had manufacturing scale-up and field-failure issues, and faces a pending FCC MICS band rule change that could require product re-engineering. The $60 million^c 4.75% convertible notes carry a 7.8 dollar conversion price and create dilution potential, and the FSP APB 14-1 restatement will likely raise reported interest expense.

02—Key points

Key Highlights

Revenue of $9.8M in FY2008 (product $8.1M, development grant $1.7M) versus $4.6M in FY2007, but gross margin remained negative at $(5.5)M.
Net loss of $55.2M (EPS $(1.87)) and accumulated deficit of $231.4M; operating cash burn of $37.5M in 2008.
Stockholders' equity turned to a $(38.6)M deficit at year-end 2008, down from $7.1M in 2007.
FDA approved the third-generation CGM (expected SEVEN PLUS) on February 13, 2009, with commercial launch planned for Q1 2009; CE Mark for SEVEN received November 2008.
February 2009 follow-on offering of ~16.0M shares raised ~$45.6M net, which supports the company's stated liquidity through 2009.
Edwards Lifesciences collaboration provides a $13.0M upfront payment and up to $23.5M in milestones for an in-hospital CGM; Animas and Insulet development agreements add partnership revenue.
Abbott patent infringement litigation and reexamination proceedings pose a material risk, including possible preliminary injunction against the SEVEN, its only approved product.

03—Questions

Frequently Asked Questions

Is DexCom close to profitability?
Not on the evidence in this filing. Gross margin was negative in 2008 and 2007, operating losses grew to $52.8M, and management expects operating losses and cash use to rise significantly in coming years as commercialization and clinical programs expand. Development partner payments help offset some costs, but profitability depends on scaling manufacturing and achieving broad reimbursement.
Can the company fund operations without raising more capital?
Management believes that cash of $27.1M at year-end 2008, plus the roughly $45.6M February 2009 offering proceeds and expected partnership payments, will meet needs through 2009. Beyond 2009, the company says it may need additional financing, which could be dilutive or come with restrictive terms. The company's own risk factors emphasize that additional funding may not be available on acceptable terms.
What is the biggest legal risk?
Abbott Diabetes Care's patent infringement suit, combined with reexamination requests and a potential interference proceeding, is the most significant legal risk. The case is stayed pending Patent Office reexaminations, but Abbott could seek a preliminary injunction that would stop sales of the SEVEN, which is the company's only approved product. The company believes Abbott's claims lack merit but cannot estimate potential outcomes or costs.
How dependent is DexCom on reimbursement?
Highly dependent. The company's products are not covered by a Medicare national coverage decision, and private payor coverage policies that do exist are often restrictive and require medical-necessity documentation. Unless payors provide adequate coverage, patients may not use the products, and the company may need to accept lower net prices to secure contracts.

04—Continue

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