How is DexCom generating revenue, and how much of it comes from product sales versus partnerships?

In 2009, total revenue was $29.7 million: $18.0 million from product sales (SEVEN and SEVEN PLUS durable systems and disposable sensors, sold via a direct U.S. sales force and distributors) and $11.7 million from development grant and other revenue. The development revenue comes primarily from the Edwards Lifesciences collaboration ($11.1 million recognized in 2009) and the Animas joint development agreement. Partnership revenue is tied to development milestones and may not recur at the same level, so product sales are the core measure of commercial traction.

Is DexCom close to profitability, and how long can it fund operations?

Not yet. The company lost $53.5 million in 2009 and expects continued losses and rising cash use as it scales commercialization and manufacturing. Management states that cash, short-term securities, January 2010 offering proceeds, and partnership payments should cover needs for at least the next twelve months. Beyond that, additional equity or debt financing may be required, which could dilute shareholders or create senior claims.

What are the biggest legal and regulatory risks?

The most significant is Abbott's patent infringement lawsuit, which seeks a declaratory judgment that DexCom's CGM infringes several Abbott patents. The case is stayed pending USPTO reexamination, but Abbott could seek a preliminary injunction that would halt sales of the SEVEN PLUS. Regulatory risk is also present: a February 2010 FDA post-approval inspection produced a Form 483 with several observations that the company is addressing. Any failure to achieve substantial compliance could lead to warning letters, delays in approvals, or product restrictions.

Will reimbursement limit adoption of the SEVEN PLUS?

Potentially, yet. Medicare has not issued a national coverage decision for CGM devices, so patients rely on private payors, which may impose restrictive coverage policies requiring documentation of medical necessity. Coverage exists among the seven largest private payors by covered lives, and DexCom has contracted rates with five of them. Patients without covered insurance bear the full cost, which may slow uptake given the product's need for ongoing sensor purchases and finger-stick calibration.

What dilution or capital-structure issues should investors monitor?

The company issued 15.99 million shares in February 2009 and 4.03 million shares in January 2010, and in early 2010 exchanged $20.3 million of convertible notes for 2.7 million shares. About $39.8 million of the 4.75% convertible notes remained outstanding as of March 5, 2010, convertible at $7.80 per share into roughly 5.1 million shares, with a cap of about 6.1 million shares. The stockholders' deficit of $18.4 million and the 2012 put date for the notes are also points to monitor for future financing needs.

DXCM 10-K FY2009 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 2010. Cited figures are marked; the original filing is the authoritative source.

DexCom's FY2009 10-K shows a company still in early commercialization of its SEVEN PLUS continuous glucose monitor (CGM).

Product revenue rose to $18.0 million^a in 2009 from $8.1 million in 2008, driven by higher volume and pricing, and the company estimates a 37% U.S. CGM market share. Total revenue more than tripled to $29.7 million, but that growth was inflated by $11.7 million of non-recurring-style development grant revenue from the Edwards Lifesciences and Animas collaborations, rather than by product sales alone. Product gross margin was essentially breakeven (a $180,000 loss), and the company still posted a net loss of $53.5 million (EPS of -$1.21), with an accumulated deficit of $291.2 million and stockholders' deficit of $18.4 million.

Liquidity is thin relative to burn. Operating cash outflow was $39.4 million^b in 2009, and year-end cash plus short-term securities was $28.0 million, with working capital of $18.1 million. Management says cash should be sufficient for at least twelve months, helped by a February 2009 offering (about $45.6 million net) and a January 2010 offering (about $33.1 million net).

Management also expects operating cash use to rise significantly in coming years. The company has $60 million^c of 4.75% convertible notes due 2027, of which $39.8 million was outstanding as of March 5, 2010 after exchanges for equity, and these convert at $7.80 per share. Key risks are concentrated.

Medicare has not issued a national coverage decision, so reimbursement depends on private payors, several of whom have restrictive policies. Abbott has an ongoing patent infringement suit that could lead to a preliminary injunction against the SEVEN PLUS, which is the company's only commercially approved ambulatory product.

The February 2010 FDA post-approval inspection produced a Form 483, and the company is remediating the observations. Single-source suppliers and a single San Diego manufacturing site add further operational risk.

02—Key points

Key Highlights

Product revenue grew 122% to $18.0 million in 2009 (from $8.1 million), while total revenue rose to $29.7 million including $11.7 million in development grant and other revenue.
Product gross margin was roughly breakeven (a $180,000 loss), improving from a $5.3 million product gross loss in 2008, but the company remains unprofitable overall.
Net loss narrowed to $53.5 million in 2009 from $58.9 million in 2008; EPS was -$1.21, with an accumulated deficit of $291.2 million.
Operating cash burn was $39.4 million in 2009; year-end cash and short-term securities of $28.0 million plus January 2010 offering proceeds (~$33.1 million net) fund operations for at least twelve months per management.
Estimated 37% U.S. share of the continuous glucose monitoring market (October 2009 dQ&A panel report), with SEVEN PLUS the leading product among respondents.
Medicare has not issued a national coverage decision; seven largest private payors have coverage policies, and contracted rates exist with five of them, though many policies are restrictive.
Abbott patent infringement litigation remains stayed pending USPTO reexaminations; an adverse outcome could lead to an injunction against the SEVEN PLUS, its only commercially approved ambulatory product.
Convertible notes ($60M, 4.75%, due 2027) partly exchanged for equity in early 2010; $39.8M outstanding as of March 5, 2010, convertible at $7.80 per share, creating dilution risk.

03—One dollar

04—Financials

Financial Highlights

10-KFY2009filed March 9, 2010

Revenue$29.69M12.3% Gross Margin Net Income-$53.52M-180.3% Net Margin EPS (Diluted)$-0.30 Cash & Equivalents$3.60M Free Cash Flow-$42.38M

Financial Statements

Revenue	$29.69M
Cost of Revenue	$26.03M
Gross Profit	$3.66M
R&D Expenses	$14.29M
SG&A Expenses	$35.20M
Operating Expenses	$49.49M
Operating Income	-$45.83M
Interest Expense	$8.04M
Net Income	-$53.52M
EPS (Basic)	$-0.30

05—Questions

Frequently Asked Questions

How is DexCom generating revenue, and how much of it comes from product sales versus partnerships?
In 2009, total revenue was $29.7 million: $18.0 million from product sales (SEVEN and SEVEN PLUS durable systems and disposable sensors, sold via a direct U.S. sales force and distributors) and $11.7 million from development grant and other revenue. The development revenue comes primarily from the Edwards Lifesciences collaboration ($11.1 million recognized in 2009) and the Animas joint development agreement. Partnership revenue is tied to development milestones and may not recur at the same level, so product sales are the core measure of commercial traction.
Is DexCom close to profitability, and how long can it fund operations?
Not yet. The company lost $53.5 million in 2009 and expects continued losses and rising cash use as it scales commercialization and manufacturing. Management states that cash, short-term securities, January 2010 offering proceeds, and partnership payments should cover needs for at least the next twelve months. Beyond that, additional equity or debt financing may be required, which could dilute shareholders or create senior claims.
What are the biggest legal and regulatory risks?
The most significant is Abbott's patent infringement lawsuit, which seeks a declaratory judgment that DexCom's CGM infringes several Abbott patents. The case is stayed pending USPTO reexamination, but Abbott could seek a preliminary injunction that would halt sales of the SEVEN PLUS. Regulatory risk is also present: a February 2010 FDA post-approval inspection produced a Form 483 with several observations that the company is addressing. Any failure to achieve substantial compliance could lead to warning letters, delays in approvals, or product restrictions.
Will reimbursement limit adoption of the SEVEN PLUS?
Potentially, yet. Medicare has not issued a national coverage decision for CGM devices, so patients rely on private payors, which may impose restrictive coverage policies requiring documentation of medical necessity. Coverage exists among the seven largest private payors by covered lives, and DexCom has contracted rates with five of them. Patients without covered insurance bear the full cost, which may slow uptake given the product's need for ongoing sensor purchases and finger-stick calibration.
What dilution or capital-structure issues should investors monitor?
The company issued 15.99 million shares in February 2009 and 4.03 million shares in January 2010, and in early 2010 exchanged $20.3 million of convertible notes for 2.7 million shares. About $39.8 million of the 4.75% convertible notes remained outstanding as of March 5, 2010, convertible at $7.80 per share into roughly 5.1 million shares, with a cap of about 6.1 million shares. The stockholders' deficit of $18.4 million and the 2012 put date for the notes are also points to monitor for future financing needs.

06—Continue

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