01—Abstract
Summary
Summary of the 10-K filed February 23, 2016. Cited figures are marked; the original filing is the authoritative source.
DexCom's fiscal 2015 10-K shows a company in a rapid commercial ramp, but one that is still deeply unprofitable.
Total revenue rose 55% to $402.0 milliona (from $259.2 million), driven by product revenue of $400.7 million, up 56%. Gross margin held strong at roughly 69% (gross profit of $278.4 million), and the company is approaching a self-funding model: operating cash flow turned positive at $49.0 million, up from $23.6 million. However, operating expenses grew even faster, rising 70% to $335.5 million, so the operating loss widened to $57.1 million from $21.5 million, and net loss reached $57.6 million, or $0.72 per share.
Note that about $36.5 millionb of R&D expense was non-cash, tied to the issuance of shares to Verily under the August 2015 collaboration, and share-based compensation totaled $82.7 million. Excluding these non-cash items, the cash burn profile is considerably better than the headline loss suggests. The balance sheet strengthened, with cash, equivalents, and short-term securities of $115.2 million, working capital of $164.4 million, and stockholders' equity of $221.2 million after equity issuances.
Management states this liquidity is sufficient through at least December 31, 2016, though the company has an accumulated deficit of $555.4 millionc and warns it may need additional financing, which could be dilutive. Revenue concentration is significant: distributors Byram and Edgepark accounted for roughly 18% and 11% of total revenue, respectively. The most important near-term risk is regulatory and product-quality related.
On February 23, 2016, DexCom issued a customer notification about a problem with the audible alarms and alerts on its G4 PLATINUM and G5 Mobile receivers, which could cause users to miss severe hypoglycemic or hyperglycemic events. The company is developing a fix, and its financial impact is not yet known. Investors should also weigh the Medicare reimbursement gap, the lack of a national coverage decision, and the dependence on a small number of single-source suppliers.
02—Key points
Key Highlights
- Total revenue grew 55% to $402.0 million in 2015, with product revenue of $400.7 million (up 56%), led by growth in disposable sensors (about 70% of product revenue) and the G4 PLATINUM and G5 Mobile systems.
- Gross profit increased to $278.4 million, a gross margin of about 69%, while operating expenses rose 70% to $335.5 million, widening the operating loss to $57.1 million from $21.5 million.
- Net loss was $57.6 million ($0.72 per share), which includes a $36.5 million non-cash R&D charge from shares issued to Verily Life Sciences and $82.7 million in share-based compensation.
- Operating cash flow turned positive at $49.0 million (vs. $23.6 million in 2014). Cash, equivalents, and short-term securities totaled $115.2 million, with management saying this funds operations through at least December 31, 2016.
- Customer concentration is notable: distributors Byram (18% of revenue) and Edgepark (11%) together accounted for about 29% of 2015 total revenue.
- On February 23, 2016, DexCom issued a customer notification regarding audible alarm and alert failures on its G4 PLATINUM and G5 Mobile receivers. The company is implementing a fix, and the financial impact is not yet quantified.
- Reimbursement remains a key constraint. There is no Medicare national coverage decision, and the seven largest private payors have coverage policies that are often restrictive. Management has negotiated contracted rates with all seven.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2015, Dexcom Inc lost $0.14.
- Revenue$400.7M100.0%
- Cost of revenue−$122.3M30.5%
- Gross profit$278.4M69.5%
- Operating costs−$335.5M83.7%
- Operating income−$57.1M14.3%
- Interest, other & tax−$500,0000.1%
- Net income−$57.6M14.4%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 23, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $400.70M$257.10M | +55.9% |
| Cost of Revenue | $123.60M$82.30M | +50.2% |
| Gross Profit | $278.40M$176.30M | +57.9% |
| R&D Expenses | $137.50M$69.40M | +98.1% |
| SG&A Expenses | $198.00M$128.40M | +54.2% |
| Operating Expenses | $335.50M$197.80M | +69.6% |
| Operating Income | -$57.10M-$21.50M | −165.6% |
| Interest Expense | $400K$800K | −50.0% |
| Net Income | -$57.60M-$22.40M | −157.1% |
| EPS (Basic) | $-0.18$-0.07 | −140.0% |
| Shares Outstanding (Basic) | 319.20M300.80M | +6.1% |
05—Questions
Frequently Asked Questions
Is DexCom approaching profitability, and what is driving the net loss?
Gross profit is strong and cash flow from operations turned positive ($49.0 million), but the company is still reporting losses. The 2015 net loss of $57.6 million reflects a large increase in operating expenses, which grew to $335.5 million. Key drivers included a $36.5 million non-cash charge for Verily-related shares, $82.7 million in total share-based compensation, and higher headcount and marketing costs. Management expects continued losses as it funds commercialization and R&D, while its ability to reach sustained profitability depends on revenue growing enough to cover its cost structure.
Does DexCom have enough cash to continue operating, and might it need to raise more capital?
As of December 31, 2015, DexCom had $115.2 million in cash, equivalents, and short-term securities and $164.4 million in working capital. Management believes this is sufficient through at least December 31, 2016. However, the company has an accumulated deficit of $555.4 million and says it may need additional capital to fund next-generation products or new markets. Any equity raise could dilute shareholders, and debt could carry restrictive covenants. The Silicon Valley Bank and Oxford Finance loan agreement also restricts dividends and additional borrowing, and it contains covenants that could accelerate repayment if breached.
What is the February 2016 customer notification about, and why does it matter?
On February 23, 2016, DexCom notified customers of an issue with the audible alarms and alerts on its G4 PLATINUM and G5 Mobile receivers. A failure of these alarms may prevent users from detecting severe low or high glucose events, which poses a patient safety risk. Customers were advised to test their alarms every few days. DexCom is developing a solution and says the FDA is aware of the notice. The filing notes that the effects could differ from initial estimates and could include product recalls, regulatory action, liability claims, or reputational harm. The financial impact cannot yet be determined.
How concentrated is DexCom's revenue and customer base?
Revenue is heavily concentrated among a few distributors. Byram accounted for about $74.1 million (18% of 2015 total revenue) and Edgepark about $42.6 million (11%). Together they represent roughly 29% of revenue. Stocking distributors accounted for 61% of total revenue. Loss of, or reduced volume from, these distributors could materially affect results. On the receivables side, two customers represented 23% and 13% of net accounts receivable at year-end 2015. Revenue is also concentrated in the United States, which represented 86% of total revenue.
What are the main risks to DexCom's growth outlook?
The main risks include limited Medicare coverage, since there is no national coverage decision for CGM devices, and restrictive private payor policies that require extensive documentation. Competition is intensifying from Roche, LifeScan (J&J), Abbott, Medtronic, and others, several of which have greater resources and brand recognition. The company depends on single-source suppliers for key components such as ASICs and polymers, so supply disruptions could limit production. Regulatory risk is also significant. The G4 and G5 systems are PMA devices, the company has a history of FDA warning letters, and the current alarm issue could lead to further scrutiny. Finally, the company's products are not yet labeled as a replacement for finger-stick testing, which limits the market opportunity.
06—Continue