01—Abstract
Summary
Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.
DexCom's fiscal 2016 10-K shows a company still in the investment phase of a growth story.
Total revenue rose 43% to $573.3 milliona (from $402.0 million), driven mainly by growth in the installed base of G4 PLATINUM and G5 Mobile users and the resulting disposable sensor sales, which made up about 70% of revenue. Gross margin held at roughly 66% ($378.4 million gross profit), but operating expenses grew faster, pushing the operating loss to $63.9 million and the net loss to $65.6 million, or $0.78 per share. Accumulated deficit reached $621.0 million, and share-based compensation of $110.8 million is a major non-cash drag on reported results.
The most important regulatory and commercial development was the December 2016 FDA approval of a non-adjunctive indication for the G5 Mobile system, which allows patients to dose insulin without confirmatory finger sticks. In January 2017, CMS classified Therapeutic Continuous Glucose Monitors as Medicare Part B durable medical equipment, opening a large potential payor channel. The G4 PLATINUM is excluded from that decision, and the company still depends on private payors, with the seven largest having issued coverage policies.
Concentration is significant: distributors Byram and Edgepark accounted for about 17% and 11% of revenue, and the February 2016 audible-alarm customer notification was classified as a Class 1 recall. Liquidity is adequate but thin relative to burn. Operating cash flow was positive at $56.2 millionb, but capital expenditures of $55.7 million for manufacturing expansion, including a new Mesa, Arizona facility, meant free cash flow was negative.
Cash and short-term securities totaled $123.7 millionc, with $200 million available under a June 2016 credit facility. Management says this is sufficient through February 28, 2018. The company also faces an active patent suit with AgaMatrix and competitive pressure from Medtronic, Abbott, and others, including Medtronic's 670G system.
02—Key points
Key Highlights
- Revenue grew 43% year over year to $573.3 million, with about 70% from recurring disposable sensor sales, reflecting a growing installed base.
- Gross profit of $378.4 million (about 66% gross margin), but operating expenses of $442.3 million produced an operating loss of $63.9 million and a net loss of $65.6 million ($0.78 per share).
- FDA approved a non-adjunctive indication for the G5 Mobile in December 2016, the first CGM with this label. CMS then classified CGMs as Medicare Part B durable medical equipment in January 2017, though the G4 PLATINUM is not covered.
- Operating cash flow turned positive at $56.2 million, but $55.7 million in capital expenditures for manufacturing capacity (including the Mesa, AZ facility) left free cash flow negative.
- Cash and short-term securities of $123.7 million plus a $200 million credit facility are management's basis for saying liquidity is sufficient through February 28, 2018.
- Customer concentration is high: Byram (17%) and Edgepark (11%) account for over a quarter of revenue, and sales run largely through stocking distributors (68% of revenue).
- Litigation and competition risks are rising: AgaMatrix patent suit (with DexCom counter-suit), a Class 1 recall tied to receiver alarms, and new competitors including Medtronic's Guardian Connect and 670G, and Abbott's FreeStyle Libre.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2016, Dexcom Inc lost $0.11.
- Revenue$573.3M100.0%
- Cost of revenue−$194.9M34.0%
- Gross profit$378.4M66.0%
- Operating costs−$442.3M77.1%
- Operating income−$63.9M11.1%
- Interest, other & tax−$1.7M0.3%
- Net income−$65.6M11.4%
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 28, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $573.30M$400.70M | +43.1% |
| Cost of Revenue | $194.90M$123.60M | +57.7% |
| Gross Profit | $378.40M$278.40M | +35.9% |
| R&D Expenses | $156.10M$137.50M | +13.5% |
| SG&A Expenses | $286.20M$198.00M | +44.5% |
| Operating Expenses | $442.30M$335.50M | +31.8% |
| Operating Income | -$63.90M-$57.10M | −11.9% |
| Interest Expense | $700K$400K | +75.0% |
| Net Income | -$65.60M-$57.60M | −13.9% |
| EPS (Basic) | $-0.20$-0.18 | −8.3% |
| Shares Outstanding (Basic) | 334.40M319.20M | +4.8% |
05—Questions
Frequently Asked Questions
Is DexCom approaching profitability?
Not yet. Gross margin is strong at about 66%, and the operating loss narrowed only modestly in dollar terms because operating expenses grew 32%, including $110.8 million in share-based compensation. Management says it expects losses to continue as it commercializes products and funds R&D. Revenue growth is strong, but profitability depends on scaling revenue faster than the cost base.
How much does Medicare reimbursement matter for future growth?
It is potentially very important. The January 2017 CMS classification of Therapeutic CGMs under Medicare Part B could open a large patient population, but coverage conditions are still to be determined by CMS and local contractors. The G4 PLATINUM is excluded, so near-term benefit flows mainly through the G5 Mobile. Private payor coverage remains restrictive and requires significant documentation.
What are the main risks to revenue concentration and supply?
Two distributors, Byram and Edgepark, made up about 28% of 2016 revenue, and several components come from single-source suppliers, including ON Semiconductor and DSM PTG. Manufacturing capacity is constrained in San Diego, and the Mesa facility is not expected to produce until 2018 at the earliest. Any disruption to distributors or suppliers could materially affect results.
Does the company have enough cash to fund operations?
Management believes existing cash of $123.7 million, operating cash flow, and the $200 million revolving credit facility are sufficient through at least February 28, 2018. Beyond that, it may need to raise equity or debt, which could dilute shareholders. The credit agreement contains financial covenants that could restrict borrowing if violated.
06—Continue