01—Abstract
Summary
Summary of the 10-K filed February 27, 2018. Cited figures are marked; the original filing is the authoritative source.
DexCom's FY2017 10-K shows a company in rapid commercial scale-up that is still unprofitable but closing the gap.
Total revenue rose 25% to $718.5 milliona (from $573.3 million), driven mainly by growing installed-base sensor sales, which made up about 70% of revenue. Gross margin expanded to 68% from 66%, helped by lower warranty costs after the February 2016 receiver alarm customer notification. Operating loss narrowed to $42.5 million from $63.9 million, and net loss improved to $50.2 million, or $0.58 per share, from $65.6 million.
Operating expenses still grew fast, with SG&A up 22% and R&D up 19%, so profitability depends on continued revenue growth outpacing spending. Balance sheet and liquidity strengthened materially. The company raised $389.0 millionb in net proceeds from 0.75% convertible senior notes due 2022 ($400.0 million principal), repaid its $75.0 million short-term borrowing, and ended the year with $548.6 million in cash and marketable securities against $200.0 million of undrawn revolver capacity.
Management states this is sufficient through at least February 27, 2019. Risks to note include the convertible notes' cash-settlement features and potential dilution, a 2017 tax-reform remeasurement of deferred tax assets, and a $761.6 millionc federal NOL base with a full valuation allowance. The key investment risks are concentrated reimbursement and competition.
Medicare began covering Therapeutic CGMs after the G5 Mobile received its non-adjunctive indication, and the seven largest private payors now cover the category, but coverage remains restrictive. Competitors are advancing, including Abbott's FreeStyle Libre (FDA-approved September 2017), Medtronic's Guardian Connect and 670G pump integration, and Senseonics.
Distributor concentration is high, with Byram and Cardinal Health representing about 14%d and 17% of revenue. Ongoing patent litigation with AgaMatrix and Arbmetrics, plus a planned Mesa, Arizona manufacturing facility expected to start in 2018, are additional items to monitor.
02—Key points
Key Highlights
- Total revenue grew 25% to $718.5M in 2017, with disposable sensors about 70% of revenue, supporting the recurring-revenue model.
- Gross margin improved to 68% (from 66%), aided by lower warranty costs following the 2016 receiver alarm recall.
- Net loss narrowed to $50.2M ($0.58/share) from $65.6M, but operating expenses rose 21% to $534.6M, so profitability is not yet achieved.
- Raised $389.0M net from 0.75% convertible notes due 2022; year-end cash and marketable securities of $548.6M plus $200M undrawn credit facility.
- Medicare classified Therapeutic CGMs as durable medical equipment in January 2017, and all seven largest private payors have issued coverage policies, though many are restrictive.
- Competitive pressure increasing from Abbott's FreeStyle Libre (FDA-approved September 2017), Medtronic's Guardian Connect, and Senseonics' implantable system.
- Concentrated distribution: Byram (14%) and Cardinal Health (17%) of 2017 revenue; ongoing patent litigation with AgaMatrix and Arbmetrics; Mesa, AZ facility expected to begin production in 2018.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2017, Dexcom Inc lost $0.07.
- Revenue$718.5M100.0%
- Cost of revenue−$226.4M31.5%
- Gross profit$492.1M68.5%
- Operating costs−$534.6M74.4%
- Operating income−$42.5M5.9%
- Interest, other & tax−$7.7M1.1%
- Net income−$50.2M7.0%
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 27, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $718.50M$573.30M | +25.3% |
| Cost of Revenue | $226.40M$194.90M | +16.2% |
| Gross Profit | $492.10M$378.40M | +30.0% |
| R&D Expenses | $185.40M$156.10M | +18.8% |
| SG&A Expenses | $349.20M$286.20M | +22.0% |
| Operating Expenses | $534.60M$442.30M | +20.9% |
| Operating Income | -$42.50M-$63.90M | +33.5% |
| Interest Expense | $12.80M$700K | +1728.6% |
| Net Income | -$50.20M-$65.60M | +23.5% |
| EPS (Basic) | $-0.14$-0.20 | +25.6% |
| EPS (Diluted) | $-0.14— | — |
| Shares Outstanding (Basic) | 345.20M334.40M | +3.2% |
| Shares Outstanding (Diluted) | 345.20M— | — |
05—Questions
Frequently Asked Questions
Is DexCom profitable, and is it getting closer to breakeven?
Not yet. DexCom reported a 2017 net loss of $50.2 million ($0.58 per share), an improvement from $65.6 million in 2016. The operating loss narrowed to $42.5 million from $63.9 million as gross profit grew faster than operating expenses. Management says it expects to keep incurring losses as it expands commercialization and R&D, so breakeven depends on sustained revenue growth outpacing spending.
Does DexCom have enough cash to fund operations?
Management believes so for the near term. At December 31, 2017 the company held $548.6 million in cash, cash equivalents and marketable securities, and $200.0 million remained available under its revolving credit agreement. The company says this is sufficient through at least February 27, 2019. Longer term, it may need additional capital, which could be dilutive to shareholders, especially if convertible notes are settled in shares.
What are the main risks from the $400 million convertible notes?
The 0.75% notes due May 2022 carry several risks. Holders can require repurchase upon a fundamental change, and the company may not have enough cash to repay or settle conversions in cash. Conversion could dilute existing shareholders or pressure the stock price. If conversion triggers are met, the notes could be reclassified as current liabilities, reducing working capital. The notes also add non-cash interest expense from debt discount amortization, which weighs on reported earnings.
How dependent is DexCom on reimbursement and distributors?
Highly dependent. Coverage from Medicare and private payors is critical, and many policies require extensive documentation. Two distributors, Byram and Cardinal Health, accounted for roughly 14% and 17% of 2017 revenue, respectively. Products shipped to distributors represented about 75% of revenue, and the company notes that losing or reducing these relationships could materially affect results.
What competitive and regulatory developments should investors watch?
Competition is intensifying. Abbott's FreeStyle Libre received FDA approval for consumer use in September 2017, Medtronic's Guardian Connect and 670G insulin pump are in market or advancing, and Senseonics is pursuing an implantable CGM. DexCom's next-generation products depend on FDA approvals, and the company has faced prior product recalls and audible alarm issues. Investors should also watch the Mesa, Arizona manufacturing facility, which is expected to start production in 2018, and ongoing patent litigation with AgaMatrix and Arbmetrics.
06—Continue