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DexCom (DXCM) Q1 Loss Wider than Expected, Stock Down

Shares of DexCom Inc. DXCM fell 3.6% to close at $65.96 on Apr 28, following a disappointing first-quarter 2016 earnings release. The company reported loss of 23 cents per share in the quarter, a penny wider than the Zacks Consensus Estimate. DexCom had reported a loss of 17 cents in the year-ago quarter.
 

Revenues surged 59.6% year over year to $116.2 million, beating the Zacks Consensus Estimate of $110 million. Average selling price (ASP) was in the range of $70−$75 per sensor while ASP for Dexcom’s hardware stood at approximately $850 to $850 per starter kit.

International business generated $19 million in revenues. The company is gearing up for the inauguration of its European headquarters in Scotland post which it plans to expand its team in the continent.

Gross margin expanded 80 basis points (bps) year over year to 64.6%. The modest growth can be attributed to lower sales due to seasonality, higher warranty expenses and unfavorable product mix.

Selling, general and administrative (SG&A) expenses rose 57.6% on a year-over-year basis to $62.1 million. Research and development (R&D) expenses also increased 62.6% year over year to $32.2 million. Overall, operating expenses surged 59.3% year over year to $94.3 million.

The higher expenses may be attributed to increased head count in the company’s organization (including both field sales and internal sales support staff). Additional marketing expenses were a major factor driving the year-over-year increase.

DexCom spent less than $10 million on its four key strategic initiatives – the Verily partnership, manufacturing capacity expansion, international expansion, and investment in advanced data platforms. The company plans to spend a total of $40 million on these four initiatives through full-year 2016.

DexCom reported an operating loss of $19.2 million as compared to an operating loss of $12.7 million in the year-ago quarter.

FDA Action

On Feb 23, 2016, DexCom issued a customer notification in its website and certified mail to patients that alerted customers of a potential issue affecting the audible alarms and alerts associated with the speaker component of certain receivers. The company started voluntary recall (class II) of those affected receivers that were experiencing problems with audible alarms and alerts.

After an inspection in late March, the FDA classified the recall as Class I due to the extreme importance of alerts and alarms in a continuous glucose monitoring (CGM) system. Accordingly, DexCom issued a press release on Apr 11 and also posted the class I recall notice on its website.

DexCom hopes to solve the issue by replacing the current speaker with a more efficient one and has already sought approval from the FDA. The company is also evaluating a software upgrade for the current receiver to systematically test its audio functionality on a regular basis.  

Depending on the timing of the FDA approval for these corrective measures, DexCom noted that it may need to write-off its currently stocked receiver inventory, which will cost approximately $5 million.

Product Details

DexCom launched its next-generation G5 Mobile CGM system in the U.S. and Europe in 2015. According to management, “G5 Mobile system is the first and only CGM system approved by the FDA for both adults and children as young as two years of age that sends glucose data directly to a smartphone.” The company plans to launch the Android version of the G5 Mobile later this year.

DexCom also plans to submit and possibly launch an enhanced version of G5 Mobile app to provide additional features and functionality, such as insulin onboard data obtained from the company’s pump partners in 2016. In this regard, the company noted that it expects to gain a FDA approval for the insulin dosing claim in the second half of 2016.  

With respect to Gen 6, DexCom expects to obtain IDE approval in the coming weeks and plans to commence a pivotal study in the late second quarter or early third quarter of 2016.

Guidance

For fiscal 2016, DexCom projects revenues in the range of $540 million to $565 million, reflecting growth of approximately 35% to 40% from 2015. The company expects 55%--60% of these revenues to be generated in the second half of the year.

DexCom noted that gross margin will be impacted slightly in 2016 by higher costs related to manufacturing capacity expansion project. The company expects gross margin between 67% and 70% for the full year.

Our Take

DexCom’s healthy product portfolio and innovative pipeline are the major catalysts for 2016 and beyond. The company’s ongoing direct-to-consumer marketing campaign as well as signing of Pharmacy contracts with United Healthcare and Anthem ANTM are a positive in our view.

However, higher warranty expenses related to the product recall will continue to hurt margins in the near term. Moreover, uncertainty over timing of the FDA approval for the corrective measures on the affected receivers will drag down the shares in the near term.

Zacks Rank & Key Picks

Currently, DexCom carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the medical sector are Inogen INGN and Exactech EXAC. Both the stocks carry a Zacks Rank #2 (Buy).

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