Shares of DexCom Inc. (DXCM Quick QuoteDXCM - Free Report) fell 5.7% in after-hours trading on Aug 2, following another disappointing earnings release. The company reported loss of 24 cents per share in the second quarter of 2016, much wider than the Zacks Consensus Estimate of a loss of 11 cents. DexCom had reported a loss of 5 cents in the year-ago quarter.

Revenues surged 47.3% year over year to $137.3 million, beating the Zacks Consensus Estimate of $133 million. Average selling price (ASP) was in the range of $70−$75 per sensor while ASP for Dexcom’s hardware was stable (approximately $850 to $850 per starter kit) in the quarter.

International revenues surged 45% year over year to $18 million in the quarter. DexCom bought its distributor Nintamed, which operated in Germany, Austria and Switzerland.

DexCom also established direct team in the U.K. Notably, in Germany, the G-BA agreed to provide reimbursement for the company’s continuous glucose monitoring (CGM) device. The reimbursement approval is anticipated to benefit DexCom’s top-line growth beginning 2017.
 

Operational Details

Gross margin contracted 850 basis points (bps) year over year to 62.3%. The gross margin was affected chiefly by increased warranty expense as well as a write-down of excess and obsolete inventory of approximately $3.5 million related to the company’s receiver recall.

Selling, general and administrative (SG&A) expenses surged 53.3% on a year-over-year basis to $69.3 million. Research and development (R&D) expense also jumped 48.8% year over year to $36.3 million. Overall, operating expenses were up 51.7% year over year to $105.6 million.

The higher expenses can be attributed to increased payroll related costs and expenses related to work on the company’s product pipeline. DexCom also incurred considerable expense related to its Verily partnership.

DexCom also spent more on its four key strategic initiatives – the Verily partnership, manufacturing capacity expansion (in Arizona), 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 $20.1 million  compared with an operating loss of $3.6 million in the year-ago quarter.

Regulatory 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 U.S. Food and Drug Administration (FDA) classified the recall as Class I due to the extreme importance of alerts and alarms in a CGM system. Accordingly, DexCom issued a press release on Apr 11 and also posted the class I recall notice on its website.

During the second quarter, DexCom received FDA approval for a more robust speaker for the current receiver. The company is in the process of planning the production of this newly configured receiver.

DexCom also filed its next generation touchscreen receiver with the FDA during the quarter.  The company also submitted for a firmware update on the transmitter and a software update for its mobile app that will enhance the performance and reliability of the G5 Mobile transmitter.

While recently, the Clinical Chemistry and Clinical Toxicology Devices Panel of the FDA voted in favor of the proposed non-adjunctive indication for DexCom’s G5 Mobile CGM system. This indication would designate the G5 Mobile CGM system as a replacement to finger-stick glucose testing for diabetes treatment decisions.

DexCom had filed a pre-market approval (PMA) supplement with the FDA for this indication, for which the review by the advisory committee was conducted on Jul 21.

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.”

DexCom plans to launch the Android version of the G5 Mobile app in the third quarter. The U.S. Android launch is now dependent upon the transmitter firmware revision that the company filed for the FDA approval in the second quarter. The company now expects the U.S. Android launch to happen in late 2016 or early 2017.

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. The new G5 insertion system and transmitter is expected to be filed for the FDA approval within the next few weeks.

With respect to Gen 6, DexCom obtained IDE approval in the second quarter.

Guidance

For fiscal 2016, DexCom now projects revenues in the range of $550 million to $575 million as compared with previous guidance of $540 million to $565 million.

DexCom anticipates warranty costs as a percentage of sales to decline in the third quarter of 2016 and is expected to normalize before the end of the year. DexCom forecasts gross margin to be in the mid-to-upper 60% range for the second half of the year and in the mid-60% for the full year of 2016.

Zacks Rank & Key Picks

Currently, DexCom carries a Zacks Rank #2 (Buy).

Better-ranked stocks in the medical sector are Cepheid , Masimo Corp (MASI Quick QuoteMASI - Free Report) and Natus Medical . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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