Dexcom’s biggest triumph and its biggest let down this quarter both involved the FDA. On the positive side, a verdict from a special FDA panel means Dexcom may soon be able to change its CGM’s intended use to replace fingerstick glucometers. On the negative side, a voluntary device recall this quarter that potentially affected all of Dexcom’s receivers led to higher-than-expected Q2 losses.
Ultimately, the company posted a net loss of $20 million, despite a 47 percent year-over-year increase in revenue, from $93.2 million in Q2 2015 to $137.3 million this past quarter.
“Our gross margin in Q2 was affected primarily by increased warranty expense as well as a write-down of excess and obsolete inventory of approximately $3.5 million related to our receiver recall,” Dexcom EVP of Strategy and Corporate Development Steve Pacelli said on the call. “We do not expect any additional substantive excess and obsolete inventory write-downs related to the receiver recall. Additionally, we anticipate warranty costs as a percentage of sales will begin to decline in Q3 and should normalize before the end of the year.”
The recall had to do with the audio alarm on certain receivers not functioning. Because this could lead to certain patients not being informed about too-high or too-low glucose, the FDA classified the recall as Class 1 — the most serious kind. Pacelli said they’ve taken steps to avoid a repeat.
“We have received FDA approval for a more robust speaker for the current receiver and are in the process of planning production of this newly configured receiver,” he said. “We filed our next generation touchscreen receiver with the FDA during Q2 and we believe this receiver will not only be more durable, but will also greatly improve the patient experience. And during Q2, we submitted for a firmware update on the transmitter and a software update for our mobile app that will enhance the performance and reliability of the G5 Mobile transmitter.”
In addition to the recall, though, the loss was affected by heavy investments in R&D, partly related to Dexcom’s partnership with Verily to build a bandage-like continuous sensor for people with Type 2 diabetes.
“We believe that the information our system provides to a Type 2 patient exceeds anything that they can learn from the tools that they use today,” Dexcom President and CEO Kevin Sayer said on the call. “We believe the first product developed in the collaboration with Verily will be commercialized in 2018 and we expect that a smaller bandage-like sensor could be available as early as 2020. In fact, our first feasibility study of the bandage-like sensor will take place this fall.”
Sayer also gave an update on the FDA panel’s greenlight of the new non-adjunctive labeling.
“We are now beginning to work with the FDA to nail down exactly what this means,” he said. “For example, the FDA mentioned during the panel meeting that the establishment of performance standards for non-adjunctive CGM should be a function of this process. We've had discussions and some proposals regarding such standards, but nothing is yet finalized. The level of training and education required for a non-adjunctive product will certainly be different than our current level of support. We will work with the FDA to finalize these education plans for patients and health care professionals across the board.”
He also said he expects the new labeling will help to get Dexcom CGMs covered by Medicare, which could be a major win for the company.
Sayer also talked about mobile, saying that the company is awaiting FDA clearance for a new version of the iOS app related to the G5 CGM system and plans to file the Android version in Q3. The company expects to launch an Android app in late 2016 or early 2017.
“We continue to work on several other enhanced versions of our G5 Mobile app to provide for additional features and functionality, including the incorporation of insulin data and several mobile platform retrospective analysis reports,” he said.
