DexCom (DXCM), a player in the glucose monitoring market, reported fourth-quarter 2011 loss per share of 18 cents, higher than both the Zacks Consensus Estimate of a loss of 17 cents and the year-ago loss of 16 cents per share. Net loss for the quarter increased 24.9% year over year to $12.3 million.

For fiscal 2011, loss per share of 68 cents was also above the Zacks Consensus Estimate of a loss of 67 cents but much lower than the year-ago loss of 97 cents per share.

Revenues

Sales increased sharply 43% year over year to $22.4 million in the fourth quarter, beating the Zacks Consensus Estimate of $22 million. Revenue was $76.3 million in fiscal 2011, up 57% year over year, surpassing the Zacks Consensus Estimate of $75 million.

Product sales climbed 54% to $20.9 million while development grant and other revenues were down 27% to $1.5 million in the reported quarter.

Margins and Expenses

Gross margin improved to 47.7% in the fourth quarter from 44.7% a year ago. Cost of sales moved up 35.6% year over year to $11.7 million on account of higher cost of product sales. Operating expenses increased 36.1% year over year to $23 million on account of higher R&D spending and selling, general and administrative expenses, which grew 33.8% and 37.7%, respectively, in the quarter.

Balance Sheet

At the end of the quarter, DexCom had cash and short-term marketable securities of $81.9 million, up 74% y/y.

Our Take

We believe DexCom is poised to gain a major share of the glucose monitoring market, driven by sustained product development initiatives, collaborations, favorable reimbursement coverage and increased need for continuous glucose monitoring.

However, we note that competition in the glucose monitoring market is intense and DexCom faces stiff challenges from much larger players such as Johnson & Johnson (JNJ), Medtronic (MDT) and Abbott Labs (ABT). Moreover, the company has incurred losses since inception and is exposed to a stricter regulatory environment. Our Neutral recommendation is supported by a short-term Zacks #3 Rank (Hold).

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