Dexcom 2Q19 – Sales of $336 million rise 39% on US traction; FY19 guidance +$75 million – again! G6 capacity expansion, Medicare, Canada in 2H19 – July 31, 2019

Executive Highlights

  • Dexcom reported 2Q19 sales of $336 million, rising a robust 39% YOY and 20% sequentially. This marks five straight quarters of 39%+ YOY growth, including a tough YOY comparison to 2Q18’s 42% gain, when G6’s launch was starting. 2Q19 was another record quarter for new patient adds, and volume growth in every channel drove the strong performance – offsetting pricing headwinds that have continued. US sales of $266 million grew 40% YOY and drove 82% of the quarter’s growth. International revenue of $70 million grew 33% YOY and was flat sequentially with record revenues in 1Q19.

  • Full-year revenue guidance was raised by $75 million for the second straight quarter – from $1.25-$1.3 billion (+21%-26%) to $1.325-$1.375 (+28%-33% growth). The new guidance implies slower 17%-25% YOY growth in 2H19, to be expected given much more challenging YOY comparisons to 2H18, when G6 revenue really took off.

  • G6 will launch in Medicare in 4Q19. In new news, CMS just issued lower monthly pricing for Class II/510(k) iCGMs – separate from current PMA/class III CGMs reimbursed at ~$8/day ($248/month). An analyst said the new pricing is ~13%-14% lower for iCGMs, implying a loss in revenue for Dexcom of ~$35/month per person. (We couldn’t find it on CMS’ website.) However, margins will still be higher with G6 in Medicare – it no longer needs Ascensia BGM supplies and one less sensor per month is needed with 10-day wear (vs. 7-day wear with G5).

  • The G6 platform has several milestones in 2H19: doubling manufacturing capacity; a launch in Canada; and launch of the lower-cost G6 transmitter. In new news, the new transmitter is also needed for direct-to-Apple Watch data transmission (i.e., without an iPhone nearby) – the first time we’ve ever heard this.

  • G6 Pro was recently filed with FDA and is expected to launch in 2020. This includes a disposable transmitter, factory calibration, 10-day wear, blinded or real-time mode, and use of the G6 app – major upgrades over the current G4 Pro. We are very excited for future growth of intermittent CGM

  • Dexcom’s fully disposable, sleek G7 is still slated for limited launch in late 2020 and broader rollout in 2021. Dexcom and Verily will be “making some very big decisions over the next couple of months before we lock in the design.” Investment and focus remains high here, and this marks at least five straight updates where the same launch timing has been reiterated.

Dexcom reported 2Q19 financial results this afternoon in a call led by CEO Kevin Sayer, CFO Quentin Blackford, and EVP Steve Pacelli. The short 2Q19 financial slides are posted here and pasted below.

Financial Highlights

1. Global Sales of $336 Million, +39% YOY; US Sales Grow 40% to $266 million, Driving 82% of Growth; OUS Sales of $70 million Rise 33% YOY

  • Dexcom reported global revenue of $336 million in 2Q19, rising a robust 39% YOY and 20% sequentially. The 39% YOY gain came on a very tough comparison to 42% growth in 2Q18, when the G6 launch was just getting underway. This marks five straight quarters of growth of 39% YOY or higher, a testament to rapidly growing CGM uptake around the globe. 2Q19 came just $2 million short of the record-shattering $338 million in 4Q18, and it was the third straight quarter of $90+ million absolute revenue growth YOY. 2Q19 was another record for new patient additions, and volume growth in every channel (US commercial, US Medicare, OUS) drove the growth – again offsetting lower per-patient revenue. US sales drove 82% of the quarter’s growth, its best performance since 4Q16.

    • Worldwide sensor revenue of $260 million rose 45% YOY and comprised 77% of sales, a sign of just how strong the core business is performing. Transmitter revenue of $58 million rose 31% YOY, while the receiver business remains very small ($18 million) and actually declined 4%. The latter was not surprising to us, given most are probably using the G5/G6 mobile apps and the G6 receiver is quite durable. Management also noted that receiver volume growth was strong, implying receiver pricing has declined – perhaps to encourage lower upfront cost to start on CGM (speculation).

    • “I think awareness has become a huge factor in our marketplace. Many more people are aware of CGM and what it can do now than have ever been before. As we do our own market research and ask about brand awareness and CGM awareness, the responses are much, much better than we've ever seen. I would tell you also that G6 is a big deal. As patients have learned about G6 and learned the experience they can have and all that it does, this has been extremely helpful in our growth. There's other little things. Tandem having an approved pump that's integrated with our system has certainly been helpful in driving new patients to Dexcom. The growth in the international markets. In the old days, you would ask us about, well, what about peds – is peds driving growth? And then recently – is Medicare driving growth? Every single business line is growing and growing nicely. The commercial business, the Medicare business, peds and adults, Europe. It's very much across the board. It's really driven by CGM awareness and the fact that people are figuring out this is something they really need to … manage their diabetes.” – CEO Kevin Sayer

  • US sales grew to $266 million, accelerating to 40% YOY growth on a tough comparison to 35% in 2Q18. For the first time in three years, Dexcom has posted three consecutive quarters of ≥40% YOY growth in the US. Sales increased 27% sequentially from 1Q19, reflecting typical seasonality. During Q&A, CFO Quentin Blackford estimated that the company absorbed ~$25 million in pricing headwinds in 2Q19, on par with $20 million in 1Q19 and about halfway to the expected ~$100 million in pricing headwinds for 2019. (The lower per-patient revenue continues to reflect the move to the pharmacy channel and greater contributions from Medicare and international.) Dexcom is doing a fantastic job of managing pricing headwinds – both in terms of growth and in terms of analyst expectations. These headwinds are expected to continue to increase in 2H19 due to the same trends; even still, the significant rise in guidance shows just how much confidence there is in increased awareness and volume growth in the US.

  • International revenue of $70 million grew 33% YOY and was flat sequentially with the all-time high in 1Q19. The 33% YOY gain came on a very tough comparison to 78% growth in 2Q18. Still, 2Q19’s OUS growth represented the slowest rate since 4Q16 – did FreeStyle Libre’s robust 64% YOY gain in 2Q19 impact Dexcom OUS? Are OUS patients using up G4/G5 stock in anticipation of G6? When asked about OUS market dynamics, Mr. Blackford maintained strong confidence, noting that sales through international distributors can be quite choppy from quarter-to-quarter (e.g., distributors’ order timing in different markets).

2. FY19 Guidance Raised by $75 million for Second Straight Q; Now $1.325-$1.375 billion, +28%-33% YOY

  • Dexcom raised full-year revenue guidance by $75 million for the second straight quarter – from $1.25-$1.3 billion (+21%-26%) to $1.325-$1.375 (+28-33% growth). As expressed by Mr. Sayer, “Any time you exit the first half of the year having raised full year revenue guidance by $150 million – more than 10% - you know the year must be going well.” As a reminder, the company also raised guidance for three straight quarters in 2018.

  • The new guidance implies slower 17-25% YOY growth in 2H19, a downtick from the 44% YOY growth seen in 1H19. Mr. Blackford reminded investors that 2H19 has some challenging YOY comparisons – 3Q18 and 4Q18 had 45% and 53% growth, respectively, compared to 30% and 42% in 1Q18 and 2Q18, respectively. He pointed to changes with Medicare iCGM reimbursement as creating slight revenue headwinds (see below), but it will be accretive to Dexcom’s margins (no need to ship BGM supplies).

    • “To grow at our current scale, there are a lot of things that have to come together, and this is a great testament to the team that we have here at Dexcom. To those in the field and the clean rooms and those thinking years down the road asking ‘what's next?’ – thank you for your commitment to Dexcom and to the people we serve. There is still a huge growth opportunity ahead for Dexcom's core business in diabetes and beyond. The technology that we worked so hard to develop positions us well to go after any significant market opportunity that we choose. In summary, it's been a great first half of 2019, but we are just getting started and we will not rest.” – Kevin Sayer

3. Gross Margin of 61%; Non-GAAP Net Income of $7.8 Million; $1.4 Billion in Cash

  • Gross margin for 2Q19 was 61%, a slight improvement from 60% in 1Q19, though a slight decrease from 63% in 2Q18. The company continues to expect overall gross margin for 2019 to be 64%-65%, with margins approaching a remarkable 70% by the end of the year. 2Q19 gross margin was negatively impacted by investments in manufacturing capacity (both for G6 expansion and in preparation for G7) and sales in lower-margin channels (OUS, pharmacy, Medicare) – presumably the latter will continue. Analysts were incredulous that gross margins could get to 70% by the end of year from the current level; the main driver will be the significantly lower-cost G6 transmitter (see below), alongside increased automation of G6 sensor manufacturing.

  • Non-GAAP net income for 2Q19 was $7.8 million, compared to net losses of $6.5 million in 2Q18 and $4.6 million in 1Q19. The non-GAAP net income excludes $6.7 million in “business transition” costs (customer service infrastructure changes) and $11.3 million in interest expenses related to Dexcom’s senior convertible notes. GAAP net loss for the quarter was $10.5 million, compared to unusually high GAAP net income of $30.2 million in 2Q18. The latter included $43 million in income related to Dexcom’s investment in Tandem – a 14x appreciation from the original $5 million investment.

G6 – Medicare, Pharmacy, Manufacturing, International Launches

1. G6 Medicare launch in 4Q19; New Lower Medicare Pricing for class II iCGMs, No Need to Offer BGM Supplies

  • Dexcom plans to launch G6 into Medicare in 4Q19, in line with previous expectations (“later in the year”). But in new news, Medicare has issued lower monthly pricing for Class II, 510(k) iCGMs – see the July 2019 announcement here – separate from current class III CGMs reimbursed at ~$8/day ($248/month). An analyst on the call said the new pricing is ~13%-14% lower for iCGMs, though we have not been able to confirm that on Medicare’s convoluted website. While the topline revenue is lower for Dexcom (i.e., down ~$35 per month per person) the profitability will still be higher for Dexcom with G6 in Medicare – it will no longer send Ascensia BGM supplies with G6 and one less sensor per month is needed with 10-day wear (vs. 7-day wear with G5). This new iCGM pricing currently only applies to Dexcom’s G6, but would presumably encompass FreeStyle Libre 2 should it obtain iCGM clearance. In Q&A, CFO Quentin Blackford noted that this is another pricing headwind to be mindful of (in addition to pharmacy; see below), though it is ultimately “margin accretive relative to the current product” and is “not going to move the needle in a significant way.”

  • G6 received Medicare coverage in October, though launch timing is behind the original goal to launch in “early 2019”; much of that is presumably from manufacturing capacity. Similar to 1Q19, management repeatedly said that Medicare uptake of G5 remains very strong.

2. Goal of >80% Pharmacy Coverage Contracts by July 2020; Pharmacy Progress in New Users, Slower Movement in Existing Users; Walgreen’s Partnership

  • One year from now, Dexcom aims to be in the “80% range” of covered lives under contract in the pharmacy. Reiterating

    1Q19 and 4Q18, management said that Dexcom currently has contracts in place for >50% of US covered lives in the pharmacy, but far less than 50% of the business is flowing through the pharmacy channel right now; the vast majority of US sales are still via DME. Several analysts asked for a specific percentage of the business in the pharmacy, though management declined to share one.
    • For comparison, Abbott

      reported in 2Q19 that it currently has ~75% of private covered lives under contract in the pharmacy. We assume all of that is actually flowing through the pharmacy too – we know it’s very seamless at Walgreen’s. On this point, CEO Kevin Sayer shared confidence: “We’re comfortable with where we are. We’ve gone through each payer, and we don’t see a lot of difference [between us and FreeStyle Libre]. Maybe we compute our covered lives differently?” Despite progress, Dexcom remains significantly behind Abbott on pharmacy – it’s much easier to build a business from scratch in the pharmacy channel (FreeStyle Libre) than to pivot one over (Dexcom).

  • Currently, Dexcom is seeing more pharmacy traction in new G6 patients; existing users are still widely using DME, and pivoting them into the pharmacy is understandably moving “a bit more slowly.” This was the first time management has differentiated between the segments in the pharmacy channel. Dexcom has not launched a major effort to move existing DME patients into the pharmacy – perhaps because there is so much to do simply marketing G6 itself. EVP Steve Pacelli also made a good point: “We spent 13-14 years building the DME business, and it’s not going to shift overnight. Doctors, field sales, and patients are all used to that existing channel. We’re pinging every new patient on pharmacy coverage, but transitioning (existing) DME over to pharmacy will take time.” Added CEO Kevin Sayer on the pharmacy: “We continue to roll along well … Our strategy is working well, we’re getting the reimbursement we want, and we just have to keep knocking them out.”

  • The new Dexcom/Walgreen’s partnership – featuring the G6 CGM in the “Find Care” section of Walgreen’s app and website – was only briefly acknowledged in the slides and in Q&A. The current offering is mainly a mechanism to increase CGM awareness within the hugely popular Walgreens app. It could be a new-to-CGM sales lead funnel, though the user experience requires quite a few clicks. Said CEO Kevin Sayer in Q&A: “Walgreen’s has been a good partner of ours for quite a while. As we started in the pharmacy, one of the best distribution vehicles was Walgreen’s Specialty Pharmacies…We view this as an opportunity to be a data partner for general healthcare. We’re looking forward to working much closer together. This is the beginning. But it’s pretty front and center how they talk about CGM on the website.” Read our coverage from last week and more screenshots here – we are thrilled to see all the increased visibility that Walgreen’s is providing CGM, especially given how trusted the brand is.

3. On Track to Double G6 Manufacturing Capacity by End of Year

  • In line with 4Q18 and 1Q19, Dexcom remains “on track” to double G6 manufacturing capacity by the end of 2019. The team has started producing the lower-cost G6 transmitter (see below) and has begun using the first fully automated G6 lines in San Diego (“really exciting”) – to be replicated at the Arizona facility. Abbott went through similar capacity constraints with FreeStyle Libre, and, while challenging, this is a great “problem” to have and will inform the launch of the redesigned G7 in late 2020.

  • Work is ongoing to bring the Philippines-based customer service up to Dexcom’s high standards. The operations are split between an internal Dexcom team and a “third-party” service, and management said the latter is not yet performing up to Dexcom’s high expectations. Comments were vague on this front, though the tone was much more of “we-need-to-do-better” than the positive remarks in 1Q19. No quantitative metrics on call times or satisfaction were shared. The new support infrastructure had “nearly 200 employees” on the ground in Manila (Philippines) as of May – a fast ramp of the new infrastructure.

4. G6 Launch Expansion in 2H19: Canada, OUS Transition; Japan probably in 2020

  • A G6 launch in Canada is expected in 2H19, in line with plans following Health Canada approval in February. The gating factor for this launch remains G6 manufacturing capacity, which should resolve in the coming quarters. As previously noted, G6 is approved for 2+ years in Canada and has the same features as the US and EU versions; however, it does not appear that Health Canada or CE Mark approval came with the new iCGM regulatory pathway focused on interoperability. Will this mean a slower cadence of innovation in Canada and Europe?

  • Dexcom will continue to drive G6 into other countries in 2H19, though no geographies were shared. Getting the no-cal, 10-day-wear G6 to more OUS markets will be key for competing with Abbott’s FreeStyle Libre in international geographies; G5 has half the wear length and 100% more calibrations (once every 12 hours). We estimate FreeStyle Libre sales outside the US (~$350 million) are about 5x the size of Dexcom’s international business.

  • Dexcom is currently “working through” the Japanese regulatory process for G6, with launch “probably” in 2020. Dexcom is only available in Japan right now in a professional CGM format with the G4/G5 sensor. FreeStyle Libre has had national reimbursement in Japan (for all type 1 and type 2 insulin users over six years old) since August 2017. Japan is about three times the size of the Canadian diabetes market – 7.2 million with diabetes vs. 2.6 million in Canada. According to Abbott in 2017, Japan has “over one million insulin users.”

5. ADA Takeaways – Rising Awareness of CGM; “I haven’t taken a fingerstick in months.”

CEO Kevin Sayer shared a few of his takeaways from ADA, aligning with several of our ADA 2019 Diabetes Technology themes – especially rising acceptance of CGM and the importance of time-in-range.

  • “We have been on record that the future is ‘CGM First.’ We believe that future is here. At ADA, CGM was no longer a minor presence relative to drug therapy. Dexcom CGM was featured prominently in standing-room-only product theaters, by academics, and in Automated Insulin Delivery. There is growing market awareness that time-in-range is quickly becoming the most important metric to assess glucose control. There are new time-in-range guidelines. Only CGM can provide these types of metrics. CGM as a diagnostic tool will become another large market for us.”

  • “At ADA, I met many people who had type 1 diabetes, and I kept hearing the same thing: ‘I haven’t stuck my finger for six months’; ‘for eight months’; ‘I rubbed my wife on the shoulder, and for the first time in many years, my fingers did not have scales on them’; ‘I’ve never been healthier in my life.’ One physician told us that we have a responsibility as a company, as his patients only rely on G6 – they don’t take fingersticks. These are great stories, and it means we have to be really good – we have to continue to perform on the financial side so we can meet our goals on technology, manufacturing, and operations. We will address the customer service and get it in line with the product experience. We appreciate the continued support, patients, physicians. Our performance in 1H19 only shines a brighter light on what can happen in the future.” This commentary reminded us of the story from Children With Diabetes Friends for Life conference at which Adam spoke recently – Dr. Buckingham relayed a story in which the parent of a newly-diagnosed child with diabetes characterized fingersticks as “barbaric!” Obviously we know that the vast majority of people in the world with diabetes who monitor glucose at all use fingersticks; still, stories like this reflect the trend toward CGM in many geographies and where we’d like to see the world go.

Pipeline Highlights

1. Lower-cost Transmitter Begins Manufacturing, Building Inventory for 4Q19 launch; Will Enable Direct-to-Apple Watch

  • The lower-cost G6 transmitter has begun manufacturing, keeping plans for a 4Q19 launch on track. The transmitter will play a key role in helping Dexcom approach 70% gross margins exiting 2019 – up remarkably from a 61% gross margin in 2Q19. Mr. Blackford again emphasized a “very meaningful” improvement in cost – a 50%+ less expensive design than the current iteration.

  • In new news, the new low-cost G6 transmitter will be required for direct-to-Apple Watch data transmission (i.e., without an iPhone nearby) – the first time we’ve ever heard this. Mr. Sayer said the transmitter has “new firmware” and may even have a slightly longer Bluetooth range; otherwise it has the same functionality as the current offering. No timing was given on the long-in-development direct-to-Apple Watch feature, but this new transmitter appears to be at least one gating factor for the launch. At Keystone earlier this month, EVP Andy Balo said to expect direct-to-Apple Watch within the next year. It is great to see Dexcom continuing to innovate on features in less costly designs.

  • Will Dexcom drop transmitter pricing once this launches? We imagine not, though perhaps there is now wiggle room for those paying cash or with high-deductibles; the current three-month G6 transmitter can be expensive for those without coverage. Dexcom reported $58 million in transmitter revenue in 2Q19, comprising 17% of revenue and growing at a lower rate (+31%) vs. the much larger sensor revenue ($260 million, +45% growth).

2. G6 Pro Submitted to FDA, Launch Expected in 2020

  • Confirming news from Keystone, G6 Pro was recently filed with FDA and is expected to launch in 2020. It uses the same 10-day sensor (factory calibrated) but adds a fully disposable transmitter, an ability to run in blinded or real-time mode, a clinic-owned reader to download the data after 10 days (and import into Clarity), and the ability for users to get real-time CGM data through the same G6 app. (Based on the Pro transmitter, the G6 app will run in a simplified mode.) This is a serious upgrade from the outdated G4 Professional CGM, and it brings stronger competition to Abbott’s FreeStyle Libre Pro. The need to reuse G4 Professional transmitters was a huge hassle (keeping track of them, sanitizing), and the disposable G6 model will be far more convenient. This will also give Dexcom experience manufacturing disposable Bluetooth transmitters at scale, good experience ahead of G7. We assume the G6 Pro transmitter will leverage the same manufacturing as the lower-cost transmitter (see above), though presumably have different firmware on the transmitter itself. 

  • G6 Pro is different from the "Pro-Q" retrospective-only product that was FDA cleared in November 2018. Dexcom told us Pro-Q is being used in pilot studies as a glucose recording device; G6 Pro is the commercial product and has both blinded and real-time modes.

3. G7 on Track for Late 2020 Limited Launch, Broader 2021 Rollout

  • Dexcom and Verily continue to accelerate work on the fully disposable G7 platform, with a limited launch still expected in late 2020 and broader rollout in 2021 – in line with 1Q19, ATTD, 4Q18, JPM, and December’s Investor Day. Today, Mr. Sayer said Dexcom and Verily will be “making some very big decisions over the next couple of months before we lock in the design.” Dexcom continues to run small trials to test configurations and design elements it is considering; no specifics were shared. Data on G7 will probably not be shared before FDA filing, though with iCGM benchmarks now the accuracy goal posts are pretty clear.

    • Based on recent updates, the planned G7 features are: a one-piece fully disposable wearable (integrated sensor/transmitter) that is slimmer on the body (see below); significantly lower cost design (presumably similar to FreeStyle Libre or perhaps lower); iCGM accuracy and factory calibration; 14-15 day wear; an applicator that is smaller, lighter, less plastic, and more convenient; and the Android/iOS mobile apps to display real-time data. What additional software and hardware features should we expect?

The slide above is from Dexcom’s JPM presentation in January.

  • On G7 timing, manufacturing, and lessons learned with G6: “[For G7], we’ll do a limited launch in late 2020, but we will not have the capacity to roll it out fully in Q4 – and we’re not going to try. We’ve learned enough about capacity this year with G6, and we’re not going to relearn those lessons. But once approved, we’ll be able to roll out manufacturing to support significant volumes. Another lesson we learned on G6: conversion to new technology can be very fast. We probably underestimated the rate of conversion. We’re not going to underestimate this conversion; it’s going to go fast. By 2021, we want capacity to swap everybody out. We’ll continue to support G6, but G7 is our flagship product by 2021.” – Kevin Sayer

  • What is the business model and wear time for CGM in non-intensive type 2 diabetes? “Long term, if we have a device that is reimbursed for wear all the time, I think they would wear it. But where is it going to be reimbursed, and what wear model serves them best? We have at least three programs testing intermittent use of G6 at different levels – e.g., three months straight, one month straight – and the outcomes exceed any drug. They learn more from wearing any sensor than any pharma product. We’re very optimistic we can make a big difference there. We’re very confident we can make a huge difference, but the business model has yet to be developed.” – Kevin Sayer

  • At Keystone, EVP Andy Balo said Dexcom is “eventually hopefully going to more of a flexible transmitter that contours to the body.” Work on this novel form factor is apparently ongoing with Verily. It was unclear if he was referring to the initial G7, a future G7 iteration, or a product beyond that.

4. Insulin Delivery Partnerships and Timing: Insulet, Tandem, Tidepool Loop, Companion, Novo Nordisk, Lilly

Management highlighted key insulin delivery partners; quotes from today’s call and recent timing are enclosed below.

  • Tandem and Insulet both presented hybrid closed loop data at ADA with Dexcom CGM – see Control-IQ’s pivotal here and Horizon’s 2-6 year old data here. As of Tandem’s ADA call, a Control-IQ FDA submission was expected in the “coming weeks” (i.e., June/July?) with a launch expected in 4Q19; we’ll hear confirmation on Tandem’s 2Q19 call tomorrow. Control-IQ is one of the most highly anticipated products of 2019 – we’ll be eager to see if it expands the pump/CGM markets in MDI/BGM users. (At minimum, it will help Dexcom/Tandem maintain share against Medtronic; best case, Tandem/Dexcom steal share.) Insulet expects a Horizon pivotal in 4Q19 and a launch in 2H20.

  • At ADA, Dexcom also signed on as a partner to integrate G6 into Tidepool Loop – joining Insulet and Medtronic. Today, EVP Steve Pacelli highlighted Dexcom’s “support of patient choice and interoperability with the iCGM designation.” Great to hear this acknowledged on today’s call! At FFL this month, Tidepool CEO Howard Look kept expectations realistic about hopes for the timing of the Tidepool Loop FDA submission: “We hope it's measured in months, not years. We let the FDA know that we set an aggressive target of trying to have a submission prepared before the end of the (calendar) year, but there's a lot that's out of our control, so that's just an estimate. We promise to keep the community up to speed as things proceed.” This reflects fast progress since the October 2018 announcement to build a regulated version of the DIY iOS app, of Insulet joining in November, the Jaeb observational study kicking off in January, and partners Dexcom and Medtronic joining in June. Tidepool meets with the FDA frequently and is currently working on the submission path – will it receive an iController designation?

  • Mr. Pacelli also highlighted the new smart pen partnership with Companion Medical (June), combining insulin data into Dexcom Clarity for retrospective review. Today’s call said that real-time display of insulin data in the G6 app could happen “late this year or early next year.” (This would also have implications for Tandem’s t:slim X2 mobile app, also  slated to launch this year.) We assume insulin doses would appear as “events” in the G6 app when the phone is turned sideways. We’re still eagerly awaiting a CGM-based bolus calculator that uses trend arrows and insulin on board to recommend slightly smarter doses.

  • Dexcom is “excited” about its partnerships with Novo Nordisk (smart pens) and Lilly (smart pen and hybrid closed loop); no timing was shared. As of October 2018, Novo Nordisk expected 2019 launches of its reusable smart pens (NFC-enabled) and a Bluetooth-enabled disposable pen attachment; we saw some promising Swedish pilot data in poster form at ADA. Lilly’s connected insulin pen has been filed with the FDA, while the hybrid closed loop is slated for a 2021 launch (per 2Q19). Will we see both insulin players with smart pens on the market before next ADA? We’d love to see more focus here since there is so much room for better and smarter insulin dosing for people on MDI using CGM.

5. Not Mentioned from Keystone: Arm-Wear Indication, New Adhesive, Pregnancy and Hospital Studies

The following Dexcom pipeline projects were mentioned in EVP Andy Balo’s Keystone talk; no updates were provided today.

  • In response to feedback from the field that sensors aren’t staying put for the full 10 days, Dexcom recently filed with FDA to replace the G6 adhesive with a new one called “MA91.” Additionally, Dexcom has been working with 3M - maker of Post-its and Scotch tape – for three years, developing a new adhesive with the goal to extend wear time and get a survival rate of ≥90% for sensors in the field. (Dexcom does offer an excellent transparent over-tape for the current G6 adhesive, which customers can order for free but must take the initiative to ask for it.)

  • Dexcom has several pregnancy studies in motion, and notably just finished one with arm-wear. This data is currently being analyzed, and pregnancy and arm wear indications are expected to be submitted to FDA “within the month.” The company hopes to eliminate the pregnancy contraindication by the end of the year, and “will also have an arm indication, which will be good for all of our products too” (no timing shared). Reversing the pregnancy contraindication will be huge, as far more women should be on CGM – the CONCEPTT study showed that it is cost saving (particularly in the neonatal outcomes category), so much so that NHS plans to offer CGM to all pregnant women with type 1 diabetes by 2020/2021! The arm-wear indication will also be a nice win, as it’s commonly done off-label and it will be nice to have this on-label for training, customer support, and marketing.

  • Dexcom is currently running four hospital CGM studies across the country, with the goal of completion by the end of the year: One in the ICU, two in med-surg, and one in pre-op. See our recent coverage of these, along with the hiring of FDA’s Dr. Stayce Beck. On the business case: “We’ve learned that, on a weekly basis, surgeries are cancelled because of high blood glucose levels. They can’t do the surgery – so they bring patient back, give them insulin, and the cost of the patient goes up…Pre-/post-op, we think this can reduce the cost of the patient, and reduce readmissions. If the glucose level goes up before they leave, what happens is they don’t leave – they get readmitted, sometimes back to the ICU.”

Questions and Answers

Q (Robbie Marcus, JP Morgan): After the big beats and raises you put up in the first half of the year with north of 45% growth in the first half of the year, guidance implies 17 to 25% growth in the back part of the year. I know there's a lot of moving parts here in terms of pricing as you switch from DME to pharmacy, Medicare, international, but maybe as a catchall question here, Quentin, help us understand some of the moving pieces here and the impact that each of them have on guidance for the back part of the year?

Quentin Blackford (CFO): You point out the decelerating growth in the back half of the year, which is accurate. I think probably the most important thing just to draw everybody's attention to is the fact that comps get meaningfully more difficult in the back half of the year to the tune of roughly 15 to 20% percentage points of headwinds in the third and fourth quarter, respectively. So, if you think back to the launch of G6 last year, you saw a growth in the back half of the year starting to get up into the mid-40s, even north of 50% in the fourth quarter.

We are now anniversary-ing that and it creates a meaningful comp headwind. So, I think you start to normalize for that and you get growth rates back into the ranges that you've seen in the first half of the year. And then, certainly, from a price perspective, we continue to anticipate double - see those headwinds throughout the course of the back half of the year even probably accelerating just a bit in the fourth quarter when you start to contemplate some of the incremental moves that CMS has made with the Medicare business that will create a little bit of an incremental headwind from a pricing perspective. From a margin perspective, we feel pretty good that over time it's actually going to be beneficial to us as we no longer have to provide all the BGM supply. So, we feel good about where that goes longer term, but it's going to create a bit of headwind. I think those are the big moving pieces, but the biggest one being that the tougher comps.

Q (Robbie Marcus, JP Morgan): Everybody's focus is ahead all the way to G7 as we sit here today. Can you lay out just the time lines of what we should expect? I know it's an iCGM filing that's going to be different than what we have historically seen for your different iterations. But, give us sort of the time lines of what we'll see, when we'll see it, whether it's data presentations or manufacturing, ramping up and product out there?

Kevin Sayer (CEO): We continue a lot on the development side on G7. We're making some very big decisions over the next couple of months before we lock in design and go. As far as clinical trial presentations in all Canada, we probably will not have much until the product is approved and the pivotal has been submitted to the FDA because we really don't want to play our hand. We are running small trials all over the place right now, looking at configurations and things we can consider putting in that product. But none of those are really contemplated for publication. Since iCGM standards are out there, we know what the outcome has to look like. Therefore, we're going to run a trial that will meet those outcome points and no one should be overly surprised or confident that the G7 platform will perform very well. We have some really wonderful things going into it and technology that we've been developing for years. As far as the launch, as Steve said in his remarks, it'll be a limited launch in late 2020. We will not have the capacity to roll it out to everyone in the fourth quarter and we are not going to try, and we do not want to - we've learned enough about capacity this year. We are not going to relearn those lessons in even bigger way. We will then, once we get approved, roll this thing out as we get our manufacturing plant up and fully ready to go to whereby we can support significant volumes. And other lesson we've learned on G6 from G5 is the conversions with new technology can actually be very fast. We probably underestimated the rate at which our patients will convert from G5 to G6 just given what we know about our patient behavior. We are not going to underestimate this conversion. It is going to go fast and it is going to be a wonderful product. So, by 2021, we really want the capacity to be able to swap everybody out. We will continue to support G6 in specific markets and with integrated products and such, the G7 becomes our flagship product by the end of 2021 with G6 supporting entirely different roles.

Q (JP McKim, Piper Jaffray): Could you give us an update on where you are in terms of coverage and maybe volume going that way, and if you could touch a little bit on the Walgreens announcement? It was in the PowerPoint, but you didn't talk about it in your prepared remarks. So maybe talk about that partnership and what that could do for you guys going forward?

Steve Pacelli (EVP of Strategy and Corporate Development): We continue to make good progress on the pharmacy front. I think, importantly, the new patients that continue to come into the company continue to come in through the pharmacy channel. We see good progress being made there. Obviously, we've got an existing business that we've put in place over the years. We've trained folks how to navigate through the DME channel and they're still accustomed to that. That shift out of DME in the pharmacy on the existing base has gone a bit more slowly than what we see coming in with the new patients. We fully anticipate that the business model over time will be through the pharmacy channel. We continue to push the organization down that pathway. We're making good progress, but there's still a lot of runway ahead of us, there's still a lot of room to go. You'll hear we talk about it for quite some time, I'm sure.

Mr. Sayer: With respect to Walgreens and that announcement, Walgreens has been a good partner of ours for quite a while. In fact, as we started pharmacy coverage for patients, one of our best distribution outlets in the early days was the Walgreens specialty pharmacies where our patients could very easily get access to the technology via pharmacy benefit. With Walgreens, we view this as an opportunity to be a very strong data partner for general healthcare. We think it'll be a great place for patients to get their product over time and we're looking forward to working much closer together. This is the beginning. If you take a look at their website and how they've talked about this, it's pretty front and center, so we're very happy.

Q (JP McKim, Piper Jaffray): Can you address the delta and the growth rate between the segments, on transmitter, receivers - especially on the receiver side which was down 4%. I assume it has to do with international and the move into the pharmacy, but if you could just maybe give people some expectations around why the growth rate should be so different across the various products?

Mr. Blackford: The receiver is actually down from a dollar perspective in the reported figures, but I can tell you from a unit basis, they were up significantly. As Kevin pointed out in his prepared remarks, our new patient numbers were at record levels, an all-time record for us, again, in the second quarter. What you're seeing play out there is really a dynamic in how we think about strategically pricing the product for the future, both as we move into the pharmacy, but as well as we start to think about new product iterations like G7 over time, that start to remove the transmitter or the receiver component altogether. While the values getting placed are a bit different from a category perspective, it's not reflective of the underlying volume growth in the business. It's certainly something that we have made very distinct decisions around in terms of how we set up these pricing strategies. There’s nothing that would indicate any underlying concerns or anybody needs to pay attention to. Volume growth is incredibly strong, new patient growth is strong as it has ever been.

Q (Jeff Johnson, Robert W. Baird and Company): Conceptually, we thought of you guys as generating maybe $3,000 per year per patient in revenue. With G7 launching late next year into 2021 and going for maybe 10 to 14 or more likely, I think, 15 days, what do you think that $3,000 per year per patient revenue?

Mr. Sayer: We’re not going to get into the specifics of that price point. I think importantly, as we sit down with payers and negotiate positions, we tend to look at this from an average value per patient on an annual basis. We've put the playbook out there in front of everybody to see, particularly the payers. I think the important thing to note is that we understand the configuration of G7 when it comes into the marketplace. It's very different than the G6 product. We are having discussions with payers today around how we structure these contracts, so the G7 can come in very seamlessly and we move right into it. Revenue will start to change across each of the buckets and it does start to come down, on an annual basis, or on a per-user perspective. As we move further into the pharmacy, we know it has to come down over time. I would just point you back to our long-term goals. When we put out the $2-$2.5 billion in revenue, we absolutely anticipated that the revenue per patient has to come down over time, and we are right along the path that we anticipated.

Q (Jeff Johnson, Robert W. Baird and Company): On your fourth-quarter comments around Medicare and with that class 2 bundle down 13 or 14%, you size that as one of the factors for why 4Q19 may be modestly impacted. The guidance implies a little bit slower growth later this year. How do we think about that going into 2020? Is that something we need to put a finer point on in our models thinking about next year's revenue growth, that change in the Medicare dollars?

Mr. Blackford: We need to be mindful of it. It is going to be a headwind for us as we now will have a full year of the impact relative to just one quarter of 2019. It’s certainly something that we'll speak more about as we get closer to the end of the year and start talking about 2020, but you're going to want to be mindful of it. Importantly, the ability to eliminate the BGM supply from the bundle, or no longer having to provide that actually puts us in a position where it becomes margin accretive relative to the current position that we're in with Medicare channel. Overall, we view it as an opportunity from a margin perspective to show some improvement. It's not going to move the needle in a significant way, but it does become a headwind then.

Q (Margaret Kaczor, William Blair and Company): Switching over to the OUS dynamic, could you walk us through the near- and long-term outlook? What are the two or three scenarios for you guys in a bear and bull case? Where and when will market penetration be outside the US? Above 20% penetration? Above 50%?

Mr. Pacelli: Europe is lagging a little behind our penetrations in the US, but there is no reason that - particularly in the reimbursed markets in Western Europe - that over time, Western Europe shouldn’t look a whole lot like our U.S business, as frankly should Japan and Canada and Australia and the other developed markets. We're not going to give specifics on when and how quickly we think we can get to those levels of penetration, but it's coming. One comment I would make on the European business revenues, particularly in the second quarter, is that it's still predominantly through third-party distribution, which tends to be a little more choppy. We don't have the same seasonality from DME deductibles that reset in the first quarter. In the European distribution network, the order patterns just tend to be a little choppier. The European business is still humming along. It's a big bright spot for us, and we expect it to continue to be great from a growth perspective.

Q (Margaret Kaczor, William Blair and Company): On the outsourced support organization, was there anything you guys missed in your commentary? Also, over what time horizon should we still assume the track toward the long-term operating margin?

Mr. Blackford: I don't think you should have or walk away from the call with any incremental concern being added to an operating margin goal. We are tracking incredibly well from that perspective, and we feel great about the decision that we made there and it's going to be a really nice leverage point for us over time. When we stood up that Philippines operation, we started with two paths. There was a direct Dexcom employee base that has performed incredibly well and then there's a third-party outsourced component that we've utilized as well. What we've learned is the standard that we hold ourselves to is just not the same standard that other parties probably hold themselves to. The issue that we're starting to remedy is to get into those situations, elevate the standard that we expect, and hold them accountable to deliver that for us and to us. I think it's going to be a few months here as we work through it. It's front and center, it is a priority for the team. We've got our resources all over it. The reality is we can do better. And I think that's what we're trying say here, is we understand the challenge. The experience can get better for our patients; we know that and we're after it. We’re committed to investing and improving that. You shouldn't look at that as a significant investment beyond the current spend rate that you see us executing up to now.

Q (Joanne Wuensch, BMO Capital Markets): It sounds like last quarter, you were able to share that Cigna had granted pharmacy benefit. Are there any other larger insurers that you can give us an update on? Or as another way to look at it, a percent coverage at this moment?

Mr. Pacelli: We haven't had any large contracts that we disclosed that have come to fruition this quarter, but we continue to roll along really well. One of the things we're struggling with, in all honesty, is having to find how many covered lines we have, because as we look at all the payers we have or our competitors may have, we're about the same, but we don't really want to disclose that same percentage. We do know we are well over 50%. We're always getting where we want to be. The more important factor in this situation is that we have got to increase the coverage that we have. If we continue to flow new patients through there, that would be helpful. We’ll continue to have programs on that and you'll see a lot of effort there in the future. Our strategy has been working very well as we go before payers, and I've gone before a couple of them. Our presentation has been very strong, and we've been able to get the reimbursement that we're wanting. Very frequently we’re getting to the pharmacy channel. We just have to keep knocking them out.

Q (Joanne Wuensch, BMO Capital Markets): If I calculate this correctly on a dollar basis, your international revenue was flat sequentially. Am I looking at that right? Is there something going on there I should know about?

Mr. Blackford: You’re looking at it correctly. I don't think there's anything there that you need to particularly be concerned about. From a sequential perspective, your point is accurate. To Steve's point earlier, this is a lumpy business. Nearly half of it is still through the distributor channel. In a market or two, the matter of an order coming through in the first quarter or second quarter or falling into the third quarter, can cross over from time to time. We did have a little bit of that played out in the second quarter that would change the sequential trend. I think the important thing is when you look at new patient adoption and at existing patients' performance in these markets, it's consistent with what we've seen. There is no change in that trend. You’re seeing more of a timing issue when you look at it from a sequential perspective. In terms of YOY, the other thing to point out is you've got a meaningfully more difficult comp in the second quarter than what you had in the first quarter in this international business, nearly 30 points of incremental growth that showed up in Q2 of last year versus Q1. Again, that demonstrates the lumpiness in the international business. There’s nothing that we are concerned about playing out there. We still are incredibly bullish on the international business. The new patient opportunities continue to be strong and probably, most importantly, the overall adoption of our technology in the market is still quite liked, which leaves a lot of room to run.

Q (Danielle Antalffy, SVB Leerink): Can you give a little bit more color on the pricing headwind that you've seen so far year to date? I know you guys talked about $100 million for the year. How much of that's been absorbed thus far? How much should we expect in the second half?

Mr. Blackford: If you go back to the first quarter, we commented then that it was a bit less than $20 million. Here in the second quarter, it's closer to $25 million. It was right in line with expectations. In the back half of the year, we expect that to accelerate a bit. There are a couple of dynamics playing out. The move into the pharmacy is a big priority for us, and we've talked very clearly around our intent to allow price to come down a bit to open up that channel. You've also got the Medicare revision in their rates. That will create a bit of a headwind as well. Then I think importantly, we're also seeing willingness and opportunity with the payers to continue to move even into DME channel to create easier access to product and technology. We’re willing to give a bit of price in that scenario as well, knowing that over time, it's going to have to walk itself down. In those negotiations what happens is we’re negotiating for easier access to the technology, less paperwork, less requirements in terms of logging glucose levels. Those are the kinds of things that can make that easier for the patient, and we are willing to concede pricing a bit, because we understand that volumes are likely to pick up. We certainly have seen that play out. That should give you some color on the incremental price in the back half versus first.

Q (Danielle Antalffy, SVB Leerink): Can you talk about what has been driving the outperformance? What level of visibility do you have? You've raised guidance $150 million, but you've only beat consensus year to date by $65 million, so clearly you know something. It sounds like expanded access. Could you quantify how much, over the last 12 months, access has actually expanded?

Mr. Sayer: There are a couple of factors. Awareness has become a huge factor in our marketplace. Many more people are aware of CGM, and what it can do, now than ever before. As we do our own marketing research and ask about our brand awareness and CGM awareness, the responses are much, much better than we've ever seen. I would tell you also, the G6 is a big deal. These patients have learned about G6 and learned the experience they can have and all that it does. This has been extremely helpful in our growth. There are other things. Tandem having an approved pump that's integrated with our system has certainly been helpful in driving new patients to Dexcom. There’s the growth in the international markets. In the old days, you all had asked us, what about peds? Is peds driving growth? Or recently, is Medicare driving growth? The truth is, every segment is growing. Every single business line is growing and growing nicely: commercial business, the Medicare business. Look at peds and adults, they're both growing. Look at Europe, it's growing very much across the board. It is really driven by CGM awareness and the fact that people really are figuring out that this is something they really need to control and manage their diabetes.

Q (David Lewis, Morgan Stanley): ADA was the first time you offered some qualitative specifics around what G7 cost of goods sold (COGS) could be. I think, specifically, you said you think G7 COGS can get down to competitor levels at scale. What you think those levels are? How do you define scale from a revenue perspective? And, what's diving your confidence now in kind of providing that kind of qualitative commentary?

Mr. Sayer: When we started the G7 project back in 2015, one of the things we put on the table was cost target. It was very aggressive, and we didn't think we'd ever be able to meet it. We’ll march to that cost target going forward. In the beginning, we're not getting to that target. Over time, as we look at the cost of the electronics, the battery, the manufacturing processes, we're implementing them differently than anything we've done before. Everything has been designed not only to perform at our standard, but it's been designed to manufacture. It's been designed to manufacture at a lower cost in a more reliable way. We’re very confident we can get to lower COGS. Quite honestly, I said in the meeting yesterday, our G6 COGS, as we get to volumes next year and as we increase our manufacturing capacity and fill out our initial plan, are going to come out significantly as well. Our COGS are moving in the right direction, it's just taking more time. As we’ve invested dollars to expand before the expansion, it's getting a little bit tough on the absorption side. But as we fill that plant and keep working hard in San Diego, we're very confident we'll get there.

Q (David Lewis, Morgan Stanley): On pharmacy coverage percentage, I think you said 50% last quarter. Can you just sort of update us what that number is today? Can you give us any sense, by year-end, what percent of revenue you think will come through the pharmacy? What could that number be perhaps in a year from now?

Mr. Sayer: I'll go into a year from now because I think that's easier than today, because I can set a goal. We certainly would want to be in the 80% range as far as coverage a year from now. That’s what we're shooting for. For where we are today, we know we're above 50%. We've gotten some more contracts. It’s better than it was last quarter, but we haven't done a lot of these calculations. I've heard one number, 57%. I've heard others above 60%. I don't have the perfect number for you, but we're comfortable where we are. Like I said earlier in our comments, we've gone through each payer. We do this on a regular basis. What do we have? What does the rest of the market have? We don't see a lot of difference there. Maybe we compute our lives differently than over there, but it doesn't matter. We're making the progress that we want to make.

As far as the percentage of our business going through, I'll reiterate Quentin's comments. We've never disclosed that percentage, and we won't until it becomes very obvious. At the end of the day, our new patients are very much going over there. We have not launched a major effort to move the existing patients over there. This relates to people being comfortable with how they’ve processed things in the past, having good insurance and coverage in DME. This is going to be a process that's going to take time, but we'll get there.

Mr. Pacelli: As we were talking in our preparations earlier today, Kevin pointed out that we spent the last 13 or 14 years building a big DME business, and it's just not going to shift overnight. Our doctors, our field sales force, our patients are used to processing the existing business. You’ll see new patients shift to the pharmacy much quicker because we're opening every new patient who comes in the door to see if we have pharmacy coverage, but transitioning the DME base over to pharmacy is going to take some time.

Q (Travis Steed, Bank of America): I wanted to get a sense for how much the limiting factor capacity has actually been on adding new patients in the first half of the year and what you could see from a tailwind as you double capacity in the second half.

Mr. Sayer: We don't think we've lost many new patients for capacity. The issue that we've had is timing of shipments where we've delayed things a bit. But at the end of the quarter, we really had filled pretty much everything.

We will not have double capacity running as we go through the rest of the year. That's a process that is ongoing, and we have some new processes. For example, we have our first fully automated G6 lines up and running here in San Diego, and we'll then replicate those lines over in Arizona over the next several months to get those things up and running. The fully automated G6 processes are really exciting for me to see. We are delaying the Medicare launch until the fourth quarter. We have Canada coming online in the second half of the year, but it's not coming out immediately. There are some other international geographies we want to be in with G6 as well when we last swap out the G5 patients, particularly those in our European markets and in our existing Medicare base. We’re still a bit constrained on all the things we would like to do, but we'll work through it, and we think by then end of the year, we'll be in a very good place.

Q (Travis Steed, Bank of America): Gross margin in the first half of the year was in the low-60% range, and you’re still committing that it will approach 70% by Q4. Is there anything you can give us to boost our confidence that you will really ramp up the gross margin in the back half of the year? How much of that is coming from the lower-cost transmitter versus other things?

Mr. Blackford: The vast majority of our ability to get that 70% range in the fourth quarter is really tied to that lower-cost transmitter. What we want to see in Q3 is probably somewhat in line with what you saw from Q2 over Q1, that same kind of sequential improvement. We’ll see the nice improvement in the fourth quarter to 70%. In trying to deliver a little bit of confidence, or help you become more confident in that number, we've got our first low-cost units off the production lines as we speak. We’re producing them now in San Diego. They've also come off the lines in Mesa. We have a high degree of confidence in being able to scale that up and ramp it. Our confidence level is quite high that we can get to these numbers.

Q (Ryan Blicker, Cowen and Company): You talked of making steady progress in expanding coverage for intensively managed type 2 patients in the US. Is there anything more quantitative you can say? I believe Medicare represents about a third of this patient population. How much progress have you made within commercial payers, specifically? Do 50% of commercial lives have coverage, or anything close to 50%?

Mr. Pacelli: I don't know that we have a specific answer for you. We continue to make progress. Certainly as we push to move into pharmacy, pushing for greater access for intensively managed type 2 is right at the top of the list.

Mr. Sayer: As an example, in the past a couple of years, one of the things we would give up to get better access for our type 1 patients was type 2 access in our contractual pricing discussions. That's not going on now. We are pushing aggressively to get the type 2 insulin users covered. Having the CMS issue has been very helpful for us. It's been a catalyst for us to go to payers and say, "Look, if Medicare patients get this, so should the others." We’re making progress, but we're not there yet.

Q (Ryan Blicker, Cowen and Company): Previously, you had talked about launching a decision support system for MDI patients, along with the smart pen partner around late this year or early next year. Is that still on track? Or has that been pushed out a little bit?

Mr. Pacelli: Our first commercial smart pen launch will be together with Companion. We’re doing a retrospective review of insulin data together with CGM data in our Clarity system. With respect to a real-time display of insulin in the Dexcom app, that still could happen later this year or first part of next year. We haven't been specific with who and what that product might look like, but we're still making good progress.

Mr. Sayer: I'll just add to that. We don't view that as a revenue driver as we sit here today. That would be nice to have.

Q (Jayson Bedford, Raymond James): In terms of the new transmitter, I realize the COGS benefit to Dexcom, but are there features and benefits to users?

Mr. Sayer: It's identical to the existing G6 transmitter. I will add, we couldn't go to direct-to-Apple Watch until we get to this new configuration. There are some better electronics we'll be able to use the features on and get some new firmware in. As far as performance, it's my understanding that the range is a little bit longer, but it's not a huge change.

Q (Jayson Bedford, Raymond James): On the international commentary about the flat sequential growth, you mentioned that half the business goes through distributors. Did you see more consistency from the direct business? Have you seen any change in market dynamics in Europe?

Mr. Blackford: We do see more consistency in that direct business. That revenue cycle is a little bit different. We're recognizing revenue upon the sales to the end-user, whereas the distributor, generally, will take inventory positions, work though inventory, replenish, and so forth. You get a bit more lumpiness in that distributor business than you do in the direct business.

In terms of end market trends or anything changing, there’s not. I think we were pretty clear with the comments earlier. The new patient numbers continue to be a very nice for us, continue to track in terms of what we've seen historically from the overall international business. Existing patient trends, from an overall international perspective, are looking very good as well. It's a bit of lumpiness. It’s the tough comp. We’re going to have a tough comp in the third quarter as well in the international business. Last year, the third-quarter growth rate was even beyond what it was in Q2. You’ll probably see this again for another quarter, and then I think you'll start to see it pick up again in the fourth quarter. There’s nothing unusual here, nothing that is drawing our concern. We understand the patient dynamics quite well and we're very encouraged with what we see.

Q (Raj Denhoy, Jefferies): We're still waiting for Libra 2.0 to get approved here. I guess do you any updated thoughts on that product or the competitive landscape and really anything about the delay on the product getting approved?

Mr. Sayer: No, we don't. And, we're not going to give them our air time. We've dealt with competition ever since we've been here, and we'll deal with that one when it comes. We don't have anything to add.

Q (Raj Denhoy, Jefferies): Over the next several months, we're going to see the first automated insulin delivery systems with your CGM. Do you have any thoughts on what that could do to CGM adoption or your growth really into next year?

Mr. Pacelli: I'll somewhat defer to Tandem, but their latest public guidance is that their Control-IQ system would launch in Q4 of this year. That will be a Dexcom G6 sensor with a DexCom/TypeZero algorithm running on the Tandem X2 pump. The beauty of the architecture of that, and the current system with Basal-IQ, is that patients who are already taking advantage of the G6 system with Basal-IQ will be able to field-upgrade their system. Many of their existing patients are already joint patients that are using the G6 system. It remains to be seen whether more automation, reinvigorates growth in the pump market. I think we're optimistic that it does, and so to the extent we attract new patients and do pump therapy, be it Tandem, Insulet, that's obviously a benefit for all of us.

Q (Chris Pasquale, Guggenheim Partners): You had talked about not assuming that the gross margin level with every office is a sustainable one for you in 2020 given ongoing pricing pressure. Could you just update thoughts on where gross margin shakes out over the course of the next 12 to 18 months?

Mr. Blackford: Again, we're not going to get into setting the expectation for 2020 just yet. Obviously, you've seen where the fourth quarter is expected to exit. We feel very good about that number approaching the 70% range. It speaks to the potential that we have in front of us, but we are trying to be very transparent about the fact that the pricing headwinds are going to continue to exist. We're going to continue to navigate toward the pharmacy channel. We know Medicare is a bit of a headwind from a top line, but from a margin perspective without giving the CGM supplies, we actually feel like that could be a bit accretive. We’ll give more color as we start to get closer to the end of the year, but I don't think you should anticipate it being up at that 70% range that we see in Q4. That’s a fine starting point, and as you start modeling in the pricing headwinds that we talked about and the pressure that comes from the shifting mix of the business as OUS becomes a bigger component, you can start to work yourself into a number, but we're not going to give any more specifics than that at this point. It's too early.

Q (Chris Pasquale, Guggenheim Partners): If I do a little bit of math here on the duplicative cost piece that you talked about, it looks like it was about 7 or $8 million in the quarter by my math. Is that in the right ballpark? And how does that trend over the back half of the year? Does it stay in there? Or does it gradually come out?

Mr. Blackford: I think you're a little bit high, to be honest with you. You're not meaningfully off, but you're bit on the higher end of where that is. I wouldn't look at that and annualize that per se, but you're getting down the right path. We do think that that will start to alleviate a bit in the back half of the year. One of the things that we said we would do, and be very careful about, was that we would ensure we have the capabilities stood up in our new facility before we let resources go here. We are now demonstrating that. We have had a wave of resources go or two. We'll see that continue to play out in Q3. The duplicative costs will start to step down in the back half of the year.

Q (Steven Lichtman, Oppenheimer): As you continue to move toward G7, I was wondering if you can give update us on your latest thoughts on how you see the usage model within the non-intensive patient population. Do you still expect it to be intermittent use? Any related thoughts overall and moving into that large channel long term.

Mr. Sayer: Long term, if we had a device that would be reimbursed, that patient could wear all the time, I think they would wear it. The issue becomes what is going to be reimbursed and what type of model is going to serve those patients best from a cost perspective. I can tell you about at least three programs we're aware of where intermittent use of G6 is going on right now. Some wear for three months straight, some wear it for one month, depending upon where they are. The outcomes in these patients exceed anything ever in a type 2 patient with any drug. They learn more from wearing the sensor than any pharmaceutical product that's ever been introduced in that market. We're very optimistic we can make a big difference there, and we will continue to work on that business model with our G6 platforms.

Q (Steven Lichtman, Oppenheimer): On international, Steve, you mentioned Japan briefly. I was just wondering if you could provide an update on that opportunity and when you think you can start becoming a personal and not just professional use there?

Mr. Pacelli: We’re still working through the regulatory aspects of G6 in Japan. If you remember, we actually launched in Japan with a professional version, utilizing the G4/G5 sensor platform. I would tell you it's probably not before the end of this year, but probably sometime. I'm hoping in the first part of next year, we're launching G6 as a direct-to-patient consumer use product.

Q (Suraj Kalia, Northland Capital): You all have been consistent about Q4 margins stepping up to 70%, or at least the math you have suggested is Q3 is going to be, give or take, 63% and then it steps up to 70%. Can you help us fill in the blanks here? I just did some rough math. For the transmitters, the ones that are going to cause a step change, am I right that they have to be 80%-plus gross margins?

Mr. Blackford: We’ve never given specific gross margin profiles of any particular product of ours, but I would tell you, the cost reduction that we have in that transmitter from where it was is significant. It is orders of magnitude less cost than what it used to be. We’re not going to give you the specifics, but it was a very meaningful reduction. The team did an incredible job, really both the R&D teams and operations teams combined in designing cost out from a design perspective, but also just the process of manufacturing the product with the whole team effort that generated this incredible benefit.


--by Adam Brown, Albert Cai, and Kelly Close