Memorandum

Dexcom 2Q20 – Sales of $452 million rise 34% YOY, driven by type 2s (now 20+% of total US users); full-year guidance reinstated for 25% YOY growth; no meaningful G7 updates – July 28, 2020

Executive Highlights

  • Dexcom reported global revenue of $452 million in 2Q20, rising 34% YOY (+35% operationally) on a tough comparison to 39% YOY growth in 2Q19. Sequentially, sales rose 12% from 1Q20 – notably, 2Q19 was nearly the strongest quarter on record in history for Dexcom (just $11 million less than 4Q19), which is especially notable for just two quarters in, the midst of COVID-19, etc. CGM uptake and awareness among patients continues to fuel revenue growth despite decreases in new patient starts in early April due to COVID-19. However, management said by “late April and over the remainder of the quarter,” new patient starts were recovering – that seems to be an understatement looking at the quarter as a whole. US sales in the quarter totaled $367 million, rising 38% YOY. International sales in the quarter totaled $85 million, rising 21% YOY (+22% operationally). Sensor growth hit 40% versus 2Q19, and “hardware” (including transmitters and receivers) growth was 15%. Sequential sales of sensors and hardware were 12% and 8%, respectively.

  • With what many assumed would be the most difficult quarter of the year gone, Dexcom chose to reinstate guidance for 2020. The company is now guiding for full year 2020 revenue of $1.85 billion representing 25% YOY growth. This reinstated guidance represents a $100 million increase from the midpoint of initial guidance from the beginning of 2020 “resulting from the strength of the business in the first half of the year.” The fact that Dexcom is increasing its guidance from pre-COVID-19 levels is a testament to the momentum behind CGM.

  • During prepared remarks, Mr. Sayer shared that people with type 2 diabetes now “exceed 20% of [Dexcom’s] total US patient base.” This is, to our knowledge, this figure has been explicitly shared, though the focus on type 2s has been a theme for the last several quarters and clearly an increasingly important part of Dexcom’s business (while it’s from a small base, there is clearly so much upside here, particularly if Standards of Care and Physician Practice Guidelines and WOM [word of mouth] and media all continue to grow). In the second quarter, Dexcom also saw coverage wins with UnitedHealthcare and Aetna for type 2s on intensive insulin therapy, collectively representing over 90 million covered lives. We are also seeing forward-looking UnitedHealthcare show considerable interest in CGM as a tool as preventing type 2 diabetes and managing it better – terrific from a public health perspective, particularly as many patients in the US still do not have the support they need to use tools like insulin successfully.

  • Excitingly, Dexcom reported today that it successfully “doubled” G6 manufacturing capacity in the first half of the year. Wow! As a reminder, Dexcom also doubled its G6 manufacturing capacity through 2019, meaning its current capacity is ~four-times the level at the start of 2019. With G6 supply no longer constrained, Dexcom also began to accelerate direct-to-consumer advertising in the second quarter, a fantastic opportunity to continue driving CGM uptake. Presumably, Dexcom’s PAP also is under less pressure, and presumably easier to use, now that it’s not as hard to provide CGM to those that need it – we are sure Dexcom was also happy to hear the government doing its part as well, and finally (!thank you ADA!) relaxing some (some) of the burden for US-based patients with type 2 diabetes on Medicare – see (“CMS temporarily “will not enforce” requirements for coverage of non-adjunctive CGM during COVID-19”) from May, where the government through CMS began to make it easier (officially) to get CGM through CMS as long as the patient was using insulin three times a day. We continue to believe that many more people than are on MDI should be able to use CGM 24/7 or at least professional CGM. Ideally, this would include people who used CGM to avoid major hyperglycemia or severe hypoglycemia. Although the new guideline is very positive for some patients, we’ve also heard US distributors can be difficult about making sure patients on CMS can get sensors, as there is apparently a fear that the more relaxed approach will end suddenly.

  • Dexcom declined to provide a meaningful update on its pivotal trial, submission, or launch timing for G7, though Mr. Sayer confirmed that there would be no limited launch of G7 in 2020. Still, Dexcom has continued work on preparing G7 manufacturing and based on today’s comments, it appears the company may go into a full launch of G7 from the start, forgoing original plans for a limited launch. Assuming the “minimum delay of approximately six months,” we could potentially see G7 launched by summer 2021, though as with so many other things, timelines are quite difficult to predict in the context of a pandemic, which has multiple implications (regulatory timing, company timing, analysis, etc.).

Dexcom reported 2Q20 financial results this afternoon on a call led by CEO Kevin Sayer, COO and CFO Quentin Blackford, and EVP Steve Pacelli. The 2Q20 financial slides, very well done and easy to understand, are available here.

Financial Highlights

1. Global sales of $452 million, rising 34% YOY; US sales of $367 million, rising 38% YOY; OUS sales of 85%, rising 21% YOY (+22% operationally)

Dexcom reported global revenue of $452 million in 2Q20, rising 34% YOY (+35% operationally) on a tough comparison to 39% YOY growth in 2Q19. Sequentially, sales rose 12% compared to 1Q20, the second strongest quarter on record. Revenue growth continues to be fueled by increasing CGM awareness and uptake among patients, even despite lower new patient starts in early April due to COVID-19. However, by “late April and over the remainder of the quarter,” new patient starts were recovering – that’s certainly evident given the very strong revenue quarter overall. During Q&A, CEO Kevin Sayer shared that at the “end of June,” that rebound in patient starts was “back in line with previous expectations”; however, this trend apparently see-sawed back again in early July (early 3Q20), as COVID-19 cases began to rise again in the US – while we assume the imminent launch of the Libre 2 will expand the market, presumably when it has alarms, there will be some competition for patients who embrace alarms but are not yet on closed loop. As noted below, Dexcom’s guidance for the remainder of the year assumes current new patient additions are between 75%-80% of normal values. CFO Quentin Blackford noted that Dexcom saw strong growth in this quarter across all three of its main channels: pharmacy, DME, and Medicare with pharmacy continuing to see the fastest growth (likely from a smaller base). US sales drove the vast majority of sales in 2Q20, accounting for 87% of sales.

  • US sales in the quarter totaled $367 million, rising 38% YOY on a tough comparison to 40% YOY growth in 2Q19. Sequentially, sales rose 26%, bouncing back from the seasonal first quarter dip. US sales accounted for 81% of total revenue in 2Q20, slightly higher than the average across 2019 (~79%). At $367 million in revenue, 2Q20 represents Dexcom’s second-highest US revenue on record following 4Q19.

  • International sales in the quarter totaled $85 million, rising 21% YOY (+22% operationally) on a tough comparison to 33% YOY growth in 2Q19. Sequentially, sales fell 25% following a blockbuster quarter in 1Q20. At $85 million, Dexcom’s 2Q20 international sales were at their lowest levels in a year, with the COVID-19 pandemic having a greater effect on Dexcom’s OUS business than US business and perhaps greater competition from Freestyle Libre and Freestyle Libre 2, which throughout much of Europe has alarms. The international business delivered just 13% share of growth in the quarter, its lowest levels since 2017. Encouragingly, activity in Dexcom’s direct international markets returned to “strong growth” in June and distributor markets have shown early rebound signs early in 3Q20, though Mr. Blackford noted it was “a bit premature” to assume this will continue through the rest of the third quarter. Although presumably Abbott’s FreeStyle Libre may be more competitive with alarms, it also saw a sequential decline in 2Q20 (more than half its revenue is from outside the US). Dexcom’s e-commerce platform, first launched in Canada, was launched into the UK market and highlighted as a bright spot.

  • Revenue from sensors totaled $365 million, growing 40% YOY, 12% sequentially, and comprising 81% of total sales. Hardware revenue (transmitter and receiver revenue) totaled $87 million, rising 15% YOY and 9% sequentially. Dexcom first chose to bundle transmitter and receiver revenue in 1Q20, which was not surprising at the time given receiver revenue has continued to fall as G5 and G6 mobile apps becoming easier to use. Of course, when the fully disposable G7 launches, we’ll be interested to see how these revenue “bins” change.

2. Full-year guidance reinstated: revenue guidance raised $100 million at midpoint to $1.85 billion (+25% YOY)

With what many assumed would be the most difficult quarter of the year gone, Dexcom chose to reinstate guidance for 2020. The company is now guiding for full year 2020 revenue of $1.85 billion representing 25% YOY growth. This reinstated guidance represents a $100 million increase from the midpoint of initial guidance from the beginning of 2020 “resulting from the strength of the business in the first half of the year.” The fact that Dexcom is increasing its guidance from pre-COVID-19 levels is a testament to the momentum behind CGM. Notably, this guidance assumes 75%-80% of original expectations for new patient additions in the second half of 2020; given that Dexcom saw new patient additions back at “normal” levels by the end of June, this guidance assumption would seem conservative (though given the rising COVID-19 cases in the US, conservative is not a bad thing) although comparisons, as noted above, are even more challenging in 2H20 compared to 1H20. Also considered in guidance are some effect from Dexcom’s recently announced patient assistance program (PAP), though Mr. Sayer noted that the program didn’t really have much of an effect on revenue in 2Q20. We imagine given supply constraints to date, the PAP Even at 25% YOY growth, this reinstated guidance is suggesting a fairly significant slowdown of growth from FY18 and FY19 which both saw revenue growth >40%. Still, we would note that Dexcom has consistently surpassed its full-year guidance: the company beat guidance by ~160 million at the midpoint of FY18 and by ~$300 million at the midpoint of FY19. Mr. Blackford also noted that Dexcom will have some expenses that were deferred into the second half of the year due to COVID-19, such as costs related to G7 trials and direct-to-consumer marketing initiatives that affected operating and adjusted EBITDA margin guidance.

3. GAAP net income of $46 million; gross margin of 63%; $2.5 billion in cash following a $1.2 billion convertible note offering

Continuing to strengthen its profitability trends, Dexcom reported GAAP net income of $46 million, compared to GAAP net loss of $10.5 million in 2Q19. On a non-GAAP basis, net income was $77 million compared to just $7.8 million in 2Q19.

  • Gross margin in 2Q20 came in at 63%, up from 61% in 2Q19. This YOY improvement was largely driven by Dexcom’s lower-cost transmitter, which began rolling out in 3Q19. Sequentially, gross margin remained even with 63% from 1Q20. For the full-year, Dexcom is guiding for a gross margin of at least 65%, suggesting an uptick in 2H20.

  • In 2Q20, Dexcom completed a $1.2 billion convertible note offering, finishing 2Q20 with ~$2.5 billion in cash and marketable securities. Clearly, this is a treasure trove for M&A, particularly given that the stock would be great currency – that said, which companies could Dexcom purchase that would bring more strength and stability to the company versus just focusing even more on the core business?

G6 Highlights – Type 2, Pharmacy, and New Markets

1. Type 2s “exceed 20% of [Dexcom’s] total US patient base,” Medicare a big driver; coverage wins with UnitedHealthcare and Aetna for type 2s

During prepared remarks, Mr. Sayer shared that people with type 2 diabetes now “exceed 20% of [Dexcom’s] total US patient base.” This is, to our knowledge, the first time this figure has been explicitly shared, though the focus on type 2s has been a theme for the last several quarters and clearly an increasingly important part of Dexcom’s business, albeit from a small base. A small base, perhaps, but clearly one that is growing and that has far more upside than type 1 alone. For comparison, Abbott last disclosed about a “50/50” split between type 1 and type 2s in the global FreeStyle Libre user base (3Q19). During Q&A, Mr. Sayer highlighted Medicare patients as driving the expansion in type 2s and we expect with lower barriers, this will will continue to be the case. As a reminder, Dexcom launched G6 in Medicare back in October and aimed to complete the transition from G5 to G6 by “mid-2020.” There was no update on the transition, but as of April, a “majority” of Dexcom’s Medicare user base had transitioned to G6. In the second quarter, Dexcom also saw coverage wins with UnitedHealthcare and Aetna for type 2s on intensive insulin therapy, collectively representing over 90 million covered lives.

  • Dexcom continues to highlight the pharmacy channel as the “fastest-growing” segment of the business. On today’s call, CFO Quentin Blackford shared that “the majority” of national plans and PBMs are now covering Dexcom through the pharmacy channel. This came as no surprise, as we last estimated pharmacy contracts in place for >75% of US covered lives back in 4Q19. Despite the large number of contracts in place, we’d imagine most of Dexcom’s business is still running through DME. For comparison, Abbott reported in 2Q19 that it currently has ~75% of private covered lives under contract in the pharmacy, and we assume close to that level is running through the business. Perhaps a better comparator, Insulet reported in 1Q20 that “almost 30%” of its total US volume was running through the pharmacy – by our estimate, the transition from DME to pharmacy has been slower for Dexcom than Insulet, but the pharmacy remains Dexcom’s “preferred long-term channel.” While the pharmacy channel reduces Dexcom’s average revenue per patient, the business is attractive because of the reduced effort from Dexcom to get devise to patients (e.g., paperwork) and makes reordering more convenient for patients. Many patients receive texts like clockwork from their pharmacies, asking them “YES OR NO” whether they want refills, etc. – we’d imagine this will increase predictability for those converting to the pharmacy channel.

    • Dexcom’s pharmacy and Medicare channel saw a big win in November with Walgreens’ announcement that it had identified a “billing solution” that would make G6 available to Medicare patients at any retail Walgreens location. We wonder how much of Dexcom’s Medicare volume is now running through the pharmacy. Walgreens’ press announcement did note that the company is working with other CGM manufacturers to bring the same billing solution to other Medicare CGMs, i.e., Abbott’s FreeStyle Libre. 

  • The launch of UnitedHealth’s Level2 type 2 diabetes remission program was a hot topic during the call as it was throughout the last several weeks with our readership. As a reminder, the intervention provides a Dexcom G6 continuous glucose monitor, a Fitbit activity tracker, smartphone app-based alerts, personalized clinical coaching, and virtual specialist consultations and an estimated 230,000 members will have access to the program at no cost. EVP Steve Pacelli emphasized that Dexcom was still in the “capturing data” and proving value phase with non-intensive type 2s, noting, tongue-in-cheek, that UnitedHealthcare serves more than 230,000 non-insulin using type 2s that Dexcom is interested in reaching.

    • Later on, Mr. Pacelli eloquently elaborated further, sharing that he believed the products for non-intensive type 2s will ultimately be different than those for intensive insulin users: “We think the products are going to be different. They won't be nearly as – I don’t want to say nearly as robust, because the performance of the underlying sensor will be the same. But, having some of the bells and whistles that we need for the intensive insulin population just don’t apply the type 2 [population]. The software experience needs to be different. So, those types of things are within our control or even, frankly, within the control of some of our partners that we’ve talked about, right? Livongo offers a patient experience to their patients. United, the Level2 program is an experience that we’ve developed together with United, but it's really a UnitedHealthcare patient experience. So, there's not going to be a one size fits all here.”

  • During prepared remarks, Mr. Sayer highlighted several studies from ADA demonstrating the value of CGM in type 2s. Posters from Dexcom demonstrated large improvements in A1c and patient-reported outcomes from patients using Dexcom G6 and reductions in hospitalizations for Medicare patients on intensive insulin therapy using Dexcom G5. Additionally, a presentation from Onduo demonstrated 2x greater A1c reductions when Onduo was paired with Dexcom G6 compared to a connected BGM. Separately, regarding Onduo, we recently heard that Chief Medical Officer Dr. Ron Dixon has left the company to be Chief Medical Officer at Remedy, an Austin-based start-up characterized as “the house call for the digital age” – the impact on Onduo will no doubt be negative as Dr. Dixon is such a highly regarded medical leader, though presumably CGM is here to stay at Onduo.

2. G6 manufacturing capacity doubled in 1H20 as expected; direct-to-consumer marketing ramps up in 2Q20

Excitingly, Dexcom reported today that it successfully “doubled” G6 manufacturing capacity in the first half of the year. This is a huge win for Dexcom and allows the company to keep up with its expanding penetration into the type 1 and intensive type 2 markets, as well as the non-intensive type 2 market. As Mr. Sayer put it, this puts Dexcom “in a great position operationally to address the significant market opportunities ahead.” As a reminder, Dexcom also doubled its G6 manufacturing capacity through 2019, meaning its current capacity is ~four-times the level at the start of 2019. At the end of 2Q20, Dexcom was in the strongest inventory position “in [the] company’s history” and given the supply constraints for G6 we saw for much of 2019, CGM uptake could accelerate even further.

Also on today’s call, Mr. Sayer shared that the company “began to accelerate” direct-to-consumer (DTC) advertising in the second quarter. This is slightly ahead of schedule based on its intentions to “really turn on” spending on DTC marketing in the “back half” of 2020, which Mr. Sayer stated in Dexcom’s 4Q19 call, at JPM 2020, and in the company’s 1Q20 call. While few details about their DTC efforts were disclosed, management shared that they have teams analyzing DTC marketing success and promptly responding to consumer requests in response to advertisements in “a matter of hours.” Anecdotally, we’ve heard recently of TV ads for Dexcom since last week – specifically, from one contact, right in between Jeopardy! and the 4 PM news. Abbott, which has also been supply constrained for FreeStyle Libre in the past, has also invested in DTC marketing and given the amount of runway left for CGM, marketing from both organizations will almost surely bring more awareness to CGM, as a whole.

  • Mr. Pacelli was very excited about the potential for Dexcom’s DTC marketing, saying “there’s not a better investment that we could make”: “You know, working from home now, we see Dexcom ads wherever we watch TV – a lot more than we used to – and it has been very successful and our team is really good at it. And I would just say, you know, from a return on investment (ROI) perspective, there’s not a better investment that we could make inside these four walls today [than] in direct-to-consumer spending.”

  • During Q&A, Mr. Sayer suggested that part of the growth in new patients, particularly type 2, is coming from DTC marketing: “Many of these patients don't even see endocrinologist so they're finding out about Dexcom and coming to us directly because of our marketing efforts and because what they've heard word of mouth or what they've seen from others.

  • That said, we also hear more lamentations that patients can’t pay for CGM, as the population who are seeking CGM broadens, and we certainly hope government access continues and other payer coverage continues to improve.

3. G6 Pro launched “on limited basis,” expanded launch in “early July”

The G6 Pro launch was briefly highlighted during prepared remarks. Mr. Sayer called G6 Pro a “natural extension into the type 2 non-intensive market” and anticipates prescription for blinded use for all people – not just those with diabetes. After receiving FDA clearance in October, Dexcom G6 Pro was launched in June “on a limited basis” with an expanded launch initiated in “early July” (per our coverage, shipping was scheduled to begin on July 6). Per the ordering website, the products are still on “launch sale”: a starter kit with a reader and four sensors is sold at $249 each ($299 regularly) and subsequent devices are priced at $59. Reimbursement is already available for the G6 Pro, and importantly during the pandemic, analysis and discussion of G6 Pro data are billable whether provided remotely or in person.

  • During his prepared remarks, Mr. Sayer shared, “We are also excited about the launch of our G6 professional product, which has several appealing uses as we explore the full value of our CGM platform. The product provides a natural extension into the type 2 non-intensive market by leveraging the strong existing reimbursement framework for professional CGM with a tool that empowers clinicians. G6 Pro gives doctors the flexibility to assess a patient's glycemic health in real-time for all patients with diabetes. As a single-use product, G6 Pro will also serve as a great introduction for a patient looking to experience the functionality of Dexcom CGMs. G6 Pro can also be prescribed for blinded use where the patient does not see the real-time data to all people, ages 2+ years – and not just people with diabetes – providing all people with the opportunity to assess their glycemic health.”

  • As a reminder, the system has the same form factor as the G6 but contains a fully disposable Bluetooth transmitter, real-time blinded and unblinded modes, and gives users the option of the receiver or G6 app for viewing data. Making the device fully disposable both eliminates HCP’s responsibility to keep track of and clean transmitters – and makes it far easier to prescribe and analyze – and it more fully prepares Dexcom for the manufacturing of its fully disposable G7. We continue to believe there are far more opportunities to use professional CGM than are being used currently and hope to see a significant uptick.

4. Temporary CGM use in hospitals is an opportunity to learn, not an immediate revenue driver; gestational and pregnancy indications “going to be a while,” but “significant revenue drivers in the future”

Today’s remarks made it clear that the FDA’s temporary authorization for use of Dexcom CGM’s in hospitals is an opportunity to gather data and fine-tune their system, not a money-maker. Mr. Sayer laid it out explicitly: Dexcom’s “hospital efforts were not a material driver of revenue in the second quarter, and we do not expect it to be for the current year, but the data that we are generating is invaluable as we assess the regulatory pathway forward for this important market.” These points are in line with management’s beliefs in the 1Q20 call in which Mr. Sayer noted that Dexcom’s significant financial investment in using Dexcom CGMs in hospitals. As well, there seems to be significant compassionate use at work here – people in the hospital need and want CGM (if they are conscious) and hospitals’ already-low margins and their weaker and far less predictable financials during COVID-19 make them into great examples of organizations that should receive lower prices, particularly given the very ill states of so many of their all patients with already-existing diabetes as well as what is being increasingly referenced as “sudden-onset” diabetes.

On the pregnancy and gestational use front, Dexcom remained optimistic about the potential, but it’s “going to be a while.” However, Mr. Sayer also shared that on the pregnancy side, “[Dexcom’s] had very detailed discussions with the FDA as to what we need to do on the pregnancy side to get that label.” This is a no-brainer from our view and we are surprised that a safety measure is to test this though we understand regulatory requirements are very complex. As a reminder, Dexcom announced CE-Marking for G6 use during pregnancy at ATTD 2020, and in Dexcom’s 1Q20 call, Mr. Pacelli stated that a launch of G6 for pregnancy in the UK had begun. Just a few weeks ago, Health Canada authorized temporary use of Dexcom G6 in pregnant women during COVID-19. In terms of permanent authorizations, management anticipates that a gestational-specific product will follow pregnancy indications, given that building a gestational-targeted product will require Dexcom to “head down the line to develop a product and a platform that fits into that market on a cost-effective and positive-outcome basis.” Of course, off-label use for CGM in pregnancy is already quite common (65% from 2016-2018 according to US T1D Exchange data) and Mr. Sayer acknowledged as much on today’s call, saying, “We all know the product works very well in pregnancy. All you've got to do is go to social media and see the Dexcom patients who have had a child that they never thought they would have.” Of course, however, the label is needed because what’s also obvious from social media is that everyone who has diabetes and is pregnant does not have access to CGM, despite, as Mr. Sayer says, its’ obvious, many positives.

Dexcom is thinking in terms of the long-term revenue potential and is taking advantage of the temporary authorizations to best position itself going into regulatory processes. Per Mr. Sayer, You know, we've already spent some time talking about it on the call today, but you look at opportunities like hospital and gestational use. Those are significant revenue drivers for us in the future. We're going to make sure that we're spending in those areas to ensure that we open those up and then provide for growth into the future, so we are going to [continue to] spend in the back part of the year.” As a reminder, this interest in hospital, pregnancy, and gestational use is not new: Dexcom has been running several pregnancy and hospital studies since May 2019. While the gestational use study was briefly mentioned on today’s call, we haven’t heard any substantial updates on these studies since 4Q19 – again, this is a no-brainer from the perspectives of patients and newborns and better outcomes.

  • In terms of hospital CGM use, Dexcom continues to focus learning and gathering data. Echoing their thoughts from the April 1Q20 call, management reiterated their hopes to use the FDA’s temporary authorization for Dexcom CGM use in hospitals to “gather as much data” as possible, including data on their sensor’s potential interferences with other metabolite compounds and the logistics of remote monitoring. Per Mr. Sayer, Dexcom spent the quarter navigating unexpected obstacles like hospital IT systems and starting to gather data. Notably, although all the hospitals are using the same CGM (Dexcom G6), they each had their own protocols: some “put it on anyone with diabetes. Some would put it on anybody with elevated glucose levels, and others will take the approach that ‘We’re not going to do this until somebody’s really sick.’” All these differences in the centers’ protocols will have to be part of the data collection process, in addition to outcomes and patient profiles, including medications given while hospitalized.

  • Mr. Sayer also highlighted a case study coming out of San Diego Scripps Hospital that had “several encouraging points” and shared that anecdotally, “what we’ve heard is our product performed in the hospital the way we thought it would and its accuracy and performance really wasn’t affected by the compounds used to treat these patients.” Overall, Mr. summarized, “The use of G6 was eagerly embraced by the hospital and nursing teams with high rates of satisfaction among patients as well.”

5. OUS success with e-commerce in Canada and UK; distributor markets weaker in 2Q20

As noted above, 2Q20 was a weaker quarter for Dexcom internationally. However, at several points during prepared remarks and Q&A, management highlighted particular success in the UK and Canada during 2Q20. The two markets “were amongst [Dexcom’s] highest growth markets in the second quarter,” driven by the e-commerce platform that was launched in Canada in 2019 and recently expanded to the UK.

  • Dexcom highlighted particular struggles in its distributor markets in 2Q20. This does not come as a surprise, as many have speculated sales in Europe and Asian geographies might see more of an effect from COVID-19 due to their heavier reliance on hospitals for diabetes care. Mr. Blackford did note that distributor order growth started to rebound at the end of the second quarter and beginning of 3Q20, though he noted guidance assumes a lower level of distributor orders through the remainder of the year.

  • There were no updates on potential G6 launches in new geographies. In 1Q20, Dexcom highlighted regulatory approvals for G6 in Australia, Japan, and South Korea, with launch plans for “later this year.” Of course, getting the no-calibration, 10-day-wear G6 to more OUS markets will offer a nice improvement over the G5 system and offer nice growth potential for Dexcom’s smaller, but rapidly growing, OUS business.

Pipeline Highlights

1. No limited launch of G7 in 2020; hardware and algorithm are “complete” and first production line is up; no updates on pivotal trial timing

Dexcom declined to provide a meaningful update on its pivotal trial, submission, or launch timing for G7, though Mr. Sayer confirmed that there would be no limited launch of G7 in 2020. As a reminder, the plan prior to COVID-19 was a limited launch of G7 towards the end of 2020 with the full launch coming in early 2021. On the update at the end of April, we learned the G7 pivotal trial would have a “minimum delay of approximately six months.” Back in April, Mr. Sayer speculated that the delayed trial could potentially be moved if there were a way to statistically justify a smaller sample size in the pivotal trial, but given the lack of any comment on today’s call, we’d be surprised if that were the case. Still, Dexcom has continued work on preparing G7 manufacturing and based on today’s comments, it appears the company may go into a full launch of G7 from the start, forgoing original plans for a limited launch. Assuming the “minimum delay of approximately six months,” we could potentially see G7 launched by summer 2021, though as with so many other things, timelines are quite difficult to predict in the context of a pandemic.

  • On a more positive note, Mr. Sayer shared that the first automated production line for G7 is now up and ready to produce devices for trials. We’d heard on the company’s most recent call that its global suppliers were “putting equipment together” for G7 manufacturing. Additionally, Dexcom is “in the process of finalizing” clinical sites for the pivotal trial. Both manufacturing and clinical trial costs related to G7 were highlighted as expenses in the back half of 2020, suggesting the company will be ready to move forward as soon as it is safe to do so.

  • As a reminder, planned features for G7 include the following: 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 with Bluetooth. At JPM 2020, Verily appeared to confirm for the first time that the G7 would also contain a built-in accelerometer although later reports appeared to clarify that announcement, indicating that no formalized plans had been determined. On today’s call, Mr. Sayer noted that Dexcom had spent the extra time from COVID-19 to add “some great enhancements to the system” – there were no hints of what those enhancements might be.

  • Dexcom is clear it will not be held to specific dates for G7 launch – this is smart from our view, as so many patients are still thrilled with the move to G6 as well as other upgrades such as even small improvements in Clarity (patients just started being able to see 250+ mg/dL on the “main screen”, etc. Said Mr. Sayer on the launch front:

    • “And, finally on to G7, where we are pressing forward on several fronts. As we said on the last call, COVID-19 has affected our timeline on this project. Specifically, pivotal studies would be delayed for at least six months due to uncertainty of the clinics, and we are going to be fully ready for a G6 conversion when we launch. Some G7 manufacturing scale activities have been delayed or some of our vendors shut down for meaningful periods of time. Let me remind you, we are going to be fully ready for a G7 conversion, when we launch, and a very small amount of G6 equipment can be used for G7. I am not going to provide you a specific clinical trial filing and launch dates today. In this competitive world, we have no interest in sharing our playbook for the entire industry. There will not be a limited launch of G7 in 2020. Such a launch would not provide a meaningful financial impact and rushing to accommodate such a launch would ultimately delay our long-term plans. The hardware and sensor electronics are locked and the G7 algorithm is complete. We have used our extra time to add some great enhancements to the system. We are back in the clinics. We are in the process of finalizing clinical sites and timing our US pivotal studies. Our first fully automated G7 line is up in San Diego. Additional G7 automation equipment is arriving regularly in San Diego, Mesa, and a third-party contract manufacturers.”

Slide taken from Dexcom’s JPM 2020 presentation.

2. No updates on Tidepool Loop integration or direct-to-Apple Watch

Given the busy nature of the call, other pipeline updates on Tidepool Loop and direct-to-Apple Watch transmission were not provided. Neither of these projects have been mentioned in some time, but the latest news is below.

  • At ADA 2019, Dexcom signed as a partner to integrate G6 into Tidepool Loop, following similar moves from Insulet and Medtronic. Updates on the integration partnership were not provided today, but Dexcom has previously championed itself as a support of “patient choice” and “interoperability.” Six-month data from new Loop users read out at ATTD 2020, showing a 1.4 hour/day increase in Time in Range and A1c drop from 6.8% to 6.4%.

  • Dexcom was expected to launch direct-to-Apple Watch data transmission in the quarter – it’s unclear if that happened. The feature will require the new low-cost G6 transmitter, which saw its first full quarter of production in 4Q19.

Analyst Q&A

Q: So, Kevin and Steve, you both touched on hospital and pregnancy, gestational use. I guess what I'd love to hear an update on is maybe the pathway and timelines to maybe extending some of those reimbursements to more of a permanent nature, whether that's Canada, the U.K., where we've seen some of the movement on gestational over the last year or even in the U.S. Just again, pathway and timelines on how we should think about when those can become more permanent contributors to the model? Thank you.

Kevin Sayer: You bet. I'll take that, Jeff. On the hospital side, we are really now just starting to gather data from the centers that use CGM. When we started the whole hospital initiative, it was just let's get the product out there and help the staff at the hospitals and also make patients healthier, and we navigated through a series of things that we really didn't anticipate very well, such as the IT systems of the hospital and things of that nature.

So, we're now starting to gather data. We also have learned, interestingly enough that a lot of the hospitals, even though they all got the same product, had different protocols in a different way that use CGM. Some of these centers would put it on anybody with diabetes. Somebody would put anybody with elevated glucose levels, and others would take the approach. We're not going to do this until somebody's really sick.

So, we're going to learn more about the protocols and how it was used. And to start gathering data about the sensor and how it works, and also, we're going to try and gather data with respect to how these patients were treated from a drug side as well.

Anecdotally, what we've heard is our product performed in the hospital the way we thought it would, that its accuracy and performance really wasn't affected by the compounds used to treat these patients. And we should have a pretty good picture of where it is. We've not had any additional discussions with the agency on the hospital data yet, because we really haven't had anything in a form that we could present that would start us down a path.

As far as next steps in the hospital, we still have the ability to use the product in the system and with COVID not going away, I think we'll be able to gather more data. And now that we've been through this initial wave of learning, we'll probably get better data and more data and know what we're looking for going forward and put together data, we'll present that to the FDA. And at the same time, we'll present them what the plan as to what we think we need to do next. That's going to be a while. And -- but we've got some time to gather more data.

On the gestational side and the pregnancy side, we have seen some countries open up and say, hey, let's go do this, the UK and Canada that you pointed out. We've had very detailed discussions with the FDA as to what we need to do on the pregnancy side to get that label, and we are working on that. We all know the product works very well in pregnancy. All you've got to do is go to social media and see the Dexcom's patients who have had a child that they never thought they would have, who have diabetes of our type 1 patients on gestational side, we think our opportunity is outstanding. Not only from a manage those patients who have gestational diabetes as a predictor of those who may in fact, get it. And again, we are running studies. There are studies being run by many others to determine what that model looks like. I think our first step there, Jeff, is we need to get just a pregnancy indication with the FDA rather than specific gestational one. And then head down the line to develop a product and a platform that fits into that market on a cost effective and a positive outcome basis, but we're very optimistic that it will.

Q: I just wanted to talk a little bit about the quarter and maybe just kind of understand any differences you're seeing in underlying the patient behavior or patient demand in states or geographies that have high levels of COVID currently or any states or geographies that don't, I'm just trying to understand how much of an impact we saw to new patient starts with respect to your COVID in the quarter and how we should think about the potential for the rising case volumes, potentially increase in the second half of the year?

Kevin Sayer: Yes, we didn't quantify exactly what we believe the impact to be in the second quarter, but we tried to give some color and it's the foundation for how we thought about the back half of the year as well. If you look at the end of March and into April, new patient starts when COVID was really starting to ramp at that point in time was roughly 75% of kind of that normal range that we would have expected. So, you saw about a 25% impact on the new patient starts at that point in time. Now I will say over the course of the quarter, end of June, we saw that rebound nicely back in line with previous expectations as things started to come under a bit of control. Now we saw it pick up a little bit in July as the COVID cases have increased a bit more that we're all aware of, and we were very clear in our guidance that we're assuming roughly 75% to 80% of new patient starts throughout the back half of the year. That's the best data point we have at this point in time. So, I would just take you back to that reference point of 75%, 80% roughly, new patient starts throughout the month of April, is kind of how we saw the impact in the quarter.

Q: Can you talk a bit more about the recent launch of UnitedHealthcare's level 2 program? How significant of a catalyst is this for non-intensive type 2 adoption in the US? And do you believe that this program together with Intermountain data that you've shared suggests that CGM use will be more frequent and sustained among non-intensive type 2 patients over the long-term than the intermittent use case you've historically discussed?

Steve Pacelli: Yes, this is Steve. It's certainly evolving, but I think these are all validating points for us, right, that certainly, UnitedHealthcare serves more than 230,000 non-insulin taking type 2 patients and we would hope that over time, that program has expanded pretty dramatically beyond where it is today. We're in the midst of just continuing to capture data and prove out the value of this technology in the non-intensive patient population. We know we have something there. We know it's important. Whether it becomes a real-time all-the-time use case, over time, it very well could be. We're seeing some very positive outcomes for people using it for, frankly, a longer period of time than maybe we would have cited previously. So there is an opportunity. Reimbursement is still in its infancy in the non-insulin-using patient population, so we've not only got to prove the outcomes, we've got to get the product paid for. So it's still not even the balance of this year, not going to be a material piece of the business, but it's going to continue to grow over the coming years, for sure.

Q: I want to maybe spend a little bit on the guidance here. You touched on new patient expectations. Usually, at the beginning of the year, at JPMorgan, when you give guidance, you give us a little flavor for how we should think about revenue per patient and the headwind expected there for throughout the year as you shift into pharmacy and restructure some of your negotiations on price and international, so I was wondering if you could give us a little bit more flavor, we're halfway through the year, what's baked into guidance? And also, if you could spend some time walking us through the bottom-line expectations. You put a fantastic adjusted EBITDA this quarter. How much of that really is the new baseline? And if you could quantify how much was just deferred spending that we should expect in the back part of the year.

Quentin Blackford: Great. So, with respect to the first part of that question around top line and revenue per patient or maybe the pricing headwinds that we've talked about historically, certainly, we came into the year with an expectation that, that was going to be somewhere around $125 million to $150 million, likely being around $125 million to $150 million, range. I can tell you that based upon where we saw price come in, in Q2, it was right in line with our expectation. We have not changed our pricing assumption, our full year guidance at this point in time, we still expect it to be around that $150 million range. So not anything significant in terms of a change there, the strategy we've put in place, to step this down over time continues to play out exactly as we had expected. So that continues to be consistent. With respect to the bottom line, we've made incredible progress from a profitability perspective, really over the last call it, four or five quarters now, with nearly 1,500 basis points of improvement in operating margin profile in Q2 alone.

There's no question that some of the spending was impacted in the quarter, particularly around efforts like DTC as we started to pull back some of that early in the quarter just with the uncertainty around how COVID was going to impact things over the course of the quarter and into the back part of the year. I will tell you, we did start that back up in early Q3. So you're going to see incremental spending in the back half of the year around things like DTC. The other thing to keep in mind that's going to impact your spending trends that won't allow the same kind of improvement in Q2 to play through in the back half of the year is the fact that we're starting up the G7 trials.

We've been very open and deliberate about the spend that's going to go into that. We're putting forward quite a bit of resources around standing up those manufacturing capabilities and ensuring that capacity is going to be there right out of the gate. We do have the first line up. There's incremental lines coming right behind it as we speak and building out that entire supply chain capability. And then finally, we've already spent some time talking about it on the call today, but you look at opportunities like hospital, gestational. Those are significant revenue drivers for us into the future. We're going to make sure that we're spending in those areas, to ensure that open those up and provide for growth into the future. So, we are going to spend in the back part of the year. You're not going to see the same sort of improvement. But at the same time, we're committed that over time, we will continue to mature as an organization. We're going to step towards the long-term goals of profitability that we've laid out. And I think we've made great progress towards it, but you're not going to see these sorts of improvement every single quarter. I think you need to look at it over a period of time.

Q: I wanted to follow-up on the type 2 mix this quarter. The 20% number seemed pretty strong and it seems like it's increasing. So, can you guys give us any sense around where these patients are coming from? Are they top prescribers for Dexcom or other T1s? Or anything on patient profile, new to CGM or early adopters?

Long story short, as we look at that T2 growth, even within the intensive population going into the back end of this year and into next. Is it push or pull? Or is it getting easier at all?

Kevin Sayer: This is Kevin. I'll take that. It is getting easier. And I think the biggest catalyst in all this was when we got Medicare approval a while ago, and now we're getting Medicare awareness with these insulin-using patients because a large number of insulin-using patients in this type 2 population are, in fact, Medicare patients. So, that has been a big catalyst for growth, particularly as we've gotten better at serving and taking care of those patients. I think the other catalyst is just the approvals we were seeing from some of the large payers.

Steve pointed out, UnitedHealthcare covering type 2 patients on intensive insulin recently, again, giving more patients access to it. As these patients are having positive outcomes, access is growing and they're matching the CMS approvals that we've already received. So, it's coming across the board and it's not coming to us from our primary prescribers, they are coming from everywhere. Many of these patients don't even see endocrinologists. So, they're finding out about Dexcom and coming to us directly because of our marketing efforts and because what they've heard word of mouth or what they've seen from others. We've always felt this would be a great use of our technology, and it's proving to be exactly that.

Q: I guess, just on the international business, it looks like that's probably the only place you could really pick at here. Quentin, can you just summarize why the growth was a bit slower than historical trend? You seem to infer that trends in the direct market picked up in June and in distributor markets in July. Can we assume that you expect a greater than seasonal impact in international sales in the second half?

Quentin Blackford: Yes, it's a fair question. I think it's a bit premature to speak to that fact in terms of playing out over the course of Q3 with respect to the distributor orders. Certainly, we saw those orders start to come through and in the third quarter. I think the question becomes based upon what was happening with COVID in the broader environment today, do we see that actually rebound and double up in terms of the orders in Q3 or does everything just kind of defer and push a bit. Our guidance would contemplate the fact that it pushes at this point in time. Just based upon the best information that we have. If it were to all come in and terrific, I think we'd be very happy.

Just a little bit of color around that OUS result. I think what you're seeing there is very comparable to what the broader marketplace and the industry realized over the course of the quarter as well. I think if you look at the data points that have been put out there by our competitors, thus far, they saw a slowdown in growth in Q2 in their international business, just as we did sequentially, absolute dollars step down from Q1 into Q2, which we certainly saw as well. But the broad market saw the same thing. So, I don't think you're seeing anything that's unique to Dexcom. I think over time, we remain as bullish as ever on the international opportunity. We've stated the fact that we're going to step down price over time in the international space as well. And when you have a quarter like Q2 where the ability for new patients to get into the clinic and come on to the product becomes a bit muted, you see a bit more of a pronounced impact. So, that's all part of a long-term strategy that we believe in and are very bullish around. So, we're still very, very optimistic and excited about that international business, but that's a bit of color that played out in Q2. And with respect to Q3, our view is that things probably push. But if we see it rebound, it's been great, there's upside to the number.

Q: Nice quarter. ADA seems like a million years ago now – June, but can you give us an idea of what the key things were that you walked away from that you think we'll be talking about over the next 18 months?

Kevin Sayer: Yes, I'll take that one. I think, again, the walk away from ADA is how important CGM has become in all this. Almost every presentation you went to every presentation we saw the performance of drugs, the performance of other systems is based on CGM data. From Dexcom's perspective, obviously, the drive of the automated insulin delivery systems was largely driven by Dexcom sensors, regardless of who the presenter was up at the pulpit other than Medtronic and we can see our sensor can drive great outcomes there.

I think the other takeaway is we're not stopping innovation in diabetes. Everybody is still pushing forward, and we still think there's better ways to attack this. This is a big cost and healthcare problem in our country and around the world. And I don't think anybody is going to slow down. But -- our biggest takeaway, compare that to your first ADA, Joanne, where we had to beg for anybody even listened to us. And now every place we go and just our industry growth, CGM has become the dominant technology here across all of the diabetes treatments. And we're looking forward to just continuing to be better.

Q: Kevin or Steve, a higher-level question on the non-intensive side. I appreciate some of the comments you made, but I hope you can discuss maybe how you perceive these models or programs evolving over the next few years? Do you expect the revenue model to be similar to what you see with the intensely managed population? Or do you expect it to take different forms with maybe some possible risk-sharing or shared cost saving developments? Just anything you can offer there and how you see the contracts coming together over time, now that you've been engaged with payers and other partners on various models.

Kevin Sayer: Yes. This is Kevin. I'll add a bit to Steve's comments earlier. We don't see one solution yet. We are working with a number of partners on the payer front. We're working with clinics. We're working with a lot of these diabetes management systems as well to provide CGM data to that to figure out what the best model for these patients is. We're not only working with these partners, but we're doing a lot of market research on our own. And one of Steve's comments that is becoming very evident in all the work that we do is Type 2 patients are more than open to wearing CGM and learning what's going on with their bodies.

They want a different experience than we offer today for the Type 1 patients connecting to insulin pumps and Bluetooth pens and sophisticated predictive alerts and alarms and things like that we have today are not as important to that group. But what is important to that group is that they're healthy and that we can reduce their meds, we can reduce their cost, that we can make their physician visits more productive and we can make changes in their help that save them these complications over the years. So I think what you'll see is we'll continue to pursue all these models, at the same time, we're going to pursue the proper product configuration. And reimbursement models for us.

I've been in numerous discussions where we ask, if we get paid X for an intensive patient for a year, what should we -- what should be the reimbursement rate for non-intensive Type 2 because the fact is we aren't saving their life on a near-term basis. With an alert and alarm, we are not giving them something that determines their drug dosing decision, but we are giving information to better manage their lives.

So, we think there may ultimately be a different class of product here and a different form of reimbursement even patients wear them all the time, which is, again, another reason we're investing so much in scale here, because we like these things everywhere. I think the market is developing nicely and the constant thread coming from all these approaches, if this thing works.

Q: Just wanted to touch on the hospital channel a bit more, I'd just love to hear how you're going to approach the commercial aspect longer term, you don't really have reps in the hospital. Do you need a partner there? Or are you planning to build out a separate sales force?

Kevin Sayer: The revenues in the hospital wouldn't have a significant impact on the financials. The costs are exceeded the revenue. So, we'll leave it at that. With respect to the channel, we've not made a decision there as far as how we'd pursue that. We are early enough in this process that we're not ready to adopt a commercial model.

We want to leave our options open. We would explore partners. We would explore doing it ourselves. But, we'll figure out where to best use our dollars. And then we haven't made a decision there yet.

Q: So, in the second half, you're effectively assuming that new patient start rates are similar to sort of the trough of COVID, even though there probably has been some improvement and you're not assuming any distributors sort of recoup in ex-US markets. And just kind of related to that, can you just give us a sense ex-US whether this was country-specific or just broadly ex-US? Because our sense is maybe Germany performed differently than Canada, performed differently than France.

Quentin Blackford: Yeah. I think in the prepared remarks, we were pretty clear with the fact that we saw COVID did impact certain countries a little bit differently than others. UK and Canada performed incredibly well, particularly on the e- commerce platform that we had put in place. Germany certainly was impacted in our distributor markets were certainly impacted.

On the distributor point, again, I think it's just too early to tell if that's going to double up in Q3 or if that's just going to be simply something that pushes out over the course of the remainder of the year. I think at some point in time, it will catch up to itself, and we'll be back on that same trajectory. It's just too hard to predict if that happens in the next six months or not. And our guidance would be based off the fact that it does not, that it's been pushed. That's kind of how we thought about it.

So -- and then your point on just the new patient starts in the back half of the year. Like I said, we're trying to create some clarity for you guys in the back half of the year around what we're confident that we can deliver on. We're using the best data points that we have from our experience. And that 75% to 80% new patients start as what we realized early in the second quarter as COVID was kind of starting to really gain some traction.

We've seen COVID numbers increasing here recently in the third quarter as well. And so that's the best data point that we have. So, that's how we went about putting the numbers together. Obviously, if we can navigate through that more effectively or to a better degree, then there's going to be opportunity in the guidance number, but we don't want to get ahead of ourselves at this point.

 

--by Hanna Gutow, Katie Mahoney, Albert Cai, and Kelly Close