Dexcom 3Q18 – Sales grow 44% to $267 million, US & OUS records; FDA clearances for G6 professional CGM (Pro Q) and non-intensive G6 Glucose Program with coach chat – November 6, 2018

Dexcom reported record 3Q18 financial results this afternoon in a call led by CEO Kevin Sayer, CFO Quentin Blackford, and EVP Steve Pacelli. Noted CEO Kevin Sayer in concluding remarks, “Accurate timely glucose information will drive everything in the future diabetes ecosystem. We have all the technology pieces to take CGM across all of healthcare.” See the top financial and pipeline highlights below!

Financial Highlights

1. Record sales of $267 million grow 44% YOY; Record US sales of $202 million (+34%); Blowout OUS sales of $64 million (+93%); revenue per patient reduced on US pharmacy shift

Dexcom Quarterly Sales (1Q12-3Q18) – Global, US, OUS

• Dexcom’s worldwide 3Q18 sales hit a record-high $267 million, accelerating again to impressive 44% year-over-year (YOY) reported growth (+45% operationally). The outstanding performance came on a fairly tough comparison to 24% growth in 3Q17. Sales increased 10% sequentially from the previous record high in 2Q18. This now represents four record sales quarters out of the last five and Dexcom’s first time crossing $250 million in quarterly sales (yep, that annualizes to $1 billion in annual revenue) – and this was only the first full quarter of G6 on the market. For the second straight quarter, both the US and OUS businesses saw record-high sales, as noted in the graph above and detailed in the bullets below. CEO Kevin Sayer pointed out that 3Q18 revenue exceeded full-year 2014 revenue – not that long ago!

  • In 3Q18, Dexcom did start to see reduced per-patient revenue, driven by three channel trends: (i) More of the US commercial business flowing through the pharmacy (Dexcom some conceded some pricing to get G6 into the pharmacy and open up access); (ii) OUS sales becoming a larger portion of revenue; and (iii) more sales from Medicare. All are in line with expectations, and given the revenue growth, Dexcom is seeing very impressive volume growth.

  • CFO Quentin Blackford said most of the per-patient revenue impact came from the US pharmacy channel – US growth would have been 40% YOY if not for the pricing headwinds. This implies Dexcom lost about $9 million in US revenue in 3Q18, a good tradeoff in our view given the higher potential access in the pharmacy, lower HCP and patient hassle, lower copays, and simpler process for Dexcom to serve the pharmacy channel.

• Record US revenue of $202 million grew 34% YOY and 7% sequentially, propelled by G6’s first full quarter on the market. Notably, Dexcom’s commercial new patient pipeline has “more than doubled” compared to 3Q17, a clear testament to how G6 is driving more volume and expanding the category at a faster rate than sales growth. Over 40% of Dexcom’s US covered lives are through the pharmacy channel now, with G6 supplying the “majority” of those. This was a far higher-than-expected number and has happened in a very short period of time, as 2Q18 only talked about the pharmacy as an option under discussion. (It was unclear if 40% of the US business is now in the pharmacy, or simply if Dexcom has pharmacy contracts in place to ultimately serve 40% of its US covered lives – we assume the latter.) The pharmacy channel tradeoff, as noted above, has been lower per-patient revenue as G6 has moved into the pharmacy; again, we think this is very positive mid/long-term, and clearly revenue/volume growth remains very robust. Management noted that G6 has seen some shipping delays in the new patient pipeline due to product availability – certainly an indication of strong demand and boding well for a big Q4. The Medicare business also continues to “build nicely” (not quantified).

• Record international revenue of $64 million grew a remarkable 93% YOY as reported, hitting a record 24% of Dexcom’s total sales. G6 has now launched in 14 countries. Sales in “all major markets nearly doubled” YOY in 3Q18, bringing the OUS business to its fastest quarterly growth than at any period in the last five years. Impressively, this came on a difficult comparison to 83% OUS growth in 3Q17, and now marks six straight quarters with 49%+ YOY sales growth internationally. OUS sales also rose an impressive 22% sequentially from the previous record-high in 2Q18 ($53 million), continuing the inflection point in this business (see blue line above, which continues to see an uptick). The OUS business drove 38% of Dexcom’s 3Q18 growth, its second highest level ever (3Q17 was the record at 42%).

  • Dexcom has received approval in Japan and Korea, though it did not sound like either country has launched yet. As of JPM, a Japan launch was expected in 1H18 (professional model), with Korea expected in 2H18.

2. 2018 Guidance Raised by $50 million! Now ~$975 million in sales, +36% YOY; double the YOY growth expected at the start of 2018

• In the third straight guidance raise this year, Dexcom now expects 2018 revenue of ~$975 million, rising 36% YOY. This is a major $50 million raise from the previous ~$925 million guidance (2Q18), which itself was an ~$70 million raise from 1Q18’s $850-$860 million (+19%). Relative to the original guidance to start 2018 –$830-$850 million, rising 16%-19% YOY – Dexcom now expects double the growth. What a year it has been for the CGM category and for Dexcom! Noted CEO Kevin Sayer, “2018 has exceeded our expectations in every way. G6 enhances the patient experience more than anything we’ve ever done. And we are only five months into the G6 launch.” 4Q18 will have a tougher YOY comparison to 29% growth in 4Q17, though Dexcom will need to see just 25% YOY growth in 4Q18 to hit the ~$975 million guidance – this seems very doable, though management expects about ten-percentage points of growth headwind from the move to the pharmacy channel, meaning volume growth will need to be far greater than 25%. Still, given all the momentum, we wonder if $1 billion in sales is in the realm of possibility!

• Dexcom expects gross margins to rebound slightly to 65% in 4Q18, though the lower revenue per patient will continue in 4Q18 and into 1H19. Despite the $50 million increase to topline revenue, operating expenses are still expected to increase only ~18% in 2018 – impressive leverage.

3. Impressive net income of $47 million (GAAP) carried by investments; $15 million net income excluding investments/interest; 63% gross margin

• Dexcom reported GAAP net income of $47 million in 3Q18, a staggering improvement from 3Q17’s $2.0 million net loss. Net income on a non-GAAP basis was $15 million in 3Q18, reflecting $35 million of income related to investments (presumably the $5 million investment in Tandem earlier this year, given Tandem stock’s tremendous 18x appreciation from $2/share to now over $36) and $3 million in interest expense related to senior convertible notes. Excluding the Tandem investment, the business is still showing strong profitability gains, even with the G6 launch adding some disruption.

• Gross margins of 63% were in line with expectations, given the natural inefficiencies in launching G6. Gross margin was down notably from 69% in 3Q17, though consistent with 1Q18 (64%) and 2Q18 (63%). Revenue growth (+44%) exceeded growth in operating expenses (+21%) by more than 2x for the quarter and YTD – excellent leverage.

4. Dexcom Investor Day on December 4 in Orange County, CA

• Dexcom will hold an Investor Day on December 4 in Orange County, CA, sharing both financial and pipeline highlights. The agenda is still in progress, so there is no timing or location to report. We’re especially looking forward to more pipeline details, which have been light in recent calls. We’ve covered Analyst Meetings for Medtronic and Tandem this year and found both extremely insightful. Insulet held its first investor day in 2016, but has not had one since.

G6 Launch and Market Highlights

1. More G6 users than G5 users; G6 Net Promotor Score “off the charts”; Medicare in early 2019; some intensive T2D payer progress

• Notably, Dexcom already has more G6 users than G5 users – very fast growth just over one quarter into the launch. Assuming Dexcom’s global installed base is now >350,000 users (30%+ growth from >270,000 users at the start of 2018) implies there are now probably ~175,000 G6 users and perhaps more (depending on how large G4 and G5 are). CEO Kevin Sayer mentioned there are “still quite a few G5 patients out there,” as some are waiting for transmitters to expire and/or have G5 sensors to use and Medicare users are on G5 until G6 comes in early 2019.

• Dexcom secured Medicare coverage for G6 in October and still intends to launch in “early 2019.” See our detailed coverage. Abbott has a slight head start here on no-cal CGM, as it already has Medicare coverage for FreeStyle Libre 10-day and 14-day and just received FDA approval for the FreeStyle LibreLink Apple iPhone app.

• According to management, net promotor score (NPS) for G6 are “off the charts” and the feedback is “unlike anything we’ve ever done.” Management noted the NPS data came from a third-party source, perhaps dQ&A – contact Richard.wood@d-qa.com for more information. Read diaTribe’s G6 test drive here.

• Dexcom has seen some reimbursement “increase” in type 2 intensive insulin users, though the gain was not quantified. Still, this is truly excellent news and could effectively double Dexcom’s potential market in the US alone. Given Medicare reimbursement for type 2 intensive insulin users, we hope commercial payers come to their senses.

2. G6 now in 14 countries, up from 5 as of EASD

• Management said G6 is already available in 14 countries worldwide, an impressive increase from 5 countries as of EASD in early October. As of EASD, G6 was in the US, Germany, UK, Austria, and Switzerland; we assume it has now launched in several more European countries, though none were specified today. Dexcom will continue to roll out G6 globally in 2019, though no other countries were specified. Dexcom’s website (upper right corner) lists ~40 countries, meaning there are plenty more countries in which to launch G6.

3. US CGM penetration? ~25-30% of T1D's, according to Dexcom

• Dexcom now estimates US CGM penetration at ~25%-30% in type 1 diabetes. This would imply 375,000-450,000 CGM users with type 1 in the US, assuming 1.5 million total US type 1s. That seems like a very smart estimate to us, as Dexcom likely has at least 200,000 US users now, Medtronic has at least 97,000 CGM users via 670G alone (see 2Q18), and we estimate Abbott has at least 125,000 US FreeStyle Libre users with type 1 (assuming two-thirds of its estimated US base are type 1; see 3Q18).

Pipeline Highlights

1. G6 Professional CGM (“Pro Q”) receives FDA 510(k) clearance for retrospective use; approved for 2+ years in ALL people; disposable transmitter

• On Friday, Dexcom received FDA 510(k) clearance for a professional version of G6 – called “Pro Q” – which collects CGM data retrospectively through a “fully disposable” on-body component. Notably, it is cleared for “all people two years and older,” meaning it is indicated for people with prediabetes and people without diabetes – “a first step in making CGM a valuable diagnostic tool.” Excellent! See the FDA database listing here, which shows the clearance occurred in less than two months (submitted in early September) and creates a new category of device: “Integrated Continuous Glucose Monitoring System For Professional Retrospective Use.” This was very under the radar and not publicly announced until today! No decision summary is posted and no features were discussed today, other than the “disposable” mention. (The FDA page does not indicate the transmitter is disposable.) We assume the hardware form factor is the same as the G6 real-time version, but with different electronics inside to enable a lower-cost disposable. We’re also not sure if it can display real-time data, like the G4 Professional CGM, or if this is like FreeStyle Libre Pro and Medtronic’s iPro2.

• Management said it will be using disposable G6 CGMs in “various pilot activities in 2019 and beyond,” though no further details were shared. This was discussed separate from the Verily gen one product (see below), which has always been positioned as a disposable transmitter but for a real-time device. We could imagine this G6 professional version fitting into many existing partnerships, including Onduo’s virtual clinic, the Dexcom/UHC pilot in ~10,000 people with type 2 diabetes, the Fitbit partnership, and others.

• Along with the other FDA clearance discussed below, management noted the advantage of the class II iCGM designation for G6, which reduces the regulatory hassle and enables faster innovation. Indeed, a less than two-month review for a CGM is impressive and a true sign of how much faster Dexcom is able to move vs. the traditional PMA path. As a reminder, the original FDA approval of FreeStyle Libre Pro followed a 15-month review! While part of that was FDA probably getting comfortable with factory calibration for the first time in the US, it is a reminder of how much longer the PMA path can take.

• From FDA: “An integrated continuous glucose monitoring system for professional retrospective use is a continuous glucose recording device indicated for the retrospective discovery, analysis, and interpretation of glycemic variability in persons age 2 and older for use by healthcare professionals to guide appropriate patient management. The system is also intended to interface with digitally connected devices.”

2. FDA 510(k) cleared: G6 iCGM for “Non-intensive Diabetes Management”; G6 app with new features: coach chat, no alarms, Android only, TIR

• On October 26, Dexcom also received FDA 510(k) clearance for the “G6 Glucose Program,” classified as a real-time iCGM for non-intensive diabetes management. According to the FDA summary, the G6 Glucose Program offers an altered feature set vs. the predicate Dexcom G6 CGM System, designed to help people with diabetes who are not at significant risk of severe hypoglycemia. Notably: (i) users can chat in-app with a wellness coach; (ii) the app does not alarm for highs or lows; (iii) the app is only compatible with the Samsung J3; (iv) the app is the only primary display device; (v) time-in-range is displayed in-app; and (vi) only 6- and 12-hour history are displayed on the trend graph. Otherwise, the device has the exact same indications for use and sensor/transmitter hardware as the current version of G6, including 10-day sensor wear, approval for 2+ years, factory calibration with optional manual input, real-time communication via Bluetooth every five minutes, and a three-month transmitter.

• Dexcom plans to continue learning and piloting non-intensive use of CGM in 2019, with the goal of launching in 2020 and beyond. “Coming out of 2019,” said Mr. Pacelli, “we’ll have a more defined go-to-market strategy.” Clearly this clearance will allow Dexcom to test much more next year.

• This clearance gives Dexcom a CGM to drive behavior change in type 2 non-insulin users, especially with in-app coach chat, no alarms, and a bigger focus on time-in-range. We’ll be fascinated to see what else has changed in the user experience and how Dexcom moves this forward. The degree of value they could create is immense – we are so interested to see what happens on this front.

• EVP Steve Pacelli: “We’ve always maintained that G6 is a platform technology, and this is an extension of the core G6 platform. We expect to ride this platform for a number of years. We’re still big believers in the second-gen Verily disposable, but particularly in the iCGM world, we can iterate very rapidly and advance our learning outside of the core intensive insulin business. We’ve got a number of pilots in work, including with UHC.” We haven’t heard much from UHC in ages – we’d love to get an update, but that seems fairly challenging from our attempts.

• Will payers cover CGM for non-intensive diabetes? CEO Kevin Sayer: “Payers will eventually cover it, but it will depend on the program and how CGM is going to be used. One of the 510(k)’s (see above) is a device that can be used across all segments of the healthcare world, and it’s a good step as a diagnostic product. But payment will take years to develop. We’re still in type 1 intensive space for now, but we’re optimistic and very confident it [type 2 non-intensive reimbursement] will happen.”

• From FDA: “An integrated continuous glucose monitoring system for non-intensive diabetes management is intended to replace finger stick blood glucose testing for diabetes treatment decisions in persons with diabetes who do not have significant risk of severe hypoglycemia. The device also aids in the detection of episodes of hyperglycemia and hypoglycemia, facilitating long-term therapy adjustments. The device is also intended to autonomously communicate with digitally connected devices. The device can be used alone or in conjunction with these digitally connected devices or services for the purpose of managing diabetes.”

3. Verily: gen one “considering options”; gen two late 2020/early 2021

• Dexcom is “considering options” for the first-gen disposable transmitter with Verily. A gen two launch is still expected “late 2020/early 2021,” in line with 2Q18 though quite a bit further back from the original timeline (see below). CEO Kevin Sayer framed gen one as “not a huge revenue producer” and noted the Dexcom team is already “all hands on deck” launching G6. To us, it sounds like gen one might very well be shelved in favor of going straight to gen two. At this point, gen one sounds like a 2019 launch, which would be yet another manufacturing disruption ahead of a gen two launch in 2020-2021. Either way, the gen one Verily timing will miss the original 2015 timeline that called for a gen one launch in 2017-2018 (“within 2-3 years”).

• In line with past comments, Mr. Sayer noted that the gen two, much lower-cost, penny-sized CGM is “a completely new platform,” with new electronics, new insertion, new sensor, and “pretty much new everything – they are going to be a lot of steps, a large clinical study, and that project is going very well and on schedule with internal plans. It’s a big-move-the-earth effort, similar to what we’ve had to do with G6.”

4. New G6 adhesive in not-too-distant future; 14-day wear is “certainly” something Dexcom will do (no timing shared)

• In a question on 14-day extended wear (to match FreeStyle Libre), CEO Kevin Sayer shared that a new G6 adhesive is coming out in the “not-too-distant future.” Dexcom wouldn’t go to 14-day wear until this new adhesive is ready. However, Mr. Sayer did say 14-day wear is “certainly something we will do, and it’s a question of when and what modifications are needed to go there.” In 1Q18, a 14-day wear clinical trial for G6 was expected to run in “2H18,” timing that has not been confirmed since. The iCGM designation is critical here, as a 14-day wear G6 will need to show robust accuracy to hit the iCGM special controls out to 14 days.

5. Novo Nordisk smart pens and TypeZero decision support, goal of 2020 broader commercial rollout

• Management acknowledged the Novo Nordisk smart pen partnership (October) and the TypeZero acquisition, which give Dexcom a nice path to decision support for injection users. EVP Steve Pacelli said Dexcom is running some “smaller pilots” now and “certainly by 2020” investors can expect a broader commercial rollout. See this UVA/Mt Sinai/Stanford study as one example of a smart pen pilot we’ve been following, which has an expected completion date this December.

• Dexcom/TypeZero will launch its first product in Tandem’s Control-IQ hybrid closed loop system, slated for a summer 2019 launch. The pivotal is fully enrolled. See more in Tandem 3Q18.

• Dexcom’s AID partnerships with Insulet and Lilly were also mentioned in passing – see Insulet 3Q18 for the latest on Horizon (2H20 launch, direct smartphone control) and exciting plans to integrate with Tidepool Loop. Lilly has been notably quiet since the blogger meeting in May; we assume the late 2019-2020 launch plan still stands.

6. Not mentioned: Lower-cost G6 transmitter, G6 receiver-optional indication, direct-to-Apple Watch

• Not mentioned: lower-cost G6 transmitter. Per 2Q18, the goal was to launch “sometime” in 2019. The updated Dexcom G6 transmitter has a new electronics redesign and cost advantage.

• Not mentioned: G6 receiver-optional indication. As of 1Q18, Dexcom was “putting plans in place” to file this with FDA. There was no update on the 2Q18 call. Right now, the receiver must be purchased, just like with G5, a disadvantage for upfront cost relative to the no-receiver Medtronic Guardian Connect and Senseonics Eversense.

• Not mentioned: G6 transmitter direct-to-Apple Watch. At Keystone, CEO Kevin Sayer said to expect this sometime in 2019. One Drop’s BGM can now send data direct-to-Apple Watch, so hopefully the path has been paved here; see more in our coverage of Apple’s September Event.

-- by Adam Brown and Kelly Close