Memorandum

Dexcom 1Q15 – Sales of $73 million rise 56%; Share receiver launched, Gen 5 out by end of year; Gen 6 to launch in 1H17, factory calibration potential – April 29, 2015

Executive Highlights

  • Dexcom reported strong 1Q15 revenue of $73 million, a 56% year-over-year increase. The sales were Dexcom’s second-highest ever, though declined 14% sequentially from record-high 4Q14 sales of $84 million.
  • Dexcom launched the Share receiver in March and expects FDA approval/launch of Gen 5 by the end of the year. A Gen 6 launch is tentatively slated for 1H17, with potential for factory calibration.
  • Management expressed the strongest commitment yet to automated insulin delivery – Dexcom will support pump partners with future technology only if they commit to going beyond just displaying the CGM information.

Dexcom held its 1Q15 financial update today in a call led by CEO Kevin Sayer. See our top financial and pipeline highlights below, followed by a pipeline summary and Q&A.

Financial and Business Highlights

1. Dexcom reported strong 1Q15 revenue of $73 million, a 56% year-over-year rise. The sales were Dexcom’s second-highest ever, though as expected with first quarter seasonality, declined 14% sequentially from record-high 4Q14 sales of $84 million (this is compared to a 9% decline from 4Q13 to 1Q14).

2. International sales were ~$11 million, rising to over 15% of the quarter’s revenue. Dexcom only has four international employees, so it’s still early days. 

3. 1Q15 new patient YOY growth “far exceeded” the quarter’s 55% revenue growth, a terrific sign as the company seeks to expand the patient base, which was ~90,000 as of 4Q14. Management estimates ~13% of US type 1 patients are on CGM. Management stressed that upgrade revenue would fall, given patients would move toward smartphone use. Management also said that transmitter revenue would likely fall.

4. Regarding profitability, Dexcom had some one-time charges related to the launch of the Share Receiver, though cash-based net income was $9.3 million in 1Q15, a significant rise from a cash-based net loss of $500,000 in 1Q14.

R&D Pipeline Highlights

5. Dexcom launched the Bluetooth-enabled G4 Platinum Share receiver in March, just over 30 days after receiving FDA approval. The company has been “flooded with phone calls and emails” on the benefits of the improved connectivity. An Android version of the Dexcom follow app is scheduled to be released in early summer.

6. The G5 mobile system (Bluetooth transmitter, iPhone mobile app) was filed with the FDA in February, and Dexcom continues to expect FDA approval and launch later this year. The new G5 mobile transmitter will have a labeled useful life of three months, down from six months for the G4 Platinum. The FDA will likely require patients on Gen 5 to purchase a receiver “as a backup.”

7. In the first major timeline update ever, Dexcom expects to conduct a pre-pivotal trial of Gen 6 this summer, with plans for a 1H17 commercial launch. Gen 6 will have a reduced calibration scheme, a new algorithm, and could even be factory calibrated – however, some confirmatory fingersticks may be required for safety.

8. Discussions continue with the FDA regarding an insulin dosing claim, and more clarity is expected on the 2Q15 call. The toughest part is human factors and labeling.

9.  Management shared perhaps its strongest comments yet on the artificial pancreas: “...automated insulin delivery is going to come...We want a product in that space. We want a partner to be in that space.” Moving forward, Dexcom is supporting pump partners with its future technology (e.g., Gen 5, Gen 6) only if they can commit to products that go beyond CGM display and offer some measure of insulin control.

10. “Good progress” is being made on the next-gen insertion system; a lower-cost and higher quality Wi-Fi enabled receiver; and several generations of transmitters. No timing was shared.

Financial and Business Updates

1. Dexcom reported strong 1Q15 revenue of $73 million, a 56% year-over-year rise. The sales were Dexcom’s second-highest ever, though as expected with first quarter seasonality, declined 14% sequentially from record-high 4Q14 sales of $84 million. This now marks eight consecutive quarters of 55%+ YOY growth. Management maintained the previous full-year 2015 revenue guidance, which expects sales of $340 million-$360 million (32%-40% growth).

Table 1: Worldwide Revenue

 

1Q14

2Q14

3Q14

4Q14

2014

1Q15

Product Revenue (millions)

$46.7

$58.2

$67.9

$84.3

$257.1

$72.8

Year-over-Year Growth

68%

64%

60%

64%

64%

56%

Sequential Growth

-9%

25%

17%

24%

-

-13%

Figure 1: Dexcom’s Quarterly Worldwide Product Revenue (2007-2014)

2. International sales totaled ~$11 million, rising to over 15% of the quarter’s revenue. This contributed 28% of the quarter’s growth, an all-time high. The mix of international revenue has hovered in the 13-15% range of total revenue over the past four quarters. Certainly, it has now reached a material level, though management does not have very good visibility on the business, as it is 100% through distributors. Notably, Dexcom only has four international employees, so it’s still early days.

3. 1Q15 new patient YOY growth “far exceeded” the quarter’s 55% revenue growth, a terrific sign as the company seeks to expand the patient base, which was ~90,000 as of 4Q14. Management estimates that ~13% of US type 1 patients are on CGM.

4. Regarding profitability, Dexcom had some one-time charges related to the launch of the Share Receiver, though cash-based net income was $9.3 million in 1Q15, a significant rise from a cash-based net loss of $500,000 in 1Q14. Net loss in 1Q15 totaled $12.9 million and included $18.7 million in non-cash expenses. Gross margin was 64%, down from 70% in 4Q14 – the Share Receiver launch decreased margins by approximately four margin points. Margins are expected to return to normal over the course of 2015.

Pipeline Highlights

5. Dexcom launched the Bluetooth-enabled G4 Platinum Share receiver in March, just over 30 days after receiving FDA approval. As a reminder, this receiver looks exactly like the previous G4 Platinum receiver, but the addition of Bluetooth allows the CGM information to be relayed straight to the Share app on a nearby iPhone/iPod touch (eliminating the docking cradle launched last fall). The Share receiver also has the new G4AP algorithm built in and is upgradeable to Gen 5.

  • CEO Kevin Sayer said the company has been “flooded with phone calls and emails” on the benefits of the improved connectivity. Parents have identified serious lows in their kids, many of whom are away at college. For patients, the Share receiver brings added discretion – patients can see their own CGM data right on the Share app, eliminating the need to take out the nearby receiver from a pocket or backpack or purse. [Dexcom updated the Share app with a Home screen that contains the CGM number/graph from the nearby receiver, so patients don’t need to “follow” themselves and download/run two apps, as in the first iteration of Share. Another nice interim step on the way to Gen 5.]
  • We downloaded the new Share2 app and had the Share receiver paired and running on an iPhone in less than three minutes. Setup simply requires typing the receiver serial number in and clicking through a couple screens. The pairing process was seamless and the app immediately detected the nearby Share receiver. Yet again, Dexcom has rocked it on the usability front.
  • Impressively, Dexcom also launched an Apple Watch version of the Dexcom Share App in tandem with the Watch’s launch last week. As we noted in our coverage, the Share receiver does not directly connect to the Watch; the Apple Watch works like most smart watches, whereby the nearby phone is required to relay information to the watch. The same will be true for Gen 5, as we understand it. Early reports note that the watch takes a moment to update when someone looks right at the watch – no doubt this will improve over time.
  • The Share receiver posts glucose data to Apple’s Health app, which will allow other apps to pull the glucose data and use it. This is quite exciting from an app ecosystem perspective, since the data can now flow freely between different apps. Additionally, it will help alleviate the manual burden that a lot of apps now require.
  • An Android version of the Dexcom follow app is scheduled to be released in early summer. This is the first specific timing we’ve heard on an Android launch, which was previously slated for sometime this year.

6. The G5 mobile system (smart Bluetooth transmitter, iPhone mobile app) was filed with the FDA in February, and Dexcom continues to expect FDA approval and launch later this year. CEO Kevin Sayer said the company has had “excellent dialogue” with the Agency. Dexcom has planned the transition brilliantly from an operational perspective, and current patients will simply need a new transmitter and to download the free app to get going on Gen 5. The call did have several new details revealed on the Gen 5 business model and product design fronts:

  • The FDA will likely require each new patient to purchase a Dexcom receiver, which will “more than likely be used as a backup.” As noted above, the G4 Platinum Share Receiver is upgradeable to Gen 5, so those who have a receiver won’t need a new one. But in practice most patients will probably use their iPhone/smartphone as the primary receiver, so the required receivers may simply sit in patients’ drawers (our wording) ... From a business perspective, as noted, receiver upgrades are expected to decrease.
  • The new G5 mobile transmitter will have a labeled useful life of three months, down from six months for the G4 Platinum and 12 months for Seven Plus. The reason is because the Bluetooth radio requires more power, and Dexcom wanted to keep the Gen 5 transmitter on-body footprint the same as the current G4 transmitter – a tough tradeoff, but we think the company made the right call, all things considered. On the plus side, the shorter transmitter lifecycle will shorten patient upgrades to new platforms. For example, when Gen 6 is launched, the new smart transmitter and corresponding app will be available to all existing patients during their normal purchasing cycles within a few short months. Moving forward, management expects total transmitter revenue to possibly increase.
  • In line with previous comments, Dexcom plans to develop G5 mobile apps for display on a number of platforms and devices. We assume Android is at the top of the list, along with smartwatches.
  • Dexcom believes that G5 will be a “major catalyst in driving new patient growth.” Management also expects that the improved user interface and data sharing capabilities could have a positive impact upon patient retention and sensor utilization. We have no doubt on either front – sending the data directly to the phone is a huge leap forward, especially for those reticent to get on CGM.
  • Dexcom is in discussion with healthcare partners to work on advanced analytics and displaying “a complete” patient “health profile.” These comments were vague, but we imagine Dexcom data could be combined with lots of other diabetes and non-diabetes medical data, enabling providers a more holistic view of how patients are doing. Of course, the question of provider bandwidth is always at the top of the list.

7. In the first major timeline update ever, Dexcom expects to conduct a pre-pivotal trial of Gen 6 this summer, with plans for a 1H17 commercial launch. The pre-pivotal study will set the stage for subsequent pivotal studies. Management cautioned that the Gen 6 launch timing can change based on a number of factors.

  • Gen 6 will have a reduced calibration scheme, a new algorithm, and could be factory calibrated – however, some confirmatory fingersticks may be required for safety. Said management, “Based upon the performance we have seen with this sensor to date and the capabilities of our next generation algorithm platform, we believe that calibrations could be completely eliminated with this future system. However, as we work with the FDA on an non-adjunctive claim for our current sensor platform, and as we work with the various artificial pancreas groups around the globe, we’ve come to recognize that it may be prudent to require the safety of some fingerstick confirmations during the sensor session.”
  • As a result, the Gen 6 sensor may evolve over time with multiple product offerings leveraging the same sensor technology but with different algorithms, different user interfaces, and different labeling. For example, an AP sensor labeled for use as part of an automated system, but still requires calibration for safety. Conversely, a non-AP sensor might use a different algorithm and a different user interface, which would not require calibration and have a different labeled indication.
  • “Ultimately, we do plan to eliminate fingersticks for all indications, but that will take some time and some more experience.” This was encouraging to hear, and we wonder what piece is driving the staggered approach – sensor technology (e.g., is it accurate and reliable when factory calibrated), manufacturing, regulatory burden, or something else.
  • Gen 6 platform also offers Dexcom the ability to expand into other markets: diagnostics for non-insulin using type IIs, hospitals, pregnancy, even prediabetes, and obesity. The company has discussed these loosely over the past few years, though it was great to hear continued confirmation that these are a priority. We believe the type 2 and hospital indications could make a tremendous difference in diabetes care. On the former, management highlight some lower cost initiatives in Q&A, suggesting a potentially competitive product to Abbott’s FreeStyle Libre (this is good news – the Libre has exceeded our already-high expectations and we do believe the Libre represents competition for Dexcom in certain segments like young women, etc.).
  • Consistent with prior comments, Gen 6 is expected to have an extended 10-day wear. Said management, “Extended sensor life will provide us with yet another opportunity to reevaluate our business model.” We assume this refers to pricing.  

8. Discussions continue with the FDA regarding an insulin dosing claim, and more clarity is expected on the 2Q15 call. Said management, “The agency has been extremely thoughtful and progressive in this area.” (As usual, management likes to give FDA a lot of credit – we believe this is well deserved.) In Q&A, management suggested that the timing is largely a function of meetings and discussions with the Agency, and one of the biggest efforts is going to be human factors – “when we have a claim that you can dose info with this device, we have to make sure the user interface, the manuals, the training – everything – actually teach someone how to use the system and how to know its influence from it. We're heading into some new ground here.”

  • Notably, Dexcom is “actively working on” similar labeling in OUS markets. This was encouraging to hear, and we assume Europe is at the top of the list, given the indication on Abbott’s FreeStyle Libre and previous Navigator sensor.

9. Management shared perhaps its strongest comments yet on the artificial pancreas: “...automated insulin delivery is going to come...We want a product in that space. We want a partner to be in that space.” Moving forward, Dexcom is committing future technology (e.g., Gen 5, Gen 6) to pump partners only if they can commit to products that go beyond CGM display and offer some measure of insulin control. Notably, Dexcom has committed to provide additional support to these partners, which we assume is R&D or financial or perhaps even distribution and customer support. We’ve noticed a trend towards more interest in automated insulin delivery from pump players, with some early work announced at Tandem and Insulet last quarter – we wonder if these were spurred by Medtronic’s April 2017 launch expectation for the MiniMed 670G, or the announcement of Bigfoot Biomedical, or Dexcom pushing them forward.

  • J&J reported “positive feedback” on the US launch of the Vibe, and Tandem’s t:slim G4 remains on track for launch later in 2015. Management has devoted less and less of prepared remarks to these sensor-integrated pumps, and there was nothing shared on the Asante or Insulet integration partnerships. Management’s comment from the 4Q14 call was ringing in our ears: “From a revenue generation perspective, we’re treating the pump companies as additive vs. transformative.” Of course, this has to be interpreted in the context of today’s comment on automated insulin delivery. As a reminder, neither the Vibe or Tandem will have the updated G4AP algorithm, nor compatibility with Gen 5.  

10. “Good progress” is being made on the next-gen insertion system; a lower-cost and higher quality Wi-Fi enabled receiver; and several generations of transmitters. We caught glimpses of these at JPM and ATTD. All these products are designed to be more convenient for patients and less costly for Dexcom – we consider these positives all around.

Pipeline Summary

Pipeline Product

Timeline

Animas Vibe insulin pump with G4 Platinum CGM integration

Launched in 1Q15.

Dexcom G4 Platinum Share Receiver
Built-in Bluetooth to communicate with Dexcom Share App on nearby Apple device; backup receiver for Gen 5 system

Launched in March.

Tandem t:slim insulin pump with G4 Platinum CGM integration

PMA filed in July 2014; launch expected in 2H15.

Gen 5 system

[Mobile app, Bluetooth transmitter, Share Receiver, G4 Platinum sensor]

FDA submission in 1Q15; FDA approval and launch by end of 2015.

Apps:
- Apple Watch app
- Android version of Dexcom Share
- Android Gen 5

- Launched in April 2015
- Early summer 2015 launch
- Unclear

Next-gen insertion system

Wi-Fi enabled receiver

New generations of transmitters

Could come before or after Gen 6 sensor

Gen 6 sensor

[New sensor with goal of reduced or eliminated calibration, insulin dosing claim, new calibration algorithm, interferent blocking,]

 

Pre-pivotal trial in Summer 2015; 1H17 launch

Data Management

-Dexcom Portrait on the Web
-SweetSpot
-Tidepool
-Glooko
-Databetes
-Training Peaks

-Launched
-Under FDA review? (per our 3Q14 report)
-Unclear
-Unclear
-Post Gen 5 launch? (demo at CES 2015)
-Post Gen 5 launch? (demo at CES 2015)

Insulet next-gen OmniPod with Gen 5 transmitter/smartphone app integration

Following Gen 5 launch

Asante next-gen Snap with Gen 5 transmitter/smartphone app integration

Following Gen 5 launch

Questions and Answers

Q: You made a comment along the lines of patient growth this quarter actually far outstripping revenue growth. Can you clarify what exactly you said, and shed some light on what's happening?

A: I was pretty proud that I gave that much detail, but what I said was that our revenues grew 55%, and our new patient growth exceeded that number. So, if you compare the new patients we added in Q1 of last year, we added more than 55% more than we added last year.

Q: Is the incremental momentum that you think you're seeing in pediatrics? Do you have enough of a sense to be able to identify where it's coming from?

A: It's all across the board. Pediatrics has been very helpful, but we have had the pediatric approval in February of last year. It's across the board.

Q: I want to understand a little bit about the comments you made about your partners on the insulin delivery side. You commented about how you're working with the partners, and you said that you’re only going to be supplying the CGM integration capability to companies that had a bigger vision and that were looking to do more than dual display. Could you just expand on that?

A: With Gen 5, we moved the display to the mobile phone. Even with G4 Platinum with Share, we’ve heard that nobody is pulling out their receivers anymore. People are ecstatic about interacting with their CGM on the phone. Our belief, and I think our partners by and large share this belief, is that once the data is on the mobile phone nobody is going to pull out their pump just to look at their CGM readings.

Therefore, going forward what we're saying to the partners using Gen 6 and beyond is that they need to do something with the sensor data other than just display it - and I think most of the partners are understanding and onboard with this. In these projects they work for us and for our R&D teams and put a bunch of resources forward for a display only, but it's just not something that we are interested in going forward. So the comment really just says, ‘partners you need to step-up and commit resources to doing something – not necessarily calling in an artificial pancreas, but something more automated with the sensor doing some sort of pump control before you're going to get access to our future technologies.’

A: I also said we do want to support them and we will. We'll be involved, if we were going to make more automated systems and systems that do more. We probably know as much about algorithms given our experience with all these artificial pancreas groups as anybody in the world. So, as these companies make their commitments, we will make commitments with them.

Q: If G5 is approved later this year, what will the transition from the Gen 4 to the Gen 5 look like for the company? Do you have any incremental thoughts on how that's going to play out, and how long that will take?

A: As soon as we get approval, it will be very similar to the Gen 4 launch before. We'll go very quickly, provided we don't get an approval two months ahead of where we planned getting it like we got with the receiver. Now our G4 Platinum with Share Receivers have the capability to receive the Gen 5 transmitter signal through a software revision, so those patients are not going to have to buy new Receivers to get the Gen 5 transmitter and they can go directly to that. That transmitter will speak directly to a phone.

Patients will have to download the new app, but we're not planning on charging for the app for Gen 5. With respect to sensor manufacturing, it is a G4 Platinum sensor. To start, the transmitter is going to be a similar form factor to the G4 transmitter. We're not going to have to change anything operationally. We'll be producing the exact same sensor, so it's going to be all systems go from day one.

Q: A patient is going to need a new transmitter for every three months, starting with the Gen 5?

A: That's what it's labeled for. Our current transmitter is labeled every six months, and we know some of our patients get a lot longer than six months out of it. This one will be labeled for three-months use, because a Bluetooth radio requires a lot more energy, and we did not feel like going much bigger for the patients. So, we want to keep the same footprint.

Q: Can you help us understand how shifting to the pharmacy benefit is going to impact the business. Can you step back and give the short-term pros and cons, as well as, longer-term, how this plays out and impacts the overall business?

A: Longer term, it's going to be much easier for our patients, for us, and for everybody involved because if you can go to Rite-Aid or Walgreens and pickup your sensors and your transmitter every three months, possibly the bundle package, that makes life much easier. Pharmacy copays are typically lower than DME deductibles and all the other things involved in that cycle. That will make things much better for the patients.

Over the long-term that will, quite honestly, reduce the number of distributors that we manage and ship product to. We will still always have some business in DME. As we look out over three years to five years, we are hoping to be at a 70% to 30% ratio, pharmacy vs. DME; that would be our goal.

With respect to pricing, we're in the middle of negotiating pricing contracts for pharmacy benefit, and pricing is going to be different. It's negotiated differently. What people tend to forget is we already sell to distributors and give part of our price away to them to begin with, so it's going to balance out over time. What we hope to do is keep pricing relatively constant over time, and we go to create measures to evaluate each and every one of these contracts. What they do, from an operating expense perspective, we think it could be a huge impact for us. We can't go lease a building to deal with all the phone calls on the DME side – it is not a scalable business model for us over time given how many patients we're going to add and who are going to use this product. We feel the need to, as I often say, change before you have to, and we'll push the business in that direction.

Q: In the near-term, as you're making this transition, where are you today in terms of how much of the business is going through PBMs today? How does this impact the P&L short-term? Is there going to be initial incremental cost or lower pricing upfront or anything we should be thinking about as you go through this?

A: We've been moving business through that channel, and pricing on an overall basis really hasn't changed. We don't disclose the percentage that we move. We are going to give everybody more of a report card on this later on in the fall, as some of the contracts we’re in the process of the negotiating fall into place, which will have an effect on our business probably going forward for the rest of the year. Short-term it hasn't effected as much, and I don't think it'll have much effect in 2015, because I don't think we can push enough of the business there to really have a big impact. We'll see how it goes in 2016, but again let's not forget something else - then we go to a ten day sensor, so if we can get ten days of reimbursement per sensor vs. seven days per sensor, that certainly would eclipse anything we would lose on the pharmacy benefit front. So, as we go through these business evolutions, we're contemplating a whole bunch of variables while we do this.

Q: The ten day sensor was part of the G6? Or will that be an amendment to the G5?

A: No, that will be a Gen 6 sensor – not Gen 5.

Q: That is a 2017 event, based on your comments?

A: That's where it's scheduled for today.

Q: It appears from the commentary on the patient ads that you had obviously a very strong quarter. To fit the total revenues with the 30% contribution from hardware inside what you reported, does that suggest you had a bit more seasonality and purchasing for sensors this quarter?

A: Our existing patients don't buy as many sensors in the first quarter as they buy in other quarters because they frequently stocked up in December when all their co-pays and deductibles and other areas have been meet and they still have their flexible spending accounts. So, you have an increase in hardware purchased, which is driven to a large extent by new patients who buy receivers and transmitters in Q1 and then buy some sensors, and then we have some other sensor purchases; however the rest of the upgrade cycle is a little slower in Q1. So that's how the 30:70 ratio remains relatively consistent from Q4 to Q1.

Remember one thing we commented on in our year-end call a couple of months ago: we got much, much better at processing and pushing product out the door. What we commented on the last call is that we did an exceptional job in Q4 of pushing everything we possibly could out the door in terms of sensor disposables.

Q: My specific point is that I had 30% patient growth baked into our model to drive toward $360 million, and then I grow patients as 56%, and I have to cut sensors in Q1; that’s a bear to hold the model at $360 million because then the durable mix drops to about 25% for the balance of the year. So, my patient numbers for the balance of the year are either really, really too low or you have a spike in patient adds in Q1 and then it's going to drop off in Q2 because you had the launch. So, do you think you're going to grow patient adds sequentially in Q2?

A: Our plans would currently indicate that. How much they grow over Q2 of last year – I wouldn't talk about today. However, our team is certainly looking forward to adding more patients in Q2 than we did in Q1.

The hardware mix is also going to be affected with the Gen 5 launch, because then the new patients may buy receivers, but the new receiver upgrade cycle is going to decrease a lot. So, all these factors are going to affect the business model throughout the rest of the year.

Q: Right, but is it your intention to maintain roughly the same hardware revenue per patient, or total revenue per patient as you switch to the shorter life transmitter?

A: I think the hardware revenues could go up slightly, but we also think that sensor utilization could go up with Gen 5, because we think there is going to be a stronger compliance particularly in the pediatric segment. I think hardware revenues from a transmitter perspective could go up slightly. However, the receiver replacement cycle was 12 to 18 months, and that probably extends out because people are going to keep their receiver at home in their briefcase, backpack, desk – they're not going to use it as much so they're not going to need a replacement.

We'd like to keep patient revenue the same but the split will probably change. The 30:70 mix as you look at Gen 5 will probably start moving down closer to 25. That would be what we would anticipate.

Q: How do you think about the dosing claim in terms of either timing or size of clinical studies, and when can we expect an update on that because that’s an important one for you, along with the calibration progress.

A: It is very important, and this is largely a function of our meetings and discussions with the agency and we're still in the middle of discussing clinical study sizes and efforts. I would tell you that one of the biggest efforts is going to be human factors, because when we have a claim that you can dose info with this device, we have to make sure the user interface, the manuals, the training – everything – actually teach someone how to use the system and how to know its influence from it. We're heading into some new ground here. I don't have timing for you today. We will upgrade that more at the end of the Q2 call but I think it's going to be something we work on as we go. It is independent of the Gen 5 filing. It's independent of the Gen 5 launch. We're going to have to change our user guides and cut over to that claim at some point in time, but we kept that effort independent of the core technologies.

Q: Is the applicator still early 2016?

A: We’re hopeful for 2016. It does change depending a lot upon Gen 6 timing, depending upon dosing claim timing, depending upon how we do with Gen 5. It's a little bit fluid. We have run studies on the applicator system, and they have gone extremely well, so our design is very much locked down right now and it's a question of how quickly can we scale up.

Q: I wanted to circle back on the commentary regarding pump partnerships. If you think about how far ahead you guys are in terms of your technology versus pump partners, does it really matter if those partnership exist or not in terms of driving pump sales – especially given what we know about current generation pumps and even next-generation pumps? After all, your system almost works better independently and if I'm correct with that thought, then what – obviously short of an artificial pancreas – do you need to see from the pump guys to really invest more in those relationships?

A: We have been involved with enough research projects that we know automated insulin delivery is going to come. Medtronic spends a large amount of time talking about their 640G, their 670G, and their future products. We want a product in that space. We want a partner to be in that space. We think we can help that group of patients who truly want some type of control – maybe just during the night time, maybe during the day, if they want control within a range … really, however they want to configure it. There are number of studies going on. We do believe in the pump market. Those products are going to be important. We believe our partners can get there, but we don't want to go back and spend a bunch of time re-engineering the Gen 4 or Gen 5 system and continue to have to support it and build it for another ten years to support somebody who gets a sensor-augmented pump approved in three. So we're pushing to go faster. We're pushing to go to our future platforms, and we’re offering to help. We're prepared to run the business. Our models are standalone to a large extent, certainly for the short-term. We think as we look out over ten years and become a force in the diabetes world – bigger than we currently are – we need product offerings and the fact is that patients deserve the best sensor technology and they're not getting it someplace else.

Q: Do you agree with the statement that over the next year to even three years, it's a nice marketing statement as a pump company to say we’ve got Dexcom on board? Does it really drive pump sales? And then, would you entertain entering the pump business on your own?

A: We're not in the pump business today. Call us when we're at $2 billion or $3 billion in sensor revenue and we'll think about it. With respect to the pump partners, I do think display on their pumps is going to be helpful in the short-term, because people do want to integrated solutions with Dexcom. I think over the next couple of years as we evolve our products faster than they're able to do, it will be a little problematic for them, but we'll work with them. We'll make these relationships work as best as we can.

Q: You mentioned the very strong user growth in the first quarter. I'm wondering if J&J's Vibe provided a significant contribution to that growth, and if so, can you give us an idea how much?

A: It helped. But I wouldn't call it significant.

Q: Can you give us an idea what percent of the user base either purchased or upgraded to the Share receiver in the first quarter and what the pipeline for upgrades looks like going forward?

A: As we discussed in the financial section – all the upgrades we promised for free – we have all the revenue on that deferred and that program will be completed by the end of the second quarter. Other people's receiver will upgrade over the course of their normal upgrade cycle if they choose to and that is just part of our normal sales. We don't have a schedule for that nor could I tell you, nor do we disclose what percentage of our patients did upgrade in this quarter.

Q: Just anecdotally, does it feel like people are accelerating receiver upgrades that they would be due for a few months from now or are they just going through the normal cycle of a receiver?

A: You know what we've learned over time here is that our patient community is very pressed on the cost side. So to accelerate an upgrade and pay more than you would pay with the co-pay deductible is not something most of our patients do. Now, we have had some pediatric patients, who – the day this thing was announced – called up and said, “I’ve got to have this tomorrow,” but that wasn’t a majority of them. We even learned this with Gen 4 when we launched that back in 2012; we offered reduced price upgrades among other things and not many people took advantage of them. So, I don't see that as going crazy. I think it's basically happening during the normal course of use and during normal purchasing patterns.

Q: Last quarter, you said the starter kit was around $850 to $900. This quarter you said it was little bit lower, $800 to $850. Is that more of international or US?

A: No, it's a combination of things. In the US, we sell a portion of our business direct to payer contracts and a portion through distributors. Internationally, we sell a 100% through distributors. It depends on the mix of distributors in a given quarter. The insurance plan pricing varies, not dramatically, but it varies enough to move the needle. So, that's all that's going on there.

Q: You didn't mention the potential price of the G5 transmitter. Is that going to be at the same levels?

A: We haven't disclosed anything regarding pricing for the G5 yet.

What we did say is the cash flow of transmitter revenues on an annual basis should be a little more than they were on Gen 4. All that stuff has to cycle through our payer arrangements, so that is going to take time.

Q: With the expedited access program that the FDA just implemented, how does that factor into your prior discussions around the insulin-dosing claim?

A: Our discussions with the FDA have been very aggressive on the dosing or non-injunctive claim relative to when we started earlier this year. I don't know if that's the initiative that sparked their interest, but they have been very progressive and we have very routine dialogues with them on it. I can't attribute it to that or anything else other than that they know that patients use our sensor to dose. They see patients in the FDA who wear our system and who use it to dose, so they want to put some parameters around that type of activity.

Q: Do you have to apply to that program, get accepted and then pursue it?

A: We haven't applied to any.

Q: Can you provide an update on how the backlog progressed throughout the end of the quarter and did you exit the quarter with similar strength in the backlog?

A: Our pipeline is great.

Q: You have mentioned in the past that international patients tend to utilize the sensors less frequently than US patients. Can you provide an update on where sensor utilization is per patient per month in your core European markets like Germany, Sweden, Netherlands, and Italy? Do you have an idea where CGM penetration is in these markets?

A: No. I mean, to be honest, we don't have great visibility. We only have three international employees at this point … maybe four.

Four, we just added our fourth.

All of our business internationally is through distribution, so we don't get great visibility into it. We’re making estimates based on discussions with distributors and selling patterns in the clinics. We really don't have a good sense of what the utilization is. We know that in Europe there is a much more predominant use of the professional use system, meaning that the clinic or the hospital or the doctor's office owns the hardware and then uses it with multiple patients on a more periodic basis. We just don't have great visibility there.

Q: What should we expect for the timing of the pediatric indication for the G4AP algorithm and do you know if that algorithm is available for international patients yet?

A: That algorithm is not available for international patients yet. We're working on when exactly to drive that in. With respect to pediatrics, we continue to have an open dialogue with the FDA on that. The study results and our filing has been in for a reasonable amount of time, but certainly not to the point where we're concerned about timing. The dialogue has been ongoing. It should be available little bit later this year … probably in the first half of this year.

Q: I was hoping we could talk about the pipeline a little bit more and how we should think about the ramp of G5 and then G6 in 2017. You guys have said in the past that these new product cycles are meant to sustain 40% product growth. But now, in the early days with integrated systems and Share, do you still stick to that 40% long-term growth number? Do you think that it could actually be better than that?

A: We will stick to 40%, and if we do better as we did this quarter, then that is great. Everybody forgets that 40% growth means that you double every two years. That’s a lot of growth, and that's a lot to sustain. I do think we need these new products and platforms to expand our markets to get different types of patients, to get more new patients, and to get on new patients more quickly. However, again, if we double our business every two years, that is a lot of growth to manage for anybody. So we'll stick to that and if acceleration continues like this, we'll be thrilled. I mean, we’ve kept up with over 50% growth for something like ten quarters in a row without a back order. I don't think there are many companies who can do that, so kudos to our team. We'll just keep driving to keep doing that, but we'll just have to see.

Q: I was wondering if you guys can give an update on where we are with the type 2 patient population. Not to get greedy, but much longer term, that is a potentially massive market. I know you guys have some coverage there. Where are we with CGM in type 2 patients?

A: We are gradually and slowly increasing the use of CGM for insulin-using type 2 patients. Many of our payer contracts are now being renegotiated to cover all insulin-using patients, which would cover the insulin-using type 2s. One of the problems with this is that a lot of those are Medicare patients, and we don't play in that space right now. As we look out over time to other type 2 patients who may not be on insulin or who may be making the choice of whether to go on insulin, we really think – particularly if you look at Gen 6 and all the cost improvement models that we are working on with transmitters, insertion devices and other new products – that we can offer something very, very economical. We think we can offer a wonderful platform for type 2s for the intermittent use of diagnostics, pre-diabetes diagnostics, and evaluating the effectiveness of drugs. We have a reasonably sized – not a huge – but a reasonably sized sales effort for clinical studies of diabetes drugs. Some of these drugs, when you see how they affect type 2 patients on the CGM, it is pretty remarkable. The glucose scores go down very rapidly with these compounds. There is no better way to titrate these compounds. There is no better way to determine which ones are effective and which ones aren't than a CGM worn for a couple weeks. As we go to extended wear and as we go to a possibly disposable transmitter and no calibrations and some of the other things we're doing we think we can play there very nicely. But it's going to be a little while. We've got enough road to hold with insulin-using type 2s and type 1s today. That’s be our focus and then over time, we'll move to the others.

Q: I'm assuming the definition of new user is the number of starter kits sold. Is that still correct?

A: The definition for us is somebody who hasn't purchased a starter kit from us ever or maybe a two-year gap or something like that – some long period of time.

If you remember, the starter kit still goes to an out-of-warranty patient if the insurance company will approve it.

Q: That's why I ask. Can you talk about market share? Where are the new users coming from? Are they Medtronic, distant franchise Medtronic users? Are they new to CGM? I'm just trying to figure out where this bolus of new users is coming from.

A: They're coming from everywhere. We're still getting a nice chunk of MDI patients. There are some Animas users in the new patient group, certainly more new Animas users this quarter than there have been in other periods because of the Vibe launch. Tandem patients and Insulet patients – many of those patients are using our sensors. I don't think distant Medtronic users are the biggest factor in our growth. I have seen independent marketing data that says that while we were losing a lot of our patients to the 530G when it came out, the percentage of 530G patients now using Dexcom sensors is beginning to increase. That’s from an independent source, not from what we have here. So we're picking some of that out of this as well. It is across the board.

Q: And what do you think the percentage of type 1s in the US using CGM?

A: 13%.

A: Between 10% and 15%.

Q: And Kevin, when a Vibe user switches on a G4 that they ordered, do you see that or do you just see a new user and you don't know where it's coming from? The reason I ask is that J&J was talking about the Vibe a little bit more than usual. It's no longer a dead product for them and I'm assuming it has to do with you guys. Can you expand on that a little bit?

A: You’re right. J&J – in their earnings call and even subsequent to the call – have commented that the Vibe is actually helping their sales in US. I think in response J&J has acknowledged that it has helped. But you're right that when we look at our patient base – at the pump portion of our patient base – certainly a big chunk of them were Animas Vibe users previously. So, when they come in, we would not count them as a new patient. That would not be a net new patient to us. That would just be a patient who would continue to buy G4 Platinum sensors but now they can connect their transmitter directly to the pump.

A: They did purchase a new Vibe pump so they have an integrated system. That is certainly where some of those sales come from as well.

Q: And do you think that would drop off a little when G5 comes around?

A:  I don’t know.

Q: Okay. But it’s certainly helping sell more pumps for J&J?

A: As we say on every one of these calls, as long as we sell more sensors, we're happy.

Q: Right. And in terms of buying a pump company, if you said yes, I know Terry would have reached out from where ever he is and strangled you, but we'll leave it at that?

A: Terry is on an airplane and he cannot reach me at this point in time.

Q: I wanted to just drill down on one comment you made earlier about awareness. I think you talked about making some investments in awareness, and I just wanted to clarify what you meant?

A: We spend a lot of time in marketing and spend a lot of sales dollars on marketing to healthcare providers and the healthcare professional community. You’re going to see over the next year that we're going to go to people. Everybody understands what an iPhone looks like. Everybody understands sharing data. They understand what iWatches looks like and that the iWatch app is beautiful. We’ve tried some pilot programs to go more direct-to-consumer by going into magazines, into newspapers. We even tried a little bit of a directed television stuff to see what we can do. We're going to get bigger and go out to a broader base. We need to take this message to the people.

Q: It seems to me that doctors – maybe not intentionally – are holding back a little bit. I mean the new patient growth was through the moon this quarter. Obviously, I think there is more that could be done to drive additional adoption.

A: Doctors are doing fine, but we think more can be done to drive additional adoption as patients become more aware. We need to drive some of that awareness. One of the most effective ways for patients to get on CGM is to have them walk into the doctors offices and say, “I've seen this. I would like this.” Terry and I learned that back in our pump days as we drove awareness with some very focused campaigns. We’re going to start doing some of that here. So stay tuned. You’ll see.

[Comment]: This was a great quarter for Dexcom. Our revenues increased by approximately $26 million. Even though our financials are little bit fuzzy here with the launch and the charges we had to take, our adjusted net income on a cash basis was $10 million higher than it was a year ago. In essence, we get pretty close to 35% of everything that we increased on the top-line. Our business model is working very well in spite of significant investments on the commercial and on the product development side. We always believed that our mobile platforms would be a key moving this company to the next level. It's happening as we speak. We've also taken on a lot of infrastructure this quarter. We've opened up a new building, and we're increasing our manufacturing capacity seamlessly. Finally as you can tell from our enthusiasm, our product pipeline is progressing at an amazing pace. Our commitment to our patients is unparalleled and will never go away. You should continue to expect great things from us. Thank you very much.

 

-- by Adam Brown, Varun Iyengar, Hannah Martin, and Kelly Close