Memorandum

Dexcom 3Q20 – Record revenue of $501 million (+26% YOY), driven by 40% YOY unit volume growth and record new starts; G7 to launch in “key markets” in 2H21, but with 10-day wear – October 27, 2020

Executive Highlights

  • Dexcom reported record global revenue of $501 million in 3Q20, rising 26% YOY (both operationally and as reported) on a very challenging comparison to 49% YOY growth in 3Q19. Sequentially, sales rose 11% compared to 2Q20, driving revenue in 3Q20 well past the previous record high of $463 million in 4Q19. US sales in 3Q20 totaled a record $399 million, up 29% YOY on a very tough comparison to 53% YOY growth in 3Q19. 3Q20 international sales totaled $102 million, up 17% YOY from $88 million in 3Q19.

  • Despite headwinds from COVID-19, 3Q20 saw a “record number” of new patient starts on G6. Unit volume in the quarter grew at “almost 40% YOY,” outpacing the 26% YOY revenue growth. The call highlighted several “government-wide contracts” won in the quarter, including a pharmacy contract win for VA beneficiaries. The topic of Medicaid coverage for CGM also arose in Q&A, with CEO Kevin Sayer estimating that Dexcom currently has coverage in “40 of the 50 states” but that “it’s spotty.”

  • Following its strong showing in 3Q20, Dexcom once again raised its FY20 revenue guidance, this time to $1.9 billion, which would reflect 29% YOY growth. This is up $50 million from the company’s previous guidance given on the 2Q20 earnings call in late July of $1.85 billion. This guidance for $1.9 billion in FY20 revenue assumes that during 4Q20, new patient starts will achieve at least 90% of pre-COVID expectations for the quarter.

  • Following several months of uncertainty related to COVID-19, Mr. Sayer shared a number of updates around the next-generation G7 CGM. Most notably, “approval support trials” for G7 have begun this month. Based on the phrasing, “approval support trials,” it’s not entirely clear where the trials are taking place - when asked explicitly if the US pivotal trial had commenced during Q&A, Mr. Sayer declined to give an answer for competitive reasons. In terms of launch, Dexcom expects G7 to launch G7 in “several key markets” in 2H21, though it’s unclear which countries will be first. Finally, Dexcom G7 will launch with 10-day wear, compared to previous expectations for the device to have 14-15-day wear. Through early trials, Mr. Sayer noted that survival rates for the sensor out to 15 days are in the ~70% range, a figure Dexcom is not comfortable with for its users. We imagine, based on this as well as our own speculation, that there may not be as much room as possible to cut prices as much as some may expect.

Dexcom reported 3Q20 financial results this afternoon on a call led by CEO Kevin Sayer, CFO Quentin Blackford, and EVP Steve Pacelli. The 3Q20 slides are available here and our top highlights are below.

Financial Highlights

1. Record global sales of $501 million, rising 26% YOY; US sales of $399 million, rising 29% YOY; OUS sales of $102 million, rising 17% YOY

Dexcom reported record global revenue of $501 million in 3Q20, rising 26% YOY (both operationally and as reported) on a very tough comparison to 49% YOY growth in 3Q19. Sequentially, sales rose 11% compared to 2Q20, driving revenue in 3Q20 well past the previous record high of $463 million in 4Q19. Revenue growth continues to be fueled by increased CGM awareness and new patients starts, which have begun to climb again after lower new patient starts in April, due to COVID-19. According to CFO Quentin Blackford, 3Q20 saw the  highest ever new patient starts for a quarter in Dexcom history, although the figure still did not quite hit pre-COVID expectations (more on this below). During 3Q20, the pharmacy and Medicare channels saw the strongest growth, although all three channels (the third being DME) contributed to the quarter’s strong 26% YOY growth. The new patient assistance program that was announced in April and launched this quarter did not have material impact on financial performance, although Mr. Sayer hinted that it may start having an impact on growth during the fourth quarter.

  • US sales in 3Q20 totaled a record $399 million, rising 29% YOY on a very tough comparison to 53% YOY growth in 3Q19. Sequentially, sales rose 9% from $367 million in 2Q20, surpassing the previous US revenue record of $376 million set in 4Q19. US sales once again drove the vast majority of sales during 3Q20, accounting for 85% of total revenue in 3Q20, higher than the average across 2019 (~79%) and 2Q20 (81%). This is a testament to the strength of Dexcom’s US business, and also reflects challenges outside the US.

  • Third quarter international sales totaled $102 million, rising 17% YOY from $88 million in 3Q19. Sequentially, OUS sales rose 21% on an easy comparison to a 25% sequential fall in OUS revenue in 2Q20. This is generally in line with expectations for third quarter OUS revenue, which is generally up ~20% from the second quarter, according to Mr. Blackford. COVID-19 continues to have a greater impact on OUS new patient starts than on US new patient starts in the third quarter, although the impact was mixed depending on the specific country. Specifically, COVID primarily impacted Dexcom in markets with higher administrative requirements to technology access that are complicated by the pandemic and stay-at-home orders; in contrast, countries where Dexcom has launched its e-commerce platform, i.e., the UK and Canada, continued to see “strong growth and momentum.” Still, as seen in the graph above, the growth outside the US isn’t as strong as it is inside the US; for context, we estimated Abbott FreeStyle Libre’s OUS revenue at over $500 million in 3Q20, rising a strong 36% YOY from a larger base. Unlike Dexcom, Abbott’s business is much stronger internationally.

  • Revenue from sensors totaled $406 million, growing 28% YOY on a tough comparison to 64% YOY in 3Q19, 11% sequentially, and comprising 81% of sales. Hardware revenue (transmitter + receiver) totaled $95 million, up 53% YOY and 8% sequentially. These sequential growth rates are relatively consistent with those from 2Q20. As a reminder, Dexcom began bundling receiver and transmitter revenue in 1Q20, which wasn’t surprising as smartphone apps have become easier to use and receiver use has fallen. We can’t believe how much more use patients can get from the Clarity app as it used to be and we point out how relatively recent the smartphone app phase has been.

2. FY20 revenue guidance raised by $50 million to $1.9 billion (+29% YOY); FY20 gross margin to meet or exceed 65%; Investor Day set for December 9, 2020

Following its strong showing in 3Q20, Dexcom once again raised its FY20 guidance, this time to $1.9 billion, representing 29% YOY growth. This is up $50 million from the company’s previous guidance given on the 2Q20 earnings call in late July. The 2Q20 guidance was itself a $100 million increase from the midpoint of the initial guidance shared at the beginning of 2020. This guidance for $1.9 billion in FY20 revenue assumes that during 4Q20, new patient starts will achieve at least 90% of pre-COVID expectations for the quarter. Although management elected not to share any guidance for 2021 during the call today, Dexcom will share more of its expectations and plans for 2021 and beyond at its virtual Investor Day on December 9, 2020, which was announced during today’s call.

  • Based on the $1.9 billion FY20 revenue guidance, Dexcom is guiding for $542 million in revenue in 4Q20 (+17% YOY). A 17% YOY growth rate would be Dexcom’s lowest ever in our model (which dates back to 2005), suggesting this guidance is likely conservative (not a bad thing during a pandemic, especially with rising cases in the US and around the world; for context, Dexcom results exceeded guidance by ~$160 million at the midpoint in FY18 and by ~$300 million at the midpoint in FY19. We imagine that 2020 would also see guidance beaten, but meeting guidance at all is certainly a major success. Still, expectations have become quite steep for Dexcom, the med-tech darling of the decade …

  • Dexcom also raised guidance slightly for gross margin, non-GAAP operating margin, and adjusted EBITDA margin. FY20 gross margin is now expected to meet or exceed 66%, up 1% from guidance in late July and 2% from the FY19 gross margin of 64%. The non-GAAP operating margin and adjusted EBITA margin are expected to meet or exceed 16% and 26%, respectively, both up 200 basis points from guidance reinstated in July.

3. GAAP net income of $72 million; highest quarterly gross margin (68%) since 2018; $2.6 billion in cash and cash equivalents

Dexcom continues to strengthen its profitability metrics, reporting GAAP net income of $72 million, compared to GAAP net income of $46 million in 3Q19. As a reminder, 3Q19 was the first quarter that Dexcom was profitable on both GAAP and non-GAAP bases. Impressively, Dexcom has now maintained profitability for five straight quarters.

  • Gross margin came in at 68%, compared to 62% in 3Q19. At 68%, 3Q20 saw the highest quarterly gross margin since 2018 “despite increasing pricing pressure.” This gross margin improvement is undoubtedly a result of Dexcom’s investments in manufacturing and the lower-cost G6 transmitter. Sequentially, gross margin improved quite meaningfully from 63% in 2Q20. For the full year, Dexcom is now guiding for a gross margin of at least 66%, suggesting that Dexcom expects that 4Q20 will have a similarly high gross margin as 3Q20, averaging out with 63% gross margin in both 1Q20 and 2Q20.

  • Dexcom closed the quarter with a whopping $2.6 billion in cash and cash equivalents. During his prepared remarks, Mr. Blackford shared that this “leaves us with plenty of liquidity to continue our capacity extension initiatives for G6 and G7, in conjunction with growing CGM demand, while also being opportunistic with our investment strategy as we contemplate the long-term growth potential for our technology.”

Business Highlights

1. “Record number” of new patient starts on G6 in 3Q20; unit volume growth of “almost 40%” YOY

During Q&A, Mr. Blackford confirmed that 3Q20 saw a “record number” of new patient starts on G6. New patient start levels were “slightly ahead” of Dexcom’s COVID-adjusted predictions shared in 2Q20, which guided for new starts to be between 75%-80% of pre-COVID expectations in 2H20. Based on these recovery trends and the record number of additions in the quarter, Mr. Blackford commented that Dexcom expects new patient starts to continue improving to approximately 90% of original expectations in 4Q20. According to Mr. Sayer, patient growth continues to be driven by growth in Dexcom’s pharmacy and Medicare channels which demonstrated the “strongest growth in the quarter.” During Q&A, Mr. Pacelli was asked about the competitiveness of pricing in the pharmacy channel (compared to Abbott’s FreeStyle Libre), replying, “I think it’s important for folks to recognize that in the pharmacy channel, our product is not priced all that differently from Libre with respect to what the patients [pay] out-of-pocket for. Greater than 70% of our patients are able to get on our product at less than $60/month, many of them with no out-of-pocket on a per month basis.” Dexcom hasn’t given any meaningful updates on the percentage of its business running through the pharmacy channel; we last estimated Dexcom has pharmacy contracts in place for >75% covered lives in 4Q19, though presumably, only a portion of those patients are actually getting G6 through the pharmacy. Still, the pharmacy is, long-term, Dexcom’s preferred channel for doing business and has been a significant growth driver for Dexcom.

  • According to comments made by both Mr. Blackford and SVP Steve Pacelli during Q&A, unit volume grew at “almost 40% YOY,” outpacing the 26% YOY revenue growth. Much of this discrepancy was attributed to pricing pressure from the pharmacy channel. Mr. Blackford gave additional commentary that pricing headwinds through the first three quarters of 2020 were above expectations and Dexcom is now estimating total pricing headwinds of $175 million for FY20, compared to “over $100 million” expected coming into the year. Still, the “almost 40%” YOY unit volume growth in 3Q20 is a good sign; analysts were eager to compare that figure to Abbott’s FreeStyle Libre, which grew 38% as reported (+36% operationally) in 3Q20, from a larger base.

    • “In terms of growing overall at a slower rate than one of our competitors, I think you have to keep in mind, we're navigating through a price headwind right now as we start to step price down and move more into the pharmacy channel. We’re making terrific progress on that front, even a bit ahead of our expectations. If you were to look at the third quarter, in particular, in the 26% revenue dollar growth that we put up, if you were to look at that on a unit volume perspective, I believe we put up market-leading unit growth in the quarter itself, growing nearly 40% from a unit perspective. That's better than anything else out in the marketplace right now. So, I think when you adjust for price, which is a bit specific to us and you really look at patients and unit volume, I think we're putting up market leading performance.” – Mr. Pacelli

  • At the start of 3Q20, Dexcom launched its Patient Assistance Program for individuals who’ve lost insurance coverage due to COVID-19. The program was first announced in April. Though the program did not have a “material impact” on performance in this quarter, Mr. Blackford predicted more patients taking advantage of the program in the fourth quarter due to patient purchasing patterns and the unemployment rate lingering at a high level.

2. “Nearly all people in the US with type 1 now have access to Dexcom CGM”; growing coverage among intensive insulin type 2s; G6 available in VA pharmacies

During prepared remarks, Mr. Sayer commented that “nearly all people in the US with type 1 now have access to Dexcom CGM, as well as a quickly increasing number of people with type 2 diabetes on intensive insulin.” Mr. Pacelli also discussed growing coverage among intensive insulin type 2s citing Medicare, United Health Group, Aetna, and the VA as some of the payers now covering G6 in this population. This is in line with updates from 2Q20, when management said that type 2 patients “exceed 20% of [Dexcom’s] total US patient base.” While we did not receive an update on this front today, with continued growth in new patient additions, a sizeable portion would certainly be type 2s though we believe that population is more competitive. In Q&A, Mr. Pacelli hammered home the size of the opportunity with intensive insulin-using type 2s: “In the US, we're looking at a patient opportunity of probably pushing like 2 million patients, where we used to use a number maybe like 1.5 million in the US. I think the data that we have suggested that market opportunity is a lot bigger. So, while there’s penetration, certainly I think that we're making great progress on the insurance front, and it's a huge market opportunity as we look to continue to expand the intensive business.” We’d agree the market is at least 2.0 million based on 7.5 million that ADA estimated took insulin during President Trump’s commentary in the rose garden on diabetes in May, 2020.

  • The call highlighted several “government-wide contracts” won in the quarter. The most notable win was announced last month, opening access to G6 through the pharmacy with $0 copays for VA beneficiaries. Expanding access through the VA also allows Dexcom to reach a very at-risk population, as veterans have a much higher rate of diabetes than the population at large. Though there are few type 1s in the VA population (the vast majority of type 1s have not traditionally been allowed to serve), type 2 diabetes is a major health concern affecting nearly 25% of the VA’s patient population.

  • The topic of Medicaid coverage for CGM also arose in Q&A, particularly given the economic effects of COVID-19 potentially driving Medicaid enrollments higher. Mr. Sayer estimated that Dexcom currently has coverage in “40 of the 50 states” but that “it’s spotty.” Mr. Sayer referenced the variation in state requirements acknowledging that it is much harder to gain coverage in certain states compared to others. Medicaid coverage requirements for CGM are indeed quite variable from state-to-state – see diaTribe’s article here.

    • In addition to the varied requirements for CGM coverage, Mr. Sayer also expressed frustration at the varying requirements to enroll for Medicaid across states (e.g., work requirements): “We are trying hard to be better and we've had some major wins on that front. But, there are some states where we get across the finish line, and then they've attached Medicaid coverage to some other thing and in the state legislature and we get thrown out. It's been a very frustrating thing for me and particularly because so many of those patients are children and really deserve access to Dexcom CGM, deserve access to Share and Follow and all the things that we have to offer. So, we continue to fight that battle. I hope we have it in every state, and we'll make sure that we can compete competitively on the pricing side. We're not going to give the Medicaid business up. We want patients to have access to us.”

3. Direct-to-consumer marketing continues to ramp; focus on primary care patients; major expansion of sales force

Building on the “doubling” of manufacturing capacity announced in 2Q20 (compared to end of 2019 levels), Dexcom is continuing to invest in manufacturing and has rolled out wider direct-to-consumer marketing efforts (many of our associates have been seeing Dexcom advertisements on TV and social media!). Mr. Sayer didn’t provide too much detail on feedback so far, but he did share that Dexcom is seeing “very, very good” returns on its direct-to-consumer marketing investments thus far and still “has not capped, as far as effectiveness.” With CGM penetration still relatively low in type 1s (we estimate perhaps around 40-50% in the US, but we are very unsure) and quite low in type 2s on insulin and virtually nonexistent in other people with type 2 diabetes, we continue to believe that increasing awareness alone is enough to drive adoption – see dQ&A data showing the very high percentage of patients that do not have coverage that could. To that end, we were excited to hear a specific goal of reaching primary care patients as part of Dexcom’s direct-to-consumer initiatives.

  • During Q&A, Mr. Sayer shared that Dexcom is underway with efforts to expand its sales and marketing force “over the next year.” The company is particularly interested in expanding its sales force into primary care practices where Mr. Sayer said the company is looking to target non-intensive type 2s. We have heard that Dexcom is expanding its sales force significantly and will be great to have some in PCP practices where it makes sense. Mr. Sayer’s comments were also in line with the announcement earlier this month of a “co-marketing strategy” between Lilly and Dexcom to help HCPs, particularly in primary care, boost awareness of Lilly’s rapid-acting insulin Lyumjev and Dexcom’s G6 CGM technology. While Mr. Sayer didn’t characterize the scale of sales force expansion, we believe it’s quite significant: many dozens of open sales positions posted for Dexcom on Linked In and other channels were identified as of last week, compared to ~15-20 open positions typically available. We’ve heard similar figures of sales positions “doubling” from ~130 to 250+. Regardless, it’s clear this is a significant investment and signal of confidence from Dexcom.

4. New and emerging opportunities: “over 200 hospitals” have inquired about Dexcom CGMs, OUS e-commerce platforms a bright spot, and software investments

  • Following temporary authorization of CGM use in hospitals, Dexcom has had “over 200 hospitals” reach out about use of CGM during the pandemic. As was noted in 2Q20, Dexcom is focused on using this opportunity to collect and evaluate data “to potentially expedite approval for the use of CGM for patient monitoring.” To this end, Dexcom created a hospital registry system, launched in September, to collect data on CGM “performance and efficacy” during the pandemic. Though not mentioned, we assume similarly to 2Q20, hospital CGM was not a driver of material revenue in the quarter – that said, it could be taking up significant time and energy of management as they work to coordinate coverage.

  • In contrast to OUS markets where patients have faced challenges due to COVID-19 and administrative processes requiring in-person training, Canada and the UK have continued to stand out with record high growth rates driven by Dexcom’s e-commerce platform. Dexcom initially launched its e-commerce platform in Canada in 2019 and recently expanded it to the UK. Of note, Dexcom has also recently launched G6 into Turkey and Belgium at the start of October – it’s unclear whether G6 is available through distributor or through e-commerce platforms there. In 2Q20, we also learned about regulatory approvals for G6 in Australia, Japan, and South Korea, but there was no word today on potential launch timelines.

  • During Q&A, Mr. Sayer made reference to new software offerings from Dexcom coming in the future. These new offerings would help personalize CGM experience for different people, helping to improve engagement and ultimately, outcomes. From this standpoint, Dexcom has an outstanding place to build from with its Clarity app, which is utilized at very high rates and has very high ratings – write Richard Wood at dQ&A for more on this. Dexcom has also, of course, allowed other developers to build their own software experiences around CGM using its API. Regardless of approach, we’re eager to see what Dexcom has in store on the software side.

    • “Well, you'll hear more about our software product pipeline as we launch those products over time … We still lead in connectivity and connectivity and multiple devices and interoperability and data sharing and all of those things. That infrastructure has taken us a long time to build, and it costs a lot to support. I think over the next several years, software will be a key thing, delivering the experience to the patient that will keep them engaged and provide a great outcome. I was at dinner with a long-time diabetes patient the other night, and we started talking about experiences, and a guy looked at me goes, ‘So wait a minute, you don't think one size fits all?’ I said, ‘No, I don't.’ I think at some point in time, you'll see -- I know you'll see from Dexcom, different software offerings. So, stay tuned on that one.” – Mr. Sayer

5. Chief Commercial Officer Rick Doubleday to retire at end of 2020, and to stay on as a consultant through 2021

Mr. Sayer ended the prepared remarks portion of the call by thanking Chief Commercial Officer Rick Doubleday for his eleven-year tenure at Dexcom. As announced yesterday, Mr. Doubleday will retire at the end of the year and continue working with Dexcom “in a consulting role” through 2021. During Q&A, Mr. Sayer made it clear that Mr. Doubleday’s retirement “has nothing to do with” current plans to expand Dexcom’s sales force, which per Mr. Sayer, are actually “Rick’s plans.”

  • “Rick joined Dexcom in 2009 leading our sales organization from approximately $49 million in sales in the first full year to $1.9 billion that we’re closing in on now. I can’t think of many examples where a commercial leader has overseen compound growth of greater than 40% over a 10-year period. But that’s what Rick has accomplished here. He is a great leader and a great friend who has developed a solid plan to executive as we progress into 2020 and 2021 and then G7 system. Rick has also worked extensively to develop a very talented commercial team. So, we are in a great position as we press forward to execute our goals in 2021 and beyond. I hope that you will join me in expressing appreciation for Rick’s outstanding leadership at Dexcom and best wishes as he embraces well-deserved time spent with his family.” – Mr. Sayer

Pipeline Highlights

1. Dexcom G7 trials to support regulatory submission began this month; expected to launch in “several key markets” in 2H21; wear time reduced to 10 days (at least initially)

Following several months of uncertainty related to COVID-19, Mr. Sayer shared a number of updates around the next-generation G7 CGM. Most notably, “approval support trials” for G7 have begun this month. Based on commentary during Q&A, we believe these trials have not yet finished enrollment, but as a reminder, CGM pivotal trials can finish as quickly as 10-14 days after enrollment is completed. Based on the phrasing, “approval support trials,” it’s not entirely clear where the trials are taking place. We’d assume that at least two trials are underway, potentially including the US pivotal trial, though the phrasing “pivotal trial” was avoided on the call. When asked explicitly if the US pivotal trial had commenced during Q&A, Mr. Sayer declined to give an answer for “competitive reasons.” If the pivotal has indeed begun, the timing comes on the early side of April’s update that the pivotal trial would have a “minimum delay of approximately six months.”

  • In a somewhat cryptic announcement, Mr. Sayer also stated that Dexcom expects to launch G7 in “several key markets” in 2H21. During Q&A, he declined to give more details on which markets might be launched first, though the phrasing obviously suggests OUS countries will be part of the initial launch (with or without a launch in the US). Following initial launch, broader expansion of G7 into all of Dexcom’s “core markets” will “likely go into 2022.” Overall, an initial launch of G7 on the early side of 2H21 would represent a delay of ~six months from long-standing, pre-COVID-19 expectations to have the device launch in “early 2021” (see 4Q19, JPM 2020, 3Q19, 2Q19, 1Q19, ATTD, 4Q18, JPM 2019, and December 2018 Investor Day).

  • During prepared remarks, Mr. Sayer also shared that Dexcom G7 will launch with 10-day wear, compared to previous expectations for the device to have 14-15-day wear. Through early trials, Mr. Sayer noted that survival rates for the sensor out to 15 days are in the ~70% range, a figure Dexcom is not comfortable with for its users. During Q&A, Mr. Sayer shared further that ~30% of sensors were not meeting iCGM accuracy special controls out to 15 days and felt that “[Dexcom would] rather be reliable and go with 10 days” at launch. Ultimately, Dexcom is still aiming to get to 14-15-day wear with G7, though there was no publicly disclosed timeline on this.

    • Mr. Sayer characterized the difference between 10-day and 14-15-day wear as a “cost issue, more than anything else.” Of course, from a margin perspective, with CGMs generally reimbursed on a per-day or per-month basis, having longer-wear is beneficial (e.g., three 10-day sensors are required per month, compared to just two 15-day sensors). From a patient perspective, some may see the major upgrade from G6 to G7 in the smaller and fully-disposable form factors, rather than longer wear-time.

  • Aside from wear-time, the other expected features of G7 remain the same. These are a one-piece fully disposable wearable (integrated sensor/transmitter) that is slimmer on the body (see below); significantly lower cost design (presumably similar to FreeStyle Libre or perhaps lower); iCGM accuracy and factory calibration; an applicator that is smaller, lighter, less plastic, and more convenient; and the Android/iOS mobile apps to display real-time data with Bluetooth. On today’s call, Mr. Sayer also referenced, unannounced features for G7 that will “delight the world,” though he didn’t hint at what those might be. 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.

  • Mr. Blackford noted that, at the “early stages,” G7 “will be more expensive [than G6],” but ultimately, reach lower cost at scale. This is more detailed commentary than Dexcom has traditionally given on G7 that the device would have “significant manufacturing cost reduction” – we assume that was based on wear time. Dexcom has been making significant investments in G7 manufacturing already.

  • Last month, Abbott announced CE-Marking for its FreeStyle Libre 3 CGM, its first-ever real-time CGM. The device is expected to be available in Europe in the “coming months.” See here for a feature comparison of the FreeStyle Libre 2, FreeStyle Libre 3, Dexcom G6, and Dexcom G7.

Slide taken from Dexcom’s JPM 2020 presentation.

2. No updates on Tidepool Loop integration of Direct-to-Apple Watch

No pipeline updates were given on Tidepool Loop or direct-to-Apple Watch transmission. Neither of these projects have been mentioned in some time – see reminders of last coverage 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: Thank you, and congrats on a nice quarter. Kevin, the topic that I think is the focus to most investors now is the competitive environment and the pricing environment, particularly between you and Abbott. You both have great products. It's a large market. We've gotten a lot of product updates, both from you and your competitor and today with G7 moving into trials here and a launch in the second half of next year now with a 10-day product. How should people think about the increasing similarity of the options from the two products and how to think about the ongoing price differential? I know you've talked about this before, but I just think it's important to reiterate the answer here given the focus for investors. Thanks.

Kevin Sayer: No, I appreciate that, Robbie. With respect to pricing, I think our results very clearly demonstrate how well we've managed this process as we moved a great deal of our business through the pharmacy channel, and I'm sure Quentin will get into that more later as we get into more questions. As you look at our margins, as great as they are with volumes significantly higher than they were before and prices coming down, we've truly proven that we can scale here. So, we definitely understand how that works.

With respect to products and features and things of that nature, let me start with G6 before we move to G7. This is an incredible product and it has incredible features and has truly been a market leader. It has taken us a while to get up to scale manufacturing G6 and get the capacity that we need, and we have that now. And so, we will push G6 very hard and very competitively until G7 gets here. G6 is what we have today.

With respect to our future products, I can't speak to what our competitors have. I know what G7 is and what it does. There are many features in there. We have not shared with everybody that will delight the world. We went to the 10-day life for exactly the reasons I said on the call. And it really leads into what's going to be the differentiation. We did this because we want the patient experience to be what we committed to.

We have learned in our extensive research, the most important thing for us is to deliver what we say. And as we were getting out to 15 days, particularly with our algorithm, with that sensor, we saw too many of them not making it. And while it performed great at the longer time, it wasn't great enough for us. So, we shortened the life for now. We're very confident what changes we can make to make it last longer.

Where the difference will be over time and where we're investing significant resources is on the experience side. The concept that one CGM experience fits all is just not going to work going forward as you look at the AID systems. As you look at people that are Type 2 intensive insulin users, who have migrated to CGM later in life, they may want different information and different experience.

I think as we get the physical features of the product, exactly where patients want them and very comfortable with G7, what's going to be most important is delivering the experience that keeps them engaged and leads to better outcomes, and we're very confident that we can win that battle.

Steven Pacelli: And Robbie, just to add on to that and hit on Kevin's point on the pharmacy, I think it's important for folks to recognize that in the pharmacy channel, our product is not priced all that differently from Libre with respect to what the patient's coming out of pocket for. Greater than 70% of our patients are able to get on to our product at less than $60 per month, many of them with no out-of-pocket on a per month basis. So, from a patient perspective, it's priced very competitively.

Q: Hi, good afternoon, guys. I'm sorry to harp on the competitive landscape, but I'll ask more specifically, you saw growth in Europe that was lower than one of your competitors, and they did launch a competitive product in Europe. If you could give us a little bit of color on what's happening if anything there is the first part of the question. The second part of the question is, just as a whole, you grew slower than the competitor that's been on top of mind for a lot of investors today. And I'm just curious if how much of that is supply – being a little bit more constrained and not really pushing G6 as much as you could or will be doing in the future versus any real competitive dynamics here. Thanks so much.

Steven Pacelli: Sure. Danielle, I'll take that. Let me hit OUS first. From an OUS perspective, our performance in the quarter was right in line with our expectations. I think if you go back and look historically at seasonal trends in that international business, Q3 is typically up around that 20% range, and we were up 21% sequentially this year in Q3 coming off of Q2.

To be a bit more clear with it though, we certainly saw some mixed results at the country level. And in those countries where the patients required to be in the physician office to train on, to go through the administrative process, through all the paperwork that's required, we certainly have seen that be a slower uptick in getting back to normal volumes in the midst of this COVID environment. Clearly, COVID has impacted the ability to be in the office.

Contrary to that, though, in markets where we have our e-commerce platform in place, for example, UK and Canada, we're seeing record numbers of new patients coming on to our technology and just some tremendous growth there. So I really believe it's more a story of what the model looks like and how COVID is impacting that or not in terms of the patients' ability to get onto the product. And I think if you looked across the competitive landscape and you go back to some of the commentary that's been put out there over the course of the quarter, for those folks who are more focused in the IIT space, which happens to be where we're primarily focused today in our international business, I think you've heard them speak to some softness in the international business as well. So I think what you saw come together for us was right in line with what the market is seeing. We feel good about it. Again, it was in line with our expectations.

To your point, in terms of growing overall at a slower rate than one of our competitors, I think you have to keep in mind, we're navigating through a price headwind right now as we start to step price down and move more into the pharmacy channel. And we're making terrific progress on that front, even a bit ahead of our expectations. And if you were to look at the third quarter in particular, in the 26% revenue dollar growth that we put up, if you were to look at that on a unit volume perspective, I believe we put up market-leading unit growth in the quarter itself, growing nearly 40% from a unit perspective. That's better than anything else out in the marketplace right now. So I think when you adjust for price, which is a bit specific to us and you really look at patients and unit volume, I think we're putting up market leading performance.

Q: Good afternoon, everyone. Thanks for the question. Steve, I wanted to touch on the comment about sampling. And if you'll indulge, I'll just have two intertwined questions on that topic. The first one is, how should we think about the potential impact of sampling on Type 2s versus Type 1s? Would you expect it to be more impactful for Type 2s than Type 1? And then the follow-on to that is, we actually did talk to a doctor last week that, I'll say, very gleefully told us you had begun sampling his practice for the first time. And he said he expected something like 50% conversion of his first, call it, 20 patients or so into paying customers. That sounds like that would be a home run if that was broadly true, but help us understand how you're going to measure success or ROI on this new initiative. Thanks.

Kevin Sayer: Well, this is Kevin. I will take that one. We're thrilled to be able to sample at this point in time and to be doing it in a manner that we think can be very large scale. For years, patients have wanted to try Dexcom and see what they could do. And given our status with our direct business and all the things we're doing, there were constraints around our ability to do that. We've removed those constraints as we've worked through the distribution channel.

We believe that it's going to affect patients across the board, not only Type 1s, but I think your comment on Type 2 intensive insulin users is a very good one. They might be a bit more resistant to the technology, because they've been dealing with diabetes longer. And gee, do I really want to do that. If you have the experience of wearing a G6 and being able to see what happens, this becomes very easy. And so, we're really excited about it. We expect the results to be good, if not fantastic.

And if you look at the payback for us, you look at the revenue we get from a patient per year, if we convert 50% of these people to full-time use, that is a beyond spectacular program. We don't even have to come close to that number for this to be a spectacular result for us. But I think the recognition and the ability for a physician to say, look, I have an answer for you, let's try this. It's really important to us, and we think it's going to be a big initiative for us this year.

Q: Good afternoon, all. I just wanted to weave a couple points into a single question maybe. We've been discussing recently some fairly tangible evidence that we think exists anyway that you guys might be looking to dramatically expand your sales force over the coming months. So what I'm wondering, more than anything is: one, is that true; two, does Rick's departure at all signal maybe he wasn't on board with that or anything else in the direction of the commercial organization; and three, we don't typically think of sales reps in your business being a key driver of sales? So, what might be driving that planned expansion, if it is underway or plan to take place here over the coming months? Thanks.

Kevin Sayer: I'll take that one. Let me address the Rick issue first. This has nothing to do with Rick deciding to retire. If anything, all our sales efforts right now are Rick's plans, and he does get to see them through to the end of the year while he'll be working with us through year-end. So, these events are completely unrelated.

We are planning several things on the sales and marketing front over the next year. We won't reveal all of them. But what we do believe is we do need more coverage in the field, particularly as we look at the HCP community and those who are not endocrinologists as you get into primary care physicians who are seeing more and more of these patients. We need some access there, and we need some more feet out speaking to them.

We're very cognizant of the return our sales force has for us, and I would disagree with you. Our sales team is great and they do provide a lot of benefit to our company. They are a great voice, and really our face of the company in many of these geographies. So, that I disagree with. We are fully on board with what we're going forward with and look forward to measuring results of it.

Q: Thank you for taking the question. Can we pause a little bit on your comments regarding pricing versus unit volume? At one stage, I think we were looking at a little over $100 million headwind in terms of pricing in 2020. Is that sort of the same number that we're thinking about? And then the second part of that is, at what stage do you close the gap on pricing so that unit volume strength really shines through? Thank you.

Quentin Blackford: Yeah, Joanne, this is Quentin. As we spoke about price this year, just coming off of last quarter, for example, we were talking about $150 million headwind in the business, so I think we were north of the $100 million you had referred to. That was something that was probably a year old, to be honest with you, as we were starting to navigate through it last year. So, it was a bit higher than that.

As we've made terrific progress on the pharmacy side, we've actually seen price be a little bit more of a headwind than what that $150 million would have represented. I think it's going to be closer to $175 million for the year. We saw stronger price headwinds come through in Q3 that were embedded in that 26%. And obviously, if you do the unit volume at nearly 40%, you can kind of understand what the impact was in the quarter. But the majority of that is being realized as a result of us opening up that pharmacy channel which we believe in the long term is the much better channel to be putting patients onto the product through for various reasons. It increases access, makes it easier for folks to get onto the product, and importantly, from a profitability perspective over time, will be a much more profitable business model for us.

And I think just looking at the quarter itself, seeing gross margin reach record levels of 68%, while the quarter represents the greatest amount of mix in that pharmacy channel, just demonstrates our ability to really get after the cost profile of our product and compete in that segment quite aggressively.

In terms of how long it takes to ultimately get to the price point or the mix of the pharmacy channel, we're not going to speak to that today. I think you're going to hear more from us as we get to our Analyst Day around just how far we are into that pharmacy channel and where we see that going, but we're making terrific progress. We're very happy with what we're seeing.

Q: Quentin, just a follow-up there, just thinking about the fourth quarter guide, it basically implies around kind of 20 points of momentum deceleration. And that's probably 5 points heavier than you guided sort of into the fourth quarter last year. Anything you'd call out US or ex-US we should be thinking about in the fourth quarter and perhaps it just reflects, frankly, that incremental $25 million of price as you exit out the year? Thanks so much.

Quentin Blackford: Yeah. Thanks, David. Let me talk through a little bit of the assumptions that we've made as we head into Q4. I think we continue to operate in an environment where there's not a great deal of clarity with respect to how COVID is ultimately going to impact the business and we want to be prudent and thoughtful around how we set those expectations.

First and foremost, as we move more and more business into the pharmacy model as well as the Medicare business continues to grow at a strong rate, the seasonal impact in the business is going to shift. You're not going to see nearly as much revenue show up in the fourth quarter as the patients no longer really incentivized to take advantage of a scenario where they might have already met their deductible and they're going to load up on product as they exit the year. So, the seasonal trends in the business are going to look a little bit different as the mix in the business shifts.

With respect to COVID in particular, our best estimate at this point in time is that we're going to see about a 10% impact to new patient starts in the fourth quarter. If we navigate that more successfully, then terrific, there's going to be some upside to the number, but that's our best estimate at this point in time.

And then, I think that the other thing to consider is the fact that we've put in place the Patient Assistance Program that really hasn't had an impact on the overall results just yet. We saw it start to take place in Q3, but it didn't impact us in a material way. But if you think about it, that was put in place to help those patients who ended up being unemployed or just couldn't afford the product in general. And most of that started to happen back in the second quarter, as COVID really started to take place. And if you think through that scenario, we've got patients who would go on to COBRA for a period of two or three months, they typically would make their last purchase of a quarter's worth of supply, so another three months of product. And that puts them right into the fourth quarter when they're going to be making their next purchase, which is when they would now be coming on to the Patient Assistance Program. So our belief is that's going to be a bit more impactful in the fourth quarter than what we've seen in other quarters. I think when you take those sorts of things into consideration and you try to quantify those, if you were to exclude them, you'd see a growth rate right back in line with what you've seen year-to-date.

Q: Good afternoon. Thanks for taking my question. Kevin, the comment that you made about not seeing what you wanted to see from day 10 to day 15, is that because you can't hit the iCGM designation? Was it just the adhesive wasn't working? The algorithm wasn't quite right? What exactly does that mean? Do you think you're going to have an iCGM designation for this – for G7 when you get out to 15 days? And then on the 10-day sensor, is it going to be a cheaper sensor, because I know cost is a big gating factor for some people? Thank you.

Kevin Sayer: So, let me start with pricing. Again, we currently sell our 10-day sensor, and pricing is very much based upon the cost per month, whether you buy two sensors or three sensors as we bid these contracts. CGM is a monthly cost. It really doesn't get down to the unit, particularly, if you look at the way our contracts are negotiated with respect to transmitter and receiver prices and you get into rebates on various components. So, the cost per individual sensor really doesn't matter. It's what we can make and what we get reimbursed for in a given month.

With respect to getting out from 10 to 15 days, for us, this is a problem that we can solve. In order to meet iCGM standards, the way our algorithm works, as we turn the sensors off when the data, we believe, isn't necessarily good enough for iCGM standards. Many of our patients would argue that the data is just fine when we shut them off, but that's how we look at this and how we run it. We saw that we're basically shutting out more sensors than we wanted to right now, and we needed to perform better.

As I said earlier, we can get 70% of them to 15 days without any trouble, but 70% in our mind is not good enough for our patients. We'd rather have a better reliability number and go 10 days. It is a cost issue more than anything else, and over time when we get to 15 – the COGs will obviously be less. But as you look at our G6 performance with our 10-day sensor now and the cost profile that our ops team – Quentin and the team have created, we're very happy with that and we're very comfortable. Going forward G7 with 10, we'd like to make it 15, and we'll work on that as soon as we're done with the 10 filing. We expect everything we do to have an iCGM designation, by the way. So, there won't be any backing off on that.

Q: Hi, thanks for taking the questions. Just wanted to get a little bit more color on the G7 timelines, you mentioned key markets in the second half of next year. Is the US falling in the second half, or is that going to be more 2022? And then on the US pivotal trial, when do you expect that to actually finish enrolling?

Kevin Sayer: We're not going to give all those timeline details out for competitive reasons more than anything else. Our policy in the past has been more to announce approvals rather than to give a bunch of details on the studies. I did say that we've started our studies with respect to generating data for approvals. By saying multiple geographies, that obviously means there will be international launches. To the extent we launch in other places, has yet to be determined.

Right now, we're focused on a number of efforts, getting ready for that. And the complexity of G7 for us is – actually, it's kind of a blast. It's very exciting to go through a change as big as we're doing. But literally, every single process in building this is different than what we've done before. And so, we are getting factories and capacity up and running, the lines will be fully automated. We want to be completely ready to manufacture tens of millions of these things at launch rather than just a few.

And in fairness to our commercial team and everybody in the field, we've spent all of 2019 living on about three days of finished goods, and we're not doing that again. That won't be – I have very – every confidence there will not be the delay launch, it will be getting all the approvals in. But we'll launch it in the appropriate time frames and give color as the situation evolves.

Q: Hi, good afternoon, guys. Thanks for taking my question. Yeah, I wanted to follow up on the G7 launch and just operationally, have you guys been able to start working through some of those payer contracts? Are they asking you to wait? And I ask it just because of that lack of the transmitter, whether that's going to then structure that G7 sales cycle on an annual revenue basis where maybe days per sensor don't matter as you extend further into the life of that, or is it going to be sensor only?

Kevin Sayer: We've contemplated the G7 launch ever since we started negotiating contracts for G6. We don't view this as a big changeover for us. If anything, our team will be more than ready to do this in the field when time happens. And as it gets closer as we go through the next bidding cycle, inevitably, our team will floor G7, there will be some payers who will go to dual pricing even though G7 is not approved, others will want to wait until the product is approved, the policies vary across the board. But we've contemplated the G7 launch in all the G6 work that we've done. So, we have a model going forward that will be easy to repeat.

Q: Hey, thank you. Maybe, Quentin, one for you about the gross margin. It's been pretty impressive to see the gross margin expansion even as you guys are absorbing all of this price. And I guess the question is whether – or really how long you can keep doing that? Is there a level at which gross margin can – has to stop going up and actually starts to go the other direction as pricing continues to come down? And I appreciate G7 represents kind of a step change in that, but as we're still on G6, how long does this keep going?

Quentin Blackford: Yeah, Raj, great question. We couldn't be more excited about where we've been able to take the cost profile of our G6 product. And keep in mind, we're doing that at a time where we've created record inventory levels for the company, which just opened up more and more growth potential and growth avenues for the organization that we can start to pursue. So, we're excited about that. We're currently at our lowest cost point to-date on G6. And I think there's quite a bit of runway still in front of us with respect to take cost out of that product, particularly as we keep pushing significant volumes through the plant.

As you look at the cost profile, I believe we can get to a profile that is less than $1 a day per – or cost for the product, regardless of whether that's G6 or G7. Keep in mind, G7 from the very beginning of time was designed with cost in mind and the ability to get to a lower cost profile than G6. And so, while we're making tremendous progress on G6, the ability to replicate that and do even better with G7 is something that we fully believe in our ability to do.

Now, that being said, G7 will be more expensive in the early stages as we're ramping capacity. But at scale, it will be a lower cost profile for us than G6. So, I think there's still quite a bit of good runway in front of us. The teams are focused on driving cost out of the product. We're redesigning manufacturing process where we can take manual efforts and move them to automated efforts. We're moving into lower cost jurisdictions. We've renegotiated cost points with many of our vendors as they've taken advantage of larger volumes as well. We've redesigned the logistics and distribution model that we utilize as well, taking cost out.

So, I don't think we're anywhere close to having realized the full benefit of all of that just yet, but you're starting to see it play through. To the degree that we continue to navigate through price headwinds, it will somewhat impact how high that gross margin can go. But at the very least, it lets us combat those sorts of things. So, we're excited about where we're at on the cost side.

Q: Thank you. Hi, guys. I was wondering if you could update us on progress in intensive Type 2. Are you seeing momentum now on the commercial side with the wins you talked about with United and more recently, Aetna, and about where do you think we are in terms of the market on intensive Type 2 CGM penetration?

Kevin Sayer: I'll refer to Steve or Quentin on the market penetration, I can just tell you anecdotally, what we're hearing is very much as these patients are getting covered, the technology is getting to them. We've always had Type 2 intensive insulin use coverage in Medicare. In that respect, I think our biggest barrier there, and again, it talks to sales force expansion and messaging was getting to physicians to recommend it to those patients and making everybody aware. So, we're happy with that one.

Steven Pacelli: Yeah. On the penetration, what we said on the last call is that our Type 2 business was exceeding 20% of our patient base. I don't think we're prepared to update that today. But the point that I would want to make on the – even just the intensive Type 2 space is the addressable market is simply larger, right, so whether you're looking at the US business or you're even looking at the European or the other foreign market. In the US, we're looking at a patient opportunity of probably pushing like 2 million patients where we – we used to use a number of maybe like 1.5 million in the US, I think the data that we have suggest that, that market opportunity is a lot bigger. So, while penetration certainly isn't there, we're making great progress on the insurance front and it's a huge market opportunity as we look to continue to expand the intensive business.

Q: Thanks. Two quick ones for me. One, I was just hoping you could give us a little bit more on the significance of the government contract you mentioned in the US, what impact that could have on the business. And then I just want to follow up on the question about international. I'm curious if the situation is improving in the countries that have lagged due to COVID, or if you actually think that might get a little bit worse here in 4Q as virus case counts increase in some of those places? Thanks.

Kevin Sayer: The government contract is really important to us, particularly on the VA side. There's a much higher instance of diabetes with that group of patients than the general population. Being able to get access to G6 through a pharmacy benefit at zero co-pay, we think is a wonderful benefit for that group. I think it's just part of the general blocking and tackling that we do to continue to grow. So, I can't quantify it. These are the types of wins that you've seen Dexcom generate over the past several years, and we are looking forward to serving this patient base much easier than we have before. I'll let Quentin talk about the international piece.

Quentin Blackford: Yeah. With respect to international, early signs are starting to point to the fact that new patient numbers are starting to step back up, clearly, not back at the levels they used to be at, but we are seeing those start to trend back up the way we would expect them to, over time. So, we're seeing some good progress there. And clearly, that's in those markets that have the administrative burdens placed upon and that are a bit heavier, in those markets where you're utilizing something like the e-commerce platform, we've seen terrific results there.

Q: Good evening and thank you for taking the questions. Just maybe at this point from me interested, Steve, when you think about the UVA collaboration and you talked about the advanced analytics, Dexcom already essentially owns and controls the data through the generation. You have the algorithms in place. [indiscernible] (00:50:18) on maybe a future revenue stream from whatever we want to call this an IT management or some type of [indiscernible] (00:50:28) ways you could further leverage the data that you have in-house now to further enhance the margin profile longer term?

Steven Pacelli: Yeah. No, it's a great question. We've spent time exploring ways to monetize the data to-date. And quite frankly, at this point, to the extent we can help our partners be more competitive with the algorithms that we provide to them and/or that we provide to our patients just from a patient capture and patient retention perspective, I think we're pretty happy with that.

The UVA collaboration, in particular, you guys all know we bought TypeZero a few years back. That algorithm, in particular, is commercialized in the Tandem Control-IQ product today. Really, when we look at the opportunities at UVA, it's really to expand to next-generation algorithms, whether they be for automated insulin delivery, which we would probably do in conjunction with our folks at TypeZero, or even beyond to the intensive insulin patients who don't use an insulin pump and even beyond that, whether it's Type 2 more broadly, health and wellness, pre-diabetes, even in the hospital. So, we're looking at kind of ample opportunity over the next five years to really work closely with UVA, who has been responsible together with our folks at TypeZero for developing these best-in-class algorithms.

Q: Great. Thank you for taking the questions. Just two for me, both on the commercial side. First, on the DTC program, can you help us understand, I guess, the ongoing effectiveness of the program and where you're at with respect to rolling it out and realizing the value and the return on investment from those DTC investments? And then secondarily, are you seeing changes with respect to your referring physician mix? Obviously, you talked about maybe making some salesforce investments as you move more into the non-endos. Just trying to understand how those different channels have different sales and marketing needs.

Kevin Sayer: Well, with respect to DTC, we have rolled that out, and we're going very strong here in the fourth quarter. Our return on our DTC investments has been very, very good to-date. In fact, compared to other ones we've seen in other companies, our returns are extremely high still. So that program has not capped as far as effectiveness. So, we'll continue to investigate and you will see more from us going forward this quarter and the first of next year. We have a lot of fun things planned for you on the DTC front.

With respect to more channels and referring physicians, again as Quentin said earlier, we had tremendous new patient numbers this quarter. So, we're still getting referrals, obviously, in the endocrinology community and the communities where we serve. Traditionally, we just feel the need to go deeper and to visit with more healthcare professionals and help them better treat their patients as well. One of the things we learned from – we learned from COVID with respect to our CLARITY system as physicians had to do mobile appointments or tele appointments, if they can pull CLARITY data up on the screen, those appointments become very effective. And there's a large group of physicians who don't have access to CLARITY or haven't been using it. We need to get out and get our message out there. So, that's our plan, is to go deeper and to help our people focus more on those territories where they work.

Q: Good afternoon. I hate to get granular here, but I thought I heard Kevin say that new patient growth continued in the third quarter. Yeah, there are a couple of ways to interpret that comment. So, my question is, did you add more new patients in 3Q 2020 than you did in 3Q 2019?

Quentin Blackford: Yeah, Jayson, just to be clear, Q3 2020 was a record number of new patient adds for us. So, it was the highest quarterly new patient add of any quarter in our history.

Q: Hi there. This is Iris calling for Ravi. Thanks for taking the question. So, if you can talk a bit about CGM coverage under Medicaid. So, as we think about the macro economy, the unemployment rate is high, and maybe there are more people moving to Medicaid from other insurances. So, can you talk about CGM coverage under Medicaid? And do you think the shift to Medicaid would reduce patients' access to CGM or increase pricing pressure? Thanks.

Kevin Sayer: Yeah. This is Kevin. I will take that. We have Medicaid coverage in approximately 40 of the 50 states as we sit here today, and I would be in full disclosure. It's spotty in some states, it's very easy in some states, they make it very hard as they're very budget conscious and they're worried about spending dollars. We believe – and we have various pricing arrangements throughout all the states. There's a wide range of pricing there. I don't – if we had coverage in all 50 states and everything were equal in almost every device business, Medicaid pricing ends up being lower than everything else, and we're prepared to do that. We believe these patients have access to our technology as well.

But really the challenge for us has been getting it across the finish line in a manner to whereby patients can get the technology, and it's just too hard right now. We are trying hard to be better. We've had some major wins on that front. But there's a couple of states where we just keep knocking on the door and keep – I mean, there are some states where we get across the finish line, and then they've attached Medicaid coverage to some other thing in the state legislature and we get thrown out. It's been a very frustrating thing for me and particularly because so many of those patients are children and really deserve access to Dexcom CGM, deserve access [indiscernible] (00:56:50) and all the things that we have to offer. So, we continue to fight that battle. I hope we have it in every state, and we'll make sure that we can compete competitively on the pricing side. We're not going to give the Medicaid business up. We want patients to have access to us.

Q: Hi, thanks for taking my question. You've always said that at some point, competitors will close the gap versus Dexcom on performance and connectivity. Assuming this happens at some point over the next one to two years, do you believe Dexcom can differentiate versus its competitors via the software around the CGM and accordingly sustain some degree of premium price long term? You're clearly making significant investments here as demonstrated with TypeZero and the UVA collaboration. But again, do you believe Dexcom can differentiate via software over time instead of the hardware differentiation you've enjoyed since 2012? And if so, when will we start to hear more about your software product pipeline? Thank you.

Kevin Sayer: Well, you'll hear more about our software product pipeline as we launch those products over time. And let's be clear on the hardware differentiation side, while we've said that gap is going to close, it still hasn't. And we still lead in connectivity and connectivity in multiple devices and interoperability and data sharing and all of those things. That infrastructure has taken us a long time to build, and it costs a lot to support.

I think over the next several years, software will be a key thing, delivering the experience to the patient that will keep them engaged and provide a great outcome. I was at dinner with a long time diabetes patient the other night, and we started talking about experiences, and the guy looked at me and goes, so wait a minute, you don't think one size fits all, I said, no, I don't. I think at some point in time, you'll see – I know you'll see from Dexcom different software offerings. So, stay tuned on that one.

I think the other thing that everybody needs to understand also about this market as we look out over the next several years is just the challenge of scale, and we've lived through this. As we continue to invest in factories – we've got G6 pretty much built out now. That took us a couple of years, and now we're investing heavily in G7. You're looking at somewhere between $0.5 billion and $1 billion in capital investment on our part to do this to get to where it needs to be, to get these products at the cost basis they need to be, but also automated and at scale, so we can deliver the volumes that we need. And that will be a differentiator as well.

If companies aren't investing in that scale, that's going to be difficult. So, as I look out over time, connectivity and the hardware experience that we provide, we still believe we'll be best-in-class over everybody else. But the software experience we can create based on the mentality that we have and as close as we are to our patients really is going to be a differentiator.

As far as premium pricing over time, we will continue to work towards that end. We've done very well in the pricing – in our pricing schemes now that as Quentin alluded to earlier, with our shift to the pharmacy, and many of our patients to Medicare, that's becoming – our pricing models have moved in the way that we thought they would.

I do think there are things we have CGMs to do that are worth more than other things. And as I look to this in the future, I do see an experience. This is just me personally, that it's worth a higher price than some other experience and conversely to some other experiences that may not be worth as much as what we charge today. So, stay tuned on that. As I mentioned to somebody the other day, we've kind of created this industry from 2012 to now, and it's going to be fun to evolve over the next several years as well.

Q: Hey, guys. Thanks for fitting me in. Quentin, any color or preliminary thoughts on how we should think about 2021 relative to 2020, the 29% top line growth you're guiding to in 2020 and the operating margin of greater than 16%? Any high level thoughts? Thanks for taking the question.

Quentin Blackford: Yeah, Larry. We're not going to talk about 2021 on the call today. Clearly, we believe there's tremendous opportunity for growth in front of us given just the fact that there's so much awareness to continue to be had around our product. I think we've been clear from a profitability side. We're going to be disciplined in this organization, and we're going to make the right investments where we need to, to open up new growth channels into the future. And all of that will be contemplated in the guidance that we ultimately end up providing for 2021, but we're not going to do that today.

Close Concerns’ Questions

  • What exactly are the “approval support trials” for G7 mentioned during the call? Where are these taking place?

  • Is the US pivotal trial for G7 underway? If so, at what step of the process is the trial?

  • Where are the “several key markets” that G7 will launch in first? Does that include the US?

  • What pricing is Dexcom expecting to hit with G7? How does the decision not to launch with extended 15-day wear hurt efforts to lower the price of G7?

  • Who will take over as Chief Commercial Officer when Rick Doubleday retires from the position at the end of the year?

  • Given that Dexcom did not disclose many details during today’s call, what can we expect to hear at the Investor Day on December 9?

 

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