Dexcom 1Q19 – Sales of $281 million rise 52%, driven by 45% US growth; G7 in late 2020-early 2021 (“spectacular”); FY19 Guidance raised by $75 million; Cigna pharmacy coverage – May 1, 2019

Executive Highlights

  • Dexcom reported worldwide 1Q19 revenue of $281 million, rising 52% year-over-year (YOY) and accelerating from 30% growth in 1Q18 (press release, slides). Sales declined 17% sequentially from the record in 4Q18 ($338 million), the same sequential decline that Dexcom saw in 1Q18 and 1Q17. US sales of $211 million grew 45% YOY – nearly doubling 1Q18’s 25% YOY growth – and drove 68% of 1Q19 growth. This marks two straight quarters of US sales growth >40% YOY, a first for Dexcom since mid-2016. International sales hit a record high $70 million, rising 79% YOY as reported (+86% operationally). Overall, the call emphasized improved global awareness of CGM, with growth propelled by strong new patient additions/volume in all channels: US commercial, Medicare, OUS. We’re very glad to hear of the international growth – we believe Time in Range continues to gain more attention as a critical metric and CGM is the primary way to assess it.

  • Given the momentum, 2019 sales guidance was raised by $75 million: FY19 revenue is now expected at $1.25-$1.3 billion (+21%-26% YOY) – arguably still conservative. Notably, Dexcom has been “very successful” in payer discussions over the past few months, including brand-new pharmacy coverage from Cigna. From our discussions with Cigna, the payer is very focused on long-term outcomes for people with diabetes – it’s great to see the CGM investment.

  • In the pipeline, Dexcom continues to work on finalizing the G7 system, with plans “on track” for a “late 2020/early 2021 launch (no change). CEO Kevin Sayer mentioned in Q&A that he has been wearing G7: “With respect to the experience, it is spectacular. The wearable is pretty much non-existent on the body. In all of the innovation we’ve attempted during my term at Dexcom, this is the biggest leap we’ve ever taken.” He added the leap from G6 to G7 will be bigger than that from G5 to G6. Whoa – that was very exciting to hear. So was hearing Sayer muse about how decision support tools associated with G7 would be valued.

  • Matt Dolan has been appointed General Manager of “New Markets,” signaling an increased focus on new applications of CGM ahead of the G7 launch: non-intensive type 2 diabetes and prediabetes, hospital care, gestational diabetes, and consumer/obesity/wellness. While Dexcom has had some of its “best people” working on these areas, the creation of a “New Markets” vertical seems like a turning point – building a team to set goals and give greater focus to the “different business models” needed. Gestational and hospital CGM studies will initiate this year. We are very excited to hear this as we believe every woman with diabetes should receive CGM from the very start of pregnancy – week 26 is far too late to begin CGM, in our view. Mr. Sayer actually mentioned the possibility of a CGM session potentially replacing the traditional oral glucose tolerance test, though this is far from certain at this stage.

  • The lower-cost G6 transmitter will begin manufacturing in 3Q19 and begin selling in 4Q19, bringing a 50%+ less expensive design vs. the current G6 transmitter. Other G6 enhancements are expected in the “fall,” but no details were shared. Mr. Sayer confirmed that extended G6 wear will not launch in the US 2019, suggesting that 14-15 day wear may wait until G7.

  • Dexcom now plans to launch G6 into Medicare “later in the year,” back from the original plan to launch in “early 2019.”

Dexcom reported 1Q19 financial results this afternoon in a call led by CEO Kevin Sayer, CFO Quentin Blackford, and EVP Steve Pacelli. See the short 1Q19 financial slides here, the first time Dexcom has shared presentation slides with its call.

Pipeline Highlights

1. G7 “on track” for late 2020/early 2021 launch; “It is spectacular…the biggest leap we’ve ever taken” – Kevin Sayer

Dexcom continues to work on finalizing the G7 system, with plans “on track” for a “late 2020/early 2021 launch. This timing was consistent with ATTD, 4Q18, JPM, and Dexcom’s December Investor Day. The most interesting comments of the call came from CEO Kevin Sayer in Q&A, who shared that he has been wearing G7: “We run trials with G7 all the time, gathering data to learn and fine-tune. With respect to the experience (regulatory and legal are going to kill me), it is spectacular. The wearable is pretty much non-existent on the body. In all of the innovation we’ve attempted during my term at Dexcom, this is the biggest leap we’ve ever taken. I give kudos to all the people involved in it. If I were to design what I hoped CGM would be when I entered this field 25 years ago, I would have designed this. We’re finally here.” This was quite a notable comment from Mr. Sayer, and he later said that the leap from G6 to G7 will be bigger than the move from G5 to G6. “[G7] will be wildly competitive,” he added in Q&A. Per previous remarks, the G7 feature set will indeed be compelling: a fully-disposable, single-piece sensor-transmitter with a smaller on-body footprint, a “significant cost reduction,” iCGM accuracy without calibration, extended wear (14-15 days), and direct Bluetooth to the phone. It’s not clear when Dexcom will run a pivotal trial on G7, though one will certainly be needed given the iCGM/extended wear plans.

  • In Q&A, an analyst asked about G7’s pricing vs. FreeStyle Libre. Said Mr. Sayer: “We’re not going to outline specific details. We look at the annual revenue per patient per year, and then consider what is the appropriate amount to charge per-patient – rather than pricing the components. There are a lot of variables too. For instance, would decision support tools justify a premium? From a cost basis, we have a lot of flexibility for G7, with a design for manufacturing at lower costs and extended wear. We are prepared for what the market will do, and we will have a detailed go-to-market strategy. We’re very optimistic about the direction we can go.”

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

2. Matt Dolan appointed GM of “New Markets” Division – CGM in non-intensive T2D, gestational, hospital, wellness

Dexcom has appointed VP of Corporate Development Matt Dolan as General Manager of “New Markets,” signaling the increased focus on new applications of CGM ahead of the G7 launch. This is an exciting promotion for Mr. Dolan, a very well-regarded professional at Dexcom. In line with remarks over the past three months, remarks today mentioned several promising future markets for CGM: non-intensive type 2 diabetes and prediabetes, hospital care, gestational diabetes, and consumer/obesity/wellness. The slide below in today’s investor presentation split these out further – and notably, was the only non-financial slide in today’s deck. While Dexcom has had some of its “best people” working on these areas (and talked about them for years), the creation of a “New Markets” vertical seems like a turning point – building a team to set goals, measure progress, and give greater focus to the “different business models” needed. Said Mr. Sayer, “My personal expectations for our New Markets group are very high. We need as much clinical and cost evidence with G6 so we’re prepared to attack these markets with G7.” As of the December Investor Day, Dexcom planned to run gestational and hospital studies this year; there were no specific updates on these studies today, though a slide from today noted they will indeed initiate this year. Mr. Dolan has been with Dexcom for several years, most recently serving as VP of Corporate Development, opening the earnings calls, and working closely on investor relations with EVP Steve Pacelli. See a few other quotes on New Markets below.

  • In new markets, what are the outcomes of focus? How will Dexcom and payers define success in clinical trials? EVP Steve Pacelli: “You have to take the individual markets separately. In non-insulin type 2 diabetes, reduction of drug costs is paramount. In the hospital, it’s reduced length of stay, and moving someone from the ICU to the general ward to out of hospital. Prevention of hypoglycemia is also key in the hospital setting – and it’s on CMS’ radar. For gestational diabetes, it’s still early and we’re exploring there. I would love to tell you that a CGM session would replace the OGTT, but we’ll need time and effort and clinical trial work. Matt [Dolan] has developed and will continue to develop a robust team to tackle these markets.”

  • Which of these new markets will bear fruit for the company in near-term? CEO Kevin Sayer: “I’m not as concerned on revenue side as building the long-term case. Our efforts this year are to develop the outcomes and the cost-based evidence, business models, and establishing those relationships to distribute into those markets (i.e., 2019 and early 2020). When we roll out G7, we’ll roll out to these other places. Right now, we haven’t just been sitting around and not working on this. We’ve had some of our best people working on this, but now we’ve formalized the structure – you have a team, a home, goals, so go get this done. Now we’ll start measuring some of this stuff.”

  •  “In the hospital, CMS has renewed focus on hypoglycemia as a huge problem; you’re not going to detect hypoglycemia with fingersticks, even if you’re taking a couple fingersticks an hour. CGM plays perfectly into that environment. We also know recurring hyperglycemia is a probably – e.g., reduced healing time. We could get CGM put on a patient pre-op, get them into the hospital, and get blood glucose under control before a procedure. There is a great application there. The disposable nature of G7 is the perfect product opportunity there.” – Mr. Pacelli

3. Lower-cost G6 Transmitter to Begin Manufacturing in Q3 and Selling in Q4; More than 50% Cheaper

The lower-cost G6 transmitter will begin manufacturing in 3Q19 and begin selling in 4Q19 – in line with previous plans for a “2H19” launch. This was the only other pipeline project mentioned today, and it came up repeatedly in Q&A in profitability comments from CFO Quentin Blackford. The transmitter will play a key role in helping Dexcom approaching 70% gross margins exiting 2019 – up remarkably from a 60% gross margin in 1Q19. Mr. Blackford said it is “more than 50% cheaper” than the current G6 transmitter, offering a “very significant benefit” on cost with the same functionality. We’ll be interested to see if Dexcom drops transmitter pricing once this launches, as the current three-month G6 transmitter is still quite expensive and a source of lots of consumer complaints (while many have coverage, per se, high deductibles keep this a high-cost item for many patients). Dexcom reported $50 million in transmitter revenue in 1Q19, comprising 18% of revenue and growing at about the half the rate (+32%) of sensor revenue (+61%).

4. G6 Medicare Launch “Later in the Year”

  • Dexcom plans to launch G6 into Medicare “later in the year,” though no specific quarter was shared. The original plan was to launch in “early 2019,” a timeline that has now been missed. G6 received Medicare coverage in October, and presumably this launch is gated by G6 manufacturing capacity. Management did say that Medicare uptake remains strong, and G5 is still a “sticky” product – including in intensive insulin users with type 2 diabetes.

5. New G6 Features in “Fall”, But No Specifics; Not Mentioned – G6 Professional CGM, Direct-To-Apple Watch, Smart Pens

  • Mr. Sayer said to expect new G6 features in the “fall,” but no further details were shared. He confirmed that extended G6 wear will not launch in the US 2019, suggesting that 14-15 day wear may wait until G7 launches. (And giving Abbott’s FreeStyle Libre 14-Day a wear-time advantage for quite a while in the US.) Given the need to hit iCGM accuracy benchmarks, Dexcom would also have to run a large study to extend G6 sensor wear, and Mr. Sayer said the team is carefully considering whether to improve G6 or “accelerate” G7 – “In many cases, we are choosing G7 acceleration.” That makes a lot of sense, given Dexcom’s already-strong growth with G6 and the clear upside to getting G7 to market as quickly as possible.

Other notable pipeline projects were not discussed today:

  • G6 Professional CGM – As of JPM, this was expected to launch sometime this year. We saw the first picture and details at ATTD (see below): fully disposable transmitter and 10-day sensor (factory calibrated), an ability to run in blinded or real-time mode, a reader to download the data in clinic after 10 days, and the ability for users to get real-time CGM data through the same G6 app. (Based on the Pro transmitter, the G6 will run in a simplified mode.) This is a serious upgrade from the outdated G4 Professional CGM, and it brings stronger competition to Abbott’s FreeStyle Libre Pro.

  • Direct-to-Apple Watch – Also at ATTD, we heard that Direct-to-Apple Watch remains in development, but it has “taken a while” because Dexcom “really wants to get the user experience right.” It was previously expected to launch in 2019.

  • Smart pens sending data directly into the G6 app and Clarity– we saw a picture of this at ATTD, but launch timing presumably depends on Dexcom’s partners (e.g., Novo Nordisk, Lilly) and an update to the G6 app.

  • Dexcom recently updated the Clarity data management app with some excellent time-in-range featuressee our coverage here.

Financial and Business Highlights

1. Sales of $280 million Rise 52% YOY; US Sales Grow 45% to $211 million, Driving 68% of growth; Record OUS Sales of $70 million Rise 80%

  • Continuing the momentum from Q4, Dexcom reported worldwide 1Q19 revenue of $280.5 million, rising 52% year-over-year (YOY) – a meaningful acceleration from 30% growth in 1Q18. Sales declined 17% sequentially from the blowout record in 4Q18 ($338 million), which was actually identical to the sequential decline that Dexcom saw in 1Q18 and 1Q17. The call emphasized improved global awareness and adoption of CGM, with growth propelled by strong new patient additions and volume across the US commercial, Medicare, and the international businesses. The sales growth came despite the pricing headwinds Dexcom has talked about over the past few quarters; again, CFO Quentin Blackford reiterated that ~$100 million in pricing headwinds are expected in 2019 (move to the pharmacy channel, greater contribution from Medicare and international). The US business drove 68% of the 1Q19 growth, fairly consistent with the level seen throughout 2018. The vast majority of new patient adds continue to come from MDI, reflecting no change for Dexcom over the past couple of years.

  • US sales of $211 million grew 45% YOY, nearly doubling the 25% YOY growth seen in 1Q18. Sales declined the typical 25% sequentially from the record Q4, but still marked the second highest US sales ever – even beating out 3Q18, which was G6’s first full quarter on the market. This also marks two straight quarters of US revenue growth exceeding 40% YOY, a first for Dexcom since mid-2016. A fatigued-sounding Kevin Sayer acknowledged that the demand has brought organizational challenges, especially in the first quarter – Dexcom must reconfirm benefits and document clinical necessity, and the process can be highly burdensome between HCPs, payers, and Dexcom. “We are working around the clock,” said Mr. Sayer, “and we saw improvement in our ability to meet demand.” Comments on the US move to the pharmacy and customer support improvements are in separate highlights below; both should help.

  • International sales hit a record high $70 million, rising 79% YOY as reported (+86% operationally) and reaching an all-time high 25% of global sales – up from ~17%-24% throughout 2018. Management highlighted Germany as a “standout” country, with “significant growth” in the Nordic markets. Notably, incremental reimbursement was just secured in Australia, and contributions from Japan and Korea are expected to provide a “nice tailwind” over time. (This also implied both countries have launched, following news of approval in 3Q18.) CFO Quentin Blackford reiterated the Investor Day goal for “at least 30%” of Dexcom’s business to be from international markets by 2023; certainly things look on track there, given the growth rate.

2. FY19 Guidance Raised by $75 million: $1.25-$1.3 billion, +21-26% YOY

  • Management raised full-year 2019 guidance by $75 million: sales are now expected at $1.25-$1.3 billion, a 21%-26% YOY rise from 2018. The guidance factors in continued volume growth and more access in the pharmacy channel, balanced against the previously discussed lower per-patient revenue. As a reminder, Dexcom raised sales guidance three straight times throughout 2018, so it’s certainly possible we’ll see several guidance raises again. With a $1+ billion business and lots of market dynamics (e.g., Abbott’s FreeStyle Libre 2, Tandem’s Control-IQ), there is still a fair amount of uncertainty over the balance of the year. Gross margins are expected to be at 64%-65% for 2019, with “meaningful improvement” in 2H19 – reaching 70% exiting the year.

3. Gross Margin of 60%, Sales Growth Outpaces Expense Growth by >2x; $1.4 Billion in Cash

  • Gross margin was 60% in 1Q19, a decline from 66% in 4Q18 and 64% in 1Q18. Gross margins (GM) are expected to rise to 64%-65% for all of 2019, including margins “approaching” 70% to exit the year. Key enablers will include planned improvements in manufacturing capacity, higher sales volume, and the launch of the lower-cost G6 transmitter. CFO Quentin Blackford emphasized that taking cost out of the system will give Dexcom “strategic flexibility to be proactive with payers and navigate pricing headwinds” – in other words, Dexcom should have some room to drop prices if needed. Management again emphasized strong leverage in the business, as revenue growth of 52% was more than double the growth in operating expenses.

  • Non-GAAP net loss was $4.6 million in 1Q19, a serious YOY improvement from a $26.3 million loss in 1Q18. In 1Q19, the non-GAAP amount excluded $6.4 million of business transition costs, $11.3 million of non-cash interest expense (senior convertible notes), and a $4.2 million loss related to equity investments. GAAP net loss was $27 million in 1Q19, roughly flat with a $24 million loss in 1Q18.

4. Pharmacy Coverage from Cigna; “Very Successful” in Payer Discussions in Recent Months

  • Dexcom has been “very successful” in payer discussions over the past few months, including brand-new pharmacy coverage from Cigna. No further details were shared on the Cigna deal or G6’s move to the pharmacy in the US, but getting this major payer on board is obviously a nice win for Dexcom. Today reiterated the 4Q18 comment that Dexcom has contracts in place for >50% of US covered lives in the pharmacy, but far less than 50% of the business is flowing through the pharmacy right now; the vast majority of US sales are still through DME. Getting into the pharmacy clearly remains a major focus of management, but it’s clear that even getting a majority of the business shifted to this channel will take quite a while.

5. On Track to Double G6 Manufacturing Capacity by End of 2019; Customer Support Transition to Philippines Seeing “Great Results”

  • In line with 4Q18, Dexcom remains “on track” to double G6 manufacturing capacity by the end of 2019. Interestingly, management noted that G6 will continue to function as a “platform product for many years to come, even beyond the G7 product.” Obviously it’s quite an investment to build these lines, and the G7 insertion and form factor will be radically different than G6.

  • Following the 4Q18 announcement, Dexcom now has “nearly 200 employees” on the ground in Manila (Philippines) – a remarkably fast ramp of the new customer support infrastructure. Management said the initial transition has been very positive: “significant efficiency,” higher qualitative scores than the domestic teams, “great results,” and lower-than-expected costs ($15-$20 million are now expected, instead of the previous $25 million). CFO Quentin Blackford said the efficiencies are “significant,” and this will make it “much easier to scale more quickly and effectively.” He added that the customer support could become a real strategic asset for Dexcom, influencing how it competes and what markets it decides to pursue. As we noted in February, call wait times were very long in 1Q19, in part because Dexcom has to reconfirm benefits and the installed base is so much larger. Hopefully these moves will improve the customer experience, as most sales still flow through the admin-heavy, headache-inducing DME channel. This was a big decision that hit the US-based Dexcom family in very challenging ways (it’s presumably a sizable number of employees that will lose jobs, although we do not have an exact number). Notably, a significant part (1/3 of one building we believe) was moved from manufacturing capacity to customer support some time ago, and it will be valuable for patients to have that move back to manufacturing. This is the reality of business today as well – competing in today’s world with customer service based in the US is just not sustainable, medium- or long-term. We are sure this does not make it easier, however, and our hearts also go out to the dozens and dozens of incredible US-based customer-service reps we have personally spoken to over the years. They have been incredibly professional and always amazing help, even in times of long wait times; we are sorry for this team and although we know Dexcom will work to take very good care of them, we know many are personally impacted by diabetes themselves (or in their families) and hope they will be as well as possible. The Philippeans  is supposed to be a very strong country for customer service – it is far easier to hire people there, the average English skills are very good, and the approach to service is world-class.

6. What about competition from Abbott’s FreeStyle Libre 2 iCGM?

  • The investment community is very focused on what the under-FDA-review FreeStyle Libre 2 iCGM means for Dexcom’s G6 in the US. Comments from the call are enclosed below, and we’d underscore the enormous runway in the global CGM market – US CGM penetration is estimated in the “30%-range” in type 1 diabetes and <10% in intensive type 2 diabetes (Mr. Sayer’s estimates today). As he noted in closing remarks: “We forget that this market opportunity is huge. Intensive insulin, type 2, health and wellness. We continue to see people buying our system who simply want to manage nutrition and are paying cash. We truly see a day when CGM is in multiple configurations and forms and becomes a useful tool across all of healthcare. Our pricing, pharmacy, and payer teams are doing well and we’re hitting on all cylinders here. Given the size of the opportunity, we didn’t expect to remain the sole voice in CGM. Increased awareness by all parties gets patients to the technology that meets their needs …We’ll have G6 enhancements later this year and G7 is coming. We expect to be a leader in this industry for a very long time.”

    • “About a year ago, we talked about iCGM for the first time. We remain bullish that FDA gave us guidance and standards that are safe and in the best interests of patients. We’ve wanted standards and guidance for years. We never assumed we’d be the only iCGM company; we knew others would up their game. If Abbott does, that means they have provided enough evidence to do so. The history of our company, ever since I’ve been here, is that we’ve always had a competitive offering. The claims of those companies, “We’re as good as a Dexcom,” were never “We’re as good as somebody else.” In real-life use, in the field, our technology leads the way in real-world, clinical performance. We’re very confident we’ll remain top of the line. We have not seen a lot of Libre 2 in Europe, and we don’t have a lot of answers We know a lot about our technology, we have enhancements coming for G6 over the year that will make it better, and we’ll be offering decision support. Moving to G7, the smaller on-body wearable, a one piece component, no transmitter, the lightweight nature. Many of you know I wear the G7 quite a bit – I’ve always been a sensor snob. It’s a bigger leap than G5 to G6. That product will be wildly competitive and have all the benefits of G6 and more. Our pipeline is fabulous. And it’s a great market opportunity and there is room for multiple products and companies.”

    • As a sidenote, we think it’s very positive that CGM is starting to be used for weight management. Though many people would not have the funds to afford it, some clearly do – it would be great from our perspective if they did not need a prescription to gain access.

7. Dexcom New Real-World Evidence Publications: G6 Urgent Low Soon Alert and Value of Remote Followers in Youth

Dexcom just published two journal articles sharing real-world evidence. One showed the benefits of G6’s urgent low soon alert on hypoglycemia, and the other showed the value of Dexcom Share/Follow in youth.

  • Real-World Hypoglycemia Avoidance With a Predictive Low Glucose Alert Does Not Depend on Frequent Screen Views (Puhr et al., JDST 2019): Dexcom analyzed glucose data from an anonymized convenience sample of 15,000 patients who used the G6’s predictive low glucose alert (forecasts ≤55 mg/dl within 20 minutes). Over 93% of users enabled the urgent low soon alert, and its use was associated with significantly reduced hypoglycemia <55 and <70 mg/dl – independent of screen view frequency. The table below shows that with urgent low soon disabled (left columns), time <70 mg/dl was ~4.5%, which declined to ~2.6% with the feature enabled; time <55 mg/dl went from ~1.2% without the feature to 0.65% with the feature. The outcomes were almost identical between high and low screen views. While these may sound like low rates of hypoglycemia, the difference with the use of the predictive low-glucose alert was nearly half an hour a day less with the predictive alert, demonstrating clearly and powerfully how a smart, actionable alarm can drive further clinical benefit.

  • For comparison, Abbott’s real-world time-in-range data from ATTD (nearly 500,000 users) showed higher rates of time <55 mg/dl: 2% in the median FreeStyle Libre user and 1.6% in those scanning 40 times per day. That said, Abbott’s data set was 70-times bigger than this Dexcom data set, meaning the real-world outcomes are likely not comparing the same types of users (i.e., these are early adopters of G6).

  • Real-Time Sharing and Following of Continuous Glucose Monitoring Data in Youth (Welsh et al., Diabetes Therapy 2019): Dexcom analyzed CGM data and device usage in 15,000 youth ranging in age from 2-18 years. Overall, 95% of the population used the sharing feature and had at least one follower. The presence of at least one follower (vs. zero) was associated with slightly lower mean glucose values and slightly more time-in-range (70-180 mg/dl). We note that the actual clinical differences here were really quite small, and number of followers could arguably just a measure of a family’s overall engagement. Still, this is a cool data analysis and we look forward to seeing much more like this!

-- by Adam Brown and Kelly Close