Memorandum

Dexcom 3Q13 – Record sales of $43 million, 101% growth; comments on MiniMed 530G; pediatric indication by year-end – November 7, 2013

Executive Highlights

  • Dexcom had record-high product revenue of $43 million, up 101% from 3Q12. The big gain reflected new patient adds and higher sensor sales associated with the G4 and a relatively easier 3Q12 comparison.
  • FDA approval of a G4 Platinum pediatric indication is still expected by year-end. Animas needs to perform additional testing for the Vibe. PMA filing of the integrated Tandem t:slim pump will likely slip to early 2014. Dexcom is responding soon to FDA questions related to Share. Dexcom has filed for a professional use indication for the G4 Platinum.
  • Dexcom is adding new sales reps by year-end, to reach 90.

Dexcom reported 3Q13 results yesterday in a call led by CEO Mr. Terry Gregg, who had an impassioned tone throughout. Dexcom achieved record sales of $43 million, up 101% year-over-year (YOY). As Gregg said, the results speak for themselves. Notably, the impressive gains reflect two factors. First, Dexcom is on a roll, with patient, healthcare provider, and payer interest all at high points. The company added more new patients and sold more sensors than in any quarter in its history. Indeed, Dexcom hasn’t had triple-digit growth since 2010, from a much lower base ($14 million). This reflects what we see as a tipping point in CGM interest and acceptance. Second, the comparison to 3Q12 was a relatively easier oneas a reminder, 3Q12 revenues had been relatively “suppressed” as patients delayed purchasing Seven Plus sensors in anticipation of the Dexcom G4 Platinum approval (sales had essentially been flat sequentially in 3Q12, and the G4 had just been approved). Sequentially, 3Q13 revenues grew 20% from the previous record-high 2Q13 revenues of $36 million. Notably, Dexcom is seeing important operational gains as well – gross margin was 65% in 3Q13, up from 61% in 2Q13 and 36% in 3Q12 and gross profit more than tripled from a year earlier. Net loss narrowed to $6 million in 3Q13 from $17 million in 3Q12. Year-to-date cash operating loss was $1.5 million, a dramatic shift from the $27 million loss in the first nine months of 2012. Management is “confident” that 2013 full-year sales will exceed the top end of the $130-$140 million product revenue guidance range (40-50% YOY growth in 4Q13). Mr. Gregg shared “exciting news” regarding the addition of Qualcomm’s Mr. Steve Altman to Dexcom’s Board of Directors – the addition of a Fortune 500 leader like Ms. Altman would be outstanding news for any company of any size, but he is a particularly valuable addition given the company’s connectivity ambitions with Dexcom Share and the Gen 5 mobile platform.

Mr. Gregg’s had quite bold remarks on the Medtronic MiniMed 530G and Enlite sensor during the call. He believes that “the pursuit of an artificial pancreas has unfortunately been dealt a substantial blow” with this product’s approval. He sharply criticized the Enlite’s “poor” accuracy, citing independent data (e.g., Dr. Steven Russell at ADA 2013; Dr. Garry Steil at DTM 2013) that the G4 Platinum Sensor is 40-70% more accurate than the Enlite. His full transcribed remarks can be found below. Dexcom expects a near-term impact on new patient adds, though Mr. Gregg asserted that Dexcom is “committed to compete toe-to-toe in marketing the superiority of our system.” 

On the pipeline side, discussions continue with the FDA regarding a pediatric indication for the G4 Platinum. Management still sounds optimistic about this and expects approval by year-end. The regulatory cycle continues to move on the highly awaited Dexcom Share; the FDA responded to the PMA supplement filing with some questions, which Dexcom expects to respond to in the next two weeks. On the pump side, Animas is conducting additional testing on the Vibe to respond to the FDA’s questions – unfortunately for patients, responses are not expected to be submitted until the end of January. Notably, Mr. Steve Pacelli mentioned that Dexcom and Animas are working on a “more advanced product than the MiniMed 530G” – he could not give details, though we suspect it could be a predictive low glucose suspend device. Competition drives even faster innovation; Medtronic, of course, also continues to work on next generation products. Regarding the Tandem t:slim integration partnership, Dexcom management no longer anticipates a PMA filing by the end of the year, a delay from previous forecasts. Last, Dexcom has filed a PMA supplement with the FDA seeking a professional use indication for the G4 Platinum – this indication is extremely important in our view, as it will drive more use of the Dexcom G4 by type 2 patients. We believe all type 2 patients not at their glycemic target should be using CGM intermittently to learn more about improving or optimizing their diabetes management. Professional use of the G4 would help tremendously toward this end and would be excellent awareness-building as well, enabling with a hands-on way to get more HCPs and patients acquainted with the technology.

Financials and Business Update

  • Dexcom’s product revenue of $43 million rose a remarkable 101% from $21 million in 3Q12. This represented Dexcom’s highest sales ever by a long shot, exceeding last quarter’s record sales of $36 million by 20%. Management attributed the strong results to two factors:
    • First, the comparison to 3Q12 was an easy one. Management reminded callers that 3Q12 revenues were “suppressed” as patients delayed purchasing Seven Plus sensors in anticipation of the Dexcom G4 Platinum approval (as a reminder, FDA approval was announced on October 8, 2012 and the product started shipping on October 20). Indeed, growth in 3Q12 was just 27%, the lowest year-over-year growth we’ve seen since we’ve been tracking Dexcom. Additionally, Dexcom took a $1.2 million revenue reduction in 3Q12, reserved for sales returns related to the 30-day money back guarantee Dexcom offers on its hardware (and extended sales return offer for patients who purchased the Seven Plus between September 1 and the October 5th G4 Platinum approval).
    • Second, performance was simply strong in 3Q13, reflecting perhaps a “tipping” point – Dexcom added more new patients and sold more sensors than in any quarter in its history. Management noted that consumable and durable sales both rose significantly, though sensor sales grew at a much faster rate than durable sales. Both patient retention and sensor utilization were up. Management specifically noted that there are a “much higher number of patients” who are purchasing enough sensors to wear a new one every seven days; this reinforces dQ&A data that has shown for many years that 24/7 use of Dexcom is higher with Dexcom wearers than Medtronic users. In response to an analyst question as to why any patient “would give up a perfectly working sensor after seven days,” management had a nuanced and astute reply – it’s likely that Dexcom is now moving out of the early adopters. In others words, new patients “read the labeled instructions” and use the G4 Platinum according to its seven-day labeled use, while early adopters “figured out ways to trick the system.”

Worldwide Product Revenue

 

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

Product Revenue (millions)

$21.5 

$21.1 

$31.7

$27.8

$35.5

$42.5

Year-over-Year Growth

 42%

 27%

52%

49%

65%

102%

Sequential Growth

 16%

 -2%

 50%

 -12%

28%

20%

 
  • Sequentially, 3Q13 revenues grew 20% from the previous record-high 2Q13 revenues of $36 million. Dexcom’s sequential growth has been quite lumpy in recent quarters, which largely reflects launch of the G4 Platinum in 4Q12 and the end-of-year seasonality associated with deductibles/insurance.
  • In 3Q13, Dexcom had a 65% gross margin, an impressive increase over 36% in 3Q12. Management emphasized that gross margin was “artificially low in 3Q12 due to one-time charges in the transition from the Seven Plus to the G4 Platinum.” Still, gross margin grew four margin points sequentially and gross profit tripled. The gain was attributed to increased sensor volumes and improved operational performance (which we assume means yields are higher, fewer sensors are rejected due to quality, etc). Management has long maintained that the margin target for the G4 Platinum sensor was in the 70-75% range – subtracting out the lower gross margins on hardware, management noted, “We’ve got there. We achieved what we said we would do from a margin perspective.”
  • Product revenue now reflects a 75% consumable/25% durable mix, up from a 70%/30% mix in 2Q13. This is a favorable shift for Dexcom’s business, given the higher margins on the consumables. ASPs remained consistent at ~$70 per sensor and ~$850 for the starter kit.
  • “The international business exceeded our expectations” – similar to the overall business, international revenue rose approximately 100% year-over-year and continues to represent “close to 10%” of product revenue (~$4.2 million in 3Q13). This reflected a ~60% sequential gain, as 2Q13 international revenues were 5-10% of total product revenue. Management expressed confidence that by the end of 2013, the G4 Platinum will be approved in all ten of the previously planned new countries (these were not specified).
  • Absent non-cash charges, net income would have been a positive (and impressive) $3.5 million for 3Q13. Including the $9.5 million in non-cash expenses, Dexcom recorded a net loss $6 million. The operational side of the business is unquestionably improving and there is more leverage in the business model that should allow the company to reinvest more into the R&D and commercial sides of the business.
  • Management emphasized, per its commitment, that it would not raise additional equity funds. As of September 30, 2013, Dexcom had $48 million in cash and marketable securities, up slightly from $46 million at the end of 2Q13. Year-to-date cash operating loss was just $1.5 million, a dramatic shift from a $27 million loss in the first nine months of 2012.
  • Management said it was confident that 2013 sales will exceed the top end of the $130-140 million product revenue guidance range. Despite the strong 3Q13 quarterly performance, no adjustment was made to this guidance range. Management expects year-over-year growth in the 40-50% range in 4Q13, which would represent sales of $44-$48 million (4-13% sequential growth from 3Q13). This seemed to perplex analysts during Q&A, though management outlined two key reasons for the lack of a guidance adjustment:
    • First, Medtronic received approval of MiniMed 530G/Enlite and is currently commercializing the device. Dexcom expects Medtronic to “aggressively” market this as “the first artificial pancreas.” As a result, it “could impact the rate of adding new patients to the installed base.” Prepared remarks from CEO Mr. Terry Gregg fell in a similar vein: “…the Medtronic marketing machine is out in full force. As a result, we do expect some impact to our new patient additions over the next several quarters as clinicians and healthcare providers evaluate [the MiniMed 530G].” See his full, arresting comments on the MiniMed 530G below. We would point out that regardless of marketing, there are a meaningful percentage of Medtronic pump users (we assume in the area of 20-30%) that currently use the Dexcom system. We are in the midst of surveying pumpers and those on CGM about their preferences on these and other fronts; please contact richard.wood@dQ&A.com for more information.
    • Second, the upcoming comparison to 4Q12 will be a challenging one, as Dexcom “sold an extraordinary amount of hardware in 4Q12) (the first quarter of the G4 Platinum launch – growth was 52% year-over-year in 4Q12 vs. the 27% growth in 3Q12 that was this quarter’s comparator). On the positive side, management emphasized that Dexcom has three near-term catalysts coming: the G4 Platinum pediatric indication (expected by year-end 2013), the Share system (PMA supplement under review by the FDA), and the Animas Vibe (J&J is working to respond to FDA questions, likely by January). We are not worried at all about the growth in 4Q13; from our view, the year over year growth is less relevant than sequential growth and we are just glad to see so much organic patient demand. While we believe that Medtronic is going to be much more competitive than it has historically, we think that is far less important than how much more attention CGM is receiving in the market overall and how much more confidence there is in the technology broadly speaking – for both of the existing players.
  • Before the end of the year, Dexcom plans to add an additional 20 sales reps, bringing the total sales force to 90 reps. CEO Mr. Terry Gregg noted that in the next 20 new hires, Dexcom can “hire some of the best,” particularly as other companies contract on the device side. He expects this will translate into more active and successful reps that don’t have to climb the typical four to six-month learning curve. We also note it is easier for reps to climb the learning curve when the technology is so much easier to use and teach! They do not need to learn so many of the objections HCPs previously had, etc. Mr. Gregg further noted that Dexcom is not completely serving the entire diabetes population that it should. We very much agree there is huge potential in broader penetration, which is still well under 10% of type 1s and under 1% of insulin using type 2s.  “There is enough awareness of the G4 Platinum that we can drive that message to a larger group,” Mr. Gregg concluded.
  • Mr. Gregg also shared “exciting news” regarding the addition of Qualcomm’s Mr. Steve Altman to Dexcom’s Board of Directors. Mr. Altman currently serves as vice chairman of Qualcomm Incorporated, “ the world leader in 3G, 4G and next-generation mobile technologies.” We think the addition is a brilliant one for Dexcom, given the company’s focus on connectivity with Dexcom Share, Gen 5, and the Qualcomm 2netHub and also given, of course, Mr. Altman’s visibility as such an effective and high visibility Fortune 500 leader more broadly speaking. Mr. Altman joins a fantastic board of directors (among the very best we’ve ever seen): Nick Augustinos (Senior Vice President Health Information Services and Strategy at Cardinal Health); Dexcom CEO Terrance Gregg, Barbara Kahn (Professor of Marketing, Wharton School), Dr. Jonathan Lord (former Chief Innovation Officer at Humana); Dexcom President Kevin Sayer, Dr. Jay Skyler (University of Miami), Dr. Eric Topol (Director of the Scripps Translational Science Institute). We know that Mr. Gregg expects countless hours of work by its board and that every board member is expected to be a very active participant; it appears to be a model board of directors in our view, having watched so many boards over so many years!

 

Regulatory Update

  • In line with the 2Q13 call, Dexcom continues to have a “regular, open dialogue” with the FDA concerning a pediatric indication for the G4 Platinum – approval is still “optimistically” expected by the end of 2013. The ongoing discussions continue to center on appropriate labeling of the product for children (see below) – it’s been surprising to hear just how long this aspect of the approval is taking, a holdup we assume is coming from the agency side of the discussion. Dexcom will be prepared to launch the pediatric product as soon as it is approved – as evidence, management cited the quick two-week turnaround between approval and launch of the G4 Platinum last October.
    • Management called the pediatric indication a “wonderful growth opportunity for us.” Most obviously, it will expand the number of patients and HCPs Dexcom can officially market to. While some payers already reimburse CGM, it will be fantastic that HCPs do not see this as “off-label.” There are now key children’s meetings at which it will be able to market the device, etc. Additionally, it has obvious synergies with the Share remote monitoring product, which should have strong appeal among parents.
    • In the 2Q13 call, management noted that Dexcom may need to produce a separate pediatric product with different packaging and inserts (the G4 Platinum sensor and hardware would be exactly the same). As a reminder, due to differences in the adult and pediatric clinical studies, the label for the pediatric G4 Platinum will be different (e.g., two-year-olds were not subjected to the same forced glucose swings as in the adult G4 Platinum study). Importantly, the FDA has indicated that the pediatric study includes enough data for approval, so Dexcom will not need to conduct any additional clinical studies. This approval seems to be very much a question of “when,” not “if” at this point.
  • Dexcom has received written feedback from the FDA regarding the PMA supplement for the Share remote monitoring product (originally submitted in late July). Dexcom is preparing responses to the questions and will submit them to the agency within a couple of weeks. The questions have required “simple clarification and a bit more testing.” In response to a question on the severity of these questions, management further remarked, “We don’t see anything major, though we never see anything from the agency as benign. We’re giving them due diligence. But they did not ask us anything we can’t answer.”
    • In response to a question on the pricing of Dexcom Share, management was frank: “We’re not going to launch a product that people cannot afford. We want people to use this and buy more sensors. It will be very economically feasible. Our goal is to sell more sensors. That’s what we’re shooting for.” This is valuable to hear from a patient perspective, especially since parents and patients have been critical of the high price of the Medtronic mySentry – ~$2,000-3,000, depending on discounts (lower with reimbursement, though it is still limited to our knowledge). That said, we also believe systems must enable profitability on the part of companies; we think on balance pricing is low for sensors and would be glad to see payers reimburse more, given the safety improvements they add to lives.
  • During 3Q13, Dexcom filed a PMA supplement seeking an expanded indication for the G4 Platinum for professional use. The professional version of the G4 Platinum will be available for use in either a blinded or unblinded mode. This was great to see: 1) professional use of the more accurate/reliable G4 Platinum will allow Dexcom to begin shifting outdated (but far too common) healthcare provider attitudes that CGM technology is still early stage and doesn’t work; 2) a broader segment of patients will be able to experience CGM, perhaps winning more patients over to the technology for both intermittent as well as full-time use; 3) the updated indication should help Dexcom compete with Medtronic, who historically has been strong in the professional market. As we wrote in our piece on use of CGM in clinical trials, we think this area will expand greatly in the coming years, especially as time-in-range becomes more widely used and accepted. On the type 2 front in particular, we think every type 2 patient not at goal should be wearing a sensor for a week twice a year to help them either improve or optimize their diabetes management.

Partnership Update

  • Animas is currently completing additional verification, validation, and human factors testing for the G4 Platinum-integrated Vibe insulin pump. All additional testing and responses are expected to be submitted by the end of January. This process is being driven by J&J at this point. This was not formerly characterized as a delay (Animas could technically still make the previously issued “early 2014” launch timeline), though it’s definitely a longer response time than we were expecting to hear. We’d note that this PMA was filed in 1Q13, meaning the statutory 180-day review will soon stretch out to a year. In response to an analyst question on the struggling J&J Diabetes business (see our J&J 3Q13 report), Executive Vice President Mr. Steve Pacelli emphasized that the Vibe “remains a critical priority” for J&J. We were very glad to hear this.
    • Mr. Pacelli mentioned that Dexcom and Animas are working on a “more advanced product than the MiniMed 530G,” though he could not give specific timelines or disclose further details. We wonder if this could be a predictive low glucose suspend product – there is one recently completed study posted on ClinicalTrials.gov (Identifier: NCT01919385) sponsored by Animas that would fit the bill. It does not mention Dexcom directly, though we would not be surprised if this was the product Mr. Pacelli was referring to. We thought the comment on “more advanced product” was a bit gratuitous since Medtronic itself is obviously continuing to work on more advanced products also. Competition drives innovation, and we’re happy to see both companies working so intently on improving life for patients.
  • Dexcom no longer anticipates a 4Q13 PMA filing for the G4-integrated Tandem t:slim pump – this represents a delay from year-end estimates given for the past two quarters. Management asserted that although “Tandem is highly engaged in the IPO process,” (read our report) the two companies “continue to work closely” and hope to file the G4 Platinum-integrated t:slim PMA “as soon as possible.” This was a disappointment and we hope that it is not delayed too long. That said, we also know the dual-chambered pump is a big priority for Tandem; both are highly awaited.
  • The call did not provide an update on the critical care GlucoClear CGM in partnership with Edwards. Dexcom management noted that Edwards is marketing the product commercially on a “limited basis” and the company “appear[s] to be bullish on the product.” Dexcom “didn’t have much on the revenue side” on this front. Based on the Edwards 3Q13 call, enrollment is complete for the GlucoClear European ICU accuracy. In the US, Edwards expects to receive further insight on the pathway toward US approval of the GlucoClear in 4Q13.
    • Mr. Gregg emphasized that the goal with the GlucoClear is not just accuracy (“which is exquisite – we’re down to lab reference accuracy”), but changing nursing behavior in the ICU. We think this is very key, especially for reimbursement – the continuous glucose information should at the very least, save nursing time spent manually checking blood glucose values. At its best, it will hopefully improve patient outcomes, reduce lengths of stay, prevent readmissions, and save both the hospitals as well as Medicare and other payers significant money that could be used much better elsewhere in improving patient outcomes.

Research and Development

  • Management did not provide an update on Gen 5 or Gen 6, and there were no questions related to either product. In mentioning the products in passing, Mr. Gregg emphasized that Dexcom’s long-term objective is to replace fingersticks. As of updates in the 2Q13 call, the Gen 5 system (mobile platform, new transmitter, new algorithm, improved applicator; G4 Platinum sensor) was expected to be “rolled out in several stages over the next two years.” Regarding the Gen 6 sensor, the 2Q13 call included news of a $4 million development grant from Helmsley Charitable Trust based on milestones over the “next several years.” The last update suggested an ~2017 launch. We are thrilled that HCT has funded this important research and as very early funders in the artificial pancreas work, they obviously have a lot of confidence in how CGM will fit into the artificial pancreas.
  • Dexcom will conduct new clinical studies “to demonstrate the clinical and economic benefits of CGM as frontline therapy.” More color on these studies is expected next year. Mr. Sayer noted that Dexcom has never run a clinical study for anything other than a product approval; as such, these studies are evidence of Dexcom’s transition to a “marketing company.” The trials are expected to provide marketing messages that demonstrate CGM is the “most important and cost effective tool in intensive management of diabetes.” From our view, there is vast potential for intriguing studies:
    • Further studies of CGM in type 2 diabetes and prediabetes. The Vigersky et al., Diabetes Care study from 2012 ago drew lots of interest, though we have not heard much research on the CGM front in type 2 front in some time.
    • “CGM first.” There continues to be discussion on which technologies should be first. In general, we see this as very specific to each patient and eschew broad generalities; that said, a head-to-head study comparing initiating an insulin pump alone vs. CGM and MDI/SMBG in type 1 patients would be interesting. Of course, whether or not “real life” circumstances could be used would be a question. .
    • A hypoglycemia mitigation study – In CGM-naïve patients, could Dexcom replicate the nocturnal hypoglycemia reductions seen in the ASPIRE in-home study of the MiniMed 530G? Perhaps a very loud CGM alarm would be enough to wake patients up and alert them to nocturnal hypoglycemia. As an aside, there are certainly tricks so patients can hear better, such as putting the CGM in a glass (the rattling caused by the alarm tends to be loud) – we suspect that at least some of the “I can’t hear the alarm at night!” complaints by adults with diabetes relates to fear of disturbing partners sleeping etc.
    • Remote monitoring with Share – It will be interesting to see studies of Share demonstrating the benefits of remote monitoring.

Pipeline Review

Product

Timeline

G4 Platinum Pediatric Indication

CE Marked; FDA approval by the end of 2013, pending ongoing labeling discussions.

Animas Vibe insulin pump with G4 Platinum CGM integration

PMA filed with the FDA in 1Q13; Animas is currently completing additional testing, with responses to be submitted to the FDA by the end of January 2014.

Dexcom Share

[Remote monitoring via docking cradle, Bluetooth, and smartphone app]

PMA supplement filed at end of July 2013; responses to FDA questions to be submitted in the next couple of weeks.

Tandem t:slim insulin pump with G4 Platinum CGM integration

PMA filing unlikely by end of 2013; filing as soon as possible.

G4 Platinum Professional Use Indication

PMA supplement filed in 3Q13.

Updated G4 Platinum algorithm

[MARD improvement by two percentage points; remote software update]

On hold until pediatric indication is approved by the FDA. The 1Q13 call targeted FDA filing in late 2013/early 2014, with a 2014 launch. 

Dexcom/Edwards GlucoClear 2

[Critical care CGM]

CE Marked; European accuracy study finished enrollment; discussions in 4Q13 regarding US regulatory path.

SweetSpot Cloud-based Data Management Platform

As of 3Q12, goal was FDA submission by end of 2012. We have not been updated on SweetSpot platform progress since.

Qualcomm Remote Cloud Computing Platform

2013-2014 launch

Gen 5 system

[Mobile platform, new transmitter, new algorithm, improved applicator; G4 Platinum sensor]

To be “rolled out in several stages over the next two years”

Gen 6 sensor

[New sensor]

 

$4 million development grant from Helmsley Charitable Trust based on milestones over “next several years”; ~2017 launch

Mr. Terry Gregg’s Prepared Remarks on Medtronic’s MiniMed 530G

“There's been a lot of buzz in the diabetes community of late with Medtronic's announcement in September of approval of the [MiniMed] 530G. I'd like to briefly share my thoughts on this approval and its impact on Dexcom.

While a system that suspends insulin when a low glucose threshold is breached is considered a first step to achieve a close loop or bionic pancreas, I do not believe the 530G adequately achieves that first step due to its poor sensor accuracy and reliability. In fact in my opinion, the pursuit of an artificial pancreas has unfortunately been dealt a substantial blow with the introduction of this product.

The diabetes community is already complaining that after seven years and hundreds of millions of dollars spent, “Is this the best industry could come up with?” I share their frustration. Patients deserve better. Sensor accuracy is what matters and in multiple independent studies, our G4 Platinum Sensor is anywhere from 40-70% more accurate than the new Medtronic Sensor. At this point, most investors are aware of the work out of Boston University and presented at the ADA Scientific Session meeting last summer. Dr. Stephen Russell shared competitive data from patients simultaneously wearing the G4 Platinum and Medtronic's Enlite and reported an MARD of 10.8% for the G4 Platinum and 17.9% for the Enlite. [See pages 62-63 here for more on this study, which was 24 patients over 48 hours]

And just last week, at the Diabetes Technology Meeting in San Francisco, Dr. Garry Steil presented comparative sensor data as part of a study examining the use of CGM in critically ill infants, reporting an MARD for the Enlite of 17.8% and an extremely high 81% early failure rate. By comparison, Dr. Steil reported an MARD of only 11.7% for the G4 Platinum with no early failures. We expect additional studies with similar results will follow. [See page nine here]

Medtronic cites several different accuracy metrics in their labeling [read our coverage], but unfortunately it seems that no independent investigator can reproduce the Medtronic data, and we believe the sensor's poor performance will be obvious to patients who try the device. Furthermore, while Medtronic's data raises a number of questions, we believe that to achieve any reasonable level of accuracy with this particular product, patients will need to take up to four fingersticks calibrations per day.

We know from our own market research that reducing or eliminating calibrations is extremely important to patients. We've also heard initial reports from patients that a considerable number of [MiniMed] 530G alerts are false, which is in line with one of the Enlite data tables where Medtronic discloses that more than 50% of the Enlite's alerts at 70 mg/dl within a 15 minute window are false. As we learned with several of our prior products, repeated, inaccurate, or false alarms undermine a patient's trust and faith in a CGM system and are a key factor in patients electing to quit using CGM.

We are very prepared with our messaging in the field, particularly around the benefits of CGM first, but we are also cognizant of the fact that the Medtronic marketing machine is out in full force. As a result, we do expect some impact to our new patient additions over the next several quarters as clinicians and healthcare providers evaluate this new product.

Diabetes is a burden. It's a burden for the patient 24/7/365. There are no holidays. There are no vacations. It is a life sentence. And as challenging as it is for patients, loved ones, friends, and colleagues are all impacted by diabetes. Our mission remains steadfast: replace finger sticks, and in the process, eliminate one of the most cumbersome and painful requirements of managing diabetes successfully.

For Dexcom, the future is about simplicity, patient convenience, and connectivity. Our goal is to continually miniaturize the footprint on the body to make the patient experience as minimally invasive as possible. Our goal is to enable the patient to interact with their glucose data directly on a smartphone, which will not only add to the overall patient experience, but will enable parents to receive their glucose information during the nighttime, during the school day from the child while the parent is at work, or allow a spouse to monitor a loved one while at work or when traveling.

As I routinely tell our employees, stay the course. With their substantially larger field presence, we expect our competition will attempt to create confusion in the marketplace with regards to sensor performance. But we are committed to compete toe-to-toe in marketing the superiority of our system. In the end, by presenting performance data that is truthful and accurate, we will continue to win the hearts, minds, and loyalty of patients and healthcare providers.

 

Selected Questions and Answers

Q: Since launching at the end of October, have you seen anything from the Medtronic customers in your account base?

A: I’ve gotten reports of screenshots from patients showing highly inaccurate readings on the Enlite sensor. They are direct screenshots with their own meter, the Enlite, and our sensor. It’s alarming, and I don’t mean that as a pun. The rate of excessive alarms is remarkable. The blogs are populated with “This thing isn’t working the way Medtronic is hyping it.” It does a disservice to the artificial pancreas consortium. For those of us that are active in artificial pancreas world –  and clearly we are in 17 projects around world – this overhyping by Medtronic will blow back at them. It’s also caused the artificial pancreas project and patient advocacy groups to question where we’ve come. We’ve spent all this money, organizations like JDRF, and I think there’s a question in everyone’s mind – “This is the best we can do?” It’s certainly dismal in my opinion.

Q: Pending the Vibe launch, how do you expect that to go with the new Medtronic product?

A: We have to look at the international experience as a proxy. The Veo has been there for three years. It has not grown particularly. The Animas Vibe has taken share in every country. Physicians recognize the lack of utility of low glucose suspend. When it’s only suspending for average of 11 minutes, and suspension represents less than a couple units of insulin, it’s really not doing much. It won’t necessarily harm patients – all it will do is drive them crazy to do confirmatory fingersticks. Then they recognize that the Enlite sensor is wrong. That gets them frustrated and it all comes back to the blogs and HCPs. I think the Vibe once launched here will take share.

Q: With sales productivity increasing, have you reached maximum sales productivity?

A: There is a lot more upside. As penetration in category, most everyone thinks we have more than 50% share in the US. As a category, we’re approaching 10% penetration. Pumps are not quite at 30%. Our target has to be north of pumps. There is lots of runway in front of us.

Q: For the full year guidance, can you talk about the variables driving the fact that you’re not raising the guidance? What’s keeping you from doing that? Is that conservatism against the Medtronic launch?

A: This isn’t conservatism against the Medtronic launch. It’s when we look at the business and what we anticipate against 4Q12. We have not upgraded the guidance. If we do upgrade it, we change the year-end guidance. We’ve given you enough of a frame to tell you where our numbers will. Also, if we gave you Q4, you would then look forward to 1Q14. And we don’t want to give quarterly guidance.

Q: As far as the Medtronic launch, there are a good number of Dexcom users that have Medtronic pumps. I’m not sure if you’ve disclosed that number. What are you seeing in those patients? Are they holding on? Are they switching over? Sometimes Medtronic automatically upgrades patients…

A: It’s too early in their launch to have good optics. It’s a complicated scenario. Even in those that are upgraded, they will get to do their own comparative analysis between the G4 Platinum and the Enlite. I worry less about attrition of those patients. Based on the few inputs we’ve received – I get screenshots from patients making their own comparison. I’m not as concerned as some others are.

Q: Congrats on the triple-digit quarter. On the J&J and Tandem integrated launches, can you give some color on how you see those two partners supporting a launch? Are they going after new patients vs. converting existing pumpers?

A: I cannot speak with specifics for Tandem. We haven’t talked to their business folks. Absolutely with the Animas Vibe, their expectation is to go straight after the Medtronic installed base. The vast majority of US patients wear Medtronic – they have a ~65%+ market share. Every year, more pumps are probably sold to existing patients than to new patients. That’s the lowest hanging fruit – existing patients. That will be Animas’ primary target. My guess is Tandem will do the same.

Q: Compared to the launch of the Seven Plus, how is the G4 Platinum doing in terms of higher sensor utilization and lower attrition? Could those early trends slow as we move beyond the initial launch?

A: It’s exactly the opposite. Satisfaction with the product is determined very quickly. If patients find it reliable and informative, they stay on it. Early usage is the more important indicator vs. long term usage. In this case, the early history of the G4 Platinum is much better than the Seven Plus in the beginning. It’s truly a positive trend.

We’re moving beyond the early adopters. It’s becoming part of the fabric of their diabetes armamentarium. When those who have never been on CGM go on the G4, they are extremely happy. If they were on Seven Plus and are now on G4, they are even happier. And if they were on another sensor entirely, they are even happier. All of that goes to reduction of attrition and continued use of more sensors per month. I don’t see headwinds associated with that.

Q: Regarding the Tandem PMA filing, you mentioned validation testing. How long will that take?

A: I cannot give more specifics. As we talked previously, Tandem and Animas are moving from a 510(k) to a PMA environment. The level of systems testing for the PMA is substantially greater. There is lots of work to do. Animas and Tandem probably underestimated the magnitude of the work to complete an adequate PMA to submit to the FDA. I cannot give specifics. They are very attuned to it. We will help them get the filing done as soon as possible.

Closing Comments (Mr. Terry Gregg): Thanks for joining us. I would echo the words of one questioner on this call: “Wow.” We’ve done everything we’ve said we were going to do, and then some. The technology is so exquisite. The management team is the best I’ve ever been associated with. And I’ve been on some good teams. We know we’re being chased by others who want to be the lead dog. Because if you’re not the lead dog, the view never changes. While those who chase us shoot for G4 Platinum accuracy, for example, we've already set our sights and are deeply engaged in therapeutic accuracy followed by reduced or factory calibrated sensors. To the 350 million people with diabetes, help is on the way. And it will have a Dexcom label.

 

--by Adam Brown and Kelly Close