Memorandum

Dexcom 2Q17 – Revenue of $171M up 24%, record INTL for third straight Q; Medicare shipments begin cautiously; G6 filing in Q3; one-touch applicator and smaller transmitter to wait for G6 – August 1, 2017

Executive Highlights

  • Dexcom’s worldwide sales totaled $171 million in 2Q17, up 24% YOY on a tough comparison to 2Q16’s 48% growth. Sales grew 20% sequentially from 1Q17. In a positive for expanding the base, ~2/3 of new patients were from MDI.
  • The US business saw sales of $141 million grow 18% YOY, while international sales of $30 million hit a record-high for the third straight quarter, rising 69% YOY. Management maintained 2017 guidance for sales of $710-$740 million (+25%-30% YOY).
  • Dexcom began shipping the first few “test case” G5 Medicare bundles in the last two weeks of July. Assuming these claims are adjudicated and actually paid, shipments will roll out more aggressively in 2H17. There are now 20,000+ Medicare patients in the pipeline, more than doubling the 10,000+ as of 1Q17.
  • On the pipeline: (i) the G6 pivotal is complete and an FDA filing is expected by the end of 3Q17; (ii) Dexcom has decided to withdraw the FDA filing for the G5x one-touch inserter and 30% lower profile transmitter – these will now launch with the G6 sensor; (iii) the new G5 touchscreen receiver will launch this fall; and (iv) a more detailed timing update on the first-gen Verily sensor is expected on the next call, after the FDA filing of G6.

Dexcom reported 2Q17 financial results today in a call led by CEO Kevin Sayer, with a big focus on Medicare progress (first shipments), record-high international sales, enormous cash resources ($497 million on hand), and G6 progressing (pivotal complete, 3Q17 filing). “We’re built for the long haul at Dexcom,” said Mr. Sayer. We enclose the top business and pipeline updates below, followed by a pipeline summary.

Financial and Business Highlights

1. Worldwide revenue totaled $171 million, a strong 24% year-over-year (YOY) gain on a challenging comparison to 2Q16 (48% growth). This was Dexcom’s second-highest-ever quarterly revenue and a robust 20% sequential gain from 1Q17. As the base grows, growth has naturally slowed – this now marks three straight quarters with <31% growth, a trend Dexcom has never seen. In line with 1Q17, ~2/3 of new patients were from MDI.

2. US sales totaled $141 million, rising 18% YOY and up 21% sequentially. International sales of $30 million hit a record high for the third straight quarter, rising an impressive 69% YOY and 14% sequentially on continued strong uptake in Germany. Management later mentioned encouraging OUS sales in Nordic countries, Australia (“leadership position”), UK, and Canada

3. In a first, management disclosed segmented sensor, receiver, and transmitter revenue. Sensor sales of $121 million grew a robust 27% YOY, comprising 71% of the business. Transmitter sales of $35 million grew 23% YOY (20% of the business), while receiver sales of $14 million grew just 7% YOY (8% of the business). Sensor revenue is what matters most, since it is Dexcom’s core business and where it adds the most proprietary value.

4. Management maintained previous 2017 revenue guidance for sales of $710-$740 million (+25%-30% YOY) and a worldwide patient base of 270,000+ by year-end (+35% YOY, outpacing revenue). Sales in 3Q17 are expected to increase in the mid-to-high single-digit range sequentially, implying record-high revenue of ~$180-185 million

5. In 2Q17, Dexcom successfully raised a remarkable $400 million in gross proceeds from a convertible senior note offering, bringing total cash resources to $497 million. Gross margin improved to 69% (up from 66% in 1Q17), and cash-based net income improved to $23 million from a $7 million cash-based net loss in 1Q17.

6. Dexcom announced that new CFO Quentin Blackford will start on September 1. Mr. Blackford previously served as CFO at NuVasive, a medical device company focused on spine surgery.

Medicare Coverage Highlights

7. In the last two weeks of July, Dexcom began shipping the first few “test case” G5 Medicare bundles. Assuming these first claims are actually paid, shipments will roll out more aggressively in 2H17. We see this as an important milestone, signaling a belief that all the pieces are in place. Specific therapeutic CGM billing codes now exist, eliminating the need for miscellaneous codes.

8. There are now 20,000+ Medicare patients in the pipeline, more than doubling the 10,000+ as of 1Q17 – and without any marketing! Management called the response “amazing,” though still doesn’t expect a very big sales impact in Q3. More than $10 million in sales are hopefully expected in Q4 from Medicare, assuming things get up and running smoothly.

9. Dexcom will process most of the Medicare claims directly, pivoting from its previous plans to mostly rely on distributors. In light of the administrative complexity mentioned in 1Q17, Dexcom determined the best course was to do Medicare processing in-house

10. It was not mentioned on today’s call, but at Keystone two weeks ago, Dr. Claudia Graham and CEO Kevin Sayer confirmed that for Dexcom to ensure CMS reimbursement compliance, it had to turn off app communication for Medicare G5 transmitters (i.e., no remote monitoring).

Pipeline Highlights

11. Dexcom’s Android G5 launched in the US in June on the most popular Android smartphones, including “several” from Samsung, Motorola, and LG. Management said “user numbers are rising steadily.” According to Google Play, the Dexcom G5 app has 5,000-10,000 downloads, with a middle-of-the-road 3.2/5.0 stars.

12. The G6 pivotal trial is complete (right on schedule), and Dexcom still plans to submit a PMA to the FDA by the end of 3Q17. Management did not give an approval timeline, but has long maintained plans for a 2018 launch. We assume this FDA review wouldn’t last nearly a year, meaning a launch might be possible in the first half of 2018 (our speculation).

13. Following the G6 progress, Dexcom has decided to withdraw its FDA filing for the G5x one-touch inserter and 30% lower profile transmitter. These improvements will now launch with the G6 sensor. This decision was implied on the 1Q17 call, when the submission was still under FDA review. As the gap continued to narrow between G5x and G6, management felt the operational strain to launch both products separately “no longer made strategic sense.”

14. Management mentioned in Q&A that the new G5 touchscreen receiver will launch this fall, in line with previous expectations

15. A more detailed timing update on the first-gen Verily sensor is expected on the next call, following an FDA filing of G6. Notably, since the first-gen is quite far along, Dexcom has “shifted significant resources to the “second-gen system.” At Keystone, these were positioned as 2018 and 2020-2021 launches, respectively. We interpret the resource shift as a positive sign on the hardware development front. Clinical data from this program is expected in 2018.

16. Pump partner Insulet was called “a big winner” for new patient adds, and management acknowledged that Tandem’s software-updateable t:slim X2 is the “right way, but it’s meant a few softer quarters for pump additions.” Today’s call did not acknowledge previous R&D partner Bigfoot Biomedical signing an exclusive agreement to use Abbott’s next-gen Libre.

17. Surprisingly, management did not mention the exciting Apple announcement from early June – WatchOS4 will be capable of talking directly to Dexcom’s CGM transmitter without a nearby phone (i.e., direct CGM-to-Watch communication).

Financial and Business Highlights

1. Dexcom’s 2Q17 worldwide revenue totaled $171 million, a strong 24% year-over-year (YOY) gain on a challenging comparison to 2Q16 (48% growth). This represented Dexcom’s second-highest-ever quarterly revenue (just $0.6 million short of the 4Q16 record) and a robust 20% sequential gain from 1Q17. As expected, the expanding base of sales continues to make Dexcom’s YOY growth story tougher – this now marks three straight quarters with growth under 31% YOY, a trend Dexcom has never seen. As we said in Q1, this appears to be the law of large numbers more than underlying weakness in the pipeline or CGM utilization. Indeed, management said the revenue is in line with full-year expectations (no change to revenue guidance; see below), and the analyst community did not press this during the call. Management highlighted the strong record-high international performance (see below), the upside as Medicare sales in the US ramp up in 2H17, and continued growing awareness of CGM’s benefits in MDI (e.g., DiaMonD, GOLD). With two straight quarters of ~2/3 of new patient adds from MDI, Dexcom believes its “CGM first” message is resonating.

Dexcom Quarterly Sales, millions (2Q12-2Q17) – Worldwide (Black), US (Red), International (Blue)

  • Consistent with 1Q17, ~2/3 of Dexcom’s new patients were from MDI in 2Q17. “We’ve got more opportunities than ever,” said CEO Kevin Sayer. Management noted that this mix aligns with the overall US type 1 market, further evidence that Dexcom continues to broaden the CGM population – we agree it is a great sign, though also a reminder that Dexcom’s two current integrated pump partners (Animas and Tandem) are not adding a lot of patients with their G4 integrated products. Interestingly, sales cycles are getting slightly longer relative to what Dexcom has seen historically. Management attributed this to the broader population Dexcom is now hitting, as well as the source of leads – those who learn about Dexcom from social media/DTC advertising seem to take longer to close than those referred by physicians.

2. US sales totaled $141 million, rising 18% YOY and up 21% sequentially. International sales of $30 million hit a record high for the third straight quarter, rising an impressive 69% YOY and 14% sequentially on continued strong uptake in Germany. Management later mentioned encouraging OUS sales in Nordic countries, Australia (“leadership position”), UK, and Canada – all places where CGM reimbursement exists, and therefore, Dexcom is focusing its efforts. The US business still contributed 63% of the quarter’s growth, though that was the lowest level Dexcom has ever seen. On the other hand, the international growth contribution (37%) was far above Dexcom’s 2016 levels of 10%-18% - clearly a lot of momentum in the business. Management noted that MDI patients are driving US growth (consistent with 1Q17), as Tandem and Animas continued to see softer new patient adds.

  • Regarding Abbott’s FreeStyle Libre, management said the following: “In markets where there is robust reimbursement, we are competing quite favorably…quite a few Abbott FreeStyle Libre customers are shifting over to Dexcom. It’s because of our superior performance – the clinical data shows our sensor is much more accurate than anything else on the market. That resonates with patients, particularly when they are receiving reimbursement for CGM. Once reimbursement is in place, our field folks say patients and clinicians prefer real-time alerts/alarms and the improved accuracy of Dexcom over what FreeStyle Libre provides – particularly the performance in the hypoglycemic range. When Libre was competing on a cash-pay basis per day, it was a less expensive product and it was tougher. But when patients can get CGM paid for, they’re becoming Dexcom users.”
    • Overall, we’re elated to see both systems competing and think a rising tide will lift all boats here – far too few people are on sensors globally! See our coverage of Abbott 2Q17 for the latest on FreeStyle Libre, which now has 300,000+ users globally. The loss of Bigfoot as a partner was not acknowledged on today’s call.
  • Regarding Medtronic’s MiniMed 670G/Guardian Sensor 3, management said the following: “I think consistent with Medtronic’s other launches, there’s a lot of noise at beginning, and now the noise and confusion has gone away. As I’ve talked to physicians, I’m hearing a similar tune: ‘the majority of our patients will do very well with CGM and shots. That’s the solution for the masses and that’s where Dexcom wants to be. If and when they launch full tilt and ship sensors, we’ll see. We too hear of continued delays and patients not being happy [about the delays].”
    • See our coverage of Medtronic at Keystone 2017 and a subsequent update on sensor shortages for more details. As of Keystone, ~1,000 patients were on the MiniMed 670G, meaning very few additional systems have shipped beyond the ~750-person customer training phase. It will be interesting to see if any of the 20,000+ Priority Access Program participants are Dexcom users – if so, will Dexcom see a revenue impact later in the year as these users get their 670Gs?

3. In a first, management disclosed segmented sensor, receiver, and transmitter revenue. Sensor sales of $121 million grew a robust 27% YOY, comprising 71% of the business. Transmitter sales of $35 million grew 23% YOY (20% of the business), while receiver sales of $14 million grew just 7% YOY (8% of the business). Sensor revenue is the most important metric to follow in our view, since it is Dexcom’s core business and where it adds the most proprietary value – that this is outpacing the company’s overall revenue growth is great to see. Of course, it’s also a positive for profitability, since margins are lower on hardware and higher on sensors. In this first segmented performance, we were struck by how small the receiver revenue is – clearly, many are using the G5 app now, a trend we only expect to increase.

4. Management maintained previous 2017 revenue guidance for sales of $710-$740 million (+25%-30% YOY) and a worldwide patient base of 270,000+ by year-end (+35% YOY, outpacing revenue). Sales in 3Q17 are expected to increase in the mid-to-high single-digit range sequentially, implying record-high revenue of ~$180-185 million. At this point through 1H17, Dexcom is 43% of the way to its FY17 guidance, right on with what it saw in 2016. Some analysts thought there was upside to the Q3 guidance, though management was clear it is realistic, given the Medicare rollout. Q4 will almost certainly be a very big quarter for the company, with Medicare expected to ramp along with the strong seasonal tailwind. It will be fascinating to see what impact (if any) possible competitive launches from Abbott (FreeStyle Libre’s consumer review at FDA is coming up on a year!) and Medtronic (MiniMed 670G launch ramping into the fall, Guardian Connect standalone CGM last expected to launch by October).

5. In 2Q17, Dexcom successfully raised a remarkable $400 million in gross proceeds from a convertible senior note offering with “attractive” terms, bringing total cash resources to $497 million – this more than doubled the $181 million on hand as of 1Q17 (some of the convertible note proceeds were used to pay back $75 million in borrowing from a credit facility). The cash infusion gives Dexcom great flexibility to spend across several key initiatives: expansion of its manufacturing capacity (new factory in Arizona), growth in international, support for the Medicare rollout, and “making CGM an integral tool in diabetes management.” At the start of the year, the big data platform and Verily partnerships were also called out as key strategic R&D initiatives, though these were not mentioned in this section of prepared remarks.

  • Gross margin improved to 69%, up nicely from 66% in 1Q17 and 62% in 2Q16. The gain was attributed to an improvement in the warranty rate, implying the receiver recall is no longer dragging down margins.
  • Cash-based net income was $23 million in 2Q17, a notable improvement from a $7 million cash-based net loss in 1Q17 and doubling the $11 million cash-based net income in 2Q16. GAAP-based net income was actually $2.9 million, reflecting a $17 million non-cash tax benefit related to the convertible note raise. Non-GAAP net loss was $14 million, which included $37 million in non-cash charges (share-based compensation, etc.).  

6. Dexcom announced that new CFO Quentin Blackford will start on September 1. Mr. Blackford previously served as CFO at NuVasive, a medical device company focused on spine surgery. There, “he played a key role through a phase of significant growth and improvements in profitability since 2009.” For context, NuVasive is also based in San Diego and currently has a market cap of $3.3 billion (a bit smaller than Dexcom’s ~$5.8 billion). Mr. Blackford will take over from current interim CFO Kevin Sun, who took over the post after CFO Jess Roper resigned effective April 1.

Medicare Coverage Highlights

7. In the last two weeks of July, Dexcom began shipping the first few “test case” G5 Medicare bundles, including the recently-partnered Ascensia Contour Next One BGM for calibration. Assuming these first claims are adjudicated and actually paid, shipments will roll out more aggressively in 2H17. To be clear, CMS has not paid Dexcom for these first shipments yet, so there is still some uncertainty if the process and paperwork are fully ironed out. Said management, “We just need to get the processes down” and “We’re learning as we go.” However, we see this as an important milestone, signaling Dexcom’s belief that all the pieces are in place now; hopefully Medicare comes through with payments and shipments start to accelerate in 2H17. As expected last quarter, the local coverage decisions from the MACs came through, and as of July, specific therapeutic CGM billing codes now exist – eliminating the need for Dexcom to use miscellaneous codes to obtain coverage. This also seems like a great sign. Getting Ascensia as a BGM supplier was also a key step, which seemed to happen very, very quickly – the commercial agreement was only just announced on July 11. As a reminder, the Dexcom G5 CGM Medicare bundle includes:

  • G5 sensors and transmitters;
  • G5 receiver (it doesn’t have Share functionality, per CMS’ Part B requirements);
  • Ascensia’s Contour Next One BGM; and
  • 60 test strips per month (two per day for calibration).

8. There are now 20,000+ Medicare patients in the pipeline, more than doubling the 10,000+ as of 1Q17 – and without any marketing! Management called the response “amazing,” though still doesn’t expect a very big sales impact in Q3. More than $10 million in sales are hopefully expected in Q4 from Medicare, assuming things get up and running smoothly. As a reminder, Dexcom is paid $236-$277 per durable receiver + a monthly price of $248.38 for sensors. This translates to a Medicare startup pulling in ~$750-$900 per quarter, and multiplied by 20,000 patients in the pipeline would come out to $15 million-$18 million. In other words, hitting $10 million in quarterly sales will require Dexcom to ship to roughly half of the current Medicare pipeline – that seems very doable, assuming things get up and running. Outsized Medicare success in Q4 will help Dexcom get to the upper-end of its 2017 sales guidance for $710-$740 million. Dexcom also has a number of cash-paying Medicare patients, though by law, it is not allowed to bill them now that coverage exists; this has negatively impacted sales by ~$2.5 million per quarter. With this freed up (assuming shipments happen), the topline will also benefit in 2H17.

  • Similar to 1Q17, management reminded listeners that “Medicare is a longer term, subscription model” with ~50% lower upfront revenue than commercial insurance patients. This will pay dividends once a big Medicare base is built up, but the initial contribution will not be large. This also will translate to lower initial profitability/margins from Medicare, though management did not share any worry on this front. Said EVP Steve Pacelli, “We love this subscription model of ~$250 per month. Once we have systems and paperwork in place, we can pick up the phone and figure out what supplies are needed and ship them. Over 12 months, Medicare patients become great [for the business].” For context, Dexcom currently gets ~$1,500-$2,000 in a quarter to start a commercial patient on CGM – $800-$900 for the starter kit, and then 12 sensors at $70-$75 each. On Medicare, Dexcom will receive ~$250-$300 per month for a new patient starting on CGM (monthly receiver rental + disposables), meaning a new Medicare patient will bring in $750-$900 in a given quarter. On a yearly basis, this means Dexcom gets ~$3,000 for Medicare patients – quite favorable pricing, considering the decimation in BGM. As Dexcom moves to G6’s 10-day wear (three sensors per month), the margins will improve, assuming it can keep the same monthly pricing. Management said it is “very fine” with this payment model and pricing, though it will cause “a little pain upfront.”

9. Dexcom will process most of the Medicare claims directly, pivoting from its previous plans to mostly rely on distributors. In light of the administrative complexity mentioned in 1Q17, Dexcom determined the best course was to do Medicare processing in-house. We love seeing this commitment and internal investment, which should pay dividends down the road. We assume this will also benefit Dexcom’s long-term margins and perhaps give better data on how Medicare beneficiaries are using G5, reordering, etc.

10. It was not mentioned on today’s call, but at Keystone two weeks ago, Dr. Claudia Graham and CEO Kevin Sayer confirmed that for Dexcom to ensure CMS reimbursement compliance, it had to turn off app communication for Medicare G5 transmitters (i.e., no remote monitoring). Per the Medicare coverage criteria, even if patients use the G5 receiver, they are not allowed to use their smartphone to share or view CGM data – doing so makes the system ineligible for reimbursement. This was extremely unfortunate to hear and something we had feared; it was surprising it did not come up in today’s call. Both Mr. Sayer and Dr. Graham highlighted the value of remote monitoring, and shared at Keystone that Dexcom is working aggressively to remedy the current situation. Said Mr. Sayer in Q&A, “We have literally plans A, B, C, and D in development if they won’t let us use the phone, because we believe remote monitoring is so important. In a year, we won’t be talking about this issue.”

  • Per Dexcom’s Keystone symposium, submitted but yet-to-be published data shows the benefits of remote monitoring in seniors. The study found that over 43% of older adults using the Dexcom Share Cloud had at least one follower. Compared to those with no followers, these patients had slightly higher glucose values, but they used their sensors more regularly and had 14% fewer sensor glucose readings <70 mg/dl. Data like this underscores the insanity of depriving this population of remote monitoring.

Pipeline Highlights

11. Dexcom’s Android G5 launched in the US in June on the most popular Android smartphones, including “several” from Samsung, Motorola, and LG. Management said “user numbers are rising steadily.” According to Google Play, the Dexcom G5 app has 5,000-10,000 downloads, with a middle-of-the-road 3.2/5.0 stars – the written reviews cite issues with phone connectivity, alarm settings, and Android phone compatibility. To Dexcom’s credit, the app has already been updated once with bug fixes on June 18. Putting a class III CGM app on Android is no small task, and the burden of developing/maintaining world-class apps for iOS AND Android and their paired watches grows by the day. The approval came on the early side of expectations for “mid-year” and followed a fairly long FDA review after a 3Q16 submission. This puts Dexcom well ahead of Medtronic and Abbott in the US, neither of whom will have an Android standalone CGM offering soon stateside (based on public information).

  • Android holds a majority of the US market, meaning this approval could notably expand adoption of G5 mobile. Dexcom also has the iOS AND Android versions of G5 available outside the US, and management noted many OUS patients in Europe don’t even buy receivers – they just get the sensors and transmitters and use their phones. We expect the US market to move this way over time, though it does hinge on FDA approving Dexcom’s system without a required backup receiver. We’ll be interested to see if Medtronic’s Guardian Connect receives FDA approval without a backup receiver –we’ve never seen a picture of one, suggesting it may be trying to go this route out of the gate.

12. The G6 pivotal trial is complete (right on schedule), and Dexcom still plans to submit a PMA to the FDA by the end of 3Q17. Management did not give an approval timeline, but has long maintained plans for a 2018 launch. We assume this FDA review wouldn’t last nearly a year, meaning a launch might be possible in the first half of 2018 (our speculation). No accuracy data from the pivotal was shared, though pre-pivotal data from DTM 2016 showed a more accurate sensor on half as many calibrations (MARD: 8.1%) and outstanding potential to move to factory calibration (MARD: 8.8% with simulated factory cal). The initial G6 sensor has one calibration/day after startup, 10-day wear, a 30% thinner wearable than G5 (see below), and no acetaminophen interference. Mr. Sayer emphasized that the large pivotal trial (n=300+; 30,000+ matched pairs) will be an incredible data set and drive FDA discussions and modeling on the path to no calibration with Verily. At Keystone, Mr. Sayer stated that the leap from G5 to G6 will be almost as big as Seven+ to G4 – considering that many consider G4 to be the first viable consumer CGM, these are strong words!   

13. Following the G6 progress, Dexcom has decided to withdraw its FDA filing for the G5x one-touch inserter and 30% lower profile transmitter. These improvements will now launch with the G6 sensor. This decision was implied on the 1Q17 call, when the submission was still under FDA review. As the gap continued to narrow between G5x and G6, management felt the operational strain to launch both products separately “no longer made strategic sense.” We agree – a slight delay in the applicator and transmitter will be worth the launch going smoothly. Every Dexcom user is going to want this upgrade! Plus, this should enhance the marketing and splash around G6 next year, a smart move from a competitive perspective– we’d speculate Abbott’s FreeStyle Libre consumer will likely be out in the US by next year (unless the FDA review stretches far past a year), along with a broader launch of Medtronic’s Guardian Sensor 3. Combining the one-touch applicator, smaller wearable, and improved G6 sensor (better accuracy, less calibration) is a strong from a competitive perspective.

14. Management mentioned in Q&A that the new G5 touchscreen receiver will launch this fall, in line with previous expectations. We’re not sure how the launch will proceed, but assume new patients will get it, as well as those reordering receivers. This more durable receiver is larger and definitely loses the cool factor of the current slim receiver, but it does add a three-year life (a Medicare requirement and fixing previous reliability issues), is less expensive to make, and brings a user interface in line with the G5 app. The receiver was on display at ADA (see picture below) and the bulkier form factor took us by surprise – we had expected something sleeker. We’d have to assume it will encourage even more patients to move to the phone, which benefits Dexcom’s business. The other plus is the receiver is lower cost. The device received FDA approval in March.

15. A more detailed timing update on the first-gen Verily sensor is expected on the next call, following an FDA filing of G6. Notably, since the first-gen is quite far along, Dexcom has “shifted significant resources to the “second-gen system.” At Keystone a few weeks ago, these were positioned as 2018 and 2020-2021 launches, respectively. We interpret the resource shift as a very positive sign on the hardware development front. However, management said there is more work to do on scale up and engineering. The first-gen product will use the G6 sensor extended to 14 days, make it factory calibrated, and fully disposable (real-time to phone). We’ll be interested to hear more specifically what the path to market is and if the timeline gets pushed out – Dexcom will clearly need to do some work with the FDA on factory calibration using the G6 pivotal dataset. It remains unclear if this first-gen product will maintain an insulin dosing claim and cross over to Dexcom’s current installed base; remarks continue to position it as a type 2/non-intensive product, though given the major improvements, current Dexcom users are obviously going to want it.

From Dexcom’s May Investor Presentation

  • In line with previous comments, Dexcom is also formulating new commercial strategies around non-intensive use of CGM. Clinical data is expected in 2018. Said CEO Kevin Sayer, “The first thing is to develop the proper model – we know that all type 2 patients aren’t going to wear sensors 24/7/365.” He mentioned the possibility of using CGM as part of a 10-week diabetes program, which would be quite awesome in our view. “We’re running studies to validate our assumptions… we know somebody with type 2 diabetes can control it by adjusting three things: exercise, diet, and meds. CGM has an impact on all three.” Mr. Sayer shared a story of one non-intensive user on CGM who simply changed the time of a metformin dose – mean glucose dropped from 190 to 110 mg/dl!

16. Mr. Pacelli called pump partner Insulet “a big winner” for new patient adds, and acknowledged that Tandem’s software-updateable t:slim X2 is the “right way, but it’s meant a few softer quarters for pump additions.” Mr. Pacelli again clarified that Dexcom is not looking to acquire an insulin pump, since 2/3 of its new patients are from MDI. More information on Dexcom’s other internal developments are expected in the next 6-9 months – we’d have to assume a smart pen or dose titration partnership is in the consideration set.

  • On the pump partner side, Tandem’s t:slim X2 with G5 remains under FDA review, while the PLGS system is slated for a “summer 2018” launch (see 2Q17). Insulet’s Horizon system is rapidly completing studies and is positioned for a 2019 launch, with a pivotal in 2018. Nearer term, an FDA 510(k) submission of Insulet’s Bluetooth-enabled OmniPod Dash PDM is expected in 2H17. Based on what we know, Dash could interface with Dexcom CGM on a patient’s own smartphone, but CGM data will not be displayed on the PDM.
  • Today’s call did not acknowledge previous R&D partner Bigfoot Biomedical signing an exclusive commercial agreement to use Abbott’s next-gen FreeStyle Libre. This was mentioned in passing in one analyst question, but management talked only about Abbott or the broader landscape.

17. Surprisingly, management did not mention the exciting Apple announcement from early June – WatchOS4 will be capable of talking directly to Dexcom’s CGM transmitter without a nearby phone (i.e., direct CGM-to-Watch communication). The feature, called “native core Bluetooth,” will launch this fall as a free upgrade across all watches – nice! Perhaps it was not mentioned because Dexcom has not talked to the FDA about this; presumably some kind of submission would be needed. We see this as a major, major form factor win for G5, an enabler of Apple Watch sales, and a definite partnership victory for Dexcom – it was mentioned on stage at a webcast Apple special event!

  • This update has long been requested by Dexcom G5 app/Watch users, representing a major form factor upgrade from the current setup that requires a nearby iPhone running the G5 app to relay data to the G5 Watch app. View the Apple keynote here starting at the 19:45 mark – the picture below, which showed the Dexcom G5 app on the Watch on screen, occurs at 19:53. Notably, Dexcom CGM was the first app mentioned related to this upgrade, alongside an app that connects directly to a tennis racket and another that connects to a surfboard. Talk about major visibility for diabetes! “Continuous glucose monitoring” is also mentioned in the description of this feature on the WatchOS4 developer page (see text in the second picture below).
  • We saw this announcement as a major win for Dexcom on a number of fronts: (i) a major user experience and hardware upgrade for users (no need to carry a phone to see CGM data on the Watch); (ii) shows Apple’s commitment to this partnership; and (iii) highlights that Apple is laying a great developer groundwork to make the Watch a more compelling standalone device in health (and by extension, diabetes). Dexcom and Apple have longed worked together on the mobile app side, and this announcement further implies (to us) that Apple is unlikely to launch its own non-invasive CGM to compete with Dexcom.

Pipeline Summary

Sensor and Software Pipeline

Pipeline Product

Timeline

Android G5 app

Launched in US in 2Q17. Available internationally since January. 

Touchscreen receiver

Launch this fall. FDA approved in March.

Next-gen one-button insertion system and 30% smaller transmitter (G5x)

To be included with G6 sensor launch. FDA submission to be withdrawn as of 2Q17.

G6 sensor

New sensor and algorithm, initially with 10-day wear and one calibration per day after startup. Insulin-dosing label claim, acetaminophen blocking, predictive alerts, one-button insertion system, 30% smaller transmitter.

 

PMA submission by the end of 3Q17. Launch previously expected in 2018.

Direct Apple Watch-to-transmitter communication (“Native Core Bluetooth”)

Mentioned in Apple’s June event, update this fall in WatchOS4 will make it possible; Dexcom’s timeline unclear.

G5 enhanced app improvements, including ability to receive insulin dose data from other devices

Under FDA review as of 4Q16 call. Not commented on today.

Verily [Google Life Sciences] partnership

Simple, low-cost, disposable, 14 day, Bluetooth-enabled, factory calibrated sensor. First-gen smaller than FreeStyle Libre, second-gen bandage-like.

More clarity expected on 3Q17 call. First gen previously expected to launch by end of 2018.

Second-gen, bandage-like sensor in 2020-2021.

Automated Insulin Delivery Partner Pipeline

Tandem

  • t:slim X2 with Dexcom G5 integration
  • Predictive low glucose suspend
  • Treat-to-Range hybrid closed loop (TypeZero algorithm)

 

 

  • Remains under FDA review. Launch previously expected in Summer 2017.
  • Summer 2018 launch
  • Pivotal trial (IDCL) getting underway soon, launch by the end of 2018.

Diabeloop

Diabeloop algorithm running on a wireless handheld, Cellnovo patch pump, Dexcom CGM

  • CE Mark pivotal trial expected to reach primary completion in October 2017. EU filing and launch expected in 2018.

Insulet

  • Next-gen OmniPod Dash PDM with possible G5 app integration on phone
  • OmniPod Horizon Automated Glucose Control System

 

  • FDA submission in 2H17, launch in late 2017/early 2018.
  • Launch in “2019,” with a pivotal study in 2018 and a pre-pivotal study in 2017. Algorithm now tested in 82 patients (adults and pediatrics).

Beta Bionics

Bionic Pancreas dual-chamber iLet with integrated Dexcom CGM, insulin-only or insulin+glucagon modes.

 

  • Insulin-only: Pivotal trial start 2H18; possible launch in late 2019; bridging study in 4Q17-1Q18
  • Bihormonal: Pivotal trial expected to start in 2H18 (NIH funded); PMA submission timing to be discussed with the FDA. Zealand dasiglucagon trial in iLet integrated device expected in early 2018.

Animas

Hypoglycemia-Hyperglycemia Minimizer with Dexcom CGM

  • No recent updates. As of 2Q17 call, IDE for pivotal study still not filed with the FDA. Launch previously expected in late 2018/early 2019.

 

-- by Adam Brown and Kelly Close