Memorandum
Dexcom reported 4Q18 financial results this afternoon in a call led by CEO Kevin Sayer, CFO Quentin Blackford, and EVP Steve Pacelli – the third consecutive quarter of record sales and huge momentum exiting a milestone $1 billion year. Today’s commentary mostly reiterated JPM and December’s Investor Day, primarily focused on financials. See key highlights below!
Financial & Business Highlights
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In line with JPM, Dexcom announced 2018 worldwide sales of $1.03 billion, accelerating to 44% year-over-year (YOY) growth and exceeding full-year guidance by an impressive $57 million. 4Q18 revenue totaled $338 million, a remarkable 53% YOY gain from 4Q17 and a 27% sequential gain from previous record-high sales in 3Q18 ($267 million). The chart below puts the impressive quarterly and annual acceleration into perspective – Dexcom’s first time crossing $1 billion and actually accelerating to 44% YOY growth after 25% growth posted in 2017. In 4Q18, record US sales of $281 million grew 50% YOY and a blowout 39% sequentially, driven by strength in the US commercial business. The US business propelled 80% of Dexcom’s Q4 growth – its highest point in eight quarters. OUS sales totaled $57 million, rising a robust 71% YOY but down 11% sequentially. Dexcom did not provide an installed base number, but patient adds are certainly exceeding revenue growth, given lower per-patient pricing. Overall, it was a truly outstanding quarter to cap off a milestone year for Dexcom.
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2019 sales guidance from JPM was maintained: ~$1.175-$1.225 billion, reflecting growth of ~15%-20%. This was in line with the Investor Day in December and contemplates a number of factors: (i) no major 2019 product launch like G6; (ii) launching G6 in Medicare and Medicaid; (iii) further OUS expansion for G6 (where prices are lower); (iv) increased access/awareness; (v) continued move to the pharmacy channel in the US, resulting in lower per-patient revenue, but better profitability and likely higher volumes; and (vi) continued competitive headwinds. Analysts pressed management about “conservative” 15%-20% growth; again, CFO Quentin Blackford reiterated that ~$100 million in pricing headwinds are expected in 2019. Absent that, Dexcom’s underlying 2019 sales growth would be ~20%-25%, and volume growth will be higher than that. Most companies, of course, would be thrilled with growth of 15-20%, particularly companies in their 20th year!
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Dexcom posted its most profitable Q4 and full-year in its history – non-GAAP operating income was $53 million, quadrupling from $12 million in 4Q17. (This excludes a one-time $218 million charge related to the Verily agreement restructuring). 4Q18 gross margin was 66%, up from 63% in 3Q18. In 2018, revenue grew at more than double the rate of operating expense growth – again showing great leverage.
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Dexcom has an impressive ~$1.4 billion in cash and equivalents, more than doubling sequentially, primarily reflecting a $700 million convertible note raise. Could we see more acquisitions in 2019, just as we saw TypeZero in 2018?
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Dexcom has contracts for >50% of US covered lives in the pharmacy, up from 40% in 3Q18; however, far less than 50% of the business is flowing through the pharmacy right now (most is still through DME). Over time, this channel is still expected to become a majority of the business – great news for patients, in our view, and also great news for the system. Ideally, when pharmacists become more familiar about CGM, they will begin to recognize how helpful it can be for guiding therapy decisions – type of therapy and in the case of insulin, dosing. There is so incredibly much upside here in our view for patients doing better and for bending the cost curve significantly.
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In light of G6 demand, Dexcom is expanding and reorganizing its customer support infrastructure – including outsourcing to third parties and a new office in the Philippines. This also means a reduction in certain Dexcom employees in both San Diego and Arizona. Dexcom will incur $25 million in restructuring-related charges in 1H19. Call wait times have been very long in 1Q19; hopefully these moves will improve the customer experience, as most sales still flow through the admin-heavy, headache-inducing DME channel. While this is obviously a big decision that will hit the US-based Dexcom family in very challenging ways (we believe it’s a sizable number of employees that will lose jobs although we do not have an exact number), we believe this is the right decision for Dexcom, particularly in that it will enable greater manufacturing capacity. Notably, a significant part (1/3 of one building we believe) was moved from 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. Manila 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, as is the approach to service.
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Dexcom aims to double G6 manufacturing capacity by the end of 2019 to meet demand, as well as to prepare for the late 2020 launch of G7. On balance, this should be better for the income statement than we had been expecting since we had not assumed they could convert the space in Arizona back. Clearly, the G6 requires different manufacturing than the G7, but it’s a high-class problem in our view – demand is demand, and it’s our sense that G7 demand will be over the top – and this is just one more reminder of how positive the G6 is over the G5. CGM has been absolutely transformational for so many patients and the cost implications of the service changes and the manufacturing should be positive for Dexcom and should offset some of the pricing shifts.
Pipeline Highlights
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G6 will start shipping to Medicare in the “near-term” (in line with the previous “early 2019”). OUS launches of G6 are also expected in “multiple” countries in 2019.
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JPM timing was maintained for G7 (Dexcom/Verily Gen 2): an initial launch in late 2020, with broader rollout in 2021. See JPM for more details. EVP Steve Pacelli said today that Dexcom is unable to share data from the T2D pilot with UHC, and it is unlikely UHC will be vocal about the “proprietary data.” That is too bad that UHC can’t take a perspective about its learnings in terms of what would be positive for the world – we are very unimpressed with this perspective (“get a life!”). In line with the Investor Day, Dexcom plans to run studies this year in the hospital and gestational markets – we expect both to be extremely positive.
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A lower-cost G6 transmitter will launch in 2H19. Management noted the Tandem/Dexcom Control-IQ hybrid closed loop will launch “later this year” (pivotal wraps in April, per ATTD today; previously expected for a summer launch). Management also called out progress on Insulet’s Horizon (2H20 launch with smartphone control) and Lilly’s hybrid closed loop (the launch expected in 2019-2021 – as we understand it, there is some testing going on in the San Francisco Bay Area with the system next month with one of the very traditionally strong PIs).
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In line with Investor Day, Dexcom-integrated smart pen systems will be commercially available in 2020. Novo Nordisk and Lilly were mentioned; NN smart pens will launch this year, and Lilly will submit its pen to FDA this year.
Sales Graphs
Dexcom Quarterly Sales – 1Q12-4Q18
Dexcom Annual Sales – 2012-2018
--by Adam Brown and Kelly Close