Welcome to the Dexcom Q4 and full year 2016 earnings release conference call. My name is Ashley, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the call over to Kevin Sayer, President and CEO. Mr. Sayer, you may begin.
Thank you very much, and good afternoon, everyone. We appreciate you listening to our Q4 2016 earnings call. We'll start off with our safe harbor statement from Steven Pacelli.
Thanks, Kevin. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, and expectations about future events, strategies, competition, products, operating plans, and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to Dexcom and are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statement. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in Dexcom's annual report on Form 10-K, quarterly reports on Form 10-Q, and other filings with the Securities and Exchange Commission.
Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to confirm these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our cash-based operating results. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Kevin?
Thank you, Steve. Joining me today are Steve Pacelli, our Executive Vice President of Strategy and Corporate Development, Jess Roper, our Chief Financial Officer, and Kevin Sun, our Vice President of Finance. Before I begin, I would like to take this opportunity to congratulate Jess on his pending retirement. We wish Jess the best and thank him for his many important contributions over the past several years. Jess has helped us scale through a period of tremendous growth and has assembled a very capable team led by our VP of Finance, Kevin Sun, who will serve as our interim CFO until we complete a search for a new one. Now let me highlight a few exciting recent developments for Dexcom before I turn the call over to Steve to review our Q4 2016 financial results. 2016 was a very big year for us.
In December, five months after a positive advisory panel meeting, we achieved a landmark milestone in obtaining the first-ever non-adjunctive or insulin dosing indication from the Food and Drug Administration. As a result of this approval, a new classification of therapeutic CGM has been established. This was a monumental achievement, and I'm very proud of the Dexcom team, whose hard work over a number of years helped to make this a reality for our patients. Dexcom G5 Mobile is the only glucose measurement device that is FDA-approved for therapeutic decision-making. In early January, as a direct result of our label expansion, Medicare issued a positive ruling providing us the opportunity to bring this life-saving technology to our senior population here in the United States.
Together with the advances we are making to our technology platform, we see a clear path to making the vision we had when the company first started this journey a reality, eliminating finger sticks altogether. As you can probably tell, we've never been more excited about the work we're doing here at Dexcom for people with diabetes. With that, I will now turn the call over to Steve for a review of our financials, after which I will expand on these accomplishments and provide a business update.
Thanks, Kevin. Dexcom reported revenue of $171 million for the Q4 of 2016, compared to $131 million for the same quarter in 2015, a $40 million or 31% increase. This is slightly ahead of the $168 million revenue estimate we provided in early January during our pre-announcement. Sequentially, revenue for Q4 was up approximately 15% from the prior quarter. Our Q4 gross profit was $117 million, generating a gross margin of 68%, compared to a gross profit of $91 million and a gross margin of 70% for the same quarter in the prior year. On a year-over-year basis, our hardware gross margin was negatively impacted by sales of our G5 Mobile transmitter, which has a shorter useful life and lower ASP. In addition, although we are seeing some improvement in our warranty expense rate, we are still experiencing warranty expenses at higher than historical levels.
This includes the impact of our receiver replacement efforts in certain European markets. Note that we reserved for our current estimated exposure for this issue throughout 2016 and do not anticipate a material impact on our financial statements in the future. Going forward, we anticipate continued decreases in our warranty expense rates throughout 2017. Some final thoughts on our revenues and our gross profits. Our mix between durable and consumable products was within our normal historical range in Q4 at approximately 30% durable and 70% consumable. The ASP for our hardware has remained stable, and sensor pricing remains within an ASP range of $70-$75 per sensor. Finally, our international business showed continued year-over-year growth, generating $21 million in revenue during the quarter, up 28% from last year and 15% sequentially.
For the year, our U.S. revenues grew 38% and represented 13% of our overall revenue. Research and development expense totaled $44 million for Q4 of 2016 compared to $29 million in Q4 of 2015 and flat sequentially. We continue to make investments in a number of important initiatives. These include the G6 pivotal study and multiple submissions with the FDA, including efforts associated with our recently approved non-adjunctive claim. We continue to make progress on our advanced product pipeline, and we incurred expenses associated with our Verily partnership, our next-generation sensor technology, and the build-out of our data platform.
Selling, general, and administrative expense totaled $79 million in Q4 of 2016 compared to $61 million during the same quarter in 2015, with the increase due primarily to year-over-year increases in headcount in our customer support organizations, as well as a ramp in our patient-focused marketing expenses, higher IT costs, and our OUS expansion. During Q4, we also increased our U.S. field-based sales force to approximately 130 reps to support our growth in 2017 and beyond and remind investors that we did not add any sales reps last year. Our GAAP net loss was $7 million in the Q4 of 2016, which included $34 million in non-cash expenses, consisting primarily of non-cash share-based compensation expense across all functional areas of our business. For the year, our net loss was wider than our original expectations.
As we stated on prior calls, although we budgeted a significant incremental investment in a number of new programs at the beginning of the year, over the course of the year, we made the decision to spend beyond these levels in order to support the growth opportunities we see in front of us. These include the expansion of our customer ops and tech support infrastructure to support our anticipated growth, increased direct-to-consumer marketing, which has demonstrated very positive results so far and will continue to grow in 2017, and continued investment in IT initiatives to support our anticipated growth. Our Q4 operating expenses also included increased spend on the four strategic investments that we outlined at the beginning of the year, our Verily relationship, building out our data analytics capabilities, international expansion, and our new manufacturing facility in Arizona.
Absent non-cash charges, non-GAAP cash-based net income was $27 million for Q4. Our GAAP loss per share for the quarter was $0.09. We ended the Q4 with $124 million in cash and marketable securities. With respect to 2017 guidance, we provided a detailed outlook early in the year, including anticipated revenues of $710 million-$740 million, reflecting growth of approximately 25%-30%. As in prior years, we anticipate the Q1 to be sequentially down due to typical seasonality associated with the annual reset of deductibles. We remind investors that we have historically seen 18%-20% of our annual revenues in the Q1 building throughout the year.
We also remind investors that we grew 60% year over year in Q1 last year as we rolled out the G5 Mobile, making for a tougher year-over-year comparison. As a final reminder, although revenues decline sequentially from Q4- Q1, operating expenses will continue to increase. We expect a 20%-25% sequential increase from Q4- Q1, due in part to approximately $10 million in payroll tax expenses related to annual share vesting as well as one-time charges associated with retirements, severance, and restructuring. For the full year, guidance for OpEx remains a year-over-year increase of 20%-25% versus 2016. With that, I'll turn the call back to Kevin for a business update.
Thank you, Steve. As I said in my introductory remarks, we are very proud of the milestones we achieved over the past few months, particularly with our non-adjunctive claim and Medicare's rapid response to cover CGM as a result. The dosing claim represents a paradigm shift in diabetes management. These events are the culmination of a long and thoughtful process, and we appreciate the collaborative efforts of both the FDA and CMS, as well as our patient advocates, to bring this technology to a population that desperately needs it. We estimate Medicare-aged patients represent approximately 20% of the overall Type 1 market, or as many as 300,000 patients in the U.S. Intensive insulin-using Type 2 Medicare patients could be an even larger addressable patient population over time.
Looking ahead, we are engaging with the MACs to establish the scope of coverage and facilitate reimbursement for our patients on a broader basis later this year. We believe these achievements were fundamentally driven by the strong performance of our CGM platform, both in clinical trials and in the real world. Notably, this performance is driving clinical outcomes. In January, data from both the first phase of our DIAMOND study and the GOLD trial were published in JAMA. Each trial demonstrated that CGM can significantly improve A1C in MDI patients. We are already seeing the benefits of this message in our business today, where the majority of our new patient additions are MDI patients. The publication of DIAMOND and GOLD, both prospective randomized controlled trials in a highly respected peer-reviewed journal, will accelerate our awareness campaigns with physicians, patients, and payers.
In addition, we saw an abundance of Dexcom CGM data at the Advanced Technologies and Treatments for Diabetes, or ATTD, conference in Paris earlier this month. Additional data from DIAMOND was presented and concluded that Type 2 patients on MDI also experienced a statistically significant reduction in A1C. Although Type 1 patients who switched from MDI to pump therapy did see a slight improvement in time and range, overall, the data show no incremental benefit in A1C reduction and show increased hypoglycemic time in the pump cohort. Clearly, CGM can provide an overwhelming benefit regardless of a patient's preference for insulin delivery. As a side benefit, we demonstrated that patient adherence to Dexcom CGM is very strong even after a year of wear. We hope to see additional DIAMOND data published in the near future. Overall, these data continue to build support for our CGM first message.
Let us be very, very clear. Based upon the data we currently see, the most significant benefit to a patient in the intensive management of their diabetes comes from CGM. Also, at ATTD, there were continued discussions surrounding the establishment of industry standards for CGM performance. We support these efforts 100%. However, we believe any performance thresholds must properly mitigate the risks to people with diabetes who rely on these technologies for their health and safety, particularly if they are dosing insulin. We were perplexed during a session at ATTD, where several of our purported competitors together proposed raising the minimum threshold for performance from the traditionally accepted threshold of 20/20. For example, a 90% 40/40 threshold was proposed. This would mean that only 90% of the glucose values from a system would fall within 40% or 40 mg/dL of a reference value.
90% within 44 is certainly well below what we believe and historical data demonstrate a reliable CGM must provide. The fact that others in the industry would promote such a standard concerns us. Just as a point of reference, our G5 Mobile is achieving 20/20 performance of approximately 93%, and our G6 prepivotal data has our sensor achieving 20/20 performance over 96% of the time. With our non-adjunctive claim for G5 Mobile and our future product platform that I will discuss momentarily, we are confident Dexcom has set an appropriate standard for accuracy, manufacturability, and other performance metrics. We will continue to work to bring together the FDA, industry, and clinical societies to drive standards and provide transparency across the industry while maintaining an appropriate level of patient safety.
Leaving ATTD, it was clear to us that Dexcom CGM has and will continue to raise the bar in CGM performance. As many of you have seen, we presented data from our G6 prepivotal, both with our intended initial one calibration per day label, as well as data using the G6 sensor with no calibrations. The initial accuracy data from these studies is very encouraging, and we are increasingly confident that we can ultimately deliver a no calibration sensor while maintaining market-leading CGM performance. Been a very exciting few months, to say the least. Beyond these strategic developments, we generated significant commercial growth last year. We finished 2016 with approximately 200,000 patients worldwide. To put things in perspective, our Q4 revenue exceeded what we generated in sales for all of 2013. This growth has not been without its challenges, however.
For example, as we stated previously, we believe our receiver recall accounted for at least $10 million in lost revenue in 2016 and a significant increase to our warranty expenses. We also had to make unplanned investments in our customer support structure to handle the challenges associated with this level of growth and our shift to a mobile platform. We have certainly come a long way in a very short period of time, and we continue to see a significant long-term growth opportunity for many years to come. Internationally, we are pleased with our continued growth as our OUS business kept pace with our robust U.S. growth. Looking ahead, we're very pleased with Germany's positive national reimbursement decision to cover CGM.
We remind investors that the initial decision includes both Type 1 and Type 2 insulin-using patients and defines real-time CGM as systems that provide alerts and alarms. We have signed our initial German payer contracts and will have a more substantial portion of the market covered as we exit 2017. We are also making steady progress in obtaining reimbursement in other international markets and will provide future updates as appropriate. All in all, we're very pleased with the continued pace of CGM adoption and anticipate ending the year with approximately 270,000 patients globally. Now for an update on our product pipeline.
We have a number of submissions in front of the FDA that will enhance our G5 Mobile platform, including a new, more reliable touchscreen receiver, our new insertion system and corresponding smaller transmitter, our Android platform, which we hope to launch in the U.S. by mid-year, and additional enhanced versions of our G5 Mobile app to provide additional features and functionality, including the incorporation of insulin data. Our G6 pivotal trial continues to make good progress. Our goal is to file the G6 PMA by the end of Q3 2017, which will allow us to launch in 2018, assuming a positive review by the agency. As I mentioned earlier, the early data from G6 has been very impressive. Assuming this performance is replicated in the pivotal trial, we believe G6 will represent the next major paradigm shift in continuous glucose monitoring performance standards.
G6 will allow us to reduce calibrations initially and provide the foundation for our no-calibration technology. Turning to our Verily partnership, our collaboration to develop simple, low-cost disposable CGM systems continues to make good progress. To remind investors, our initial joint product offering with Verily will be a no-calibration CGM platform based on G6 sensor technology. We believe the products we develop in our Verily partnership will drive the entry of CGM into the non-insulin using Type 2 market and someday become the basis to establish CGM as a standard of care for these patients as well. In our experience to date, real-time CGM has demonstrated an ability to significantly improve a patient's average glucose values, time and range, and provide a holistic view of the effectiveness of a patient's treatment regimen.
As we explore this market further, it is becoming clear to us that CGM, when combined with knowledge-based decision support tools, will help Type 2 patients optimize their diabetes therapy through better medication management and behavior modification. Ultimately, we look to demonstrate not only CGM's clinical value in this category, but also its impact on the expense of treating one of today's most costly conditions. From a product perspective, we believe our first Verily product should be commercialized by the end of 2018 and anticipate that the second generation device will be available in the 2020, 2021 timeframe. We continue to conduct human pilot studies with first generation device, and we have completed our initial feasibility studies for the second Verily product and remain excited about continued progress on our collaboration this year.
Turning to our insulin delivery partners, our G4 integrated pump offerings remain well liked by our mutual patients, and we see continued progress in our other integrations with both G5 and G6 with advanced insulin delivery systems, including pumps, smart pens, and other connected diabetes management platforms. We expect to be able to highlight more specific progress on these integrated systems as these integrated systems approach clinical trials and commercial launch. In conclusion, with our non-adjunctive claim and subsequent positive reimbursement ruling by Medicare, as well as our international expansion, our commercial team has plenty to keep them busy over the next several quarters. Additionally, the data published in JAMA and presented at ATTD were powerful.
The more Dexcom's CGM is studied, the more we see the value it brings across the diabetes healthcare continuum to patients, to payers, and to providers, all with minimal training and minimal investment along the way. With real-world studies like DIAMOND and GOLD, we have never been in a better position to drive CGM penetration and capitalize on a healthcare payer environment that increasingly calls for outcomes that bring economic value. I would now like to open the call up for Q&A.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. From JPMorgan, we have Mike Weinstein.
Thank you. Good evening, everybody. Just maybe wanna start, Kevin, with reimbursement. Let's cover, if we can, the progress both in the U.S. and in Germany. I heard your comments on both. How should we think about the timing of getting reimbursement from all the MACs? When do you think you'll have that process effectively complete? Second, in Germany, could you just give us a sense of a percentage of coverage that you may now have in place and how you expect that to track over the course of the year. I know you made comments earlier in the year when you were in San Francisco about how strong December was in particular for Germany. Would love to, you know, get your updated thoughts there.
Well, things continue to go well in Germany as reimbursement expands. We only have a partial group of the payers covered with specific contracts at this point in time, and we're reaching out to the rest of them. Those efforts will continue over the course of the year, Mike, and certainly we'd like to have a large percentage of them. I can't really give you where that is. Obviously, we'll shoot for 100%, but inevitably there ends up being nits along the way, but so far so good. The growth has been very good so far in Germany, products being very, very well received. As I said back in January, we're doing well with CGM in Germany.
With respect to the MACs, we're just starting those discussions, and I believe, as I said back in January, as a goal for us, we would love to have all this resolved by the middle of the year. Again, it. I also said in January that we weren't expecting approval till 2018. I—we have plans. We are working on presentations, meetings, et cetera. We'll go as quick as we can.
Obviously, we're not gonna see any benefit from the Medicare expansion this quarter. If we see a benefit, it will start to accrue in the Q2 . Is that fair?
Yeah. Yeah, there won't be any Medicare benefit in this quarter. The only thing that I would note, though, is we are getting a lot of phone calls from Medicare patients who would like it, so we are optimistic about the opportunity once we can really go out and market this and present it to more. We have a lot of opportunities in the pipeline waiting for the coverage.
Okay. The G6 filing and the Verily G1 filing, are you gonna do those in tandem? Is that possible in your dialogue with the FDA, or are you gonna space those out?
We will file the G6 system first. That trial will be done first, and then the Verily filing will reference the G6 filing, particularly all the manufacturing of the sensor. Then we'll see where the filings go and what additional work we have to do. Obviously, we'll have to validate and verify all the electronics configurations and probably run some kind of study with that system since it will be a no calibration system. It will be labeled different more than likely than the G6 because of the calibrations. We'll file G6 first, but the Verily configuration will come certainly not too long after that. We'll push pretty hard.
Okay. Last topic is, you know, I know there was some, you know, question on the street in terms of what impact Medicare reimbursement would have on your outlook for the year. Obviously, it's only late February at this point, and you still have to discuss with the MAC. The question I think probably people have is one, are you seeing any impact of the FDA label change prior to getting, you know, the reimbursement from the MAC? Separate topics there. Are you seeing any benefit from that? Is your confidence in the initial guidance you gave at the start of the year the same, unchanged, or is it higher as a result of the Medicare reimbursement?
Let's start with the non-adjunctive labeling change. For any of you who've seen our marketing campaigns, we have been marketing to that, and the response from the public has been very well in our DTC campaigns with the non-adjunctive claim and therapeutic use of CGM. We are seeing some benefit to that, right now. With respect to our guidance for the year, we reaffirmed in our call our guidance for the year. We have not really considered Medicare in those numbers at this point in time, and there will be moving pieces, you know, once Medicare gets approved, and we'll update everybody after we have that.
You know, I think Medicare will be very good for us, but we really need to know what group of patients is gonna be covered so we can peg it to a population and look at how many of those patients we can add, and we don't have that guidance yet, Mike. When we get that, we'll provide you guys with more information.
Very helpful. Thank you, guys. I'll let somebody else jump in.
Thank you. Next from William Blair, we have Ben Andrew.
Hi, good afternoon. Jess, congratulations on your decision to retire. I'm sure you'll enjoy your boats a whole lot more now.
Thank you, Ben, for the kind words. It's been great working with you the last decade, so.
You as well. Yeah, you as well. We'll miss you. Couple questions from me. You know, Kevin, maybe is there an update on the G5x timing, and how do you think about the magnitude of the impact of that as you roll that out over the course of presumably the year or back half of the year?
I don't have an update on timing. We received questions from the FDA, and we are finishing our response to those. We will submit those. I would tell you the only factor in G5x timing for us, this is a very complicated change for us, as I've talked about it before. We have to change pretty much every manufacturing process that we do with respect to G5x to get that thing launched. The sooner we can get started, the better.
But it is complicated because patients will be on G5 and G4 and G5x. And so there's a very detailed plan that we have to roll out. I don't have a timing update today. We'll see how our responses are received by the FDA, and combine that with the complexity of just receiving a non-adjunctive claim as well. This is a very thoughtful process by the FDA that they're putting us through and that we're going through, and it needs to align with everything that we do.
Okay. Then on the reimbursement discussion, you know, with the payers relative to the DIAMOND and the GOLD data, particularly the new DIAMOND data. Kevin, how have your conversations changed now that you have that data in hand? Does it embolden you to consider risk-sharing contracts sooner than you might otherwise? Can you know, build on the notion of CGM first as you go through those conversations?
We've had numerous discussions, and now that the DIAMOND data is rolled out, it does become a very strong talking point that we've never had before. I would tell you, Ben, internally, we're not opposed to risk-sharing arrangements with the payers, particularly as we look at the DIAMOND data and the type of A1C reduction we achieved, the minimal amount of severe hypoglycemic events that have gone on. In our past experience in our studies where our patients have very few severe hypoglycemic events, hence not a lot of hospitalization costs as well. The challenge for us in these types of contracts has not been our willingness to accept risk. It's been figuring out how to structure them based on the information that the payers have about their patients combined with the information that we have regarding the performance of our systems.
I'll give you a simple example. If a payer said, "I'll do a risk-sharing arrangement with you, but you have to produce a report from the patient," and if that patient chooses to use the receiver instead of the phone app, we don't necessarily have that patient's data readily accessible. It creates some different types of scenarios. We're pursuing all of those. We've had very active discussions. They're interactive. They're lively. We're willing to accept some risk there. It's, w ell, we just need to get a few of these done. I'm hoping for some really good outcomes over the course of 2017 on that front.
Okay. Last one for me. You talked about increasing the field organization to 130. I thought I heard you say that was in Q1. What was the number before? Was it around 110?
It is closer to 100, a little between 100 and 110. Most of those reps were added over the course of Q4 and early in Q1. We've been through our training and got these people on the street and going. I would tell you, whenever you have an expansion of this nature, it is a bit disruptive. It'll take the new ones a bit of time to get up to speed and our existing sales force a bit of time to get used to the readjusted territories.
Great. Thank you.
Thank you. Next from Stephens Inc., we have Chris Cooley.
Thank you. Good afternoon. I appreciate you taking the questions. Could you just remind us, maybe Steve, a little bit more in terms of the metrics that you had built into the 17 guide and maybe more specifically, what you're expecting for attrition rates relative to year-end run rates as we play through the year? I have just one other quick follow-up. Thank you.
Yeah. We've never kind of broken out what specifically went into the guide. Obviously, you can assume, you know, obviously U.S. ramp, continued U.S. ramp penetration in MDI patients is something we've talked quite a bit about as we've, you know, more recently added a majority of MDI versus pump patients. That was factored in. Germany is obviously gonna ramp over the course of the year. We didn't obviously, when we gave the guidance early this year. At that same time, we estimated that Medicare was coming in 2018. You should assume in the current guidance there is no, you know, no ramp for Medicare this year. It's kind of the usual stuff. Sorry, tell me the second part of your question.
No.
On attrition rates?
Yes.
Yeah. You know, we've never disclosed a specific attrition rate, but the color we tried to give at the beginning of this year in the 8-K, I was trying to let you triangulate it. Attrition is a complex problem. It's a complex thing to analyze here because you have different time frames in which we have different attrition metrics, and we're not gonna go into that level of detail. What we tried to triangulate you guys to was an attrition rate that you could calculate, having given you a single number of somewhere between, you know, 8% and 12% on an annual basis.
I know that's a bit of a range, but that was what we were trying to triangulate when we talked about, you know, kinda net new adds in 2016 and anticipated gross adds plus net new adds, you know, net total at the end of the year of around 275. That can get you to a kind of a once a year attrition rate of somewhere, you know, between 8%-12%.
Thank you. Just wanted to verify that. Then secondly, could you just maybe comment? I realize this is a longer term growth opportunity, but how you would see the potential benefit of, shall we say, smart pens going forward and helping further drive growth for CGM, especially as you're starting to see more of your patients come from the MDI population. Thank you.
Yeah. We think the opportunity is huge. You know, particularly as we look to the future and we know ultimately the day will come where this fight is going to be fought, if not being fought today at the payer level, even more so, you know, not just in the U.S., but in the OUS markets where, you know, pumps are really probably less than 10% penetrated and in many markets, far less than that. We think, you know, we're very bullish on the opportunity for smart pens. You know, we believe many companies, both insulin companies and non-insulin companies, are working on smart pen development. A number of licensees are working and announced publicly they're working with different algorithms and different software developers.
You know, I think over the next 18-24 months, it'll be pretty exciting to see some of the products that can come to market. I think much like, you know, our sensors driving some of the work we're doing on the automated insulin delivery systems with some of the pump partners, you're gonna see really the real value in these systems will be integrating that insulin on board information from a smart pen together with our CGM data in a single unified app on the phone, and we can do some pretty powerful stuff there.
You know, when you start demonstrating outcomes with a smart pen together with, you know, with CGM data and providing patients with dosing support information, behavior modification information, at really a fraction of cost of some more complex systems, I think we really have a home run there.
Thank you.
Thank you. Next from Canaccord Genuity, we have Kyle Rose.
Great. Thank you very much. Can you hear me all right?
Yep.
Yep.
Great. Thanks for taking the question. Just wanted to I know it's still early days with regards to the CMS and the Medicare opportunity, but just wanted to take a step back and think, you know, from a high level, one of the things I think or takeaways from 2016 was just the changing needs of the new patients that are adopting the technology at this pace. Obviously, there were some big customer service investments took place last year.
Just how do you, when you think about the CMS population and that being a different demographic just from a user base, just what type of investments do you foresee, you know, from an infrastructure standpoint, and how do you view those patients just from a potential utilization perspective, what's different than some of the previous patients you've seen in prior years?
Sure. I'll take that one, Kyle. From a customer service perspective, obviously, we need to be ready on the phone to talk to these people. We've made a lot of investments in just underlying IT tools to make our team more effective and enable them to handle more calls and have more of a knowledge base type system as they address with and work with these patients. We believe we're ready for this. We are also expanding our call center operations in Q2. We're gonna take our facility in Arizona and have a second call center over there. Several of our people actually are moving from San Diego over there to man that. We won't have a bunch of startup time to get up and running.
We'll have some great people over there working, and that will help us as well. With respect to utilization, it's been interesting as we've gone through analytics on our patient base. Forever, our most loyal patient group has been the over 50. The over 50 patients, while they are on this, they have not left us. They have been very, very loyal. I think what you'll see with these patients is very similar to what Steve talked about as we broaden the patient base. It'll probably be a function of they'll start up, and if they don't like it, they'll quit fast. If they like it, we think we can keep them on for a very long time. It's our job and our challenge to make sure that quit fast thing doesn't happen. We have to make our system.
You know, we have a team called Dexcom CARE that reaches out to patients and can train them directly on tools like Skype and FaceTime and things like that. We need to make sure that group is heavily involved with our senior population as we ramp them up, and we'll do that, and we're working on that. We're optimistic that they'll stay.
Okay. That's very helpful. Then just another one there. When we read the CMS rule, it provided reimbursement on a monthly basis that includes some of the other related supplies. I know you're putting the business model together now, but from a longer term perspective, I mean, do you envision a plan where you'll provide some of the other ancillary supplies for calibration and things of that sort, at least in the near term? Or do you plan to partner to add some of those incremental products? Just how do you view that getting distributed to the customer?
Yeah. In the near term, it'll probably be in partnership with one of our DME suppliers. You know, over time, who knows? I think that, you know, looking at the economics broadly speaking, I think particularly as we look to some of our future sensor products, which go to 10 days or 14 days, the economics are quite favorable to us. I think we're pretty happy there.
Okay, great. Then just the last question for me is, just any expectations to see the initial feasibility data from the Verily, you know, G1 at some point, you know, this year? If so, you know, is ADA the most likely place we should think about that?
Probably not. Not ADA. Hopefully, we can see something before the end of the year. I mean, we have initial data in-house, but it's in a limited number of patients, so it's not something that we're. You know, we typically wait till a study is pretty well baked. The 10-patient in-house study isn't something we spend a lot of time talking about. I can tell you there's a lot of people at Google who walk around with this thing as well. There's a pretty good data set, but we're not probably not at ADA, maybe later in the year.
Great. Thank you very much for taking the questions.
Sure.
Thank you. Next from Morgan Stanley, we have David Lewis.
Good afternoon. Maybe just two questions for Kevin, one tactical, one strategic. So Kevin, just given the changing competitive dynamics were a big focus last quarter, I wonder if you could just update us on these dynamics in the U.S. and ex-U.S., sort of in the Q4 or perhaps kind of early 2017, you know, relative to your commentary in the Q3 . You know, what assumptions, if any, were made for 670G or Libre timing in the 2017 guide? Then a quick strategic follow-up.
With respect to our 2017 guidance, we built out the model based on what we think we can achieve. We do consider the fact that these other products will be out. I think a lot will depend on how they're labeled and how they're gonna be used and timing. We built our models out with the best assumptions we had at hand and leave them at that. We did consider some of those things. We do not let competitors drive our growth assumptions. We hold our people to a standard that this technology and this therapy is important for everybody. We don't get to sit back and say, "Well, there's competition. I'll take my foot off the gas." We don't do that. We do consider it, that would be where that would land. I'm sorry, I forgot the other part of your question, David.
Sure. You'd say competitive dynamics, Kevin, were pretty stable in sort of the Q4 relative to your commentary in the third?
Yeah, I'd say, you know.
Yeah. Go ahead, Steve.
Coming into, you know, that Q3 call, remember the 670 had just been approved, and so I think there was considerable additional noise at that point in time. That's largely died down, I would argue.
Yeah.
You know, we were just at a big diabetes conference in Paris, and I, you know, without patting ourselves on the back, I would say Dexcom was again the shining star, particularly in terms of our sensor performance and the data we released. I think it's quieted down quite a bit on that front.
Kevin, just real quick strategically, I apologize, I'm in an airport here. You know, this announced divestiture of J&J, this J&J divestiture has ignited a debate around, you know, integrated products. I feel like there's two camps, right? Some see value in a second integrated pump CGM player, and others say, you know, given the DIAMOND study and the market opportunity in MDI and T2, you know, why bother with pumps? I wonder if you'd provide us your updated perspective, and I'll jump back to you. Thank you.
We continue to support several integrated insulin delivery systems, and we'll continue to do so. We have built our company on the concept that our goal is CGM first. As these guys will tell you, I walk around the hall all day long and saying, "Sell more sensors, sell more sensors, sell more sensors." I think there will be some benefit to the integrated systems. We have to drive our business based on the information, the reimbursement and sales dynamics that we have today. We will focus on that, and we'll see where our investments and our relationships and partnerships pay off over time.
Thank you. Next from Raymond James, we have Jayson Bedford.
Good afternoon. Thanks for taking the questions. Just a few kind of cleanup type questions. Just to clarify, the expected year-end installed base is still 270,000, correct?
270, yes.
Okay. In terms of the new transmitter and inserter, do you plan on waiting for the G6 to launch these products, or are you gonna launch them as they get approved?
It will depend upon timing of the approval and the timing of the G6 filing and a number of factors. Our plan today is launch when they get approved. We will consider all that, Jayson, as we look out over the course of the year.
Okay. Fair enough. On Germany, of the contracts that you've signed, are they covering both Type 1 and insulin-dependent Type 2 ?
Yes, they are.
All right. Just lastly for me on the Medicare opportunity, are you actively selling or marketing into this market opportunity right now, or do those efforts kickstarted maybe in the Q2 ?
We're not really actively marketing. We are getting a lot of inquiries about that.
Right.
It is indicated as CMS approved, so people call and ask us to market that. The position, you know, individuals can get approved CMS reimbursement on their own if they apply and go through the process of getting individual reimbursement. We are not leading those efforts. We are guiding towards getting more clarification from the MACs and CMS in general, so we can get it approved and make it easier for the entire population.
Okay. That's fair. Thank you.
Next, from Leerink Partners, we have Danielle Antalffy.
Hey, good afternoon, guys. Thanks so much for taking the question.
How you doing?
Kevin, this question is for you, and Jess, just congratulations on your retirement. I hope you enjoy the time. Kevin, as we get closer to a Verily product, closer to a real type two opportunity, how do you see Dexcom as a company from a scale perspective, both manufacturing, distribution, et cetera, evolving? How much lead time do you need to sort of get there to where you can handle what is potentially a massive opportunity?
That's a fantastic question and one that we debate and struggle with. One of the reasons, quite frankly, you'll see over the next several quarters large capital equipment investments for us as we build out an alternative manufacturing facility in Arizona. We need to be ready to handle this type of volume, and it is gonna be different. Many of these patients, for example, won't wear sensors all the time. They may wear four sensors a year. Even our relationship with these patients is gonna be different. The call will be different. We're doing a lot of studies and a lot of work right now to figure out what that market's gonna look like. We think a lot of it will be payer-driven.
You know, these patients don't spend a lot of money on finger sticks a day for us to go in and offer a solution similar to what Type 1 patients are paying, we know doesn't work. Intermittent CGM will be a reality for these patients and how much are we gonna spend a year and how many sensors are patients gonna wear. What we're working on is just developing thoughts as to what those programs look like and what type of benefit they could provide. Again, as we've shown in our investor slides, in a 2-4-week period, we can see some of these patients taking their estimated, you know, their estimated A1C down more than a full point, and their average glucose values move down significantly because they don't get feedback from anything like CGM.
It really enables patients to pull the three levers that there are in taking care of type two diabetes, medication, exercise, and diet. By pulling those three levers and getting real-time feedback in a mechanism that's easy to look at, their phones, say, "Hey, well, maybe I ought to do something a little bit different," we see dramatic results. In fact, somebody I talked to the other day was looking at type two study data and said, "Do you realize this is more significant than any type two drug I've ever seen?" I said, "Yeah, I do." We know the opportunity is there. It is gonna be a different business model, Danielle, and we really have to give it a lot of thought and go pretty quickly and develop a lot of data.
I think there will be a lot of exciting announcements from us. We're gonna have to be creative. We're gonna have to think differently than we have in the past, but we're preparing to do that and having a lot of fun trying to put it together.
All right. Thanks so much for that. Just a follow-up on the Type 2 opportunity. Do you think the first gen Verily product that we could see in 2018, at the end of 2018, I guess I should say, is that gonna be a product that can open up that Type 2 market, or will that be limited to maybe insulin-dependent Type 2s? Or how do we think about that product and approaching Type 2s in a real way?
We hope to open up the market with that product. We are doing work now with our G5 product, even with the two calibrations today, and getting very good results from that. That is one thing we would certainly like to focus on. If we could accelerate and go faster with our current configuration, we can, but we're somewhat cost-constrained today due to the cost of the hardware and the fact that, you know, that it is reusable now. Just that is a product we certainly will drive this market with. The app, for example, could look a little different than what we have today, but still provide the same data, just maybe a little different format. There's a lot of decisions to be made as we go forward.
Thank you so much.
Thank you. Next from Cowen and Company, we have Doug Schenkel.
Hey, guys. Good afternoon. Thank you for taking the questions. I guess maybe my first one is just another one on Medicare. Given the pent-up demand, upcoming reimbursement, and the huge clinical need for these patients, why can't penetration move to where the broader market rate is today, you know, pretty rapidly, you know, maybe not this year, but in 2018, 2019?
Yeah. I mean, I think the biggest gating factor would be just education, right? We've not at all targeted this patient population historically. In fact, we spent a lot of time targeting, you know, younger patients when we got our pediatric approval. I think there's gonna be an element of education. There's, you know, right now, most folks probably still believe there is not reimbursement for, you know, for the over sixty-five patient population. It's gonna take a little time.
I absolutely think we can get there, if not even higher.
Yeah. There we, you know, certainly with the demand we've seen generated just at the early stages here, yeah, that's right.
Okay. Thanks for that. I guess a follow-up on some of the Type 2 questions. You've discussed ongoing programs with commercial payers in the U.S. in an effort to improve Type 2 reimbursement. Can you give us a status update on these programs? Do you believe broader Type 2 commercial coverage could come faster than you previously discussed, given the progress with CMS?
No. I mean, again, we're still waiting to see what the ultimate coverage, scope of coverage looks like out of CMS. I think on the private payer side, my belief is that we still need some more data. You know, the DIAMOND type two data was great. We showed benefit in that patient population, but I think we're gonna need some additional larger studies, you know, particularly as we look outside of the intensively managed type two population into folks on orals or diet and exercise. We've got to show not just outcomes, we've got to show cost benefit, and that's some of the initiatives we have internally.
I'm not gonna get into details, but some of the things we're working on internally, we're really starting to look at that data and look at how we will present it to the payers. It's not a, you know, it's certainly not a this year event by any stretch.
No. There, there's a lot of work to do. I agree with Steve. Although, I guess the, you know, the caveat that I would add, if we went by the assumption that Type 2 intensive insulin-using CMS patients had access to CGM, then we could see very positive outcomes there.
Yeah.
As we gather data from the phone systems in particular, we would have a very good case to go back to payers with that we don't have today. This might provide us a wonderful opportunity to go do that. We just need to see how it plays out.
Okay, super helpful. Thank you.
Thank you. Next from BMO Capital Markets, we have Joanne Wuensch.
Good evening, and it's great to talk to you. The new hires that happened in the Q4 , could you help me understand how these people are gonna be focused? Is it more educational? Is it more regional? Is it more counter-detailing all the competitive launches which are currently happening and expected to?
No. I mean, these are folks that. So as Kevin alluded to when he described, you know, the existing sales force getting used to new territories, what happens when we do a field sales force expansion is, you know, many territories will end up shrinking. You know, quotas go up and territories shrink, and that's just sort of the nature of a growth business like this. So no, these. The people that we added in Q4 and maybe a little bit in Q1, these are kinda quota-carrying sales reps who will have their own territory. Their primary detail will be doctors, will be endocrinologists. You know, in terms of counter-detailing, no, we don't spend our time, you know, bashing the competition 'cause frankly, right now, we don't have much competition.
We're out detailing the benefits of our product to doctors. You know, these people, as Kevin said, they, you know, it takes a little time to get them ramped up, but they've gone through sales force training and they're currently in the field. We'll, you know, start to look for contribution as we look into the latter part of 2017.
Terrific. Just a follow-up question. It sounds like some of the noise that we talked about on the Q3 call has quieted down. Anything in particular that drove that other than I mean, I won't even answer my own question. What sort of caused that quieter, calmer moment? Thank you.
Yeah. It's you know the news is kind of out you know with between particularly with respect to six seventy. There was a pretty broad you know broad-based media blitz surrounding six seventy both you know from Medtronic and from some other industry advocacy groups. It's just kinda quieted down at this point. They still haven't launched the product. Still remains to be seen when they will actually start the commercial launch and to what scale and scope that commercial launch will be when they actually do launch it. I think just the noise has certainly died down in the clinics and otherwise.
Very helpful. Have a good evening. Thank you.
Thanks.
Thank you. Next from Piper Jaffray, we have Tom Bakas.
Hey guys, good afternoon. Thanks for squeezing me in. My first question, I just wanna make sure I heard you correctly. Did you say that the second generation Verily product is now potentially a 2021 product? If so, it seems.
We're.
Go ahead, sorry.
We're focused on 2020. We added 2021 to be conservative just in case. Our focus is 2020 right now.
Okay.
We just, you know what? We did that to give ourselves a bit of a hedge. I don't think anybody would be happy if we're at 2021. You know what? There's a lot going on in our industry that we'll be moving between now and when that product gets launched, and there's a lot of variables that aren't under our control at this point in time. we did have to be a little conservative. We have very aggressive timelines for that system, and we'll stick with them.
Okay, that makes sense. Thank you. I guess, just given all the other developments that have sort of come up over the last few quarters, the transition of the pharmacy seems to sort of taken a back seat. Just hoping you could update us on the progress of that channel shift and just how important this is moving forward for the company.
Of all the initiatives we started, this is the one that has moved, quite frankly, slower than anything that we want it to. The key, there have been two factors that have made it slower than we'd like. Number one, we want to maintain a certain level of pricing. We've had opportunities to move from time to time where pricing is just prohibited, and we're not willing to accept those options. The other one, in all honesty, our providers, our payers, everybody does not share the same sense of urgency with our technology that we do. Whereas we see this opportunity to make it wonderful for people to go to the drugstore and pick this up.
By the time somebody from accounting goes back and figures out how many Type 1 patients they have in the system and how many Type 1 patients use CGM and data, it takes time. We've had numerous creative proposals by our payer team that to get us to pharmacy, to move more of that that literally have. They haven't died, they're just being evaluated beyond belief. We would love to go there. I think as we go forward, in 2020, when we're selling the Verily Band-Aid type product or 2021, if I go with the conservative, that has to be sold at the drugstore. We can't handle the demand that we're gonna have for this number of patients.
Even in Type 2, with 20 million patients, as you look at penetrating that at a rate of intermittent use much higher than what we have now, those products all have to be sold at the drugstore, and the reimbursement channel has to change. For our current Type 1 population, that change has not happened as quickly as we like it, and quite frankly, it hasn't had to sustain our growth. Over time, we believe that's where our technology needs to be, and we're gonna look at some different approaches, some different contract type approaches, and maybe quite frankly, keeping some of it in the DME and trying to get it easier for patients to get the system. One of the things we see in the Q1 as deductibles reset, you know, my emails, my negative emails bounce around as to what I get.
Now in the Q1 , what I get from everybody is, "Hey, why can't I get my stuff?" Usually the response is from customer service, because their deductible reset because we have to get all this new documentation and stuff. I think what you'll see from us going forward, we will continue to try and go to pharmacy where it makes sense. In those cases where we're just not gonna crack that barrier, what we wanna do is decrease the documentation load to try and make it easier for patients to get on and to stay on and make it easier for them to buy the system.
Thanks. I appreciate that. Have a great night.
Thank you. Next from Wedbush Securities, we have Tao Levy.
Great. Thanks gentlemen. Just maybe a quick clarification. I feel obligated to ask this question, so I apologize ahead of time. The agreement that you have with the European countries, that's not the same as in the U.S. regarding the receiver. Can you explain that briefly if possible?
Yeah. In essence, it is the same. In Europe, it is also a voluntary recall. What we did agree, and you know, we agreed in a couple of countries to affirmatively bring product back. You're gonna see other countries posting similar notifications, is my guess, over the next, I don't know, months, probably. As we mentioned in the prepared remarks, we've already accrued for any potential exposure in 2016, and this shouldn't have any impact going forward.
Got you. If you have to replace, you know, those receivers, you know, in the international markets, that shouldn't have a financial impact, going forward.
Or-
Yeah, in the select European markets. Again, remember, we launched the new configuration of our receiver in the fall. So as we've sold more receivers, as we've grown since last fall, those receivers won't be subject to this initiative. You know, the patients in Europe got the same letter the patients did in the U.S. when we started the recall procedure. This isn't anything new to us, and we've been talking with many of the countries for months, and many of the countries have signed off on what we did in the U.S. and felt it was good enough. We continue to have you know, a piece of paper in the sensor box reminding people, please test the auto functionality of your receiver. Many of the countries felt that was good enough. Some of the others are still evaluating.
Some, including the one that we read about recently, have decided it isn't. They want us to recall the devices that may be subject to auto failure and replace them with the newer configuration in the interest of patient safety, and we'll do that.
Gotcha. Okay, I didn't hear whether you reiterated your gross margin guidance that you provided at the beginning of the year, 67%-70%.
Yeah.
Yeah.
It's the same.
We didn't change anything.
Okay. Lastly, you know, you provided the, you know, your guidance for the installed base to grow, you know, kind of around 35%, this year, but your sales guidance is only, you know, you're guiding for 25%-30%. What's the difference there? Because those normally when I've gone back historically, I mean, those two numbers of growth rates are pretty close to each other, and then this year it seems to be a wider delta. Thanks.
Yeah, it's primarily timing driven. When we add the new patients, we ramp over the course of the year, and the Q4 is always the largest number by sometimes a fair margin, the largest number of new patient additions during a given year. Those guys don't contribute from a sensor disposable perspective like patients that are already on board.
No, I guess the other thing I would add is just the size of the installed base already. Even as we look at our monthly and quarterly numbers, new patients don't move the needle as much as they did in the past 'cause the installed base purchases so much of the product that's there. I think the timing combined with more from our installed base are what make those numbers a little different.
Okay, great. Thank you.
Thank you. Next from Robert W. Baird, we have Jeff Johnson.
Thank you. Good evening, guys. Just a couple of last-minute questions here, maybe. On CMS, I know we've talked about it a lot, but Kevin, you know, when the document first came out in January, it looked like it included both T1 and T2 coverage. I'm assuming that's probably a negotiated point, though, with the MACs. You know, just maybe your latest feeling on do we see T2 coverage early on once some of the coverage starts coming in? Then I had heard that, and I don't remember where I heard this, but that you're maybe not having to negotiate with all 12 MACs, that there's more consolidated negotiating point there that you're dealing with. Can you just flesh that out for me a little bit?
Yes, Steve. I would say it's too early to tell on the first part of your question. We're not deep enough in discussions to know what the scope is gonna look like. But you're correct in that, under Part B, where we reside, there are only four MACs that we need to actually work together with. It's a much more efficient process than under Part B.
Yeah, that's what I was gonna say. Just more efficient, easier to get these.
Mm-hmm.
Agreements put in place. Kevin, you talked about your 50-year-old and older patient base, being kind of the most loyal portion of the wearers. I don't know that I've asked this question before, but you know, as patients age into the Medicare population at 65, what's the dropout rate? Is it a very high dropout rate? Or said another way, I'd assume your penetration rate in the Medicare population is pretty low. I just don't know if I've ever heard you answer that question. Thanks.
Excuse me. It's been very low 'cause they don't have reimbursement. Our dropout rate's been relatively high unless they wanna pay cash. It's been a challenge for us.
Yeah. I guess that was my question. You said they were very loyal after 50, so most of them, though, they're loyal until 65, and then they do drop out, so this is a very low penetration rate.
Yeah. We get heartbreaking emails from them or from their spouses all the time.
Yeah. Understood. I just wanna make sure.
Yeah.
Thanks, guys.
They just can't afford it.
Yeah.
Thank you. We have no further questions at this time.
You know, well, I'm gonna offer some concluding remarks, and then we'll be done. Thanks, everybody, for the questions and for listening. You know, year-end earnings calls are a great time of reflection as we look back at the accomplishments of another year. In a year of much confusion and turmoil in the diabetes industry, Dexcom grew our revenues more than 40%, an annual increase of approximately $170 million in worldwide revenue, a number that's quite frankly more amazing than the percentage when you compare Dexcom to everybody else in our industry. We received our non-adjunctive claim, CMS approval came right after the end of the year, and significant advancements have been made on the international reimbursement front. All these things point to realization of our vision.
The CGM will become the standard of care for diabetes, and this is gonna happen very quickly. No company has a product pipeline like ours, and the investments we've made in products, facilities, people, processes, our Verily relationship and other relationships will put us in a position to remain a leader in this industry and continue to have a major impact on the lives of people affected by diabetes, their healthcare providers, and ultimately upon reducing the costs associated with diabetes across the board. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.