Welcome to the Dexcom Third Quarter 2017 Earnings Release Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note this conference is being recorded. I'll turn the call over to Matt Dolan, Vice President, Corporate Development. Matt Dolan, you may begin.
Thank you, Adrienne, and welcome to Dexcom's Third Quarter 2017 earnings call. With us today are Kevin Sayer, Dexcom's President and CEO, Steven Pacelli, our Executive Vice President of Strategy and Corporate Development, and Quentin Blackford, our Executive Vice President and Chief Financial Officer. We will begin with our prepared remarks and then open the call up for your questions. At that time, we will limit analysts to one question and one follow-up so we can provide an opportunity for everyone participating today. I will begin with our safe harbor statement and then pass the call over to 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 statements. 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 such forward-looking statements after the date of this presentation or to conform 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 non-GAAP net loss and 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. With that, I'll turn it over to Kevin.
Thank you, everyone, for joining us today. I will begin the call with an overview and then hand it over to the team for their comments on our financial results. I would like to start by publicly welcoming Quentin to our executive management team. He's already been a big contributor to Dexcom, and we're looking forward to the next leg of our journey together. Dexcom continues to shine, with revenues up 24% through the first three quarters of the year. We remain significantly under-penetrated in the intensive diabetes marketplace, and the number of covered lives that we have access to has doubled since last year. From an overall business perspective, our financial picture has never been better. Gross margins are within our targets. Our expenses are scaling as anticipated. The business is generating cash, and we continue to make key investments for our future.
Our U.S. business continues to see adoption across the intensive population, where approximately two-thirds of our new patient additions are on multiple daily injections. We continue to believe that CGM should be the first line device in the management of diabetes, regardless of a patient's insulin delivery preference. Internationally, Dexcom adoption accelerated again, with several markets driving overall growth of greater than 80%. Our strategy outside the U.S. is working even in the face of increased competition. We remain disciplined in driving our value proposition through the clinical benefits of real-time CGM, particularly as we see improving reimbursement in these markets. In the U.S., the team has been working aggressively to fulfill the significant demand we have seen from the Medicare population.
As we told you on our last call, early in the third quarter, the billing codes for CGM became effective, and we are now servicing and submitting claims for our Medicare patients. I'm pleased to tell you that these early submissions have gone well. In Q3, between our direct and distributor efforts, we estimate that we shipped to more than 4,000 Medicare customers and continue to have a strong Medicare pipeline totaling close to 20,000 patients. This Medicare rollout is an unprecedented opportunity for Dexcom, but it's also been a significant drag on our commercial organization. Patients have simply been waiting too long. To our Medicare patients, please trust me, we have heard you loud and clear, and for this reason, our first priority for the rest of the year is to get the product to you.
Finally, we submitted our G6 PMA with the FDA as committed to at the end of the third quarter. Since then, we've had several interactions with the agency. In addition to the once-per-day calibration system we submitted, we believe we have a regulatory pathway to launch a no-calibration real-time system sometime before the end of 2018. I will dig into this in our product pipeline plan shortly. With that, I will turn the call over to Steve for a review of our financials. Steve?
Thanks, Kevin. Dexcom reported record revenue of $185 million for the third quarter of 2017, compared to $149 million for the same quarter in 2016, a $36 million or 24% increase. Sequentially, revenue was up 8%. As Kevin mentioned, we began processing our Medicare-eligible patients in the third quarter. The revenue contribution remained relatively small, but considering the monthly subscription model established by CMS.
As compared to our commercial business, where we generate higher upfront revenues, we expect contribution from this population to steadily increase over the next several quarters. Of note, our early metrics are positive. Both approvals and reorders have been strong. While we were still early in our Medicare ramp, we see significant demand from the field and are optimistic about our commercial team's ability to execute from here. Our third quarter gross profit was $127 million, generating a gross margin of 69% compared to a gross margin of 68% for the same quarter in the prior year. We remain comfortable with our full year gross margin outlook. As you saw in our press release, our product mix was within our normal historical range at approximately 70% sensors and 30% hardware.
Average sensor pricing again came in just under $70 due to the strength of our international business, where we have a larger percentage of revenue running through our distributors at a lower ASP. Operating expenses totaled $128 million for Q3, compared to $120 million in Q3 of 2016, reflecting an increase of 7% year-over-year and down 3% sequentially. Overall, operating expenses were well controlled relative to our top-line growth, and we continued to invest in our key initiatives, including DTC marketing campaigns, OUS expansion, and product innovation. Our GAAP net loss was $2 million or $0.02 per share. Excluding a non-cash tax benefit related to our convertible notes, non-GAAP net loss was $3.1 million or $0.04 per share.
Absent approximately $30 million in non-cash charges, primarily share-based compensation and non-cash interest expense, and excluding the tax benefit mentioned above, our non-GAAP cash-based net income was $27 million. We ended the third quarter with $526 million in cash and marketable securities on our balance sheet, compared to $124 million at the end of 2016. Our increased cash balance was driven by cash flow from operations and our convertible debt offering earlier this year, offset by higher CapEx, primarily associated with our manufacturing infrastructure build-out. With respect to the balance of 2017, we have narrowed our expectations and now expect global revenue in 2017 to come in at the lower end of our guidance range. This would be consistent with our mid-teens sequential growth last year from Q3 to Q4.
As we've discussed, the timing of our Medicare ramp in Q4 creates variability in the revenue contribution from this patient base. Finally, the amount of competitive noise in our marketplace and the uncertainty surrounding several of our partners warrants a bit of conservatism. With that, I would like to turn the call over to Quentin for some additional commentary. Quentin?
Thank you, Steve. Having been in the CFO seat for two months to the day and having witnessed several market-changing dynamics, I can say that I have never been more excited about the opportunities ahead of us here at Dexcom. Our CGM technology has applicability far beyond my original assumptions and has tremendous upside to our current penetration levels. Beyond the commercial opportunities of the Dexcom technology, one of the aspects that attracted me to Dexcom was my belief that there were numerous opportunities to identify and drive efficiencies in our cost structure. Those beliefs are now convictions, as I've had the opportunity to get into the details and better understand the existing cost structure.
For example, we're in the very early stages of standing up our manufacturing facility in Mesa, Arizona, which weighs on operating margins today and will continue through 2018, but then become a meaningful lever for us well into the future. A large component of our product cost today is manufacturing overhead. As a result, a good portion of our product cost will remain relatively fixed as we scale into the future, and the benefits of incremental volume through the plant will drive meaningful cost reductions. Further, the ability to automate a large part of our processes will lead to further efficiencies, translating to cost improvements and enabling meaningful scale at a lower cost.
From an operating expense perspective, we have multiple levers within our G&A spend profile where we have hundreds of basis points of improvement, which can be accomplished with automation and scalability initiatives that we'll begin to implement gradually. Further, similar opportunities exist within our sales and marketing profile, where we can become more efficient without impacting our customer experience. The multitude of opportunities to address in our cost structure become a meaningful enabler of our ability to continue to out-innovate our competitors and aggressively capture new customers in these rapidly evolving markets. As we continue to introduce a more disciplined approach to capital deployment across the company, you'll hear more from us with respect to our plans to deliver an improved profit profile with meaningful free cash flow generation over time. Kevin?
Thank you, Quentin. Well, as you all know, the diabetes industry is never boring. I will discuss our current market dynamics momentarily, but I would like to begin by affirming our long-term positioning. In our core intensive diabetes markets around the world, CGM remains less than 10% penetrated. We remain committed to best-in-class performance, increased patient convenience, enhanced connectivity, data analytics, and lower-cost platforms. Beyond our intensive strategy, our product initiatives will drive a number of business model innovations for the non-intensive population that we believe will fundamentally shift how we serve these patients. In our U.S. business, the commercial pipeline is as strong as it's ever been, even with the Medicare challenges of the past nine months. We are making strides working through our Medicare backlog, and Steve gave you those metrics.
Given the progress we saw in the quarter, we are doing everything we can to get this backlog taken care of by the end of the year. To add a little more color on our international markets, of course, Germany has been very strong, but our growth has been broad-based. Our commercial investments are paying off, with revenue roughly doubling in nearly all of our direct geographies.
It's also worth noting that with our receiver optional configuration, more international patients are choosing to go direct to their phones and not purchasing a receiver. By driving down the upfront cost of CGM, we are seeing a very nice uptick in demand. Late in the third quarter, the FDA approved Abbott's FreeStyle Libre Flash Glucose Monitoring System. We always believed the FDA would approve this system, and while we understand why it has been labeled as CGM, it is not real-time CGM. The benefits of real-time CGM are clear. Reliable accuracy, actionable alerts and alarms, and connectivity will all drive clinical outcomes in the intensive world and will deliver value in all applicable markets. Overall, there's a very positive conclusion here for Dexcom. We believe the pathway is clearly paved for sensors to replace finger sticks, and we're gonna take this opportunity to move faster.
Please remember, we have been competing against Libre outside the U.S. for three years, and our growth there has accelerated for the fifth consecutive quarter. Our focus on driving reimbursement based on a differentiated value proposition for real-time continuous glucose monitoring is resonating with payers around the world. Many international payers have recognized that flash-based systems are not equivalent to real-time CGM and have created different reimbursement categories for each. Early signs in the U.S. suggest that payers feel the same way. We also know that many of our new international patients have transitioned from Libre to Dexcom because of these important differences. Ultimately, this is a very, very large and very under-penetrated market. Last month, J&J /Animas announced it is finally exiting the pump business in the U.S.
J&J announced its change in direction back in January, and Animas' contribution to our new patient additions has been minimal for some time. At this point, although this decision will ultimately be a drag on our patient base, we view it as manageable. Now for a pipeline update. Turning to our product pipeline, we submitted our G6 PMA to the FDA at the end of the third quarter. Based on our review of the data, the G6 platform takes real-time CGM sensor performance to the next level, especially in terms of its improvements in stability and consistency over an extended period of time. It also carries important ease-of-use enhancements, including a new applicator and smaller form factor. We know patients will be excited by the reliability and convenience of this system.
As I mentioned in my opening remarks, since our filing, we have been in regular communication with the FDA, and while it is early, we believe we have a path to bring the first real-time, no calibration sensor to market before the end of 2018. We will continue discussions with the FDA to bring this important advancement to the diabetes community. On the app and wearables front, the number of Dexcom customers using their mobile phones is rising steadily with the availability of both iOS and Android systems. Patients want to share their data with loved ones, and Dexcom's connectivity provides that very important capability. We are also leveraging our connectivity to provide patient CGM data on alternative displays, like the Apple Watch and Android Wear devices. We also recently announced our efforts with Fitbit to provide a display on their new smartwatch.
Our open API platform went live during Q3 and received a great response. Within our insulin delivery partners, development of Dexcom integrated systems are making progress. Insulet has shown tremendous dedication to our partnership, and our teams are working hard to bring our connected systems to market. Once launched, we see a number of differentiating features in our combined systems, including an attractive form factor and opportunities for smartphone connectivity. In the meantime, we have embarked on a few commercial activities together and will continue to work with Insulet to deliver attractive options for our shared patients. Tandem recently launched its G5 sensor augmented pump, representing the first insulin pump system that carries a non-adjunctive sensor claim. Because Tandem's pump offering is field upgradable, patients won't be locked into a legacy technology and will be able to use enhancements as soon as they are available.
Shifting to our non-intensive strategy, we are making good progress with our pilot programs and will expand our efforts in 2018. We look to complete development of our first-generation CGM system with Verily in the first half of next year. The timing of its commercial launch will be dependent upon the outcome and timing of our no-calibration regulatory strategy. The Dexcom and Verily R&D teams are also beginning to accelerate efforts on the smaller, less expensive second generation system. Our early experience continues to show the value of real-time connected CGM outside of the insulin-intensive diabetes population. Real-time data is intuitive and allows patients and caregivers to quickly optimize drug therapies and behavior. In conclusion, the Dexcom team continues to deliver in 2017, and we have a number of positive catalysts as we look forward to next year. Medicare will become a key contributor.
Our U.S. momentum should remain very, very strong. Product innovation in 2018 promises to be the most remarkable year in Dexcom's history, and we have tremendous opportunities to continue to improve our financial results going forward. With that, I'd now like to open up the call to Q&A. Before Q&A, I'm gonna turn it back over to Matt to go over the ground rules again. Thanks, everyone. Matt?
Thank you, Kevin. As a reminder, we ask our audience to limit themselves to only one question and one follow-up. Adrienne, please provide the Q&A instructions.
Thank you. We'll 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. Our first question comes from David Lewis from Morgan Stanley. Please go ahead.
Good afternoon. Can we just start, Kevin, talking about the U.S. market in this quarter? I think you talked about at our conference, given the Medicare push, there was some distraction amongst some of the U.S. sales force, Kevin. Just the trends you're seeing in the U.S. marketplace this quarter and how you expect it to trend into the balance of the year? I had a quick follow-up.
Sure. Thanks. With respect to the U.S. market, the noise that you talked about from the Medicare push has been very real. Each of us has been out in the field, literally in the past month and ridden around, and, frequently we walk into a physician's office with our sales rep and get handed a list. "Here's my Medicare patients. When you take care of them, we'll give you some more." It has been a bit of a difficult issue for our field team. Now that we've learned how to process these things and we've got. We think we're over the initial hurdles, we can start getting these patients out the door. Our U.S. commercial pipeline is still very robust and very large.
Our digital marketing program continues to generate a large number of leads, and we're getting a good number of leads from the field as well. It's just a matter of execution right now, and we need to push through this. Medicare has had a big impact on us, there's no question.
Okay. Kevin, just, you talked some about this in your prepared remarks, and I appreciate that, but it sounds like your strategy going forward is gonna continue to, as it relates to competition, price to value and not compete on price. I just wanna have you kind of walk through that. Have you thought about the pharmacy benefit channel, and is it more important now for the company to start approaching payers more proactively to start talking about these differences between real-time CGM and CGM? I'll jump back in queue. Thanks so much.
Thank you. A couple of thoughts here. First of all, with respect to pricing, as we've been competitive in Europe with Libre for quite some time, we've been able to maintain a higher price level than them because of the additional features of our product. Because of the actionable alerts, the alarms, the continuous data, the connectivity, the ability to share data, all the things that really make our system unique, and of a great benefit to our intensively managed patients. We will continue to emphasize those features as we go forward. With respect to the distribution channel, you know, we pushed hard on the pharmacy benefit channel for quite some time, and of all our initiatives, this has very much been an uphill battle. We'll win one, we lose one.
Medicare is in the DME channel, so that's where we're focusing a lot of our distribution efforts right now. With respect to the long term, and with respect to cost and pricing and everything, please understand, we've had cost reduction initiatives in place for a long, long time, and those things are gonna start hitting. You know, Quentin talked about increased volumes reducing overhead. Longer sensor wear, longer sensor labeling certainly reduces our cost per day. We have electronics configurations on the horizon that will come very quickly that are orders of magnitude cheaper than the ones that we make now. We've had cost reduction plans in place for a long time, and as you look out three, four years, then we have our Verily disposable products coming, which really have aggressive cost targets. When we hit them, we can compete that way as well.
For today, for our investment world, we're gonna stick to value and we are gonna, you know, go about it that way. Over time, we're prepared for whatever direction the market takes us.
David, I think one other comment on pricing that should not be lost on people has to do with a real-world, what we view as a real-world per-day cost for the product, right? Because while, you know, on its label, we're a seven-day label at around $70 a sensor, so $10 a day. People get nervous when they hear Abbott talking, you hear Abbott talking $4 or $5 a day. But you know, in reality, if a patient's wearing a sensor for 12 days or 14 days, our per-day price on a sensor in reality, the revenue per patient is how we really look at it. The revenue per patient per day is a lot closer to where Abbott is in Europe and frankly, where we think Abbott's gonna come in in the U.S.
That's an important thing that analysts and investors frankly shouldn't be lost on.
Our next question comes from Jeff Johnson from Baird. Please go ahead.
Thank you. Good afternoon, guys. Kevin, you mentioned in your prepared remarks that you're seeing some early signs that payers are seeing a difference between real-time CGM and obviously the Libre product. I was wondering if you could flesh that out a little bit and maybe talk about what you're hearing from U.S. commercial payers between your product and Libre over time as well?
Yeah, this is Steve. I'll take that one. Couple things, you know, somewhat anecdotal at this point, but there was a call hosted by one of your competitors maybe a few weeks ago that had a couple of payers. You know, that was kind of the general theme that, you know, this is not CGM. It shouldn't be priced as the same category. We've seen it in Europe. I mean, Germany is a great example where we certainly receive a premium price on an annualized basis versus the Libre. We're starting to hear the same things just anecdotally from physicians and from physicians who frankly have influence over the payers. You know, we'll have to wait and see how it plays out. I think, you know, Abbott's path to reimbursement is gonna take some time.
It's not something that they're just gonna flip the switch and have reimbursement overnight. We'll see how it plays out. Initial indications are there's certainly, you know, differentiation among the premium price product that we offer.
All right. That's helpful, Steve. I know we've gone out and talked to plenty of endocrinologists and diabetologists, and would love to hear what maybe you're hearing in the field. If Abbott would get pharmacy access, obviously that makes it much easier for the docs to prescribe a Libre over a Dexcom system. Just what would your strategy be if there's a big move to pharmacy for Libre versus your product staying in, you know, largely in the DME channel at this point?
Well, quite honestly, it would be nice if somebody else would go somewhere first instead of us. We've been first everywhere here. If in fact there's a big push to pharmacy and we can get acceptable reimbursement rates there, we'd be happy to follow. With respect to DME in general, like I said, Medicare has put our product in the DME category, and several payers have told us as we push for pharmacy benefit that CGM is a DME product regardless of how we wanna put it in pharmacy. It's been an uphill fight for us. If they get pharmacy coverage with payers, certainly we will take the opportunity to follow if that simplifies distribution and we can generate the type of gross profits that are acceptable to us. In the meantime, we can still sell DME.
While distribution channel does make it easier for people to get product, ultimately for people who have this condition, the most important thing is the product that they use and the features that it offers and the benefits it provides. We believe we win out that way.
Our next question comes from Mike Weinstein from JPMorgan. Please go ahead. Mike, your line is open.
Can you hear me? I apologize.
Yeah, we can hear you, Mike.
Sorry. I'm still at TCT and on my cell phone, so I apologize. Let me just circle back on the updated guidance for the year. This quarter, obviously all U.S. business had a great quarter. U.S. business grew 16%. Your guidance for the year seems to imply that you think the U.S. business grows at a similar rate in the fourth quarter. Am I reading that correctly? Basically, you think the U.S. business grows at about that 16% rate in fourth quarter?
Yeah, that's fair.
Okay. I want to make sure I understand, Kevin, your thoughts and plans for Verily. Well, let me step back. I want to understand your thoughts and plans for G6 and no calibration. It sounded like you were saying by the end of the year next year that you would need to get an initial approval for one calibration and then get a supplement on that for no calibration. A, did I understand that correctly? B, the timing of Verily Gen 1 is unclear at this point because it may be influenced by what happens with G6.
That piece is correct, Mike. The way we look at this and understand we just completed the largest CGM study that the FDA has ever seen. We have matched pairs, almost 30,000 matched pairs in this study to YSI. There's all sorts of data here. People have seen what our no calibration G6 data looks like at numerous seminars over the past several months. As we looked at the results of that trial and we looked at that data, we felt the product is accurate enough to go no calibration now. We've had open discussions with the FDA about how we would do that. Now the PMA is on file, and we've discussed three or four alternatives with the FDA with respect to how we do that.
One of them is the one you outlined to whereby we get the one calibration a day product approved and then file a supplement on top of that. We're discussing a couple of other alternatives with them as well, and I really don't wanna give the whole playbook here 'cause it's all very tentative. Our first priority is to get a product to our patients with no calibrations that serves the current patient base and can meet the cost profile that they're looking for. That's our G6 system as it is now with the reusable transmitter. Once we get through that filing, then the first Verily product becomes a priority. That product is a disposable transmitter and will be thrown away.
We have decisions to make, for example, about 14-day life versus 10 days and things of that nature that we'll make as we go through these processes. The second generation Verily product will come after that, and we're accelerating work on that product rapidly because that is our product with the most aggressive cost targets and really with the size and usability that we think our patients want ultimately. That is a very, you know, it's going very well. It is a very aggressive timeframe, and we need to work on that too. We've got several things lined up in the pipeline, but they're all dependent upon decisions we'll make over the next six months. I can tell you by the time we're out of the first quarter, we'll know exactly what's happening.
We wouldn't say we were comfortable with a no calibration G6 sensor if we weren't. We're very comfortable we have it.
Maybe just one more, I don't know if I could sneak it in. You didn't give a full update on reimbursement in Germany. Can you do that in terms of where you are, as well as any progress with other geographies? Thanks.
Yeah. We have reimbursement now, I think from 43% of the payers, have contract relationships with 43% of the payers now and are about to knock off another one of the big ones, which I think puts us up over.
Over 50.
Yeah, way up over 50. The other ones approve it on a one, you know, on a use by use basis. We're not having any trouble getting people to pay for product in Germany. It's going very well.
Yeah. It's actually covered lives.
Covered lives. Okay.
That's what we committed to by the end of the year, was to have north of 50% of covered lives under commercial contract.
Our next question comes from Jayson Bedford from Raymond James. Please go ahead.
Good afternoon. Thanks for taking the questions. Just to clarify, would you launch G6 with a one-cal system, or are you waiting for the no-cal?
That remains to be seen, Jason. We'll see what happens as we head down the path.
Okay.
Let me just add a little bit to that.
Sure.
We need a new product in the U.S. The G5 is wonderful with its connectivity. We've added Android, we've added things around it, but the fact is our guys need something new to sell. We're gonna launch something new next year, and if the fastest path to get something new is that, we'll pursue it. We would prefer to go to no calibrations, directly, but we will do, whatever's most efficacious and whatever we can work through with the FDA.
Okay. Thanks, Kevin. As my question, I guess, in terms of Medicare, seems like you're progressing well here. At what point do you get more aggressive with the advertising?
We've just started trickling it out a little bit. We've not gotten too aggressive yet, but we have started a little bit out there. It's a very good question. One of the nice things about Medicare is we don't have the seasonality of deductibles that we have in our other commercial business in the U.S. I think we'll start pushing harder in the fourth quarter and very much early on in the year next year.
Thank you.
The next question comes from Kyle Rose from Canaccord. Please go ahead.
Great. Thank you very much for taking the questions. Can you hear me all right?
Yep.
Great. I appreciate the additional color at the beginning of the call as far as the patient demographics. It sounded like two-thirds of the underlying patient base in the commercial sector are MDI. Just wondered if you could give us a little more color as far as how you think about the rest of the mix. Maybe break down as far as adults versus peds and then potentially what type of exposure you may have to Animas pumps in particular?
Yeah. I mean, we've never given a real breakdown on a quarterly basis of adults versus pediatric adds. What we've said in the past, and it holds true, is that, you know, peds have been trending nicely out of the gate. Peds were obviously a huge contributor when we got that approval a couple of years ago. I would tell you today, peds are roughly tracking. They typically track about, you know, the estimates of, you know, whatever we think the peds represent in the U.S. As far as Animas, though, peds is an important aspect of Animas, the Animas shutdown. You know, a couple things Kevin mentioned in his prepared remarks that new patient contribution from Animas has been basically zero for a pretty long period of time. This isn't gonna impact new patient additions.
From a shutdown perspective for existing Animas patients, Animas does do quite well. It's well known. Animas does well in the pediatric segment. To the extent, you know, Medtronic has access to those patients, they wouldn't have access, in theory, shouldn't have access to the pediatric patients because they're not labeled. The 670 is not labeled for pediatric use. I would also add on the Animas front, look, people chose an Animas pump for a reason. They chose an Animas pump with Dexcom connectivity because it's a superior sensor, right? I mean, to the extent Medtronic is able to fix their sensor manufacturing challenges and actually supply sensors at some point in the future, you know, patients have opted for a far superior sensor with the Dexcom technology.
When we say it's manageable, that's what we're thinking. I mean, you know, Insulet's running an aggressive program to target those patients. Tandem is running a program as well. You know, this isn't something that we're gonna lose a whole bunch of patients overnight. You know, to the extent we could have some at risk, but we think it's manageable.
Great. I really appreciate that additional color. Obviously, I think the approval with Libre and the label it got, you know, caught a lot of people by surprise. I just wanted to see if you could step back and give us a little color on how you think the FDA is evaluating the risk benefit of CGM in these Flash products, you know, overall from a high level. It sounds like you guys have moved around or at least evaluating the pipeline, but just high-level thoughts as far as how you guys think about the future real regulatory pathways for some of these products?
Well, I think the regulatory pathways, I can tell you we're gonna be more aggressive. If I could take one learning away from the whole experience in labeling there, I think we're gonna push ourselves to do better and to move faster. We need to. You know, we went through a year-and-a-half timeframe working on that non-adjunctive claim because it was the first they'd ever done and the first they had ever seen. It's great we got it, but it literally slowed us down for about a year and a half to work through all that data and all that processing and the panel meeting and all of that stuff. I think moving forward, we can go much more aggressively. I think the statement I made earlier in the call is very applicable.
After the shock and surprise, we sat back and said, "You know what? We really can replace finger sticks. Finger sticks can go away now. We can make devices that can replace them across the board." We'll work with the agency to make those devices. What we are focused on and what we'd encourage the community to focus on, we need to make sure these devices are good. We need to make sure these devices are safe and these devices meet patient needs. We can't have devices where you get into some of the fiascos we've gotten into with finger sticks, for example, where you have accuracy across the board products out there. We need to make sure that the devices do what they claim they're gonna do and provide the patients the benefit that they need.
I think it's a new day for us, and I think we'll make everybody happy with the pipeline we have coming.
Our next question comes from Doug Schenkel from Cowen and Co. Please go ahead.
Good afternoon. Two questions. First on CMS. You said you expect to clear the remainder of backlog by the end of the year. Could you give us some more details on how the billing process is working today? Are you ready to really open this up, or are you still working through just some of the ramp and inefficiencies there? The second question is on FDA. Based on everything we've talked about in terms of the evolving environment, what's the outlook for you removing the current requirement in the U.S. to sell a receiver to all new patients? Thank you.
With respect to the receiver requirement, that really is gonna require additional filing for us. The thing that we're concerned about or contemplating there as we do that, we don't want to mess up our Medicare label, which requires for a receiver to have DME coverage. We have to balance those two things, and we will do that. With respect to CMS and the Medicare patient backlog, we have made some progress. There are 20,000 patients we said in the pipeline. I also said we're hopeful we get through the whole backlog. Again, we need to meet the demands of our commercial patients in the pipeline in addition to servicing those, it's gonna be a balancing act, but we need to take care of these people. With respect to our billing experiences so far, we've been paid quite regularly on claims.
The reorder history for those actually eligible for reorders has been solid. It's been very good, but it is still very different than our regular patients. I mean, I had a five email exchange with a Medicare patient last year because the birth date that he gave his doctor is not the birth date in his Medicare record, and he can't believe that we were so stupid that we couldn't get that processed. Finally, we figured it out, and this was somebody that was acquainted with a dear friend of mine from the past. I got involved, and I had a look into the life of our inside salespeople, and I wanted to walk over there and thank them all and apologize for what they're going through.
This is what's happening and this is how it works, and we just need to learn what the rules are and play by 'em. We hope to get through that whole pipeline and get them shipped. As the guy said earlier, again, on a Medicare patient, that first billing is only $500 versus our commercial patients that are $1,500, you know, on average, with two to three boxes of sensors, two transmitters and a receiver. We don't get the same amount of revenue, but it is probably more paperwork. It's a balance. We need to take care of these patients and honor our commitments here, and we will do so as best we can. That's kinda how it plays out, and that's a big factor as we look at Q4 going forward.
Our next question comes from Danielle Antalffy from Leerink Partners. Please go ahead.
Hey, good afternoon, guys. Thanks so much for taking the questions. I was wondering if you could talk a little bit about what changes in the manufacturing process for a no calibration G6, and depending upon what that change is? Do you expect the same level of yield with a no calibration product as you're getting with the current products?
I'm gonna go into all those details right now. Our manufacturing processes are pretty solid as it is. This does not require a major change, or I wouldn't be telling you we'd pursue this as aggressively as we are. We're very comfortable with the procedures we have in place, that we can get there. More to come later.
Okay, that's fine. Just curious, when you look at Europe and where you're competing directly head to head with Libre in the European markets, where there is currently CGM coverage, what are you seeing from a competitive perspective? Is Libre really more of a market expander, or do you feel like you're competing really directly head to head with them? I guess I'm just trying to get a sense of what to expect here in the U.S. where CGM is well covered? You know, they don't have the benefit from a cash pay, a largely cash pay market that they've had in Europe. Because you look at their installed base, and they have hundreds of thousands of patients. Obviously, your installed base is much less than that. Maybe give us some color on why that's the case?
Well, in those markets where we go head to head, again, we're up over 80% year-over-year. I can go through a couple of the geographies. In Australia, for example, where there's government approved reimbursement, we have over 70% market share in CGM for what the government is paying for, and we're classified as CGM there, compete with them directly. In the U.K., Abbott announced the Libre improvement there, but we're reimbursed under a completely different system in the U.K. We're more than double in the U.K. what we were a year ago. Canada, in our business, we've gone direct in Canada. Our business, again, has more than doubled in Canada. I think it's more. It's almost to a different audience than what we've done. You know, the products are appealing to different people.
In the Nordics, where it's a tender process and everything is paid for, you know, kinda from the overall general budget, one of the things that's been very successful is our campaign to eliminate the receiver from the original purchase. By taking that large amount of money out upfront, patients could look at that and say, "Okay, I can get into the CGM technology easier than I could before." We're getting a lot of new patients in the Nordics who are former Libre users. That market, while it hasn't doubled like the others, 'cause it was our biggest market before, we're still experiencing accelerated growth there from where we were a year ago. Italy is the same thing. Our Italian distributor is doing very well.
Reimbursement for CGM that excludes flash glucose monitoring has come through in a couple geographies, and we've been very successful in those areas. It's been a real good year over in Europe, and I just wanna remind you all, two years ago, we had three employees there. This is a big move for us, and it's been very successful so far. Our team has worked really, really hard to get where we need to be. But we're appealing to a different group of people, I guess, what I would say. We're going about as fast as we can, to be honest with you.
Our next question comes from Margaret Kaczor from William Blair. Please go ahead.
Hey, good afternoon, guys.
First question for me is, given the success that you've seen out of Libre, given their simpler form factor, why wouldn't you launch a similar product on the market? Is it specific market indicators that you're looking for that would make you wanna launch that? If you were to do it, how long would it take?
You know what? We certainly could take our technology down a level if we wanted to. For now, we need to finish what we started. A no calibration G6 system, with the performance and accuracy that we have combined with the sharing and connectivity and the ability to get your data where you want to, we think is a product that best serves our current patient base and those that we call on now. As far as future product offerings, again, take a look at what we've talked about with our Verily systems. Low cost, disposable transmitters. They certainly will be very, very competitive. In fact, have features far beyond what Libre offers by a long ways. Those will be the products that we look to compete with against that versus our current system.
We think this ultimately bifurcates into two different paths, and we're very prepared and very ready to go down that path.
Okay. In terms of your hiring plans, now that you're up against the two big players in the marketplace, I know you've known that they're gonna come online for a while, but has this changed structurally what you think you need from a market presence perspective? Will this have any impact on your advertising budget as we look out over the next year or two? Thanks.
If anything, we're in the middle of a planning process right now, so I'm probably speaking a little out of turn. I think we'll stay very aggressive on the marketing and advertising campaign, particularly our digital efforts, will continue to be there. As far as field expansion, I think we'll give that some more thought. They're going through their field plan right now and developing all their models. We'll evaluate the payback from field presence versus marketing dollars. That's an exercise that, actually Quentin gets to lead us through 'cause he's been through this several times before, and it's really good to have a new set of eyes question the return we get on the different investments we make. We're evaluating that now. We'll give you more guidance after the first of the year.
Margaret, the one thing I would add to that is when you look at the cost structure here, there's plenty of opportunity for us to be more efficient and thoughtful with respect to how we deploy our capital, which means as we get more efficient in some of these areas, we redirect it into these things that really move the needle, and it doesn't become a net reduction to the overall investment or an increase in the investments that we have to make. They balance each other out, but much better directed or well directed.
Our next question comes from Matt O'Brien from Piper Jaffray. Please go ahead.
Hi, good afternoon. This is J.P. on for Matt. I wanted to ask a question about just kind of when you were going through the whole Medicare process and how important from that side of the field was it that you guys had these alerts and the alarms given the much higher incidence of hypo unawareness? Just trying to really gauge your thoughts on Libre's access there eventually.
Well, we certainly believe that hypo unawareness is one of the key factors in a Medicare patient choosing to use a continuous glucose monitor, and we provide actionable alerts and alarms. I might even add the G6 system has a predictive low glucose alert that will predict when you're going low in addition to the hard alert that has performed very well in our studies and been extremely accurate. We think patients will migrate to that and they will want it, but, you know, only time will tell. That'll certainly be what we push, and that'll certainly be our message.
Got it. Then, I'm not sure. What was the exact fact that pushed you to lowering the guidance? There was a handful of things, but was it more one thing or the other? Was it Medicare? Was it competitive noise?
Yeah. I mean, as we kinda mentioned in the prepared remarks, look, with the competitive noise out there, some uncertainty around a couple of our commercial integrated pump partners, combined with some of the, you know, the distraction and even frankly, the near term revenue contribution, the upfront revenue contribution from Medicare warrants some being conservative at this point.
Our next question comes from Raj Denhoy from Jefferies. Please go ahead.
Hi, good afternoon. Wonder if I could just maybe ask one question. You know, when you came into this year, you talked about adding, I think, 70,000 patients. Obviously, there's been a lot of changes, you know, with Medicare and the competitive landscape. You know, one, are you still comfortable with that level of new patient additions this year? Then when you think about 2018, you know, again, with all the puts and takes with competition mostly, how do you think about that patient number? Are you expecting, you know, a high rate of attrition in your customer base? Do you still expect to add a fair amount of patients that next year? Just any thoughts on that complexion would be really helpful, I think.
We're looking into the crystal ball as you speak, and I don't have all the answers. With respect to the 70,000 net new patient adds, certainly with the growth we've experienced in Europe and adding Medicare patients, we're comfortable that we're gonna add that many new patients. The flip side of that argument is, for example, the Medicare patients are all coming back-weighted in the fourth quarter, so they're not gonna contribute that much to the revenue. Hence, you have a new patient number that grows faster than our revenue numbers do in general.
The second thing to consider is even with all the new patient adds outside of Germany where reimbursement is very, very strong, and most of our European entities where we go through distributors and our pricing is a bit lower, so the revenue per patient from those new patient adds hasn't been as high, and that kinda reconciles the revenue number versus the new patient adds. We've done well on new patients this year with respect to attrition and retention. We'll give a little more color on that as we come out the first of the year with our remarks and guidance for next year.
The one thing I would tell you that we've learned as we've studied and looked at this, as we go deeper into these markets and we attract more patients, it's a little bit different than the old days when the people who bought our device were people who really depended on it for life. Now we get customers who call up and say, "Hey, I hear this thing talks to the phone. Sounds cool. Can I get one?" The thought of using that CGM all the time is a little bit different value proposition than what they're used to. What we're seeing with some of our new patients is a different utilization pattern. They might use it for two months and take a month off. We're seeing more variability, and we're learning to live with that.
We're great with that. We think it's fine. We want all those people, but we don't want, you know, we don't wanna overshoot. We'll give you more guidance on that at the end of the year.
No, that's helpful. Maybe just a sort of a follow-up, though. You know, I guess, you know, one of the concerns when, you know, the headlines when Libre hit and obviously the label that they received was that somehow it was going to pull away a lot of your patients, right? Certainly, we haven't seen that in Europe or other places. Do you expect that is going to happen? You know, when you look out into 2018, do you expect you're still gonna add a fair number of patients on a net basis next year?
Oh, we absolutely do expect we're gonna add a fair amount of net new patients next year. There's no question our market's still under-penetrated. We still have a lot of reimbursement, a lot of places to go internationally. Ongoing patients, we still have Medicare patients to add next year. That market has just begun. We absolutely think we'll add net new patients. We do not see our patients running away to go use the other product. If you recall last year on this earnings call, we were answering the same question. They were all gonna go away for 670G, and it doesn't appear that they have. We will stick to it, and we'll push our folks. We expect to continue to add new patients and grow the business. Remember, as I said on those remarks, more innovation next year than any year in our history.
We haven't had anything new to push in the United States for quite a while other than connectivity, but that applicator looks the same way it did in 2006. It works lovely, but it's kinda scary. If you read the blogs and the patients' comments, "Man, I got my new Dexcom, but I don't know if I wanna push that plunger." That problem's gone when we launch G6. It's pushing a button. The ease of use of this product and the lower profile, the consistency of the sensor, this is gonna give our guys a fabulous story to tell in the field, and they need one. We owe them one, and we're gonna give it to them.
Our next question comes from Joanne Wuensch from BMO Capital Markets. Please go ahead.
Good evening, and thank you for taking the question. I just wanna make sure I have my head around the timing of G6. You're talking about several different pathways, but then you're also talking about it being at the end of next year. Is there a pathway by which it might be earlier in the year?
Joanne, there's a bunch of pathways that we're looking at. As I said, we've been given clear direction and clear guidance in our meetings with the FDA that we think we can get G6 to no calibration that we would launch before the end of the year. Our launch decision on that product will be greatly dependent upon our further discussions with the agency. If it appears we have a path that we can get to sooner by going straight to no calibrations, and sooner, you know, pick a date before the first of September or something like that, we might go direct there. We also have the option, if we wanted to stick with the one calibration a day and go with that one, we can. We have a lot of balls up in the air with the agency on G6, and they're all good.
It's all good because of the reliability and accuracy and performance of that system. We just wanted to let everybody know that we will have a no calibration system out relatively soon, and it's what patients want. We will meet that need with real-time CGM.
I think that's incredibly clear right now, so thank you for that. Just as a follow-up or as my second question, I would anticipate that Libre is gonna undergo a fair amount of direct-to-consumer campaigning. Do you have a similar expectation? If so, how do you plan on countering it or not countering that type of approach? Thank you.
You know what? We don't have Abbott's dollars to spend on television ads, so we will look and see how that goes. Our commercial guys and our direct-to-consumer campaigns have been really good for the amount of money that we've spent. We'll put in place actions to counteract that. Trust me, if I gave the guys all the money they asked for, we can go head-to-head, but we have a balance sheet and a P&L to balance as well. Ultimately, if it creates more awareness for CGM and once people find out what they're not getting with Libre, it might be our best advertising campaign ever.
Joanne, I think Germany is a fantastic example of that, right? Where awareness has been created and ultimately patients find their way to the best technology in the marketplace. Germany has shown that time after time.
Our next question comes from Matt Taylor from Barclays. Please go ahead.
Hi. Thanks for taking the question. I guess I was hoping you could clarify two earlier points when you're talking about some of the dynamics outside the U.S. Firstly, could you help us put a finer point on the reimbursement differentials that you're seeing between you know, your technology, given the additional features and flash monitors? And then you referenced a couple times on calls that you're converting patients from Libre. Could you help quantify how many patients you're converting?
I really can't quantify that number. We don't have that sitting in a statistical bin somewhere. We certainly hear the stories as we go out in the field, in our foreign offices. We do know that it happens. I don't have that number handy. As far as reimbursement differences, that varies widely geography to geography. In some places, it's 25%-30%. In other places, it's significantly higher. It really depends upon the reimbursement agency that we're dealing with.
Okay. Then I just wanted to clarify something in the U.S. with your strategy. You know, this is the first quarter, I guess, that we haven't seen a large amount of growth in the Medicare pipeline. I'm assuming you're taking your foot off the gas a little bit there because, you know, it's just taking some time to get through the backlog. Is that right? You kind of step back on the gas next year once you've gotten through the people that are waiting.
Actually, we never put our foot on the gas. The pipeline that we created has come simply because of the approval and people looking at our webpage. We'll put our foot on the gas later this quarter and certainly early in 2018.
Our next question comes from Tyler Levy from Wedbush. Please go ahead.
Great. Thanks. Good afternoon. First, maybe, you know, since you didn't call it out, I assume it's probably not much of an impact, but, you know, anything related to the hurricanes and, you know, ability to get product to your customers?
Yeah, that's not something that, you know, I don't believe had a material impact on the quarter. Certainly, it had somewhat of an impact on the revenue number would have been higher, but it's hard to quantify exactly what that is. I will tell you, those are two regions in the U.S. that happen to be stronger regions for us, but the exact number we're not gonna put out there.
I would also add that our you know our field sales force and frankly even our third-party distributors our DME distributors really went above and beyond to help get patients product when they needed it. Kudos to them.
Okay. Just so I can understand, you know, the G6 products that might be coming out next year. I mean, is there a major difference between a no calibration and a one times a day calibration just from a product standpoint? I mean, can it just be a calibration optional? You know, the data that you had shown previously, wasn't that just all on the same system, whether you calibrate it once or no times?
No, Tyler, that's exactly right. It was the G6 sensor. It's the same configuration mechanically, and the membranes and stuff on the sensor are the same. What changes is the software. That's what we have to work through is how we configure that software for that product. Again, we have several options. We'll clarify that at year-end.
Our next question comes from Suraj Kalia from Northland Securities. Please go ahead.
Good afternoon, everyone. Thanks for taking my question. Kevin, all of us seem to be asking the same question in different ways, and let me try a different approach. It almost seems like cost versus accuracy is a new battlefront that's gonna open up. My first question is $10 per day, you know, a fixed threshold that, you know, you'll look at, you know, when developing new sensors? I guess where I'm trying to head at is, you know, for the newer products coming online, how much would you all be willing to sacrifice on the $10 per day bogey without sacrificing accuracy? The subpart of my question is, you know, I appreciate the commentary, you know, you all made versus Libre. Let's say Suraj comes in, XYZ comes in, and they both need sensors.
When you all go head to head with Libre, how do those statistics stand up in some of these countries? I understand Germany and others, the reimbursement has propped up things recently, and I can appreciate that. But I'm just trying to understand in Europe, when you all go head to head for the, you know, for the same patients coming in, what is your success rate? Thank you for taking my question.
I'll take the first one. As I mentioned in an answer response to a prior question, we're not getting close to $10 a day today for our sensors. Trying to compare a $10-a-day sensor to a $5-a-day Libre, which is pretty typical in Europe, isn't a fair comparison when you consider that patients are wearing our sensors off-label and wearing them for an extended period of time. In terms of going head-to-head with Libre, as we mentioned, you know, anecdotally, we're seeing patients who, when we get reimbursement, who have access to our technology, we are seeing them switch.
We don't have great data on, you know, how many of them, but a full-featured CGM, when patients have access to it, is definitely a preference, particularly for an intensively managed, you know, Type 1 or intensively managed Type 2 patient. You know, we compete quite favorably. We'll continue to push the message of our performance, accuracy, connectivity, and really try to maintain a premium price point. Trying to evaluate it at a $10 a day or $10 of revenue per day per patient isn't the real world today. I wouldn't try to do that going forward.
You know, I just add on to Steve's comments. Again, a lot of times it's what a patient is looking for, and it depends on the geography. If a patient is looking to avoid low hypoglycemia at night, there's only one product they're gonna pick. If you're looking to manage a child whereby you can see the child's information from afar, there's really only one product that you can pick. Our feature set is much more robust. It's not just a cost versus accuracy. It's a cost versus features and what a patient wants, and what are the needs of that patient. As far as the future, please understand, again, and I need to emphasize this, we haven't been just sitting here thinking we're not gonna take cost out of the system. We're gonna.
We will be competitive on the full-cost front regardless of where it heads. For us, the most important thing in considering pricing is what does that do to access? Because having a race to the bottom really doesn't do much for us at all, to the extent that we can really expand access and get more people access to the system. We've always been open for different pricing structures with payers and with people that we talk to. It's just that that's kinda how the business works. We're prepared for wherever the market goes.
Our next question comes from Chris Cooley from Stephens. Please go ahead. Your line is open.
Thank you. Can you hear me now? Sorry about that.
It's okay, Chris.
Here at TCG, had it on mute. Just two quick ones from me at this point. I just wanted to clarify. In prior discussions, you had explored the realm of possibility of maybe having a fixed shutoff, and I fully appreciate what Steve conveyed now twice in terms of your real cost per use per day really tracking closer to about that $6 level, which is an attractive premium, you know, or I should say, an attractive price point for all the added benefit and features that you get. Is that off the table at this point? Or just how do we think about maybe a fixed end of use on the sensor?
Secondly, just my last follow-up, and you may have mentioned this in the prepared remarks, but did you give us an update on smart pen development with CGM, with two-thirds of your new patient starts now coming from that MDI population? We think that would be even more attractive on a go-forward basis. Thanks so much.
Good questions, Chris. With respect to the sensor shutoff situation, we're evaluating that as we speak and, you know, as we talk on the kind of new product pipeline. Certainly, our Verily products are designed to last 14 days, and electronics isn't gonna work anymore after that. The battery will be dead. We have to look at our other product platforms and make the right decisions. At some point in time, we know the accuracy of those systems isn't good anymore, and it's actually in the patient's best interest for them to be done. We'll look at that and consult with the FDA as we look at our future generation products. We're open to both alternatives, and we haven't made any final decisions.
With respect to, you know, smart pen development/integration, we've got a number of irons in the fire. Not really in a position to give a date on this call, but, you know, hope to be able to provide some additional color before the end of this year or early part of next year.
Thanks. Appreciate you taking the questions.
The next question comes from Steven Lichtman from Oppenheimer. Please go ahead.
Thank you. Hi, guys. I was wondering if you guys have an early read on adoption among Type 2 patients among the Medicare population since the beginning of the rollout. Can you update us on how you see the potential for expansion into the intensive insulin Type 2 patient population commercially as well?
Go ahead, Steve.
Yeah, I was gonna say, now I anticipated this question and checked with our commercial team, and quite frankly, we've not done a great job with the initial bolus of patients at capturing Type 1 versus Type 2, but our guess is that the vast majority at this point are Type 1.
Yeah. We haven't pushed that yet. I think word of mouth and getting the product out there is gonna be key to reaching those patients over time. We certainly have clinical data with our DIAMOND study that shows with intensive insulin using Type 2 patients, the CGM definitely provides a benefit. We just need to get our pipeline serviced, and then we'll turn on the faucet and go after those guys.
Got it. Kevin, you mentioned during Q&A, I think, like, you guys have some electronic enhancements on the horizon that can significantly reduce cost. It sounded like that was outside of the Verily product pathway. Is that right? Can you flesh out that opportunity a little bit more?
It is actually stuff that has been designed by our people in-house. We did launch a new receiver this quarter, and while the actual cost profile on it to build it isn't any higher, we believe the warranty return rates on it will be much less significant, and that will ultimately save us costs. We have a new transmitter coming in the G6 configuration, not with what we filed, but coming out soon after, not far after we launch. Those electronics have been designed with us and one of our partners. It costs, again, a lot less to manufacture and much more efficient automated manufacturing processes that we can push into that product as well. Literally everything we do, we have three pillars, every product that we make.
We have to continue to have performance. You've gotta take out costs, and you've gotta increase patient convenience and compliance. Anything we start has to answer those three questions or we shut it down. Everything we're looking at answers all three of those.
This concludes our question-and-answer session. I'll now turn the call back over to Kevin Sayer for final remarks.
Well, I just wanna make sure it's not lost on everybody. We had an amazing quarter. The biggest quarter in Dexcom's history. You look at the cash we generated from operations, look at the management of our expenses, look at the gross profit line, and gross margin lines hitting the targets that we've established. The company had a wonderful quarter, and everybody here should be congratulated. There really has never been a better time to be in our industry than we are now, and our confidence in our new pipeline to deliver the systems we know patients want has never been higher. We'll continue to innovate. We'll continue to drive our business. We'll continue to grow. We'll continue to take new approaches to attack this wonderful opportunity to serve patients who really need this technology across the board. Thanks, and have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.