Welcome to the Dexcom third quarter 2016 earnings release conference call. My name is Adrian, 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 now turn the call over to Kevin Sayer, President and CEO. Kevin Sayer, you may begin.
Thank you very much, and thanks, everyone, for listening to our third quarter conference call today. We'll start off by turning the line over to Steve Pacelli for our traditional safe harbor statement.
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. 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 any 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 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. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release, which is available on our website. Kevin?
Thank you, Steve. Joining me today are Jess Roper, our Chief Financial Officer, and Steve Pacelli, our Executive Vice President of Strategy and Corporate Development. Sticking with our usual format, Steve will review our third quarter financial results, and I will follow with our customary operations update and offer some concluding thoughts before opening the line for questions. Before I turn the call over to Steve, I wanna take a few minutes to discuss recent developments in the U.S. competitive landscape. Approximately a month ago, Medtronic announced it had received FDA approval of the 670G Hybrid Closed Loop System. Since that time, there has been significant press surrounding this product, which has created considerable confusion in the marketplace.
For example, we recently attended a diabetes charity event where it was declared from the podium that type 1 diabetes is now being cured because of the FDA-approved artificial pancreas. Clearly, this is not the case. Patients and caregivers are showing signs of skepticism and frustration due to the overhype of the promise of this technology. Our review of the currently available data suggests that although this product may be an incremental step in automated insulin delivery, it appears to be an extremely complex system, and its real-world performance remains to be seen. Earlier that same day, Abbott announced FDA approval of the FreeStyle Libre Pro. This system is not a direct competitor to our core commercial product portfolio in the U.S., as the data generated by this sensor is blinded to the patient and only made available to the clinician retrospectively.
Additionally, the first independent studies regarding Libre's performance as a consumer device are beginning to be published. One compared Libre to Dexcom G5, where Dexcom CGM outperformed on nearly every metric, including improved time in range and reduced time in hypoglycemia. Just last week, at the ISPAD meeting in Spain, a pediatric study was published showing that Libre accuracy is inconsistent and not reflective of previously published data. Put simply, this form of technology does not achieve the same results in diabetes management as CGM, and alerts and alarms and real-time communication are very critical in generating real clinical outcomes. While we are always vigilant of these well-resourced competitors, and we expect the noise surrounding these offerings to only increase, we will continue to focus on the things that we do well.
The superior performance and feature set of our current and future products, including industry-standard accuracy, reliable real-time alerts and alarms, and connectivity across multiple platforms leave us well positioned to remain the leader in CGM. I will now turn the call over to Steve.
Thanks, Kevin. Dexcom reported revenue of $149 million for the third quarter of 2016, compared to $105 million for the same quarter in 2015, a $43 million or 41% increase. Sequentially, revenue for Q3 was up approximately 8% from the prior quarter. Our third quarter gross profit was $101 million, generating a gross margin of 68%, compared to a gross profit of $75 million and a gross margin of 71% for the same quarter in the prior year. As we mentioned during our Q2 earnings call, our warranty costs remain higher than historical levels due primarily to the receiver recall. This has impacted gross margin by 1-2 points during Q3.
However, as expected, warranty costs as a percentage of sales began to decline in Q3 and should normalize before the end of the year. Some final thoughts on our revenues and our gross profits. Our mix between durable and consumable products was within our normal historical range in Q3 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 $18 million in revenue during the quarter, up 29% from last year. Although international sales were relatively flat sequentially, OUS revenues are up over 40% year-to-date.
Research and development expense totaled $44 million for Q3 of 2016, compared to $65 million in Q3 of 2015, with the decrease due primarily to the $36.5 million non-cash milestone payment to Verily in connection with our collaboration, offset by increases consistent with those we have discussed throughout the year. Specific to our near-term pipeline during the quarter, we incurred significant expense associated with our G6 pivotal study, our continued efforts with the FDA to obtain a non-adjunctive claim for our system, and several other recent FDA submissions. We also incurred significant expense related to our advanced product pipeline, particularly expenses associated with our Verily partnership, future generation sensor technologies, and the building out of our data platforms.
Selling general and administrative expense totaled $76 million in Q3 of 2016, compared to $52 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 investments in our OUS expansion efforts. Our net loss for the third quarter of 2016 totaled $19 million, which included $34 million in non-cash expenses, centered primarily in non-cash share-based compensation expense across all functional areas of our business. Our net loss was wider than street estimates and even our own internal expectations due to a number of factors, including one, building out our customer ops and tech support infrastructure to address the customer service issues we experienced during the first part of the year.
We believe that these groups are now staffed appropriately to support our anticipated growth and new product launches through 2017. Two, increased direct-to-consumer marketing in Q3, which we expect to further increase in Q4 as our metrics suggest strong conversion rates with our early programs. Finally, we added new senior talent during the first part of the year, which led to incremental compensation expense and some severance expense during the quarter. We also remind investors that our operating expenses this quarter included increased spend on the four strategic investments that we outlined at the beginning of the year, namely our Verily relationship, building out our data analytics capabilities, international expansion, and finally, our new manufacturing facility in Arizona. We're now trending to the $40 million of incremental expense we outlined earlier this year. Absent non-cash charges, non-GAAP cash-based net income was $15 million for Q3.
Our GAAP loss per share for the quarter was $0.22. We ended the third quarter with $127 million in cash and marketable securities. With respect to 2016 revenue guidance, we currently believe that we will fall within the mid to upper end of our range of $550 million-$575 million in revenue for the year. However, we do not expect to exceed the top end at this time. With that, I'll turn the call back to Kevin for a business update.
Thank you, Steve. As many of you know, during the past few years, we have consistently increased our annual revenue guidance on the third quarter call. We're obviously pleased with our continued growth during Q3 and adoption of Dexcom CGM remains very robust. More importantly, the majority of our new patient additions are now MDI patients, a long-stated goal of our company. There are some variables we are currently experiencing that we haven't seen in prior years. First, our hardware sales model has been significantly affected by the issues we've encountered with our receiver and the related product recall. Numerous patients have returned their receivers for new ones free of charge. Historically, these would have been revenue-generating replacement receivers, particularly in the fourth quarter, as our patients' out-of-pocket expenses are much lower than any other time of the year.
I would like to note, however, that we have completed all of the compliance procedures related to this recall and have filed the appropriate documentation with the FDA to close out this action. Next, our international business grew 29% in Q3, a bit slower than the past several quarters, and our sequential increase from Q2 was relatively flat. In countries where CGM is not reimbursed, FreeStyle Libre has gained traction with its low-cost approach. As we've consulted with healthcare providers and patients in these markets, we found that these are cost-based decisions, not performance-based decisions, and virtually anyone we speak to would agree that our system offers so much more. This is exemplified by the recent reimbursement decision in Germany to not cover products like FreeStyle Libre.
We remain optimistic about our long-term international growth outlook, particularly in the EU, where we have made early progress on the reimbursement front in other geographies in addition to Germany. Our biggest growth opportunity internationally remains reimbursement for CGM. We knew that going into 2016, and that's why we made the decision to establish our international headquarters and to begin to ramp up our internal sales and support staff. Germany represents a prime example of this strategy. We evaluated the opportunity and determined the best way to attack it was to bring our distributor team into Dexcom. We expect to make additional international investment to obtain reimbursement and accelerate growth in reimbursed markets in future years. Finally, as I mentioned in my opening remarks, there's a lot of confusion in the US marketplace today.
The media blitz surrounding what is being called the new artificial pancreas has been deafening. Based on what they've been told, many patients currently perceive that they will no longer need to manage their diabetes if they purchase this product. Therefore, many patients are willing to delay purchase decision until the system becomes commercially available. They're being directed to purchase the current Medtronic offering with the promise of being first in line for the 670G. In the short term, we intend to focus on the following. Continue to reinforce our CGM first message. Emphasize data from multiple recent clinical studies demonstrating outstanding real-world outcomes with standalone CGM, and focus on the connectivity and ease of use of our current and future systems.
Over the long term, we are developing CGM systems which are much more accurate and reliable than today's products and greatly reduce the daily burden of diabetes management. These systems will be cost-effective solutions for the management of type 1 and intensively treated type 2 patients globally. Our insulin delivery partners will have access to this exquisite technology, and we believe we will have very competitive product offerings in automated delivery market in the not-too-distant future. Now I'll move on to a pipeline update. You know, we never believed we would be alone in this marketplace. Accordingly, we have strategically positioned our product pipeline to maintain our technological leadership position in CGM. Specifically, we continue to work with the FDA to finalize the parameters of a non-adjunctive claim for our G5 Mobile system.
For example, we are working through the additional training and education that will be required for a non-adjunctive sensor system. We continue to work through the final size and scope of a post-market study. Finally, as we have stated previously, the FDA is working to establish standards for a non-adjunctive CGM. Not just sensor accuracy standards, but manufacturing and performance standards as well. We have submitted and will continue to submit data to support such standards, but nothing has been finalized at this point. As a result, timing of this approval is more likely an early 2017 event. Importantly, at this time, we do not anticipate that these ongoing deliberations will impact our goal of obtaining Medicare coverage in 2018. We are actively engaged in discussions with both FDA and CMS regarding the non-adjunctive system. Let me emphasize this.
This is a really big deal. When we go out into the field, Medicare coverage is the most common topic and the most urgent need presented by the caregivers we visit. Turning to other product pipeline developments, we continue to make progress on several enhancements to our G5 Mobile platform. We recently received FDA approval for a new version of the iOS G5 Mobile app and a new transmitter firmware configuration which provides us with key features like mute override, improved Bluetooth connectivity, and several other features to enhance the patient experience. We're pleased to report that we have filed a PMA supplement seeking approval of our new insertion system and smaller transmitter. We've also filed a PMA supplement seeking approval of a next-generation receiver, which incorporates a color touchscreen display. Finally, we have filed a PMA supplement for our G5 Mobile app for Android.
Depending on the timing of FDA review, we expect the U.S. launch of our Android platform to occur in late 2016 or early 2017. We already launched Android in several key markets internationally earlier this quarter. We continue to work on several other enhanced versions of our G5 Mobile app to provide additional features and functionality, including the incorporation of insulin data. Turning to future sensor technology, G6 is as important an advance in our technology as was the shift from Seven Plus to G4 Platinum in 2012. G6 is a complete change in our sensor platform, new algorithm, new sensor, many new features.
Initially, it will provide the basis for reducing calibrations, and we believe it will be the foundation of our no-calibration technology, both with our first Verily products and with our G7 system. I'm pleased to report that we have commenced our pivotal trial, and to date, 40%-50% of patients have completed the study. The G6 pivotal is the largest pivotal study that we have ever executed, with pediatric and adult patients included in one combined study of approximately 300 subjects. We could not be more excited about the prospects for G6, in large part due to extremely promising data sets captured during a number of pre-pivotal studies. Early G6 data will be presented next week at the Diabetes Technology Meeting in Bethesda.
All we can tell you now is we are not going backwards with respect to accuracy and reduction in and/or elimination of calibrations. We are working with several of our automated insulin delivery partners to incorporate G6 into their research and clinical studies to gather more valuable data on these systems. Gen 6 will more than likely be a 2018 launch, and we'll provide more color as we get further into the study and the filing. Turning to our partnership with Verily, our collaboration to develop simple, low-cost disposable sensor systems is one of the most aggressive, innovative development opportunities we've ever engaged in. Our initial joint product offering with Verily will be a no-calibration CGM platform based on the Gen 6 technology.
We believe the products we develop in our Verily partnership will not only expand CGM use in type 1, but will drive entry into the non-insulin using type 2 market. As we continue to do research into this type 2 market, it has become more and more evident that the approach to the treatment of type 2 diabetes has been historically very hit or miss. For example, roughly 40%-50% of patients remain poorly controlled despite a proliferation of new drug classes over recent years. We believe the information our system provides to a type 2 patient exceeds anything they can learn from the tools that they use today.
CGM paired with knowledge-based decision support delivers healthcare providers a window into glucose variability and enables patients to visually connect the cause and effect that diet, physical activity, and medication choices have on glucose, therefore, driving sustainable behavioral changes. Put simply, CGM data advances the potential for treatment optimization and ultimately better clinical outcomes and lower long-term costs. We believe the first product developed in collaboration with Verily should be commercialized in the second half of 2018, and we expect that the smaller bandage-like sensor could be available as early as 2020. The first feasibility study of the bandage-like sensor is taking place this quarter.
With respect to our insulin delivery partners, our G4-integrated pump offerings remain popular among patients, and all of our partners are making progress on integrating more advanced insulin delivery systems that leverage our G5 and G6 technologies with pumps, smart pens, and other connected diabetes management platforms. Early studies on several of these platforms look promising, and we anxiously await the outcomes. In conclusion, we have long held that the largest market opportunity in insulin-using patients for our product is in the MDI segment, representing more than 70% of patients in the U.S. and more than 90% outside the U.S. With all the noise in the current marketplace, it appears people have lost sight of how compelling the data from our DIaMonD study actually is. In patients using CGM, we saw a full 1% reduction in A1C, which is unheard of in almost any other diabetes study.
Patients on Dexcom also experienced decreased time in hypoglycemia and improved time in range. All of these outcomes achieved with a minimal amount of training and without a complicated and expensive insulin delivery system. The CGM first message will continue to resonate. We also remain extremely bullish on our future market opportunity to change the management of type 2 diabetes with our CGM platforms. The information we are gathering from patients is fascinating and confirms what we have long believed. To quote a type 2 patient who's also the father of one of our scientists, who has type 2 diabetes and has been using our product, "Diabetes has been a series of losing battles for 20 years. CGM has given me my first win." I'd now like to open up the call for Q&A.
Thank you. We'll now begin the question-and-answer session. If you have a question, please press star then one on your touchtone 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 touchtone phone. Our first question comes from Mike Weinstein from JP Morgan. Please go ahead.
Thank you, and good afternoon, guys. Kevin, the first question is, it sounds like the approval of 670G and all the discussion around it has basically taken up all the noise in the room and made things a little bit more difficult for the rest of the diabetes players. I don't know if you saw, but Tandem reported relatively soft results tonight and guided down for the year. It sounds like that's kind of occupying all the discussion right now in the space. Two questions. One, can you maybe just characterize kind of the tone of business kind of pre and post that? Obviously, it's reflected in your guidance commentary for the fourth quarter, but any other color there would be great.
Two, how do you change that dynamic? How do you make it so that you're not spending the next six months, you know, trying to get people's attention when Medtronic seems to have dominated the discussion over the last month? Thanks.
Well, Mike, not only getting their attention, but talking about a product that's not commercially available yet, that patients can't see, and the perception being created that it truly is an artificial pancreas. Where we're taking this, the discussion, Mike, is back to the fact that CGM is the most important tool in intensively managing diabetes. The outcomes we've achieved in the DIaMonD study, there are several other studies coming out in the not too distant future that are similar to that, real-world studies, are great outcomes. You know, our problem, the doctors have been very supportive. They're very much taking a wait-and-see attitude. We've done very well with clinics in getting our message across to them. Again, it's just this, you know, confusion or cloud that's hanging above us all.
We'll focus on CGM first, quite honestly, in the fourth quarter in particular, the investment in CGM, if somebody's met their deductible, is not tremendously large. We will offer programs to encourage new patients to sign up. You'll see those come out over the internet over the next couple of weeks to see if we can get, you know, certainly get more patients on. I would tell you from a color perspective, our reorder patterns still remain very strong. We're not seeing reorders fall out of the queue. We're not seeing new patients we get signed up fall out of the queue saying, "I wanna go over the other way." It's just combating the overall noise. We went through not as much noise with 530G, but we did go through noise with 530G as well.
The difference being that product's been out in Europe, and we knew exactly what we were going after. There have been studies comparing our sensor to theirs and other things, so we could adopt a technical and a tactical approach. This time, there isn't one because, again, the product's not out. We'll just continue to plug. We'll continue to offer promotions. Our DTC campaign has been very effective as far as generating new leads. It's, you know, that's just where we are today.
Our next question comes from Ben Andrew from William Blair. Please go ahead.
Good afternoon. Thanks for taking the questions. You know, Kevin, talk a little bit about international being flat sequentially. Can you kind of attribute some of that, or what amount, to the move to direct operations separate of maybe an impact from Libre? Second, how should we think about the impact of you guys going direct and getting reimbursement and when that will begin to impact revenues, at least in Germany?
There was no impact in Q3 with respect to reimbursement in Germany. If anything, what we did is we significantly increased our operating expenses by adding the operating expenses of our distributor to our own expense line. We are seeing now as reimbursement is starting to sporadically come in for some of the payers in Germany, that our opportunities of new patients have gone up quite significantly. I think there will be a bit of a bump in Q4 for 2016 for Germany. It really is more of a 2017 event than it is late 2016, probably more Q2 and beyond, again, as we have to get reimbursement and insurance contracts ironed out.
You know, we have the staff to go do that, and we're calling on the people we need to meet with and talk to now. Our direct opportunity in the U.K., as we said earlier, we've gone direct in the U.K. U.K. was very small for us. It's still not very big, but the fact is our business has gone up at a nice rate since we hired a great team over there. Again, we've hired people who can go drive reimbursement, and there is a percentage of our patients who are getting covered in local geographies there. I think, you know, German reimbursement is gonna help significantly. U.K. growing reimbursement might help a tad bit, but it's not gonna be a huge driving factor.
As we look at other countries, we certainly have had meetings and discussions in France. We see reimbursement continuing to be talked about in Italy. Australia is now looking at reimbursement for CGM as well. We've got programs going on in Canada also. There's a lot of opportunities, and once we get reimbursement, we think we can grow nicely in those markets. With respect to cash payers, I'll get back to what I said earlier. Our product isn't expensive. It is very expensive, and there's a reason it is. It's really good. It provides a lot, and it is a large cash commitment for somebody. When offered a much lower cash price up front, folks have elected to try that.
I think over time, when we get reimbursement, we can certainly work through that because of the features that our product set offers.
As we think about kind of the transition here while we wait for the other products to show up in the market, if they actually, obviously do with most likely 670G and then whatever label that Libre consumer might get next year, do we think about kind of different growth rates before and after that happens? Is there this transition where people are holding back a bit and we, you know, I've come through with kind of maybe subpar revenue growth, but after that gets out there and you can message, you got the G5X that you would expect to see patient adds accelerate perhaps in the second half of 2017. Is that a fair way to think of it?
I'll let Steve start. I mean, I'm gonna look at Steve and let him start, and then I'll add my two cents.
Yeah. I mean, obviously, Ben, we'll give formal guidance for next year in January. It's something we're still evaluating. You know, I would tell you know, we're starting to see new patient adds tick up again. I think it's too early to tell. I wouldn't even wanna speculate on Abbott. The challenge we have with Medtronic, as Kevin mentioned, we went through this exact same thing with 530G. It was supposed to put us out of business. We had the benefit of having an actual product, and independent investigators had the benefit of having an actual product to test it. I mean, you know, we've scoured their safety statement. It appears that patients are being recommended to take at least four finger sticks a day to keep the thing running.
They also have to take finger sticks every time it drops out of automatic mode to keep it in the automatic mode. You know, the alert, the false alert rates seem pretty high, in fact, potentially even worse than the 530G. As we know in the 530G context, that's the one thing that patients complain about most in the field, is that the false alarms that they receive from that system. Look, we're fighting a ghost for the next six to nine months, and we won't really know what we're up against until we actually have physical product to go test.
Yeah.
I'm not sure how to speculate on the impact.
I think we need to see what the fourth quarter brings, and we need to see what our you know, we also have a non-adjunctive claim on the horizon, and I believe that could be a very big deal for marketing and positioning Dexcom against these other products before they're even out there. Because when there is a sensor that is labeled, you can dose insulin off of this thing, I think that'll be very compelling for physicians, caregivers, and patients and present a very good story for us. As you've mentioned G5X, so we have G5X coming, which is the smaller transmitter and much easier insertion system, much more practical and easier experience for our patients. We have a number of positives that we're not quite sure of the timing on that go into this entire discussion as well.
We'll be a little more concrete in January.
Last question for me. Is it then fair to assume hardware as a percent of revs drops below 30%, both because of the warranty stuff you mentioned, and then perhaps the patient starts and replacement hardware for maybe the next 1-3 quarters? Thanks.
You know, Ben, what we said when we started the G5 transmitters is it was two for one. We expected our gross transmitter hardware dollars to go up and our gross margin percentage go down because we were supplying two transmitters for the price of one, and that has happened. What has affected us again is the lack of receiver revenues, but there has been an increase in transmitter revenues. We think ultimately the percentage will go down, and we'll be more sensor-driven than transmitters.
We sell a lot of transmitters.
Yeah, we sell a lot of transmitters. I don't have percentages to give you to where that goes yet. We'll provide more color in January.
Thank you.
Our next question comes from Jayson Bedford from Raymond James. Please go ahead.
Good afternoon. Can you hear me okay?
Yep.
Okay. You kind of alluded to it, but have you seen any change in the attrition rate with the launch of G5?
No.
No.
No, we have not. We think our patient retention metrics are still very good. I would tell you the thing that may have changed, and we're studying this a little bit, and I can't give you complete color because we study retention all the time. As we enter a broader market of patients, you know, our early adopters were pretty intense on CGM. I need CGM or I'm gonna die, basically, was often the statement that we'd hear from patients. As we're entering a group of patients who will say, "Okay, I'll give this a try," we see their use patterns may be different than our long-time users, every day, all the time patients. We also see that just given the reimbursement world, the continued use of our sensor for more than seven days remains prolific.
that you know is something we factor into our revenue models and revenue analyses as well. I don't see a huge increase. We don't see a huge decrease. We think it's remain relatively consistent.
Okay. You mentioned some of the marketing initiatives that you have. Just given some of the stiffer headwinds, any thoughts on adding to your sales team going forward?
We are going through our 2016 planning efforts right now. More than likely, we will expand the team. We'll announce how much and to what extent in early 2016.
Okay.
2017.
Okay.
I'm sorry, early 2017. Thank you, Steve.
Just, I guess lastly from me. On Germany, can you just give us any clarity on the level of reimbursement or how ultimately price will shake out? Are the economics comparable to the U.S. for Dexcom?
Yeah. Actually, without giving you specifics, the preliminary numbers that I've seen look quite favorable, even with respect to or in comparison to what we see here in the U.S. I would tell you, I spoke to John Lister, who heads up our European operation yesterday, and he informed me that we're currently in discussions with approximately 40% of the covered lives, if you wanna look at it that way in Germany, and the pricing looks quite favorable.
Okay, thanks. I'll let someone else jump in.
Your next question comes from Kyle Rose from Canaccord. Please go ahead.
Great. Thank you very much. Can you hear me all right?
We can.
Great. I just wanted to touch on, you know, the G5 and, you know, the potential dosing claim. Is any color or can you add to the conversation with the FDA as far as, you know, potential, you know, changes from a product perspective that they may be looking for, whether it be a required number of calibrations a day or, you know, sensor shut off or something along those lines?
Yeah, no, nothing in particular. I think what the FDA is really focused on right now is, you know, what sort of standards do they want to set? What bar is gonna be the bar for a dosing type sensor, right? Meaning not just MARD, but you know, we focused in on 20%/20% and outliers and things like that. The FDA is focused, we mentioned in the prepared remarks, the FDA is focused on, you know, manufacturing standards, manufacturing variability, things like that. So there's a whole bunch going into this and very thoughtful, frankly, on the part of the FDA. And it's just taking a little bit longer is all. I don't expect they come back and ask us to modify the product in any way.
I just add, that's one of the reasons for the post-market study. After the post-market study, if we see anything, then we would go back and discuss it with them. For today, there's nothing significant.
Okay, appreciate the color there. Then just lastly, you know, on the quarter, you know, any comments directionally on, you know, new patient additions and what the type of mix was there? I believe last quarter you talked about, you know, 60% of patients coming from MDI. Just any sort of color you can give us on this quarter.
Once again, more of our patient adds came from MDI than they did from the pump world. We continue to make inroads there. With respect to numbers, just to get to $149 million in revenues we reported, the new patient number had to be significant. It certainly was within our target. Quite candidly, as year to date, based on our internal targets, we are spot on at the end of Q3. New patient growth remains very robust for us.
Great. Thank you very much for taking the questions.
The next question comes from Doug Schenkel from Cowen and Company. Please go ahead.
Hi, this is Ryan Blicker for Doug. Thanks for taking my questions. Maybe just starting with sensor utilization. You mentioned that reorder rates haven't changed, but then you also noted that the use patterns of the product may have changed given the broader patient base you now have. Can you clarify these comments? Is average sensor utilization in Q3 and through the first nine months of the year, maybe closer to the lower end of your historical range?
I think sensor usage for the first nine months of the year is really consistent with what we've had before. What I was trying to do in making my comments was indicate that again, patients continue to use them a lot, particularly those where reimbursement is tough for them and they're not covered as well as others and again, some of the new patients. I don't think there's really been a significant change in sensor utilization. As the whole population gets bigger, the portion or, you know, just the raw numbers of people who use their sensors longer is gonna go up. It becomes more visible to us as we look at it, same with the use patterns. You know, we go through exercises.
I'll get into a lot of detail, but we go through exercises where we pick samples of the new patients in the patient base and try and follow them all the way through and look at their purchasing patterns, look at their use histories and everything. Every time we do it, we learn something different and something new. Those were really the two things that were pointed out from the last group and the last population that we studied that we still see increased sensor use and maybe the use patterns for some of these patients are not what they were before. That's okay, they're still patients, and they still derive great benefit from it.
Okay. Thank you. That's helpful. You talked about the impact Libre had internationally. Can you talk more about the features of your first generation Verily product, and how it stacks up versus Libre for type 2 patients or maybe type 1 patients in the near term who might desire a less comprehensive solution? Thank you.
I mean, certainly the first product. Well, let me couch this first by saying we don't believe the first product that we launch in partnership with Verily is kind of the end all product, and we've said that on multiple occasions. It will be-
It's a learning experience for us, yeah.
It will definitely be a smaller form factor than the Libre platform. In many ways, similar attributes, you know, no calibration, up to 14 days. I think the performance characteristics, and you guys will be pleased when you see the data at DTM next week. It incorporates the core Gen 6 sensor technology. You'll see some preliminary data on that next week, and you'll understand the levels of performance that we'll be able to achieve with that product. I think that'll be a real positive for us. You know, in many respects, it's a smaller, better performing version of the Libre.
You know, I would add one of the things that will dictate the software around that product and the feature set is gonna be our non-adjunctive label. Because as we head into particularly intensive insulin-managed markets, we're not gonna give up our non-adjunctive label for anything. Once we get it, we're gonna stay there. We believe our technology is more than robust enough, again, as Steve said, as you'll see next week, to maintain that label with reduced and no calibrations over time.
I should add too, key differentiating factors, of course, that it does have Bluetooth technology and does have real-time alerts and alarms as part of the system.
Yeah.
That, that's an important point not to overlook.
Our next question comes from David Lewis from Morgan Stanley. Please go ahead.
Hello, this is actually Jon Demchick in for David. Thanks for taking the questions. I wanted to go back to the top line and guidance. You mentioned the number of times that you see, you know, the sustainable growth rate of this business like 35%-40%, I think, is what you've said historically. The guidance range as we look into the fourth quarter, I guess, implies just shy of that even at the top end. Should we think of the fourth quarter more as, you know, fully baked in for these competitive pressures and that, you know, from that base, we can start to recover back to more of a normalized rate? Do you think there, it could potentially get, you know, larger impacts sequentially for a couple of quarters as, you know, the launches continue competitively?
The first part of the question, you know, we don't have a crystal ball to tell you know, this confusion. You know, there was initially substantial confusion in the marketplace. We've now started to see some press to the contrary, where they're trying to clear up the mistaken notion that this is actually an artificial pancreas coming. But, you know, we don't have a perfect crystal ball to tell you what this is gonna look like going forward. We're being conservative, obviously, in our guidance. I wanna though take a step back because we stated 35%-40% sustainable growth something like four or five years ago. As I look four or five years out, you know, four or five years ago, looking forward, we've successfully sustained and exceeded that level of growth.
At some point, we've said even on recent calls that the law of large numbers is such that on a percentage basis, growth is not gonna continue to exceed, you know, 40%, 50% like it has in the past.
Yeah.
You know, you guys are trying to read a whole lot more into this, I think, than there is.
We need some time. The flip side of that, and I'll cover a little more in my close, penetration in the type 1 market for CGM is still not above 20%. There's plenty of runway there. We're not penetrated in type 2s at all. Well, reimbursement will come there. I think it'll be a combination of when we can get our new technologies and products out and feature sets that can expand to broader populations, you know, combined with just market penetration in the current markets where we sit. We'll just see over time.
Understood. Very helpful. Just a follow-up on gross margins. I mean, you mentioned last quarter they would jump back up to the upper 60s%. They certainly did. Sounds like there's still, you know, elevated levels of warranty expense. You know, normalized for that, is it fair to say that we get back in towards the 70% levels?
I think that's fair. You know, our warranty expense was about 3.5% of revenue versus our historical averages of about 2%. We have some opportunity there. The margins came up this quarter kind of in combination of lower warranty costs as a percent of revenues. We also had better yields, particularly on our G5 mobile transmitter. Of course, we had higher sales volume.
Understood. Thank you.
The next question comes in Joanne Wuensch from BMO Capital Markets. Please go ahead.
Good afternoon, and thank you so much for taking my questions. I really have two. We've focused mostly on German reimbursement. Can you give me a timeline of when we might get additional reimbursement? My second question has to do with the non-adjunctive claim. Is there anything qualitatively that you can provide regarding the conversation that you're having with the FDA?
On the non-adjunctive claim, we're really not gonna provide any more details than we have. We need to work through the requirements and standards and really have a clear position before we explain everything to everybody. Again, I'll re-echo Steve's comments. The discussions have been very good and very focused and very regular. They've been paying significant attention to the process, and we hope to get through it soon. With respect to the other geographies, we really don't have timelines. One of the things we're learning as we go to other geographies, a lot of these places aren't national decisions. They're very local, and it's state by state or region by region. You know, we certainly have very good reimbursement in Sweden right now through the tender process. We have the German reimbursement decision that just came.
There's reimbursement in Switzerland, Austria, and there are some other regions, like I said, in the U.K., where we're getting a little bit of reimbursement and a little bit is beginning to come forth in Italy, but there's not been any national decisions, and we'll just continue to work on region by region, and we'll give you more color as time goes on.
Okay, thank you very much.
Our next question comes from Tao Levy from Wedbush. Please go ahead.
Yeah. Hi, can you hear me?
Sure.
Just a couple quick questions. Am I right in sort of estimating that there was maybe about a $3 million impact from receivers on the revenue line in the quarter? Is that kind of ballpark?
We're not gonna quantify it.
Okay. Then, in terms of, you know, CMS, it doesn't sound like, you know, these are sort of linear discussions where you're waiting for, FDA approval of the non-adjunctive, and then you'll go to, CMS. You know, it sounds like there's positive dialogue going on, you know, around, you know, ahead of that. Is that fair?
Yeah, that's a fair statement. In fact, it's, you know, communications together, CMS and FDA and our, you know, our regulatory folks. Yeah, there are certainly discussions ongoing. Obviously, we will still need the non-adjunctive labeling before, you know, before we can really become active with CMS. But I would say this is a. I mean, it's highly visible, not just at FDA, but within CMS as well. I do think our belief is that CMS is going to ask us to go directly for a national coverage decision as opposed to trying to go regionally, like we had discussed previously.
Still, from what we're hearing from our consultants and from our internal folks that they don't think even if the non-adjunctive claim pushes into the early part of 2017, that that'll impact our path to Medicare by sometime in 2018.
Okay, thank you. Then just lastly, in terms of data that's gonna come out next week, what specifically, you know, is it? Are these patients from the pivotal trial, or is this another study that you have going on with?
With all of our sensors, we run several pre-pivotal studies. The data that'll be presented next week is from a relatively large pre-pivotal study using our Gen 6 platform.
Okay.
That'll be what's presented. It's not the pivotal data.
Thank you.
'Cause we wouldn't open that up till.
Till it's done. Yeah.
Till it's done, till we submit it.
Yeah, that's what I figured. I just wasn't sure. Thank you.
Our next question comes from Anthony Petrone from Jefferies & Company. Please go ahead.
Thanks and good afternoon. Maybe just a little bit on CGM pricing broadly. You know, you have 670G out there and then Libre, and I think there's the potential for some other CGM clearances in 2017, if I'm not mistaken. I mean, how do you see pricing kind of shaking out with, you know, all the increased technologies on the marketplace at this point? Then I have just one follow-up.
You know, we've remained relatively consistent on the price front for quite some time. I think future prices will be determined by the outcomes one can generate with the technologies. Another big factor on pricing is gonna be the length of wear of the sensors. As we've talked about our Gen 6 sensor is a 10-day product versus a seven-day product, which gives us an opportunity to either increase price or increase value to the patient and payer, and we'll probably end up with a combination of both with the Gen 6 sensor. We prepare internally scenarios for every alternative. We prepare for higher prices. We prepare for lower prices. We prepare for everything you can imagine. We've modeled several scenarios.
We'll adapt to where the market takes us, and being the leader, we wanna take the market, obviously, to the right place. These technologies have to be affordable for patients, and they have to provide outcomes that are worth more than the cost of the CGM system. That's how we look at pricing in the future.
That's helpful. Maybe just a follow-up on 670G and when you look at the dynamics between pumpers and MDI, it seems to me that the initial low-hanging fruit would be pumpers. I mean, how much of a broad push are you expecting from 670G? Do you think it's sort of gonna be broad-based in those two categories and therefore, you know, potentially more competition in the MDI segment of the marketplace? Thanks.
You know, I think that's the big question, right? When Terry and Kevin, I'm speaking for Kevin who's sitting here, but when Terry and Kevin sold MiniMed 15 years ago, pump penetration was at about 20% in the U.S. Today, it's at about 30%. Fifteen years later, four commercial pump companies have been able to drive, you know, an additional 15 points of penetration. I mean, I personally don't believe that six seventy is gonna move the needle from 30% penetration to 40% or 50% penetration in any meaningful period of time. I think particularly outside the U.S., MDI is going to remain the vast majority of patients' method for insulin delivery.
I think even in the U.S., I think patients are, you know, as we continue to improve our technology, improve the form factor and, you know, shrink the form factor on the technology, add patients with additional tools, additional decision support tools with respect to their insulin on board, et cetera. I think that the product offering and then from a pricing perspective, the product offering of CGM and an intelligent insulin pen, for example, will be a very compelling both from an outcomes perspective and from a cost perspective.
That's helpful. Thank you.
Well said.
The next question comes from Rebecca Wang from Leerink Partners. Please go ahead.
Hi. Can you hear me okay?
We can.
Hi, this is Rebecca on behalf of Danielle. Have you seen any impact on new patients adds from the DIaMonD data that was released at the ADA this year?
You know, the DIaMonD study has not been officially published in a journal yet, so we remain relatively low-key about that data at this point in time. We know it is under review right now. We are gonna be a little more aggressive with marketing because we think it's getting closer to publication. We will really unleash a DIaMonD blitz over the month of November here. Hopefully that will add, you know, help increase patient adds. Not a lot so far because we really haven't pushed it.
Can you provide like, more color on the timing of the rest of the DIaMonD data to be released this year, or?
You know, there's a couple of other study arms. There's a type 2 patient study arm. There's also an arm of the study where they some of the patients continue to use CGM for a longer period of time, another group of patients continue to use CGM, but go to an insulin pump in addition to CGM. I know the studies are all winding down. I don't have timelines for you, and they'll be greatly affected by publication timelines as well. But the study is pretty much you know it'll be wrapped up. The actual patients in and out will be wrapped up by the end of the year. The data will come after that.
Thank you.
Our next question comes from Jeff Johnson from Robert W. Baird. Please go ahead.
Thank you. Good afternoon, guys. Two quick questions here. One, just on G6, it seems like the pivotal is moving very quickly there, and FDA has also seemed to be moving fairly quickly in some of their approvals recently. Just wondering how solid you feel on that, you know, 2018 commercial launch time. What are the options to maybe pull that forward or see that move up a little bit from a potential launch standing?
You know, we have a sequence of launches next year, particularly with the new applicator and transmitter with the G5 system, that we need to get those manufacturing processes up and mature really quickly. That's really important to us. That is a bigger endeavor than anything we've undertaken for a long time. It's probably better timed that G6 come out a bit after that because we fully intend to use the new transmitter and new applicator configuration, and we'd be much happier if we didn't have to start from scratch. If we could pull it in, that would be wonderful and we'd work to pull it in. There's a lot of boxes to check.
With respect to FDA timing and speeding things up, while I would agree they appear amenable to that, we have been discussing non-adjunctive claim for a very long time, and it's not through. When you get into complex issues, it can become real tough. I think they'll be very cooperative with Gen 6, and I think we can push it through quickly provided the data set is reflective of what you guys will see next week. I think it's a tremendous advance in sensor technology that we can get through. We've got to remain diligent and keep going, but there's a lot to get ready before it comes.
Yeah. Understood. That's helpful. Steve, just wanna go back and clarify something you said on Germany. It sounds like the reimbursement rates are coming in, you said, you know, pretty solid, especially even relative to U.S. rates. Just wondering, that's the kind of the sell-in price or the price you're gonna recognize for sensors and transmitters and receivers and things like that is on par. I don't wanna put words in your mouth, but relatively good relative to U.S.
You can put words in my mouth. That's exactly right. Yeah, I mean, none of this is finalized, right? We still don't expect to see an impact until, really until, you know, next year. But I would tell you so far so good.
Do you have any idea the co-pay patients are gonna have on that system in Germany, how that maybe stacks up relative to self-pay for a Libre or something like that?
I don't, but you know, we can certainly maybe for the next call we'll have a little more detail.
Well, we'll know more, yeah.
We'll have some contracts signed by that point.
Yeah, understood. Thanks, guys.
Thanks, Jeff.
Our next question comes from Mike Weinstein from JP Morgan. Please go ahead.
Thanks. I think she probably put me back in from earlier. You know, just let me just ask you, just relative to Europe since Germany was just discussed, do you have any greater visibility on the other countries coming through? You know, I'll just share, you know, as you're aware, our checks on Germany have been pretty positive, you know, over the last several weeks, just in terms of not only how reimbursement is shaping up, but potential demand. Do you think that Germany could be bigger in 2017 than maybe you're assuming or the Street's assuming?
Yeah, it certainly could be, particularly as I mentioned, you know, we're in discussions. I'd characterize discussions with about 40% of the covered lives. So as we continue to accelerate that, if we can, you know, truly contract with, I think there's something like, you know, 15-ish kind of critical payers to get the vast majority of covered lives. Germany could be a much bigger contributor next year. You know, just give you an example, in the U.K., we're actually seeing reimbursement. Most of our patients are actually seeing reimbursement these days, but it's a one-off basis, and they're having to apply individually, so it's not something that's scalable. So we really do need to reengage with NICE and push that issue and really try to make it more formalized. France, the same thing.
You know, we're in discussions. There's not been any formal action taken in France. The signs are looking positive, so that could be a contributor potentially as early as next year as well. Yeah, I think you're thinking about it right, Mike, that Europe as a collective, if we knock off a couple more of these big countries, it could be a big, you know, a big push for us next year.
You know, there is obviously there's something to learn here from what's going on with Libre, right? I mean, Libre has taken off in Europe. There's, you know, this demand for, you know, diabetes technology in Europe that hasn't been satisfied. So when you think about the fact that there's been now, you know, all, you know, a couple 100,000 patients that potentially are on Libre or have tried Libre, better put, at this point, how do you tap into that once you get reimbursement in a country like Germany? What's the, you know, launch strategy look like?
'Cause I have to think that with the Libre experience, and the enthusiasm that product has seen, that how you think about going to market has to be different than maybe you were thinking a year or two ago.
I think, Mike, we are very much evaluating product configurations. I'll give you one example. We have CE Mark for the system without use of the receiver in Europe now. If a patient wants to use the system, unlike in the U.S. where we get a new patient, we are required to sell them a receiver. We don't have to do that anymore. We've put ourselves in a position where we can somewhat reduce the upfront cost for patients to get them to start. As far as enthusiasm, we are enthusiastic. In fact, our German team is going through budget processes, and their request for sales heads is remarkable. They obviously are very optimistic about their ability to go sell.
Poor Jess has to be the bad guy down at the end of the table. We're gonna add significant feet on the street in Germany to go after that. I think one of the other lessons learned is people do want information. If their copay and out-of-pocket and their reimbursement covers this, you know, by offering connectivity and the things that we offer from a feature set versus this product, we think are gonna really lead to fast growth. We will configure future products as we look at it. You know, we're gonna offer a no-calibration sensor over time. We're just gonna offer one that's gonna be accurate enough to meet our standards and to meet the non-adjunctive claim standards that we believe will be set up by the FDA as well.
You know, there is a lot to learn here, and we'll aggressively go after it.
Understood. Thank you, guys.
As a reminder, if you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. Standing by for further questions. We have no further questions at this time.
Okay. I'll just close with a couple concluding remarks here. You know, we wanna thank everybody for being on our call today and everybody for their questions. They're very insightful. We continue to address what we believe is one of the most meaningful opportunities in all of healthcare. The treatment of diabetes, type 1 and type 2, is one of the leading cost drivers in healthcare all over the world. We're gonna continue to focus on what we do best, developing, manufacturing, distributing the world's leading CGM technology. Our future platforms, sensor platforms, our new algorithms, Verily's technology, advanced data analytics, we're gonna be able to change the conversation in diabetes management over the next several years. Our growth opportunity, even in times like we've described today, is still huge. The type 1 market is very under-penetrated.
There's a completely unpenetrated type 2 intensively managed insulin market. The global opportunities we've discussed with Germany, the U.K., the other places we're seeing, reimbursement come up are huge, even in light of the increased competition that's coming. It's a great time to be here at Dexcom. We'll continue to deliver great products and great performance for our investors. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.