Welcome to the Dexcom third quarter 2015 earnings release conference call. My name is Anna, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Kevin Sayer. Kevin, you may begin.
Thank you very much, and welcome everybody to the third quarter 2015 Dexcom earnings call. We'll start off by turning the time over to Steve Pacelli with our 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 expectations about future events, operating plans, and performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under Risk Factors and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Additionally, we will discuss certain financial information that has not been prepared in accordance with GAAP with respect to our cash-based operating results.
This non-GAAP information is provided to enhance your overall understanding of our current financial performance. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Kevin?
Thank you, Steve. Joining me today are Jess Roper, our Chief Financial Officer, and Steve Pacelli, our Executive Vice President of Strategy and Corporate Development. Before I turn the call over to Steve to review our financial results, I would like to provide you with some additional color regarding our pre-release a few weeks ago, as I'm confident that many of you were taken a bit by surprise when we announced our Q3 sales numbers and provided some commentary on our payer relationships. On the morning of October fourteenth, a report was issued indicating that we were having trouble processing UnitedHealthcare and Anthem patients under the provisions of our new pharmacy contracts. The investment community reacted to this immediately, and we were flooded with calls. As we have said on numerous occasions, payer relationships are challenging.
Our efforts to streamline payer operations are never-ending, and we remain fully committed to moving our business primarily to the pharmacy channel over the next few years to increase access to CGM and develop more scalable business processes for the long term. In this instance, because of the confusion created by this report, we felt it was appropriate to alleviate market concerns, pre-release of our Q3 revenues, and provide some additional color regarding our payer relationships. Rest assured, we will not make this a regular policy. More from me later. I'll turn the call back over to Steve.
Thanks, Kevin. Dexcom reported revenue of $105 million for the third quarter of 2015, compared to $69 million for the same quarter in 2014, a $36 million or 52% increase. Sequentially, revenue for Q3 of 2015 increased $12 million, up 13% from the prior quarter. Our gross profit totaled $75 million, generating a gross margin of 71% for the third quarter of 2015, compared to a gross profit of $47 million and a gross margin of 68% for the same quarter in the prior year. I'd like to take this opportunity to give clarity on the Q3 financial impact of our sooner-than-expected FDA approval of G5 Mobile.
Under the terms of the upgrade program we previously announced, all U.S. patients who purchased a G4 PLATINUM with Share system in the 30 days prior to our public announcement of the approval of G5 Mobile until our commercial launch have the right to receive a free upgrade to the G5 Mobile. This upgrade program required us to defer $800,000 of revenue in Q3 related primarily to upgrade transmitters which were not shipped prior to quarter's end. However, we expect to recognize this revenue in Q4 as we ship the balance of G5 Mobile upgrades.
We are now at the upper end of our gross margin targets on our sensor disposables and on our hardware, but we remind investors that our gross margin on hardware should be slightly lower for a period of time due to the introduction of the G5 Mobile transmitter, which has a shorter useful life and a lower ASP. Some final thoughts on our revenues and our gross profits. Our mix between durable and consumable products remains steady at approximately 30% durable and 70% consumable. ASP for sensors fell within a range of $70-$75 per sensor, and the ASP for our hardware was approximately $800-$850 per starter kit. We do note that quarter-to-quarter variability within these ASP ranges stems from our ever-changing payer mix, including direct DME contracts, third-party DME contracts, and pharmacy contracts.
Finally, our international business continued to perform, representing $14 million or 13% of our revenues in the quarter. We also note that our split between hardware and sensors OUS is similar to our split in the US. Research and development expense totaled $65 million for Q3 of 2015, which included a non-cash charge of $36.5 million related to our license of certain technology from Google Life Sciences, pursuant to which we issued 404,591 shares of common stock. Excluding this one-time upfront payment to Google, R&D expense totaled $28 million for Q3 compared to approximately $19 million in Q3 of 2014, with the increase due primarily to additional payroll-related costs and expenses related to work on our near-term product pipeline and work on our advanced product pipeline.
Selling, general, and administrative expense totaled $52 million in Q3 of 2015 compared to $34 million during the same quarter in 2014. With the increase due primarily to year-over-year increases in headcount in our sales organization, including both field sales and internal sales support staff, as well as additional marketing expenses in connection with our awareness campaigns and some investment in our IT infrastructure. Our net loss for the third quarter of 2015 totaled $42.5 million, which included $62 million in non-cash expenses, centered primarily again in one-time $36.5 million-dollar charge related to the Google transaction, as well as $22.6 million in non-cash share-based compensation expense across all functional areas of our business. Absent these non-cash charges, cash-based net income was $20 million for Q3, representing 19% of revenue.
Put another way, 100% increase over cash-based net income in Q3 2014 of $10 million. Our loss per share for the quarter was $0.53. Again, absent the non-cash charge related to our Google transaction, our loss per share for the quarter was $0.07. With respect to our balance sheet, we ended the third quarter with $113 million in cash and marketable securities, an increase of $16 million from Q2 of this year. Consistent with past practices, we take this opportunity to update our full-year revenue guidance. We are now comfortable that our revenue for the full year will exceed the top end of our range of $375 million.
Before I turn the call over to Kevin, I would like to add some additional color around our OpEx spend for the balance of this year and into 2016. Yes, we are continuing to make a significant investment in our future. We have seen exceptional growth since the launch of G4 PLATINUM in 2012, and we have clearly demonstrated that technology innovation is key to driving this growth. We will continue to take advantage of near-term opportunities to invest in our core business through system performance improvements such as improved accuracy, extended duration, and reduced calibration, work on our advanced integrated insulin delivery systems, and simplification of our sensor deployment through a new applicator. We are engaged in numerous clinical trials necessary to demonstrate improved outcomes and lower costs to drive favorable payer policies.
Beyond our core business, we have several key initiatives that will require additional investment through the balance of this year and into next. We will look to expand our manufacturing capacity and continue to automate our manufacturing operations to meet ever-increasing demand. We need to invest in our advanced technology development efforts with Google. We anticipate growing our foreign operations, particularly as we see reimbursement evolving outside the U.S. We need to invest in our data and analytics platforms as we see this as a key differentiator for Dexcom going forward. Of course, we can never forget that our obligations to patients come first, and we will make sure that we invest in resources to bring our technology to as many new patients as possible and serve our existing patients appropriately. With that, I'll turn the call back to Kevin for a business update. Kevin?
Thank you, Steve. We've had a very exciting first three quarters of 2015. Since January, we've introduced the G4 PLATINUM with Share apps to enable CGM display on the Apple Watch. We entered into an extremely exciting collaboration with the life sciences team at Google, and we launched our G5 Mobile CGM System, both in U.S. and in Europe. On top of all that, we've had a $96 million increase or 55% increase year-to-date in sales and a $27 million or 155% year-to-date increase in cash-based net income. Not a bad nine months. Our G5 Mobile system is the first and only CGM system approved by the FDA for both adults and children as young as 2 years of age that sends glucose data directly to a smartphone, freeing users from the need to carry a separate receiver.
Response in the diabetes community for mobile connectivity has been exceptional, and demand from new patients is at an all-time high. We have received numerous letters, emails, and messages of gratitude for this latest technology advance. We also now receive much more advice from our patients on how to make the experience on the phone better, much of which we will consider in the future. As you know, we received approval for this product in late August, and while our initial production plans were targeting a Q4 2015 launch, we made the decision not to delay and began shipping in September. We also initiated an upgrade program whereby all users of a G4 PLATINUM system with Share from August 1, 2015 until we commence shipping the G5 Mobile system are eligible to receive a no-cost upgrade to G5.
We are also offering a low-cost cash upgrade to the G5 Mobile system for those patients who are still under warranty with their existing systems. I would add that this upgrade program has had a much greater response than previous programs of this nature. The combination of an earlier than expected launch, exceptional demand, and a well-received upgrade program have put a lot of pressure on our manufacturing operations. As a result, we've experienced some transmitter inventory challenges over the past several weeks, which have resulted in some shipping delays to new patients and has limited our ability to quickly fill upgrades to existing patients. We are confident that our transmitter inventory challenges will be resolved in the coming weeks and that they should not have any impact on our fourth quarter performance. A few additional points of interest on G5 Mobile.
Like its predecessor, the G4 PLATINUM with Share, users can also select up to five designated recipients or followers who can remotely monitor a patient's glucose information and receive alert notifications from almost anywhere. We plan to launch the Android version of G5 Mobile next year. Note that the Android Follow application is already available. Our G5 Mobile launch in Europe not only introduced connectivity to this market, but the CE Mark G5 Mobile is the first-ever continuous glucose monitor that does not require confirmatory finger sticks when making treatment decisions. Although a minimum of two finger sticks a day remain necessary for calibration.
We have always said that CGM will ultimately be the standard of care in diabetes management, and we see a clear path to the day when the only reason to take a finger stick will be to calibrate your sensor for a safety check to ensure proper sensor performance. With G5 Mobile, we are now receiving millions of real-time data points each day, and we're expanding our data analytics team to develop platforms that will make CGM even more valuable to patients, healthcare providers, and payers. Finally, with G5 Mobile, we also launched the first phase of our Clarity cloud-based data platform, which was developed by our Portland-based software development team.
Patients can now get an intuitive retrospective view of their CGM data right on their phone without the need to plug a receiver into a computer or visit their physician for a data download. The first version of Clarity is geared primarily for patients. Future feature sets will be added to provide healthcare professionals with more advanced tools, and we will ultimately have a Clarity payer platform as well. Obviously, with ever-increasing demand comes ever-increasing revenue aspirations for the balance of this year and especially in 2016. We continue to invest in the commercial side of our business. Our number one priority is to increase awareness. Our initial DTC campaigns for G5 Mobile are beginning to roll out this month, and while early feedback is encouraging, it is much too early to report anything more than that.
Future DTC investments will be evaluated based on the results of our initial campaigns, which extend through the first half of next year. We need to continue to drive awareness in the healthcare community as well. In connection with the launch of G5 Mobile, I've spent several days in the field over the past few months, and I believe we are in a much stronger position with healthcare professionals than we have ever been. There's still a lot of work to do. CGM first rings true for many, but not enough. We want to further simplify and expand access for our patients. Pharmacy benefit is the future for us.
While we have more than achieved our internal 2015 goal related to the number of covered lives under pharmacy benefit, we have also learned that entering into a pharmacy contract is just the beginning and not without administrative pitfalls. A couple of examples include inconsistent application of prior authorization policies and failure of individual plans to actually move reimbursement from DME to pharmacy in spite of the contract. Also, there's a common misperception in the investment community that our move to the pharmacy will disrupt our pricing models. This has simply not been the case. We note that in many instances, we see increased pricing with the direct pharmacy contract for pharmacy benefit versus pricing with the payer with a third-party DME distributor.
Above all, in my travels, it becomes abundantly clear that we need Medicare approval for adults and Medicaid approval, especially for children. For Medicare, we continue to work on all fronts, administrative, legislative, and judicial, and we work state by state with Medicaid plans and continue to see advancement, but we need to do more. Turning to the Google relationship we entered into this quarter, our objectives for this development are far-reaching. We intend to work together to develop simple, low-cost sensor systems integrated into advanced data analytics platforms to improve diabetes care from prediabetes all the way through intensive insulin therapy. We expect these advances will make diabetes management much more convenient and flexible than ever before, and we are excited for the promise this technology holds for patients and caregivers.
Turning to our core internal product pipeline, we continue to make progress on our advanced sensor technologies, including G6 and beyond. Activities related to an FDA-approved insulin dosing claim continue to evolve, and we continue to have discussions with the FDA regarding the data that will be required both pre- and post-market to support such a claim. We need to finalize the requirements before offering more specific guidance regarding the timing of both the dosing claim and G6, as we have no intention of ever moving backwards from a non-adjunctive claim once we establish it. We continue to make good progress on the next insertion system, a new lower-cost, high-quality receiver, and several generations of transmitters, all designed to be more convenient for our patients and to reduce costs for Dexcom. The new insertion system will be used initially with the G5 sensor and algorithm.
From an operations perspective, the new insertion system is one of the most complicated tasks we have ever taken on, but we are confident that it will be a great experience for our patients. We plan to launch both the new receiver and the new insertion system in the U.S. in the second half of next year. We continue to study sensors with no calibration requirements. Based upon the performance we have seen with our advanced sensor technologies and the capabilities of our next-generation algorithm platform, we continue to believe that calibrations can be completely eliminated in the future. We are also making significant investments in next-generation apps with additional features and functionality for our patients. With respect to our pump partners, J&J and Tandem have reported their results and appear to be pleased with their G4 PLATINUM-enabled product launches.
Continued development by the existing commercial pump companies and by several early-stage companies is promising, but have not been major drivers of our revenues here to date. One final note. As we look towards the second half of next year, it appears that we will have early data from our DIaMonD study and European studies to demonstrate the therapeutic and cost benefit of full-time CGM use, regardless of the method of insulin delivery. Stay tuned. I would now like to open up the call for questions.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are 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. We have a question from Ben Andrew from William Blair. Please go ahead.
Hi. Good afternoon, guys. Thank you for taking the questions.
You bet.
First off, talk a little bit more, Steve, about the operating expense trajectory, maybe Jess. You've been kind of growing $10-$11 million sequentially each quarter this year. Does that pace look about right for several quarters, or should things taper as you've had the buildouts? Because there's a whole bunch of moving pieces, obviously, on the development and the DTC side in the next several.
You know, Ben, this is Kevin. I'll grab that one real quick. One of the big growth factors obviously has been our non-cash expenses, particularly the stock compensation because the stock has performed so well. Those numbers were much bigger than we'd anticipated and certainly much bigger than we'd had a year ago. As far as the increases in our quarter-to-quarter spending, again, there are moving pieces, and we continue to make investments. A perfect example is the investments we made in the DTC campaign this quarter, where we spent in excess of $2 million just getting geared up for the start. There are other things that we've spent on the R&D side, the data opportunity and things like that.
I would tell you, as you look forward next year, the best answer I can give you is we're gonna be a little more transparent on expenses and a little more firm as we give our guidance at the start of the year. We aren't gonna quit investing. As I said in my remarks earlier, we've certainly increased our cash base net income at a more rapid rate than we've grown, but we've also turned around and spent what we can to position us for future periods, and that's kind of where we sit today.
Okay. On the G5 launch, you've shipped a few units in September and obviously more since. What has been the early user experience with the device? I know Bluetooth can be a little trippy, but that combined with some early feedback, what are you hearing from customers, and what are you seeing in terms of pipeline and demand as the launch is progressing?
Well, pipeline and demand has been exceptional. Our opportunities coming into our system every day are much higher than we've ever experienced before. Demand has been great. The patient experience, and you're right, Ben, Bluetooth can be a little bit tricky. That's one of the things that, you know, that we've learned here. As we've gone through and analyzed the data, you know, the best part of this is we get all the data points every day. As we've gone through and looked at the data, other than when it appears to us in data analytics that people have walked away from their phones, our data capture rate is pretty much equivalent to what we had with the old receiver. We've learned a few other things that have gone on.
For example, that 30-foot range that we experienced with the G4 receiver, a lot of the patients don't experience that with Bluetooth and with the phone. Remember, that phone has radios that's geared to do a number of tasks. You got Wi-Fi, regular Bluetooth LE, and a number of things. Depending upon how certain individuals use their phone, there can be things that behave a little bit differently. We've had to really gear up our tech services people for calls that are different than what they've had to deal with before. It's been good. We've learned a lot. You can't learn these things until you get out there, so we're really glad that we launched it. We have software, upgrades coming in the future that we think can address any concerns we have.
The experience with the patients as far as just looking at the phone and the interaction has been fabulous. I mean, this is the first-ever Class 3 medical device without a printed user guide. The user guide's on the phone. If somebody has a question, they can touch the screen. They can get the user guide. They can watch videos on their phone as to how to insert the product and how to deal with it. It has been a great experience from an actual interface perspective and very well accepted, particularly by our young patients. We've had parents call us up who'd bought G4 for their kids before, and their kids wouldn't wear it because they wouldn't carry the receiver, who will now take this and look at it on the phone all the time.
The experience has been by and large good. We have learned a lot, and it really starts us with a whole new future.
Our next question is from Mike Weinstein from JPMorgan. Please go ahead.
Hi, this is Robbie Marcus in for Mike. Congrats on the great quarter, guys.
Thank you, Robbie.
Thanks, Robbie.
I was wondering, can you give us more color into third quarter trends? I mean, it came in well above where the street was thinking. You know, this was almost entirely without the G5 impact. So can you give us you know, a little more insight into what drove those trends. Then, you know, just transitioning into the G5 launch, you know, this is the first time that pediatrics will have access to the AP algorithm. You know, what are you seeing there so far in the early launch, and how do you expect that to play out over the coming time frames? Thanks.
Yeah. Robbie, on the first part, I mean, what we've really seen, frankly, since the pediatric launch of G4 PLATINUM, and then particularly this year with G4 PLATINUM with Share, when we launched the mobile Share platform with G4, what we really saw was a shift from a push from the endocrinologist down to the patient till we really started to see this thing go, what I would characterize as more viral, where patients, parents of patients, friends of patients have become by far our biggest advocates. I would tell you in the quarter, that's probably the impact there was probably our biggest driver because as you mentioned, we know we really barely started shipping G5 in the quarter.
I think the Nick Jonas campaign, it's hard to measure, but I think that had some impact as well. I guess, you know, the product's performing and I think what we're seeing is just CGM is becoming much more rapidly more the standard of care. I hate to call it the standard of care yet, but we're not quite that penetrated into type ones yet, but it's quickly becoming the standard of care. I think, you know, when we look at getting big as quickly as we can, we talked about some of the spend we're gonna do, and Kevin mentioned some of the spend in Q3, which is literally spend just gearing up for, you know, the more aggressive DTC campaigns that we're anticipating here in Q4.
As for, you know, pediatric utilization of the new algorithm with Gen 5, I'm not sure we've seen any impact there.
We do know that the physicians are happy that it's available.
Yeah. The other, you know, I don't think, you know, it hasn't been a material impact yet, but we did as of the beginning of the quarter start shipping, you know, much more of our business through the pharmacy channel with, you know, with United and Anthem going live at the beginning of Q3. That's starting to have an impact as well.
All right. It's been several months since the Google partnership was signed. Have you guys come up with how much incremental R&D spend we might see per quarter going forward from it? Thanks a lot.
You know what, Robbie? This is Kevin. We don't really have an incremental number to give you for Q4. We will give you very firm guidance on that the first of the year. We're just getting to know everybody, to be honest with you. So while our projects are taking place and our project teams are getting together, there's still a lot. We did sign this in the third quarter that we just reported on. It hasn't been that many months. We're really starting to get going now.
Our next question is from Bill Plovanic from Canaccord. Please go ahead.
Great. This is Kyle on for Bill. Congrats on a great quarter. Just wondered if we could start off on the PBM side. You know, third quarter is the first quarter with moving with Anthem and UNH. I guess could you just talk to us about, you know, where are you in that transition over? I mean, how many or what's the percentage of patients now that are currently through that channel? You know, where do you see that going in the near term, next 12-18 months?
You know what? I pretty much said what we're gonna say. We've hit our internal goal of covered lives, and we have seen an increase in number of patients that have gone over, but we're not gonna give a whole lot more color than that today. Our goal is over a really a three-year period to move 70% of our business as pharmacy benefit as the primary reimbursement source, and we're getting there. That's about it.
Okay, great. I know it's still early obviously with the G5 launch, but you highlighted looking to put a new receiver in the market in the second half of next year. Just wondered, you know, with the new system being, you know, moving to the phone, how should, you know, we be modeling a new receiver launch and just thinking about utilization from patients and adoption from that standpoint? That's it. Thank you.
You know, the new receiver launch is strictly a function of coming up with something that is more modern than what we have. Touchscreen, a better experience for patients. It will be lower cost. The revenues aren't gonna change. We don't view drastically with respect to the receiver. There are some patients, as we've learned, that would rather look at the data on their receiver than on their phone. This will provide a much better experience for those guys and for that patient group, but it's not gonna change much of anything.
Our next question is from David Lewis from Morgan Stanley. Please go ahead.
Hey, thank you for taking the question. Just wanted to follow up on the manufacturing and inventory constraints that you alluded to in your prepared comments. You know, what drives your confidence that that will not have an impact on the fourth quarter from a new patient start or revenue perspective?
We meet on this every day. I could give you very detailed specifics. We're catching up on the manufacturing side. This was, to a large extent, a component issue and getting components in place to our contract manufacturer who's done a yeoman's job building with what we have. The material's coming in. We're building at full capacity right now. We are pretty comfortable with our capacity and what we have. The only way we'd have a problem by the end of the quarter barring something unforeseen today would be if it was just a true mega quarter beyond anything we could comprehend in our room here. We feel pretty good about it. You know, we've got very good visibility into the capacity of our contract manufacturer.
We have very strong visibility into the component schedules as they come in to get this done. This isn't a big yield problem. This isn't anything other than we launched the thing earlier than we planned, and we took a month that we were supposed to be building up inventory in, and we shipped all the stuff. We put ourselves a little bit ahead of schedule, but we'll catch up. We're very comfortable with it.
Okay. Just on operating expenses, you walked through a fairly long list of investment priorities. Would it make sense if there were just, you know, one or two or maybe three of those to call out that are gonna be chunky pieces of incremental spend into 2016? Just trying to get a sense of the relative importance of those items.
Yeah. Let me, in case it wasn't clear in the prepared remarks, let me tell you the message that we were trying to convey was this, that, you know, we've always continued to invest and continue to spend on the core, kind of the core technology development. What we're talking about in 2016 that could be, Google could be chunky, for example, you know, we are looking strategically to make some additional investments in our foreign operations. You know, our manufacturing capacity. We've got extraordinary manufacturing capacity that you guys are all aware of here in San Diego, but guess what? We look out 2, 3 years from now, and the way demand is growing, you know, we could be butting up into some of that, you know, the capacity.
Class III regulated manufacturing facilities don't come online overnight. Guess what? You have to start investing in them now in anticipation of turning those things live in two years, three years. Those are the kinds of things that'll be chunky. As Kevin mentioned, look, we're gonna do our best to give you some much better. We haven't historically given really detailed OpEx guidance, and I think we're gonna try to do that in a much more granular level for next year, for 2016.
Dan, it's time.
Okay.
Our next question is from Brooks West from Piper Jaffray. Please go ahead.
Hi, guys. Thanks for taking the questions.
Hey, Matt.
Kevin, you talked a little bit about the pricing dynamics in the shift to the pharmacy, and that is a common question from investors. Can you just give us a little bit more on the mechanics of how that changes and how you might be actually realizing a higher price as you shift into that channel?
Well, I can just give you the simple example. We have seen contract pricing between payers and our independent third-party distributors to the tune of, I don't know, $90 a sensor, when we've set our ASP at 70-75. When you look at a contract like that, and we look at that and go to a payer and say, "Look, from a cost perspective, we can get you this as a pharmacy benefit at a price much lower than 90," and I'm just using 90 as my test case here, it's pretty easy to show how that's better for the payer. On our side, we're selling the stuff to the third-party distributor at a discount. When all is said and done, net to Dexcom, in some cases, can be better. In some cases, it will be lower.
We know that. We believe at the end, we're trying to keep this as even as we possibly can, and we evaluate all the pricing opportunities very carefully.
Should we be thinking about the potential for some price benefit in addition to the underlying unit volume, you know, that you're generating as we think about the next couple years?
Our goal is to remain even on the price perspective as we push out the distribution channel to the pharmacy benefit, and that's how we look at the contracts. If we can remain status quo, we're fine. Where the price benefit may change in future years and in future models is with an extended wear sensor like we're planning for G6 when we go to 10 days, but that has yet to be determined.
Dan, I guess the only other comment I'd make, Brooks, is looking out, let's look out 5 years, 10 years. I mean, we expect pricing to come down.
Yes.
We expect to maintain gross margins in a similar scenario, but one of the key driving factors behind the Google deal was to develop products that are much lower cost for us to enable pricing to come down to make the technology more accessible to people. You know, I don't see that happening in the next 2-3 years, but
Over time.
Absolutely, expect it over time.
Okay. Could I just have one more on cost, if I could. There's been a lot of questions on, you know, gross margin and operating expense, but maybe at a higher level, Kevin, as you think about, you know, it looks like you have a lot of leverage available in the model. As we look out, you know, the next year or two, should we think about the increased spending that you're talking about as maybe taking away some of that leverage? Are you actually going to spend beyond, so we should be thinking about, you know, maybe some losses coming in at the bottom? How should we be thinking about matching the incremental expense with the revenue growth that you're generating? Thanks.
Brooks West, that's a great question, as we're in the middle of our planning cycle for 2016, that's our great debate here internally. Steve Pacelli identified a couple chunky areas as far as investing in additional manufacturing capacity, our Google relationship, which we're gonna spend money on, also data analytics. What we're gonna do as we start next year is really break out those areas that are gonna be above and beyond the spend in the core business. There is a lot of leverage in the model. There's no question that our business model works as even as I said through my comments, when you look at the 155% increase in cash basis net income over 9 months. Our only goal here is not leverage.
We wanna get big, and we wanna serve more patients, and so we're gonna have to make some investments. As you look at the people who are coming to our markets, A, they're really big, and B, they don't have to report this level of granularity as far as their spend into what they're doing and their activities. We'll give you more guidance. It could be a combination of both. I think in the core business, there definitely is gonna be more leverage, and that is gonna be. You'll continue to see that be more and more profitable. There's no question there. As we continue to do some of these other things, as we outlined, we're gonna have to spend some money that's outside and above the norm. That's okay because that's preparing us for the future.
Our next question is from Jayson Bedford from Raymond James. Please go ahead.
Hi, guys. This is Mike calling for Jayson. Thanks for taking the questions. Not to beat a dead horse, but circling back to the investment comments, from a sales and marketing perspective, is it still fair to assume you're gonna add maybe 20 or so reps in 2016? Could it be a more significant expansion, or do you think at this point you're getting more bang for your buck spending it on DTC or more of an R&D focus?
Well, on the commercial side, they're going through their plans right now. I can tell you that our more recent investments have been made on the channel side with respect to the distribution channel, with respect to payers, with respect actually to programs to go out to pharmacies, to prepare pharmacists to market and to sell this product. We know there's gonna be an investment there for next year. I haven't looked at next year's proposed territories yet. I can tell you we're getting tremendous bang for the buck out of our team. They're doing a fabulous job. I mean, you look at this revenue growth, and even though we added quite a few reps at the beginning of the year, these guys couldn't possibly be achieving these types of numbers without us getting a lot, a lot of bang for our buck.
We are investing in a lot of new tools with respect to IT infrastructure and with respect to things we can do to make that process go faster with our online store. We know we could make improvements there, and we have, and things of that nature. The R&D spend is, for us, almost completely independent of the commercial spend. We're spending most. There's really a couple spends on the R&D side. You know, there's actually three or four. There's really near-term products that are gonna come as we talk about the applicator and the new receiver, for example. By the way, the applicator also has a new transmitter that is smaller and lower cost. You see there's a new hardware configuration, and that's a very short-term 2016 event.
You get into more near-term things like the extender, and things of that nature, combined with a bunch of clinical trials to run those projects. We've got longer-term sensor R&D investment to whereby we get into really small, no calibration, and the money we have to spend on Google. We will spend money in a very controlled, structured spend, with to drive the commercial business. Steve mentioned investing in our international business. You'll hear more about that at the first of the year as well. We're studying it all pretty thoughtfully, but it's across the board to keep us growing.
Okay. Got it. I'm sorry if I missed this, but looking at the shifting hardware model with G5, can you give us an idea on where ASPs are heading for G5 transmitters?
Well, that's.
Yeah. I'm not gonna give you a specific ASP, but we've talked about this previously, which is the fact that, you know, that the transmitter now carries a three-month warranty. Unlike the G4 transmitters, which carried a six-month warranty but were really lasting, you know, kinda 9, 10, 11 months, something like that, this transmitter, because of the increased power requirements of Bluetooth, really isn't gonna last much longer than three months. The patients are gonna have to go from somewhere, you know, 2 or maybe less than 2 transmitters per year to really close to 4 transmitters per year. We're not anticipating that the payers are gonna pay us, you know, the old ASP was probably around $400-$450 for a transmitter.
We're not expecting that we're gonna receive that, you know, four times a year. The pricing is gonna come down. Now that will be somewhat offset as we really ramp up the G5 launch by increased volumes. The margins will end up being, you know, better over time because of the increased volume. That's about as specific as I think we're gonna get. You should expect, you know, just on that transmitter component, that margins will come down a little bit.
Our next question is from Tao Levy from Wedbush Securities. Please go ahead.
Yeah. Hi, good afternoon. Maybe I can start with a comment from you guys around utilization. I don't know if I missed that. You know, is there a difference that you've seen this quarter versus prior on sensors?
No, this is Kevin. No, I don't. I think it continues to remain very strong. You know, everywhere I go, I hear people get on this and stay. Fortunately, as we migrate to G5, as these patients have their data go to the cloud, there will come a day when I ultimately have my big brother dream, and I can have a TV in my office that shows me how many patients are on the system each and every day, and get a much better idea of that. From our cloud-based systems, we're gonna be able to determine how often they change, what patterns really are. I mean, anecdotally, we hear all sorts of things out there.
We heard one patient say the data wasn't very good, and when we asked her how long she had worn the sensor, she was on week six. Well, for a seven-day labeled product, week six is pretty good. We're gonna learn a lot more and have a lot more understanding of those patterns. No, utilization's good.
My understanding is the way the transmitters with the G5 are shipped is, you know, you're shipping them sort of two at a time, so, you know, patients are still ordering, you know, just twice a year or getting scripts, you know, twice a year. Is that?
How it works and, you know, and is that how the insurance companies understand it? 'Cause I guess what I'm getting at is, you know, is there a risk that the insurance companies lag in, you know, how quickly they update their systems? All of a sudden the patient's asking for 4 refills on their transmitters instead of just 2, and, you know, insurance systems just aren't up to date with what you guys are doing.
We're both kind of chuckling because insurance systems are never really up to date, and we're always experiencing challenges. No, I mean, the fact that we're sending two means that the patient's probably not gonna have to come back for another, you know, 6+ months. With G4 PLATINUM, the transition there was relatively seamless. Moving from, remember with SEVEN PLUS it was a 12-month transmitter that lasted somewhere between 12-18 months. G4 PLATINUM, we were definitely selling more transmitters, and we were not having challenges at the insurance level.
Not globally, but sometimes.
all, yeah.
Sometimes case to case.
There's always insurance challenges.
That just happens, yeah.
Okay, great. Thanks.
Our next question is from Doug Schenkel from Cowen and Company. Please go ahead.
Hi, this is Ryan Blicker on for Doug, thanks for taking my questions. Maybe just to start with, new revenue guidance. You said you now expect revenue to exceed the top end of your previous range, but, even at the top end-
Yes.
I think that could be exceeded with flat sequential revenue from Q4. You've targeted a long-term growth rate of 40%, but all of your commentary today as well as your results suggest your business is actually accelerating. Is there any reason you believe growth will decelerate below that 40% in Q4?
No, we're sticking with our guidance, what we said. We updated our guidance last quarter to a top end of $375, which was north of our original stated guidance of 35%-40%. You know, we're not gonna give any additional color as to where we think Q4. We didn't say that we expect a sequential decline. We didn't say that we expect sequential flat. We said we are comfortable that we're gonna exceed the top end of our $375, and we're gonna leave it at that.
Okay. That's fair. Just moving to the transmitters, can you give us a sense of how patients are responding to the shorter transmitter useful life with G5? Maybe provide more color on the new transmitter you just talked about that will launch along with the sensor applicator in the second half of next year. You said smaller and lower cost. Should we also be looking for another shortened useful life?
No, the useful life will remain the same, and they really haven't had time to respond this three-month life 'cause we've only been shipping for.
A month and a half.
For a month and a half, so we haven't heard anything on that front yet. You know, there's advantages and disadvantages to a 3-month transmitter life. Obviously, the disadvantage is you do have to buy more of them, and as Steve mentioned earlier, hardware margins should come down a bit because of that. The advantage is when we get something new, that upgrade cycle is gonna be really short 'cause no matter when you bought your last transmitter, within 90 days you can move to the new one. The upgrade programs we have have gone to great effort to offer our patients and we'll continue to do so if necessary. The fact is we're not gonna have to do that much of that 'cause everybody's gonna be ready to go in 90 days. There's pluses and minuses of both.
Our next question is from Danielle Antalffy from Leerink Partners. Please go ahead.
Hey, good afternoon, guys. Thanks so much for taking the question. Kevin, in the past, you guys, you've talked about 40% sort of sustainable growth going forward, and obviously you've been growing much better than that this year and last year. Just wondering how we should be thinking about that longer time. You guys have a lot of tailwinds both near and medium term. Can you update us on what, how, what you're thinking about that longer term growth target?
You know what, Danielle, we continue to plan for that sustainable 40% number. Having lived through these several quarters of 50%+ growth, it's been great. Just by the law of increasing numbers, as you can see even in Q3 this year compared to Q3 last year with the blowout quarter, it's down from what used to be 60 into the 50s. As our numbers increase, just because of percentages, some of those percents have to come down. There is still a whole bunch of market to go penetrate and go get in our Type 1 market. I mean, we still don't have the penetration that we need. There's a large international market for us to go capture.
We think, you know, as we've scheduled the pipeline and you've seen this growth, as Steve said, largely executed by great new technology and a commercial team that's executed on all cylinders, combined with approvals and all those other things, you know, those things are still in place for us. Growing 40% on a number this year of, you know, well, just last year, growing 40% on last year's number is certainly much tougher than growing 40% on the number from the year before. The law of big numbers eventually gets to you a little bit, but we're very optimistic about our business future and we're not slowing down at all. We'll give you a lot more color early in 2016 when we provide our 2016 guidance.
Okay, awesome. That's great. Just following up on that, maybe a higher level question. As you think about the total addressable market here, what in your mind is a realistic penetration rate ultimately for Type one patients, assuming you're successful in continuing to evolve the technology? No reason to assume you won't be, because you guys have been so successful thus far. Ultimate penetration in Type 1s, and then how big do you think this can get in Type 2s? I'm asking at very high level, you know, 5 to 10 years from now, obviously not asking you to provide guidance for the next 2 years.
You know, I'll let Steve take his guess first, and then I'll give mine.
Interesting. In Type 1, I would tell you in Type 1 in the US, if we're successful with the product iterations that we have, and I would tell you, not even relying on the Google product, just some of the things that we have in the more near-term pipeline. There's no reason that as we replace finger sticks and whether we ultimately, if the FDA ever allows us to ultimately eliminate calibrations completely or whatever the safety check might look like down the road, there's no reason that every Type 1 in the US who has some form of insurance, and I include Medicare and Medicaid in that over the next several years, there's no reason that everybody wouldn't use CGM.
Why would you prick your finger 6, 7, 8 x a day if you're a Type 1 if you have to monitor? You know, wear a sensor. The Type 2 market is still very much evolving. You have to segment the Type 2 market. There are the patients that we're frankly, you know, starting to include in our target markets today, which I would call intensive insulin-using patients. These are Type 2s who look and feel a lot like a Type 1 'cause they've progressed in their disease to a point where they're taking mealtime injections of insulin. I think that the penetration there could be quite extensive. When we look to the broader type, you know, Type 2 market or the pre-diabetes market, the obesity market, you know, it's still somewhat to be determined.
I think we can have, you know, meaningful impacts there. I don't necessarily think that these are gonna be patients wearing sensors in real-time all the time like our Type ones or intensively managed Type twos. But there's no reason that as the standard of care becomes, truly becomes monitoring, that these people aren't gonna be wearing multiple sensors a year. The numbers just become staggering at having, you know, millions and millions of people wearing, you know, four sensors a year or six sensors a year.
What we have to do and we talk with the Google people about this on a regular basis. We've gotta develop the clinical evidence that basically says you're better off as a Type 2 patient wearing 4-8 sensors a year than you are sticking your finger twice a day. We believe that's very doable and very true. The other thing I'd add to Steve's comment, I support pretty much everything that he spoke there. I was with a physician up in L.A. who's a long time old school endocrinologist, and I asked him. I said, "What % of Type 1 patients would have this?" He said, "All of them." I said, "Why don't they?" He said, and he said he threw the cost number out. I challenged him.
I said, "What's the number? What do we have to charge per day for CGM to get this on every single patient?" To which he didn't have an answer, 'cause he was a bit taken aback by my response. We talked through that, and we talked through the cost per day. All these things are gonna line up over time, and I think we're positioned to do that. If we make this easy enough, for patients, I think the better answer is why wouldn't somebody use it versus why are they?
Our last question is from Jeff Johnson from Robert W. Baird. Please go ahead.
Thank you. Good evening, guys. Just two quick clarifying questions here. Kevin, I think I heard you say not giving an update on timing for a potential dosing claim. Last quarter I remember you saying expecting that claim by next year. Is there any change there that I'm missing or is there a change there or just can you clarify that?
I'm just being a little conservative, for all intents and purposes. We are getting close to defining exactly what we have to do here. Yeah, I'm just being cautious, that's all.
All right, that's fair. I thought you also said from a pipeline standpoint that seeing a new inserter next year and a new receiver. I think in Q&A somebody asked about a new transmitter coming next year as well. Is it the new receiver that's coming next year, or is it a new transmitter as well?
With the new insertion system, there will be a new transmitter that has a much lower profile and a new receiver. We'll have transmitter, receiver. It'll be a big hardware year for us next year. Hardware and new apps and things of that nature will be our big product launches next year. Like I said, we'll give you more color on that versus there when we provide our 2016 guidance.
We have no further questions at this time. I would now like to turn the call over to Mr. Sayer for closing remarks.
Thank you very much. In conclusion, I wanna thank all of you for your continued interest and support of Dexcom. As we've stated throughout our comments all year and on this call, we're very proud of our accomplishments. We see an amazing future, and we will not rest until we achieve these goals. This quarter we added an amazing partner in Google that's gonna help us ultimately develop the products and analytical tools to achieve the outcomes that years ago we would have only dreamed of. We're executing the plans we've described all year. Our revenues are growing robustly. We continue to add record numbers of new patients.
Our cash-based operating results are improving at a much faster pace, but we are fully committed to making the investments necessary to get this company to more than $1 billion in revenues in a very short period of time, much, much faster than I ever would have thought when I came here four years ago. As I said earlier, also, I had an opportunity to spend quite a bit more time in the field over the past few weeks and visit with our great team and several healthcare professionals in their areas. I'm gonna leave you with two other thoughts. First, when it comes to CGM, we're clearly the market leader here. One physician said to me, "When it comes to CGM, I don't even think of anybody else." Another one said, "The effectiveness of an advance in diabetes technology is measured by one simple thing, reorders.
Do the patients come back and do they use it? Yours is the CGM that my patients continue to use." Second, I was visiting another office where the physician has had very little experience with our system and very few patients using it. We challenged him to wear a G5 and see what our patients experience. He doesn't have diabetes, but he's pretty excited and really demanded that, "I wanna wear it right now." Fortunately, we had a demonstration system, our rep did, and after a week, our rep went back and informed me that he absolutely loves the visualization. He thinks the phone interface is fantastic. He's amazed at the information he's learned about his diet, his activity and everything, and he really has no intention of giving the demo system back unless we do something to get it.
Our long-term vision of CGM across the board is very real. It's gonna take time, it's gonna take money, it's gonna take patience and innovation from all of us, but we're gonna get there. Thanks again.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.