Welcome to the Dexcom fourth quarter and full year 2014 earnings release conference call. My name is Leslie, and I'll be your operator for today. 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 Mr. Kevin Sayer. Mr. Sayer, you may begin.
Good afternoon, everyone. We'll start off with Steve Pacelli reading 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 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 or results superior to those 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. This being my first call as Dexcom's CEO, I've decided to change the format slightly. Steve will start with a review of our detailed fourth quarter 2014 financial results and some commentary on 2015. I will then provide our customary operations update and offer some concluding thoughts before opening the line for questions. Before I turn the call over to Steve, let's start big. At the JPMorgan Healthcare Conference in January, we announced Q4 and full year 2014 product revenue of approximately $84 million and $257 million, respectively.
What we did not disclose at JPMorgan, but I am pleased to announce today, is that for Q4 2014, we were profitable for the very first time on a GAAP basis. Yes, it's happened. We have earnings per share. I'm also very proud to announce that our G5 Mobile PMA supplement, all 15 volumes of it, was filed earlier this week. What a great accomplishment for our team, and obviously, we've fulfilled several exciting milestones here at Dexcom. I actually thought about with my new title, just ending the call right now and taking Q&A, but I don't think we can do that. We have a lot more to talk about. With that, I'll turn it over to Steve.
Thanks, Kevin. Dexcom generated $84.3 million in product revenue for the fourth quarter of 2014, compared to $51.3 million for the same quarter in 2013, a $33 million or 64% increase. Sequentially, product revenue for Q4 of 2014 increased $16.4 million, up 24% from the prior quarter. Total revenue for the fourth quarter of 2014 was $84.3 million, compared to $51.7 million during the same quarter in 2013. Our product gross profit totaled $59.4 million, generating a product gross margin of 70% for the fourth quarter of 2014. Compare that to a product gross profit of $34.1 million and a product gross margin of 66% for the same quarter in the prior year. Sequentially, product gross margin for Q4 increased two margin points from the prior quarter.
Although we are now achieving our gross margin targets of 70%-75% on our sensor disposables and approximately 50%-60% on our hardware, going forward, we will continue to seek improved gross margins through increased volumes, continued manufacturing improvements, continued shift in the sales mix to more disposables revenue, and some cost savings in future product design. However, in the first quarter of 2015, due to our typical seasonality, together with the financial impact of the launch of our Share Receiver planned for March that we will discuss momentarily, we expect product gross margin to be down sequentially in Q1. We do expect margins to return to normal over the course of 2015. Some final thoughts on our product revenue and our gross profit. During Q4, we added more new patients and sold more sensors than in any prior quarter.
Just to add some perspective, our Q4 2014 product revenue of $84 million was just shy of our full year 2012 product revenue of $93 million. Our mix between durable and consumable products remained steady at approximately 30% durable and 70% consumable, a mix we expect to remain fairly constant going forward. ASP for sensors has stayed consistent at approximately $73 per sensor, and the ASP for our hardware continued at approximately $850-$900 per starter kit. Finally, our international business exceeded our performance expectations in 2014, as it was up over 150% year-over-year and represented approximately 14% of product revenue in 2014.
Research and development expense totaled $21.6 million for Q4 of 2014, compared to $12.6 million in Q4 of 2013, 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. Sequentially, R&D expense was up $3.1 million, with the increase primarily due to activities related to our G5 Mobile filing, work on our next-generation applicator system, software app development, and work on our advanced product pipeline. As we look to 2015, we expect that R&D expense for the full year will be up approximately 25% on a GAAP basis versus 2014 and less than 15% on a cash basis. Some expenses, such as our overhead and share-based compensation expense, will increase as a cost of doing business.
Additional increases will depend upon our development progress and regulatory timelines with respect to continued system performance improvement, including completion of our Gen Five system, work on our advanced sensor programs, work on our mobile and cloud-based data platforms, and a variety of clinical trial opportunities we expect to execute during 2015. Similar to prior years and consistent with our commitment to continued innovation, we will consider additional R&D spending opportunities if they will better position the business for the future. Selling, general, and administrative expense totaled $36.2 million in Q4 of 2014 compared to $23.8 million during the same quarter in 2013. The increase was primarily related to increased headcount in our sales organization, including both field sales and internal sales support staff, increased sales commissions resulting from our robust product sales during the quarter, and increased marketing expenses.
Just as a reminder, we are growing our U.S. sales team by 20%-25% with continued additional investment on the distribution channel team and our in-house support staff. Much of our 2015 sales expansion was completed by the end of fiscal 2014, and the remainder will be completed by the end of Q1 2015. We have also targeted several key international sales and marketing hires for 2015. It is also important to note that the year-over-year increase in SG&A expense includes $4.5 million of increased non-cash share-based compensation expense. As we look to fiscal 2015, we anticipate an increase in SG&A expense of approximately 25% on a GAAP basis and approximately 20% on a cash basis.
The increase will be driven primarily by the sales and marketing investments I discussed previously, as well as IT and related infrastructure investments to support our growth. The increase will also include expense related to an additional 90,000 sq ft facility adjacent to our headquarters in San Diego that we leased in Q4 2014. Finally, the increase will include additional non-cash share-based compensation expense, largely resulting from our higher share price. Our net income for the fourth quarter of 2014 totaled $1.3 million and included $17.4 million in non-cash expense centered in share-based compensation, depreciation, and amortization. Absent these non-cash charges, cash operating income was $19 million for Q4 and was $37 million for fiscal 2014. For Q4, that cash-based operating income number represents 23% of our sales.
Our business model is achieving the success we have always envisioned. Obviously, we are quite pleased with our cash operating results as this compares quite favorably to our cash-based operating income for fiscal 2013 of only $5 million. Our earnings per share for the quarter were $0.02. With respect to our balance sheet, we entered the fourth quarter with $84 million in cash and marketable securities, up approximately $9 million sequentially. I'd like to close the discussion of our financial results with some thoughts on Q1 and 2015. At JPMorgan, we gave product revenue guidance for 2015 of between $340 million and $360 million, and we remain quite comfortable with that range.
While we do not provide specific quarterly guidance, I remind investors that the first quarter is traditionally a seasonally slow quarter for our business as annual insurance deductibles reset and flexible spending accounts are largely unfunded. As a result, our patients typically purchase as much product as they can during the fourth quarter. Based on our reported Q4 sales, you can see that 2014 was no exception. Add to that the fact that we have become much more efficient in our processing capabilities, we were quite successful during Q4 at filling virtually every order in the pipeline, taking care of those patients who could purchase at year-end for little or no out-of-pocket expense.
Of course, that means at the start of 2015, we need to rebuild our new patient pipeline, and we also experienced some delay in sensor and transmitter reorders by existing patients who loaded up in December. As we look to close out February, however, I'm pleased to report that our pipeline of new patient opportunities is larger than it has ever been. To add some final additional color, I remind investors that in years past, including in 2014, approximately 40%-45% of our product revenue was generated in the first half of the year and 55%-60% was generated in the second half, and we do not view 2015 any differently. Q1 has typically represented around 20% of our revenue for the year, and in 2014, Q1 revenue represented only 18%.
I'd also like to take this opportunity to give some color on the Q1 financial impact of our sooner-than-expected FDA approval of our Share Receiver, as this approval will affect both our product revenues and our gross profits for Q1. We announced that all U.S. patients who purchased a G4 PLATINUM system from January 1 until the launch of the Share Receiver will receive a free upgrade to the Share Receiver. This program requires us to defer a portion of our G4 PLATINUM revenue until we ship the upgrade receivers. We also announced that we would ship a Share Receiver free of charge to any patient who previously purchased a Share Cradle. Additionally, we will be recording a charge to cost of sales for each of the upgrade receivers that we ship with no additional revenues.
Consistent with past practices, we will offer a low cash cost-low-cost cash upgrade to the Share Receiver for those patients who are still under warranty with their existing receiver. We have set the cash upgrade price at $199. We expect to begin shipping the Share Receiver in early March, but to the extent we are unable to ship the full allotment of receiver upgrades before the end of Q1, we will be required to defer revenue until we ship in Q2. Finally, with respect to inventory and cost of goods sold, we expect to write down certain excess and obsolete inventory related to our G4 PLATINUM receivers as a result of this approval. With that, I'd now like to turn the call back over to Kevin for a business update. Kevin?
Thank you, Steve. For our business update today, I would like to discuss several major initiatives for 2015. Let's start with innovation. On a worldwide basis, we launched a total of five new products in 2014, compared to a total of three worldwide product launches in the previous two years combined. We are currently planning at least five more launches in 2015, and depending upon execution and regulatory time frames, we could see that number go up to as many as 10 product launches in 2015. Our nearest term innovation is the Dexcom Share Receiver. Work on this, on a receiver of this nature commenced more than two years ago when we received a research grant from the Juvenile Diabetes Research Foundation to develop better tools to support artificial pancreas research.
We want to take the opportunity to recognize JDRF support of this project. This is a great example of how industry and research collaborations can greatly benefit both parties. The Share Receiver uses a secure wireless connection via Bluetooth Low Energy or BLE between a patient's receiver and an app on the patient's smartphone to transmit glucose information to apps on the mobile devices of up to five designated recipients or followers. Initially, the system will be compatible with the Apple iPhone, iPod touch, or iPad, but we plan to launch apps on an Android platform later this year and on other devices like smartwatches, including the Apple Watch. I am also pleased to note that the Share Receiver will be compatible with the G5 Mobile system. As I stated in my opening remarks, we submitted our G5 Mobile PMA supplement to the FDA earlier this week.
We believe that this system will truly make the cell phone the center of the diabetes universe for our patients. Some unique features of this system are. The G5 Mobile platform operates through a smart transmitter, meaning glucose values are computed on the transmitter, eliminating the need for a receiver. Glucose values will go directly from the transmitter to a patient's mobile device. Patients will still be able to use a receiver if they wish, because the G5 Smart Transmitter can communicate with two BLE-enabled devices simultaneously. Now, patients will have a choice. The communication protocol will enable our system to display on a number of different platforms, glucose when you want it and where you want it. The user interface for the G5 Mobile platform is completely different from the current patient experience than anything seen before in diabetes.
It looks very much like other apps in the mobile environment. We have conducted many, many, many hours of human factor studies to develop and refine our apps to best meet our patients' needs. Finally, the G5 Mobile system will take full advantage of all of the FDA-approved data-sharing capabilities of our Share platform. While it is impossible to predict FDA timing, we are cautiously optimistic that this product will be available before year-end. We also plan to introduce this platform in our major U.S. markets, with timing to be discussed in the future. Shifting to our integration partnerships, I am pleased to report that Animas has initiated shipment of the Vibe in the U.S., and initial reports from the field suggest that patients are quite pleased with the user interface for CGM as displayed on the pump.
Just yesterday, Tandem reported that they have completed an FDA site inspection associated with their t:slim G4 PMA filing and are encouraged by the outcome. Tandem also reported that they are preparing for launch during the second half of 2015. We recently returned from the annual Advanced Technologies and Treatments for Diabetes meeting in Paris last week. I brought the cold with me. I would like to share some observations with you. With our recently launched 505 software or G4 AP algorithm, Dexcom has truly set a new standard for CGM accuracy and system performance. This represents a major hurdle for all of our competitors. We met with several groups utilizing G4 CGM in developing closed loop and partially closed loop artificial pancreas-type systems.
Significant progress has been made by many of these groups, but the pathway to commercialization for many of these projects remains unclear, and we will continually evaluate our own path to the artificial pancreas closely. With the world's most accurate and reliable CGM system, we intend to play in this arena. We left the meeting very confident that with execution of our planned product portfolio, we will remain the world's leader in continuous glucose monitoring. With our new insertion system, the G6 and other advanced sensor platforms, expanded connectivity with user-friendly apps, and the ability to perform advanced analytics once CGM and other diabetes data is in the cloud, we believe we are positioned to lead this industry for a very, very long time. In addition to innovation, access, and awareness are major initiatives for 2015.
We have made much progress to make it easier for patients to gain access to CGM. We have frequently discussed our plan to migrate CGM coverage to a pharmacy benefit. In 2014, we laid the foundation to make significant progress in 2015 and beyond by putting in place several key PBM, wholesale, and regional payer contracts. We are currently in discussion with several major payers and plan to offer additional detail on these initiatives in future quarters. Increased access for our patients not only includes moving from DME benefit to pharmacy benefit, but it also includes obtaining broader coverage from those plans that choose to remain, to maintain CGM as a DME benefit.
We have succeeded in broadening coverage with several payers and in reducing documentation to streamline processing. The most consistent question we get in the field with respect to access is very simple. Where are you with Medicare? We continue to pursue both traditional legislative pathways. Bills were introduced into Congress last year, but with the elections and adjournment of Congress, no progress was made past introduction. We expect the bills to be reintroduced in early 2015, but we are not gonna rely solely upon legislation. CMS was very clear with us that a product with a non-adjunctive claim will be required to obtain Medicare coverage. We are planning the clinical study necessary to support this claim. In other words, to truly replace finger sticks for diabetes management decisions.
We are actively engaged with the FDA, and we'll update you on our progress in this area in future quarters. Finally, we recognize the need to expand our clinical study activity beyond simply supporting product approvals. Enrollment for our CGM first study entitled the DIaMonD study has commenced and will continue throughout the year. A large reimbursement study is underway in Sweden, and we have a study planned for Germany later this year. We will continue to evaluate opportunities to conduct additional studies to demonstrate the effectiveness of CGM as the most important tool in diabetes management today. All of these initiatives will lead to increased awareness. While we are making progress, we still see awareness as a tremendous opportunity for future growth. Just last week, we had an individual with Type 1 diabetes in our office for an interview.
The person is treated by a San Diego-based endocrinologist that we know very well. The person had not heard of Dexcom or CGM until they were introduced to our company for potential employment and could not understand why CGM recommendation had not been made for this person. Unfortunately, these types of conversations happen far too frequently. The expansion of our sales team should certainly help with awareness as more sales staff will allow more frequent contact with healthcare providers and patients. We have also expanded our Dexcom advertising programs. Our mobile platforms also provide us with a great opportunity to increase awareness. Just look at the tremendous amount of press that has been generated through discussion of our Apple mobile platforms. We will diligently look for opportunities to increase awareness, and we will increase our investment as opportunities present themselves.
Finally, I wanna emphasize that all these efforts support the ultimate goal of scaling and simplifying our business activities. New products must be more cost-effective and more efficient than the products they replace. For example, our new insertion system has been designed with the goal of fully automated assembly. Our Gen 6 manufacturing line eliminates many of the variables involved in the manufacture of our current sensor. This is a key step in reducing and eventually, when proven safe, eliminating calibrations altogether. Improved access leads to a more efficient sales process, giving our sales team more and more time to spend with healthcare providers and patients, and not just collecting documents and being on the phone. The efforts of our sales process improvements were clearly demonstrated. Excuse me.
The success of our sales process improvements were clearly demonstrated with our incredible performance in Q4 2014, but we will continue to improve these processes. In conclusion, 2014 was an amazing year all the way around. We had over $100 million in revenue growth year-over-year, and we were able to drop $30 million, more than $30 million of that to our cash-based operating results. We brought an FDA-approved CGM system to children all the way down to two years of age. Our G4 AP algorithm, or Software 505 as it's known commercially, has truly set a single-digit MARD accuracy standard for the entire industry and will become the foundation of our finger stick replacement claims. Finally, our first data sharing platform was approved and launched via the Share Cradle, even though we rendered it obsolete just three months later with our Share Receiver.
We are moving fast. We moved fast in 2014, and we're gonna move even faster in 2015. I'll open the call up for Q&A.
Thank you. 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. The first question is from Ben Andrew with William Blair.
Good afternoon, guys. Thanks for taking the questions. The first one for me, I guess, is, as you look at the, as you said, stronger than ever pipeline for new patient flows, is the contribution there similar to what you saw maybe six or 12 months ago, or has it shifted relatively heavily towards peds?
You wanna take that?
Yeah, go ahead.
Yeah. I mean, Ben, we're not gonna break out the distribution between adults and peds. As you know, what we said kind of earlier or at launch, what we said was that the education effort required of the pediatric endos was slightly greater than we expected. You know, even the education of parents and patients with their parents was taking a little longer than expected. By Q2, we felt like that had kind of normalized. What we disclosed then is that we were tracking basically to what we thought was the ratio of adults to peds in the U.S. You know, roughly 25% of our new patient adds back in Q2.
We said at the time that we weren't gonna break it out because frankly, internally a five-year-old, a 15-year-old or a 50-year-old to us, if they're on the system and using disposables are basically look and feel like the same patient.
But I guess I'd summarize by saying just our ped ads are strong, and we're quite pleased with where we are on the pediatric launch.
Okay. Do you expect the insertion device to be available with the G5 platform? Is that gonna be in time?
Not initially. We're, you know, it's again, we like to stop thinking about these things we said before, and we start, you know, we like to lump everything into generations. At the same time, as you saw when we launched the new algorithm, for example, with sort of, you know, in between generations, if you will, we're probably gonna, you know, we're not necessarily gen six, you know, may or may not have the new applicator. It could come before. It could come slightly after if the sensor is ready to go. I mean, there's a lot of moving parts here. It definitely won't be with gen five, I guess the short answer.
Okay.
Not to start. I'd add to that, Ben, of all the things we're doing operationally, that is by far and away the most complex.
Sure. Now it's got a lot of benefits as well, of course. But maybe talking about the pharmacy benefit, Kevin, I know this is important on a lot of different levels, but, how much leverage can this create on a kind of standalone basis a year in when you're fully implemented with pharmacy benefit? 'Cause obviously, you eliminate a lot of the back-office functions, you eliminate a lot of the paperwork, et cetera. How does that mix look, you know, several years in? 'Cause you'd referred to some DMEs, you know, functions sticking around over time with certain payers.
Our long-term goal is a 70/30 split, 70% through the pharmacy, 30% through DME. It will take us a long time to get there. We, as I said in my remarks, we've got a lot of major discussions going on right now, and I would tell you guys probably after the second quarter, we'll give you more of an update as to where we are. We really don't wanna give anything away. People are very interested, and we're getting a lot of traction here.
Can you comment on organizational leverage in terms of through the P&L?
Organizational leverage. What this will enable us to do, Ben, more than anything, is not add a bunch more bodies to process sales. I think we can keep our staff levels much flatter as we go forward. The tricky part of this is if price erosion comes into play, how much price are you willing to give up versus the leverage you obtain operationally, and those are the types of equations that Jess and I look at all the time, and those types of trade-offs.
Okay. Thank you.
Okay. Next question is from William Plovanic with Canaccord.
Great. Thanks. Good evening. Can you hear me okay?
Yep.
Oh, good. I'm trying to pick which questions to ask here. A lot to ask. Just clarity, I mean, that was amazing gross margin in the quarter. As you think about it, are you pretty much kinda capped out until we move on to I think it was the gen six you said, on where we sit on the gross margin, or do you continue to get operating overhead leverage?
I think we can continue to get some overhead leverage as we continue to increase volumes. I mean, our volume increase last year was amazing. That was very helpful in getting G4 sensors to the margin level that we attained. I think over time, we are gonna have to have new platforms and new processes. I mean, we never thought we'd be above 80, and we're clearly in the 70%-75% range on our sensors now. There will be some upside, Bill. I don't know how much more. I mean, we'll get it, and we'll see how it goes.
Okay. Since I'm on the gross margin topic, just, you mentioned that you're going to have a lot of one-time charges as you transition with the old Share. Just ballpark a number for us. What type of charge should we look for in Q1?
Honest to goodness, we don't have any idea as we sit here today. We've got a lot of work to do before we get there. There's a bunch of variables. For example, patients who want the new receiver have to fill out an application and say, "I want my receiver upgraded." We have to measure that response as to how many. We also have to see what's left in the distributor and the manufacturing pipeline with respect to potential G4 write-offs as to what's in the field. It's all very early. I mean, we just got approval. Not too long ago, this wasn't something we were planning on discussing today a few weeks ago. You just have to give us some time.
You know, J&J, I believe, stocked a little into the fourth quarter. Can you help quantify that just so we understand, you know, were they stocking $1 million, $10 million, $5 million? Just so we can understand what's, you know, normal throughput versus maybe one-time upfront from that partnership.
Yeah. Bill, this is Steve. J&J doesn't stock anything. J&J does not serve as a distributor of sensors or heads, and then we support the patients with respect to transmitters and sensor disposables. There was no stocking by J&J. I don't know where you got that.
Good. Well, who's handling the back-office reimbursement? I mean, so basically, are you handling the paperwork to get your stuff approved, the CGM approved, and then you're just drop shipping to them? Is that what it is? Kinda keeping it separate, yet it's a single device.
That's right. As it stands today, we treat the patients as our patients from a CGM perspective, so we're fulfilling all of their CGM needs, including technical support on the CGM front. We're exploring, you know, some ways to make it more seamless, but as it sits today, that's, that is the path.
Great. Last question, just, so we can put a stake in the sand, can you give us an idea of the number of patients you had at year-end 2014, U.S. or anywhere?
Oh, Bill, that is spectacular, Bill. I will reiterate what we said at JPMorgan. We certainly grew our new patient base more than 50% last year. It was a great year for us.
All right. You can't blame me for trying. Congratulations. Thanks.
I can't blame you for trying. I love it. Wouldn't want it any other way.
Next question is from Mike Weinstein with JPMorgan.
Hi, this is actually Robbie Marcus in for Mike. I just wanted to start, last night, Tandem announced that they're going to go for a low glucose suspend or a combo pump using the Dexcom sensors, presumably the G5. Can you give us a little more clarity on that program, how that'll impact the income statement, and then how you'll handle the patients there?
Yeah. I mean, this is really a Tandem program. I don't think we could comment on the specifics of the Tandem program other than to say that, you know, we're a partner with Tandem and we've been supporting them with our current sensor technologies. At this point, we're not prepared to move forward with G5 with any partner because we're just literally filing it, you know, in the last week or so. You know, I would say it's largely a work in progress at this point. It would not be a meaningful P&L impact to Dexcom because it's really the partner, you know, Tandem or any other potential artificial pancreas partner. The program is really being driven by the partner.
Okay. At the ATTD conference, you or someone from Dexcom presented information on the new gen six sensor that a single calibration led to an 11.7 MARD in days one through seven, and 12.1 in days one through 10. You know, is that good enough to get patients to trade accuracy for the fewer calibrations, or do you need to come down further on that number?
You know, that is a wonderful question. There are three things involving making that decision, length of time, calibrations. Well, mainly the length of time, calibrations, and then just performance over time, and how the sensor works. We are working on a dosing claim with the FDA, and that will be our next big technological advancement. We will probably focus on getting the dosing claim first and then continue making our sensors accurate enough to serve as a finger stick replacement. Making no calibration sensors is pretty hard. You've got to manufacture within a very, very narrow range, so they all perform exactly the same. We actually had similar data with that system with no calibrations, that we did not present, at the show.
We're gonna weigh that over time, the convenience versus the calibrations versus the accuracy versus the labeling that we look for, all of those factors playing together. Honestly, as these guys will tell you, I'll push them for more accuracy. I'm kind of a jerk when it comes to that. It's a big deal to me.
All right. Let me sneak in one last one. Abbott's FreeStyle Libre, obviously different from a CGM, but still doing really well in the initial launch in Europe with a significant amount of Type 1 patients as a percentage of the patients that are using it starting to adopt that product. You know, have you seen this impacting European new patients at all? Is this an area that Dexcom would be willing to get into?
You know, I'll go on and Steve will probably have some other comments. We've long said that Abbott is a very formidable competitor, and our view there has never changed. The system they've put out, again, as you said, is not CGM. It is different. There's no alerts or alarms, and you don't get the benefit that comes with CGM there. We could certainly move to that space if we thought that was what patients wanted and make it go to a phone, for example, rather than to a handheld reader. Right now, we're focused on intensive management and focused on what we do. We will watch it very closely. Obviously, the form factor, everybody loves the reduced calibrations, but we've heard other things.
I mean, we've heard, for example, that as I said earlier, manufacturing no calibration sensors is very hard. We heard while within a certain lot of sensors, if one in the lot works, they all work. We also heard they have many lots that don't work, and they're not even adding any new patients due to manufacturing difficulties. It's early. There's a lot of looking at it as we miniaturize our technologies, as we reduce calibrations. As we go to our mobile platforms, we'll be in the same space. Steve?
Yeah. I would just say, you know, I don't know that we have data to support. I think Abbott has done a great job of creating hype over in Europe. They have had a couple of recalls on the device, and my understanding is that they're in a pretty significant back order. So while there may be some interest in the product, I'm not sure we have data to support that they're having meaningful sales with respect to the product. You know, the other thing that I think, you know, as we keep going back to, this is not a CGM. It doesn't provide the alerts and alarms. With the Abbott product, you're gonna miss any readings during the time you're asleep. That's frankly a critically important time, particularly for an intensively managed insulin-using patient.
We've said before that we think this could be a very interesting product for the Type 2 market. We're keeping an eye on it. Certainly, as you know, to respond to the latter part of your question, if this is something that Abbott figures out an interesting angle into the Type 2 market into figuring out the distribution model, the payment model, the education model, because remember, Type 2s are typically seen by by primary care, by internal medicine. They're not typically seen by endocrinologists. You know, let someone else do some heavy lifting in developing a different category. Today, we're gonna stay focused on the insulin using diabetes patients.
All right. Great. Thanks a lot.
Our next question is from Brooks West with Piper Jaffray.
Hi, guys. Thanks for taking the questions.
You bet.
Kevin, congratulations on the GAAP profitability. I just wanted to start with, is that something on an annual basis that we should be thinking about Dexcom achieving, going forward?
You know, that's certainly one of our stretch goals for 2015. Brooks, we had over $50 million in share-based compensation in 2014, and that number is not going down in 2015 as we have more grants come out with our stock price. We'll look at it. We measure our results primarily on our cash-based performance. And over time, we know that stock-based compensation will come down as a percentage of everything, and our financial statements will look more normal. That's a stretch goal of ours. We're also gonna not let that deter us from doing all the things that we wanna do. If we can increase our cash-based operating income number, I mean, as I said, we grew $100 million in revenue and dropped over $30 million to the bottom line.
That's pretty good year, and that's great execution of a plan.
I guess, let me push on that a little, Kevin, if I could. If we use that metric, given the increased spend obviously tied to still, you know, strong revenue growth, should we see that, you know, operating cash number increase significantly this year over last year?
We certainly hope so. That's our plan. I mean, we went from -30% in 2012, -30%+, to +5% in 2013, to +37% in 2014. There aren't many businesses that show that kind of turn. Our business model is truly scalable, Brooks. Now, the key question for us is what investments do we make? You know, Terry and I often discussed, if we wanted to just turn this thing into a cash money maker, there are ways to do it. But that doesn't position us for the next half a billion dollars in revenues. We gotta continue to invest, so we will. It is a balance. It's a balance each and every day.
Thanks. Let me ask you one product question then on the partnerships, the Vibe and the potential Tandem when that does launch. Do those systems support the G4 AP algorithm? I think the answer to that is no. If they don't, how do you see the kind of rapid adoption of the AP algorithm impacting those partnerships?
You're correct in the first question, which is no, neither the current iteration of the Vibe nor the Tandem product, when it launches, will accommodate the G4AP algorithm. You know, and quite frankly, we're cautiously optimistic that by the end of this year, we're gonna be on the G5 platform, so we'll also be on a mobile phone. You know, I don't wanna comment specifically on how the new algorithm will or will not impact the launch of those pump products. I think as we've said in past earnings calls and at conferences, you know, from a revenue generation perspective, we're kind of treating the pump companies these days as more additive than transformative for our business. I think we've really
We've kind of downplayed them slightly, and we're not really looking at those guys to be driving the top line in any significant fashion. You know, I think I'm not sure we're that concerned about it, to be honest.
Okay. Thanks so much.
Our next question is from Jayson Bedford with Raymond James.
Hi, good afternoon, and thanks for taking the questions. You added more new patients than you ever have in the fourth quarter, and I realize that's becoming a bit of a trend, but you also introduced the AP algorithm late last year. Obviously, your current user base is thrilled with the upgrade, but do you think that the new algorithm was a key driver or the key driver of new patient growth in the fourth quarter?
This is Kevin. I think it helped, but I don't think it was the key driver, Jayson. I think just as we increase awareness, that's what drove it. It certainly is an easy presentation to clinicians to say this is more accurate than what we had before. Most patients judge the accuracy of their system not from what's in the book, but what they experience day to day. The algorithm, you know, one of its characteristics, it does move quicker with your glucose information, so patients saw that and experienced that firsthand. It helped, but I don't know that it was the primary driver. I think it's just increased awareness.
Okay. Have you filed the algorithm for the peds indication?
We have filed the algorithm for the pediatric indication.
Okay. Just lastly for me, I'll jump off and let someone else ask, but international, I guess by our math, was just under $14 million in the quarter. First, is that correct? Second, you mentioned adding some key international hires, and I'm just wondering if you're adding more to an existing team or branching out into some new countries. Thanks.
Well, we're gonna do both, Jayson. We branched out to approximately 10 countries last year. Our most significant new countries last year were, I think, Canada last year and India near the end of the year. We're going there. We actually have an employee relationship in India that works with our distributor. We have all of four international employees as we sit here today. As I look at key hires, they'll be to supplement what we have. In particular, a health economics expert to help drive reimbursement over there. On top of that, a clinical research expert as we do more studies overseas to prove the effectiveness and demonstrate the effectiveness of CGM. We need somebody with more clinical experience than what we have now.
We've got a couple folks lined up in that area, and that's where we'll start. You know, almost all of our revenue internationally goes through distributors. We monitor that distribution channel very closely and carefully.
Okay. Thank you.
Next question is from Tao Levy with Wedbush. Please go ahead.
Yeah. Hi, good afternoon. I was wondering if maybe you could talk a little about the, again, on the international business. I don't know if you've disclosed or talked in the past about, you know, the percentage of the OUS business that, you know, that is J&J related or related to the Vibe.
No, we don't break that out. Frankly, J&J would never let us break that out.
Okay. Is that a big part of the growth, or is it mainly, you know, I guess non J&J?
It's certainly a part. You know, I'm not gonna give you a level of materiality, for example, but it's, I mean, it's a part. Our efforts through our network of distributors is obviously a very important part.
Okay. On the Bluetooth on the G5, will that enable sort of direct transmission of data from the blood glucose meter to the transmitter during calibration, or is it just one way?
The transmitter can have a two-way conversation. We have not written software to take a calibration from any specific meter chip.
Yeah.
We could.
Okay.
We could. I think as we look at our horizon, we're more concerned about getting.
Yeah, we'd rather get rid of calibration.
We'd rather develop more apps with the Android platforms and the watches and stuff, so.
Okay.
We can look at it.
Just lastly, you know, one of the benefits, you know, that Medtronic has is, you know, they've got both the pump and the CGM, and can work on things, you know, all under one roof, like, you know, threshold suspend and start to make some progress there. You know, it seems like they're at least moving a little bit faster than they have, you know, historically on developing new technologies in diabetes. You know, I was just trying to figure out whether, you know, at some point that is something that Dexcom needs to start thinking about, just kind of putting everything under the same roof so you can move quickly and kind of go after artificial pancreas and those kind of opportunities.
You know, that's a great question. As we sit here today, and as we've sat here for the past several years, our message has been CGM first and making CGM systems more and more accurate and reliable and better suited to work with an artificial pancreas. We're very comfortable with our product pipeline. The question then becomes is how do we play in the sensor-augmented pump arena? As somebody said earlier, Tandem announced a threshold suspend type device yesterday. We know J&J has ongoing efforts. There are a lot of efforts going on. We won't sit and let somebody else control our fate forever if nobody does this. We will get more involved if we see a project that is going very, very well. We haven't found anything that we wanted to commit to yet.
We support all the artificial pancreas programs with sensors. We support our pump partners. We're cognizant of this, and we're cognizant of the fact that, you know, we need to play here. We've got the best sensor in the world. Our patients are gonna want this. We're gonna have to offer something to them.
Okay, great. Thank you.
Next question is from Shaun Rodriguez with Cowen and Company.
Hey, guys. Good afternoon. Thanks for taking the question. First, another angle to one of the pharmacy channel questions. Given the growth here, is there a point over the next few years where you actually need to be pushing a significant portion of the business through this channel to just maintain the service and processing support you need to service patients? Or is this something you think you'll be able to stay ahead of with pretty good visibility in terms of internal resource requirements as you work through the process with the payers?
We don't want to build the infrastructure to support our business the way it's designed today. We need to move through these channels. You can just build building after building after building with employees in the DME environment. Quite honestly, that's been one of Medtronic's great barriers to entry in the pump world and why all the other pumps out there have a hard time making money. It's hard to replicate that structure unless you have a huge amount of revenues. We really have a mission to go this way. We need to make it more efficient. You know, think about how much easier it is for our patients. Right now, they call us. They fill out paperwork. They get letters from their doctors, et cetera, glucose logs.
If we can move this to the pharmacy and drop some of the criteria, you go to your doctor and get a prescription, drop it off at Rite Aid, and pick it up the next day when it's shipped from Cardinal Health or McKesson or whoever to the drugstore. When it comes to reordering, I don't know if you have any medications, but I can tell you if I have 30 days worth of pills, I start getting calls on day 27 every single month. I think it just makes for a much more efficient, better patient order processing experience. The way we'll track that, we're gonna give up some control, which is very hard for me.
In all reality, when that data is all going to the cloud from your phone, we'll be able to track those patients, and we'll know who is buying what and how often they use sensors and when they're up for reorder. That data and this data revolution that's coming is gonna change our business processes combined with pharmacy distribution. We see our company in a far different place in three years.
Yeah, that's helpful. Jumping around a bit, but you previously talked about some specific reimbursement studies planned for Germany and Sweden, I believe. Any updates on these? Really the question is about the cadence of incremental OUS markets that you'll be opening up over the next, call it 12, 24 months.
You know, right now we are opening up more smaller countries. We're in most of the large countries, certainly in Europe, very little in Asia. Asia, we've got efforts going on in Japan right now, and we're kind of trying to decide what to take to China because we have to take an FDA-approved product over there, but it takes some time to get approved, and we don't wanna get something approved that we don't build anymore. There's a bunch of dominoes that have to fall in place for China approval. We've taken very much a shotgun approach in these countries because there hasn't been a lot of reimbursement. The more countries, the more cash paying patients, the more product we can sell.
I think as we get reimbursement in, hopefully in Germany, hopefully in Sweden, and other countries over the next, you know, 18-24 months, you could see some significant pickup in sensor revenues overseas, as this product is reimbursed. It'll be a while. It's not gonna happen overnight.
Yep. All right. Helpful, guys. Thanks very much. Congratulations.
Thanks. Thank you.
Next question is from Danielle Antalffy with Leerink Partners.
Good afternoon, guys, and congrats on turning profitable and filing G5 big milestones in the quarter. Kevin or Steve, I was hoping maybe to get some more color on the dosing claim. I think that's really exciting. Just wondering how we should be thinking about what kind of trial that would require from a size and perspective and also endpoints. If we can't get more color today, when we would be able to expect some more color from you guys on what that could look like.
I think ultimately, Danielle, we'll have a lot of visibility by the call in August for Q2. We have a number of meetings slated with the agency between now and the end of the second quarter to put this trial together. Suffice it to say it's not gonna be a small one.
Right. Okay.
Test a whole bunch of things and a whole bunch of different patient population segments, et cetera. The guys are doing a great job working with the agency on this. It's been a very interactive discussion. They wanna help us. We meet regularly. We're gonna get there.
Yeah. I think that's awesome. Higher level, my next question is, so G4, obviously, there was a big step-up in new patient adds. Now the base is much larger, of course. As you guys continue to evolve the technology, how do we think about each short sort of next evolution of technology? Starting with G5 and then G6, and maybe with the dosing claim and then calibration, the increase in new patient adds, do you see it just sort of this steady 35%-40%, which is what you said historically? Could it be incremental to that? Just high level, how do we think about that? What could ultimately drive the inflection point here?
Because at the end of the day, CGM is still just, I think, around 15% of Type 1s. This technology moves along, I mean, I feel like it could be much, much larger than that. Is there any sort of one obstacle you'd have to knock over to get it there?
You know, Danielle, I'll take this one. I think, you know, you kinda hit it on the head. You said 35%-40%. We've never said we were gonna sustain 60+% growth. Let's start with we need to sustain 40% growth for the foreseeable future. Our real mission internally is over the next several years, you know, two to three years, to be able to continue that 35%-40% growth rate. In order to do that, we have to continue to iterate new and better products to increase the size of the addressable market.
The way I like to think about it is way back, you know, in the STS three-day days in 2006, the product didn't work particularly well, and there were just probably a very small handful of people who were willing to put up with a product that didn't work particularly well. Much better performance in the SEVEN, an incremental improvement in the SEVEN Plus. That drove the addressable market to a much larger size. Now, obviously, with the G4 Platinum, that's been a huge catalyst. I don't know if you use the term inflection point or not, but a huge catalyst for growth in terms of new patient adds. To sustain, just to sustain this phenomenal growth that we're seeing, you need to get to Gen 5 with our mobile platform. You need to get to Gen 6 to reduce calibration and extend the duration.
You need to get to what, call it Gen 7, 8, 9, you know, eliminate calibration, miniaturization, new applicator, all of the things that we keep talking about in our kinda near to midterm pipeline. I mean, kinda near to midterm meaning three to five years. We need to do all of these things, in my opinion, just to sustain the growth that we're trying to achieve. I don't think, you know. Could there be upside to the numbers? Sure. But I think we're really targeting trying to do the things and iterate the technology in a way that we can assure ourselves that we can continue to grow at the rates we've been growing or at the rates we've said that we're gonna grow.
All right. Thanks for that.
Next question is from Anthony Petrone with Jefferies.
Thanks, gentlemen. Maybe a follow-up for Kevin on no calibration and accuracy. Just thinking ahead as you know, attempt to do that from a manufacturing standpoint, I imagine it would be a little bit of a higher cost manufacturing endeavor. So I guess the question is what is Dexcom willing to give up in terms of margins in order to achieve, you know, reduced or no calibrations, you know, coupled with improved accuracy?
You know, that's a great question. Every time we make a sensor more accurate, we improve our margins. so far as we've had manufacturing improvements, they've been designed in mind that that it would be more cost effective and produce more accurate sensors and produce better yields. I think the key to no calibration sensor is to have an extremely repeatable manufacturing process. As I discussed earlier, the Gen 6 manufacturing line eliminates some of the steps that cause errors or yield loss in the G4 system and is much more automated and much more advanced. There's more steps to automate in this process. I don't think we'll have to give up much on the margin side, particularly as we go to extended wear. The math becomes quite simple.
If we have a 10-day sensor and we can bill at the same per day rate as the seventh-day sensor, we can pick up some more margin and even include a little extra cost in that sensor if that's what we have to do to get that label. I don't view them as a trade-off.
Okay. That's helpful. Maybe just to switch gears to maybe coverage of endocrinologists you're adding to the sales capability. Maybe just an update on how much room for expansion in the U.S. particularly is there as it relates to adding new practices? Maybe an update on the average penetration of CGM into existing practices.
You know, that's a great question. As we've talked on this call several times with Terry when he was here, we have thousands, probably more than 8,000 physicians who prescribed one CGM system in 2014. We certainly have several champions, and we consider champions or a certain level of high prescribers. That number has gone up, but not as fast as we would like. We need to move everybody up further. Access drives a bit of that. If a patient can go to their doctor and get a prescription signed and go to the drugstore and pick up a sensor, that will take physicians who had to spend an inordinate amount of time doing paperwork for the one CGM they prescribed and get them more accustomed to prescribing CGM for their patients. Access is gonna help with this.
Our product improvements are gonna help with this. You know, the data on the phone, the data in the cloud-based platforms. If we can show the physicians that, "Hey, look, you can sit down and pull up Steve's data on your computer without Steve plugging anything in to his machine," that's pretty cool, and that will help. You know, we call on every endo that we can. We're very specific as far as calling on those who prescribe a lot of insulin, and who have large practices. We've worked our way down, you know, down the food chain. We move further down those lists as we get bigger every year, and there's still more room to grow.
At the end of the day, we still have too many onesies and twosies, and we've got to get out to these other guys and get them to increase what they're prescribing.
That's helpful. Just last from me, just a clarification on the Share ecosystem. Is that an open architecture where eventually that data can be shared with, you know, competing offerings should they come down the road? Or is the data that's captured in Share, you know, only compatible with a Dexcom CGM, therefore it cannot be accessed by competing companies?
The data that is stored in the cloud from our share platform is right now accessed only by Dexcom devices. We have made a lot of progress over the past few months with respect to data and possibly sharing data with others. We have not signed any agreements with anybody to let them access that data in the cloud yet. We will consider it, you know, if it meets a patient need that we can't meet, and it's something the patients want. We are open with respect to our architecture as we've demonstrated with our, you know, our relationships to date. We'll consider that over time, but we're not gonna run out and sign everybody up in the world and distract from what we're doing.
Thanks again.
Great. At this time, I show no further questions. I'll turn it back to you, speakers, for final remarks.
Thank you very much. In closing, I want to address one of the frequent questions that we hear as we meet with others on the outside. Now that you're in charge and Terry has graduated on to executive chairman, what's gonna change? It's easiest to tell you what's not gonna change, and that's our commitment to our patients. Our patient-first strategy has put Dexcom in a very enviable position. Even one of our competitors referred to our off-the-charts Net Promoter Score in one of their presentations at ATTD. Our passion for patients is what drives this company. That culture has been put in here by Terry and will never change. I've been very fortunate for the past three-plus years with Terry and the CEO chair to become familiar with the intimate details of our company and help Terry build an excellent team here.
What's different now is that our business is really undergoing major changes. You heard it in my prepared remarks earlier as we compared the number of product launches this year to our two previous years. We are much more complex. In addition to our growth, as I said previously, the business has got to be scalable. With this great team we've assembled, I'm very confident that we can execute our very ambitious plans and achieve our simple final goal. We wanna replace finger sticks. Thanks, everybody.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.