Hello, and welcome to the Dexcom third quarter 2014 earnings release and conference call. My name is Joe, and I will be your operator for today's call. At this time, all participants are in a listen-only mode, and 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 the CEO of Dexcom, Mr. Terry Gregg. Sir, you may begin.
Thanks, Joe, and thanks, everyone for joining Dexcom today on our third quarter of 2014 investor conference call. I'm gonna have Steven Pacelli read our safe harbor statement to kick things off.
Thanks, Terry. 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 performance.
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. Terry?
Thanks, Steve. Joining me today are Kevin Sayer, our President and Chief Operating Officer, Jess Roper, our Chief Financial Officer, and you just heard from Steven Pacelli, our Executive Vice President of Strategy and Corporate Development. Today's call will follow our traditional format. Kevin will review our third quarter 2014 financial results and provide a business update, and I will then follow with some concluding thoughts. Before I turn the call over to Kevin, I'd like to comment briefly on our results for the quarter.
Our product revenue growth is unparalleled. We have grown over 60% annually for six consecutive quarters, and our average year-over-year quarterly revenue growth has been 65% since the launch of G4 Platinum. In Q3, our cash-based operating income increased by approximately 3x over Q3 2013. Clearly, our business model is working as planned.
All the while, we are in the midst of three simultaneous product launches. First, a new, smaller version of our G4 Platinum transmitter. Second, Dexcom Share, our first step into mobile remote monitoring. Third, our new G4 AP algorithm with an unprecedented 9% MARD. Things could not be better for us. With that, I'll turn the call over to Kevin.
Thank you, Terry. I'll start with the financial update. Dexcom generated $67.9 million in product revenue for the third quarter of 2014 compared to $42.5 million for the same quarter in 2013, a $25.4 million or 60% increase. Sequentially, product revenue for Q3 of 2014 increased 17% from the prior quarter. Total revenue for the third quarter of 2014 was $69 million compared to $42.9 million during the same quarter in 2013.
Our product gross profit totaled $46.1 million, generating a product gross margin of 68% for the third quarter of 2014 compared to product gross profit of $27.7 million and a product gross margin of 65% for the same quarter in the prior year. Sequentially, our product gross margin in Q3 2014 was flat. As we said previously, our gross margin target for the G4 Platinum sensor is between 70% and 75%, and our gross margin target for G4 Platinum hardware is 50% or better. With a blended gross margin of 68%, we are achieving our targets.
While we may see minor incremental gross margin gains in future quarters, we do not expect to see continued large improvements in gross margin until we introduce new products and achieve even greater sales volumes.
I would like to share some additional thoughts on our product revenue and our gross profits. During Q3 2014, our revenue mix between durable and consumable products was again approximately 30% durable and 70% consumable. ASP for sensors was flat for the third quarter at approximately $72 per sensor, and the ASP for our hardware was approximately $850 per starter kit, with a little more than half of our hardware ASP attributable to the transmitter.
While we continue to target ASPs in a range of $70-$75 per sensor and a range of $850-$900 per starter kit going forward. Finally, our international business continued to exceed our expectations in Q3, with international product revenues representing approximately 15% of product revenue during the quarter.
On the expense side, research and development expense totaled $18.5 million for Q3 of 2014 compared to $11.8 million in Q3 of 2013 and $14.8 million in Q2 2014. Yes, we are making a significant investment in our future. As Terry mentioned in his opening remarks, we have seen exceptional growth since the launch of G4 Platinum, and we have clearly demonstrated that superior product performance has been key to driving this growth.
Yet, as we evaluate what we believe will be required in terms of improved sensor performance and advanced system features and functionality to meet the ever-increasing demands of our patients and clinicians, we must continue to invest in the near term.
In addition, we need to complete the clinical trial work necessary to demonstrate improved outcomes and lower costs to drive favorable payer policies. We will look to take advantage of near-term opportunities such as advanced integrated pump CGM systems, simplification of sensor deployment, mobile and cloud-based data platforms, and additional system performance improvements such as improved accuracy, extended duration, and reduced calibration.
Page two. Over time, we will focus on miniaturization and advanced decision support tools, all with an eye on increasing patient convenience, improving outcomes, and lowering costs. We will not lose sight of our ultimate goal of replacing finger sticks entirely. Selling, general, administrative expense totaled $33.7 million in Q3 of 2014, compared to $21.6 million during the same quarter in 2013, an increase of $12.1 million.
The year-over-year increase in SG&A expense relates primarily to increased sales costs driven by our robust sales, increased marketing spending, and IT expenses for our commercial infrastructure as we scale the business for continued revenue growth. SG&A expense also includes a $4.4 million increase in non-cash share-based compensation expense over the prior year. SG&A expense for the preceding quarter was $30.9 million.
The sequential increase of $2.8 million includes $600,000 in incremental non-cash share-based compensation expense and commercial expenses to support our 17% sequential growth in product revenue. Our net loss for the third quarter 2014 totaled $5.2 million and included $15.2 million in non-cash expenses centered in share-based compensation, depreciation, and amortization.
Absent these charges, our cash-based operating income would have been approximately $10.1 million for Q3 2014. Obviously, we are quite pleased with our cash-based operating results, as this compares very, very favorably to a cash-based operating income for Q3 2013 of $3.5 million. Our basic loss per share for the quarter was $0.07. With respect to our balance sheet, we ended the third quarter with $74.9 million in cash and marketable securities, up almost $13.6 million sequentially. We remain quite comfortable with our cash position.
Finally, consistent with past practices, we take this opportunity to update our full year revenue guidance. We now expect product revenue for the full year to meet or exceed the top end of our range of $235 million.
Now for our business update. Over the past few weeks, we have had a very exciting string of news related to our product portfolio. First, in mid-October, we were very pleased to announce the approval of Dexcom Share, the first FDA-approved remote monitoring system developed to address the unique challenges faced by caregivers in assisting people with Type 1 diabetes.
As a reminder, the Dexcom Share system is a docking station for the G4 PLATINUM receiver, which enables wireless transmission of glucose information, such as a patient's trend graph, from the G4 PLATINUM to designated recipients, allowing the recipient to view the patient's data today on their iPhone or iPod touch, and in the future, on an Android platform as well. We view Dexcom Share as the first of many steps in bringing CGM to mobile devices.
We successfully launched Dexcom Share within days of approval, and we couldn't be more excited about the early feedback we've received from patients using the system. Just this morning, we were pleased to announce that FDA has approved a new algorithm for the G4 Platinum system that we dubbed the G4 Artificial Pancreas or G4 AP algorithm. The clinical data from this new algorithm was first presented at ADA in June in a late-breaking poster entitled "CGM Is Not the Limiting Factor in Artificial Pancreas Systems."
I n this study, we demonstrated that our technology is approaching finger stick accuracy with an overall G4 AP MARD versus YSI at an impressive 9.0% compared to a finger stick MARD of 5.6% versus YSI. The new algorithm will be made available free of charge to existing adult patients using the G4 Platinum.
They can simply go online and download the software to update their receiver. Additionally, we expect to file a PMA supplement for pediatric indication for the G4 AP algorithm this quarter. All new adult patients going forward will receive the software preloaded onto their Dexcom receiver with new orders. We believe this new algorithm represents an important next step on our path to obtaining an insulin dosing claim and the potential for factory calibration, both of which support our ultimate goal of replacing finger sticks altogether.
Shifting to our integration partnerships, Animas believes that the Vibe is nearing US FDA approval, and we are gearing up for a commercial launch of Vibe in the US, which could come before the end of this year.
On our last call, we shared that Tandem had submitted a PMA, a PMA application to the FDA for the t:slim G4 insulin delivery system, which integrates the Tandem t:slim pump with our G4 Platinum system. As Tandem reported this morning, they are extremely pleased with the level of interaction with the FDA since the filing, and they are confident in their ability to bring this device to market. That being said, timing of product approval is at the discretion of the FDA, and Tandem continues to estimate a 12- to 18-month review cycle for the t:slim G4.
Finally, on the data integration and data management front, there seems to be a considerable amount of confusion in the marketplace as to where and to what extent Dexcom is a participant.
When it comes to retrospective display of our CGM data, we have announced an open architecture policy whereby we will allow third-party software developers, companies such as Tidepool, Diasend, and others, to display retrospective data from our G4 PLATINUM system within their data aggregation platforms. When it comes to our mobile app platform, we have stated a desire to incorporate insulin onboard data and other potential relevant data into our mobile platform.
To that end, we have entered into agreements with Insulet and Asante, and are considering others to integrate data from their insulin delivery systems into our G5 mobile platform. This platform will enable us to aggregate glucose and other diabetes-related data from patients' devices and display the integrated data on a smartphone. This will be a Dexcom-driven software development process, and we expect these apps to be PMA products.
With respect to real-time display of Dexcom CGM data, we have thus far elected to maintain tight control, due in large part to the regulatory and quality systems requirements imposed upon CGM devices by the FDA. Obviously, our standalone products will provide patients with real-time information. To date, we have only granted rights to commercialize display of our real-time data to a select few insulin pump companies.
Going forward, we will consider on a case-by-case basis whether we open up real-time data display for commercialization to other third parties, such as other insulin pump companies or groups working to develop an artificial pancreas utilizing our sensor technology where it makes commercial sense. Prior to doing so, however, we would want to assure ourselves that any such third party has a robust quality system and regulatory resources required by FDA to develop and maintain a Class III medical system.
With that, I would now like to turn the call over to Terry for some concluding remarks.
Thanks, Kevin. Well, our third quarter performance did not entirely surprise us as we continue to see momentum for the G4 Platinum build in the diabetes community. One needs only to read the diabetes blogs and chat room discussions to know what a tremendous difference we are making for patients as well as their parents and loved ones as they strive to improve control over their diabetes. We must continue to innovate, never resting on what we have accomplished, which of course, today is the industry-leading CGM technology.
We will never be satisfied until we reach our goal of replacing finger sticks, and upon achieving that milestone, we will simply develop new goals to continue to drive Dexcom to remain the dominant name in continuous glucose monitoring.
We recently received approval for our Share system, and we believe this is the first step in the connectivity pipeline we are developing to ease the burden of trying to better control glucose levels safely. Even more important is that Share actively engages the patient and his or her support team, which are parents, spouses, and loved ones. For the first time with an FDA-approved device, you can be in the next room, the next state, or across the globe and someone has your back remotely. We are changing the paradigm of managing diabetes for the better.
Kevin mentioned our recent approval of a new algorithm, the G4 AP, that we will begin to distribute shortly. I can remember how happy and satisfied patients were with the improvement in accuracy from the 16% MARD of the 7+ to the 13% MARD of the G4 Platinum.
I'm even more excited to get this new algorithm with an MARD of 9% into the hands of patients. We have learned the importance of accuracy in CGM. It translates into confidence and trust in the G4 system. It also translates into freedom for the patient to live a more normal life, and it moves Dexcom a step closer to our goal of replacing finger sticks.
Our pipeline is very robust, and we expect to introduce a steady stream of product innovations on our sensor technology as we look at G 6, on the durables with an improved sensor deployment system, and especially on the connectivity side as we introduce our G 5 system. We will continue to make the appropriate investments to achieve these goals. As I have often commented, being in the CGM space is extremely difficult and expensive.
Many have tried, and most have failed, and yet we continue to prosper and drive adoption by providing superior technology in a patient-friendly format. Kevin touched on the reimbursement challenges facing the med tech world as cost of care becomes front and center for the payer universe, and we believe we are well-positioned to demonstrate improved outcomes while saving the system money.
A single severe hypoglycemic event with a hospital admission can cost on average $17,000, and yet we can reduce or eliminate hypoglycemia events. The compendium of positive outcome data associated with continuous glucose monitoring continues to grow.
One of our near-term goals is to harness that data to enable payers and healthcare providers to better manage treatment modalities and ultimately further reduce costs of care. The world is waking up to the potential benefits of connectivity with wearables for improved health. Dexcom has been a pioneer in this area since our inception, so we are excited to be able to partner with companies like Apple to accelerate our efforts. You'll be hearing more about these collaborations in the future. With that, we will take questions.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star and 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 do have a question, please press star and then one on your telephone keypad now.
Operator, we're not hearing anything.
Oh, yes. I'm sorry. Our first question here comes from Danielle Antalffy from Leerink Partners. Please go ahead.
Hi. Good afternoon, guys. Congrats on yet another great quarter. I was hoping you could comment, you know, there was some talk in the quarter about a competitive launch in Europe. Obviously, I'm talking about Abbott's Libre, which, you know, from what I understand, is not a true CGM. I was hoping maybe you could talk a little bit about what that product is and more importantly, what you're seeing so far in Europe, from an adoption, potentially market expansion perspective. Also any comments on pricing with that product.
Yes, Danielle, this is Steve. I'll take this one. You know, I think you kind of hit it on the head. Look, the FreeStyle Libre product is first and foremost, it's not a CGM product. It does not have the capability of alerting a patient, for example, to nighttime hypoglycemia, which is a critical attribute to CGM. It's not really fair to have an apples to apples comparison between Dexcom CGM and the FreeStyle Libre product. That being said, we long assumed that Abbott would come back into the market. They've been talking about this product for over a year now. It certainly wasn't a surprise to us.
You know, we've been watching the blogs, frankly, but I think they're in the very early stages of their launch, so there isn't a whole lot of detail or information out in the marketplace at this point. I've heard pricing. It's, you know, it appears to be priced favorably to a full-blown CGM. But again, your patients would be purchasing a product that doesn't have, you know, the full protections of CGM in terms of alerts and threshold alerts and alarms.
You know, I think at this point, we're gonna take a wait and see approach, wait and see what if and what they develop as a category and market in Europe. You know, no idea. They've been very silent as to potential timelines for a US commercialization.
We'll take a wait and see approach here. I think the net net for us is, look, I mean, the configuration that Abbott has come to market with is certainly something that we could mimic and potentially, you know, make some tweaks to have a product that would be very competitive to an Abbott Libre product, to the extent that they're able to develop some new category for the product. I think, you know, with that, we're gonna take a bit of a wait and see approach.
Okay, great. That's helpful. I was hoping you could give some more color on Share. Congrats on the approval, sort of how we should think about that contributing to revenue. Is that a subscription-based model? Or how does Share work and how do we look at that going forward from a revenue top line driver perspective?
Sure, Danielle, I'll take that one. The Share system is. It's an upfront charge of, I think, $299, and you get the cloud and your data to start off. It is not a subscription model at this point in time. Our patients buy the hardware and that's what they get. With respect to driving our revenues, as I said in the prepared remarks, this is really the first step in our mobile platforms. While we expect this to contribute some, it's not gonna be a major revenue driver when we're already growing at 60%.
What we do see, what we do anticipate is that this will be very helpful and continue to grow the pediatric market. The other benefit of Share, quite frankly, isn't on the top line.
It's a pressure test for all the infrastructure we've been building for a long time to manage this data remotely. We have learned a whole bunch in a very short period of time about our patients' behaviors and patterns and their glucose readings. All in all, it's a great launch for us.
All right. Thanks so much, guys.
Thank you. Our next question here comes from Ben Andrew from William Blair. Please go ahead.
Hi. Good afternoon, gentlemen. A few questions from me. If you think about the fact that FDA moves so quickly with the new algorithm, I mean, obviously the benefits it provides are material. Does it give you any information content relative to what that could mean for the G5 approval? Or does that transmitter, because it's really just a transmitter now that's changing, I believe, and kind of the connectivity dynamic that would represent the G5.
You know, I think they're different. The algorithm is certainly science that the FDA is familiar with respect to Dexcom, as we've been through several sensor launches and even an algorithm change in the past with respect to the seven system without changing hardware, and the data was very clear cut. We're hopeful that we get a quick approval on the G5 system, but it is more than just a transmitter. It is, you know, display directly on the cell phone. It is human factors work on display on a cell phone. It's all the things we have to mitigate for loss of connectivity and things of that nature, Ben.
While we've met with the FDA on several occasions and have a very good idea of what that file is gonna look like, and we believe they have a very good idea what the file is gonna look like, I don't think the two are related. We're hopeful, but we'll just have to wait and see.
Okay. Then Kevin, you talked about, you know, the R&D spending and to Terry as well, being allowing you to do some more things. You mentioned device integration with advanced pumps or delivery systems as well as advanced decision-making tools. Over what timeframe should we see you guys moving forward with that commercially? Is this two, three, four years? It seems like it will be an evolution, obviously, including the current portfolio. Does this allow you to accelerate some of that and bring those things forward? 'Cause those obviously may represent additional revenue opportunities as well.
You know, Ben, right now, a lot of that is infrastructure building and getting ready to develop those types of tools. I think it's two to three to four years out where we really have good, really good live decision support tool. We haven't even been through an FDA path on something like that yet. We do know that we have great data, and we'll accumulate more to whereby we can develop those things. You know, we're just making more investments.
We've, as you know, Terry and I have been around the diabetes industry for a very long time, and we've seen what happens when companies take their foot off the pedal as far as innovation, and we're not gonna do that. I don't know, Terry, if you have anything to add to that.
Sure. One of the things we did, you know, we're the founding member with Joslin Diabetes Center. As we look at taking data and not only using predictive analysis, but in a real-time sense to allow therapy changes on the fly that patients can do ultimately with obviously the counsel of their physician. All of this becomes, the more you look at prediction software, becomes very exciting to us that this, disease called diabetes is one that would be, particularly benefited by these types of programs. We're moving as fast as we can. Once again, it's Dexcom breaking brand new ground, and we've gotta go about it slowly.
We can only move as fast as the agency will allow us to move with this because in the end, we are not physicians, and there is a great degree of concern that we don't cross over that line.
Okay. Last thing for me, Kevin, you were kind enough to give us the 30% of revenues coming from hardware. Can you give us a sense how that breaks down at all in terms of replacement hardware versus new patients? Thank you.
You know, we get asked this question every quarter, and we're not gonna add any more color to what we've added. We're having great new patient results. You can't grow as fast as we are without having that, so we'll leave it the way it is.
Thank you. Our next question here comes from Tom Gunderson from Piper Jaffray. Please go ahead.
Hi, guys. My first question is around the pediatric indication. We all know a lot of parents that have been waiting for Share, but it kind of begs the question of, oh, yeah, that other approval that you had recently on pediatric expansion. Can you give us a little color on that, how you're doing from a penetration of clinic standpoint? Also, is the split pretty much the same right now with pediatric? I'm sorry, with durable and consumable with pediatric, or is it a little bit more on the starter kits? Any color there would be helpful.
You know, Tom, the pediatric launch has been very successful. We're a couple quarters into it. As we said last quarter, a pediatric patient has the same usage and spending patterns as a regular patient, so we're not gonna break that out, and continue to report on that every single quarter. I can say it's certainly been a driver in our growth and been very successful so far. You're right, a lot of parents are very happy with the Share watch.
Okay. You know, OUS coming in at roughly $10 million, it's starting to get significant here. Again, can you give a little more color there? Is it mostly Europe? Is it mostly out of pocket? Is it, you know, mostly starter kits as people figure out that the accuracy is worth the investment? Thanks.
You know, it is really very much mostly Europe. We've done very well in Canada this year as we've launched there as well. We have some countries that have carried us, Italy, Sweden, Germany are three of the bigger ones, and the Netherlands. There's four large ones in Europe where we've done very well. Reimbursement is improving. We see reimbursement in some countries in Europe. We are also investing, you know, I talked about the study investment in the prepared remarks.
We're investing in some very large studies over there to drive governmental reimbursement of CGM for patients. We're making investments over there to get full-on reimbursement for CGM. A lot of it's out of pocket, and a lot of it's durable. It's a mix.
It's not the same mix as the US, and it's not as predictable. We don't have as much color on those patients as we have over here, but the business is doing very, very well.
Just a quick follow-up, Kevin. Does Vibe contribute meaningfully to that $10 million, or is it still early?
No, it does. The Vibe is doing very well in there. Animas has done very well with that product over there.
Got it. That's it for me. Thank you.
Thank you. Our next question comes from Mike Weinstein from J.P. Morgan. Please go ahead, sir.
Hi, this is actually Robbie Marcus in for Mike. Congrats on the great quarter. I was hoping maybe you could give us some more insight into trends into where the patients are coming from. Is the pharmacy benefit helping out here? Are you taking share from Medtronic? Are these all new to CGM, adult versus pediatric? Any kind of insight into the trends would be really helpful.
All of the above. I mean, literally, pharmacy benefit has helped in some cases. We're certainly not losing market share based on all the independent data that we look at. We have very significant new patient growth. Combine that with the fact that we're not losing patients like we used to in the Seven Plus days. Our retention rates are very good.
Our utilization rates appear to be very strong as people trust and rely on this sensor array. I can tell you I've had many patients say the worst two hours of my week or two weeks if they wore the sensor longer than seven days is that warm-up time while I wait for the next sensor to start. Every variable in there is working. Again, I'll go back to our earlier statement.
To achieve growth like we have, they all have to hit. Every one of them is doing well.
Okay, great. At the end of September, Medtronic revealed the Guardian Connect, their own standalone CGM. You know, how are you looking at this as a competitor to G5? You know, any comments around your take on that product would be really helpful. Thank you.
Yeah. I mean, you know, Medtronic revealed a potential standalone system at a trade show earlier this year. You know, we haven't seen or heard, frankly, anything else about it, since that time. Much like the Abbott Libre, we're gonna take a wait-and-see approach. Not clear to us what sensor component would be included, whether it's their current Enlite sensor, which we've all seen the performance of that sensor or some future sensor.
Again, it's somewhat unclear. I think one of the comments that was made by Medtronic was that the first generation Guardian Remote, or whatever they're calling it, would not have a remote monitoring feature. It would simply be displayed to the patient.
In that respect, it's somewhat different than what we're gonna come to market with G 5. Outside of that, I don't think we know a whole lot about it.
Thank you. Our next question here comes from Bill Plovanic from Canaccord Genuity. Please go ahead, sir.
Great. Thanks. Good evening. Can you hear me okay?
Yes.
We can.
Great. A couple questions. G5, what does that include today, and when do you expect to file that?
We expect to file that in the first quarter of 2015. The primary focus of G5 is the transmitter will be able to speak directly with two separate devices via Bluetooth connectivity. It could speak to your phone and your receiver at the same time. It could speak to just your phone or just your receiver. Then that data will be shared through the applications on the phone to the cloud, and people will have access to the Share system, which will be the exact same system that we've launched pretty much with the Share that was launched this year.
The focus of G5, it will be a G4 sensor with respect to its performance characteristics. It will have the G4AP algorithm. It'll have that level of accuracy.
We're not changing the system or the system performance for the G5 platform. We are gonna come with a user interface that's very much designed to be a mobile platform for those who look at the data on the phone, that we think is just fabulous. That's what the G 5 system's gonna be.
Okay. On that, is it going to address the calibration requirements or the finger stick replacement, or that's a G6?
We will not change the calibration scheme for the G 5 system.
Okay. It sounds like you're getting ready to lock that down and submit that.
We are working very hard to lock that down. Yes.
Great. Thank you. On the pediatric mix, you know, as you think about the new patients coming in the door in the quarter, how much are peds and how much are adults if you're looking at what was coming in kind of the overall business?
You know what? Peds, Bill, I'll go with what I said earlier. We've been out for a couple quarters with peds. Everybody's a patient, and they all have the same economic patterns, and we're just not gonna report that every quarter. It's going very well with peds. We're very happy. It's met all our expectations.
Great. My last question just is how long with the new G4 AP algorithm, you know, how long do you think that'll take to get into your current installed base, number one? Number two, I take it that will just be the algorithm going forward.
Bill, this is Steve. I for this purpose, for the purpose of your question, I went and asked the ops guys how we were doing. It was actually posted on our website earlier today. We've had several hundred users already download and install the upgraded software. It's gonna go fast.
You know, we expect to start shipping the new algorithm with new purchases, with new receivers next week. We're going.
Are there any costs or anything that'll be associated with that for you that would be incremental, you know, material to call out or not really?
No.
Not material.
Nothing material, no.
Okay, great. Congratulations on the phenomenal quarter.
Thank you.
Thank you.
Thank you. Our next question comes from Raj Denhoy from Jefferies. Please go ahead, sir.
Hi, good afternoon. What if I could ask just one about the spending levels. I appreciate that, you know, the necessity to continue to spend on R&D and sales and marketing to keep the growth as it is. But should we assume that the new kind of $18.5 million R&D level, likewise with SG&A, is sort of the new baseline we should assume kinda going forward from here?
You know, Raj, that's a very good question. With respect to R&D, you know, as we prepared, we sat and discussed that. I started here about 3.5 years ago. R&D is a lot different than it was then. For example, now whenever we do something new, we've gotta run trials for adults and for peds. The cost of getting anything to market is now double on the trials and execution side once we get something that developed.
We're spending money on the cloud infrastructure and a lot of things that we weren't working on before. Fortunately, we've had the acceleration of growth necessary on the top line to hit our performance objectives.
It is important as we look going forward into next year, that we look at baselines in Q3 and Q4 of this year. Everybody may remember in Q1 of last year, everybody took our expenses way down from Q4 to lower numbers, and we ended up with much higher expenses than everybody thought. We typically don't give a lot of expense guidance, but I think you can look at this number and go from there. There's a lot of stuff going on here, and it's good. I don't know. Steve, Jess, do you guys have anything else?
I'm gonna weigh in a little bit. This is Terry. I spend a lot of my time thinking strategically for the company at this point. What I'm always cognizant of is, as you look around the universe, the cost of care is something that is obviously on everybody's mind. We heard it as a keynote speech at the AdvaMed. Mike Mussallem talked about it during the Edwards. We need to spend some of those R&D dollars to ensure that we know as a category, CGM saves the system money.
I've preached to whoever would listen that the first stage as we look at ACA, whether or not it gets changed because of an administration change, who knows? I will tell you this, that in the future, the healthcare providers will get some of their compensation based on outcomes.
It won't be too long after that. I can't tell you when my crystal ball says three years, four years, that industry is gonna be part of that game, that if you can't demonstrate you're taking dollars out of the cost of care with your products, your products are not going to be reimbursed. What we have to do is we know, and it's a lot of lip service at this point, everywhere we turn, I just gave you a $17,000 number for hospital admission. We're spending over $250 billion a year in the United States treating diabetes, and unfortunately it continues to grow at unparalleled rates that we have seen.
We've gotta be cognizant of that, and some of that R&D spend is creating and demonstrating to the payer system that we are in fact saving them a lot of money and will save them even more money in the future. As Kevin mentioned, I mean, everything we do from the standpoint of building is they hear it preached to them every day, make it better and make it less expensive. At that level as well.
These are investments for the future with the return being things that are not as price sensitive. We know we have to hit certain gross margins. No matter what we do, regardless of what the price is, we've got to hit those gross margins. From that perspective, we need to make those investments today.
No, that's helpful. If I could just ask a couple follow-ups. You noted, I think you mentioned that one of the things you're spending on is a new smaller transmitter. Did I hear that correctly?
We actually launched a new smaller transmitter this quarter.
Okay.
It's already out.
I would guess I just wasn't appreciative of that. Maybe you could describe a bit about how much smaller that is and what sort of receptivity you're seeing with that?
Well, the receptivity has been outstanding because everybody likes things that are less obtrusive on their bodies when they have to wear our devices. People have liked it very much. Driving that, we had to make a transmitter that had all the features of the previous G 4 one, particularly the ability to transmit over an extended range and also the ability to talk to our integrated pump partners.
The transmitter does both of those things. It does cost less to make, so it meets all of our objectives. As you know, Terry stated, what we do make it better and make it cheaper. They achieved them both. The guys did a great job.
Okay. Just one last one. Sorry. You know, I looked back. I think it's been almost exactly two years to when you got the G 4 approved. You know, and as you noted, I think in your remarks, you've grown consistently roughly 65% on average since then. It sort of variably begs the question of how long you can sustain this. It sounds like the G 5 is getting filed soon, and that should kind of keep things going. You know, 65% is a pretty high bar to keep having to jump over 60% even. Do you have any thoughts just around that?
You know what, Raj? We've typically said we believe our sustainable growth and what we plan for is to grow at 40% every year, and that allows you to double every two years. We've been very fortunate to grow faster than that. Our plans have always been to grow at 40% and have the infrastructure to support 60%. We're doing both, and we'll keep pushing.
This pipeline that we're developing, you know, we firmly believe can drive the business the way it has. It takes every one of these innovations to keep it going. It took a peds approval. It's gonna take a new algorithm. It's gonna take going to the phone. It's gonna take a share system.
It's gonna take every one of these things to continue to drive that growth. We can't drive the growth just by continuing to market G4 as it sits. We've got to be better, and we will.
That's great. Thank you.
Thank you. Our next question here comes from Tao Levy from Wedbush Securities. Please go ahead.
Great, thanks. Good afternoon. The professional CGM, did that have any impact in the quarter? Or how's the rollout of that product? Is it allowing you to, you know, convert more patients to CGM? Sort of any color there would be helpful.
You know, the rollout has gone fine. As we said when we announced that approval a while ago, we don't expect this to be a huge direct top-line driver of our financials. It has not been. They do convert some patients. I don't have a statistic off the top of my head. We know the percentage of people who wear our sensor on this professionally used system. The percent who convert to purchasing one is very large. It's very consistent, very favorable. So it certainly helps us, but it really hasn't been a measurable driver in direct sales. In direct sales, I don't have a number to share with you.
Okay. With the APM algorithm, you know, is that applicable also to sort of the integrated systems that'll be coming out, you know, the Animas Vibe and the Tandem?
Yeah, this is Steve. Unfortunately, they will not have the ability, neither the Animas Vibe pump nor the Tandem t:slim pump have the ability to upgrade as we do our G4 Platinum receivers to upgrade to the new algorithm. Those patients would have one or two options.
They would have to wait until a next generation, really a G5 version of the pump, or they would always have the opportunity to purchase, and we've actually seen this happen in Europe, where patients, even patients on the Animas Vibe, have elected to purchase a standalone Dexcom receiver because they prefer to, you know, pull that out of their pocket, purse, backpack, whatever, to check their glucose values rather than pull their pump out. You know, the transmitter would be the same.
The patients who wish to use the new algorithm would be able to use it with the same transmitter if they bought a separate receiver.
Okay, great. Just lastly, you know, Terry, you mentioned you know, at the end, you know, the collaboration with Apple, and I know with the, you know, Share right now, you know, only works on the Apple platform. Is that kind of what you were referring to, or are you either potentially gonna go beyond that and you start thinking, you know, the-
Oh, we'll go beyond that. As you know, you can buy the app on the iTunes store today for Share. So that's the first stage. As we have indicated, there's a trial being proposed now. It's been approved by Apple that we will utilize CGM technology G4 through first one being up at Stanford University at the hospital system that will integrate into the Epic system using iOS 8 and their HealthKit. So we view this as a long-term opportunistic relationship.
Again, it got back to my part of my comment too is as we look at this wearable technology, that's really going to drive companies like Apple, Google, Samsung, whoever, into this digital health world that everybody looks at and says, "Wow, that's really something.
That's a place we wanna play to expand our own platforms from where they're at now." Because they see the really aging of the population and the opportunities to engage that population in trying to empower them to take better care of themselves and again, reduce this healthcare burden that we spend a lot of time looking at. Obviously, anything along those lines benefits what we intend to do.
We have always considered CGM to be a consumer product. It has a requirement of a medical device, but the utility of it and its power is as a consumer tool because this is actionable for a patient that has to have many transactions in their daily life in order to better control their diabetes.
You'll continue to see these grow as first you see the watch system develop, but that's only the beginning because that's easy to do. I mean, we've demonstrated deploying our system with Pebble Watch as an example. I mean, a lot of that stuff from a technology standpoint is off the shelf with the utilization of Bluetooth Low Energy. Now, getting it through the regulatory challenges is much different.
Obviously, it's in the news with regards to cybersecurity and other challenges, risk and risk mitigation that Kevin mentioned during his presentation. You know, you'll continue to see these grow. That's really what I was focused on in my comments.
Okay, great. Thank you.
Thank you. Our next question here comes from Erica Leon from Benchmark. Please go ahead.
Thank you very much for taking our question. I'm on for Jan Wald. She had to hop. Looks like a great quarter, so congratulations there. As you're looking forward to the future, smaller and integrated systems, are you looking to move both sensor performance and quality of life together at the same pace? Or does one take precedence over the other if you do have to make a compromise?
Well, I don't think you have to make a compromise. I think they are simultaneous. Right now, look, sensor accuracy of 9% MARD. That is point of care kind of accuracy, particularly when you add in variability associated with the human influence on accuracy. I mean, if you take a patient on an SMBG, I assure you that it is not 5.6%. It's something far greater than that.
We've seen variability in finger stick measurements upwards of two measurements done on the same finger within seconds of each other to be wildly different. We actually from a accuracy standpoint are far better than finger stick measurements, and we're certainly more consistent. That is something that we will continue to drive to.
We certainly believe that at 9% MARD, we are at that threshold in which we can dose insulin. We have to demonstrate that successfully through the agency, but clearly, we believe that accuracy is there. Now you move to quality of life, and it goes hand in hand that if patients have more confidence, more trust in the tools that they're using to better manage their diabetes, their quality of life has improved. They're less worried day in and day out of everything they do.
A parent is less worried of sending a child over to an overnight because of the share system. All of these things contribute to an improvement in the quality of life.
It's just a matter of maybe one will step forward ahead of the other, but they're both moving forward together just to.
They're both moving forward together.
Make progress because you
Yes. That's an accurate statement.
What trials are you most excited about, that are happening with your sensor? When would you expect data on those trials?
You know, we're excited about a bunch of trials. The biggest trial that we started, and it started this quarter, is our, what we call our DIaMonD study internally, which is a study where we can truly bracket the benefit of CGM from a therapy perspective, from a cost perspective, where we can really do a study that shows how we drive CGM outcomes in patients new to CGM, in particular with MDI patients and what happens and what changes in their lives.
This is gonna be a long-term study for us. The data probably won't be available for 18-24 months, but we're gonna use 20 centers and fund this study to really learn about those things that are important in our business through a study of that nature. That's a study I'm very excited about.
It's just gonna not happen as fast as I'd like it. I don't know, Terry, if you have any other?
No. You'll see some interim results, at some point during the course of this study.
Yeah.
It is really, in our opinion, a key study for the future. Certainly for the first time as a company, it is a study that is being conducted without the primary intent to get a product approved from that perspective. You know, if you look at all the studies we are involved in, it is hard. I mean, we are in 20 different artificial pancreas programs. Not our studies. We participate, we provide some support. Those are exciting to see those progress along that intent to, again, reduce the challenges of managing glucose levels.
I would agree with Kevin, and the DIaMonD study is, even though it is not a near-term study, probably one that we are very focused on and just given the magnitude of the study with 20 centers at key sites throughout the US.
That sounds like a very powerful study, and sometimes you have to wait for the right science to happen. So, thanks for working on that one. That probably will help the growth even in those out years continue, hopefully outpacing your 40% goals. You definitely gave us some good color towards not quite guidance, but helping us look at the big picture here. There's one more that I was hoping that I could ask you. Right now it's great that we're seeing that you're positive on a cash earnings basis, even though we're not seeing reported positive earnings. Is that something you're putting much weight on?
Are you right now just trying to keep your foot on the gas, being responsible with your cash, but paying less attention to the reported earnings numbers because you think that there's more investment that needs to be made before that can be a main focus?
You know what, Erica? For a long time, Terry and I have philosophically operated under the principle, let's grow the top line fast and let's grow the bottom line faster. We're certainly doing that. As Terry said in his remarks, the cash operating income was 3x what it was the same quarter a year ago when we had 60% growth on the top line. As we look at our business going forward, we think about three things. How much can we add to the top, on a revenue basis?
Then we get to an acceptable gross profit number, and we ask ourselves two questions. How much do we need to spend to continue to push the agenda to keep growing the top line? How much do we need to keep to meet our commitments to our shareholders?
We evaluate all three of those things at the same time, not just as a management team, but at the board level and throughout the entire organization. We look at all of them. We will continue to evaluate our business that way.
You know, I have to laugh because here we are. Thank you, Patsy. We carry this non-cash based equity that prevents us from being GAAP positive. We've got, you know, when cash was king and it still is, and we like to add to it rather than take away from it. In order to attract the right talent in this company, we were low on the salary side, and we made it up on the equity side. We gave our employees equity.
Lo and behold, our employees don't really wanna sell the shares that they hold because they look at the upside of what this company can achieve from shareholder value improvement. The end result of that is this probably $15+ million a quarter of share-based equity that we non-cash that we have to carry forward.
You just do the math and say if we wanna get to a 20% operating number, we've got to do a lot.
We've got to sell.
Just to cover the.
Just to cover the non-cash.
Shares that people aren't selling. You can't go out and tell your employees, "Hey, why don't you go and sell shares in order to get this down?" It's just an interesting dynamic. Yes, we do. We make statements relative to what we think we can do in 2015. It's really driven, I think, growing top line again and by growing the bottom line faster.
That's very helpful. It's just you're so close to the number. I don't want us to focus too much on something that actually goes counter towards the goals for the company. Thank you so much. That was my last question. Thank you.
Thanks.
Thank you. Once again, if you'd like to ask a question, please press star and then one on your telephone keypad now. We also have a question here from Jayson Bedford from Raymond James. Please go ahead, sir.
Good afternoon. Thanks for squeezing me in. I wanted to ask about the marketing effort around the AP algorithm. Clearly, accuracy matters. It's proven to drive adoption. Your current user base will be ecstatic with the upgrade, but I'm just wondering if the software allows you to be more aggressive in going after new patients. I guess the question really is: Do you view it as a new driver of patient growth?
I think it'll drive patient growth. When patients hear that we have an algorithm that was designed for the artificial pancreas that's now been integrated into a commercial device that they can purchase, it will be very, very helpful. It definitely will be a driver, and it was our goal to make our patient base ecstatic, 'cause that is how, that's how we build the business here.
Okay. When you think your sales team and infrastructure, you got a lot of new products here. Wondering your thoughts on increasing the team as we look to 2015.
We're in the middle of our planning process. Certainly with 60%+ year-over-year growth for the entire year, we have an opportunity to expand, to grow next year, and we'll give more guidance on that at the end of the year after we get through our process.
Okay. I guess last one. You mentioned the smaller transmitter has a lower cost of goods, but I'm wondering, were there startup costs that impacted gross margin in the quarter associated with that?
No, there were not.
All right. Thank you.
At this time, I'm showing no further questions from the audience. I would now like to turn the call over to Mr. Terry Gregg for closing remarks.
Thank you. Well, I hope everyone got a good picture of how excited we are about Dexcom and the opportunities for our company. I need you to understand also we are setting our sights that this will be a billion-dollar revenue company. Not a $300 million, not a $500 million, a billion plus. Our employees believe in our mission. We believe that they know the opportunity at Dexcom is truly a unique one, and they wanna participate in that, and they are clearly aligned with shareholder value. With that, I again will say thank you and see you in 2015.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation, and you may