Welcome to Dexcom first quarter 2014 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Terry Gregg. You may begin.
Thank you, and thanks for joining us. As is our standard practice, I'm going to have Steve Pacelli read our safe harbor statement. Steve?
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. 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 Steve Pacelli, you just heard from, our Executive Vice President of Strategy and Corporate Development. As we just held our Q4 2013 earnings call in late February, today's call will be largely a financial update with Kevin reviewing our first quarter 2014 financial results and providing a brief business update. I will then follow with some concluding thoughts. Kevin?
Thank you, Terry. We'll start with the financial update. Dexcom generated $46.7 million in product revenue for the first quarter of 2014 compared to $27.8 million for the same quarter in 2013, an $18.9 million-dollar or 68% increase. Sequentially, product revenue for Q1 of 2014 decreased 9% from the prior quarter, an improvement over the 12% decrease we experienced from Q4 2012 to Q1 2013. This seasonality is not unexpected as annual insurance deductibles reset and flexible spending accounts are largely unfunded in the first quarter, requiring patients to spend more out-of-pocket dollars to obtain our products. Total revenue for the first quarter of 2014 was $47.1 million compared to $29.6 million during the same quarter in 2013.
Our product gross profit totaled $29.8 million, generating a product gross margin of 64% for the first quarter of 2014 compared to product gross profit of $15.4 million and a product gross margin of 55% for the same quarter in the prior year. Sequentially, product gross margin in Q1 2014 decreased slightly from the prior quarter. The decrease is attributable to lower product sales during Q1 and a slight shift in our mix of durable and consumable sales resulting from an increase in replacement transmitter sales. During Q1 2014, our mix between durable and consumable products was approximately 32% durable and 68% consumable. Consistent with prior periods, we anticipate that margins will improve over the course of the year as volumes continue to increase, particularly consumable product sales. Some final thoughts on our product revenue and gross profits.
ASP for sensors has stayed consistent at approximately $7 per sensor, and the ASP for our hardware continued at approximately $850 per starter kit. Q1 2014 also represents the first quarter where we have seen a significant increase in standalone transmitter sales, and the ASP on a standalone transmitter is between $400 and $500, depending upon the payer mix during a given quarter. Finally, our international business continues to exceed our expectations and in the first quarter grew faster than our domestic sales. Turning to our expenses, our total operating expenses for the first quarter were $42.1 million compared to total operating expenses of $27.4 million during Q1 2013 and $36.4 million for the preceding quarter.
The major component of this increase relates to non-cash share-based compensation expense, which is largely tied to the performance of our stock price through the end of March 2014. We note that our share price more than doubled from the end of Q1 2013 and increased 17% during the first quarter of 2014 alone. As a result, our total non-cash equity-related charges for Q1 2014 were $9.9 million compared to $7.1 million in Q4 2013 and compared to just $5.3 million in Q1 2013. Research and development expense totaled $14.5 million for Q1 in 2014 compared to $9.3 million in Q1 in 2013 and $12.6 million in Q4 of 2013. The year-over-year increase in R&D expense includes a $2.1 million increase in non-cash equity-related expense.
The remaining increase relates to continued investments in the product pipeline. Focusing upon increased accuracy, improved connectivity, patient convenience, and lower cost, with our ultimate goal of replacing finger sticks. For example, during Q1 2013, we were not running any major clinical studies and had no open submissions with the FDA. Compare that to Q1 2014, where we conducted a number of clinical studies related to future technology, new sensors, new algorithms, enhanced labeling, cellular connectivity, and general product improvements. We have a number of pending submissions with the FDA at this time, including Dexcom Share, the Dexcom G4 system for professional use, the SweetSpot cloud-based system, and several others. We believe all of these efforts will ultimately lead to a better experience for our patients and enhance our future growth and profitability.
Sequentially, R&D expense was up 15%, with 66% of the increase, or $1.2 million, centered in incremental non-cash equity-related expense. Selling, general, and administrative expense totaled $27.6 million in Q1 of 2014 compared to $18.1 million during the same quarter in 2013, an increase of $9.5 million. SG&A expense for the preceding quarter was $23.8 million, again compared to $27.6 million this quarter. The increased SG&A expense relates primarily to additional headcount for our commercial infrastructure as we scale the business for continued revenue growth. We started 2013 with 48 sales territories. We now have close to 90 sales territories, adding twenty new territories near the end of 2013 and in early 2014.
In addition to the increased number of feet on the street, we've also added corresponding in-house infrastructure to support this growth. We continue to make significant investments in personnel to manage our payer and distributor relationships. Our headcount in this group has more than doubled since the beginning of 2013. This team has been extremely successful over the past several months as we continue to secure more and better direct contracts with payers, strengthen relationships with our current distributors, and lay the foundation for CGM to be covered as a pharmacy benefit. Finally, the increase in SG&A expense year over year includes a $2.3 million increase in non-cash share-based compensation. Sequentially, non-cash share-based compensation expense increased by $1.3 million.
Our net loss for the first quarter of 2014 totaled $12.5 million and included $12 million even in non-cash expenses centered in share-based compensation, depreciation, and amortization. Absent these charges, our net loss would have been approximately $500,000 for Q1 2014, down from the preceding quarter due to the seasonal sequential decline in our product revenue and our investments for future growth. This compares quite favorably to a cash-based net loss for Q1 2013 of $3.9 million. Our loss per share for the quarter was $0.17. It is worth noting that while our loss per share was higher than consensus, the street consensus OpEx number for Q1 was actually less than our Q4 2013 OpEx spend.
While we do not provide detailed P&L guidance, we did state during our last call that we entered Q1 with an additional 20 sales reps, and we provided guidance that we expected R&D expense for 2014 to be up between 10%-20% versus 2013, and we anticipated an increase in SG&A expense of approximately 20% to support our growth. Additionally, we should clarify that the expense guidance we gave during our last call did not include the significant increases in equity-related expenses I just discussed. In conclusion, we are very pleased with our first quarter financial performance. Our revenue growth is unparalleled. We continue to make significant investments in our commercial infrastructure and our product pipeline to position Dexcom for its future long-term objectives.
On top of that, our cash-based profitability continues to improve as we develop a new category and seek to disrupt an entire industry, not just build a company or a product line. With respect to our balance sheet, we ended the first quarter with $57.4 million in cash and marketable securities, up $2.8 million sequentially. With our continued debt availability, we are quite comfortable with our cash position. Finally, we remain very comfortable with our current full-year revenue guidance at this time. Consistent with our past practices, we will evaluate our range at the end of the second quarter and expect to provide an update on our next call. Now for the business update. As you know, in February, we received FDA approval of an expanded indication for our G4 PLATINUM to include patients as young as two years of age.
We began taking orders for our pediatric product immediately upon approval, and we completed our initial shipments to patients within a matter of days. We are very pleased by the initial response of parents and practitioners to the pediatric product offering and have seen the percentage of orders from pediatric patients continue to grow to approximately 20% of our current pipeline opportunities. However, as we've learned, we have a lot of work ahead of us. Since the approval, we've met with a number of pediatric endocrinologists in the field and at our headquarters in San Diego to better understand this market.
While many of these clinics are very excited for the pediatric opportunity, we believe it will take time to properly educate parents and caregivers about the benefits of CGM generally and about the superior performance of our system more specifically to grow the pediatric market to the level where it should be. We continue to have an active dialogue with the Food and Drug Administration regarding our current filings. The major ones being the Dexcom Share system and the expanded indication for G4 PLATINUM for professional use. We believe both are in their final stages of review. As you know, in March, we received a warning letter from the FDA resulting from a November 2013 inspection of our facilities. The warning letter cites administrative deficiencies in our MDR reporting.
There were no sanctions levied by the FDA, and the warning letter does not impact our ability to manufacture and sell our product, nor does it affect any of our pending or future submissions for product approvals. We are pleased to report that within three weeks of the receipt of this warning letter, we had submitted all materials we believe are necessary to demonstrate to the FDA's satisfaction that we are in compliance with our reporting obligations, and we expect to close out the warning letter in due course. Turning to our future CGM product offerings, we remain focused on increased connectivity and convenience as a near-term goal and replacing finger sticks as our primary long-term objective. We continue to work on both Gen 5 and Gen 6 in an effort to achieve these goals.
As we continue to advance our technology, we were very pleased to learn just last week that the FDA is formulating a new expedited access PMA program for medical devices that address major unmet clinical needs. This program will feature earlier and more interactive engagement with FDA staff, a collaboratively developed plan for collecting data to support approval, reduced pre-market requirements, and a priority review. While it remains to be seen whether and to what extent CGM will apply, this program certainly appears to be a significant effort by the FDA to further the availability of life-saving and life-changing products for patients, and we view this as a big step forward. Shifting to our integration partnerships, both Animas and Tandem continue to press forward with final development, testing, and regulatory matters with their respective sensor-augmented pump systems. We continue to assist them in these endeavors when asked.
I would now like to turn the call over to Terry for some concluding remarks.
Thanks, Kevin. I want to start my comments by reflecting on something Kevin said earlier. At Dexcom, we're developing an entirely new category seeking to disrupt an entire industry. There are some 25.8 million people in the U.S. Living with diabetes, 1.5-1.75 million with Type 1, 7 million undiagnosed, and 80 million designated with prediabetes. Research published earlier this year showed a 70% increase in diagnosis of Type 1 diabetes in children under the age of six during the period from 1985 to 2004. Expanding that globally, over 382 million people are afflicted with diabetes, and that number is expected to pass 592 million in the next 15 years. What do all of these people have in common?
They all suffer from the inability to adequately regulate their glucose levels. Why? Because episodic finger stick measurements simply aren't good enough. During the last decade, the number of people in the U.S. With insulin-treated diabetes rose by more than 50%, and today it is estimated that one-third of patients with diabetes use insulin. As insulin use has increased, so has the frequency of severe hypoglycemia. In fact, it is estimated that approximately 100,000 emergency room visits and 30,000 hospitalizations occur each year in the U.S. due to hypoglycemia. During the period from 2007 to 2011, approximately 9.2% of emergency room visits were for insulin-related hypoglycemia.
Severe neurologic sequelae described as shock, loss of consciousness, seizure, associated injury or fall, and hypoglycemia-altered mental states were documented in more than 60% of these cases, and almost a third required hospital admission or transfer to another facility. With the average cost of a hospital admission for hypoglycemia at $17,000 and 30,000 admissions per year, the healthcare bill for this is over half a billion dollars and growing. Adding to the potential problem, there are over 400,000 new insulin users each year. You get the picture. Why am I telling you this? Because Dexcom is the leading company in the world addressing the challenges of maintaining adequate glucose control. Finger sticks can't do it alone, neither can an insulin pump.
When you look at Dexcom and you look at our current product offerings or our robust pipeline, what you see is the evolution of an entirely new category in a market with enormous unmet needs. We continue to believe that simplicity, patient convenience, and expanded connectivity paired with our superior sensor technology will enable us to maintain our leadership position in the CGM market. We are here now investing in tools to make diabetes management less complicated, less burdensome. We are not here solely as an accessory to an insulin pump or as a component to an artificial pancreas. While we certainly are supportive of the efforts to develop an artificial pancreas, in fact, we are the key enabling component of virtually all artificial pancreas research being conducted around the globe.
We believe we also have a duty to support the vast majority of patients who will either not opt to use this technology due to the complexity or will never have access to it due to cost. These patients deserve better tools to manage their glucose levels as well, and we intend to develop products to meet the needs of all patients. There is growing consensus that transitioning to outcomes-based payment is fundamental to driving cost-reducing innovation among providers and achieving a financially sustainable healthcare system. Most everyone agrees that we must migrate from a largely fee-for-service system to one focused on delivering the best patient outcomes at the lowest possible cost. Medical device companies such as ours need to be cognizant of this as we approach R&D. We will be successful only to the extent that we generate true cost-reducing innovations.
We believe our strategic initiatives, such as superior accuracy and performance to obtain finger stick replacement, open connectivity, miniaturization, and ultimately cost reduction will set Dexcom apart. Our CGM first message has continued to change the behavior of healthcare practitioners to help them better understand glycemic variability and how to manage it more effectively. I have stated on many occasions that diabetes is a mystery to the patients who deal with it every single day and have to act dozens of times each day to address the challenges of glucose control. This evolution has never been fast enough for me. Although when I became CEO in 2007, the CGM market was negligible, and today it is approaching 10% penetration of the U.S. Type 1 patient population. I'm of course proud to say that Dexcom has a majority market share. Thank you.
With that, I'll turn it over for a question-and-answer session.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star one on your touch-tone phone. We have a question from Thom Gunderson from Piper Jaffray. Please go ahead.
Hi. Good afternoon, everybody. On the comment on transmitters and it being meaningful for the first time, is that a slow rise, or did that have something to do with last year, especially in first quarter, a lot of people upgraded to G4 and got a whole new transmitter, and now it's a year later. In other words, should we look for higher transmitter sales for the rest of the year, or was this a one-off event?
We believe there'll be higher transmitter sales over the course of the year, Tom. Remember when we launched this, the labeled indication for it is six months. Our transmitters have been grossly lasting longer than that. This rise in transmitter sales is actually a bit delayed over what we thought would happen. Yeah, we look for that to continue over the course of the year.
Got it. Thanks, Kevin. My last question is, can you comment a little on competition to the extent that we're getting a little bit more media attention both on Medtronic and on Flash?
Yeah. I mean, the only thing I can say, Tom, is that if we look at what we did in the first quarter, we obviously did not feel much pressure, in my opinion, from a competitive landscape, either domestically or internationally. I mean, record quarters on both the U.S. as well as OUS, so that would be about the summation of my comment.
Okay. Thank you. That's it for me, guys.
The next question is from William Plovanic from Canaccord Genuity. Please go ahead.
Great. Thanks. Good evening. Can you hear me okay?
Yep.
Perfect. Just a couple questions. First, how is the strategy different for pediatric? You know, I think you told us it'll roll out a little slower, but, you know, how do you approach that market differently than your current adult population?
You know, Bill, Terry and I have both been out and visit pediatric clinics, and we're approaching them with the same sales team that we approach the adult ones with. What we both noted is we haven't been there before. We've not been an active presence in those clinics. We've, you know, complied with our labeling by not actively pursuing a lot of those. So while they're familiar with CGM, there's an educational component as we get parents, physicians, other caregivers up to speed and get them used to the experience of Dexcom's CGM. Even if they prescribed a few, they're not ready to move to many yet till they get a little more experience with this. So I, you know, it's kinda like going into new turf, for lack of a better example. We're kind of starting from scratch.
You did say, and I just wanna make sure I'm clear, that 20% of your patients in the quarter were pediatric?
No, I said 20% of the pipeline, of our open pipeline.
Of the pipeline. As I think of the quarter, you know, I think historically you're running around 10% for peds. Did you move off of that? Has that increased a lot, or?
Somewhere between 10% and 20% would be a good number at this point in time.
That's a nice tight range. Thank you. If we look at the quarter, that was a very impressive durable number. You know, and I think what we're all gonna try to find out, or at least try to figure out is, you know, how much of that is new patients? How much of that is transmitter upgrade? I know you won't answer the question, so I'll ask it this way. One, what type of year-over-year growth did you see in your new patient adds? Two, is there any type of mix that you might share with us from a revenue component, you know, of that, you know, roughly $15 million of durables, you know, 70% of it was new patient versus, you know, upgrades, transmitters, receiver upgrades, all those types of things.
You were correct the first time. We will not share the new patient changes. About the guidance between upgrades and new patients, certainly on the kids side, we've said in previous calls that we typically run at a 70-30% ratio. Over time, it may fluctuate from one quarter to another based on deductibles. I think this quarter's really relatively typical of what we've seen in the past. The increase in the durable sales really relates to more transmitters than a shift in new patients and upgrades or anything like that.
Yeah. I mean, inside that durable number, kind of what's the mix of new patients to the therapy, just to the therapy versus your existing customers, all their upgrading. You know, is $5 million of this transmitters and upgrades and what have you, up to $15 million?
Oh.
What Kevin was saying was that, again, there's a 70-30 split consumable to durable, but what he's also saying is that we've historically run close to the same split within new patients to upgrade patients. Somewhere between 20%-30% of any quarter is gonna be upgrade patients. The durable revenue is gonna be upgraded patients.
The change in the mix this quarter would be because of the increase in the replacement transmitters.
Right. The bump up to closer to 32% of durable revenue this quarter was attributable to increased transmitter sales. That's right.
That's very helpful. Thank you very much. Last question, if I may, is just, have you seen any change in your attrition rate and anything you'd like to quantify with us? That's all I had. Thank you.
No. Things look the same as what we said at year-end. The attrition rate, certainly on the G4 PLATINUM system is much better than it ever was on Seven Plus, and we continue to see good reorder patterns.
Great. Thank you. Thank you very much.
The next question is from Ben Andrew from William Blair. Please go ahead.
Good afternoon. Just following up on that same topic. If I was correct in our modeling, there was probably about $4 million of hardware replacement revenue in the fourth quarter, so that the change in percentage of the total this quarter would suggest something more like $6 million or $7 million of hardware replacement for existing patients. Is that in the ballpark?
We've given you as much as we're gonna give you.
Okay. That's fine. We'll try something else. Let's talk about the Seven Plus patients who chose not to upgrade for whatever reason. Do you feel at some point you get another shot on goal with them with the improved accuracy of the G4 or for whatever other reason?
You know, I think with some of them, we will. One of the things, you know, one of the reasons some of the patients don't upgrade, again, we've seen this as we look at the various age segments of our population, there are some age segments that tend to drop off more than others. Some of those who chose not to upgrade may have chosen not to upgrade for other reasons, and may come back. We see a lot of our patients who had dropped off Seven Plus for years when we launched G4, come back to us and become patients again, and we actually count those as new patients 'cause we lost them for a couple of years.
Bill, I think as we come out with our new technologies, again, with more accuracy, with more connectivity, with stuff that's smaller, I think a lot of the patients we've lost will come back.
Okay.
Yeah. I would just add, you know, to that in terms of the age demographics, obviously, we continue to push at a level to get reimbursement from the Medicare system. Some of these patients, unfortunately, have moved from having traditional third-party payer coverage to Medicare coverage. If they're on fixed income, there's been some challenges there, but we always look forward to the opportunity to better serve them in the future as well as we push that agenda at the highest levels in CMS as well as in Congress.
Okay. Kevin, maybe talk a little bit about the gross margin sequentially. Obviously, you had made huge progress last year. Volumes in the first quarter, we know would be lower. What do you see that trajectory over the course of the year? Do we exit closer to that 70% range, or can you give us some thoughts?
Yeah. We think we'll move up from here, Ben. We were 66% in Q4 with, you know, the large revenue number that we hung up there, and we're quite confident they'll continue to go up over the course of the year. A lot of that is volume-related as we can apply more costs, you know, to more stuff that goes out the door and as we get our other improvement programs in place. Our target margins for our sensors has always been in the 70%-75% range. While we're running at 64%-66% the last two quarters, it's pretty obvious our sensors are there within that range, and we just need to look at ways to keep pushing them up. We think we'll get improvements.
We're not gonna see sequential 10-point improvements like we did last year, but we can see sequential improvements as we go over the course of the year.
Okay. Last question for me. Can you give us some rough sense of what the margin is on hardware? I suppose we can back into it if we use that range for sensors, but is it a 10 or 15 point difference?
It's closer to 50%, William, when all is said and done.
Okay, thanks a lot, guys. Take care.
I'm getting all my guys messed up. I'm sorry.
No worries. Thanks, Kevin.
We have a question from Mike Weinstein from JP Morgan. Please go ahead.
Hi, this is Robbie Marcus in for Mike. Congrats on the quarter. Can you talk about—I know you touched on it briefly, but maybe just what you're seeing in terms of Medtronic competition with the MiniMed 530G system. You know, how have G4 sales trended in Medtronic pump users?
We grew 67% this quarter, and that would speak to the strength of our business and how well we did. We certainly hear a lot of Medtronic MiniMed 530G noise, but I think our 67% number supports itself. With respect to Medtronic pump users who use G4 systems, there's a lot of them. You know, it represents a significant piece of our pump patient base, Medtronic pump patients who use G4 sensors, and they're very happy. You know, numbers speak for themselves.
Okay, great. Maybe just a follow-up. You know, you've gotten some pretty good reimbursement on Type 2 patients recently. Can you talk about trends and what you're seeing there? And are they increasing as a percentage of your base, and kind of where are they right now?
You know, we attempt to get any insulin-using patient covered in all the contracts that we enter into, and we have had some good success in getting that. Type 2s haven't become a real large part of our business, but it does continue to grow. I think the most encouraging thing about the Type 2 business that I've seen in my travels and the anecdotal stories we've heard, we have a huge impact on these patients because once they can see, even if they're insulin using, once they can see the effect of the diet and the activities and the other things they do on their glucose levels, they can make some pretty radical changes that have very immediate outcomes.
I've talked with people in the field who've seen Type 2s go from an A1C of 10 down to 6.5 very rapidly, just with changes in diet and activity, and then they get off some of their compounds. We're very excited at the opportunity and the results it provides. It's just gonna take us a while to grow it. No, it is good. It'll be a great market for us over time.
All right, great. Thanks.
Yeah. I would just add again, when we look at the number of new insulin starts, some 400,000 a year now, obviously, the majority of those patients are Type 2 patients that have, for whatever reason, migrated either insulin in addition to oral agents or gone directly to insulin because the oral agents were not sustaining. That gives us yet another bolus of opportunity as we look at our product configuration and really build some products in the future directly, for patients with Type 2, particularly those on insulin. We certainly wouldn't exclude, and the data suggests that even if you're on oral agents with Type 2, you can benefit from CGM.
Yep. Thanks.
The next question is from Raj Denhoy from Jefferies. Please go ahead.
Hi, good afternoon. I wonder if I could ask a couple questions. First, on the operating expense lines, I think you did a fair job explaining about the heavier stock-based comp in the quarter. I'm curious about how we should think about the progression of expenses as we move through the year, you know, particularly as I think consensus numbers have you guys getting at least on an operational basis or at least, I should say, an earnings basis, positive by the end of the year. Is that in keeping with what you guys are seeing?
You know, last year, by the end of the year, we were cash flow positive from operations when we dropped all the non-cash charges from our P&L. Our goal this year was to grow that cash base net income at a significantly higher rate than we grow our top line. We achieved that in the first quarter, you know, going from almost a $4 million loss in the first quarter of last year, net cash loss, to a $500,000 net cash loss in the first quarter this year. We hope to see that improve over the course of the year.
With the GAAP perspective, when you've got a range of, you know, a high end of a range of $225 million in revenue and 65% gross profits with non-cash expenses in excess of $12 million a quarter, GAAP profitability is not happening this year. That's not been our goal for a while. We would look towards that in 2015. Again, if the equity comp number continues to be so high, GAAP profitability may be pushed out a bit. We focus very heavily on that cash profitability number and make sure we're adding more to the bank account than we're spending. We saw that this quarter, so it was good.
No. Yeah, no, that's. I totally get that. Just in terms of making sure that we model it correctly, you know, and I guess, you know, we do, and I think everybody does have you, or most people have you getting EPS profitable by fourth quarter on a GAAP basis. If I'm hearing you correctly, we shouldn't be assuming that given the non-cash expenses.
Well, yeah, if everything were the same non-cash-wise, I think we could be close to getting there. With the significant increase in non-cash expenses that we're experiencing, again, due to the stock price and
Right.
Stuff, it's gonna be pretty hard.
No, okay. I get you. Let me get you just a couple on the product side. You know, I think you've been increasingly talking about this product called Share, which I guess is one of the features that's gonna be on the G5. I'm curious if there's any updates on the timing of that. It sounds like it's at the FDA. Then subsequent to that, when it does get approved, really any expectations around whether that could be as positive as a catalyst, as we've seen with the G4 and some other advances.
It is at the FDA. As we said in our comments, we think we're on the home stretch here. You know, knock on wood. We certainly won't give a date or speak to them. Again, the Share system is our first venture into mobile connectivity, pairing the receiver inside a cradle with an Apple device and then sending data to secure servers that can be shared with people who can follow your glucose levels all the time. We think it'll have a very good impact on our business, particularly in the peds patients, where parents are gonna wanna follow their children. We've talked to a number of people over the past few months whose child has never been on a sleepover before because they don't dare let them leave the house without being able to watch them.
Big, you know, uptake in that segment. We think it'll help us. It'll also help us really with anybody who travels or is away from somebody who's a caregiver. We see a very good use for that product. We're not looking for huge changes in our revenue model for this. That cradle itself is gonna be about a $400 charge, starting out of the gate. Our goal with this is to make a system that will greatly enhance our patients' ability to manage their glucose, to take better care of themselves, and from a business side, sell more sensors.
Right.
So that's-
That's.
How the model works for us, and that's what we're hoping happens.
Right.
It won't have the impact as the G4 launch did. I can quantify that. It will. We think it'll help us. We have pretty high expectations here. We need to hit it pretty well. We think it'll be helpful.
Just so I'm clear, that's a feature. It'll work with the current G4, so it's
Absolutely.
There's no upgrade needed on that transmitter. You just need to buy the cradle and it all works.
You just-
Okay.
You just buy the cradle and go.
Okay. Just lastly, I know it's in your partner's hands, but any updates on timing on the combined products, either Vibe or the Tandem device?
Yeah, no. As we talked about, Raj, a quarter or two ago, we're gonna start deferring to the partners on timing. You know, these filings are in their hands, and so I think we'll let Tandem and Animas speak for themselves.
Fair enough. Thank you.
We have a question from Mehdi Sam from ABR Health. Please go ahead.
Hi, good afternoon. About what % of the 800, you know, US pediatric endocrinologists you've talked about have prescribed the G4 since launch in February or since approval in February?
I couldn't quantify that. We don't have that.
Would it be fair to say, like, that your goal by year-end is to get, you know, half of them to have written their first prescriptions or, you know, closer to majority of them? Just based on your comments about the, you know, more measured rollout.
No, Mehdi, I think we look at this more as a percentage of the patient base, as we build our models up rather than just focusing on the individual physicians. We wanna see the patient base over time move up to 30% of the overall patient base. We would expect the patient base to move from 10 this year up closer to 20, and then move up over the next two years higher than that. Haven't gone so far this year as to break it down by physician and by clinic.
Okay. In terms of the pediatric ramp, I know it's still early, but do you get a sense if these are stickier patients, just more likely to use CGM twenty-four seven periodically?
We think particularly the very young patients cared for by the parents are extremely sticky. That's always been a very good patient group for us, even when the product was prescribed off-label. We know with teenagers, it doesn't matter what the device or the therapy or whatever you tell teenagers to do, sticky is kind of a difficult word. We do well with them, and they certainly do well on the system, so we'll just see how it works over time.
Thanks. Then, the last question to follow up to, I think, Tom's question on the Flash. Can you just give us your thoughts on, you know, the additional data presented on Abbott's Flash at the ATTD meeting back in February? Does it seem like, you know, it might keep more folks long-term internationally on, you know, just using blood glucose meters?
No, I mean, you know, I understand the Flash is definitely not CGM. The Flash doesn't provide the patient with real-time information, doesn't provide them with hypoglycemia alerts, et cetera. It's not really a direct comparison to our product offering. I do think there could be an interesting application for Flash. We're watching it. With respect to the data, I think that the latest data presented by Abbott wasn't frankly quite as good as the first round of data we saw. We're keeping an eye on it.
I think, you know, as we've said in the past, that if Abbott finds a niche for this product, particularly, you know, in more of a diagnostic marketplace for perhaps non-insulin using Type 2s or something like that, it's something it'd be great to have Abbott help us help build the category, you know, for once. You know, we've done all the heavy lifting in this category for years and years and years. It'd be great to have someone else come in and help build a category that we could come in as a fast follower. You know, we're keeping an eye on it. We haven't. Frankly, I don't think anybody has seen much of the product itself yet, so it's a little bit early to tell.
They've stated publicly that they expect to launch it in Europe in the second half of this year. They've given no U.S. timeline for a launch or commercialization. You know, I think we'll know more by maybe by EASD this year in the latter half of the year.
Okay. Thank you very much.
We have a question from Danielle Antalffy from Leerink Partners. Please go ahead.
Thanks so much. Good afternoon, guys, and thanks for taking the question. I was hoping you could comment on utilization trends. The last few quarters, we've seen strong utilization trends. Wanted to
See if they were persisting and how we think about utilization trends evolving over the next few quarters, as you know, Mehdi brought it up. We have pediatrics who you would think, at least in the younger age group, would use the sensor more frequently. Share should contribute to utilization. Where can we get to with utilization ultimately as all these products and expanded indications hit?
You got to be careful, Danielle, when you talk about utilization trends, because remember, patients are probably wearing it longer than seven days. There's a point at which patients, even if all patients are wearing it all the time, you're still not going to have patients wearing four sensors per month. What we've said with G4 PLATINUM over the course of the last 18 months has been what we've seen is a combination of more patients wearing it all of the time and a reduction in attrition. But that doesn't necessarily mean that all patients are wearing, for example, three sensors in a month or 3.5 sensors per month. You got to really be careful at trying to expect utilization, meaning sensors per month, to go up in any meaningful fashion.
Patients, what we do think is we've moved the buckets of patients where, you know, before a patient might wear it periodically, might wear one sensor a month and take a break. That patient may be wearing, you know, two or 2.5 or three sensors a month because they're wearing it all the time. But you can't expect utilization in that sense to keep rising, because if the patient's wearing it all the time, but extending the life, the utilization is not going to go up. What we've said is that, and Kevin said it in his remarks, is that attrition trends remain very positive and patients are continuing to utilize sensors. You know, let's cut off on utilization.
Yeah. The average as a whole of sensors used per month per patient has gone up. Like Steve said, we think it's probably because patients are having a better experience overall. We have not seen a reduction in the amount of days people use it across the board. We know people extend the wear.
Oh, okay, great. Thanks so much. Just wanted to ask you guys about ADA is coming up here next, I guess, next month. I'm wondering if there's anything coming out at ADA from you guys or from the artificial pancreas side of things that we should be paying attention to.
Well, we have about eight poster presentations at ADA. We'll be very busy. Please come and take a look at them. We'll keep that under wraps till we get there. With respect to the artificial pancreas, certainly there will be a lot of discussions about that. Again, it'll be programs we're heavily involved with groups that are seeing tremendous results and measurements from our CGM to drive the success of those programs. Yeah, there'll be a lot. It'll be a very busy show for Dexcom. You'll hear a lot about us there.
Okay, thanks so much.
The next question is from Greg Chodaczek from Sterne Agee. Please go ahead.
Hey, guys. Most of my questions have been answered, but just one quick one. Kevin, in terms of operating expense growth, or excluding non-cash equity, what was that growth, those growth rates you were quoting again?
We said last year that it'd be a 10%-20% growth on the R&D side on the cash side. We said we'd try and keep SG&A around 20% on both cases. I'll be very candid with you, we look at opportunities to spend money to fund growth for the future. As you heard about the build-out of the commercial team over the past 12 months, that's a lot more than a 20% increase. We managed to keep that down in the 20% range because we haven't spent very much on the G&A side. We'll continue to make investments where we think it's gonna grow our business and where we need to. That expense growth, we'll stick to that guidance now.
We'll take a look at where we are in six months and give you a bit more. If you just go back to Q4, the growth from Q4 is very much dialed in to the expansion of the sales force for the full quarter, you know, and those efforts that we undertook. On the R&D side, the growth of the R&D expense is very much tied really just to the share-based compensation. Now, that was almost 70% of the sequential R&D growth. We're looking at that, and we'll probably give you a little more update on that spending once we get six months into the year.
Okay. Thank you for the clarification. In terms of pediatrics, your long-term goal is roughly about 30% of your revenues coming from pediatrics?
Yes, it is.
Okay. That's all I have. Thanks, guys.
Thank you.
Once again, if you have a question, please press star, then one on your touchtone phone. We have a question from Jayson Bedford, from Raymond James. Please go ahead.
Good afternoon, and thanks for taking the questions. I don't mean to be repetitive here, but just on the sequential jump in SG&A spending, it was a big number. I realize the $2.3 million in stock-based comp, the 20 new reps. But did you increase your marketing efforts there or increase cost associated with the pediatric launch at all in the first quarter?
Certainly, we've got that in there. Again, when you talk to sequential, you'd be talking Q4 to Q1 versus Q1 of last year. If we're gonna compare Q1 of last year to Q1 of this year, you need to go back to my remarks. We had 48 reps in the field at the start of Q1 in 2013. We have almost 90 by the end of Q1 in 2014, and all those were in place early in the year. You've almost doubled feet on the street there. We've more than doubled the size of our distribution channel management team with respect to payers, distributors, and all the other things associated with getting pharmacy reimbursement over time. We have built the marketing team up as well, not to the significance we built up the sales
Those expenses will probably come more over the course of the year as we do, you know, more marketing campaigns and as we run some clinical studies geared towards positioning the product for better reimbursement over time, which won't be part of R&D. As you're comparing to last year, I think 48 to almost 90 reps, that's double the number of people on the reimbursement side. That's where that growth comes from on the cash side. If you go from Q4 of last year to Q1, it's probably 20 new reps and a few people on the other side, and the growth isn't near as much. I think the issue with the OpEx, as you compare this year to last year, we're a lot bigger than we were a year ago. We just are.
There's no other way to describe it.
Right. Okay. That's helpful, Kevin. I guess the international strength was it largely due to the entry of new countries or is the same country sales growth also tracking above U.S. growth levels?
You know what? It's both. We do very well and we have some core markets, Germany, Italy, Sweden, the Netherlands. We do extremely well in Europe in those four, and the other markets are growing as well. Those four are kind of the backbone of our European business. On top of that, we got into Canada in late 2013 and did very well in Q1 of 2014 in Canada, both with our standalone CGM and with the Vibe system. Canada has really been a very positive launch for us.
Okay. Last, for me, just on the pediatric strategy, I may be getting into your sales comp structure here, but is the focus here on a portion of the pediatric endocrinologists out there and to go deep into those physicians, or is it more of a blanket approach where the goal is to, "Hey, let's touch them all by year-end?
Our focus with respect to compensation is to grow the business in total. We reward our team for you know we have obviously a model. The biggest reward in our compensation structure is adding new patients to the company. If our reps are achieving that through pediatric or adult patients, they're compensated the same. We will watch, and we will monitor and make sure those reps that we have out there are going into both areas. If we see somebody not doing adults or not doing pedes, obviously, we go check on the territory, but they're rewarded the same for both. They have, again, very high numbers to meet our expectations. I can tell you these guys are trying to get deep into everywhere they call and also call on a number of clinics.
They are measured on both the number of calls that they do, the number of physicians they call on, and also how deep they go. You know, our term for that is the Dexcom champion. How many champions do you have and how many can you create? All these guys are measured on a number of factors that really meet our overall company and business goals. Our goals are very congruent.
Okay. That's helpful. Thank you.
The next question is from William Plovanic from Canaccord Genuity. Please go ahead.
Oh, great. Thanks for taking this. Just what was D&A and stock comp in the quarter? My second question is the depreciation, amortization, and stock comp overall for the quarter, and then 'cause there's not a cash flow out.
You're gonna see that probably in about literally five minutes when we file the Q. The share-based compensation was $8.7 million for the quarter. We had depreciation and amortization of $1.9 million.
Total non-cash charges were $12 million for the quarter, which includes some accretion, change in fair value for some contingent liabilities we have with SweetSpot, et cetera.
The total non-cash expenses are $12.1.
Okay. Just on the pediatric, you've provided your strategy, kind of what you're doing. You said that you expect this to kind of ramp a little slower. When do you expect the pedes to really gain momentum?
Oh, I think they're gaining.
They're gaining momentum now.
They're gaining momentum now. I mean, I think we all believe that there's significant momentum. I think Steve characterized it and Kevin as well, that in the adult population, as an example, when we call on an account, they're well informed, not only about CGM, but particularly about G4, because we've been calling on them for the last several years. You go into a pediatric account. Number one, it's a new account for our sales reps for the most part, in terms of if they were co-located with an adult pediatric or an adult practice, then oftentimes we know them, but we never called on them. There's a relationship management that has to be established as well as the technology understanding.
It is a bit of, you know, going back as I think Kevin said, not starting over, but certainly not the same type of awareness that you have in an adult population. All that takes time. It takes repeated visits by the sales force to gain, quite frankly, the trust of that physician population, which we in some cases, it's a first-time visit. I mean, when we've been out in the field lately from a management standpoint, calling on pediatric clinics, it's amazing. I've, in fact, and 'cause I've been doing this for so long, I mean, the most startling thing to me is it's like, holy cow, they don't understand this. We have got to be sure that they understand the basics of CGM at that level in order for them to be successful.
It is literally a step back in time, but we do expect that to ramp up very quickly.
Yeah. I think the cautionary to the extent you read any cautionary language into our prepared remarks, it's really just making sure the Street doesn't get ahead of itself in thinking it was just gonna be a flip the switch launch and kind of within a month or two, we were gonna have 30% or 40% penetration into the peds market. That's all.
That's it.
It's ramping just fine.
Perfect. That's all I had. Thank you very much.
We have no further questions at this time. I will now turn the call back to Terry Gregg for final remarks.
Thank you. Thanks for joining us today. You know, I'm awfully proud of what we have accomplished. You noticed during the course of the conversation, we said nothing about inclement weather having an impact on us. We blew through that, obviously, and overcame that even when offices were closed and still had a quarter to stand by and very proud of the company. I would say this, again, for Dexcom, we say what we're going to do, and then we go out and execute it. That's the best thing that I can say about a company performing at this level. With that, I'll close. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.