Welcome to the Dexcom third quarter 2013 earnings release conference call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note this conference is being recorded. I'll now turn the call over to Terrance Gregg, CEO. Terrance Gregg, you may begin.
Thank you, and welcome to our third quarter 2013 earnings call. We'll kick it off with Steven Pacelli and reading 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 as 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 loss.
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 Steve Pacelli, our Executive Vice President of Strategy and Corporate Development. I assume by now most of you have seen our earnings press release.
Our financial results speak for themselves. During the third quarter, we achieved record sales, record margins, and we were cash flow positive. Before I turn the call over to Kevin to review our financial results in greater detail and provide a brief operations update, I would like to update the investment community with some exciting news regarding a new addition to our board of directors. It is no secret that we have a tremendous amount of work in front of us as our system evolves into display on a smartphone paired with robust data management tools.
To that end, we are pleased to announce the addition of Steve Altman, Vice Chairman of Qualcomm and longtime diabetes advocate to our board. Steve brings unique and diversified expertise to an already dynamic board of directors. Steve has served on Qualcomm's executive committee for nearly 15 years, providing direction and guidance on key initiatives across all areas of the business, as well as on overall Qualcomm vision and strategy.
He joined Qualcomm in 1989, and his leadership roles have included General Counsel, President of Qualcomm Technology Licensing, President of Qualcomm, and most recently as Vice Chairman of Qualcomm. Throughout his 24-year tenure, Steve's contributions helped enable the successful growth, evolution, and expansion of Qualcomm into a world-leading mobile technology innovator, and we are pleased to welcome him to the board. I would now like to turn the call over to Kevin.
Thank you, Terry. I'll start with the financial update. Dexcom generated $42.5 million in product revenue for the third quarter of 2013, compared to $21.1 million for the same quarter in 2012. A $21.4 million or 101% increase. We remind investors that in the third quarter of 2012, we reserved $1.2 million for sales returns relating to our thirty-day money-back guarantee on Seven Plus hardware in anticipation of the G4 Platinum launch.
Absent that increase in returns reserve, our year-over-year product revenue growth would have been 91%. We also remind investors that we believe third quarter 2012 product revenues were somewhat suppressed because purchase decisions during Q3 2012 were deferred as patients and healthcare providers anticipated the G4 Platinum introduction.
Sequentially, product revenue for Q3 of 2013 increased 20% from the prior quarter. We note that if you back out the impact of approximately $1.3 million in higher than expected Q2 2013 revenue attributed to Animas royalties and GlucoClear sensor sales, our sequential improvement in product revenue would have been 24%.
Total revenue for the third quarter of 2013 was $42.9 million, compared to $23.1 million during the same quarter in 2012. Our product gross profit totaled $27.7 million, generating a product gross margin of 65% for the third quarter, compared to product gross profit of $7.7 million and a product gross margin of 36% for the same quarter in the prior year.
As a reminder, our product gross margin was artificially low in Q3 2012 based on a number of one-time charges and reserves we took in connection with our transition from the Seven Plus to the G4 Platinum. Sequentially, product gross margin for Q3 of 2013 increased 4 margin points from the prior quarter, primarily the result of increased sensor volumes combined with continued improved operational performance.
Some final thoughts on our product revenues and our gross profits during Q3. During Q3, we added more new patients and sold more sensors than in any prior quarter. Consumable and durable revenues both increased significantly from Q2 2013, although sensor sales grew at a much faster rate than durable sales.
We continue to see increased patient retention combined with increased sensor utilization with the G4 Platinum system compared to the Seven Plus, resulting in a very favorable impact upon gross margins and gross profits for the quarter. With respect to the split between consumable and durable revenues, our mix has naturally shifted more towards consumable products and is now closer to 25% durable and 75% consumable.
ASP for sensors has stayed consistent at approximately $70 per sensor, and the ASP for our hardware continued at approximately $850 per starter kit. Our international business performance continued to exceed our expectations in Q3 as well, as it was up approximately 100% year over year and continues to represent close to 10% of product revenue.
Research and development expense totaled $11.8 million for Q3 of 2013, compared to $10.3 million in Q3 of 2012, with the increase due primarily to additional payroll-related costs and expenses related to work on our near-term product pipeline. Sequentially, R&D expense was up 6%, with the increase due primarily to non-cash charges related to our SweetSpot acquisition and share-based compensation.
Selling, general, and administrative expense totaled $21.6 million in Q3 of 2013, compared to $15.4 million during the same quarter in 2012. The increase was primarily related to selling and information technology expenses necessary to support growth. The increase also included $900,000 of additional non-cash share-based compensation.
Our net loss for the third quarter of 2013 totaled $6 million and included $9.5 million in non-cash expenses centered in share-based compensation, depreciation, and amortization. Absent these non-cash charges, our net income would have been $3.5 million for Q3 2013. Compare this to an adjusted cash-based net loss of $9.7 million for the same quarter last year.
We would also like to point out that year-to-date, our cash operating loss is $1.5 million, compared to a cash operating loss of $27 million for the first three quarters of last year. Another way to look at our year-to-date performance, our product revenues have increased by $44.6 million, or 73%, resulting in a gross profit increase of $37.6 million. That's more than double.
The gross margin percentage on these additional revenues is actually in excess of 80%. Even with our robust investment in sales expansion and our continued investment in our R&D pipeline, more than $25 million of these gross profits have fallen to our bottom line and into the bank. Our loss per share for the quarter was $0.08. With respect to our balance sheet, we ended the third quarter with $47.6 million in cash and marketable securities, an increase of $1.2 million from the end of Q2 2013. We note that our cash and marketable securities balance at the end of Q3 is roughly where we started the year.
With our cash on hand at the end of Q3, our debt availability of $28 million, and most importantly, our operating performance improvement through three quarters of 2013, we remain very comfortable with our commitment not to raise additional equity funds in the near term. I would like to close the discussion of our financial results with some thoughts on Q4.
While we are not formally adjusting our full year guidance at this time, we're confident that we will exceed the top end of our current range of $140 million in product revenue. That being said, as we look to the balance of the year, there are a number of factors, some positive and some negative, that will impact Q4 revenue growth.
Obviously, you are all aware that in September, Medtronic received approval of its 530G insulin pump with threshold suspend and is currently commercializing the system. While it remains to be seen whether this product will have a meaningful clinical impact over time, we expect Medtronic to aggressively market this device over the next several quarters as the first artificial pancreas.
More to come on that from Terry. This could impact the rate at which we are able to add new patients to our installed base as clinicians and patients take time to evaluate this product. It's also important to remember that we sold an extraordinary amount of hardware during Q4 2012 in connection with the launch of G4 PLATINUM. For our year-over-year comparison in Q4 2013, we will be comparing against a quarter in which we launched our first new product in three years.
We exceeded in Q3 what most analysts expected us to do in Q4. However, I remind investors that we've never suggested that we would continue to grow at 65% year-over-year as we did in Q2, and certainly not the 100% that we experienced this quarter. For Q4 2013, given the comparison to our first quarter of G4 Platinum sales in Q4 2012, we expect our product revenue growth to begin to normalize at closer to 40% year-over-year as we've guided previously, and we do not expect to exceed 50% year-over-year growth in Q4 2013. With respect to operating expenses in the fourth quarter, we expect to increase our spending in a couple of very important commercial areas. As many of you know, last year and early this year, we added approximately 20 sales territories to our U.S. sales force.
Before the end of this year, we plan to add an additional 20 territories, bringing our total U.S. field sales force to approximately 90 reps. We're also commencing a number of clinical studies designed to demonstrate both the clinical and economic benefits of CGM as a frontline therapy to support our position that CGM is the most important and cost-effective tool in the intensive management of insulin-dependent diabetes.
Finally, we note that our historical cash usage has always been high in Q4 as accounts receivable increase due to late Q4 sales, and we pay out a number of accrued liabilities before year-end. Adding to factors this year, inventories may increase in Q4, depending upon the timing of the approvals of our three pending FDA filings. Now on to the business update.
Turning to our regulatory activities, I'm very pleased to report that during Q3, we filed a PMA supplement with the FDA seeking an expanded indication for G4 Platinum for professional use. Professional CGM enables clinicians to gain better insight into their patients' glycemic profiles. Devices are owned by the healthcare professional and can be used either in blinded mode for simple collection and retrospective review of glucose data by the clinician or in unblinded mode, which allows the patient to experience the full benefits of real-time CGM while still providing the doctor with an opportunity to review glucose data retrospectively with the patient. Clinicians can use the insights gained from a professional CGM session to adjust therapy and to educate and motivate patients to modify their behavior after viewing the effects of specific foods, exercise, stress, and medications have on their glucose levels. Excuse me.
With respect to our pediatric indication, we continue to have regular open dialogue with the FDA concerning our U.S. pediatric submission. Our discussions continue to center on appropriate labeling of the product specifically for children, and we remain optimistic that we will receive approval prior to year-end.
Finally, with respect to our Share filing, we have received written feedback from the FDA, and we are currently preparing our responses to the questions posed to us. These questions require some simple clarification and a bit more testing of the system, and we expect that our responses will be submitted to the FDA within a couple of weeks. Turning to our future CGM product offerings, we remain focused on replacing finger sticks as our primary long-term objective, and we continue to work on both G 5 and G 6 in an effort to achieve this goal.
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. Shifting to our integration partnerships, Animas continues to work with the FDA on its PMA submission, seeking approval of the Animas Vibe System in the U.S.
Animas is currently completing additional verification and validation testing and additional human factors testing requested by the FDA, and it expects to have all additional testing done and responses submitted to the FDA by the end of January. We continue to work diligently with Tandem Diabetes Care to incorporate the G4 Platinum into a next-generation version of Tandem's t:slim.
Tandem's PMA application has not yet been filed with the FDA, and while the integrated system remains a top development and regulatory priority for them, as we're approaching year-end, we do not anticipate Tandem will file this quarter. Although Tandem management is currently highly engaged in their IPO process, we continue to work closely with the Tandem team to complete verification and validation testing and submit a PMA application with the FDA as soon as possible. I'd now like to turn the call over to Terry for some concluding remarks.
Thanks, Kevin. The third quarter was a record-breaking quarter for Dexcom as we continue to execute on all aspects of our business, be it commercial, clinical, regulatory, or with our R&D efforts, further evidence that our business model is scalable and is evolving the way we've always said it would.
There's been a lot of buzz in the diabetes community of late with Medtronic's announcement in September of approval of the 530G. I'd like to briefly share my thoughts on this approval and its impact on Dexcom. While a system that suspends insulin when a low glucose threshold is breached is considered a first step to achieve a closed loop or bionic pancreas, I do not believe the 530G adequately achieves that first step due to its poor sensor accuracy and reliability.
In fact, in my opinion, the pursuit of an artificial pancreas has unfortunately been dealt a substantial blow with the introduction of this product. The diabetes community is already complaining that after seven years and hundreds of millions dollar spent, is this the best industry could come up with? I share their frustration.
Patients deserve better. Sensor accuracy is what matters. In multiple independent studies, our G4 Platinum sensor is anywhere from 40%-70% more accurate than the new Medtronic sensor. At this point, most investors are aware of the work done out of Boston University and presented at the ADA Scientific Session meeting last summer, where Dr. Steven Russell shared comparative data from patients simultaneously wearing the G4 Platinum and Medtronic's Enlite and reported an MARD of 10.8% for the G4 Platinum and 17.9% for the Enlite.
Just last week at the Diabetes Technology Meeting in San Francisco, Dr. Gary Stiles presented comparative sensor data as part of a study examining the use of CGM in critically ill infants, reporting an MARD for the Enlite of 17.8% and an extremely high 81% early failure rate. By comparison, Dr. Stile reported an MARD of only 11.7% for the G4 PLATINUM with no early failures.
We expect additional studies with similar results will follow. Medtronic cites several different accuracy metrics in their labeling, but unfortunately, it seems that no independent investigator can reproduce the Medtronic data, and we believe the sensor's poor performance will be obvious to patients who try the device.
Furthermore, while Medtronic's data raises a number of questions, we believe that to achieve any reasonable level of accuracy with this particular product, patients will need to take up to four finger-sticks calibrations per day. We know from our own market research that reducing or eliminating calibrations is extremely important to patients.
We've also heard initial reports from patients that a considerable number of 530G alerts are false, which is in line with one of the Enlite data tables where Medtronic discloses that more than 50% of the Enlite's alerts at 70 mg per deciliter within a 15-minute window are false. As we learned with several of our prior products, repeated inaccurate or false alarms undermine a patient's trust and faith in a CGM system and are a key factor in patients electing to quit using CGM.
We are very prepared with our messaging in the field, particularly around the benefits of CGM first. We are also cognizant of the fact that the Medtronic marketing machine is out in full force. As a result, we do expect some impact to our new patient additions over the next several quarters as clinicians and healthcare providers evaluate this new product.
Diabetes is a burden. It's a burden for the patient 24/7, 365. There are no holidays, there are no vacations. It is a life sentence. As challenging as it is for patients, loved ones, friends, and colleagues are all impacted by diabetes. Our mission remains steadfast, replace finger sticks, and in the process, eliminate one of the most cumbersome and painful requirements of managing diabetes successfully. For Dexcom, the future is about simplicity, patient convenience, and connectivity.
Our goal is to continually miniaturize the footprint on the body to make the patient experience as minimally invasive as possible. Our goal is to enable the patient to interact with their glucose data directly on a smartphone, which will not only add to the overall patient experience, but will enable parents to receive their glucose information during the nighttime, during the school day from the child while the parent is at work, or allow a spouse to monitor a loved one while at work or when traveling.
As I routinely tell our employees, "Stay the course." With their substantially larger field presence, we expect our competition will attempt to create confusion in the marketplace with regards to sensor performance. We are committed to compete toe-to-toe in marketing the superiority of our system. In the end, by presenting performance data that is truthful and accurate, we will continue to win the hearts, minds, and loyalty of patients and healthcare providers. Thank you, and we will open it up for Q&A.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. We have Thomas Gunderson from Piper Jaffray in line with a question. Please go ahead.
Hi, everybody. I'll be quick, Terry and crew, Kevin. Let's see. Where do I wanna go with this? Terry, on the Vibe and the PMA that J&J is doing, has there been any correlation, any changes in how you think that product's gonna be launched given the reorg in the diabetes business at J&J?
Tom, I'm actually gonna ask Steve, since Steve heads up our steering committee relationship with Animas, and he would be better suited to answer that.
Yeah. No, I think, you know, look, the Vibe remains a critical priority. I mean, they still talk about the Vibe, not just at the diabetes franchise level, but we hear mention of the Vibe, you know, all the way up the corporate chain. I think the real challenge right now for the diabetes franchise is the diabetes franchise is being dragged down, frankly, by their finger stick business, so there's a lot of moving parts in that organization. I think, you know, first and foremost, the priority is get the Vibe out.
We are working, although it's largely being driven by J&J, we are working on a more advanced system. Without disclosing too many details, there's been some limited data published. But it's certainly a more advanced product than the 530G. I can't give you any specific timelines on that product because, you know, it's really a J&J product, and they've asked us not to disclose those yet. Yeah, I mean, J&J, I think, frankly, that the launch of the 530G has reinvigorated particularly the Animas side of the diabetes franchise.
Thanks. Steven, you guys held back so long on adding reps, and all of a sudden, you're on quite a ramp here. Can you help me understand or clarify, of those 20 that you plan on adding before the end of the year, 20 additional at the end, are those commission-generating sales guys, territories calling on unique customers?
That's exactly what they are, Tom. We've gone through a very detailed process of analyzing our demographics and where our current sales are coming from, where physicians and patients are located based on the insulin desk-side reports and everything. We've, again, divided the country back up and added 20 more reps.
Thanks.
That's exactly what they are, more commission-based sales people.
Got it. Last really quick question. You repeated that pediatric FDA clearance approved or clearance by the end of the year. Are you prepared for an early 2014 launch of pediatric?
Yeah, we will be. Absolutely.
We're prepared the day that we get the approval.
It only took us three weeks to launch G4 Platinum last time. We will get the thing out as absolutely quickly as possible.
Okay. Thanks, guys.
We have Bill Plovanic from Canaccord online with a question. Please go ahead.
Great. Thanks. Good evening. Congratulations, gentlemen.
Thank you, Bill.
As we kind of parse through the numbers here, you know, it wasn't lost on me. I just wanna get clarification. If it's the 75-25 mix, your durable revenues growth is accelerating and your utilization went up significantly. Are my numbers that off, or is that what we're actually seeing?
I'm not looking at your numbers, but what we're seeing is our durable revenues went up and our sensor revenues went up faster. Utilization and retention are doing very well for us right now.
Are there any metrics you can share with us, you know, maybe even just sequentially, like, is your utilization going improving X amount of sensors a quarter or a percentage, or is there just anything you can share to help quantify so we can understand? Because in, you know, in my model, it looks like utilization metrics are going up something like a 30% improvement on a quarter-over-quarter basis, and that it seems a little high, but I'm just trying to get, you know, some clarification on drivers.
I'm not sure that you're that high, Bill. I think, you know, again, we have imperfect data. We share data with a lot of independent distributors, and while they give us tracings, we're still consolidating as best we can. What we reviewed earlier this week, we sat down and went through all the data that we could come up with. We see patients using more sensors.
One category that really struck me and Terry is there appeared to be a much higher number of patients, for example, who are purchasing enough sensors to wear a new sensor every seven days. If patients are wearing a new sensor every seven days, then you can do the economics for that model. That's a very, very strong piece of evidence for us.
As we have stratified our user base from those who use very few sensors to those who buy the first kit and then don't buy anything else, what our goal all along was is to move everybody up the food chain to get everybody utilizing more sensors, and that's what's happening. Everybody's moving up a notch and purchasing more. This product is being utilized very regularly by the patients who have it.
Even our distributors have confirmed for us because, you know, these guys, they live to sell diabetes supplies. They are call centers. They track every call they make, every purchase made. Our distributors have come back to us and told us that the retention rate on this product is fabulous. We're not just coming up with that with our own numbers. We're coming up with that, our large distributors have verified that fact as well.
Okay. Again, kind of more in the weeds, but as I look at the past couple quarters, you've benefited from upgrades of patients. I think last quarter you mentioned maybe a third of the patients were upgrades. You know, as you look at this quarter, is there any metric around that you're willing to share?
Yeah, I can tell you upgrades are down. We added more new patients in this quarter than any quarter we've ever had. We've swapped out almost all of the seven-plus patient base at this point in time, that is active. So upgrades as a percentage came down this quarter, versus going up. This was a quarter of new patient growth, more than upgrades.
Okay. My last question, then I'll jump back into queue. You know, you generated cash in the quarter. You lose money only because you have big R&D and stock comp. You know, as you think about the business going forward, is the strategy to drive revenues and just keep it cash flow neutral because, you know, revenues is what you know, what you're valued on at the end of the day? You know, do you expect that you'd actually drive, you know, bigger positive cash flow and earnings? I mean, what is the focus of management at this point?
I'll take a crack, and then I'm sure Terry can add. We've been through this exercise before, and we wanna grow that top line as fast as we can. That will require significant investment on both the commercial side of the business and in our product pipeline. That being said, we've been at this for a long time. It's time to make some money. We will manage our top line growth and work to manage our bottom line as well and try and keep a balance. Ultimately, over the next few years, we'd expect our bottom line to grow faster than the top line, but we will never ignore the reinvestment back into the business.
We need to garner as much market share as we possibly can over the next two to three -year period and get as many people on CGM as we can, as we can support within our system. It'll be a balancing act, but we aren't gonna ignore the bottom line. Once we get here, I don't think there's a lot of turning back.
No, you can't go back. Obviously, on the cash flow, we've made comments about the full year 2014. Our board has always maintained that that's the direction that we should go, and then look at GAAP positive in 2015 and beyond. It is always going to be an incremental goal to continue to make this business more profitable, but echoing Kevin's comments, not at the expense of having a robust R&D pipeline, not at the expense of achieving our goal of replacing finger sticks, which I look on the horizon and see how close we think we are with some of the technology that we're currently developing, and it would be a shame. I think it would be. It's our moral obligation to pursue this for people with diabetes.
Great. Thank you. Congratulations on an unbelievable quarter.
Thanks.
We have Ben Andrew from William Blair on the line with a question. Please go ahead.
Not sure how to follow that praise or sequence, but I'll do my best, guys. Terry, if you think about the productivity in the sales force, did you add anybody in the third quarter that were, you know, in terms of staffing, or was this just a significant improvement in productivity by the reps? As you extrapolate forward with the 20 adds, can we again that multiplier effect in terms of the ease of getting patients on at this point with this new product?
You know, Ben, it's a combination of things. Number one, and to answer your question, no, we didn't hire the additions in the third quarter that shows this difference. I would like to contrast that by, we hired better reps in terms of our attractiveness to the people that we hire. In the next 20, I'm sure we are not lacking opportunities to hire some of the best, particularly as you get some contraction in the diabetes world as a result of economic impact. We get to kind of pick the, you know, who we choose, and I think that's an influence. What that translates into is that they are more active, more successful more quickly.
You don't have that long, traditional kind of four to six-month learning curve that new reps, particularly those that are coming from outside of the CGM business, tend to take in order to get them up to speed. I think the second thing, and in my field visits, I contrast that. The same docs that I called on a year ago, that I called back on today in ride-alongs, just their attitude towards CGM first has driven. In many cases, the product is selling itself, and the reps are certainly out promoting it.
That's one of the reasons that Kevin and the team have made the decision to expand the sales force again, because we are not completely serving the entire diabetes population that we should. Now there's enough awareness about the G4 Platinum that now is the time to drive that message to a larger group of physicians and prescribers.
Okay, that's helpful. Thank you, Terry. If you think about, Kevin, maybe the hardware component in the quarter, you obviously gave us some insights into the mix of new patients and upgrade. If you're pretty much done with Seven Plus, where do you think the steady-state, if there is one, will be in terms of hardware for new patients and equipment upgrades for existing patients after Seven Plus? New transmitters, new handhelds, things like that.
That's a very complex question with the G4 Platinum, and I can give you one variable. When we launched the G4 system, one of the things that we did is we warrantied the transmitter for six months, building in an estimated shelf life, and then selling it to possibly a distributor, where there would be another month of shelf life and then to a patient.
We've given a six-month guarantee. The transmitters we shipped last October, by and large, are still working. We haven't been able to predict when the transmitter sales are gonna come back in. We were thinking originally we'd get two transmitters a year. Our product works too well. Good for the patient, a little tough for us to model.
I think over time then on the hardware cycle, it probably won't be every year with the receiver, maybe a Seven Plus, 'cause I think this hardware will become more reliable. On the flip side of that, we've got a lot of hardware innovation coming, like the Share S ystem, that we will launch, you know, again, as soon as it's approved.
That's more hardware sales. I don't know what that does to receiver and to transmitter revenues, but it could have a very positive impact. As we look out over time with another transmitter when we talk to a phone or additional improvements that we have, our hardware cycle may become a little more traditional based on multiple product launches versus waiting three years for a new system. For now y ou know, our percentage, we were 30% last quarter durable, creeping down closer towards 25% this quarter with huge sensor sales increases. We'll just kind of play it by ear.
Okay. The new patient revenue, it's over 50% of the handheld revenues, or is it 75% within that?
We've never broke it out, but it's high. It's higher than it's been in other quarters.
Okay, great. The last question, and this is another kind of, you know, one for Terry, I guess. Why would somebody take off a good sensor at seven days? You said you were surprised by that. Is it with the patient comfort or is it just kind of a routine they get into? Thanks.
No, you know what I suspect it is, I think it's new patients coming into the system that are different than the patients that originally were the earlier adopters and high technology people. They actually read the labeled instructions and use it according to the indicated use. I think they're just following the instructions appropriately, and they haven't gone to the back because, you know, we do actually at the end of a session, we give them advance notice that the session is ending. It's this other group, earlier adopters, that figured out ways to trick the system to allow longer use. I think this is a population that is behaving appropriately according to indications for use.
Good. Thank you.
We have Kimberly Gailun from JP Morgan on the line with a question. Please go ahead.
Great. Hey, guys. Thanks for taking the questions.
Yeah.
Congrats, you know, on the quarter. This is a nice one for me, coming on board, for my first quarter. Nice work there. I guess the first question is for Kevin. Just looking at your comments, for your full year outlook and kind of no formal change, but certainly exceeding the top end of the, you know, the $140 million on product revenue.
I think that you also said in the fourth quarter you'll look to normalize toward the 40% growth in product revenues and not exceed 50%. Are you essentially saying then for the fourth quarter, just based on those growth rates, $44 million-$48 million, and then for the full year in product revenues, that gives you $150 million-$153 million?
We created a frame that you can paint any way you would like. Yeah.
Okay. Those numbers I got, I heard those numbers correctly.
Yes. You heard the 40% and not exceeding 50%. That's correct.
Okay, fantastic. How do you think that, you know, how do you think that that plays out as we go into, you know, 2014? I know broadly you've said the 40%-50% is kind of the right number for 2014. Do you know, how do you think about Medtronic's impact, I guess, next year, you know, as we move through the year?
You know, it's a little early to tell, Kim, but we are committed. We've been committed to 35%-40% growth for next year for a long time here, and we knew this product was coming. It's not like we're completely caught unaware. Driving our growth next year, obviously, a peds indication is gonna be very helpful. We believe our share system, combined with the peds indication, gives parents an opportunity to monitor their children all night long and even when they go to school when they take it with them.
It will also be based on our market research, used very extensively with spouses and other loved ones. That'll help drive revenue and combine that with possibly a J&J launch. We have a lot of things in our favor that are good growth drivers for next year. Bottom line, as we look to start next year with this patient base buying a lot more sensors, we've got a pretty good start.
Yep. Okay. Just to follow up on the gross margin, which was obviously also very strong in the quarter. Was there anything one-time in there, or is that kind of the level with the mix of business that you're seeing, is that kind of the level we should expect to grow off of going forward?
There were no one-time events in there that had a material effect on margins. We have little one-time things every quarter. You know, we've often said our margin target for our sensors was in the 70%-75% range, and as you guys do the math and figure out hardware versus sensor sales, it's not too hard to deduce that we've got there. Again, we've achieved what we said we were gonna do from a margin perspective, and we look to go forward from here.
Okay, great. Thanks, guys.
Do we have Mimi Pham from ABR on the line with a question? Please go ahead.
Hi, good afternoon. I appreciate, Terry, your honest thoughts and insight. They talked about launching sometime, you know, in the end of October. Have you actually seen them in your account base yet?
Yes.
Okay.
Yeah, we've actually got reports, and in fact, I have screenshots that have been sent to me from patients showing the highly inaccurate Enlite sensor and a direct screenshot with their own meter and our sensor, and it's alarming. I don't mean that as a tongue-in-cheek pun, but the reports of excessive alarms is remarkable.
Yeah, we've seen them out there. I think that's. My comments are attributed to that type of information. The blogs are already populated with, "This thing isn't working the way that Medtronic is hyping it." I think that's the disservice to the artificial pancreas consortium that tries to get this out and pursue this. I think it's. Like I said, I think we've taken.
For those of us that are active in the AP world and, you know, clearly we're in 17 projects around the world, I think this over-hyping by Medtronic is gonna blow back in them, number one. I think number two, it's gonna cause the AP projects, advocacy groups to take a second look at where we've come.
We've spent all this money, you know, the patient advocacy groups like JDRF and others. I think there's a question in everybody's mind as that this is the best we can do. This is, you know, certainly dismal in my opinion. For patients looking for, you know, pump CGM integration, how much can you say about the pending Vibe in the U.S. now?
You know, I have to look at the international experience as a proxy. The Veo system, which is the 530G in the European launch, and it's been there for about three years now, has not grown. Particularly, the Vibe has taken share in every country that they are in. I think the physicians recognize the lack of utility of that, quote, "low glucose suspend" over their low threshold here, that when you're only suspending for an average of 11 minutes overnight, that suspension represents probably less than a couple of units of insulin that you're really not doing much. I don't think it would necessarily harm a patient, but all it's going to do is just drive them crazy with alarms.
They wake up, do a confirmatory finger stick, re-recognize that the Enlite sensor is wrong. I think the more that happens, the more frustrated and the more alarm suppression that the patients engage in. That's all gonna come back to the blogs and to the healthcare providers.
Got it.
I think the Vibe, well once launched here, will take share.
Should we be updating our models for Vibe to reflect more of a mid-2014 launch next year?
Steve, I thought Steve you know had a great answer that this is driven by J&J. Although we're helping them every step of the way, it's really their filing. Until that actually goes in and they've responded appropriately, it would be inappropriate for us to comment on timing.
Then just a comment about the productivity, sales productivity increasing. Have you reached the max sales productivity or is there still a lot more upside?
Well, there's a lot more upside. I mean, if you look at data that says where we're at as a penetration in a category, you know, we clearly, most everybody thinks we've got more than, you know, 50% share in the US, and, you know, I don't know whether that's true or not true. As a category approaching 10%, if you look at pumps, they're not quite at 30%. I would say our target has to be north of pumps. We've got a lot of runway yet in front of us to achieve much greater goals.
Okay, thank you.
We have Tao Levy from Wedbush on the line with the questions. Please go ahead.
Yeah. Hi, good afternoon. Just to be clear then, in the third quarter, you really didn't have much in terms of incremental six-month transmitter type revenues?
Not much. No. We had some, but not a lot.
I mean, do you think that has to start hitting here in the fourth quarter?
It started picking up a little bit in September, and it's gone a little faster here, in October, November. It still has, the floodgates haven't opened yet.
Gotcha. Okay. Have you closed down the old sensor manufacturing, the Seven?
Yes, we have. We don't manufacture Seven Plus sensors anymore. We've got a safety stock of inventory built, primarily to service our professional use patients until the G4 Platinum professional use system is approved and occasional one-off shipments to our patients. We're in the middle of implementing some very aggressive upgrade programs for the remainder of the Seven Plus patients to get them switched over, and those will be going out shortly. We'll push pretty hard over the next six weeks.
Thank you. As in the Q3's gross margin number, that still includes some of the old manufacturing.
Oh, yeah. It absolutely does.
Okay. That gets better from what we've seen.
Should.
Should. Right. Just lastly, I didn't hear anything on the GlucoClear, and if there's any updates there. Thanks.
I can go ahead. You know what? They're marketing it commercially on a limited basis in Europe, and they appear, as we hear comments in their calls and such, to be very bullish on the product. We didn't have much on the revenue side there. It all appears to be going well.
Clinical feedback, do you know that's all trending in the right direction?
Yeah. As far as we can tell, you know, we have to, Mike McMullen certainly has that as a key growth driver in his comments, and I know they've committed a lot of resources to launch the product in the European sector in a very limited way. Their goal is not only from the accuracy and that which is, you know, exquisite. You know, we're down to laboratory reference accuracy with the sensor technology.
But there's this other factor that they believe is important, and that is changing behavior in the ICU to allow it to be more functional by the nursing staff and the ICU staff. That's what they're trying to look at behavior modifications for the intensivists and the anesthesiologists and the staffing and how they use it in an effective way. Because it is quite a change for the behavior in that environment.
Okay, great. Thank you very much.
We have Danielle Antalffy from Leerink Swann in line with a question. Please go ahead.
Thanks so much. Good afternoon, guys, and congrats on another great quarter. I just wanted to touch on the full year guidance a little bit, appreciating sort of the numbers that you gave. Could you talk a little bit about, in more detail about the variables driving the fact that you're not sort of raising guidance when, you know, the numbers you provided would sort of imply a $10 million beat on the top line for the product revenue. I guess what's keeping you from just going out and raising the guidance? Is it just conservatism against the Medtronic launch? You know, now we're already sort of six weeks in, I guess. Could you give a little bit more color about your thinking there?
This isn't conservatism against the Medtronic launch. This is just a look at our business and where we are and what we had anticipated for the fourth quarter. We typically in the past have never upgraded our year-end guidance in the fourth quarter, and we're gonna stick with that policy, 'cause if we do upgrade it specifically, then we end up changing that year-end guidance, and we don't feel the need to do that. We feel we've given you enough of a frame and enough information to figure out where we think our numbers will be, and that's where we are. The other impact, and I'll just be very transparent, that if we gave you Q4, you're gonna look for it in Q1 2014.
Yeah.
That's not what we wanna do.
Right.
We don't wanna give quarterly guidance.
Okay. Got it. Thank you. As far as the Medtronic launch does go, you know, a good number of your sensor wearers are Medtronic pump users. What are you seeing? I actually am not sure if you've disclosed that number, if you could give us that number. What are you seeing of those patients? Are you still managing to hold onto those patients, or are you seeing some of those patients switch over to Medtronic? Because Medtronic sometimes automatically upgrades patients, I know. I'm not sure how that's playing out.
I mean, I will tell you, it's been too early in their launch to really have a good optics on what it's gonna turn out to be. That's why in Kevin's comments, two to three quarters. You know, you can't from a billing standpoint, there are some issues to the individual component parts, transmitters and so forth that our patients have already been reimbursed for.
So Medtronic can't bill for some of those things. So I think it's a very complicated scenario. I would expect that even in those that have upgraded and get to do their own comparative analysis between the G4 Platinum and the Enlite sensor, I worry less about the attrition of those based on a few input that we've received. As I mentioned, I, you know, get screenshots from patients, making their own comparison, and I think we'll see more and more of that. I'm not as concerned, I believe, as maybe some others are.
Okay. Thanks. Okay, thanks so much.
We have Korosh Saba from Stephens Inc in line with a question. Please go ahead.
Hey, guys. Congrats on the triple digit quarter. Really nice to see. Just going back to the J&J and Tandem, the integrated launches. Can you guys just speak around some color of how you guys see those two partners kind of supporting the launch, whether they'll be going after kind of their new patients versus converting their existing patient base, and just kind of some color would be helpful. Thanks.
Yeah. This is Steve. I can't speak with specifics for Tandem because we haven't, frankly, I haven't talked to the Tandem business folks as to their specific launch plans. Absolutely, with Animas and with the Vibe product, they will. Their expectation is to go straight after the Medtronic installed base. I mean, look, it's no secret that the vast majority of pump patients in the U.S. wear a Medtronic pump.
They probably have, you know, 65%+ market share. Every year, the number of pumps sold in the U.S., I mean, there's probably. I would venture to guess there's more pumps sold to existing patients than there are new patients to pump therapy. The lowest of the low-hanging fruit is a patient who has already chosen to wear a pump but is just within that part of their upgrade cycle.
Absolutely, that will be the Animas, you know, primary target. I, you know, my guess is that Tandem will probably do the same. We have heard, and this is publicly shared from Tandem, that they have done an excellent job in adding the patients they've added to date, in converting Medtronic patients. I would assume that Tandem would probably take the same approach.
Okay. That's really helpful. Just on pediatrics, can you guys just provide some color around how you kinda see that coming on board and how quickly, you know, throughout next year you see that coming?
Well, you know, again, we continue to have discussions with the FDA. The discussions center on labeling a product specifically for pediatric patients. They are requiring specific pediatric patient labeling and a specific pediatric patient product offering. We're discussing those features with the agency and coming to where they want us to be.
As far as how that comes on board, again, I'll go back to our past history. We announced G4 Platinum, I believe, on October 7th or 8th last year, and we're shipping October 20th. We expect the same from our team here again. Once it comes on board, we can directly market to the pediatric endocrinologist.
We believe over time, that segment of our patient base will grow from the 8%-10% that it is now to be more reflective of the general diabetes population in the 20%-30% range. It's a wonderful growth opportunity for us. With the accuracy of our product, with the connectivity and convenience and communication features we're about to offer, we think it's a wonderful area for us to go.
Great. Just last one from me. In terms of that, the Share product, have you guys given or could you guys provide some color around how you expect to price that, whether it be like a monthly, quarterly or how you guys are looking at that?
You know, to start with, we've got some pricing models built. I'd rather not disclose that now. I need to let my marketing team figure their way through it. I can tell you our goal in this product is not to launch a product that people look at and go, "Oh, I can't afford that." We want people to buy this and use it and buy more sensors. It'll be very economically feasible for the patients. It'll add some to our bottom line. Ultimately, our goal here is to sell more sensors, and that's what we're shooting for.
Great. Thanks, and congrats again.
We have Jayson Bedford from Raymond James on line with a question. Please go ahead.
Good afternoon. Thanks for squeezing me in. I'll be quick here. You mentioned increased retention as kind of one of the factors in the growth here. Is there any way to quantify the improvement in retention? Meaning, is it 5%-10% higher than what you were seeing with the Seven Plus?
You know, we've never given a retention or attrition percentage in detail to anybody. It's a lot better. I'll just leave it at that. It's a very significant improvement over what we saw before.
Okay. Internationally, I think you've talked in the past about adding 10 new countries. I guess I realize it's a small piece of the pie right now, but are you seeing any contribution from these new countries? Or is the growth you're seeing from kind of countries you're already selling into?
Most of the growth this year has been in our core countries. As the new countries come on board, they start a little slow, but we are making progress in adding those 10 new countries. By the end of the year, we're confident we'll be approved in pretty much all 10 of the ones we look to add, and then we'd expect those to account for a decent piece of our international revenues next year. We'll finish that up. You know, every country is important, and every one of these adds is important to us. That's how we'll build that business over time. Our team's doing exactly what we've asked of them.
Okay. Then just last, on gross margin, I may have misheard it, but did you say that gross margin on the G4 Platinum sensor was 70%-75% in the quarter?
I said that's always been our target. One can deduce looking at 65% overall margins with the hardware and sensor mix that we're there. We're within that target range.
Fair enough. Thank you.
We have Dan Wallace from Benchmark on line with a question. Please go ahead.
Good afternoon, everyone, and congratulations on the quarter. It is exceptional. I just have a couple of quick questions. Most of the questions that I had were answered. One is just to make sure on the share submission, the questions you're getting are benign, right? There's nothing that's untoward or getting in the way of a smooth answer and response.
We don't see anything as major, but we also never see anything from the agency as benign either. We're giving them due diligence. They didn't ask us anything we can't answer. How's that?
That's a good answer. Thanks. I guess another question I had is, are there any updates on the clinical studies you have ongoing or planned? They seem to be important to your marketing strategy, and I was just wondering where they are.
You know what? We're gonna give more color on that next year once these things get rolling. I think we're in a phase in the fourth quarter. We're running some pilot studies. We're doing a lot of trial design and consultation. I think next year as we go forward, you'll hear a lot more on these studies. Right now, it's a little early to tell you anything.
Okay. Just in terms of your sales force, you have 90 reps now. You added 20. How do we see the sales per
Not yet. When we get
When you add the 20, you'll have 90.
Yeah.
Correct.
Okay, sorry.
That's okay.
How do you see the sales force growing, let's say, over the next couple of years? Are you there and ready with leverage or a lot more territories and a lot more leverage opportunities even if you add?
As pointed out earlier, these guys were pretty leveraged this quarter as we didn't add any bodies and are up, you know, 24% when comparing to the quarter before. I think we're getting more leverage out of this group all the time, particularly as we continue, again, to sell more sensors. I also don't see us stopping our expansion either.
There will be at some point in time we'll get to the right mix and more than likely be done. The time is not now. It's certainly not next year, and we probably don't see it being through 2016. We think we can continue to grow. You know, internationally, we use distributors everywhere. We've got a pretty small, effective international staff right now. There's investments to be made in that area as well.
If we're thinking about the sales force additions over time, we should just kind of consider what you're doing now is what we should see over the next year to two years.
You know, as we look at our spending, and it's a good question, we spent a whole bunch of years up before, you know, 2010 investing a whole bunch in trying to get product developed and product right. What we're doing right now to a large extent, even though we continue to spend on the product front.
It's now time for the commercial side of our business to catch up. Not only are you gonna see continued investments in the sales force as we grow it, but in all candor, we got to become a marketing company, too. We'll be not only investing in sales, but you asked about the clinical studies. You know, we've never run a clinical study other than for product approvals.
We've got to do things that support the value and again, support our fundamental belief that CGM is the most important technology in diabetes. It is the most important thing for anybody with insulin-dependent diabetes to manage their condition. Some of those studies that we're gonna do, it's different than what we've done before.
We're gonna invest in things like that in addition to salespeople. As you look at where we grow our dollars spending-wise, we will more than likely grow dollars as much, if not more, on the commercial side than we will the others over the next few years while we get to kind of an equilibrium, and then we'll see where we are after that.
Well, that goes back to a previous discussion, I think, where you were talking about growing the top line, but also recognizing now that you're gonna have to return some earnings, sooner than later, and probably by 2015. The spend rate, you know, I guess, is going to affect what you're gonna be able to drop to the bottom line. How do you see that?
Absolutely.
How do you see that going in the next year to two years?
I see that just being a balancing act, and we've got some great people here to manage it. You know, Terry and I have been through this a few times before, as have many of the people on this team. Any project we take on, we look at the payback, we look at the return, and we sometimes learn to say no. We do.
All right. Well, thank you very much. Again, congratulations on the quarter.
You bet.
We have Raj Denhoy from Jefferies on the line with a question. Please go ahead.
Hi, good afternoon. I was just curious about some of the trends you're seeing, you know, with the launch of the G4. You know, it's things like higher sensor utilization, you know, the lower attrition rates. I'm curious how that compares back to the experience on the launch of the Seven Plus. In particular, is there a concern that some of those, you know, very robust trends may slow as patients get more experience with the device or we move beyond kind of the initial launch here?
You know, I'll speak my piece. I think it's exactly the opposite. Sensor satisfaction and satisfaction with a product like this is determined very quickly. If patients find this product reliable and informative and a tool to manage their lives, if they're happy, they stay on. Early usage is probably the more important indicator versus long term with something like CGM or pumps or anything like that. In this case, the early history of the G 4 launch, where it has performed much better than Seven Plus did in the beginning with retention, sensor utilization, and those trends, it is truly a positive trend for us. I don't know, Terry, if you have anything to add to that.
I agree with Kevin. We're moving beyond the early adopters, so means we're also in CGM first with physicians and patients coming in naive to technology, and it's becoming a part of the fabric of their diabetes armamentarium, so they don't know any different. That fact that they've never been on a CGM, and the first one they go on, G4, they're extremely happy. If they've been on Seven Plus and have moved to G4, they're even happier because they have a benchmark by which to compare.
If they've been on anybody else's sensor, then they're even happier to come to G4 because they have yet another wonderful experience. All of that goes to reduction of attrition, and continued use, on a more sensors per month basis that we're seeing. I don't see any headwinds associated with that. Quite, quite the contrary.
Just to be clear, those trends you're seeing are being experienced in both the brand-new patients but also in the upgrade patients in terms of those metrics?
I don't think we have the detail.
We haven't broken that down.
To be able to answer that adequately to say absolutely. The comments that we have from the metrics are overall, we haven't dug down into to see which patients are using the sensors more frequently. You know, naive patients or new to G 4 versus Seven Plus upgrades. We don't have that data.
Okay. Thank you.
We have Steven Lichtman from Oppenheimer on line with a question. Please go ahead.
Hi, guys. It's Rosemary in for Steve. Can you hear me okay?
Yes.
Thanks for squeezing me in. Just quickly on the Tandem PMA filing, can you elaborate on the type of validation testing that's being done and generally how long you think this testing will take?
No, I can't give any more specifics other than, you know, we've talked previously, both applicable to Tandem and to Animas. Remember, they're moving from a 510(k) environment to a PMA environment. The level of systems testing required of a PMA company versus a 510(k) is substantially greater.
There's just a lot of work to do. I think, you know, both Animas previously and this time around Tandem probably underestimate the magnitude of the work that has to be done in order to complete an adequate PMA to submit to the FDA. I can't go into the specifics of the details of the testing, but you know, let's just say they're very attuned to it, and we will help them in every way we can to get the filing done as soon as possible.
Okay. Fair enough. Terry, can you talk a little more about the opportunity for G4 in professional use? I mean, how much more of an opportunity is G4 versus Seven Plus in this professional use market?
Well, I think there's a tremendous opportunity for G4 and professional use. You know, physicians enjoy the opportunity to put patients on a sensor. We have the opportunity to do it either in a blinded or unblinded manner. We prefer unblinded. I think a majority of intelligent physicians today use the unblinded way as their preference because that allows both the physician and the patient to experience the levels of glycemic variability and get a better understanding. I always remind physicians who wanna have such control that they only see their patients at best four times a year, and so the patient is left to be responsible for their own diabetes the 361 days a year that they don't see a physician.
It's better to have more information than less information with the help and education from the healthcare professional. Having that technology available to them will enable them to get more patients started who may in fact be hesitant to go on CGM, and allows them to cross the threshold and realize how valuable the information is and migrate then to their own personal system.
All right, thanks for the color.
I will now turn the call back over to Terrance Gregg.
Thank you, and thanks for joining us. Obviously, this was, as I think one of you, maybe, Bill Plovanic said, "Wow." We agree, Bill. Wow. We've done everything we said we were going to do, and then some. This technology is the most exquisite, and the management team is the best that I have ever been associated with, and my last team was pretty good.
We know we're being chased by others who want to be the lead dog because if you're not the lead dog, the view never changes. While those who chase us shoot for G4 Platinum accuracy, for example, we've already set our sights and are deeply engaged in therapeutic accuracy, followed by reduced or factory-calibrated sensors. To the 350 million people with diabetes today, help is on the way, and it will have a Dexcom label. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.