Welcome to the Dexcom Fourth Quarter and Full Year 2012 Earnings Conference Call. My name is Trish, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Terry Gregg. You may begin.
Thank you, operator. Thanks for joining us today for our fourth quarter and full year 2012 conference call. I'm gonna ask Steve Pacelli to go through the safe harbor statement. Steve?
Sure. 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 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 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. Our agenda for today's call is fairly typical. I will provide a brief update on our G4 PLATINUM launch activities. Kevin will review our detailed fourth quarter 2012 financial results and provide our customary operations update, and then I will offer some concluding thoughts.
As we discussed during our third quarter 2012 earnings call, on 5 October 2012, we received approval from the Food and Drug Administration to begin commercially marketing our fourth generation CGM system, the Dexcom G4 PLATINUM Continuous Glucose Monitoring System. The US launch of G4 PLATINUM has generated a higher level of excitement among patients, partners, and physicians than any of our previous commercial launches.
We began taking orders for G4 PLATINUM immediately upon approval, and we completed our initial G4 PLATINUM shipments to patients before the end of October 2012. While our initial focus was on processing orders for new patients, we also successfully upgraded a fair number of SEVEN PLUS users to the G4 PLATINUM in fourth quarter.
Also, during fourth quarter, approximately 60% to 65% of PLATINUM starter kits shipped went to new patients, while the balance went to SEVEN PLUS patients, including patients who took advantage of our $399 in-warranty upgrade promotions, patients who purchased SEVEN PLUS in September 2012 who were entitled to a free upgrade, SEVEN PLUS patients who were out of warranty and were processed through normal reimbursement channels.
To add some color to the new patients, I note that we had a 50% increase in kits shipped to new patients in fourth quarter 2012 versus fourth quarter 2011. We sold more kits to new patients in the US alone in fourth quarter 2012 than the total number of kits we sold in fourth quarter 2011. The commercial introduction of G4 PLATINUM continues to exceed our expectations. Our pipeline of new patient opportunities remains robust. Call volumes into customer service remain strong. In spite of typical first quarter seasonality, first quarter sales through late February have been solid.
More than ever, we believe G4 PLATINUM sets a new standard for sensor performance. It is the most accurate and reliable continuous glucose sensor ever commercialized, and we believe this system will accelerate category adoption of CGM.
Now, before I turn the call over to Kevin Sayer, I'm pleased to share that we have yet again delivered on a significant operational milestone at Dexcom. Just this week, we received approval of an expanded indication for our CE mark to include pediatric patients and expect to update our product labeling and begin marketing to pediatric patients in Europe before the end of first quarter. Additionally, as promised, we have filed a PMA supplement with the Food and Drug Administration seeking a pediatric indication for the G4 PLATINUM here in the US.
I would like to acknowledge the hard work of the people at Dexcom, particularly our outstanding clinical and regulatory teams, who have taken us one step closer to enabling Dexcom to care for all people with diabetes. With that, I would like to turn the call over to Kevin Sayer.
Thank you, Terry. I'll start with the financial updates. Dexcom generated $31.7 million in product revenue for the fourth quarter of 2012 compared to $20.9 million for the same quarter in 2011, a $10.8 million or 52% increase. We note the product revenue for fourth quarter includes a $1.2 million reversal of a sales returns reserve we recorded in third quarter relating to our thirty-day money-back guarantee on Dexcom hardware, or the so-called September patients. Sequentially, product revenue for fourth quarter of 2012 increased 50% from the prior quarter.
As we stated in the G4 PLATINUM approval call we held in October 2012, we believe that many purchase decisions during third quarter were deferred as patients and healthcare providers anticipated the G4 PLATINUM introduction.
While we believe this may have led to additional demand in fourth quarter, as Terry mentioned in his remarks, we continue to see strong demand for G4 PLATINUM in the first quarter of 2013. Total revenue for the fourth quarter of 2012 was $33.3 million compared to $22.4 million during the same quarter in 2011. Our product gross profit totaled $17.2 million, generating a product gross margin of 54% for fourth quarter 2012, compared to a product gross profit of $10.2 million and a product gross margin of 49% for the same quarter in the prior year.
Please note the product gross margin in fourth quarter 2012 was affected by a number of factors related to our G4 PLATINUM launch, including the impact of our $399 warranty upgrade program, manufacturing scale-up activities for G4 PLATINUM, extremely high manufacturing and sales volumes, early stage production yields, and the continued support of our SEVEN PLUS sensor manufacturing operations. Some final thoughts on our product revenues and our gross profits during fourth quarter.
Our split between consumable and durable revenues was slightly more heavily weighted to durables in fourth quarter due to the G4 PLATINUM launch, with approximately 32% of our product revenues generated by sales of G4 PLATINUM hardware and approximately 68% generated by sales of both SEVEN PLUS and G4 PLATINUM sensors.
ASP for sensors remained constant, while the ASP for our hardware was negatively affected by our $399 and warranty upgrade program. Our international business continued to perform well in fourth quarter, accounting for between 5% and 10% of our product revenues. However, the US launch of G4 PLATINUM somewhat overshadowed our consistent OUS growth.
Research and development expense totaled $8.7 million for fourth quarter of 2012, compared to $9.2 million in fourth quarter 2011, and a decrease primarily resulting from lower clinical trial costs and lower G4 development expenses. Sequentially, we are pleased to report that R&D expense was down 18% as a result of similar factors. Lower clinical trial costs, reduced G4 development expenses, and reduced outside consulting services.
As we move into 2013, we expect that R&D expense for the full year would be relatively flat versus 2012. Much will depend upon our timelines and opportunities with the FDA. With the pediatric PMA supplement on file, our R&D focus this year will be on the Animas and Tandem PMA filings and subsequent product approvals, mobile and cloud-based data platforms, continued system performance improvements, all of the elements of our G 5 CGM system, and early-stage research on the G 6 sensor.
Selling, general and administrative expense totaled $17.2 million in fourth quarter of 2012, compared to $13.7 million during the same quarter of 2011. The increase primarily related to sales, marketing and information technology costs to support revenue growth.
A little more detail on the $3.5 million increase in SG&A, $500,000 of it centered in non-cash share-based compensation. The remaining increase was related to G4 PLATINUM launch costs, increased variable sales costs related to our 50% plus revenue growth, both sequentially and over 2011, and marketing information technology costs to support this revenue growth.
As we look at fiscal 2013, we do anticipate an increase in SG&A expense of up to 20% to support our growth. While SG&A will increase moderately, we intend to invest in the sales and marketing side of our business. Earlier this month, we commenced a reorganization of our US field team.
We've increased the number of US sales territories from 48% to 68%, and we've consolidated what was previously a tiered model with multiple sales reps and field-based clinical support staff sharing larger territories into a flat structure with a single sales rep solely responsible for a much smaller territory.
Our clinical support team will no longer be field-based, but instead will be redeployed on phone lines and on computers as part of our Dexcom CARE Initiative, proactively reaching out to patients on predefined schedules to improve patient experience, while also working to increase sensor utilization and patient retention. As we have discussed on numerous occasions, most of our patients are trained using Dexcom support resources, including our online tools, in combination with support from our healthcare professionals and our technical support center.
With smaller territories, we believe our sales reps will have the bandwidth to handle local training issues where necessary. Upon completion of this reorganization, we will have expanded headcount in our sales organization, including non-field based clinical support by approximately 15%. We expect this reorganization to be completed by early second quarter 2013.
Our net loss for the fourth quarter 2012 totaled $8.5 million, including $6.3 million in non-cash expenses centered in share-based compensation, depreciation, and amortization. Absent these non-cash charges, our net loss for fourth quarter 2012 would have been $2.2 million.
Compare this cash operating loss of $2.2 million to a cash operating loss of $9.8 million in the prior quarter and a cash operating loss of $7.2 million. It's easy to understand our belief that we can in fact move our current business model to profitability with increased volumes. Our loss per share for the quarter was $0.12. With respect to our balance sheet, we ended the quarter with $48.7 million in cash and marketable securities, down $4.7 million from third quarter.
As we stated during our last call, we had significant working capital needs during fourth quarter as our receivables increased over $7 million from third quarter. We had capital expenditures of another $1.4 million, and we paid down approximately $2 million in accruals in conjunction with year-end.
Finally, as we disclosed on Form 8-K during our prepared remarks at the JP Morgan conference in January, our product revenue guidance for 2013 is $120 to 130 million. Now for a business update. Turning to our product pipeline, as Terry stated earlier, we filed a PMA supplement with the Food and Drug Administration seeking a pediatric indication for the G4 PLATINUM, and we have received CE mark approval for pediatric patients and expect to begin marketing to pediatric patients in Europe before the end of first quarter.
We remain extremely excited about the prospect of a pediatric indication, as it not only significantly expands the number of endocrinologists we can call in the US, we expect to be able to recommend our technology to patients as young as two years old, which would be a first for CGM.
Our future generation products are very much geared towards this market segment. On the international front, we expect approval in Canada and India shortly, and we continue to explore opportunities in China and Japan and other Asian geographies. We continue with development of the G 5 system, working on an improved applicator combined with a mobile phone interface. We continue to have discussions with the FDA on this front and believe that Dexcom is in a very strong position to become the First Class three medical device to communicate directly to a mobile platform.
Shifting to our integration partners, Animas continues to commercialize the Animas Vibe system in Europe. In its recent earnings call, Johnson & Johnson disclosed that in markets where the Animas Vibe is commercial in Europe, they have seen 35% to 50% average sales growth compared to markets where the product has not yet launched.
With regards to filing for US approval of the Animas Vibe, all development work and systems testing is complete, and we are working diligently with Animas to finalize their PMA application to be submitted before the end of this quarter.
We are pleased to note that we reached an agreement with our newest partner, Tandem Diabetes Care, to accelerate our development efforts, and we will be incorporating the G4 PLATINUM into the Tandem system. We expect development to continue through 2013 and hope to be in a position to assist Tandem in filing a PMA with the Food and Drug Administration before the end of the year.
Regarding our relationship with Insulet, as many of you are aware, Insulet announced during its presentation at the recent JP Morgan conference in San Francisco that it was seeking to partner with a to-be-named glucose sensor company in an effort to physically integrate a continuous sensor directly into the disposable pod, in addition to displaying CGM data on the Insulet handheld device. A couple of things have changed since we entered into our original agreement with Insulet. First, we have made significant progress in moving our CGM display directly to a phone.
Both companies believe that display of CGM data on a patient's smartphone significantly reduces the market impact of displaying data on the pod handheld. This is different from a durable pump like Animas or Tandem products, where the device remains continuously tethered to the patient.
Second, the physical integration that Insulet intends to pursue would present several problems for Dexcom. An integration of this nature would require the transfer of much of our sensor intellectual property and know-how to Insulet so these combination devices could be manufactured. We would then have to determine how to share patients and the resulting revenues of the combination product. Finally, and perhaps most important, Dexcom is working to develop a sensor that will last 10 to 14 days.
Integrating our technology into a three-to-four-day disposable doesn't make economic sense for us, as it will cost us the same to manufacture a three-day sensor as a 10-day sensor. While we have not formally terminated our contract, the integration path chosen by Insulet effectively ends our relationship, and we wish them well.
Turning to our development partnership with Roche, as we've discussed previously, Roche has spent the past several months evaluating the feasibility of incorporating G4 PLATINUM into their next-generation handheld diabetes management system. Roche recently concluded that the incremental expense associated with doing so could not be justified from a time-to-market perspective, particularly in light of our G 5 timelines.
Like Insulet, Roche also understands that as Dexcom's hardware platform shifts directly to direct display on a smartphone, the value of integrating G 5 into a future Roche handheld device is much less meaningful as patients will opt for CGM display on the phone.
For these reasons, together with the fact that Roche and all other SMBG companies are looking at a very challenging diabetes marketplace with respect to pricing pressure and decreasing reimbursement as a result of competitive bidding, Roche has made the decision not to move forward with G 5 integration at this time and will instead focus resources on their core business. Our overall relationship with Roche remains very strong, as Roche is a very strong distribution partner in many of our international geographies, and we continue to explore future distribution collaborations with them.
Finally, on the Edwards front, we are very pleased to announce that our second-generation GlucoClear system has received CE mark. While we don't expect significant sales this year, we expect 2013 to be a pivotal year as Edwards completes additional accuracy studies in Europe and obtains greater clarity on the pathway towards US approval.
We remain enthusiastic about the significant breakout opportunity represented by this technology and look forward to supporting Edwards as they bring our best-in-class sensor technology to the critical care setting. I'd now like to turn the call back over to Terry for some concluding remarks.
Thanks, Kevin. I'd like to start by highlighting our fourth quarter financial performance. Product revenue clearly exceeded our expectations in the quarter, but I am equally pleased by our operating performance. As you know, our board set a stretch goal for us to reach cash operating break-even during fourth quarter of 2012.
Now, we got within $2.2 million of that goal in spite of a number of unanticipated expenses during 2012, such as costs related to our SweetSpot acquisition, costs related to advancing our mobile platform, and costs associated with an earlier-than-expected G4 PLATINUM product launch, none of which were contemplated in our original budget. Needless to say, I'm excited by the long-term profitability profile we believe we can achieve here at Dexcom. Now in terms of our messaging for 2013, this is a year we put CGM first.
We have long said that to effectively treat diabetes, you must know where you are going before you can figure out how to get there. We believe CGM is the first tool that should be used in any treatment approach. For newly diagnosed patients, how does a doctor decide appropriate insulin dosage without understanding the patient's glucose profile? For all insulin-taking patients, the method of insulin delivery is not nearly as important as knowing when to dose and how much insulin to take.
For all people with diabetes, clinical data support the potential benefit of CGM for titration of insulin, oral medications, lifestyle changes such as changes to diet or exercise routine. We believe CGM will become the first line of therapy for all insulin-taking patients, and one day for all diabetes patients.
Turning to our pipeline, we are obviously very excited about the prospects of bringing G4 PLATINUM to the pediatric community. Today, pediatric patients represent only about 10% to 15% of our installed base. With an estimated 300,000 to 400,000 people with Type 1 diabetes in the US alone who are under the age of 18, we think this is an extremely important growth opportunity for the company. In fact, as we studied the pediatric opportunity and the unique challenges faced by parents managing a child with Type 1 diabetes, a new product concept was born, the Dexcom Share system.
The Dexcom Share system will be a docking station for the G4 PLATINUM receiver, enabling the wireless transmission of glucose information such as the patient's trend graph and alert notifications from the G4 PLATINUM to designated recipients, allowing the recipient to view the patient's data on a smartphone. For example, a parent can receive glucose information during the nighttime while the child sleeps in another room, during the school day while the parent is at work, or even for non-pediatric applications such as for a spouse while at work or when traveling.
When I'm asked, "What is Dexcom Share?" My response is straightforward. Share is not waking up at 3:00 AM to take a finger stick from your child. The freedom to finally allow your child to sleep over at his or her friend's house. Not worrying when your spouse is away on a business trip.
The idea is simple, connecting Dexcom users to the people who care about them. We expect to file the Dexcom Share system with the FDA in the third quarter of this year. Now I'd like to conclude with some market commentary regarding the G4 PLATINUM. While the general feedback from patients and healthcare providers has been nothing short of remarkable, we have seen three recurring points of praise.
First, its accuracy. The sensor is 20% more accurate from 400 mg to 400 mg of detection, 30% more accurate in the 70 mg and below area of hypoglycemia detection. Second, its range of connectivity. The SEVEN PLUS had somewhere between 5 ft and 8 ft of connectivity, and while the G4 PLATINUM is labeled for 20 ft, we're hearing it's closer to 50 ft, especially in line of sight.
If you think about a patient's mobility at home, the patient might be able to leave it on a nightstand, go down to the kitchen, come back up and not lose any data packets. Third is its size. Do you know it's about 1/3 the size of the old receiver, so the patient can slip it into a pocket or put it into a purse. As I look back on my diabetes career, nearly 20 years ago, I began my quest to develop a continuous glucose monitoring system to meet the needs and expectations of all people with diabetes.
Now, four generations later, I truly believe we have delivered a product in the G4 PLATINUM with broad appeal and broad application that will continue to accelerate the growth of CGM as a category and Dexcom as a market-leading participant. We will replace finger sticks, not if, just when. Thank you, and we'll open it up for questions.
Thank you. We will now begin a 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 the handset up first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Our first question comes from Ben Andrew from William Blair. Please go ahead.
Good afternoon, gentlemen.
Hey, Ben.
Hey, Ben.
Terry, two topics for me, if you could please. Talk a little bit more about the patient dynamics as you've gone through the launch and how it's changing. You gave some statistics relative to the percent that were shipped on the new version and whatnot. Can you give us a sense what the installed base is or any other metrics that we can use to kind of project forward from here?
You know, we've never given direct installed base. You guys all kinda make up your models and, you know, quite frankly, you're pretty good at that, so I don't think we'll help you out in that. That's what you get paid for, I think. I will say this. The most interesting dynamic as you're preparing new models is the fact that we're seeing greater utilization of sensors in the G4 than we did with the SEVEN PLUS. What does that mean? Are they using it more frequently? Possibly.
Certainly, I think there is a trust level with the accuracy of the technology, which is encouraging patients not to take as many holidays possibly. We haven't all the metrics yet to analyze it as completely as we would like. That is one interesting thing that we're seeing post the launch and certainly moving into this first quarter.
Is it different in the newer patients than the patients who had been on G 3 in that dynamic, or it's still too early to say?
It's still too early to say... [crosstalk]
Okay.
We haven't dialed down the metrics to that level yet, Ben.
Okay. You talked about some changes in the field organization, and maybe give us a bit more detail there and what that will do through the P&L relative to, you know, kind of bringing more people onto, it appears like a commission basis and hopefully driving more sales directly.
Yeah. I'm gonna have Kevin talk about that.
Sure. You know, Ben, as we look at our structure, we just felt we needed more coverage. We looked at, we had the field clinical sales team, and as we looked at how easy our product is to use, the fact that, as I said earlier, most of our patients train with our support materials or online, we felt we could best deploy our resources in the field with feet on the street. In essence, we'll, as I said, we'll have 68 territories. We're also adding to the in-house team. We gave them a goal as to how much more they could spend.
As I said, we won't spend more than 20% total on SG&A, but that will flow through the P&L a little bit in the first quarter, more in the second, and then you'll have the full throttle certainly for the entire third and fourth quarter. The variable expenses will go up obviously, as they did this quarter, when we have a very successful quarter and sell a lot of product.
Yeah. I would only add to that. You know, there's about somewhere between 800 and 1,000 pediatric... [crosstalk]
Yeah.
Endocrinologists that today we don't call on. Part of this structure change and expansion was to give our sales reps the bandwidth to go call on that endocrinology group. The good news is that they tend to be centered in areas, geographically that we can address it with the smaller territory without having to really expand more sales reps than moving from the 48 to the 68 territories.
Okay. Just briefly extending on that point, when you get the pediatric indication in the US and then bring on the Vibe, how should we think about the timing of those rollouts? Are those things that can step function quickly, or would they take some time to have an impact on patient adds? Thank you.
Well, Ben, we just launched a new product 20 days after it got approved. When we get peds approval, we'll roll it out pretty fast. When it comes to how it will affect our numbers, we gave a range of $120 to 130 million in revenue. Literally, that range is kind of variable based upon peds approval. If we got no peds approval, that $120 million number would be our target or $125 million or something lower, and then peds takes us up into the higher end of that range.
New patients will jump on board pretty quickly with the peds approval. That will not be something we wait for. With Animas Vibe, that'll be, we think patients will sign up pretty quickly. We know Animas will have very aggressive upgrade programs to get their patients to upgrade to stay on the Animas Vibe system. Some of those patients already used Dexcom sensors. We really haven't modeled a lot of that out, and we don't have any of it in our 2013 numbers. We'll give you more guidance on that as the year goes on.
Thank you.
Our next question comes from Bill Plovanic from Canaccord. Please go ahead.
Great. Thanks. Good evening. Can you hear me okay, gentlemen?
We can, Bill.
Great. A couple of questions. First, on gross margins. As you ramp up the manufacturing of this product, you know, remind us, at this point, what type of margins do you think you can hit on the disposables at scale, and when is that at scale timeframe?
Well, we've long maintained we can hit between 65% and 75% margins on these G4 disposables. That scale-up should really start to occur about the end of this year. The factors that will affect that, Bill, will be continuing to do our G 4, I mean, excuse me, our SEVEN PLUS manufacturing line next door. We still have to weigh those two things against each other. You know, I talked a bit about startup yields in my comments earlier for the fourth quarter. I can tell you the first quarter, our team is doing a spectacular job of getting yields much better than what we've targeted. Kudos to those guys.
We think this process is much more robust than anything we've had SEVEN PLUS, so that is something that will be a positive factor as well. You know, we believe as we start hitting the end of this year, we'll be getting close on our disposable margin targets. We certainly should be at the lower end of the 65% to 75% range anyway.
Okay. You're still comfortable with that range to the higher end over time, you know, now that you have a little experience?
I'm more comfortable today than I've ever been. Absolutely. I think Terry and Steve are as everybody else is, too. We're doing a very good job.
Okay. Congratulations. On the R&D, I think the one thing I didn't hear you talk about was the 10-day, and I was wondering if we could get some color on that.
You know what? Our focus for next year will not be on the 10-day. Our filings for next year will be the things we talked about. I mean this year. I keep saying next year 'cause our reporting on 2012. Our focus in 2013 will be on those items we reported, the G5 sensor, getting these partnership products filed and out the door. A little work on our G6 sensor in addition to the G5. 10-day is something that we kinda do off the main path. We'll work on our algorithms and our software and decide when we're gonna drop that in. Bill , we have not made a decision on that front yet.
Okay. Since I'm on the R&D, the last question, just, you know, it seems like, you know, with the guidance that you're providing at this, you know, roughly flat, 2013 versus 2012, and even on the SG&A guidance of up to 20% year-over-year, it seems like as you put together your 2013 budgets, you're extremely focused on driving this to cash flow breakeven or profitability. Is that a fair kind of statement?
I would say that would be my new name.
Yeah.
Yeah.
That's a fair assessment.
That is a very fair assessment, Bill. Yeah, we're very focused on that.
Great. That's all I have. I'll jump back in. Thanks.
Our next question comes from Tom Gunderson from Piper Jaffray. Please go ahead.
Hi, good afternoon. A couple things on regulatory. The supplement that you filed for pediatric, can you narrow that down a little bit for timing so we can model that in?
Well, statutorily, you know, it's a 180-day filing and that's—we gotta stand by that not having a crystal ball. Obviously, you know, we're taking bets as we did with G4 as to when that will get approval. Of course, Terry is always the most optimistic one—which means I'll probably lose another dinner bet, but that's okay. I think, you know, we should look at that 180 day and not know anything else.
The only kind of factor that you might wanna think about is the fact that they've already seen the adult data, so we're really just comparing the pediatric data to the adult data and submitting that. I know that they are anxious, and we're anxious to receive the file because their belief there, their being FDA belief, is that every child should be on a CGM device as part of the diabetes therapy model.
What's the start time for that, Terry? For the 180 days?
Sometime in the first quarter.
Yeah... [crosstalk]
Okay.
As I said, we have filed the PMA application this quarter. It's already in, so the clock has started.
The clock has started.
I would say, you know, sometime in the second, obviously the second half of the year.
Okay. Kevin, when you were describing Animas, I got a little confused. Is that a supplement as well, and is it a supplement submitted by Dexcom, or is it a new PMA submitted by J&J?
I'll let Steve take care of that one.
Yeah. Tom, this has been a moving target, but now we have some clarity out of the FDA. Frankly, it was extremely positive. You'll recall probably a year or so ago, we had this concept. We were gonna try to file a supplement on top of the PMA. We were guided during the G4 review, G4 PLATINUM review that we should wait until G4 PLATINUM was approved before we filed the Animas Vibe. What the FDA determined is that it would be a full PMA.
What they also determined is that Animas can file the Vibe system, and actually, rather than include all of the detailed information regarding G4 PLATINUM, they can actually just reference our PMA submission. It's really just a PMA filing that will be conducted by Animas referencing the G4 PLATINUM.
While that's a benefit to both of us, as you'll recall, as the Vibe moves the Animas pump platform from a 510(k) product to a PMA product, which means Animas becomes subject to, as we are on a daily basis, subject to all the change control procedures and requirements. Basically, they become, you know, a PMA company and have to file every change they make with respect to their manufacturing operation and things like that.
By allowing Animas to file a PMA separate and distinct from ours and be able to reference ours, that enables them to control the regulatory process on their front with respect to ongoing manufacturing operations with respect to the pump. We don't have to be in the middle of that. This is all kind of, you know, new information to us within the last three to six months. It's actually very positive from an operations perspective.
Got it. Thanks for that. On Roche, I understand what you said in the prepared remarks, but I didn't hear any reference to the in-office CGM that you have a partnership with. Is that still ongoing, or is that dissolving?
It is. You know, I wouldn't read too much into the Roche announcement. I mean, Roche is a very strong partner for us internationally. Roche has some direct distribution rights in some countries. They work frankly with our distributors and our distribution network in other countries. They've been a very strong partner and will continue to be. We said before, SEVEN PLUS professional use system that Roche has carried in the bag has been less than successful. You know, that's. We've been saying that for several quarters now, and I think that program is still ongoing.
Look, as we look to wind down the SEVEN PLUS, naturally, that program would look to wind down sometime this year. You know, and then, one of the other items on our R&D radar screen would be moving the G4 PLATINUM to a professional use model. It currently today is not labeled for multiple patient use. That's something that we're looking at obtaining in a labeled indication for. Not sure whether Roche should be the partner there or not, but we would evaluate that at the time we got an approval.
Kevin, I think you mentioned this in reference to a question from Bill, but does the $120 to 130 million product revenue guidance that you gave out a month ago it clearly assumes a pediatric approval moving different times through the year. Does it assume Vibe approved this year, or would that be upside?
It assumes no Vibe approval this year. There's no Animas numbers baked into that. The pediatric impact is really something, again, Tom, that would push us to the upper end of the range or even outside the upper end of the range. Our numbers are built pretty solidly from the ground up.
Got it. That's it for me, guys. Thanks.
Thanks.
Thanks.
Our next question comes from Chris Cooley from Stephens. Please go ahead.
Thank you. Good evening, and congratulations on a great quarter. Are there, I should say, going to be charges that we should think about or any one-time items in the P&L associated with the change both with Insulet and as well with Roche in terms of the co-development agreements there that we should think of in addition to just, you know, the timing out of those development efforts? I have one quick follow-up.
No, there won't be any one-time charges with respect to that.
There will be some changes with the development grant revenue.
Yeah.
If you look at Edwards, we have effectively, you know, completed that development arrangement and recognized revenue through December. We won't have any going forward. Other than in first quarter of development grant revenue of about $1 million. Going forward, we expect development grant revenue of about $100,000 a quarter through 2014 as we stand here today.
Okay, super. Then just lastly, when I think about product revenue guidance for the year, should we think about a normal split between consumables and hardware that we've seen historically? I'm just looking at what you put up in the fourth quarter and what seems to be intimated regarding new patient starts here in the first quarter and just trying to think about that a little bit when I think about both top line growth and margin. Just any additional color you could provide there would be great. Thanks so much.
Sure, Chris. You know, we've stated in the past that our split is typically 25% to 30% on the durable and the rest on the disposable side. We did 32% this quarter as we launched a new product. In all reality, if we didn't have the upgrade of the 399-upgrade program and also the $1.2 million that we recognized from the September patients, the ratios would have been within that range of 25% to 30%. We think things will remain relatively consistent on that front, 25% to 30% durables and the rest of it for the consumable products.
Sounds great. It's all I have. Thanks.
Thanks, Chris.
Our next question comes from Danielle Antalffy from Leerink Swann. Please go ahead.
Thanks. Good afternoon, guys, and congrats on a great quarter. I know you guys don't give quarterly guidance, but just trying to get a sense of first quarter is usually a down quarter sequentially, given deductibles resetting, et cetera. Was hoping you could give us some, you know, you have a lot of momentum, it seems, going into the first quarter. How do we think about the launch continuing to progress versus the trend of resetting deductibles and how that might offset? If you could give any context around that would be really helpful.
Certainly, I'll weigh in then I'm gonna ask Kevin to follow in, so I'll give you the 35,000-foot level, and he can get you to more specificity. Certainly, we are challenged with, as you've already identified, the seasonality with deductibles and flexible spending accounts. That's not gonna change. You know, we did $18 million in first quarter of 2012, so, you know, that was down. We had done $21 million in fourth quarter, so we did $32 million in fourth quarter.
We're gonna be down from that standpoint. I can't. I don't wanna start. If I gave you what we think we're gonna do this quarter, then every single quarter going forward, we're gonna have to do the same thing, and we don't wanna get into that.
I would say that it is, on the one end, the same type of softness that we see. The little bit of change that, you know, here's my comment saying we're at a solid through the end of February is just the G4, I think, in terms of word of mouth by patient-to-patient communication, which we've seen really, I think, more dramatically in the last three months than we have ever with the SEVEN PLUS, that there is that interest level.
Kevin mentioned that the opportunities in the pipeline are as full as we've ever seen them in the history of the company. I think now that doesn't mean that they absolutely translate into a new but certainly the interest level is there.
Again, as we look at the landscape of deductibles, they've gone up a bit, but it's still single digit this year as far as we can tell, from that standpoint. I think there are some of those headwinds, but we're doing okay. Kevin, you wanna get to more granularity?
No, Terry, you covered a number of the points. One of the things different going into this quarter. Let's just go back to fourth quarter revenues for a minute because there are some things that won't reappear. We had the $1.2 million we carried over from third quarter that you can't extrapolate what first quarter is gonna be like from that. We also had some pent-up demand that I really can't quantify in third quarter of patients who did not buy, who waited to buy in fourth quarter, but that makes things a little bit different.
We had the $399 upgrade program, so we have a group of patients who are non-repeatable. That being said, as we've come out of most years, I can tell you we have sold to most every patient we could ever find or most quarters.
When we came out of fourth quarter this year, that was not the case. We still had a very robust pipeline going into the year, and we're still getting a lot of phone calls. We are getting very favorable reaction not only from our patient customers, our distribution partners. Our dealers are ordering regularly, and basically can't keep the thing on the shelf, those who stock.
While all the issues exist with deductibles and co-pays and all these other things, it just appears that patients are a little more excited about this new product and might be able to deal with those issues and make an investment in their care earlier than they have in the past. You combine all the positives with all the things that are floating, and it's, you know, we're very excited about the quarter, but there's a bit of uncertainty still.
Got it. That's helpful. If I look at your product revenue guidance for 2013 $120 to 130 million, beyond Animas Vibe coming online this year, earlier pediatric indication, what are the other variables that could get you towards the higher end of that range? For example, you mentioned more frequent use of, or more sensors being used. Is that something that could continue? If it does, is that something that gets you to the higher end, or is that more something that gets you within the middle? Any color on that? Thanks.
You know, Steve, Terry, anybody jump in if you think I'm too far out there. I think our utilization would move us up a bit into the range. Probably doesn't get us to the very end, but I think it's very helpful. I think the other thing that you know that is if we can shave a point off the retention rate or, I mean, add a point to the retention rate, a point off the attrition rate, that's certainly very helpful. We know that G 4 does that. So far from what we've seen, people really like this thing and appear to be using it very regularly.
Earlier pediatric approval helps more than anything else we could do right now, and we can't predict that, and certainly we don't have any Vibe numbers in what we've got. Those are really the levers we could pull.
We're gonna have more coverage with more sales reps and more territories, so we'll be calling on people we haven't called on in the past or going more deeply into practices where we've had to be relatively shallow before. We might be able to go deeper and get more from there. Bottom line is we got a 40% target on our backs that we put on our backs already. We're gonna have to execute pretty well just to do that.
Right. Okay. All right. Thanks very much.
The other thing I would comment on is this peer-to-peer, which we're beginning to see in our early stages of that communication, which is then driving some sales outside of our normal call patterns, which we hope is kind of the vision of the future and what we've long predicted as a trajectory increase, attribute of having more patient demand than physician prescribing. We'll see if that continues to play out in a robust way.
Perfect. Thank you so much.
You bet.
Our next question comes from Mimi Pham from ABR- Healthco. Please go ahead.
Hi. Good afternoon. Can you clarify what percent of those 1,000 pediatric endocrinologists you would be able to access with your reorganized sales force, in later this year?
That'd be 100%.
100%? Okay. Then, regarding your guidance for 120 to 130 CGM sales, can you talk about how did you anticipate any hit from your growth due to the Medtronic next gen CGM launch in the summer? You know, if they get approval this summer or in life, have you taken that into the guidance?
Yeah. Well, I would say from a standpoint, look, we address two different markets. You know, they're really addressing the pump market. That is something that, as you know, just based on their latest quarter announcement, was declining as a pump sale. They've really never had a standalone product that was a competitive product.
I think even looking at the clinical results of Enlite versus G4, I would say most of the academic and clinical community have been disappointed in the performance of the Enlite. You know, we've seen data even in head-to-head competition by independent researchers. It looks like it's approaching the same kind of accuracy as the SEVEN PLUS had achieved.
In terms of comparing that and contrast that to the current data we're getting from G4, you know, in that contrast, we're 70% more accurate, overall, between 40 mg/dL and 400 mg/dL. We're really getting down below close to that 10 MARD range. I think that that's, you know, from the user standpoint, accuracy really counts. They're really trying to sell it as part of an integrated system. I think our pump partners will have to address that, both Animas and Tandem.
I would say this, and it gets back to so they've had the system approved in Europe for some time now, and yet on Kevin's comments, you know, based on what they, what J&J presented in their first quarter call was that they're in places where they've launched the Vibe, they're growing at anywhere from 35% to 50%. Their informal comments to us are that they're not very impressed with the Duo system. They don't find it as a competitive threat, and they're not seemingly having any problem replacing Medtronic pumps in that space. So, you know, is that gonna translate the same in the US? Remains to be seen.
Okay. We should assume, you know, if they happen to announce approval midsummer, that necessarily doesn't change your guidance or expectations for-
Oh, it doesn't change our guidance at all. I look at, you know, again, I wanna differentiate who we are versus the pump world. Pump world is a $2 billion market. Glucose monitoring is somewhere between $10 billion and $12 billion. We are in the glucose monitoring market. Our program this year for 2013 is CGM first. And what that means is, because if you look at the US pump market, maybe 28% penetrated, that means there's, you know, 60% plus that are still using injections.
We need to move the dynamic that when a patient walks in, regardless of their insulin delivery mechanism, that the physician says, "I need to know more about your glucose first." Because that's really the goal.
I mean, if you look at the pharmaceutical companies and all of the billions of dollars that they're spending on drugs, it's all about trying to figure out how to reduce glycemic variability. My God, we do that every day. I think we've got to get that point across to the prescribing population to say how important it truly is about glucose. And that's really where we're focused. I don't view the pending approval, if they can get approval, sometime later this year as being a competitive threat to us whatsoever.
No, that's helpful. In terms of the international, the 5% to 10% of sales, is the majority of that associated with Vibe, or are you getting a ramp in the standalone G4 sales?
No, we're getting good traction with the standalone, quite happily so because that's a tough reimbursement market. For the first time, as part of that contribution, we're routinely seeing patients willing to pay out of pocket, which is something that is very unusual in a socialized medicine situation where they get all of their supplies for diabetes, either from the clinic or certainly reimbursed by the government. These, the value proposition is such that many of these patients are electing to pay out of pocket in order to maintain the product on an ongoing basis.
Thanks. Then just last question regarding the share system. You know, we've heard about there being a strong demand for something like that for a while from parents. Is this a PMA supplement or is it an easier FDA path?
No, it's gonna be a PMA supplement.
Okay. Thank you so much.
Our next question comes from Steven Lichtman from Oppenheimer. Please go ahead.
Thank you. Hi, guys. Just a couple of pipeline clarifications. In terms of Vibe in the United States, it with the change in the structure of the filing, and it sounds like a, I don't know if it was a full PMA or PMA supplement. If it is a full PMA, does that change your timing of a potential by end of year?
No, because I mean, it's still, again, statutorily it's 180 days. I mean, look at our performance on the G4 PLATINUM, 177 days. You know, if you look at the Vibe, the combination of the, you know, the Vibe system is effectively the G4 PLATINUM with their base 2020 pump with some modifications. So you could argue that it's basically two approved products just talking to each other. So no, I don't think there's anything that gives us reason to believe that it's gonna be an extended review cycle, even though it's classified as a full PMA.
Okay. All right. Thank you. On as you do move to G5 and recognizing you're already on, you know, G4.5, but as you move to G5, do you need to refile with Animas and Tandem, or how will that work, when that gets through?
Yeah, I mean, they will ultimately. Again, they reference our PMA, but they would need to file a subsequent filing with each sensor iteration that we achieve. That is right.
Okay.
They will always be a generation behind us for some period of time while their filing is pending.
Okay. You haven't indicated if I'm wrong about G5 filing potential, right, in terms of timing?
We didn't give any timelines, so they know.
Okay. All right. Thanks, guys.
Thank you.
Our next question comes from Bill Plovanic from Canaccord. Please go ahead.
Great. Couple of follow questions here. Do you expect any upgrades in first quarter or second quarter, or has that program been exhausted at this point?
The $399 program, the warranty upgrade is done. We ended that on 31 January 2012. Upgrades of patients out of warranty will occur all year long. There will be some. It's always been part of our core business and will continue to be part of it.
There are a lot of patients who would look at, you know, they're sitting there in the fourth quarter looking at their insurance dollars and say, "Okay, I can pay $399 now, or I can wait till the first quarter, and my copay is gonna be $275. I'm gonna wait till the first quarter and go with the $275." We gave the patients the option, if they wanted to speed it up and they wanted to get on the G 4 system, we gave them the opportunity.
A lot of them chose not to take it. They'll upgrade throughout the course of the year and take advantage of their co-pays or their deductibles and the other things. We'll have upgrades all year. Our goal is very clear. We want everybody on G4 by the end of it, before the end of this year.
We will see some more of those in first quarter because it ended in 31 January 2012.
Yeah, not many. Not much.
Okay. The development revenues were pretty big in this quarter. Was that Edwards or was that you know? What was the extra amount that you received in fourth quarter and then the extra that you're picking up in first quarter?
Jess, you want to take care of that?
Yes, that's right. We did receive additional funding from Edwards in fourth quarter, just like we have in the prior quarters outside of the development grant agreement. We expect that, as we've stated before, to really go away in first quarter. If we do have any, we don't expect at this point to be overly significant. I think you might have heard our comment before, but in first quarter, as we sit here today, we expect about $1.1 million in development grant revenue. Going forward through 2014, expect about $100,000 a quarter.
Okay. On the accounts receivable, you did address it in your opening comments, but a little more clarity on it was a pretty big jump sequentially and year-over-year. I'm just curious if you could explain that a little.
Sure. We sold a lot of stuff in December. When we have a quarter that big, you know, as big as our $32 million quarter compared to $20 million last year, $21 million in third quarter, we up the sales number $9 million. As is with particularly every quarter I've been at a diabetes company, December is the biggest month of the year. When you just look at straight timing, our receivables grew just based on the business activity, and there was no other reason. Most of those receivables are directly with payers, and we're billing and collecting that. First quarter should be very good collection quarter.
Bill, we'd expect that to go down as we get into the first quarter and then manage it the same way throughout the other quarters of the year. There's nothing unusual there. It's just a lot of late in the year volume that you just can't get paid on before the year is over.
Okay, understood. Then, you know, historically, I think your mix has been 70% non-pumpers, 30% pumpers. Is that mix changing now with G4, or do you expect that mix to change outside of, you know, obviously your partners as we look forward?
Bill, that number has really been 60, and installed base 60% pumpers, 40% MDI patients. Obviously, as the pumpers come on, we would expect some of that shift to happen. I'm cautious because we've been pretty steady state on that ratio for some time. As Kevin mentioned in one of his comments with regards to once the Vibe is launched, if you look at the dynamics of that 60%, some 40% plus are already on Animas, about 30% are on Medtronic, the rest on Insulet.
We've got some on Roche and even some on the old Deltec pump. We've already got a pretty significant share of the Animas population. Going forward, having them promoting the product, yeah, we would like to see an uptick there as well... [crosstalk] I don't know that the ratios are going to change all that much.
As we think of the Animas opportunity, you know, how many pumpers do you think they have or what, you know, how big is the pump market in your opinion, and what percent share do you think they have? Same question asked different way.
Yeah. Well, I think in the US, the pump market is probably somewhere around, I don't know, 400,000 total. My guess is, you know, again, I don't want to speak for Animas. I've always said, "Gee, it looks to me like they've got about 18% to 20% share of that market." The market, the challenge with the market is it's not growing. It's actually, if anything, having a bit of a decline. So, if you're not growing, it's hard to predict where the share is shifting.
We certainly know that if you listen to Animas, if you listen to Insulet, they seem to be adding pumpers. So that means that they, if organic growth isn't growing, that means they've got to be cannibalizing from Medtronic.
If you listen to Tandem, their first, I don't know, three or four months, they told us that about 50% of their patients that they put to the t:slim were Medtronic patients. 25% were brand new patients, new to pump therapy. The remaining 25% came from cannibalization of Animas and Insulet, Roche and Smiths Medical. I think that's kind of the landscape that we look at it going forward.
If you think of the pediatric label, so you've submitted for that. If you have approval on that, do you have to wait for that to submit to Animas? Or would that approval for a ped automatically roll on to the Animas? I'm just trying to figure this out from a timing standpoint. Are they going to have to basically hold up and wait until you get that ped so that they can have the ped label? Because I would assume that's important for them in the US.
No, you're right. Remember, you know, with the Animas Vibe, the clinical trial requirement, if you will, is a more what we call a human factors trial, basically button-pushing. Animas will have to do a supplemental human factors trial with pediatric patients and then file that, and they will have to wait until we receive our approval so they can reference our approved. Again, it's all about referencing an approved.
There will be a gap.
There'll be a gap.
Now that doesn't mean that holds up the initial Vibe. They will go forward with the initial Vibe filing, you know, as soon as possible now. They won't wait until we get a peds indication. They'll have to supplement their PMA submission with a peds submission at some point down the road.
Okay. Just in my last question, I waited to jump back and wait till the end, but if I look at the Animas deal, I mean, the way it is now from a reimbursement standpoint, you know, it's great that you have daily reimbursement. They have their reimbursement set up. As you think about them selling the pumps, so you now have some international experience. In the US, you know, are they gonna get the reimbursement approval for the CGM or are you gonna do it? And then how do you get the product to the patient? Has that all been worked out at this point?
I would tell you it's a to be determined. There's a contract in place, but we're exploring, you know, different ways that we might make it more seamless for the patient. What I would tell you is table that question until probably the next conference call, and we'll have some more clarity there.
Okay, great. Thanks... [crosstalk] again.
From the reimbursement standpoint, you know, the HCPCS codes are established, so, there is a mechanism if we get approval tomorrow, say as an example, and even this wasn't worked out. It's really from a patient convenience standpoint, not from a reimbursement standpoint.
Right. All right. Well, again, congratulations on a great quarter, and thanks for taking my questions.
Thanks, Bill.
Thank you. At this time, we have no further questions.
I'd like to wrap it up. Needless to say, I'm very proud of our accomplishments. There are very few companies with as successful a track record as Dexcom. I look back over my career here. In 2007, we had revenue of less than $5 million. In 2012, that revenue had grown to $93 million. Here we are forecasting revenue of $120 to 130 million this year. We believe that we can sustain that 35% plus kind of growth over the next several years. We are the technology leader in the CGM space, and we continue actually to extend our lead over the competition.
Patients are walking into their physicians' offices today and asking for the G4 PLATINUM. We are moving the category from a nice to have to a must-have. The Dexcom team and I are extremely excited about 2013 and certainly beyond as well. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.