Welcome to the third quarter earnings release call. My name is Christine, 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 will now turn the call over to Terry Gregg. You may begin.
Thank you, operator, and thanks for joining us today on our third-quarter earnings call for 2012. I'm going to ask Steve Pacelli to initiate our call with a safe harbor statement. Steve?
Thanks, Terry. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's expectations about future events, operating plans, and performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under Risk Factors and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Terry?
Thank you, Steve. Joining me today are Kevin Sayer, our President, Jess Roper, our Chief Financial Officer, and of course, 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 approval and launch activities. Kevin will review our third quarter 2012 financial results and provide our customary operations update. Then I will offer some concluding thoughts. As most of you are aware, on October 5th, 2012, we received approval from the Food and Drug Administration to begin commercially marketing the Dexcom G4 PLATINUM continuous glucose monitoring system, our fourth-generation CGM system.
We received approval for a full PMA in just under 180 days, a credit to the outstanding work of our clinical and regulatory teams and a testament to the collaborative working relationship we have established with FDA over the past several years. We believe G4 PLATINUM sets a new standard for performance. It is the most accurate and reliable continuous glucose sensor ever commercialized, and we believe this sensor system will create an extraordinary patient experience and will drive category adoption of CGM. As we mentioned during our G4 PLATINUM approval conference call, we began building both hardware and sensor inventories in the third quarter in anticipation of approval. We began taking orders for G4 PLATINUM immediately. I am pleased to report that we completed our initial G4 PLATINUM shipments to patients in the U.S. late last week and have commenced full-scale order fulfillment this week.
Our initial focus has been processing orders for new patients, although we expect to begin to upgrade existing 7+ users who desire to move to the G4 PLATINUM starting this month. We are working to complete all of our upgrades by the end of 2012. The U.S. launch of G4 PLATINUM has generated a higher level of excitement at Dexcom than any of our previous commercial launches. As I stated on our call in early October, patient, partner, and physician response at the Berlin meeting of EASD in early October was exceptional. Growth in our international markets truly reflect this excitement. As one would expect, our pipeline of new patient opportunities is at the highest level in the history of the company. The number of daily calls into our customer service organization is up over 50% when compared to pre-launch.
While it is too early to determine whether this call volume will be sustained, we are certainly keeping busy processing orders for G4 PLATINUM. In fact, call volume has been so high that our team has had little time to actually process all of the orders. Contrast that excitement with the operational challenges of launching a product in the same month that we received approval. For example, we could not even begin to print user guides until we received final approval from FDA, and yet we immediately announced approval, knowing full well that all new 7+ kit sales would come to a complete halt while we assembled final G4 PLATINUM kits.
Fortunately, our pre-launch planning activities ensured that we will have sufficient inventories to meet patient demand during the quarter, a task made particularly challenging now that we offer multiple color receivers and need to forecast the appropriate build of colors. Aside from patient and clinician excitement, the G4 PLATINUM approval has created much stronger interest than we have ever experienced with potential clinical trial partners. While we have been providing blinded product for clinical trial use for the past several years, we now believe that the clinical segment represents a meaningful business opportunity. For example, a number of pharmaceutical companies have recently suggested to us that CGM is an important tool to demonstrate the effectiveness of future diabetes compounds. However, they have expressed a strong dissatisfaction with competitive CGM systems used in prior trials to the point that they had ceased using CGM in their studies.
We believe our G4 PLATINUM system, combined with our SweetSpot cloud-based data management capabilities and Qualcomm communications platform, will offer a very robust solution to these potential partners, and we will be gearing up for this opportunity next year. It is important to keep in mind that this is the first new product launched by Dexcom in over three years. Our field sales force is extremely excited about demonstrating the product to healthcare providers, and I'm pleased to hear from numerous physicians and educators that they have been eagerly anticipating the G4 PLATINUM in their practices. Above all, I would like to acknowledge the hard work of the people at Dexcom who have made this launch possible. Finally, our revenue guidance for 2012 has been $85 million-$92 million for the year.
While we don't have a crystal ball for the balance of Q4, in light of what we have seen so far with patient interest in the G4 PLATINUM system, we expect our full year product revenue to land at about the midpoint of our range. With that, I would like to turn the call over to Kevin Sayer.
Thanks, Terry. I'll start with the financial update. Dexcom generated $21.1 million in product revenue for the third quarter of 2012 compared to $16.7 million for the same quarter in 2011, a $4.4 million or 27% increase. During our G4 PLATINUM approval conference call in early October, we stated that we expected product revenue for Q3 2012 to be approximately $22.2 million prior to any adjustments related to our G4 PLATINUM launch and subject to completion of our closing processes. After internal analyses and review by our independent auditors, it was determined that we should reserve an additional $1.2 million for sales returns related to our 30-day money-back guarantee on Dexcom hardware.
As we discussed during the G4 PLATINUM approval call, Dexcom has always maintained a 30-day full refund policy on our hardware. As part of our G4 PLATINUM launch, we elected to extend this offer for patients who purchased 7+ hardware from September 1st through our G4 PLATINUM announcement date of October 5th. While historically, very few patients have returned products under the terms of our 30-day money-back guarantee, we expect a significant number of patients to take advantage of the offer to exchange for G4 PLATINUM. This $1.2 million reserve resulted in a dollar-for-dollar reduction of product revenue for the quarter. Our product revenue growth for Q3 2012 over Q3 2011 would have been 34% without this increase in the returns reserve.
It is also important to note that we plan to recognize most of this reserve as product revenue during the fourth quarter of 2012 as we ship G4 PLATINUM hardware to these patients. Sequentially, product revenue for Q3 2012 decreased 2% from the prior quarter. However, excluding these additional sales returns reserves, product revenue would have increased 3% sequentially. As we stated in our G4 PLATINUM approval call, we believe that many purchase decisions during Q3 were deferred as patients and healthcare providers anticipated the G4 PLATINUM approval and introduction. Total revenue for the third quarter of 2012 was $23.1 million compared to $18.3 million during the same quarter in 2011.
Our product gross profit totaled $7.7 million, generating a gross margin of 36% for Q3 2012 compared to a gross profit of $7.4 million and a gross margin of 45% for the same quarter in the prior year. As we discussed during the G4 PLATINUM approval call, we have recorded a number of one-time charges that have negatively affected our gross profit and gross margin for the quarter. Specifically, we recognized approximately $500,000 in cost of goods sold from 7+ hardware we shipped in September, but we recognized no revenue related to those shipments due to the increased sales returns reserve discussed previously.
We also wrote off approximately $2.5 million in excess and obsolete inventory related both to the 7+ and the 7+ upgradable product we discussed during the G4 PLATINUM call that we no longer expect to sell. We shortened the useful life of and recorded additional depreciation expense of approximately $600,000 related to certain fixed assets used for 7+ manufacturing and testing. Absent these one-time charges, our product gross profit would have been $11.9 million, generating a product gross margin of approximately 54%. Sequentially, our product gross profit decreased $2.9 million on decreased sales of $400,000 over the prior quarter, and our gross margin decreased 13 margin points.
However, excluding the charges we discussed, our product gross profit would have increased $1.3 million, and our corresponding gross margin would have increased approximately 5 margin points over the prior quarter. Some final thoughts on our revenue and gross profits during Q3. Our split between consumable and durable revenues was again between 70% and 75% consumables and between 20%-30% durables, and the ASP for sensors remained constant, while the ASP for our durables was affected slightly by our rebate program for 7+, which was offered only during the month of September. Our international business continued to perform well in Q3, accounting for just under 10% of our product revenue in the quarter.
On the domestic distributor front, our revenue split between direct and distributor business remained consistent with the prior quarters. With respect to Q4, we expect sales and gross margins to be affected by a number of additional factors related to our G4 PLATINUM launch, including the impact of reversing our sales return reserve, the impact of our $399 in-warranty upgrade program, and our manufacturing scale-up activities. Research and development expense totaled $10.6 million for Q3 of 2012 compared to $8.2 million in Q3 of 2011. The increase primarily resulting from costs associated with our SweetSpot platform, expenses related to our G4 PLATINUM pediatric trial, G4 PLATINUM scale-up costs, and continued investment in our next-generation products. Sequentially, R&D expense remained relatively flat.
Selling general administrative expense totaled $15.5 million in Q3 of 2012 compared to $13.2 million during the same quarter in 2011. The increase primarily related to sales, marketing, and information technology costs to support revenue growth. $600,000 of this year-over-year increase is centered in non-cash share-based compensation. Sequentially, SG&A expense remained relatively flat. Our net loss for the third quarter of 2012 totaled $17.3 million and included $6.9 million in non-cash expenses centered in share-based compensation, depreciation, and amortization, as well as $4.2 million in non-cash charges and reserve discussed previously. Absent all of these non-cash charges, our net loss for the third quarter of 2012 would have been $6.1 million. Our loss per share for the quarter was $0.25.
Again, absent our one-time charges, our loss per share for the quarter would have been $0.19. We ended the quarter with $53.4 million in cash and marketable securities and had working capital of $55.2 million. One additional note regarding the balance sheet. Today, we entered into a loan and security agreement with Silicon Valley Bank and Oxford Finance that provides a $15 million revolving line of credit and up to a $20 million term loan to be used for general corporate purposes. The revolving line of credit is an interest-only financing that bears an interest rate equal to the prime rate plus 0.5% and requires repayment of principal at the maturity date in November 2015.
Under the term loan arrangement, $7 million will be advanced on the funding date, and up to $13 million in additional funds will be available upon our request from June 1st, 2013, to September 30th, 2013. The term loan bears a fixed interest rate equal to the three-year Treasury rate at the time of the advance, plus 6.94%, and requires payment of interest only for the first year and amortized payments of principal and interest thereafter through the maturity date in November 2016. There are no conversion features or warrants associated with this facility. Now I'll turn to the business update. Regarding our product pipeline, I am pleased to report that we have completed our pediatric clinical trial, and we expect to file a PMA supplement in the U.S.
update our CE mark in the E.U. to obtain an expanded indication for G4 PLATINUM before year-end. We are especially excited about the prospects of a pediatric indication as it not only significantly expands the number of endocrinologists we can call on in the U.S., we expect to be able to recommend our technology to patients as young as two years old, which would be a first for CGM. On the international front, we have recently received approval in Australia, and we expect approval in Canada and India within the next six months. We're actively exploring opportunities in China, Japan, and other Asian geographies. We continue development of the Gen 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 we believe that Dexcom is in a very strong position to become the first Class III medical device to communicate directly to a mobile platforms. We have already seen several early-phase mobile-based systems in many of the artificial pancreas programs that display our data on a mobile computing platform and remain very encouraged on this front. Shifting to our integration partnerships, Animas continues to commercialize the Animas Vibe system in Europe, and it was made abundantly clear to us by the European physician community at EASD in Berlin last month that system is being very, very well received by patients and physicians in the E.U. With regards to filing for U.S. approval of the Animas Vibe, the work required to modify the system to accommodate G4 PLATINUM in the U.S. has taken slightly longer than expected.
We believe we will complete all development and system testing and be in a position to file early next year. We are pleased to note that our newest partner, Tandem Diabetes Care, recorded their first commercial shipments during Q3. We are actively working with Tandem to accelerate our development efforts, and are nearing completion of our feasibility assessment of incorporating G4 PLATINUM into the Tandem system. We are optimistic that feasibility will be successful and hope to be in a position to define our path forward with G4 PLATINUM before the end of the year. Finally, on the Edwards front, work on the second generation in-hospital glucose monitoring system is nearly complete, and as Edwards mentioned in their recent earnings call, they expect to obtain a CE Mark for the second generation GlucoClear system before the end of 2012.
I would now like to turn the call back over to Terry for some concluding remarks.
Thanks, Kevin. We created the G4 PLATINUM CGM system with the customer in mind through a series of customer surveys and regular CRM outreach and dialogue. One could consider approach akin to crowdsourcing from people with diabetes, with a focus on the consumer experience influencing our design. It is certainly a sleek, slim design for discretion and portability to meet an active lifestyle. We incorporated customized tones and melodies for alerts of glucose levels and increased the wireless transmission distance by some 4x to improve data capture, particularly around the house. We are glucose sensor technologists and the best in the world. We improved the overall accuracy by approximately 20% and by 30% in the hypoglycemia range.
Hypo detection, sensor precision, and sensor longevity were all improved, resulting in exceptional sensor stability and accuracy over time, so that from start to finish, sensor to sensor, our customers can expect extremely consistent performance. Initial customer reactions to wearing the product has met or exceeded our expectations. The blogs are filled with positive comments regarding the accuracy, durability, convenience, and user-friendliness of the G4 PLATINUM. We are now replacing the 7+ systems with G4 PLATINUM in the artificial pancreas trials, so you should expect to see those results as early as next week at the Diabetes Technology Meeting in Bethesda. I said it before the launch, and I'm more convinced than ever, that the G4 PLATINUM is transformational in the utilization, understanding, and uptake of CGM as a critical component of diabetes care. We are truly answering the promise of CGM. Thank you.
Operator, we'll turn it over for question and answer.
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 are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Our first question is from Ben Andrew of William Blair. Please go ahead.
Hi. Good afternoon, guys.
Hey, Ben.
Hello, Ben.
Terry, I think I missed the number on the upgrade number and timing that you gave early on. Can you repeat that and kind of talk through how quickly you think you can get everybody upgraded that perhaps wants to in the first phase?
Yeah. The upgrade, we didn't give you an actual upgrade number, but we are starting to identify that now and begin to ship out. Our goal is to complete that by the end of this year, so by the end of December.
Do you have a sense of what percentage of patients are likely to do that? I know that's what you're trying to figure out, but that would be awfully aggressive to get 7+ mostly shut down by the end of the year, wouldn't it?
Well, no, this is upgrade. You've got to look at those. The upgrade program is for those patients who are in warranty.
Oh, okay.
We provide them an upgrade for $399. The next group are patients that are out of warranty, and they would be responsible for the whole initial new starter kit. We've just looked at this, so the number is not as big as you think it is from that standpoint. We certainly have a number of immediate requests of those patients wanting to upgrade for $399 in particular. We're addressing first the brand-new patients, and that was my number of increase in calls in of over 50% versus our pre-launch number of patient calls coming in. Again, our goal is to address obviously both of those segments, but first the new patients followed by the upgrade patients.
Okay. Do you have any better sense of what chunk of existing patients are going to wanna switch to this? I know your goal is ultimately to get people over there, but do you have a timeframe in mind when you wanna get people off of 7+ one way or the other?
Yeah, our timeframe would be as soon as possible, so we can shut down the 7+ line. I don't have the optics. I you know remind the audience, we've been now shipping for less than two weeks. Our phones are ringing off the hook, and there's a lot of moving parts right now. Obviously, we'll try to give clarity as soon as we can, but right now, we don't have the kind of optics that I think you're looking for.
Okay. Terry, you gave some good commentary on the pediatric indication. I think maybe that was commented on, but did you update the timing there, or is that still on track for kind of mid 2013?
Well, it's our belief is it's on track for that mid-2013. The commitment that we made to the organization and actually the team made to FDA in a face-to-face meeting recently was that we would file that with the agency before the end of the year. Like any PMA supplement statutorily, you know, they have 180 days to review and complete. We're hopeful that based on the fact that this is a supplement to data that they're really looking at the clinical aspects of it.
Obviously not the degree of numbers of the, you know, more than 9,000 matched pair points that we had with the adult trial, and we're not doing the rigor of having to do intravenous blood sampling of these patients, that they should be able to look at that in straight order. I know that they are very interested in expediting this. They were very happy when we told them that the trial was complete.
Okay. Finally, Kevin, any new learnings relative to manufacturing as you-
Start ramping more aggressively with the new product, or things are on track there? Thanks.
Every day there are new learnings towards manufacturing, but, you know, yields are getting better on a weekly basis on our center lines. We turned everything on full blast, literally, we talked about during the call full scale as we were getting approval. We learn a bit every day, but things are going well. I guess one of the interesting learning experience, Terry talked about the mix of colors. Figuring out how many people wanted to buy our receiver that's called Tickle Pink has been a learning experience for us. We've had pretty good demand on the color front. It's all been good, Ben. No major surprises.
Great. Thank you.
Thank you. Our next question is from Thom Gunderson of Piper Jaffray. Please go ahead.
Hi, and good afternoon.
Hey, Tom.
I'm still getting my notes down on Tickle Pink. Hang on a sec. The same kind of question Ben asked on Animas. You said slight delay and early 2013. Do you think there's still a reasonable possibility or probability that you could have this finished by ADA?
Yes. Tom, this is Steve again. You know, with that 180-day timeframe, I think the answer is possibility, probably not probability. I would say, you know, if we get this filed, you know, very early in the first quarter of next year, you know, I think there's still an outside chance. I think it's definitely, you know, what we'd committed to previously was second half of next year with a stretch goal trying to get to ADA, and I think that's still our plan.
We just, you know, as you know, without rehashing all the old details, as we move from the old, what was G4 to the G4 PLATINUM, we had to do some systems upgrading on their side, and we just have to get through the final systems validation and verification testing and literally just then get the paperwork done.
Got it. On Tandem, I think the original agreement was for Gen 5 to go along with Tandem, and you were talking about Gen 4. Where do you think they'll? Is that something that we should plan on or is that still in the negotiation stage?
It's actually from a business perspective there is no real negotiation. We've already agreed with Tandem that if we collectively can prove that it's feasible. What I mean by that is you'll remember the Gen 5 architecture is much simpler to integrate with potential partners because all of the intelligence resides in the transmitter. With Gen 4, the partner is required to actually put some additional hardware into their handheld or in this case, the durable pump. We're just at the final stages of feasibility testing to make sure, for example, that the transmitter can communicate appropriately, send and receive the RF signal as the best example. We're very close to kind of final sign off from both engineering teams that the G4 PLATINUM system will work inside the Tandem pump.
We've actually built actual prototype pumps and we're testing them today. I think the answer is it's a high likelihood. Don't wanna tell you for sure, but it's a high likelihood that Tandem will move to the Gen 4 really because they're looking to accelerate their entry into CGM.
Thanks. One more partner question and then a quick customer service question. That would be on the partner side. Steve, any update on Insulet and combining Gen 4 with their next generation?
Yeah. You know, not really an update. There's nothing, at this point, nothing going on there.
Okay. Terry, the customer service question. When you say a 50% increase from pre-launch to post-launch, can you give me a sense of that? Because you also said that maybe, you know, people were waiting for Gen 4, so maybe customer service calls were lesser in advance of this. What kind of calls were you getting relative to what you're set up for? The second part of that question would be, do you need to temporarily boost labor there to handle the calls?
Well, my comment of 50% was greater than an average of what we were experiencing. Although we believe that there was a decision by physicians and patients, not that there was a belief, we actually were told that by both constituents that they were waiting. We certainly, if you just look at the growth of the business, we have continued to build that customer base and anticipation all along, so we didn't see any dramatic fall off from that customer call pattern. We continued, as part of that call pattern to, on customer service to fulfill the sensor orders as well. That, you know, the more starter kits we put in the market, the more sensors that we also put into the market. I would say that the 50% increase was truly, a dramatic increase as the first part.
The second part, I tried to caution the audience by saying we're not sure if that's gonna be sustainable or not. We've not seen any big drop off. Again, we're really three weeks into this, and so we don't know. We just don't have the optics on what November's gonna look like as an example. Then, of course, again, we go into December, which is always our largest month regardless, and that's kind of a DME experience for all parties in that world. Your third question regarding do we need to staff up? We're monitoring that. We do have the ability to do some shifting. If you look at kind of the way we train people, we like to have expansive training in the customer service.
For the patient level, we can shift resources as necessary, even involving tech services. One of the beauties of the 7+ is that we've seen the number of calls to tech services go down over the year, and we certainly expect that to further decrease in tech services because Gen 4 is a better product. We can shift some of those resources if necessary. I think we certainly don't wanna add to it unnecessarily in terms of the cost component, but we literally monitor the number of ops coming in every single day and make adjustments for the next day.
Thank you.
Thank you. Our next question is from Bill Plovanic of Canaccord. Please go ahead.
Great. Thanks. Good evening.
Hello.
Just a couple of questions. One, you gave an update on Edwards Lifesciences. Did you say the Gen 2 is near completion in CE before year-end 2012? Were you referring to the U.S. as well when you say the Gen 2 is complete?
No, that's. Well, the product is complete. The timeline for approval is just for CE mark approval before the year end.
Any update on the U.S. for Edwards Lifesciences?
We don't have an estimate for the U.S. timeline at this point. Quite frankly, you know, we're still somewhat waiting on the FDA to weigh in as to what the acceptable approval criteria would be in terms of performance for the system. That's something that's gonna be 2013 discussions with the agency, is my guess.
Okay. Just, you know, as you kinda move through these one-time charges, I don't think you quantified any for Q4. I was wondering if you could do that. Will all of this have been washed through as we complete 2012?
Bill, we don't see any one-time charges coming in Q4. We believe we dealt with everything now, and that was our plan. We believe it will all wash through. As Terry said earlier, it's our goal to get all those upgrades in the system on the in-warranty program and also those in the 30 days that we exchanged to try and get all that out of the system in the fourth quarter as well. We can get any effect on margins washed out with that here in Q4 and move forward with a clean slate.
Given that we're moving over to the new product, I mean, can you provide any color on what you think Q4 gross margins will be?
You know, as I said in my remarks, there's a whole bunch of things affecting them. As you walk through it, we've got a $399 in warranty upgrade program for hardware. Obviously, the margins on that, it's not gonna be real good, so that'll affect it negatively. Conversely, we have a whole bunch of manufacturing volume going on that will affect it positively. We know Gen 4 sensors cost less to build than 7+ sensors. To the extent we can shift over that, we'll have a positive impact. We've got a whole bunch of factors going every which direction, Bill, so I wouldn't give any more color than saying just it's gonna be an interesting quarter. That's all.
Okay. And so looking... Okay. And on-
Mostly good. I'll say mostly good. Even the in-warranty upgrade program, to the extent we sell $399 hardware, we're still selling sensors to those people at very positive margins. We look for a good quarter, Bill, not for a bad one.
Okay. On the 10-day trial and labeling, where are you on that?
I think we're still in planning stages from what that should look like. As I've said previously, and I'm sure Kevin and Steve have said previously at a variety of meetings, here's the landscape. As you remember, G4 PLATINUM is actually taking the membrane from G5 and moving it backwards. That's why it was a brand new PMA. We didn't stop all of the work on G5 from the hardware. On the G5, there's two new components. Basically one is a new applicator and one is putting the brains from the receiver into the transmitter. I think as you look at 10 days, they're gonna marry up from a standpoint, it's probably going to be a G5 moving forward with a 10-day trial. Part of it is these trials are not inexpensive.
If you look at the G4 pivotal trial, it's probably $2.5 million, and you add another pediatric portion to that. I don't know what that final number
It's certainly over a million.
Okay, you're looking at $3.5 million. We wanna do that once, not twice. I think from that standpoint, and the fact that in this G4 PLATINUM approval, there was no requirement at this point from the agency to cause patients to actually remove the transmitter for a restart. They will use it as they so desire. We obviously would like them to use it at the labeled indication of seven days. We do have it in our 2013 planning schedule.
Okay. Just in sum, though, the whole concept of a longer label is going to be more focused on the Gen 5 than the Gen 4.
Yes.
Yes.
Okay. Then last question, then I'm jumping off, is, you know, you have the $15 million revolver, the $20 million term loan. I think the commentary was on the term loan, you gave us the interest rate, no warrants. Was there any warrants on the revolver?
No warrants, no dilution, Bill.
No, no dilution on anything.
Okay. This definitely fills the coffers up. That's all I had. Thank you very much.
Thank you. Our next question is from John Putnam of Capstone Investments. Please go ahead.
Yeah. Thanks very much. Terry, can you talk about the economics of those clients that are not under warranty going from 7+ to G4? What will it cost them to convert?
Well, basically, they're going to. My expectation is, number one, they would use up their 7+ sensors. There's no new cost factor from that standpoint. What they're gonna be looking at is an upgrade, I mean, to the hardware durable, both the starter kit and the transmitter. As we've mentioned before, our average selling price is a little north of $800. If they are within their plan, and the majority of our patients have an 80/20 plan, from an out-of-pocket standpoint, they're probably looking at under $200 out-of-pocket for the starter kit and then the standard of what they're paying relative to the sensors. There was no increase in the cost of sensors.
Okay. You don't believe that you'll have to incentivize them to convert?
No. We're not expecting that to be a scenario. In fact, even on the, you know, those that were in warranty, we long debated whether or not we should provide an upgrade. But again, part of our motivation, and I think Kevin alluded to it, was the fact that we need to get patients into the Gen 4 format sooner rather than later. Because if you just think about the growth of Gen 4, we're making more margin on the sensors. That means that we're gonna make less margin on the 7+ sensors as we go forward. At some point, we need to get everybody converted over.
Right. Thanks very much.
You're welcome.
Thank you. Once again, if you have a question, please press star then one on your touch tone phone. Our next question is from Ben Haynor of Feltl and Company. Please go ahead.
Good afternoon, gentlemen. Thanks for taking my questions.
Hi.
First off, what percentage of the people who were eligible for the 30-day return policy have taken advantage of it now?
Well, we're not gonna disclose that. Some have filed. We haven't shipped anything to those patients yet. What we did, Ben, is we came up with an estimate of how many we thought would, based upon what we've experienced in the past, and that's the reserve that we've recorded. Nobody's got a thing yet. We have had quite a few people request it, but not all of them, and certainly not close to what we provided for in our reserve yet.
Okay, that's understandable. Then kind of a big picture question. You guys mentioned that, you know, the blog post, and we picked up on our surveys as well, increasing discussion on CGM, particularly, you know, your Gen 4. Where do you believe that U.S. penetration is at currently? Then I'm wondering where you think or how close we are to that tipping point where you really see the adoption accelerate.
Yeah, you know, I still think we're in that 6%-7% penetration as a category. I do believe now that we'll reach that, whatever that magical point is. I've always said it's around 8% or 9% within the next 12 months. Based on and in fact, I've been pleasantly surprised, more than I thought I would be with the Gen 4. We knew it from a technological standpoint that it was an advanced sensor, accuracy, things of that nature.
What I think we underestimated, didn't anticipate some of the features and benefits that would be highly desirable by patients, and that may in fact drive it to a greater degree and faster based on some of the comments that we're getting back from our field salespeople of their ability to get into accounts and drive some of the interest at accounts that were somewhat resistant for, you know, it's cumbersome and things of that nature, that the slimness and things of that nature of the receiver as an example or extended connectivity are really attributes that are more desirable at the consumer level than we anticipated.
Okay, great. That's helpful. Just one more, and I'll jump off. What's the most popular color?
Oh, still black.
Okay.
We're running right now, I think we're running 50, 25.
Okay, great. Thank you very much.
You're welcome.
Thank you. We have no further questions at this time. I will now turn the call back over to Terry Gregg.
Thank you. I'd like to close with a couple of real life experiences with the G4 PLATINUM over, just over the last couple of weeks that have come in to us. This is from both the healthcare sector as well as from patients. As an example, we've had one resistant physician whose only objection to our CGM was lack of integration with a pump, and that's not uncommon. Upon seeing the receiver and accuracy of the G4 stated, "Integration doesn't matter anymore," and gave our sales rep a list of 10 patients to initiate contact with regarding CGM. We look at that and we say, imagine the day when we are able to transmit directly to a smartphone with our next generation. We totally open the opportunities.
We've also heard from both patients and physicians that G4 will enable them to use CGM first before moving to pumps if they move to pumps at all. This has been our philosophy and our marketing message, so it is nice to see that kind of traction. Finally, from a parent with a family member playing a soccer game. The highlight of the game was his ability to hold his son's monitor the entire game and keep track of his glucose due to the extended range of connectivity. He added, "There is a helplessness of watching your kid play an innocent game worrying if he got his insulin correct." These are the things that I was just talking when with Ben about, that these are some of the intangibles that are really tangible in terms of driving market awareness and adoption.
This is the power of the G4 PLATINUM, and these experiences validate what we're trying to achieve, and particularly over the next three years as you see this innovation move into a consumer world of how we view the glucose monitoring world. With that, I'll close and say thank you very much for your participation today.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.