Welcome to the second quarter earnings release call. My name is Monica, and I'll be your operator for today's call. At this time, all participants are in 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. Mr. Gregg, you may begin.
Thank you, operator, and thanks to all of you, joining us on the call today. As is our usual and customary process, I'm going to ask Steven Pacelli to read our safe harbor statement.
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 the section 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 Steve in his new role as our Executive Vice President of Strategy and Corporate Development. As our company grows, our needs naturally will evolve. As we expand our footprint globally, Steve will be responsible for the business development and strategy that are required to commercialize our platform internationally. His new title reflects that focus. Additionally, as you all know, we use partnerships to expand the awareness and benefits of CGM as a critical tool in the management of diabetes and glycemic variability. Today, we have four insulin pump partnerships in various stages of development and a critical care program with Edwards Lifesciences.
Managing these relationships is a very demanding endeavor, and I have also asked Steve to focus his efforts in this area by leading our participation on the steering committees that govern these partnerships. Steve will continue to lead our investor relations as well as our legal and intellectual property groups. Before we review our second quarter 2012 financial results and provide our customary operations update, I would like to spend a few minutes updating investors on the status of our Gen 4 submission. As we disclosed during our Q1 earnings conference call in May, we filed a PMA with the Food and Drug Administration at the end of the first quarter seeking approval of our Gen 4 system. Within a matter of days, FDA launched an interactive review of our submission, which has continued for the past several months.
Additionally, in mid-July, FDA visited our manufacturing facility to conduct the Gen 4 PMA audit, in addition to our biannual quality system inspection technique review. I'm pleased to report that we concluded the audit with no findings or formal observations. We believe we remain on track for an approval of Gen 4 before the year-end, and of course, I am hopeful we will obtain approval sooner. I would now like to turn the call over to Kevin Sayer.
Thank you, Terry. I'll start with the financial update. Dexcom generated $21.5 million in product revenue for the second quarter of 2012, compared to $15.2 million for the same quarter in 2011, a $6.3 million or 42% increase. Our split between consumable and durable revenues was between 70%-75% consumable and between 25%-30% on the durable side. ASPs for sensors remain consistent, and ASPs for our hardware remains consistent on a gross basis. However, we offered a $200 rebate to all of our customers purchasing new hardware. The effect of this rebate, based upon actual redemption activity, was an offset of approximately $200,000 to sales for Q2.
Our international business continued to perform well in Q2, and we are pleased to report that we initiated the first, albeit limited, phase of our Gen 4 launch in Europe, and we will continue to introduce Gen 4 in other European countries over the coming months. On the domestic distributor front, our split between direct and distributor business remained consistent with the prior quarter. As a reminder, all of our international business is through third-party distribution. Let me remind you once again, only two domestic distributors stock our starter kits, and all others participate in our drop ship program. With respect to sensors, the distributors carry less than one month's inventory, more like two to three weeks. On the international side, our distributor credit terms are very tight and often require significant upfront payments for product. Given those terms, the international distribution channel inventory levels are also very low.
Sequentially, product revenue for Q2 of 2012 increased 16% from the prior quarter. Total revenue for the second quarter of 2012 was $23.5 million, compared to $21.4 million during the same quarter in 2011. I would again remind investors that in Q2 2011, we received a $4 million milestone payment from Animas based on CE Mark approval of the Vibe. Our product gross profit totaled $10.6 million, generating a gross margin of 49% for Q2 2012, compared to gross profit of $6.8 million and a gross margin of 45% for the same quarter in the prior year. Sequentially, our product gross profit increased $1.6 million on increased sales of $2.9 million over the prior quarter and our gross margin remained relatively flat versus Q1.
Our Q2 gross margin was slightly lower than anticipated and was due primarily to greater than anticipated write-offs of obsolete components and materials relating to the discontinuation of our Seven Plus hardware line internationally. Absent these charges and the ASP effects of our rebate, our gross margin would have been approximately 51%. Research and development expense totaled $10.5 million for Q2 of 2012 compared to $7.0 million in Q2 of 2011. The increase primarily the result of development costs associated with our SweetSpot platform and continued investment in our next generation products. Sequentially, R&D expense increased approximately 8%, again, primarily due to higher development costs relating to our SweetSpot platform, including $300,000 of cash expenses and $800,000 of non-cash charges related to the SweetSpot acquisition.
For the balance of 2012, we will focus our quarterly R&D expenses on completing preparations for our Gen 4 launch, our Gen 4 pediatric trial, continuing to develop our platform to obtain an extended durability claim for Gen 4, continuing to expand our SweetSpot platform, and furthering our Gen 5 efforts. Selling, general, and administrative expense totaled $15.4 million in Q2 2012 compared to $12.2 million during the same quarter in 2011. The increase was due to two factors, an increase in non-cash charges of approximately $800,000, primarily centered in share-based compensation and additional expenses related to increased selling and marketing costs to support revenue growth. Sequentially, SG&A expense remained relatively flat.
Our net loss for the second quarter of 2012 totaled $14.7 million and includes $7.1 million in non-cash expenses centered primarily in share-based compensation. The loss for the quarter was $0.21 per share. We ended the quarter with $62 million in cash, restricted cash and marketable securities, and had working capital of $67 million. We evaluate our balance sheet on an ongoing basis, and we continue to believe we are adequately capitalized to support our business operations. Finally, we remain committed to our guidance of estimated full year 2012 product revenue ranging from $85 million-$92 million. One final financial update. Based on advice from our outside tax advisors, we do not expect the Medical Device Tax to have an impact on our business based on draft IRS guidance.
We believe that virtually all, if not all of our products are exempt from the tax based upon the retail device carve-out, which defines a retail device as one that is regularly available for purchase and use by individual consumers who are not medical professionals and designed such that it is not primarily intended for use in a medical institution or office by a medical professional. Now I'll provide an update on the product pipeline. As Terry discussed at the outset of the call, we couldn't be more pleased with the progress we are seeing out of FDA on our Gen4 submission. We are also pleased to note that in June, we received CE Mark approval for Gen4 and have commenced commercialization of the system in several countries in Europe. We have initiated our pediatric trial for Gen4 .
Although the final protocol agreed to with FDA is more comprehensive than we initially expected in terms of total number of patients and number of in-clinic days, we are still targeting completion of pediatric trial before year-end. We are also working hard on a new algorithm for Gen4 , which we believe will not only further enhance performance, but will enable an extended durability claim as we look to conduct a clinical trial to seek such a claim during the first half of next year. We continue to explore the potential of reducing the need for sensor calibration without materially affecting the performance of Gen4 , and we are evaluating the clinical and regulatory strategy related thereto.
As we've stated previously, our long-term goal as a continuous glucose sensing company is to eliminate altogether the need for patients to take finger sticks, and we believe we are making significant progress towards realizing that goal. Finally, we are making good progress in our cloud-based information management efforts with SweetSpot. SweetSpot's current 510(K) clearance allows for the upload and analysis of data derived from any FDA-cleared blood glucose meter. We had our first face-to-face meeting with the FDA in July to define the regulatory path to include CGM and insulin pump data as part of our cloud-based platform. Finally, I'll provide an update on our partnerships. Shifting to our integration partnerships, Animas continues to commercialize the Vibe system in Europe, and our understanding is the system is being well received by patients and physicians.
With regard to the filing of a PMA supplement for U.S. approval of the Vibe, our timing is largely dependent on the speed with which FDA processes our Gen 4 filing, but we hope to be in a position to file before year-end. Although somewhat earlier in the development cycle, we continue to see nice progress on both the Roche and the Tandem integration products. Finally, on the Edwards front, work on the second generation in-hospital glucose monitoring system is nearly complete, and as Edwards mentioned in the 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 over to Terry for some con... F or some concluding remarks.
Thank you, Kevin. You know, the second quarter is always an exciting time for Dexcom, for in June of each year, we head to the annual scientific sessions meeting of the American Diabetes Association. This year's meeting in Philadelphia was no exception. We kicked off the meeting on Friday evening with an overview of our Gen 4 pivotal trial data presented by our medical director, Dr. David Price, as part of an oral presentation on factors to be considered when evaluating a study reporting CGM data. Dr. Price educated the audience on how to care, C-A-R-E, about CGM data by outlining key questions to be asked of investigators, including C, calibration. What was the frequency of calibration? Was it prospective or retrospective? Was it performed by trial subjects or by clinical staff? And what was the reference used? Blood glucose meters, laboratory instrument? A, for analytical techniques.
Was the sample size adequate to draw conclusions? Was the data presented as mean relative difference, mean absolute relative difference, or median absolute relative difference? Was Clarke Error Grid A zone distinguished from Clarke Error Grid A and B zones? R, for range. Was the range of glucose values appropriate, and was the rate of change of glucose values reflected? Finally, E, for excluded data. Were outlier values, outlier sensors, or other data excluded? You have to ask yourself, why is Dr. Price's message so important? Well, imagine the GPS system in your car or even your speedometer showing you your position or speed 15-25 minutes ago. What value is that to you?
You need current information in order to take action, and CGM systems must display critical, accurate, and real-time information to the patient, or in the case of hospital-based products, to the healthcare professional to be an effective tool. Shortly after Dr. Price's presentation, we saw for the first time a presentation by independent researchers comparing our Gen4 sensor currently being reviewed by the FDA to the Enlite sensor technology in a direct head-to-head comparison. As expected, the Gen4 demonstrated superior accuracy to the Enlite sensor, and as a result of this data presentation, Dexcom was besieged by the various artificial pancreas investigators from across the globe requesting the Gen4 technology for their ongoing studies.
Of course, as an investigational device, we turn to FDA to seek their collaboration on behalf of researchers and patients involved in these AP studies, and we are pleased to note that FDA has swiftly responded to and allow inclusion of Gen 4 in these studies and the switch by investigators to be made expeditiously and efficiently. The importance of prospective real-time unblinded CGM as an effective tool in managing diabetes continues to gain momentum. At the recent Keystone Conference, Dr. Robert Ratner, the Chief Scientific Officer of the American Diabetes Association, went so far as to conclude that blinded retrospective CGM has no place in diabetes. His view was supported from the podium by key opinion leaders such as Dr. Irl Hirsch and Dr. Jay Skyler.
In a recent publication in Diabetes Technology & Therapeutics, reported the lack of any glycemic improvement in both type 1 and type 2 patients in a study evaluating retrospective blinded CGM in 102 type 1 and type 2 patients over the course of 10 months. Finally, I am pleased to note that two recent independent surveys conclude that Dexcom is the market leader in the category and continues to gain share sequentially. We remain keenly focused on the patient, designing, developing, and delivering advanced technology products that are considered first in class, yet are simple and convenient for patients to use. Our market share gains and company growth are a testament to that philosophy and execution. Diabetes is challenging. Our goal is to be part of the solution, not part of the problem. With that, I will open up the call to Q&A.
Thank you. We'll now be in the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, for any questions, please press star then one on your touch tone phone. Our first question comes from Ben Andrew of William Blair. Please go ahead.
Hi, guys. This is Todd in for Ben today. Thanks for taking the call. My first question is on the international side. Could you guys give some color on, like, how much European operations are contributing to the business right now and where you see that going, like, in the next year or so?
This is Kevin. Right now, we said it's approaching 10%, in our comments, and so it's getting up to that level. We see it continuing to grow, but if it is, again, it still remain a fraction of what we're doing, as a total basis right now. We see it picking up steam over time.
Okay. Maybe some comments on how the, like, reimbursement environment's going over in Europe. Have you seen any changes to that within the past year or six months?
It's still pretty tough. There's not a lot of approval for standalone CGM. What has happened over there, and Terry has spent a lot more time with these international doctors than I have. The product is working so well that it is gaining acceptance and physicians are buying it and using it. You wanna add to that?
Yeah. I think for the first time, we're beginning to see a more U.S. type of payment out of pocket by individuals. In the way in which the product gets distributed from our distributor, generally to a clinic, that goes within the clinic budget and physicians then prescribe it to the patients. But we're beginning to see the first signs of, again, the traction, particularly Gen 4, as a technology adoption. Patients are now willing to pay out of pocket. There are a number of programs where there's some limited reimbursement, and certainly we've got dossiers on file as we go through that iterative process with those different funds.
Okay, thanks. Very helpful. Just one last question. Could you guys comment on any trends that you saw as far as attrition rates and utilization rates in the first half of the year?
You know, it's our standard practice not to comment on attrition rates, and we continue to subscribe to that. It is difficult for us to actually nail that down, as we've said on multiple calls, only from a standpoint that off-label use does occur, and it is hard for us to narrow down exactly how long a patient is using the product. We read the blogs like everybody else, and you know, we see it anywhere from it's reported seven days, which we would prefer, all the way to thirty days. It's very difficult.
Okay. Thanks for taking the question.
Our next question comes from Tom Gunderson of Piper Jaffray. Please go ahead.
Hi, good afternoon. Maybe the same question asked a different way, but maybe we can get a little bit more color, Terry, on consumer behavior. You and your team are talking to your customers a lot. The back office people are talking to them. Have you noticed anything, either since Q1 or maybe even in 2012 that shows any change one way or the other on behavior on CGM holidays or reorder rates or anything in that category?
No, Tom, we really haven't. I mean, it has been status quo. We've, you know, we're drilling down into a customer relations effort to gain more information. Again, it becomes very difficult to narrow that down in terms of the quota reorder patterns, and it depends on the payer for that particular patient, if they're willing to allow a patient to order one box or two boxes or three boxes. You know, each additional box gets tougher for us to try to analyze how soon patients would use a product or in fact, as you described, if they're taking a holiday.
We see certainly. As we look at the kind of external analyses that are available to us, and again, we have to always be mindful that these responders are typical, the most aggressive in the way in which they treat their diabetes. We've seen no pattern change in them. They end one session, however long that may be, and they immediately start another session, and many of them will comment that, "I can live without my pump. I can't live without my sensor." From that standpoint, no, we haven't seen any real change.
Last time we talked, I think you thought you were gonna pay the Medical Device Tax. Now you're not. Is there anything that changed other than a draft IRS document and an accountant that wrote his name on it?
Yeah. This is Steve. No, I actually don't think we were specific that we were gonna have to pay for it. I think our comments were very reserved previously because we were waiting for our outside advisors to get their report done. I think it's obviously a pleasant, you know, outcome for us, but I don't think it's a change in position.
Okay. Last question, also international, but Terry, you've been traveling outside of Europe. Is there any advances that we should start to be paying attention to in the BRIC countries?
Well, certainly, you know, unfortunately, diabetes is a global epidemic, and its fastest rate of growth is outside U.S., outside of Europe, and certainly looking at the BRIC countries. We are, I would classify deep in discussions with a number of distributors. Everything we do outside the U.S. will be through a distributor network as to what is our best solution, who has the biggest footprint in the space, and also the regulatory acumen to get us through the various regulatory agencies that we're going through. I would say the first on our list and the closest we are to launch would be India sometime yet this year. Then you look at China and Japan would be 2013 from that standpoint.
There are obviously some countries in South America that look like they have enough economic wherewithal to begin that process as well.
Thank you.
We have Bill Plovanic of Canaccord, online. Please go ahead.
Great. Thanks. Good evening. Can you hear me okay?
Yep.
Absolutely.
Great, guys. Just you know, any commentary on the Roche Seven Plus, how they're doing with that?
I can take that. You know what, Bill, we started up, you know, in the first quarter and the program's going. It has not had a material impact to our revenues yet. Relationships are starting to be made out in the field with our reps and the Roche reps. It's still too early to tell or make a call on the program.
Is there any commentary or color you could give, I mean, in terms of the sequential cadence of the patients, over the past few quarters?
Sequential cadence. You mean patient growth?
Yeah.
No. Well, you know, we've kind of dialed down on disclosures as far as numbers between kits and hardware and stuff. No, but suffice it to say we're comfortable with where we are.
Any update on the Gen 4 manufacturing? Just where are you? How many lines, how much can you make, you know, how's that coming along?
You know what, Bill, we started off the year, we were gonna start with one manufacturing line and go that way. We made the decision in the first quarter we needed to build another one. Part of the CapEx that you see is the equipment related to another Gen 4 manufacturing line. One is up, the other one is near completion of being up, and we're fine-tuning some of those processes, so we'll have the volumes that we need to launch this thing in a very big way. We're quite well. We can certainly support what we're selling in Europe and what we need with our clinical studies. We've not turned on the switch to produce thousands of sensors a day yet, and nor would it be prudent to do so until we see approvals right around the corner.
Do you still feel comfortable with the gross margins getting into 70%-75% as we get, you know, full manufacturing going?
Absolutely. That's gonna be a function of volumes as well, but we think the cost profile of the Gen 4 sensor will be much better than Seven Plus over time.
Okay. That's all I have. Thanks.
Our next question comes from Chris Cooley of Stephens. Please go ahead.
Thank you. Good evening. Appreciate you taking the questions. Could you maybe just explain or give us some update on the pediatric trial, both in terms of its indications and how you're managing that process while still waiting for the Gen 4 approval? I mean, obviously, when that trial wraps, I'm just kind of curious how you're managing those processes dually. I have a quick follow-up. Thanks.
Yeah. Well, we had been encouraged by the Food and Drug Administration to initiate the clinical trials in pediatrics as soon as possible, following our submission. We did. It was, as Kevin mentioned in his comments, getting down to the degree of specificity that the agency wanted to see in a protocol. There's a lot of back and forth, particularly as we go down in age group to very young patients. There is a sensitivity, obviously, from the investigators as to what they're willing to do. We need samples, but certainly can't be looking at venous samples as an example out of a very young population. Of course, agency asked us to look at that younger population, knowing that, quite frankly, which we had advised them that the product has been used in literally month-old patients, off-label.
Again, that's the discretion of the attending physician, how he or she chooses to use a product for the benefit of their patients. It was an iterative process. Now once we got the protocol signed off on by the agency, we already had several pediatric sites that we had chosen, went through the IRB process with them. As Kevin again mentioned, we have started enrolling patients in the first of those clinical trial sites.
Okay, super. I apologize if I missed this in the prepared remarks, but Kevin, I think when you walked through the developmental partnership agreements, you touched on Animas, Roche, Tandem, and Edwards. I missed Insulet if it was in there. Could you give us an update on that as well?
We don't have any development work going on with Insulet right now. We know they're very focused on their next generation product, and I think when they work that out, I think we'll resume discussions. That's where that is.
Okay. Thank you so much for your time.
Our next question comes from Danielle Antalffy of Leerink Swann.
Hi. Good afternoon, guys. Thanks so much for taking the question. Just focusing on gross margins again and the impact of the transition to Gen 4. You know, you had some impact internationally, a pretty meaningful impact on the gross margin front. I just wanted to get a sense of, could you remind us how long you expect the transition to take once you do get approval, and what we should sort of expect on the gross margin side in the first few quarters post-launch?
Well, there's a lot of transitioning going on as we launch 'cause we'll still be manufacturing Seven Plus sensors for at least a 12-month period to support the patients who have hardware that's in warranty. Production of the Seven Plus sensors will go down over that period of time. Nevertheless, we'll have to support two manufacturing lines. On top of that, we'll be transferring to, you know, transitioning to the Gen 4 hardware platform. We'll have that start up burning in as well. I think you've got a few quarters of margins that will go up as our volumes go up and as we get more efficient with Gen 4 manufacturing offset by costs related to the transition and having to run two lines. We're running two lines today.
We're running a very limited scale line on Gen 4 because we're manufacturing for our clinical studies and for Europe right now, while the remainder of manufacturing is on Seven Plus. The impact in this quarter related primarily to the hardware. We cannot sell under EU guidelines the old Seven Plus hardware anymore. The communication protocol was no longer valid, so we had some left, and we worked it down to a relatively small number, given, you know, the size of our company. We wrote that off and took that charge. We'll see how it goes over the next year. A lot of it depends on timing, Danielle. How much of the Seven Plus we work down and how quickly we launch Gen 4.
Okay, that's great. Thank you so much for that. Then, lastly, just on the competitive front, you know, we saw a very small data set from a competitor. This was, of course, an in-hospital product, but you know, the accuracy looked pretty good. I just wanted to get your guys' perspective on the competitive front going forward. Thanks.
Yeah, this is Terry. You know, we look at the competitive front really from the product offered by Medtronic in their Enlite sensor. We did head-to-head by Dr. Russell and Dr. Damiano out of Mass General, and we were obviously pleased at ADA with the outcome of that, showing us to be far superior. I think you're referring to the in-hospital. They also presented at ADA, and I think it gave us a glimpse into how really truly early stage they are.
They finally came forth with acknowledging that on that particular presentation and technology, they had to do confirmatory calibrations every four hours and that they were also suffering from an extensive time lag, which 15-25 minutes of time lag, which meant they had to go back retrospectively, do some shifting from a standpoint of it was not really what we would consider to be real time analysis. It's retrospective. Again, until they can move that forward to a level that makes sense and patients and healthcare professionals will see real time, I really wouldn't put them in that kind of competitive landscape that others that have put forth like Medtronic.
Okay, great. Thanks so much.
Once again, for any questions, please press star then one on your touchtone phone. Our next question comes from Raj Denhoy of Jefferies. Please go ahead.
Great. This is Amy in for Raj today. Thanks so much for taking my question. Just wanted to talk a little bit about R&D. I believe you all had indicated that there could be a bit of a step down to expect in the second half of the year. I'm wondering with pediatric trial being a little bit larger and longer than you all had anticipated, and you all have a lot going on, will we still see a little bit of a step down, or should we think about this quarter's run rate moving forward?
Certainly that would be the upper end of moving forward this quarter. We'd like to manage it down a bit, but you are right, the peds trial is gonna cost more and take more time than we thought. We also acquired a company in the first quarter that adds to R&D line, particularly for non-cash expenses. We'll see how we are in three months.
Okay, great. Thanks. Then just one other question regarding the type 2 space, and I know the reimbursement there is still in the very early stages, but what have you all seen in the way of demand? Are you all seeing any more increase or a shift in that type 2 patient population in demanding CGM?
Yeah, we really have. It's been interesting in that the demand has come from the professional group in terms of healthcare professionals, where the demand originally in the type 1 group was really from the patient level, and we pushed that through to the professional, and here we are being very successful in the type 1 market. The type 2, when the healthcare professionals that treat type 2 diabetes recognize the benefit, they're really the ones that are pushing it. We've got the one, well, we consider to be kind of the landmark study that Dr. Vigersky conducted. We are supporting another trial of that nature. That was a single-center trial. Although independent, randomized, prospective, you still need multi-centers in order to gain traction with the payer community.
We've elected to go out and basically repeat that study at a different site. We do see an increase in desire in pushing for those patients. That said, I would agree with you that the reimbursement landscape is still challenging for those patients.
Great. Thank you very much.
Our next question comes from John Putnam of Capstone Investment. Please go ahead.
Yeah, very nice quarter, gentlemen. My question was about competition, and I think you've covered it. Thank you.
Our next question comes from Ben Haynor of Feltl and Company.
Good afternoon, gentlemen. Thanks for taking the questions. On the mindset of I can live without my pump but not without my CGM, that we've seen, are you seeing increased awareness from doctors or maybe even payers that are saying that CGM might be a better first step than the pump when it comes to managing diabetes?
Certainly from the physician population, not yet from the payer population.
Sure. Then on the rebates, what kind of redemption rate did you see there? Do you expect some coming through this quarter as well? Does that program continue?
The program is not in effect right now, and we're not gonna disclose our redemption rate.
Great. Thank you very much.
Next question comes from Gregory Simpson of Wunderlich Securities. Please go ahead.
I thank you. Congratulations guys on a very strong quarter, and Steve, congratulations on the new job, and I'm sure the big raise that went along with it. Terry, first of all, a question for you about critical care. Seems like you guys are extremely well-positioned over the next few years, maybe as well-positioned as anyone. You talked about the interstitial product a little bit on the last call. Could you maybe elaborate either on that product or maybe just the overall strategy going forward?
Sure. You know, we view that market opportunity as one that is very robust. We know that even the Seven Plus technology is being used in, I'll call it, not quite the critical care, although, you know, certainly physicians will use it in the ICU as part of an investigation. Not anything we're sponsoring, but we do see reports of it. I think as you move downstream in the hospital sector into the step-down ward, progressive telemetry, whatever you wanna call it, then to the general ward, a robust interstitial sensor would be extremely attractive. That information comes to us really from the hospital sector as they look at things. It's, you know, they're being challenged in terms of cost of care, and so they also have a challenge with regards to recidivism.
As you well know, that any CMS patient that gets readmitted anytime in the first 30 days for lack of adequate treatment, and anything that relates to why they were there the first time, the hospital's on the hook for the treatment of that patient. I think all of the hospital sectors are beginning to take a much closer look at the economics of ensuring that patients released are in good health. Certainly we know that there are several million patients with diabetes that get admitted every year. This would not necessarily only be restricted to those patients with diabetes, but anybody, again, having type of glycemic or hypoglycemia from that standpoint. We are, as you well know, we've designated a Gen 6 technology that we have human feasibility data.
Small numbers, but it is built as a very robust, very highly single-digit MARD accuracy and drug interference blocking, and we're continuing to work on that project.
Okay, great. Thank you. Then, just a question, I don't know, maybe you can weigh in with a little commentary on the FDA inspection. I view that as obviously a very big deal. Obviously there's two ways that can happen. One, it either happens early in the process, then you seem to answer questions endlessly, or it seems to be kind of the last step in the process. Given how quickly this process has been going on, it would appear that maybe the FDA is kind of viewing that as one of the last steps. Is that fair? Or, can you maybe discuss the flow back and forth between the FDA and then follow-up questions, things like that?
Yeah. I would say that's a fair assessment. You know, obviously we're biased in wanting to believe that that's what the FDA is thinking. We can't speak for the FDA. I would say that in you know, several decades of experience, this is the fastest review that either our senior regulatory person who's been in the business about the same time I have, you know, now going on over 40 years, we both agree that this whole developmental review has been the most interactive that either one of us has experienced. I do believe that the FDA, given their resources, are doing everything possible to expedite the review and hopefully in the not too distant future, the approval. They've seen the data.
I would say in one of their comments to us at ADA, when you had all of these investigators come rushing that wanted to replace either Seven Plus or even alternative sensors in their AP programs, you know, FDA commented, "We are very comfortable with the Gen 4 clinical data." Remember, this review is not just the clinical data. There was also a manufacturing change as part of this, so it is 17,000 pages of review that they have to go through. I do think that given the comments by the auditor when she came in and when she left, we were favorably disposed that this was towards the end of the cycle as part of the review.
I think given the gauge of interaction even today, from a standpoint of discussions with agency about that audit again is encouraging. There's nothing that seems to be that they're delaying in any way whatsoever, in fact, quite the contrary.
Very much, and again, appreciate the openness.
Yeah.
Once again, for any questions, please press star then one on your touch tone phone. The next question comes from Steven Lichtman of Oppenheimer & Co. Please go ahead.
Thank you. Hi, guys. Just a couple questions. First, on the sales force, I think last call you had said it's likely to stay steady here through the remainder of 2012. Just wanna see if there's any change in those plans. Then just secondly, on the manufacturing line comment, just wanted to make sure, can you begin a U.S. launch in earnest with just one line or do you need that second line? Thanks.
This is Kevin. The second line will be up very soon. We'll begin our launch with both of them. Fortunately, we don't have to shift the entire patient base over day one, but we'll be ready to support our launch upon approval. Second piece with respect to the sales force, our sales force has remained same size as it was last quarter. There's been no additional headcount added. There has been maybe some shifting from one position to another, but no additional bodies. They've achieved this growth with the same size group that they had last quarter and at the end of last year. We don't anticipate making it any bigger as we sit here today.
Okay, great. Thanks, guys.
We have no further questions in queue. I will now turn the conference call over to Terry Gregg for any closing remarks.
Well, thank you. You know, I continue to be extremely impressed by our performance, and you should as well. The advances we are making in the technology of continuous glucose sensing are truly extraordinary, and our long-term vision of replacing finger stick measurements gets closer every day. In the meantime, we are executing on our business plan of growing the business and achieving profitability in a timely fashion. We have several tailwinds pushing us forward, and I'm thrilled to be part of a company that is transforming the way diabetes is being treated. No one disputes that CGM should be the standard of care, and we are on the cusp of seeing that vision realized. Thank you.
Thank you for participating in the second quarter earnings release conference call. This concludes today's conference. You may-