Welcome to the Dexcom second quarter earnings release call. My name is Kim, 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'll now turn the call over to Mr. Terry Gregg. Mr. Gregg, you may begin.
Thank you, operator, and thank you all for joining us today. I'm gonna have Steven Pacelli kick it off with a safe harbor statement. Steve?
Great. 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 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?
Thanks, Steve. Joining me today are Kevin Sayer, our President, Steven Pacelli, Chief Operating Officer, and Jess Roper, our Chief Financial Officer. We plan to organize things a little differently for our prepared remarks going forward. Kevin Sayer will provide you with the quarterly financial results and a brief operational update, and I will conclude with a more macro update and some thoughts on our strategy going forward. This will be followed by the traditional question-and-answer period. I'd now like to turn the call over to Kevin Sayer. Kevin?
Thank you, Terry. I'll begin with our financial update. Dexcom generated $15.2 million in product revenue for the second quarter of 2011 compared to $9.0 million for the same quarter in 2010, a 68% increase. During Q2, we shipped approximately 4,700 systems, representing a 33% increase compared to the same quarter in 2010. Sequentially, product revenue for Q2 of 2011 increased 16% from the prior quarter, and both starter kit and sensor revenues were up 19% on a sequential basis. Total revenue for the second quarter of 2011 was $21.4 million, compared to $11.8 million in the same quarter of 2010.
Sequentially, total revenue was up 51%, primarily due to increased product revenue and receipt of a $4.0 million milestone, a $4.0 million development milestone payment from Animas Corporation related to CE Mark approval of the Vibe system. Our product gross profit totaled $6.8 million with gross margin of 45% for Q2 compared to gross profit of $2.7 million and gross margin of 30% for the same quarter in the prior year. Again, very strong trends. Sequentially, our gross profit increased $2 million, resulting in additional 9 gross margin points over Q1. This improvement was primarily driven by increased production volumes and favorable manufacturing related variances.
Research and development expense totaled $7 million for Q2 compared to $5.4 million in Q2 of 2010, primarily a result of additional expenditures related to our future generation ambulatory products. Sequentially, R&D expense increased 12%, which is primarily due to higher consulting costs and share-based compensation, primarily related to increased development efforts on our future generation ambulatory products as well. Sales, general, and administrative expense totaled $12.2 million in Q2 of 2011 compared to $10.4 million during the same quarter in 2010. The increase was primarily due to additional selling, customer operations, and information technology costs to support our revenue growth. Sequentially, SG&A expense increased 14%, with the increase primarily due to higher share-based compensation and additional seasonal marketing and trade show expenses.
Our net loss for the quarter totaled $7.4 million and included $4.7 million in non-cash expenses centered primarily in share-based compensation. Our loss per share for the quarter was eleven cents. We ended the quarter with $106 million in cash, restricted cash, and marketable securities and had working capital of $110 million. Finally, we remain committed to our guidance of estimated full year 2011 product revenue ranging from $67.5 million-$72.5 million. I remind investors that over the past several years, approximately 40% of our revenue has been generated during the first half of the year, with the remaining 60% generated during the second half of the year.
Now I'd like to provide an update on our Gen 4 sensor system. We're pleased to announce that we have reached agreement with the FDA on our study design, and the FDA has approved our IDE application within the initial 30-day calendar review cycle. As we have mentioned previously, the FDA now classifies studies involving continuous glucose monitoring devices as significant risk device studies, thus requiring both FDA and Institutional Review Board, IRB, approval prior to initiation of a clinical study. We are working diligently with our clinical trial sites to secure the necessary IRB approvals and expect to commence the Gen 4 pivotal trial later this summer.
We believe this timing puts us on track to complete the trial and file our submission for Gen 4 before the end of the calendar year. However, we remind you that the Gen 4 pivotal is much more complex than any trial we have executed previously, and we will not rush the trial given this complexity. At an estimated cost of $1.2 million versus our prior pivotal trial costs of approximately $400,000, we intend to do this once and do it right. With respect to our partnerships, our combination products. First, during Q2, Animas announced the receipt of CE Mark approval of the Vibe, and we are pleased to report that Animas has launched this product in the U.K. and expects to launch it in up to four additional countries in Europe before the end of the year.
As a reminder, Animas will act as a non-exclusive distributor of sensors and transmitters to patients who purchase the Vibe system outside the U.S. Concerning the integrated system with Insulet, senior management from both companies met last month at the ADA to further discuss the development and commercialization of an integrated product, which will combine our G4 sensor technology with Insulet's next generation Omnipod system, and we continue to work towards filing a regulatory filing sometime in the first half of 2012. Finally, the development of our second generation in-hospital glucose monitoring system, conducted in collaboration with Edwards Lifesciences, continues to move forward. As Edwards announced in their Q2 earnings call, we are working to obtain CE Mark for this device by the end of this year and expect that Edwards will begin European sales in 2012.
In the U.S., we've met with the FDA to clarify the regulatory pathway, and we plan to submit an IDE and begin a U.S. clinical trial early in 2012. I'll now turn the call back over to Terry.
Thanks, Kevin. Uncertainty regarding the global economy has increased over the past few months, with debt ceiling talks weighing heavily on everyone's minds in recent weeks. The consumer confidence index quarterly average for Q2 2011 was down sequentially, and unemployment rates have risen, are now holding steady above 9%. Yet, in spite of the lingering macroeconomic downturn, we continue to show solid growth. Although sequential growth in starter kits was not as robust as we might like, particularly in the OUS markets, we are pleased to see that sensor sales continue to outpace our internal projections, indicating that patients are recognizing the benefits of CGM therapy and that more and more patients are using the SEVEN PLUS more frequently.
From the field, patients are still reporting sharp increases in their out-of-pocket expenses, and not just with deductibles, but also co-insurance obligations as employers ask their employees to share the burden of increasing healthcare costs. Nonetheless, our pipeline of new patients remains full, and Dexcom is on track for a strong 2011 as the market-leading performance of our CGM technology continues to improve the lives of people with diabetes. My personal focus for the balance of this year is to work with our field sales personnel to raise awareness among endocrinologists and diabetologists of the life-saving benefits of CGM. We need to move this from a nice-to-have category to a must-have for patients. As an example, I'm tired of hearing anecdotes of patients who have died during the night from an episode of hypoglycemia that CGM could have detected and potentially saved a life.
As I work in the field, I'm pleased by the number of healthcare providers I meet, physicians, nurse educators, support staff who wear the Dexcom SEVEN PLUS to better manage their disease. These are the healthcare providers who must drive this to a must-have. As I survey the artificial pancreas research currently being conducted around the globe, I'm reminded that the Dexcom SEVEN PLUS is the sensor of choice in virtually all of these important studies. These researchers who must also drive this to a must-have. Today, we remain keenly focused on the approximately 1.5 million people afflicted with Type 1 diabetes in the United States, as we believe this patient population represents the best near-term opportunity for the company.
However, just last month at the annual meeting of the American Diabetes Association here in San Diego, investigators presented results of a year-long independent randomized clinical trial using the SEVEN PLUS CGM system in Type 2 patients, demonstrating a significant decline in A1C in patients that use CGM as compared to those who manage their diabetes with finger sticks alone. It's important to note that these were people with Type 2 diabetes that were not insulin dependent and did not use insulin at mealtimes. Most of the patients in both the control and study group treated their diabetes with oral medications, with some using basal insulin. It is also important to note that CGM was used intermittently for 12 weeks, two weeks on, one week off, for a total of 8 weeks of CGM.
However, the 52-week results demonstrated the sustained benefits in A1C reduction shown during the initial 12 weeks of CGM use. We have long believed that CGM is more than simply a glucose monitoring tool, but in fact is an effective behavior modification tool across the spectrum of diabetes care. Of course, while data supporting the value proposition for CGM in Type 2 patients is exciting, as we've said previously, we will not devote significant resources to target that market until the reimbursement landscape for that important patient population matures. Challenging for all of us in the medical device, pharmaceutical, and biotech industries.
I could not be more proud of our team and their ability to work collaboratively with the FDA to finalize the protocol of our upcoming G4 clinical trial and to gain significant clarity in our ongoing efforts to bring a first-in-class critical care hospital sensor to the U.S. market with our partner, Edwards Lifesciences. Through a series of meetings with the Food and Drug Administration, we were able to forge agreements on trial designs and endpoints that will result in new standards for the category and will significantly raise the barriers to entry for others that compete or desire to compete in this space. I commend the Food and Drug Administration for their willingness to listen and engage in an earnest attempt to bring forth these advanced technologies in a timely manner. Thank you, and we will now entertain questions.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. At this time, we have a question from Bill Plovanic from Canaccord. Please go ahead.
Great. Thanks. Good evening. Can you hear me?
Absolutely.
Very fine, Bill.
Fantastic. Just wanted to start off, I think that's really good news on the G4 trial and a little more color if I could. You know, obviously, that'll get going. If you look at the endpoints, I mean, how different are these from previous trials? Was there any discussion on the hard cutoff at seven days on this sensor?
The first point being the difference between the previous trials. The quantitative measurements are much more frequent in the course of looking at the data points. Historically, we do YSI measurements compared to both finger stick and to the CGM device at one, four, and seven days. Although there was some in the original pivotal trials, there's some degree of flexibility when you take that sampling. In these pivotal trials, it is very distinct when you must take the sampling and also looking at other parameters. That goes all the way out to a requirement to look at more data points at 168 hours, which is the 7 times 24 for the seven-day approval. The second question with respect to a hard shutoff, no.
We have not had any discussions with the agency regarding a hard shutoff at the seven-day period. Certainly, they have acknowledged that patients using the SEVEN PLUS will use it for the full seven days and beyond. In terms of having an absolute hard shutoff, we have not had any feedback from them at this point, Bill.
Okay. On the, you know, quick, easy question, just ASPs, any color there? Attrition rates, any color there?
ASP is still running a little north of 800 on the starter kits and, you know, somewhere a little south of $65 per sensor. The ASP on the sensor has come up slightly. You know, as usual, no additional color on attrition other than, you know, we continue to see patients using, as Terry mentioned in his prepared remarks, sensors on a more frequent basis, so it bodes well for sensor utilization going forward.
Did the attrition rates change from Q1 or Q4 last year? Have you seen any shift more than numbers, just any color on any increase or decrease?
No, I think we're just as we mentioned, you know, we're pleased to see the continued utilization of sensors. I don't think we want to comment on kind of up or down trends, but we're happy with where we're seeing sensor use right now.
Okay. The last question, I'll jump back in. In terms of the 4,700 new patients, does that include any international stocking for J&J, or is that a domestic number? How do we look at that number?
Now, remember that the 4,700 is starter kits, and J&J doesn't. Well, J&J does have the right to distribute transmitters, but we wouldn't include those in that 4,700 number. Those are all domestic or OUS, you know, individual patient kits that would be sold through our normal distribution network, not the J&J number.
Okay, great. Thank you.
Thank you. Our next question comes from Ben Andrew from William Blair. Please go ahead.
Good afternoon, guys.
Hey, Ben.
Hey, Ben.
Maybe a little bit of clarity around a couple of things. Kevin, maybe talk about the SG&A spending, and it was a little above our targets. I know you gave a bit of color there, but maybe some more detail about back office versus, you know, selling organization, increases there. What are the things you've learned in your few months full-time on the job that kind of point towards additional needs for the company in terms of investments?
Thanks, Ben. With respect to the SG&A costs, we have ramped up our field sales force and our back office support staff, pretty much on schedule to where we wanted to be by the end of the year, and we accelerated some of those hires here towards the end of the second quarter and in the third quarter. We did add some folks that would increase those expenses. I'm actually seeing an increased expense because it probably wasn't in your number to begin with either. We've added some people and some infrastructure to get us where we need. A lot of our costs in the SG&A side, there's quite a bit of non-cash expense there. We'll continue to watch and monitor that.
As far as my observations here, it's been a great time to start, particularly with the ADA in my first month, to see, you know, where our company's positioned in the industry. I would say after being here as long as I've been, the opportunity's greater than I would have seen as a board member sitting in the board meetings and listening to the team. I think the potential here is vast. The other thing that I really see is we have some very clear iterative steps from a product development side to get where we need to get to on that endpoint. For us, it's a question of time and money and execution to get there.
That's what I lie awake at night thinking about is what are the right steps and how do we get that product that really puts us, as Terry said, in the must-have category? 'Cause that will come through a number of sales and marketing efforts combined, you know, with product development. I think the other thing, and again, I'll go back to what Terry said, the whole must-have conversation, right now as I talk with people and go down the list of diabetes treatment options, CGM is too far down the list. We need to move it up. It needs to be right after you start taking insulin, we better put you on CGM.
That's gonna be our marketing focus and what we try and do, and that's Terry's message as he goes out in the field.
Okay, great. That's helpful. I know you can't control the agency's review periods, but what are the error bars around the execution of the clinical study in terms of months, if you had to characterize that for us?
Well, as Kevin mentioned, Ben, as Terry, you know, our goal is to complete the trials and get this filed by the end of the year. I think the complexity, to give you a flavor, when we're looking at the initial period, day one, as an example, we're really put in a situation where we've got to house those patients overnight to get all the sampling that is required as part of the clinical trial. Therefore, we can't do all of the sites in parallel. We've got to stagger them. In fact, even doing two at a time, you still have to stagger those because we're using every bit of our clinical research staff in order to ensure that all of the data points are captured when they're supposed to be captured according to the protocol.
I wouldn't wanna handicap it, but those are the types of things that we're being extremely diligent about. We've planned this out with great detail. We've actually been at all the sites to ensure that their staff is trained and have all the capability and capacity that we're going to need to do all of these individual data point accumulations that are so critical in a trial of this nature. I hope that answers your question.
No, that's helpful. It doesn't do much good to do the trial poorly, frankly, obviously. The final question for me is, and I don't know if you're comfortable answering this, but any trends that you saw after kind of the copay reset at the end of the February quarter month, even more recently, suggestive of an economic impact or a change in consumer attitudes? Thanks.
Sure. Yeah. I mean, I think for the first time here we are, July, now August of 2011. In 2010, we had pretty much worked through the deductible challenges, and we were a lot more robust about moving patients into the category. I think we've seen the shadow of the economic downturn. Now, we've kind of worked through most of the deductible issues, but we are seeing this out-of-pocket expense. If you look at a patient having to, on a typical 80/20 copay, still $40-$60 a month, depending upon their utilization. That's been more impactful in 2011 than we saw it in 2010.
I mean, it looks like the patient add rates were right in target for us. There wasn't something at the end of the quarter or since that you found.
Oh, no. I think, again, we're working through. In the second quarter, we saw the tail, more of a tail from the first quarter with regards to deductibles working through that. Certainly, I think it. You've got an interesting dynamic. On the one hand, you have greater utilization of CGM by patients because they recognize the ease of use, the value of the information. It's not very obtrusive to them, so it becomes part of their daily lives. Certainly, they're using it more frequently, stopping a session, starting a new session. At the same time, we're hearing that patients are concerned about that out-of-pocket expense because they're having to bear more of the burden from their employers.
Right.
We do hear that, but we're certainly not seeing it in terms of the number of sensors that we're selling or patients added to it.
Okay, thank you.
Thank you. Our next question comes from Raj Denhoy from Jefferies. Please go ahead.
Hi, this is Amy in for Raj. Thanks so much for taking my question. I guess I'd just like to talk a little bit more about the clinical trial design. Were there many changes that you all have gone through since the pre-IDE submission with the FDA? It sounds like the actual time to run the trial now with the hospitalizations and overnight stays is prolonging the duration of the clinical trial beyond your original expectations.
Well, first of all, I wanna be sure that we clarify that it's not a hospitalization. These are done in clinics and we've had to select clinics that have the capacity to do overnight studies, but that doesn't mean that these patients are hospitalized. These are still clinical research centers.
Oh, no, thank you.
No, it's okay. Certainly when we do IVBG work with the GlucoClear product with Edwards, we do in fact have those patients hospitalized. There is a different locale in which we conduct clinical efforts. I would just characterize that the complexity from the pre-IDE to the final agreement was a result of multiple meetings with the agency, some of them face-to-face, in order to work out what their new standards and what they wanted to see. Certainly, it is much more extensive than what we originally applied for in the pre-IDE, but it is something that our regulatory and clinical staff and medical advisors felt that we could achieve. And therefore, you know, we agreed with the agency that these were reasonable requests, but it is much more extensive. If you really think about.
I kind of looked at them in the end as this is what the agency feels they need. You have to understand from their perspective, all of these CGM products are eventually geared to an artificial pancreas. No matter what product is out there, even as a standalone, in the agency's mind, and quite frankly, in our mind as well, we are gearing these products in iterative states to eventually, number one, dose insulin off of interstitial fluid glucose, and number two, be a key part of an artificial pancreas. Agency is pushing the companies to achieve greater accuracy, greater robustness, and we're adhering to that. We've upped our side of the equation with that. As a result of that, they wanna see more data, which I think is very reasonable from that perspective.
Great. Thanks. Assuming that all this is wrapped up, hopefully submitted by end of the year, given limited visibility with the regulatory, but hopefully clear for mid-2012 launch would be an ideal timeframe, give or take?
That would be an ideal time frame. You know, we're currently operating under the assumption that we will file this as a PMA supplement. That said, I just caution the audience that FDA is under no obligation to accept it as a PMA supplement. They could, in fact, require us to fall within a PMA standard, which would elongate the review period statutorily.
Great. Thank you. Also just a little bit, I don't know if you all have much visibility. Certainly it's very early in the rollout of the Vibe, but if you all have any sense of at least initial rollout in the U.K. and then what other countries are on tap for the next stage of launch?
Yeah, you know, it's only been launched in the U.K. to date, and I would tell you know, very, very early stages of the launch. I actually don't believe Animas has disclosed which countries they plan to roll out in which order, but there's up to four or five additional countries in Europe only, the balance of this year that we would launch. We can update as Animas permits us to update where they launch. We can update that in future calls.
Okay, great. That's it for me. Thank you.
Thank you. Once again, if you'd like to ask a question, please press Star then one on your touchtone phone. Our next question comes from Chris Cooley from Stephens. Please go ahead.
Good afternoon, and thank you for taking the questions. Terry, maybe you could comment a little bit about the new trial design. Is there anything inherent in the new design that I'm just trying to think about this from a competitive standpoint when you think about your Gen 4 technology versus potentially other CGM offerings or other sensors out there that might be trying to come through the regulatory path here in the United States. Does this change in your mind how maybe those products will queue into the commercial market? Maybe you could just update us on the Gen 5 as well. Thank you.
Well, certainly from a Gen 4 standpoint, remember, this was originally built around the concept of scalability and manufacturability, and therein lies our desire to retain the PMA supplement status of this and get a 180-day review versus a 300-day review as a full PMA. Although no matter what, this is going to be designated a panel track submission. I think the barriers to entry have grown, and one of the reasons we elected, quite frankly, to readily agree with a new level of accuracy and new level of robustness that the agency is requiring is because we felt the Gen 4 could meet that standard.
When we look at presentations of either products that are in the market today or desire to be in the market tomorrow, many of them, we believe, will struggle to meet the regulatory standard that we can achieve. From that perspective, I do think that landscape is getting more difficult for others.
Super. Then maybe just with this, not to put the proverbial cart before the horse, but Gen five, your thoughts there just in terms of what we might see there in terms of when you move forward with that design?
We're moving forward with the design. I will tell you that we are in feasibility trials with Gen five and look to introduce that product in a timely fashion. If you look at the historical performance of the company before Gen 4, we had on average about 18 months of product cycle lifetime before we would iterate to the next design. Gen 4, because of a variety of reasons that you're all well familiar with in terms of a greater regulatory science requirement initiated by the Food and Drug Administration, we'll probably live with that generationally a bit longer than that 18-month period, and then we'll look for Gen five to replace that in some timeframe. Given all the stacking of variables, I wouldn't wanna predict when actually we would see that either filed or approved by the agency at this part.
At this point, just that we will continue to conduct the clinical trials as appropriate and move that through the regulatory process as in a timely fashion as we possibly can.
Understood. Thanks again, and congratulations on a great quarter.
Thanks.
Thank you. Our next question comes from John Tudum from Capstone Investments. Please go ahead.
Yeah, thanks very much. You had a nice increase sequentially in gross margin. What do you see for the rest of the year?
Our gross margins are very much dependent upon our manufacturing volumes to cover the costs of our plants. As we continue to increase sales, provided pricing remains consistent, we would hope to continue those upward trends. Again, a lot of it depends on volume and our efficiency. Right now we're doing quite well and hope to continue.
Okay, thanks.
Thank you. Our next question comes from Ben Haynor from Feltl & Company. Please go ahead.
Hi. Thanks, guys. I like the new multi-marketing focus of putting the CGM higher up the list. Where do you guys see kind of the current penetration levels of CGMs?
Well, we're still in that single digit penetration in the Type 1 market in the U.S. It's growing, but it's not growing as fast as I would like it to grow. I think therein lies some of my personal frustration. You know, this is my seventeenth year in diabetes. It's also my seventeenth year of chasing continuous glucose monitoring devices, both ambulatory and in the hospital sector. I would like to see this whole thing. I mean, it's frustrating because I go to meetings around the world, and you see CGM as labeled the standard of care. Then you look at those who practice diabetology, who have diabetes themselves, all wearing CGM and SEVEN PLUS as the most frequent CGM device.
You get frustrated when you ask the question, "Well, if it's good enough for you, why isn't it good enough for your patients?" The, you know, a variety of comments come back, but it's really driving that message that they need to understand this is simple. This is not a complex system as some of the other systems have been. That's part of our, you know, when Kevin says moving it up the totem pole, that's what we have to get out and remind the practitioners and patients that this system is quite easy to use. You can go from the basic understanding all the way to what we call, you know, graduate school of understanding with pattern recognition.
It is along that continuum of development and continuum of complexity that a patient can go from one extreme to the other, but at least they get the basic protective nature at its most rudimentary part.
Sure. Any updates on the Edwards renegotiation for GlucoClear?
It's still in process. I think, you know, the good news is we're continuing forward. Both of us committed to the second generation development cycle. You know, it's something that'll happen. I don't wanna handicap, but probably this quarter, third quarter. You know, I would expect by the end of the year, certainly we'll have a new deal in place.
Okay, great. One last real quick one. What type of accuracy rates do you think you're gonna have to achieve to get an approval on that? Are you still seeing those single digit MARDs?
Yeah, you know, the interesting thing. In the hospital sector, I assume that you're referring to. As you know, the Food and Drug Administration does not care for the ISO standard as it relates to point-of-care measurements in the hospital sector. I think we gained, and again, face-to-face meetings along with Edwards regulatory people and operational people in meetings with FDA, a greater understanding without actually pointing to a distinct point-to-point measurement of what they would expect to see. Certainly, we are now operating, as has been published in both protocol A, protocol B, in that mid-single digit MARD versus a laboratory instrument. We were statistically significantly better than point-of-care meters in those same two trials. I think that hasn't changed at all. There has been no new standard established under the ISO standard.
It's at this point I will give credit to the agency. They wanna see the product. They recognize the benefit of CGM in that sector of reduction of morbidity and mortality in the patient population. Until a new standard is set, we can't point to that standard yet.
I know that they requested commentary from the ADA and other groups. Do you know whether they've kind of received that back yet or?
They've received commentary back. I think they're still digesting it because if you look at, there's probably three or four different groups in addition to ADA that they are seeking that information and including the laboratory people. Everybody is beginning to weigh in. I do believe that they'll ultimately get to a known standard. I don't know if it's gonna be this year, quite frankly, from whether or not they will publish something that is the new ISO standard for glucose measurement by a point of care meter in the hospital sector. Until that time, we are moving forward with them with their agreement as we create the next protocol and bring forth this technology.
Okay, great. Thanks for your time, guys.
Thank you. Our next question comes from Jonathan Block from SunTrust. Please go ahead.
Thanks, and good afternoon. Maybe just two or three questions. The first one, just on the U.S. Animas SAP product, if you can just offer some clarity there. Is the plan still to go ahead and file, you know, in and around 90 or 100 days after you go ahead and file the G4? Or due to the complexities in the trials, does that get pushed out to the right a bit?
As far as we understand from the agency, that's still the planned process that we get the Gen 4 on file and then kind of that 100-day timeframe to go ahead and file the Animas pump.
Okay, great. Steve, this one might be for you as well, or Jess, just on the product gross margin of about 45%, that was solid. In the previous two quarters, you had a lot of fluctuation as you built inventory and then worked it back down. Do you think that 45% sort of represents, you know, a normalized level of inventory during the second quarter? Now, as Terry mentioned, we go higher based on efficiencies, but we sort of go higher off of that normalized 45% number.
This is Kevin. You'll notice we did keep our inventory levels relatively constant. There's only about a $100,000 inventory fluctuation from the first to the second quarter here. By keeping inventory levels constant, we were able to eat up that overhead. As we increase manufacturing volumes and we continue to grow, we expect positive results to our margins. We don't anticipate a huge inventory buildup for some of the events like we had in the first quarter of this year, where we had to do some work over in the factory. We don't anticipate anything like that right now. I will caution you, though, as we flip over to G4 in the beginning phases, there may be some startup costs that will have some effect on our margins when we launch that product.
Right now, 45% seems like a good normal number for what we did this quarter. With pricing remaining constant and volumes going up, we should continue to see that number get a little bit better.
Perfect. Just two more quick ones. You mentioned, Terry, the PMA or the PMA supplement you're going in, you believe is a supplement. You hope it's received that way. When do you get clarity from the agency? In other words, is that something where if they go ahead and, you know, quote-unquote, "accept the filing," you know it's an accepted supplement, and then you fight that battle. When do they have to get back to you on some clarity there?
We know, again, under the regulatory statute, we will intend to file this as a PMA supplement. They will get back to you within X number of days, and they will designate it as a PMA supplement, or they will designate it as a PMA. We really won't know until that time. It's not something you can negotiate in advance until they've had an opportunity to look at all the data that you're submitting. I will say that as part of the ongoing discussions and the pre-pivotal, and pre-IDE that we submitted to them, that we outlined in a matrix form what was different between SEVEN PLUS and the G4, all the way from the manufacturing to the transmitter to the receiver.
Again, at least at this point, they have acknowledged that it appears to be a PMA supplement based on the information that we have already submitted to them.
Okay.
I just want to caution that I don't want to set expectations and then have to come back and say to you, "Well, it's really a PMA." You're going to ask me, "Why didn't you know that?" I'm trying to set the landscape up appropriately that we won't know until after we submit the PMA supplement.
Okay. No, great. That's very helpful. Last one, I promise. Just, you know, Terry, you talked about the study that we saw at ADA this year on some of the early information on Type 2. You know, are there any other studies that you know that are going on that you believe could meaningfully move the needle in terms of gathering support or building clinical data for reimbursement for Type 2? If so, you know, where is that in the pipeline? Is there anything in the works before ADA next year? Thanks, guys.
Yeah, great question. I would refer you to the ClinicalTrials.gov site looking at CGM. The last look, there were a little over 60 different trials ongoing or completed or enrolling, and there were a number in that group that were involving Type 2 patients. Without going through and analyzing each of those protocols to understand, some were, quite frankly, sponsored by pharma companies in which they're looking at oral agents, but happen to be using CGM as part of their criteria for glycemic variability differences between treatment and control groups. I do think that there is this wealth of information that continues to build along a wide spectrum, certainly inclusive of the Type 2 population.
Thanks very much, guys.
Thank you. Our next question comes from Jan Wald from Morgan Keegan. Please go ahead.
Hi, this is actually Erica Leon in for Jan. I have two housekeeping questions to start off with. Could you help us understand what other revenues you saw beyond the Animas in your other line? The $2.4 million is a little more than we've seen lately, so it'd be good to get some info there.
Jess, you wanna-
Sure. Within that, within the development grant and other revenue, it consisted of our amortization of our Edwards and Animas revenue that we amortize over time, as we've just discussed previously. It also included a $4 million milestone payment from Animas, and then approximately $300,000 from Animas related to development dollars that we're entitled to receive upon CE Mark. Then there were some additional billings to Edwards relating to our Gen 2 in-hospital product that we agreed upon between the two parties. We also have a very small miscellaneous other services revenue that we occasionally bill to other customers.
Okay. In the coming quarters, we'd probably look to obviously not have the $4 million come back, but the $300,000 from Animas, the additional billing to Edwards and the small other probably we shouldn't expect to be recurrent.
That's correct. You know, I wouldn't probably forecast more than, let's say, $1 million a quarter at this point.
Okay, that's definitely helpful. Just trying to understand where you're expecting to spend the money on the G4 trial. Would it be reasonable to expect that $1.2 million will be split pretty evenly between the third and fourth quarters?
It'll be split between the third and fourth quarters.
Okay.
Yes, that's correct. Probably a heavier burden in the third and then the rest in the fourth.
Okay.
It'll be pretty close.
Okay, that's helpful. I'm not sure if you could let us know, but did you see any difference in the trends exiting the quarter versus towards the beginning or the average? Just in general on usage and new starts and reorders.
Starts, reorders and usage.
No, I think, you know, historically, and I don't know if it's, quote, a trend, but at the end of a quarter, we see greater strength than at the front of a quarter. I've seen that in pharmaceutical companies. I've seen it in other device companies. I don't think it's anything unique to Dexcom or CGM. I think that's the mentality of salespeople when they look towards the end of a quarter, and they see they are either close to their incentive compensation or that next level, you know, they get aggressive. It drives internal people crazy as we look at that's just the landscape we all live with.
Okay. That's helpful to know that traditional cycle's continued this time. I guess my last question is if there's any milestones or guideposts that you think you'll be able to see, as you're working on your way to move CGM up to that need to have device. I know it's already stated as a standard of care, but is there anything else you see on the horizon that could help that method?
I wish I could answer in a positive fashion that I see a distinct criteria. You know, what we do see from that standpoint is many of the payers adjusting their coverage decisions to allow a greater inclusion of patients, so they're reducing the number of documents as an example, or they're removing age restrictions. I think it's just this evolutionary growth. My goal is to try to accelerate that, to watch this. You know, the dilemma that I have right now is I've seen this movie before. If you look back in the early pump days, we watched this transition take several years, and today pumps represent about 30% penetration in the Type 1 market. I think they're growing, you know, high single digits organically, but around that number.
We're seeing the same kind of growth, but it's happening quicker, so I'm getting anxious. I wanna see this grow much faster because I know it has the capacity, and the benefits to the patient are irrefutable. There has never been a study presented or published that I'm aware of on CGM, and there are hundreds of studies either presented or published that aren't positive. So there's no dispute. We never proved pump therapy was more effective than MDI. We have proven that CGM therapy is more effective than SMBG time and time again, and yet we still struggle to push this forward with the healthcare professionals to acknowledge that every single one of their patients should be on CGM.
I'm sick and tired of getting comments from physicians when I ask them, "How many patients have you lost in the last year because of dead in bed syndrome?" They'll tell me more than one, in some cases more than a handful, or a patient having a hypoglycemic event and running into a telephone pole and killing themselves, hopefully not others. It's just criminal in my opinion that we haven't forced this along a faster adoption curve. Now you've heard some of my soapbox for the remainder of the year.
Well, thank you. Thank you very much. I hope those walls start to break down because it'll be a really big benefit. Thanks for answering my questions.
You're welcome.
Thank you.
Thank you.
Thank you. Our final question comes from Steven Lichtman from Oppenheimer. Please go ahead.
Steve? Okay, why don't we wrap this up if Steve's not coming on? That's okay? Great. Thank you all. Operator, thank you. I have very just a kind of a closing comment. You know, Dexcom continues to grow our installed base of CGM users as more healthcare professionals and patients recognize the benefits of CGM. Our sensor utilization also continues to grow as patients understand the value of continuous glucose measurements on their daily life activities. The SEVEN PLUS achieves our goals, performance, simplicity, and convenience. The number of publications and presentations on the benefits of CGM continues to add to the already robust compendium of positive outcomes associated with the use of CGM. That fact contributes to the third-party payer system amending their coverage decisions, as I just mentioned, to allow more patients to enjoy the benefits of CGM.
In spite of all this positive momentum, I am very impatient on the uptake of CGM as a standard of care. I leave you with that CGM is a must-have. It is not a nice to have. The faster we get this recognized by the professional societies and patients, the fewer people with diabetes will suffer the consequences of having diabetes. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.