Q4 2019 Earnings Call
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Welcome to the Dexcom fourth quarter 2019 earnings release Conference call. My name is Charlotte 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. During the question answer session. If you ever question. Please press Star then one on your.
Touchtone phone. Please note that this conference call is being recorded I will now turn the call over to Sean Christiansen, Sir you may begin.
Thank you operator, and welcome to Dexcoms fourth quarter and full year 2019 earnings call. Our agenda begins and Kevin Fair Dexcoms, Chairman, President and CEO, who will provide a summary of the quarter and full year 2019, followed my financial review and outlook from Quentin Blackford.
Our COO and CFO and then a strategic update from Steve Pacelli, Our executive Vice President of strategy in corporate development.
Following our prepared remarks, we'll open the call up for your questions at that time, we ask analysts to limit themselves to one question. So we can provide an opportunity for everyone participating today.
Please note that they're also slides available related to our fourth quarter performance on the Dexcom Investor Relations website under events and presentations page with that let's review our safe Harbor statement. Some of the statements. We will make in today's call may constitute forward looking statements. These statements reflect management's intentions beliefs and expectations about future.
Ben strategies competition products operating plans and performance all forward looking statements included in this presentation are made at the date hereof based on information currently available to datacomm are subject to various risks and uncertainties and actual results could differ materially from note anticipated in the forward looking statements.
The factors that could cause actual results to differ materially from those expressed or implied by any of these forward looking statements are detailed in Dexcoms annual report on form 10-K, and other filings with the Securities and Exchange Commission, except as required by law, we assume no obligation to update any such forward looking statements. After the data this pre.
Syndication or to conform these forward looking statements to actual results I.
Additionally, during the call we will discuss certain financial measures that have not been prepared in accordance with gap with respect to our non-GAAP and cash based results unless otherwise noted all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or at least substance.
Two for results were superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our fourth quarter and full year earnings presentation for a reconciliation of these measures are most directly comparable GAAP financial measure now I will turn it over to Kevin. Thank you, Sean and thank you everyone.
For joining us.
2019 was another fantastic year for Dexcom.
I want to take a few minutes to highlight some of our accomplishments before we turn our attention to 2020.
This was the second consecutive year that our organic growth exceeded 40% to put this into perspective, given that we started the year on a revenue base greater than $1 million. This means that we added more than $440 million.
Absolute growth in the year, new patients continue to be the primary driver behind the growth and includes growing traction and the isn't dependent type two market, where we continue to expand access in addition to our existing coverage in Medicare.
We ended the year approaching 650000 net active patients globally, who are benefiting from Dexcom CGM technology.
And as a reminder, we only count summers of patient when they are consistently reordering product.
We're also achieving this growth with operational and spending discipline as an organization 2019 was be most profitable your index comps history and represented our first full year GAAP profitability, we are demonstrating great operating leverage even as we doubled usix capacity in 2019 and continue to invest.
In R&D to drive our future growth.
As we grow we're building in adapting our infrastructure to serve meaningfully more patients in the us were making great progress in our effort to transition to the pharmacy channel as we expanded covered lives by more than 50% in 2019.
We are now fully underway in the launch of do six into Medicare and look forward to those patients having access to the no fingerstick GE six technology.
We have build an extensive global business services team in Manila in 2019 exiting the year with progress on all of our key customer service metrics, our business services team will be a great asset for us as we continue to scale the company and strive to offer our customers the best possible experience we are.
Also transparent with you and our customers about the things we must improve as many of you heard in late November we experienced a temporary server outage that impacted the ability of family and friends to monitor glucose levels are bumped ones via our share and follow apps I told our customers healthcare providers and shareholders that we.
We needed to do better we needed a system in place to greatly improved communication with our customers in the weeks since we have taken significant steps to do just that.
We have launched a system status page on our website ahead of schedule. This provides real time updates on system functionality 24 hours a day seven days a week.
We're also in the final stages of rolling out and in App messaging system that will provide quick communication with our customers as you can see we're not sitting still even with the rapid growth that we've experienced since the launch of GE six the reason for this is simple we believe that there is a huge opportunity still ahead of.
As for our sensor platform.
For our car markets, we remain confident and the underlying shift from finger sticks to CGM as the standard of care outside of our car markets. Our excitement for the potential of Dexcom CGM to address broader global health issues continues to grow we are beginning to see great early stage data demonstrating the value of CGM for.
We're all people with type two diabetes, including those not on insulin therapy, our work with United Health Group has progressed very well and we look forward to the expanded use of Dexcom CGM and they're tied to populations. In 2020, we will look to extend the presence of Dexcom CGM for type two customers through additional partnerships with programs.
By digital held players like on duo RVR going well dock, all integrating CGM data into their respective coaching platforms.
And we continue toward directly of providers as we recently discuss at an Investor Conference. Our initial pilot work for non insulin using type two customers with Intermountain healthcare revealed gross cost savings of nearly $5000 per member per year for those using dexcom CGM relative to those using fingersticks.
We look forward to providing additional details like fees related to tied to and other new markets as we progress in 2020.
With all of this GE six driven growth in our core markets and ongoing earnings in our new markets.
We entered 2020 with an eye toward the biggest product launch index comps history.
G seven.
We have a busy year ahead, but the team has done a great job, thus far for us to progress toward our goal of full scale launch in 2021.
To summarize 2019 was another great year for Dexcom, but we're pressing forward to capitalize and execute in 2020 on these many long term opportunities.
I will now turn the call over to Quintin for review of our financials.
Thank you Kevin as a reminder, unless otherwise noted the financial metrics presented today will be discussed on a non-GAAP basis reconciliations to GAAP can be found in today's earnings release as well as our IR website.
For the fourth quarter of 2019, we reported worldwide revenue of $462.8 million compared to $338 million for the fourth quarter of 2018, representing growth of 37% on both the reported and constant currency basis.
As a reminder, the fourth quarter of 2018 represented the most difficult comp for the entire year of 2019 for both our worldwide in us business.
New patients adopting our technology remains the primary driver of our growth as people continue to gain awareness of the value of Dexcom CGM.
As Kevin noted we've been pleased to see that this new patient growth includes steady traction among the type two population, where we continue to push for increased market access.
Throughout 2019 beat increasing patient volumes and strong customer satisfaction with GE six are fueling our momentum.
Despite the most difficult quarterly growth comp in 2018, our us business continued to grow very well with growth of 34% in the fourth quarter of 2019.
As our revenue indicates our volume growth initiatives are more than offsetting the lower revenue per patient that accompanies our transition to the pharmacy channel.
Similar to what we saw in the first nine months of the year. This growth came from Oliver use channels as expanding CGM awareness is driving strong growth in Medicare DMV and our growing pharmacy business.
We saw great performance from our international business in the fourth quarter as well with 54% constant currency growth compared to the fourth quarter of 2018 to respond to the launch of GE six has exceeded our expectations. We continue to see excellent growth in direct markets like Germany in the UK and our distributor markets are also growing very well with strength across the board.
Of note for the first time in our company's history, we launched our E Commerce platform in Canada, there were more than pleased with the results as we saw the number of new patients nearly double in the fourth quarter.
Our fourth quarter gross profit was $309.3 million or 66.8% of revenue compared to 65.9% of revenue in the fourth quarter of 2018.
As anticipated we saw significant sequential step up in our gross margin in the 66.8% for the quarter represented the highest point since 2017.
The year over year margin improvement was in line with our expectations noted on the third quarter call.
Our teams continue to focus on designing incremental improvements that reduce product costs, an increase automated manufacturing, giving us flexibility in our efforts to improve patient access can prioritize efficient channels without meaningfully compromising gross margin as we head into 2020 and transitioned to Medicare customer base to GE six from Gfive.
We will receive the full cost benefit of our new GE six transmitter design, which helps to offset certain items such as the cost to scale up six stingy seven manufacturing lines.
Operating expenses were $205.7 million for Q4, 2019 compared to $168.4 million in Q4 2018.
This reflects an increase of 22% year over year, and a 540 basis point reduction as a percentage of revenue from the fourth quarter in 2018.
The expense growth in the fourth quarter was primarily driven by incremental R&D spend related to our G. Seven efforts as we advance toward our launch plans.
For the full year, the 23% growth in operating expenses remained well below our 43% total revenue growth, even as we invested significantly to capitalize on dexcoms long term growth opportunity.
Operating income was $103.6 million or 22.4% of revenue in the fourth quarter of 2019 compared to $54.4 million or 16.1% of revenue in the same quarter of 2018.
This reflects a year over year improvement of 630 basis points in operating margin for the quarter adjusted EBITDA was $141.7 million or 30.6% of revenue for the fourth quarter compared to $83.6 million or 24.7% of revenue for the fourth quarter of 2018.
Given the strength of the fourth quarter, our full year operating margin of 10.9% in adjusted EBITDA margin of 20.7% came in well ahead of our revised full year guidance of 9% in 19.5% respectively. As provided on the third quarter call. As these numbers support we remain confident in our leverage potential and the day.
Discipline that we are exhibiting as an organization.
But we will also continue to invest opportunistically as we scale manufacturing for both GE six Angie seven in 2020 and explore the use of our real time, CGM and new markets net income for the fourth quarter was $106.5 million were $1.15 per share.
In 2019, we also established for the first time in our company's history. Our first full year of GAAP profitability with full year GAAP net income of $101.1 million.
We remain in a strong cash position with greater than $1.5 billion of cash and cash equivalents on the balance sheet as we exit the year given the growth opportunities that are ahead of us our priority continues to be capital allocation that supports our organic growth opportunity.
Turning to 2020 guidance as we stated last month, we anticipate full year revenues of between $1.725 billion and $1.775 billion representing growth of 17% to 20%.
This growth contemplates many of the same factors that we navigated in 2019, including a higher rate of volume growth as access and awareness of Dexcom CGM continue to grow our expanded launch of GE six to populations like Medicare and new Dexcom integrated systems that come to market.
These tailwinds are offset by the continued realization of reduction in average annual revenue per patient as we navigate towards channels with lower prices as well as consideration surrounding the competitive environment turning to margins, we continue to track well toward our long term targets established at our 2018 Investor day.
For 2020, we anticipate the following non-GAAP results gross margins improving to approximately 64%.
Given that we remain in the early stages of patient adoption of our technology in our core market as well as validation in our patient base that type two patients are realizing the value of our technology, we must begin to plan and invest for growth beyond our San Diego and Mason manufacturing centers included in our gross margin guidance or cost associated with identifying and begins.
And just end up at third manufacturing site that will reside outside of the United States.
This third site will further our efforts to reduce the overall production cost of our products better support our international expansion strategy and support our long term gross margin expectations of the mid Sixtys, we expect operating margins to increased to approximately 13%, which contemplates the continued benefits of our global shared services center in the Philippines offset by increased.
The investments and our DTC and G. Seven efforts finally, we expected adjusted EBITDA margins will expand to approximately 23% as you can imagine with our ambition to double GE six capacity in the first half of the year invest in the scale up of G seven and expand our manufacturing footprint outside of the United States 2000.
20 will require capital expenditures in excess of what we saw in 2018.
With that I will now turn the call over to Steve for a strategic update thanks Quinn.
As our 2018 and 2019 results indicate to six has been a game changer for people with diabetes with 2019 revenue more than doubling from the year before June six was launch customer satisfaction with GE six remains very high and we look forward to the benefits of the capacity expansion that we achieved throughout the course of 2019 and continuing into 2020.
We plan to double capacity again in the first half of 2020, and allowing us to expand RG six launch in our existing markets as well as new geographies and to ramp our efforts in these new markets with direct to consumer marketing.
We are now more than a year and a half into the launch of GSX and we still have a long way to go to realize its full potential.
As Chris mentioned, the launch of our ecommerce platform in Canada has been a great success and we look forward to expanding the rollout of this platform to additional markets throughout 2020.
We expect to complete the transition of our Medicare base to GSX by mid 2020.
Many of these customers that were in a long time for GSX and we are thrilled to be providing into them as well as the many more Medicare patients who stand to benefit from access to GE six as soon as possible.
We will continue to push for expanded market access and look forward to the introduction of GSX in markets like Japan, South Korea later this year.
Our payer and market access teams have done a great job to position us for continued momentum in 2020, including our efforts to open up pharmacy access both for people with type one and type two diabetes on insulin.
As a reminder, the process of transitioning our GMI customer base to pharmacy will not happen overnight.
Even with the progress we've made for customer lives covered through the pharmacy, but we believe we're well positioned to make meaningful progress in this transition in 2020, which we have contemplated in our guidance.
We're excited to be in a position to drive multiple dexcom integrated insulin delivery systems in 2020.
We're very excited about the work that we're doing with Insulet on the horizon integrated system in December and so what began the pivotal trial and they remain on track for a launch later in the year.
Our commercial agreement with Eli Lilly's was officially signed in December and represents another step forward and bringing their system to market with two six which will initially focus on a smartphone offering.
In January tandem launched their latest integrated pump offerings the control our Q system, incorporating the Dexcom GE six sensor and our time zero algorithm to automated insulin delivery.
This is the first integrated system to offer automated correction bonuses based off the customer CGM readings in RFP algorithm.
These are the kind of achievements that do not happen overnight simply because we obtained the regulatory designation of an IC GMR at Ace pump Bert I controller.
Our relationship with each of the company's but I just mentioned goes back multiple years.
It takes hardware and significant time to integrate CGM with insulin delivery systems and Dexcom remains the leader in the effort to bring innovative technologies to the diabetes community.
Even with the ongoing success of GE six much of our attention is turning towards the southern with two seven we're moving the performance of Dexcom real time CGM into a fully disposable product that is only slightly larger than a nickel and we believe the customers are going to love the result.
As Kevin mentioned, we affirmed energy seven timeline today for a full rollout in 2021.
We're currently focused on the G seven clinical trial, which we expect to be much larger than the size of the trial that we ran for ages six and we are initiating the scale of manufacturing for G. Seven to support the launch timelines we have mentioned.
From the outset G. Seven has been designed for scale to support our belief in the market potential for real time, CGM, which we continue to think has opportunity to address far greater numbers of customers and disease States that we currently serve.
From product development and expansion of Dexcom CGM into our existing markets to new geographies to the ongoing development of new market opportunities. Our strategy is focused as we head into 2020 with that I will pass it back to Kevin.
Thank you Steve last year I spoke on this call and talked about 2018 as a year of milestones.
2019 was a year of continued momentum, but there was a lot of work behind the scenes to ensure that momentum.
We're entering 2020 as excited as ever for the opportunity that lies ahead and with Dexcom very well positioned.
We are in our best inventory position since the launch of GE, six and our focus on the right channels for efficient growth and learning each day about how to expand the use of Dexcom CGM two additional customers.
I would now like to open up the call for Q any Sean. Thank you Kevin as a reminder, we ask our audience to limit themselves to only one question at this time and then reenter the queue if necessary operator, please provide the Q and instructions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press Star then one on your Touchtone phone.
And your speaker phone any to pick up the handset first before pricing any numbers once again, if you'd like to ask a question. Please press Star then one on your Touchtone phone.
Our first question comes from Jeff Johnson from Baird. Your line is now open.
Thank you good afternoon, guys. Congratulations on the year can you hear me okay.
Absolutely.
Great Kevin I guess with my one question a lot of places that could go but let me focus maybe on the US commercial business would love to hear how you feel about the mix of new patient adds this year.
MD versus may be competitive share gains in specifically would love to hear maybe your thoughts out with some of the formulary changes we've seen at the start of this year, how you think that might help.
Since our volumes this year. Thank you.
That's a pretty complicated one I'll deal with.
Those as best I can with respect to the new patient adds this share there was a majority of of our new patient adds significant majority of our new patient adds hookup, who are multiple daily injection patients who are using app pens and insulin to controller insulin delivery, we still have a number of.
Patients as well, but to expand the way, we've expanded and to grow as quick quickly as we've grown do the math, we have the beginning patients on multiple daily injections on the competitive front, we're very pleased with our growth and the number of intense.
Anthony using patients that were picking up here.
It was just a great year, all around that on the new patient front.
With respect to the formulary and the increased access that we see coming Theres. A couple of things. We think that will be very good for next year that we see right now the first is more increase tied to intensive insulin access for many of our patients.
In other Manny the plans plans are starting to open up and Paul the Medicare guidelines, there that really opens a lot of doors for us and that'll be good and then increase pharmacy coverage, while our pharmacy rollout has been a bit choppy is as we're trying to learn here how to do that best that has not been our core business going to the drug store for since we started.
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We'll learn to be better and get better there, but as we can make the product more accessible and easy to get over over again, we see the utilization is higher and retention is better. So all those things point to a very strong 2020 for us.
Thank you. Our next question comes from Jason Bedford from Raymond James Your line is now open.
Hi, good afternoon.
Ill ask and uncomplicated question.
In terms of.
And I'm not sure I missed part of the call, but G. Seven timing is your expectation that you get it here in 2020.
Our expectation is that we launched hit full scale in 2021 and.
We've spoken several times about a limited launch in 2020, and Thats still one of our primary goals and objectives, but we don't want anybody believing that this rollout is going to happen in 2020, we need to.
Get the trial then.
The filing and interviewed and our manufacturing scaled up and apply those lessons we learned with GE 67, So our big focus and the focus we want everybody focused size that launch in 2021 as we get more information, we can share will share it.
But thats, our timeline and Thats, our commercialization timeline for now we're really not given any filing or trial timelines today, we can talk more about that as we go on.
Thank you. Our next question comes from Travis Steed from Bank of America. Your line is now open.
Great Congratulations on another great year.
Kind of question for Quinn you.
Got goals for operating margin of 15% by 2023, which looks a lot more conservative now than it did before.
Revenue than coming on the sharing.
To that this year. So just trying to think about long term profitability in this business is there anything.
Long term, if you have more business than the pharmacy channel G. Seven Thats scale is there anything that would be structurally inhibiting with from being a 25% to 30% operating margin.
And there definitely is there anything about seven launching that gross margin.
Back or any managed through that.
Yep.
Good question.
When we put out the 15% operating margin guidance at that point in time, we were just trying to get to draw reference out in the future that we were confident we can navigate towards but it was never an end goal that we had in mind. It was more along the lines of the progress we thought we can make and if you recall when we did that that was 1500 basis points away from where we were at that point in time so.
To your point, we've closed the gap quite considerably even faster than what we anticipated, but theres nothing structurally in this business that won't allow us to go beyond the 15%.
We're not ready to wear revised kind of those long term expectations of where we can go we couldn't be more bullish and excited about the investment opportunities and these new markets that are in front of US you think about the hospital gestational the non intensive type twos. The international expansion. All of these things are incredible opportunities that we're going to make sure.
We're investing into to make sure that we opened them up but none of that is going to keep us from being able to get to the 15% and then on.
Beyond that in time, so no theres nothing structurally that that concerns us whatsoever G. Seven I would just remind you that that product was designed from the very beginning with cost in mind and the idea was to be able to produce that at a very low cost profile that will go far below even where GE six we've been able to get it.
Two so from my perspective, all that does open up even greater opportunity to compete and lower price channels, if we need to to be aggressive in the marketplace to the pushed volumes in a way that we need to but all of it complements the long term profitability profile that we're trying to achieve here. So I think very complementary to what we're trying to do.
Thank you. Our next question comes from Robbie Marcus from JP Morgan. Your line is now open.
Thanks, and I'll Echo congrats on a really nice quarter end year.
We have looked over the past two years and Youve Meaningly meaningfully exceeded your initial guidance range, we see something similar in 2020.
Maybe if you could just help us understand why this is the right place to start off the year and then I remember last year, you kind of walked us through what volume versus mix versus price would be if you could do the same and maybe breakdown us versus international and what's assumed in the guidance.
Range that would be really helpful. Thank you.
Sure. So we continue to be very bullish on the opportunity that sits in front of us from a revenue perspective, just in the core markets that we participate in today I think we're very early in the adoption of the technology, which leaves a lot of runway.
But we also know there are very different patient profiles in that adoption cycle and how quickly they come onto the technology or how long it takes to convince them, it's hard to predict and we're not going to get ahead of ourselves in that respect I think if you look at our guidance. The way we thought about it is from an absolute dollar perspective, our guidance assumes a 250 to 300.
$1 billion increase year over year, and we've been very clear that there are price headwinds that continue to be contemplated in that guidance that as we walk average revenue per patient down overtime as contemplated in the numbers, we put out there thats about $150 million in 2020. So if you add that back to the net increase that we've guided.
To that takes the gross revenue increase on an apples to apples basis versus prior year to about $400 million to $450 million increase you compare that to what we just did in 2019 of a $444 million increased I think you start to get your mind wrapped around the guidance that we've provided so.
We feel good about it we think there is incredible opportunity it doesn't make sense to get ahead of ourselves at this point in time and feel like we've got guidance styled and appropriately.
Thank you. Our next question comes from market to Zohr from William Blair. Your line is now open.
Hey, good afternoon, guys. Thanks for taking the question.
Maybe first I wanted to elaborate a little bit on some of the partnerships and update you guys had over the last several months Adam because there has been a lot including from the data JP Morgan So that how should we think about some of those Furthermore, in the pipeline beyond that this year, especially you talked about thinking really really big ad.
How should we think about the timing to those partnerships, becoming more material commercial activity.
Yes, I mean, I think you have to look this is Steve I think you need to kind of bifurcate the partnership's into kind of our core intensive insulin business. Both you asked us.
We've got tandem currently launch and control at Q and foot wanting watching horizon later this year headwind with Bazell why Q in Europe, and then hopefully I don't want to speak for 10, among their timelines Detroit Q.
Right later this year.
Those are all meaningful near term revenue contributors right. Because these are folks who are going on there. Many of them are probably already our patients or some portion are already dexcom patients as they go on the system, but there will certainly be incremental new patient additions as result of those product launches. So those are really exciting the update with Lilly worse.
So some period of time out before we launched the first fully really product, but we're definitely making some progress there the the partnerships and the data that we talked about really on the non intensive side of the business at JP Morgan.
That's still really early stage I mean, the way, where we're trying to frame that Margaret is that a year ago around JP Morgan, we kind of talked about the new market opportunities strategy, particularly in the non insulin using type two space, we kind of followed that up the goals. This year JP Morgan with to follow that up.
With really from early stage, but concrete evidence that theres, a theres a real opportunity here right. During the work, we're doing with United that the cost savings, we showed with with Intermountain with one of the payer systems were working with so I.
I wouldn't look to certainly not 2020 as a meaningful revenue contribution from from really that non insulin using type two business, but we're super excited about at the data supporting that Theres, a huge opportunity there and I think in the out years and you start thinking about 20 120 to 23, I think theres going to be a much more significant revenue contribution.
From from businesses outside of kind of our core intensive insulin business.
Thank you. Our next question comes from Brian Flicker from Cowen. Your line is now Ben.
Hi, Thanks for taking my questions you talked about strong and growing contributions from the intensely manage type two patient population.
And quantify for us on that front, either how big that population is now as a portion of the installed base or new patient additions and then just overall do you expect new patient adds to growing 2020 versus 2019. Thank you.
Yes, this Kevin I'll take that we won't really breakout the type two patients in the patient base, we don't stratify it between Medicare paid.
Those types of things right now we did give everybody a patient number this year and I think it's a good place for everybody to start.
Second part of it.
I can touch on why don't you think the growth rate, probably slows a bit but the absolute number continues to be comparable if not up slightly is the way to think about it.
Thank you. Our next question comes from Danielle Antalffy from SMB Leerink. Your line is now open.
Hi, good afternoon, everyone. Thanks for taking my question Congrats on a really fantastic year.
I just wanted to ask about seasonality as we look at Q1, specifically and how to think about.
Moving through the year is there anything we need to be cognizant of as we go into Q1, which I think is usually a seasonally weak quarter any color you give on on the quarterly cadence would be helpful. Thanks, So much.
Sure I think at this point in time.
Historic seasonality that we've seen in the business that generally would have.
Q1 represent close to 20% of the full year is probably the right way to think about it.
We've seen where the street as model.
Currently 2020, I think we feel good about that so.
I think you guys have got to dialed in pretty well in terms of how youre thinking about seasonality I do think overtime as the business continues to to mature as you get more revenue flow through the pharmacy channel as Medicare continues to represent a bigger part of the overall business that seasonality may begin to change a bit but probably not in 2020 I think historic trends are a good way to think about it.
Roughly 20% is by the right right way to model.
Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is now open.
Thanks, Ken just a follow up on the 2020 guidance me if I look at year end the implied leverage for 2020 relative to 18 and 19 in the implied leverage for for 20 is a little lower ages. It will get revenue dollars versus op expense has the right way to think about this year kind of the guidance reflects the expenses that are sort of dial in for the year and that incremental upside if there is.
Going to be incremental upside to revenue that is likely to fall down at at a higher rate. Thanks. So much.
Yes, so I think what you'll see as we'll continue to be very disciplined and how we manage the business David to your point in the last 24 months, we've driven about 2200 basis points of Opex leverage in this business.
So that the team has been very thoughtful accountable disciplined and how we steward our resources.
Well, we also see some significant opportunities sitting in front of us to really pour some investment into for example in 2019, we never really poured the fuel on the fire from a DTC spend perspective in the commercial business. We didn't have the capacity from a manufacturing perspective to really opened that channel up and support the demand that we thought it might create.
We will open DTC up in a meaningful way in 2020 and that is contemplated in our spend.
Is that drives revenue if it drives it beyond kind of how we guided than I think to your point, we'd be very thoughtful and disciplined about how we let that flow through and yes, I would think that would drive incremental margin, but we want to make sure. We're not passing on the investment opportunities around things like DTC, what we're learning into new market efforts, particularly around that non intensive pop.
Relation and knowing that we can take cost out of caring for these patients we're going to make sure we set that up for success into the future. So that's what we're investing at if revenue outperforms than that I think you'll see us performed well on the margin front.
Thank you. Our next question comes from Kyle Rose from Canaccord. Your line is now open.
Great. Thank you very much for taking the questions and congrats on a strong strong year in quarter.
Steve you talked a little bit about some of the non intensive type two opportunities, but at the analyst day. You also you broke out opportunities like have hospital use to gestational use it looks like it'll be some gestational data at next week's eightd, but just wanted to kind of understand how we should think about when those potential opportunities start flowing through them.
Model.
In 2021 and beyond.
Yes, if you're asking specifically about.
About opportunities outside of non intensive non insulin using type too.
There are certainly there's work being done there's research being done you're going to see basically the cascade.
As we kind of done some preliminary work in the clinical side Weve recognized that that type two non intensive would be the next logical kind of lowest hanging fruit for us so thats, where you're going to what you're going to fiasco. After first with probably hospital being a close second.
In terms of gestational I'd said, it's an exciting market, but a little bit more limited.
Limited in terms of touch points into into the Ob Gyns offices and things like that so we're working on a strategy there as well we need to update our labeling certainly for hospital and for for pregnancy, and Thats. There some initiatives underway, there, but youre going to see a cascade of of it.
Whatever incremental and increasing contribution over the next several years and all of this category.
Thank you. Our next question comes from Matthew O'brien from Piper Jaffray. Your line is now open.
Thank you, it's actually type of Sandler.
But would love to ask a multipart question I'm sure Kevin will hate, but I just wanted to follow up a little bit more on the not intensive type two commentary first of all you're not signaling anytime concerned about a slowdown in your traditional.
Intensive manage group and then secondly.
As for Stephen open.
If you kind of frame up the opportunity that you're thinking about their you know there's a million dollars half type ones and million seven Mds patients is this non intensive group around that that level and can you access that group without some level of reimbursement.
This is Kevin and I can take both of those.
We do not believe at all that our intensive business has kind of slowed down and in fact as we look at our strategy. Our first pillars to continue to serve that patient base and continue to grow there with CGM penetration still on a combined basis, 35% to 40% range in the U.S. and much less than that and other geographies.
There is plenty of room to grow and as CGM becomes a standard of care here.
Again, I've said for a number of years I think any percent market penetration as possible and I will hold to that.
Certainly here in the U.S, so there's plenty of room to grow on intensive business, particularly as we get more automated integrated systems out on the market.
With respect to that type two non intensive business.
Now, we're not talking one and half.
1.7 man named people were talking 30 million people in the us and hundreds of million people around the world address Salvador, My closing comments and things that we've learned but we believe CGM has a tremendous tremendous benefit there.
And we're going to make sure that we can maximize that in this space.
Thanks Good question.
Thank you. Our next question comes from Matthew Blackman from Stifel. Your line is now open.
Good afternoon, everyone. Thanks for taking the question when you called out DTC as an investment priority in 2020. So you talk about the magnitude of returns you get on DTC investment dollars and then how quickly do you typically see those returns manifesting in revenues. Thanks.
Yes, so you'll see us start to turn DTC spend on really in the back half of the year our goal from a capacity perspective as the double where we exited 2019 by the time, we get to the mid part of 2020. So we will double capacity once again by the mid part once we are there we feel.
Like we built enough.
Supply that we can handle any demand that might come from the DTC efforts. It's one of the highest returns on any investment we can make in the company. We monitor it very closely it's not something that I'm going to disclose in terms of exactly what that rated but I will tell you. It's one of the best investments, we make and typically it's going to take.
Couple of months to start to see that turned back up into real tangible results in the business, but you could see some benefit in the back part of the year.
Thank you. Our next question comes from Raj Denhoy from Jefferies. Your line is now open.
Hi, good evening quitting I've a question actually you coming into 2019, you had talked about kind of absorbing 10 points of of mix.
Price mix offset due to the channel mix, you're experiencing I guess this year it sounds like 150 million, it's roughly another 10 points.
When do you imagine that settles out is there a point in which the price of of the sensor is at a point, where you're you're more normalized and perhaps were not absorbing that that level of impact every year.
Yes.
Well I think what we've demonstrated Raj is that our strategy to walk price down over time and have volume more than offset that has played out incredibly well. We started the WAC price down really two years ago, and we walked down again last year going to feel that impact this year, but we've got a price point or revenue per patient.
In mind that we're trying to get to Theres, probably a couple more years 2020 being one of those that that will continue to feel this from and I think volume will more than offset it but then we're at a very.
Very good price point that we feel great. When you consider the fact that we'll be bringing G. Seven into the market at that price when we feel like we're set up to compete incredibly well so.
There is probably a couple of years here that will continue to navigate through it and have volume more than offset it. But then we're at a point, where we think is quite sustainable into the future with an incredible product BMG seven.
Thank you. Our next question comes from Robbie Mr. from Berenberg Capital. Your line is now open.
Hi, Good afternoon can you hear me okay.
Yes, hi, good afternoon. So just a question on just a little bit on the on the trends into revenue is pretty strong.
Quarter, there on that line item more so than we had expected just walk us a little bit through what was the reason behind that strength in terms of Reorders are new patient starts. Thanks.
Yes, I think you continue to see the strength of the new patient number show up there I.
I will point out the fact that if you just look at it from a comp perspective, there was a bit of an easier comp on the transmitter line than there was on the sensor line in the fourth quarter. So if you go back a year ago and look at sensor versus transmitter revenue.
There was an easier comp sitting on that transmitter line that drove a little bit of that growth.
I would just make sure you contemplate that and then keep in mind as we continue to evolve as a company as we continue to think through our pricing strategy and position ourselves in a way that we can very easily step into the G seven product which is.
A very different form factor, where the sensor and the transmit our one unit versus two distinct units and GE six.
It ends up account, having a bit of an impact on how we account for the revenue in each one of those buckets. So we're going to have to contemplate the revenue buckets that we continue to report into the future. We want to make sure. We're giving you something that is the right way to think about the business in model it but what you're seeing play through that rate right. Now is just a little bit of accounting nuance and how we allocate revenue based upon.
On these new pricing strategies.
Thank you. Our next question comes from Steven Wichmann from Oppenheimer. Your line is now open.
Thank you hi, guys.
On the international obviously, it's been very strong and there's been a lot of breadth. There as you look ahead, just what are the countries. I think later this year. Steve you mentioned is Japan can you talk a little bit more about when you think you'll have that launched and what the opportunity is on the on the personal side in Japan looking ahead.
That's what I hope is to have a personal use CGM and GE six approved in the first half of this year.
Got it the big still unknown, if you will as weather and to what extent, we get reimbursement for that product. So.
If it comes in this cycle thats, great if not it could come next year that you're after so I would tell you that that growth like in all of our are outside of the U.S. markets growth is really.
Indicated by by reimbursement so.
Taking a little bit of a wait and see approach there.
We're certainly going to going to launch the product in Japan, once we get approval, but as you know in the cash payroll that it's not always as easy so.
I'd say wait for updates on the reimbursement front on Japan is really what you're looking for.
Thank you and your final question comes from Marine the ball from GE. Your line is now open.
Thanks for taking the question nice to see such a great you're.
Ill wrap it up I wanted to hear a little bit more about details on your plans for the third manufacturing site, you asked them, what cadence or milestones, we should be looking for throughout 2020 as it impacts gross margin line.
Sure so.
We couldn't be more excited about the opportunity that that sits in front of us in our core business, but as well the international business. We're very early in the stages of really taking advantage of that market, we probably have sub 15% of that opportunity and I think over time, youre going to see us, but a lot of focus and effort.
Aaron standing up a manufacturing capability that gets much closer to the end user is a very strategic move on our part while also identifying locations, where we can ultimately reduce the overall cost of production that will let us compete in the lower price environment. So strategically it makes a tremendous amount of sense, you'll hear us talk more about it over the course of the year as we.
Settling on exactly where we select to start to build out that capability, but what we know is that these things take multiple years to stand up we won't be producing out of that facility for a couple of years here.
But we've got to start the work now to ensure that once we get the full capacity in our San Diego and Mesa facilities were ready to step right into that international opportunity and ensure that we have no impact on supplies. So we're getting ahead of it ensuring that we don't pulled up the business and we're excited about what it can do for us.
And that concludes our question and answer session. At this time I would like to turn the call back over to Kevin Sayer for closing comments.
Thank you very much and thanks, everybody for participating today.
Last week, we had all of the leaders of our company around the world here in San Diego for leadership Summit, we wanted to accomplish a couple of things.
The first thing we want to do with celebrate 2019 like we did today on this call for the amazing year that we had.
And the team is universal around that group, we did have an amazing year the growth like this as hard.
Want to thank our people for all their hard work.
The second thing we wanted to do as lay out our plans to our group and what we tend to do and what we expect for the future similar to how we have at our investor conferences that we will never leave our core markets and we'll continue to care for our intensively managed patient for the best alternative there and then move this great technology to other applications with a focus on time.
To diabetes.
As I left that summit.
Often times.
We get him.
Things reaffirm what you said and what you tell people.
Not long after leaving the summit on the intensive management side, we got a note.
Firmer provider about one of their patients so young women, who had an agency above 13.
And she was wondering if she could ever whatever have children. Because he was afraid what would have into the child because of report diabetes control.
After six months Ondecks car hailing see is down to five and she is expecting our first child.
Great outcome and that's why we're committed to this business on the type two side in the past two weeks I've had conversations with a couple of physicians and asked the following question.
How often should people with type two diabetes be wearing CGM.
Because we hear numerous answers as we go about committing to my surprise, both and look to means that all the time.
There should be where in this thing all the time you need to figure out a way to do it.
Hence another facility, hence, we continue to grow and expand and hence we continue to invest in our business on the R&D side on the commercial side.
We couldn't be more bullish about our company than we are today and thanks everybody for listening.
Thank you ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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