Q3 2020 DexCom Inc Earnings Call
Welcome to the Dexcom third quarter 2020 earnings release Conference call. My name is Adrian and I'll be your operator for today's call at this.
Oh Im sorry to listen only mode. Later, we'll conduct a question answer session kind of question there, especially if your question. Please press Star then one on your Touchtone phone. Please note. This conference is recorded and that kind of color Christiansen shot Christensen you may begin.
Thank you operator, and welcome to the desktops third quarter 2020 earnings call. Our agenda begins and Kevin Sayer, Dexcoms, Chairman, President and CEO, who will provide a summary of the quarter followed by a financial review and outlook from Quentin Blackford, our COO and CFO and then a strategic update Steve Pacelli, our executive Vice.
President of strategy and 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.
We know that there are also slides available related to our third quarter performance on the Dexcom Investor Relations website under events and presentations page.
Are we done and I'm also pleased to announce the dexcom will be hosting a biennial investor day on Wednesday December nine, where we will discuss our business and long term outlook in more detail.
As Billy virtual events available by webcast with that lets 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 events strategies competition products operating plans and performance.
Forward looking statements included in this presentation are made as of the date hereof based on information currently available to Dexcom.
Subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward looking statements.
Factors that could cause actual results to differ materially from those expressed or implied by any of these forward looking statements are detailed in <unk> annual report on form 10-K, and other filings with the Securities Exchange Commission, except as required by law, we assume no obligation to update any such forward looking statements. After the date of this presentation.
Informed these forward looking statements to actual results.
Additionally, during the call we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash based results and what not.
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 as a substitute for results or superior to results prepared in accordance with GAAP.
Please refer to the table her earnings release and the slides accompanying our third quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure now I will turn it over to Kevin. Thank.
Thank you Shawn and thank you everyone for joining us.
Well, we've got a bit different route over the past 24 hours compared to our usual earnings records.
Very glad to be with you today.
Most of you probably saw that we preannounced revenue after market close yesterday in conjunction with the announcement of the retirement, a brick double bass, our chief commercial officer.
Well have more to say about Rick and what he's accomplished later in this call.
We chose to provide the revenue a preannouncement in order to remove any market uncertainty about the strength of our business in conjunction with our notification of Rex retirement.
Our strong third quarter results reflect the resilience of our business and the importance of Dexcom CGM to our growing customer base, even as the world continues to navigate the challenges presented by the covered pandemic based on this performance were pleased to be in a position once again to raise our 2020 revenue guidance in the area.
Total revenue grew 26% in the third quarter, driven by a strong new patient growth over the past year. This patient growth continued in the third quarter with our pharmacy in Medicare channels exhibiting the strongest growth in the quarter.
We continue to see some impact in new patients relative to our expectations as a result of the pandemic. However, as our updated guidance indicates the impact was not as significant as we expected and communicated on our second quarter call. We also officially introduced our patient assistance program at the start of the third quarter, extending our support to our customers.
Worse coverage. During this trying time, we have a small handful of people utilize the program during the quarter, but it does not have a material impact on our performance. We've made excellent progress on the access ramp with nearly all people with type one diabetes in the U.S. now having access to Dexcom CGM as well as a quick way increasing amounts of people.
Type two diabetes, our intensive insulin therapy.
We recently entered into a government wide contract for the sale Dexcom CGM to eligible government buyers, including the V.A. This contract will facilitate easier and more convenient access to dexcom CGM as it may allow for pharmacy access for Dexcom CGM for eligible veterans. Another example of how we're making it easier for.
Patients to take control of their diabetes at an affordable price.
In addition to our team is doing great work to expand access outside of the U.S., including the recent publication of our UK cost effectiveness study that showed declare economic benefits associated with use of Dexcom CGM based on studies like these we are hopeful that we will be able to drive near term access where on behalf of people with diabetes with government payers.
I was on a global basis well.
Customer feedback related to sex continuing to trend at record levels. We have several initiatives underway to extend index card growth opportunity and bring dexcom CGM to more people, who stand to benefit from enhanced knowledge of their glucose levels core.
For our intensive business. Many of you likely saw our press release with Eli Lilly earlier this month announcing our co marketing efforts of our T. SEC CGM with we always knew alter rapid acting insulin.
This collaboration as a Great example of our strong partnership with growing pains.
To provide a nice boost to our efforts to expand awareness of Dexcom CGM among practicing clinicians, including primary care physicians, we are making great progress on our efforts to extend dexcom CGM to non intensive type two customers as well Intermountain healthcare recently published the results of the first pilot using Dexcom CGM, which demonstrated annual.
Cost savings of approximately $5000 per member for Dexcom users relative to standard of care Fingersticks, We're thrilled to say the large expenses for this trial with Intermountain is now well underway.
We are excited about our work with United Health as they expand their rollout at the level two program, although weather. So early in the commercial rollout. Our teams are working together very well to ensure the kind of patient experience that we expect for end users of our CGM systems.
We continue to support hospitals and help protect patients in frontline workers during a pandemic with more than 200 hospitals, reaching out to us about dexcom CGM during this crisis.
We remain focused on generating evidence potentially expedite approval for the use of CGM per patient monitoring along these lines early feedback on the performance of our CGM has been positive including several recently published articles documenting use of the product during the pandemic in September we also announced the creation of a hospital registry to allow us to collect.
Data index from CGM performance efficiently during this time.
As we press forward these initiatives with a great customer satisfaction with GSX. Our teams internally or are currently focused on the next steps with G. Seven weeks.
We commenced approval for port trials for T. Seven the mid October this timing remains consistent with our previous discussions around the impact of covert to our clinical trial timeline or.
So our guidance are eager for you know Experis G. Seven were committed to doing this in the right way and ensuring that the trials are run efficient rate and that we bring to market a product that delivers the best in class customer experience for Dexcom users. We expect color on Cseven in several key markets. During the second half of 2021, given the growth of the bill.
As I said, our expanding patient base, we expect energy seven okay. All of our core markets will likely extend into 2022 as we continue to scale manufacturing to support these markets in the right way.
There is one change through G. Seven from our previous discussions after extensive evaluation and several pre market studies, we have made their decision until our cseven versus the 10 day product with a clear pathway to extend aware duration, Charlie our customers' lives are heavily dependent upon dexcom CGM and we have high standards to ensure that we meet our.
Our commitments to our customers for.
For example, while our 15 day configuration demonstrate survival rates in the 70% plus range. We don't believe this is good enough for our patients.
With that I will turn it over to claim for financial review.
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 todays earnings release as well as on our IR website.
For the third quarter of 2020, we reported worldwide revenue of $500.9 million compared to $396.3 million for the third quarter of 2019, representing growth of 26% on both the reported and constant currency basis are.
Our us business maintain strong performance in the third quarter, despite facing the toughest quarterly comparison for all of 2020 as we lap the 53% growth in the third quarter of 2019.
Your next revenue totaled $398.6 million for the quarter compared to $308.8 million in the third quarter of 2019 representing growth of 29%.
All three of our channels contributed to the year over year growth in the us with pharmacy and Medicare standing out as the strongest contributors in line with our strategic emphasis in our efforts to streamline access for our customers over the last several years.
Our net promoter scores approached record levels amongst our users and in particular, our Medicare customers, including those with type two diabetes non intensive insulin therapy, a testament to the simplicity of our Dexcom giesecke system and the value of real time CGM knowledge.
Our international business grew 17% versus the prior year in the third quarter to $102.3 million and increased 21% on a sequential basis from the second quarter.
The impact of the cobot pandemic on new patient starts continue to be felt more acutely in our international markets.
Especially as some of our core international markets have experienced increased case rates towards the end of summer and into the fall.
Primarily in those markets at higher administrative requirements to access to technology, which are much more difficult with cobot related restrictions. However.
However in markets, where administrative burdens are limited we continue to see strong growth and momentum with the UK in Canada, especially standing out. In addition, we are continuing to benefit from the increased manufacturing capacity that we've driven over the past year, enabling us to extend the decrease offering to additional international markets, including our most recent launches into Belgium, and Turkey at the start of the.
Fourth quarter, our third quarter gross profit was $340.7 million or 68% of revenue compared to 62.3% of revenue in the third quarter of 2019.
Increased pricing pressure that we have been talking about this represents our highest quarterly gross margin since we launched new six in 2018.
Our teams have done a terrific job designing cost out of our products and manufacturing processes. In addition to driving greater manufacturing efficiencies as volume continues to increase.
We are more excited than ever about where we believe we can take the cost profile of our products over time further enabling our ability to successfully navigate the lower pricing environment that accompanies our quest to enable easier access to our products for our customers through the pharmacy channel.
Operating expenses were $245.7 million for Q3 2020.
Fair to $187.8 million in Q3 2019 in line with our previous commentary.
This reflects an increase of approximately a 170 basis points as a percent of sales as we invested into some of our key initiatives in the third quarter we.
The increased spend in research and development is primarily focused on the G. Seven clinical trials. In addition to finalizing manufacturing readiness in anticipation of our future to seven launch.
Within sales and marketing we are prioritizing our direct to consumer marketing efforts given the continued momentum with CGM awareness and adoption runway ahead with results of our early campaigns delivering an excellent return to dexcom.
On a go forward basis, we continue to anticipate an elevated level of operating expenses in the fourth quarter and into 2021 as we move forward with our G. Seven pivotal trials manufacturing scale up and direct to consumer efforts.
Importantly, general and administrative expenses continued delevering nicely in the quarter.
Operating income was $95 million or 19% of revenue in the third quarter of $2020 compared to $59.1 million or 14.9% of revenue in the same quarter of 2019.
This reflects the year over year improvement of 410 basis points in operating margin for the quarter.
Adjusted EBITDA was $146.9 million or 29.3% of revenue for the third quarter compared to $92.5 million or 23.3% of revenue for the third quarter of 2019 and improvement of 600 basis points.
Net income for the third quarter was $93.6 million or 94 cents per share.
We closed the quarter and a great financial position with more than $2.6 billion in cash and cash equivalents. This.
This leaves us with plenty of liquidity to continue our capacity expansion initiatives produced six and seven in conjunction with growing CGM demand will also be opportunistic with our investment strategy as we contemplate the long term growth potential for our technology.
We continue to anticipate some volatility to new patients in the fourth quarter of the year as koby case rates rise and fall in certain of our areas of operations in the global economy fluctuate, but with the strong third quarter results. We are in a good position to once again raise our outlook for the remainder of the fiscal year. We now expect 2020 revenue to be approximately 1.9 billion.
In dollars representing growth of 29% over 2019 this represents.
It's an increase of $50 million from our previous guidance and $150 million from the midpoint of our guidance at the outset of the year. Despite the impact from carbon over the past two quarters.
As Kevin mentioned, new patient starts came in slightly ahead of the levels that we anticipated for the second half of the year and communicated on our second quarter call. Although they were still down relative to our pre pandemic expectations.
For the fourth quarter, we expect new patient starts to be approximately 90% of our original expectations before the impact of currency.
Turning to margins, we now anticipate the following non-GAAP results to meet or exceed the following levels gross.
Gross margins to meet or exceed 66%, representing an increase of approximately 300 basis points versus 2019. Despite the pricing pressures that we have realized primarily as a result of our emphasis on the pharmacy channel.
We expect operating margins to meet or exceed 16% an increase of approximately 500 basis points from the prior year. Finally, we expect our adjusted EBITDA margins will expand to meet or exceed 26% for the year also an increase of approximately 500 basis points from the prior year.
Our margin profiles, clearly, reflecting the strong revenue growth over the past several years and our ability to drive strong operating leverage from our key strategic drivers. We have also benefited to a certain degree this year from some near term operating expense benefits associated with carbon related impacts to clinical trials industry conferences and other normal work practices.
We anticipate that some of the investments will begin to generate returns in the fourth quarter and 2021.
In addition, we will continue to invest to maximize our growth potential for the long term and we believe that as corporate related restrictions free up there will be a return to spend in certain areas. So while we expect the organization to continue to progress the cadence of margin expansion may not continue at the same magnitude or with the same predictability as we've seen this year.
With that I will now turn the call over to Steve for a strategic update.
Thank you Quinn.
Even with the ongoing impact of the cobot pandemic and our communities our focus of Dexcom remains largely business as usual.
This means that we are focused on our patients striving to ensure that they are cared for and empowered by Dexcom CGM and this time, where glucose control is as important as ever.
This also means that our teams are focused on executing our core strategic priorities to best position Dexcom to capitalize on our growth opportunity. The significant capacity expansion that our teams have worked tirelessly for the start of 2019 has left us in a great position to aggressively target new patients via different strategic marketing pathways.
Including enhanced direct to consumer marketing and as a very recently the ability to offer product samples to healthcare providers their patients can experience first hand, the benefits of Dexcom CGM.
While we're being strategic about these investments in wider the impact of curbing, our inventory position has us well positioned to take advantage of these new opportunities and provide full support to the efforts of our field sales force and.
In September we announced a new five year research collaboration with the University of Virginia biomarker of course.
This agreement enables additional resources for our Charlottesville team as we look to innovate our artificial pancreas algorithm technology we.
We look forward to developing additional tools to offer our pump and smart and partners to simplify the experience of managing diabetes for our collective customers.
We will also use the collaboration to advance our data analytics capabilities in research programs as we demonstrate the clinical value of Dexcom CGM for customers outside of our core intensive insulin using population. This includes our efforts in non intensive type two diabetes pre diabetes pregnancy and the hospital market.
We're making good progress in our efforts to extend the use of Dexcom CGM to the broad type. Two population. This includes continued traction in our two intensive segment, where the recent via contract adds to our significant reimbursement progress thus far in 2020.
With Medicare the United Healthcare at the VA and others now covering dexcom for the type two Tencent population. We are confident that this will be a nice growth driver for the company and a great outcome for those with type two diabetes on intensive insulin therapy.
But we are equally excited about the work we are conducting demonstrate the value of dexcom CGM for the non intensive type two community.
In addition to our work with level to Intermountain healthcare as Kevin mentioned, we will kick off commercial pilot programs with several of our key digital health partners in the fourth quarter.
Our automated insulin delivery partnership strategy continues to support our growth and position dexcom to be the shift toward connected devices for people with diabetes on intensive insulin therapy.
Tennants control like you became the first automated insulin delivery system driven by Dexcom technology earlier. This year and is quickly generated great momentum for both companies and more importantly, great outcomes for users of the system.
As we draw closer to the start of 2021.
We're excited for the anticipated launch of Insulet Omnipod five system in the first half of next year. This represents another important step for Dexcom as we will have integrated systems commercially available that are arguably best in class solutions for both Twod and cash burn technologies and with our integration work with Eli Lilly, Nova Nordisk and had some at progressing as well.
We believe the Dexcom is well positioned to support our core markets for use in insulin pump and marketing systems in the years ahead.
I will pass it back to Kevin.
Thanks, Steve as we head toward the equation of 2020 I want to take a moment to extend my gratitude to Rick Doubleday, our chief commercial officer, who plans to retire at the end of this year and continue with us in a consulting role through 2021.
Rick joined Dexcom in 2009, leaving our sales organization from approximately $49 million in sales in its first full year to the $1.9 billion that we're closing in on now.
I can't think of many examples where commercial leader has overseen compounded growth of greater than 40% over a 10 year period, but that is one Rick has accomplished here at dexcom.
He is a great leader and a great brand has developed a solid plan to execute as we progress into 2021 and the launch of RG seven system Rick.
Rick is also work extensively to develop a very talented commercial team.
So we are in a great position as we press forward to execute on our goals in 2021 and beyond.
So I hope you will join me in expressing appreciation for rigs outstanding leadership index calm and best wishes as he embraces well deserved time spent with his family.
I would now like to open up the call for acuity, Sean. Thank you Kevin as a reminder, we ask our audience to limit themselves to only one question at the time and then reenter the queue if necessary operator, please provide the Q and instruction.
Thank you well now begin the question and answer session.
I have a question. Please press Star then one on your question.
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And our first question comes from Vasily markets from JP Morgan Your line is open.
Thank you and congrats on a nice quarter.
And.
Kevin.
The topic Du jour that I think is that the focus the most investors now is that the competitive environment and the pricing environment, particularly between you and add debt.
Both have great products, it's a large market.
We've got a lot of product updates both from your competitor and today with GE said, then moving into trials here and launch.
Second half next year now with a 10 day product how should people think about the increasing and I know I don't want to put the word out there, but similarity of the options from the two products and how to think about the ongoing price differential in the pharmacy I know you've talked.
Got this before but I just think it's important to reiterate the answer here given the focus for investors. Thanks, No I appreciate that Robbie with respect to pricing.
Our results, Greg clearly demonstrate how well we manage this process as we moved a great deal of our business through the pharmacy channel I'm sure Quinn again that more later as we head into more questions. As you look at our margins as great as they are with volumes.
Significant high higher than they were before and prices coming down.
We are currently proven that we can scale here. So we definitely understand how that works with respect to products and features and things of that nature. Let me start with GE six before we move to G. Seven.
This is an incredible product and it has incredible features and.
It has truly been a market leader that has taken us a while to get up to scale manufacturing do sex and get the capacity that we need and we have that now and so we will push to six very hard.
And very competitively until June seven gets here g., such as what we have today.
With respect to our future products I can't speak to our competitors have I know what g. seven isn't what it does there are many features in there we have not shared with everybody that will delight the world.
We went to the 10 day life for exactly the reasons I said on the call.
And it really leads and what's going to be the differentiation. We did this because we want the patient experience to be what we committed to.
We have learned in our extensive research the most important thing for US is still that deliver what we say and as we were getting out to 15 days, particularly.
With with our algorithm with that sensor, we talked to many of the not making it and while it performed great.
At the longer time, it wasn't great enough for us. So we shorten the life for now we're very confident where changes we can make it to make it last longer where the difference will be over time, and we're investing significant resources is on the experience side. The concept that that one CGM experience fits all its just not going to work going.
Going forward as you look at the di systems as you look at people that are tied to intend to Vince when users who.
Have migrated to CGM later in life, they may want different information and different experience.
I think as we get the physical.
Features of the product exactly where patients Latin American pathology, seven what's going to be most important.
As the learning experience that keeps them engaged and leads to better outcomes and we're very confident that we can win that battle.
And Robin just to add onto that and hit on Kevin's point of the pharmacy I think it's important for folks to recognize that in the pharmacy channel. Our product is not priced all that differently from from Libra with respect to what the patients coming out of pocket for greater than 70% of our patients are able to get onto our product at less than $60 per month.
Many of them with no out of pocket on a per month basis. So from a patient perspective, it's priced very competitively.
And our next question comes from Danielle Antalffy from FCB Leap, Inc. Your line is open.
Hi, good afternoon, guys. Thanks, so much for taking the question.
Question, I am sorry to harp on the competitive landscape and I'll ask more specifically.
Growth in Europe, It was slower than I believe one of your competitors and May deadline.
Product and in Europe, and I guess.
Give us a little bit of color on what's happening.
Is the first part of the question. The second part of the question is just that.
Slower than the competitor that Ben.
Mind for a lot of investors today and I'm just curious how much of that is supply constraint being a little bit.
More constrained and not really pushing as much as you quite or will be doing in the future versus any real competitive dynamics here. Thanks, so much.
Sure They electric that let me hit Us first.
From an O.U.S. perspective, our performance in the quarter was right in line with our expectations I think if you go back and look historically at seasonal trends in that international business Q3 is typically up around that 20% range and we were up 21% sequentially. This year in Q3 coming off of Q2.
To be a bit more clear with the Doe, we certainly saw some mixed results at the country level and in those countries, where the patients required to be in the physician office to train on to go through the administrative process through all the paper work Thats required. We certainly have seen that be a slower uptake and getting back to normal.
Volumes in the midst of this cobot environment, clearly cobot has impacted the ability to be in the office.
Contrary to that though in markets, where we have our ecommerce platform in place for example, UK, Canada, we're seeing record numbers of new patients coming onto our technology and just some tremendous growth. There. So I really believe it's more a story of what the model looks like and how cold it is impacting that or or not in terms of the patients ability to get onto the product.
And I think if you looked across the competitive landscape and you go back to some of the commentary thats been put out there over the course of the quarter for those folks who are more focused and the I.T. space, which happens to be we'll work primarily focus today in our international business I think you've heard them speak to some softness in the international business as well. So I think what you saw come to.
Together for US was right in line with what the market is seeing we feel good about it again it was in line with our expectations to your point in terms of growing overall at a slower rate than one of our competitors I.
I think you have to keep in mind, we're navigating through a price headwind right now as we start to step price down and move more into the pharmacy channel and we're making terrific progress on that front, even a bit ahead of our expectations and if you were to look at the third quarter in particular in the 26% revenue dollar growth that we put up if you were to it.
So look at that on a unit volume perspective, I believe we put up market leading unit growth in the quarter itself growing nearly 40% from a unit perspective, thats better than anything else out in the marketplace right. Now so I think when you adjust for price, which is a bit specific to us and you really look at patients and unit volume I think we're putting up market leading performance.
Your next question.
And Matthew Akman from Stifel. Your line is nothing.
Hi, good afternoon, everyone. Thanks for the question I wanted to touch on the that the commitments he bought about sampling and if you'll indulge I'll just have to intertwined questions on the topic.
First one is how should we think about the potential impact of sampling on on type twos versus type ones would you expect that to be more impactful for a type twos and type one and then the follow on to that is that you could talk to a dock last week that I'll think dairy gleefully told US you had begun sampling gets practice for the first time will be steady expected something like.
80% conversion of his first call it 20% 20 patient.
Patients or so into paying customers that that sounds like that would be a home run if that was broadly true, but help us understand how you're going to measure success or our ROI on that.
Thanks.
Well this is Kevin I will take that one we're thrilled to be able to sample at this point in time.
And to be doing it and.
In a manner that we think can be very large scale for years patients and wanted to try a dexcom.
And see what they can do and given our status.
With our direct business and all the things we're doing there were constraints around our ability to do that we remove those constraints as we work through the distribution channel.
We believe that it's going to affect patients across the board not only type ones, but I think your comment on type two and tend to Vince on users is a very good when they might be a bit more resistant to the technology, because they've been dealing with diabetes longer and Gee do I really want to do that.
You have the experience of wind energy six and having.
Being able to see what happens.
This becomes very easy and so we're we're really excited about it we expected results be good.
If not fantastic and if you look at the payback for us.
If you look at the revenue we get from a patient per year, if we convert 50% of these people to full time news that as this benefit beyond spectacular program, we don't have to have.
Come close to that number for this to be a spectacular result for us, but I think the recognition and the ability for a physician to say look I have an answer for you. Let's try this it's really important to us and we think it's going to be a big initiative for us this year.
And your next question comes from Jeff Johnson from Baird. Your line is open.
Good afternoon, all though we have a couple of points into a single question maybe we.
Discussing recently some fairly tangible evidence that we think exists in the way that you guys might be looking to dramatically expand your salesforce over the coming months. So what I'm wondering I guess more than anything is one is that true filled as Rick departure at all signal maybe was on board with that or anything else in the direction of the commercial organization and three.
Typically think of sales reps in your business the key driver of sales so what.
Might be driving that plant expansion initiatives underway or planned debt plan to take place here over coming months. Thanks.
I'll take that one let me address the Rick issue first this has nothing to do with ricks deciding to retire financing this.
Our sales efforts right now are ricks plans and he does get to see them through to the end of the year, while he'll be working with us through year end. So these events are completely unrelated.
We are planning.
Several things on the sales and marketing front over there over the next year, we will reveal all of them, but what we do believe as we do need more coverage in the field, particularly as we look.
At the HCP community and those who are not endocrinologists as you get into primary care physicians, who are seeing more and more of these patients we need some access Sarah we need some morphine.
And speaking of them were very.
Cognizant of the return our Salesforce has for us and I would disagree with you. Our sales team is great and they do provide a lot of benefit to our company. They are a great voice.
And really our phase of the company and many of these geographies so.
That I disagree with we are fully onboard with what were going forward with and look forward to measuring results of it.
And our next question constant Joanne Lynch from Citibank. Your line is open.
Good afternoon, and thank you for taking the question can we talk a little bit on your comments regarding pricing of Arsone unit volume.
Steve I think we're looking at a little over 100 million dollar headwind in terms of pricing in 2020.
Sort of the same number that we're thinking about and then the second part of that is at what stage close the gap on pricing for that unit volume strength rally.
Thank you.
Yes, John this is Quentin.
As we spoke about price this year just coming off of last quarter. For example, we were talking about a 150 million dollar headwind in the business. So I think we were north of the 100 million you had referred to that was something that was probably a year old to be honest with you as we were navigate starting to navigate through last year. So it was a bit higher than that.
As we've made terrific progress on the pharmacy side, we've actually seen price be a little bit more of a headwind.
Then what that 150 would have represented I think it's going to be closer to $175 million for the year.
We saw stronger price headwinds come through in Q3 that were embedded in that 26% and obviously if you do the unit volume at nearly 40% you can kind of understand what the impact was in the quarter, but.
The majority of that is being.
Realized as a result of us opening up that pharmacy channel, which we believe in the long term as the much better channel to be putting patients onto the product through for various reasons. It increases access makes it easier for folks to get onto the product and importantly from a profitability perspective overtime will be a much more profitable business model for us.
And I think just looking at the quarter itself seeing gross margin reached record levels of 68%, while the quarter represent the greatest amount of mix and net pharmacy channel just demonstrates our ability to really get after the cost profile of our product and compete in that segment quite aggressively in terms of of how long it takes to ultimately get to the price point or the mix of the pharmacy channel.
I'm going to speak to that today, I think you're going to hear more from us as we get to our analyst day around just how far we are into that pharmacy channel and and where we see that going but we're making terrific progress they're very happy with what we're seeing.
And your next question comes from David Miller, Tim Morgan Stanley. Your line is open.
A quick just a follow up there just thinking about the fourth quarter guidance basically implies around kind of 20 points momentum deceleration, that's probably five points heavier than your guidance sort of into the fourth quarter last year anything you'd call out you asked so X you ask we should be thinking about it in the fourth quarter and perhaps it just reflects frankly that incremental $25 million of price.
As you as you exit the year. Thanks.
Thanks, so much.
Thanks, David.
Let me talk through a little bit of the assumptions that we've made as we head into Q4 I think we continue to operate in an environment, where there is not a great deal of clarity with respect to how cold. It is ultimately going to impact the business and we want to be prudent and thoughtful around how we set those expectations first.
First and foremost as we move more and more business into the pharmacy model as well as the Medicare business continues to grow at a strong rate the seasonal impact in the business is going to shift you're not going to see nearly is as much revenue show up in the fourth quarter as the patients no longer really incentivized to take advantage of a scenario where they might have already met their deductible.
And they're going to load up on product as they exit the year so the seasonal.
Trends in the business are going to look a little bit different does the mix in the business shifts with.
With respect to coal, but in particular, our best estimate at this point in time is that we're going to see about a 10% impacted new patient starts in the in the fourth quarter.
If we navigate that more successfully than terrific, there's going to be some upside to the numbers, but thats our best estimate at this point in time and.
And then I think that the other thing to consider is the fact that we put in place the patient assistance program that really hasn't had an impact on the overall results just yet we saw start to take place in Q3, but it didnt impact us in a material way, but if you think about it that was put in place to help those patients who ended up being unemployed or just couldn't afford.
The product in general.
And most of that started to happen back in the second quarter as cobot really started to take place and if you think through that scenario.
Patients, who would go on to Cobra for a period of two or three months. They typically would make their last purchase of a quarters worth of supply. So another three months of product and that put them right into the fourth quarter, when they're going to be making their next purchase which is when they would now be coming on to the patient assistance program. So our belief is that going to be a bit more impactful in the fourth quarter than what we have.
Seen in other quarters, I think when you take those sorts of things into consideration.
Try to quantify those if you were to exclude them you'd see a growth rate right back in line with what you've seen year to date.
And your next question comes from Matthew O'brien of Piper Sandler Your line is open.
Afternoon. Thanks for taking the question Kevin the comment that you made about not seeing what you wanted to see from from date tend to date 15 is that because you can't at the CGM designation with adjusted EPS of one that working the algo isn't quite right. What what exactly does that mean do you think you're going to have an i. CGM designate.
For this for G. Seven when you get out to 15 days and then on the 10 day sensor is that going to be a cheaper sensor because I know cost as the big.
Gating factor for some people. Thank you.
Let me start with pricing you know again, we currently sell a 10 day sensor and pricing is very much based upon the cost per month, whether you buy two two centers are three centers as we bid these contracts CGM is.
As a monthly cost that really doesn't get down to the unit.
Excuse me, particularly as you look at the way our contracts are negotiated with respect to transmitter and receiver prices and you get into rebates on various.
Components held at cost per individual sensor really doesn't matter, it's where we can make.
And while we get reimbursed for in a given month with respect to getting out from 10 to 15 days for us there.
This is a problem that we can solve in order to meet IC Jam standards, where algorithm works as we turn the sensors off.
When the data, we believe isn't necessarily going to now for IC, Jim standards. Many of our patients would argue that the data is just fine when we shut them off but thats.
How we look at this and how we run it we saw that were basically turning up more sensors that we wanted to right now and we needed to perform better as I said earlier, we can get 70% of the 15 days.
Without any trouble the 70% in our mind is good enough for our patients we'd rather have a better reliability number and go 10 days it is.
It is a cost issue more than anything else and over time, when we get to 15.
The controversy may last that as you look at our T. six performance with our 10 day sensor now on the cost profile that that our ops team.
Clinton and team have created we were very happy with that and we're very comfortable going forward to seven with 10, we'd like to make in 15, and we'll work on that as soon as we're done with the 10 filing we expect everything we do to have an isogen designation by the way.
So there won't be any backing off on that.
And our next question comes from Travis Steed with Bank of America.
Hi, Thanks for taking the questions just wanted to get a little bit more color on the G. Seven timelines.
You mentioned key markets in the second half of next year is the U.S. fallen in the second half or is that going to be more 2022, and then on the U.S pivotal trial. When do you expect that to actually finish finish enrolling.
We're not going to give all those timeline details out for competitive reasons why than anything else our policy in the past.
Has the more to announce approvals rather than to give a bunch of details on the studies I did say that we've started our studies with respect to generating data for approvals by saying multiple geographies that obviously means there will be international launches to the extent we launch in other places has yet to be determined.
Right now we're focused on a number of efforts getting ready for that and the complexity of G. Seven for us.
It is.
Actually it's it's kind of blast.
It's very exciting to go through changes because we are doing but literally every single process. In building. This is different than what we've done before and so we are getting factories and capacity up and running the lines. We fully automated we want to be completely ready to manufacture tens of millions of these things have launched rather than just a few.
And in fairness to our commercial team.
And everybody in the field. We spent 19 women on about three days of finished goods and we're not doing that again.
That won't be I have very every confidence how will not be the delay.
Launch it will be getting all the approvals and that will launch it in the appropriate time frames and give color as the situation.
Evolves.
And the next question comes from Mark Cancer from William Blair. Your line is nothing.
Hey, good afternoon, guys. Thanks for taking the question.
I wanted to follow up on the G. Seven launch and add just operationally have you guys been able to start working through some of those payer contracts are they ask you to wait.
Ill ask it just because of that lack of the transmitter and whether thats going to structure that G. Seven sales cycle on an annual revenue basis for many days per sensor don't matter as you extend that further into the life of that.
Or is it going to be centered only.
We've contemplated the G seven launch ever since we started negotiating contracts for G. Six we don't view this as a big change over cars advancing our team will be more than ready to do this in the field runtime happens and.
And as it gets closer as we go through the next bidding cycle inevitably our team will.
Well 47, there'll be some payers who were gutted dual pricing, even 90 cents on a proved others want to wait.
Silver products approved the policies vary across the board, but we've we've.
We've we've contemplated the G seven launch and on the G. Six work that we've done so we have a model going forward that will be easy to repeat.
And next question comes from grade Denhoy from Jefferies. Your line is open.
Okay. Thank you.
Maybe a quick one for you about the gross margin you know it's been pretty impressive to see the gross margin expansion. Even as you guys are absorbing all of this price and I guess the question is whether or really how long you can keep doing that is is there a level at which.
Gross margin can you don't have to stop going up it actually starts to go the other direction as pricing continues to come down and I. Appreciate G. Seven represents kind of a step change in that but as were has are still RG six how does how long you keep going.
Yeah, Ross said, great question, we couldn't be more excited about where we've been able to take the cost profile of RG six products and keep in mind, we're doing that at a time, where weve created record inventory levels for the company, which just opened up more and more growth potential and growth avenues for the organization that we can start to pursue so we're excited about.
That we're currently at our lowest cost point to date on June six and I think there's quite a bit of runway still in front of us with respect to take cost out of that product, particularly as we keep pushing significant volumes through the plant.
As you look at the cost profile I believe we can get to a profile that is less than a dollar a day per call our cost for the product regardless of whether that GE six or seven keep in mind G. Seven from the very beginning of time was designed with cost in mind and the ability to get to a lower cost profile than G. Six.
So while we're making tremendous progress on GE 60 ability to replicate that and do even better with G. Seven is something that we fully believe in our ability to do now that being said Gee seven well will be more expensive in the early stages as were ramping capacity, but at scale. It will be a lower cost profile for us to do six so.
I think there's still quite a bit of a good runway in front of us. The teams are focused on driving costs out of the product redesign.
We're redesigning manufacturing process, where we can take manual efforts and move into automated efforts were moving into lower cost jurisdictions, we've renegotiated cost points with many of our vendors as they've taken advantage of larger volumes as well as weve redesigned the logistics and distribution model that we utilize as well taking cost out so.
I don't think we're anywhere close to having realized the full benefit of all of that just yet, but you are starting to see it play through.
To the degree that we continue to navigate through price headwinds will somewhat impact how high that gross margin can go but at the very Lisa let this combat those sorts of things. So we're excited about what around the cost side.
And your next question comes from Steven Lichtman from Oppenheimer <unk> Company. Your line is open.
Thank you.
Good.
Congrats and intensive type two.
Are you seeing momentum now on the commercial side with the Windows.
You know Dana recently at.
And.
Where do you think we are.
In terms of the market.
Intensive type two CGM penetration.
You know I'll defer to Steve a question on the market penetration I can just tell you anecdotally what we're hearing is very matches.
These patients are getting covered the technologies getting to them. We've always had tied to intensive insulin use coverage in Medicare.
In that respect I think our biggest barrier there and again at toxic Salesforce expansion messaging has been getting a physician's direct recommended to those patients and making everybody aware so were happy with Alan yes on the proliferation suitable for what we said on the last call was that that are tied to business was was exceeding 20.
<unk> percent of our patient base I don't think we are prepared to update that today, but.
But the other.
Point that I would want to make them, even just the intensive type two spaces. The addressable market is to simply larger Reits or whether you're looking at the us business or even looking at that the European or the other foreign markets.
In the US were looking at a patient opportunity, but probably pushing like 2 million patients, where we used to use a number of maybe like $1.5 million in the U.S I think were where the data that we have suggested that market opportunity as a lot bigger so yes.
Well penetration certainly if there were making great progress on the insurance front and.
It's a huge market opportunity as we look to to continue to expand the intensive business.
And your next question comes from Chris as clearly you can add your line is open.
Hi, Thanks, two quick ones for me one I was just hoping you give us a little bit more on the significance of the government contract you mentioned to us what impact that could have on the business and then I just want to follow up on the question about international.
Im curious if the situation is improving in the countries that have lacked to the coated or if you actually think that might be a little bit worse here in fourq Q has virus case counts increase in some of those places. Thanks.
The government contracts really important to us, particularly on the VA side. There is a much higher instance of diabetes.
With that group of patients than the regular in the general population.
Being able to get access to T. Six through pharmacy benefit at zero co pay.
We think it's a wonderful benefit for that group I think it's just part of the general blocking and tackling that we do to continue to grow so while I can't quantify these are the types of wins that you've seen dexcom generate over the past.
Several years and were looking forward to serving this patient base much easier than we have before I'll, let Glenn talked about the international piece, yes with respect to international early signs are starting to point to the fact that new patient numbers are starting to step back up clearly not back at the levels. They used to be but we are seeing those.
Start to trend back up the way, we would expect them to over time. So we're seeing some good progress there and clearly that's in those markets that have the administrative burdens placed upon them that are a bit heavier in those markets, where you're utilizing something like E Commerce platform.
We've seen terrific results there so.
And your next question comes to Chris Cooley from Stephens. Your line is open.
Good evening, thanks for taking the questions.
At this point some neat which includes key when you think about the da collaboration across advanced analytics excuse.
Next com already essentially owns and controls the data to the generation you have the algorithms in place.
Hello, there on maybe the future revenues screens from.
What we will call this.
Management or some type of who's here ways that you could sort of leverage the data that you have.
In house now to further enhance the margin profile longer term.
Yes, it's a great question and we've we've spent time exploring ways to monetize the data to date.
Quite frankly at this point to the extent, we can help our partners be more competitive with the algorithms that we provide to them and are that we provide to our patients just from a patient capture a patient retention perspective, I think we're pretty happy with that.
The Uva collaboration in particular, you guys. All know, we we bought type zero a few years back.
That algorithm in particular is commercialized in the tandem control IC product today really when we look at the opportunity to deviate, it's really to expand to next generation algorithms, whether they be for automated insulin delivery, which we would probably do in conjunction with our folks at time zero or even beyond two to be intense.
Of insulin patients, who don't use in insulin pumps and even beyond that whether it's tied to more broadly health and wellness pre diabetes, even in the hospital. So we're looking at kind of.
Ample opportunity over the next five years.
Really worked closely with Uva who's been responsible together with our folks at time zero for developing these these best in class algorithms.
The next question comes to kind of ask from Canaccord. Your line is open.
Great. Thank you for taking the questions.
Just.
Two for me both on the commercial side first on the DTC program, if you help us understand.
I guess.
The ongoing effectiveness of the program and where you're at with respect to rolling it out and realizing the value and the return on investment from those DTC investment and then secondarily are you seeing changes with respect to your referring physician.
Physician mix, you, obviously talked about it maybe make it to salesforce investments as you move more into the non and those just trying to understand how that was different channels.
To have different sales and marketing needs.
With respect to DTC, we have rolled that out and were going very strong here in the fourth quarter fourth quarter.
Our return on our DTC investments has been.
Very very good today in fact.
Compared to other ones we've seen in other companies. Our returns are extremely high scale. So that program has not tapped as far as effectiveness. So we'll continue to investigate and you'll see more from us going forward this quarter and the person next year, we have a lot of.
Fun things planned for you on the DTC front with respect to more channels and referring physicians again as Quint said earlier, we had tremendous new patient.
Numbers this quarter, so we're still getting referrals, obviously and the endocrinology community in the communities where we serve.
Traditionally we just feel the need to go deeper and to visit with more health care professionals and help them better treat their patients as well one of the things we learned from.
We have learned from Copeland with respect to our clarity system.
As physicians had to do mobile appointments or tell our appointments.
They can pull clarity that up on the screen those opponents become very effective.
And there is a large group of physicians, who don't have access to clarity rather than using it we need to get out and get our message out there. So thats. Our plan is to go deeper.
Deeper and to help our people focus Maher.
On those territories, where they work.
And your next question comes from Jason Bedford Raymond James.
Thanks.
Good afternoon.
I hate to get granular here, but I thought I heard Kevin say that.
Growth continued.
In the third quarter.
There's a couple of ways to interpret that comment. So my question is did you add more new patients in Threeq you 20 than you did in Threeq Your 19.
Yes, Jason just to be.
Claire.
Q3.
Now the.
20, with a record number of new projects and adds for us.
So it was the highest quarterly new patient add of any quarter in our history.
And your next question comes from Ravi Masera Fine Darrin back capital Your line is open.
Hi, there this is on for Rob. Thanks for taking the question. So if you can talk about.
Right under Medicaid so as we think about the macro economy, the unemployment rate of high or maybe there are more people moving to Medicaid other insurance that so can you talk about.
Jim coverage on the medical and do you think a shift to Medicare what linking patients access to CGM or increased pricing pressure. Thanks.
Yes. This is Kevin I will take that we have Medicaid coverage and approximately 40 of the 50 states.
As we sit here today and I would be in full disclosure.
It's spotty in some states, it's very easy in some states and make it very hard.
They are very budget conscious and they're worried about spending dollars.
We believe and we have various.
Pricing arrangements throughout all the states, there's a wide range of pricing there.
I don't know if we had coverage in all 50 states and everything were equal and almost every device business Medicaid pricing ends up being lower than everything else.
And we're prepared to do that we believe these patients deserve access to our technology as well.
But really the challenge for us has been getting it across the finish line in a manner to whereby.
Patients can get the technology and it's just too hard right. Now we are trying hard to be better we've had some major wins on that front.
But theres a couple of states, where we just keep knocking on the during Q.
I mean, there are some states, where we get across the finish line and then they've attached Medicaid coverage to some other thing and in the state legislature and we get thrown out and it's been very frustrating thing for me and particularly because so many of those patients are children.
And really deserve access to Dexcom CGM deserve access to Sharefile and all the things that we have to offer. So we we continue to fight that battle I Hope we have it in every state and we'll make sure that we can compete competitively on the pricing side, we're not going to give the Medicaid business, we want patients to have access to us.
And your next question comes from Brian Becker of Cowen Your line is nothing.
Hi, Thanks for taking my question.
You've always said that at some point competitors will close the gap versus decks comment on performance and connectivity assuming that's happened at some point over the next one to two years do you believe dexcom can differentiate versus its competitors via the software around the CGM and accordingly sustain some degree of premium price long term you are clearly, making significant investments here as demonstrated with.
And the Uva collaboration but again.
We believe dexcom can differentiate via software over time instead of the hardware differentiation you've enjoyed in 2012 and if so when will we start to hear more about your software product pipeline. Thank you.
Well, you'll hear more about our software product pipeline as we launch those.
Those products over time.
And let's be clear on the hardware differential side, while we've said that gets going across that still hasn't.
And we still lead in connectivity and connectivity to multiple devices and interoperability and data sharing and all of those things that infrastructure taken us a long time to build and it costs a lot to support I.
I think over the next several year software will be a key thing delivering the experience of the patient that will keep them engaged and provide a great outcome I was at dinner with a longtime diabetes patient. The other night and we started talking about experiences and direct demand goes so waiting that you don't think one size fits all I said no I don't.
At some point in time, you'll see I know, you'll see from Dexcom different software offerings. So stay tuned on that one I think the other thing that everybody needs to understand also about this mark as we look out over next several years is just the challenge of scale and we've lived through this.
As we continue to invest and factories and we've got G. Six pretty much built out now that took US a couple of years and now are investing heavily in G. Seven you're looking at somewhere between half a billion billion dollars in capital investment on our part to do this to get to where it needs to be to get these products at the cost basis that need to be but also.
Automated and at scale. So we can deliver the volumes that we need and that will be a differentiator as well.
If companies aren't investing in that scale and.
And thats can be difficult so as I look out over time.
Connectivity and the hardware experience, we provide we still believe will be best in class.
Oliver everybody else, but the software experience, we can create based on the mentality that we have as close as we are to our patients.
Really is going to be differentiator as far as premium pricing over time, we will continue to work towards that end.
We've we've done very well in the pricing and our pricing schemes now that as Clinton alluded to earlier with our shift to the pharmacy many of our patients to Medicare.
That's becoming.
Our pricing models have moved in the way that we thought they would.
I do think there are are things, we see jams to do that are worth more than other things.
And I as I look to this in the future I do see an experience that is it just me personally that its worth a higher price than some other experience and Conversely, I see some other experiences that may not be worth as much.
As what we charge today, so stay tuned on that we.
As I mentioned some of the other day, we've kind of created this industry from 2012, two now and it's going to be fun too.
Evolve over the next several years as well.
Your next question comes from Larry Biegelsen from Wells Fargo. Your line is open.
Hey, guys. Thanks for fitting me in.
Quitting anyway.
Any color preliminary thoughts on 2012, how we should think about 2021 relative to 2020, the 29% topline growth you're guiding to in 2020, and the operating margin of greater than 16% any high level thoughts. Thanks for taking the question.
Yes, we're not going to talk about 2021 on the call today clearly we believe there is tremendous opportunity for growth in front of us.
Given just the fact that there is so much awareness to continue to be had around our product I think we've been clear from a profitability side, we're going to be disciplined in this organization.
We're going to make the right investments, where we need to to open up new growth channels into the future and all of that will be contemplated in the guidance that we ultimately end up providing for 21, but we're not going to do that today.
And then just a question answer session I'll turn the call back over to Kevin Sayer for final remarks.
Thank you.
I again want to thank everybody for participating on our earnings call today I'd.
I really can't emphasize enough how strong our teams.
Performed during these incredibly and unstable times.
Half a billion dollars in quarterly worldwide sales at a time when our field teams have had very limited access to clinicians and it had to be very creative to figure out how to get the message out to patients. We've raised our guidance now for three straight quarters.
We have gross margins approaching 70% during a period of manage price reduction.
Combined with unit volumes being more than double what they were two years ago and significantly higher than last year at this time.
We have operating and net income levels higher than we've ever had before during a period when our customer satisfaction scores are also at all time highs far in excess of those of our competitors. We are doing our best our commitment to our patients.
Innovation continues to thrive here.
I personally learned more about sensor technology in 2020 than any of the other years I've been here.
All of this is pushing towards tremendous innovation going forward and as we see the use of CGM and other applications and some of the things some of our our data partners. Our payer partners are going to be able to do with this data going forward never been more bullish about innovation and what's coming in the future.
And bear starting markets are coming down.
Weve navigated our way through the hospital experience to learn there are type two efforts with the program Steve talked about earlier, we're making progress in multiple markets for the future. So we'll be able to address those UK.
You can do all these things without a remarkable team I want to express my gratitude to everybody on the Dexcom family. This time, but I remind everybody of one thing we are still at the very beginning of this journey and it's only going to get faster from here. Thank.
Thank you everybody.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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