Q4 2020 DexCom Inc Earnings Call

Okay.

Welcome to the decks com fourth quarter and full year 'twenty and 'twenty earnings release call. My name is Daryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone. Please.

This conference is being recorded I will now turn the call over to Sean Christensen, Sean you may begin.

Thank you operator, and welcome to debt Com fourth quarter and full year 2020 earnings call. Our agenda begins with Kevin Sayer, <unk>, Chairman, President and CEO, who will provide a summary of the quarter and full year 2020, followed by a financial review and outlook from Quentin Blackford, our COO and CFO, and then and strategic update from Steve Pacelli.

And our executive Vice President of strategy and corporate development.

Following our prepared remarks, we will 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 there are also slides available related to our fourth quarter performance on the debt Com Investor Relations website on the 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 events strategies competition products operating plans and performance. All forward looking statements included in this presentation are made as of the date hereof and based on.

Information currently available to desktop are subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward looking statements and 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 and Exchange Commission.

As required by law, we assume no obligation to update any such forward looking statements. After the day of this presentation or to conform. 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 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 as in substitute for results or 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 to their most directly comparable GAAP financial measure.

Now I will turn it over to Kevin.

Thank you Sean and thank you everyone for joining us today.

Let me start by summarizing some of their claims and thanks, Sam accomplished in 2020.

Total revenue grew 31% over 2019, driven by a record number of new patient additions.

This translates to more than $415 million in absolute dollar growth another high watermark for <unk> com.

We doubled <unk> capacity in the first six months in the year.

Team has done a great job to meet the ambitious plans that we outlined nearly two years ago to scale and <unk> capacity, leaving the company in the best inventory position that we have been in central launch of <unk> six the scale work led the strong gross margin expansion in 2020, even as we increasingly shift our business to the pharmacy channel we closed for fall.

And year 2020, with our highest gross margin since 2017 or enhance capacity purchase and positioned to aggressively pursue our growth initiatives.

This includes the expansion of our sales force, which we announced in October and have nearly completed as well as our efforts around product sampling and direct to consumer advertising in the U S and international markets.

Many of you have seen in our most recent effort to drive category awareness as we kicked off a new campaign around one of our decks Com Warriors, Nick Jonas, including our and during the Super Bowl.

This bold effort should give you a sense for our belief about the market opportunity ahead of us.

We have received great feedback from the campaign and so far and look forward to joining forces with Nick and diabetes advocacy groups and in coming months to drive greater awareness of and the benefits of CGM.

At the height of the pandemic first wave, we established a new effort in a matter of days to support hospitals moving to preserve personal protective equipment and utilize our remote monitoring technology. We've made significant progress in our work to bring in <unk> com CGM to people with type two diabetes and.

Including both of those are intensive insulin therapy, and those who are not we also announced several new initiatives in 2020 that we believe will position us to meet the kinds of patient growth debt, we expect over the next several years.

Building on the success of our team in Manila, where we strengthen our customer service metrics across the board, we announced a new global business services unit in Lithuania that will help serve our international operations.

We also announced that we will be building, our third manufacturing site and first international manufacturing site in Malaysia.

This day that they arent facility will be key to scaling our <unk> seven capacity and provide logistical advantages as we look to serve our growing international base speed.

Speaking of <unk>, seven 2020 source initiate and complete the first <unk> pivotal trial and we're very happy with these results and the feedback we've received from participants and clinicians involved in the trial has been outstanding our clinical work is continuing as we progress with the regulatory path in 2021 to support our goal to launch <unk>.

Kevin in the second half of the year.

And in any given year. These are accomplishments that we would be proud of.

And in 2020, our teams accomplish these goals during a global pandemic I want to use this forum again to say how proud I am of the desk current employees, who have embraced our mission to empower people to take control of diabetes in a year of very unique challenges and is a true.

So both fleet and learn from such a talented team.

And rest assured our team is focused on the growth opportunity ahead of us as we're now well on our way in 2021.

This is shaping up to be another exciting year for the company featuring our continued momentum as we look to bring <unk> to many potential customers to use CGM and the ongoing manufacturing scale up and launch of <unk> and investing in several other key initiatives related to the growth pillars that we outlined at our recent Investor day.

We believe there is still a huge growth opportunity ahead, and we are investing to ensure that the company is positioned to deliver CGM as a mass market technology for greater health outcomes.

The pandemic has contributed to structural changes in the way healthcare is delivered with <unk> CGM a valuable asset in the growing digital health and our remote monitoring health care ecosystems, and a majority of people with diabetes in the world continue to rely on finger stick technology is because of these developing landscapes in our belief in what <unk>.

CGM offers that we are announcing the formation of exco and ventures today, which Steve Pacelli will lead with this entrance into the venture capital space. We believe we will be able to accelerate development for innovative companies that share our commitment to empower and greater health outcomes for customers and their clinicians.

This may include technologies with use cases that can be combined with our CGM system as well as independent technology platforms.

To summarize we are very proud of what we accomplished in 2020 and are moving forward with the same commitment to our users and the growth index kind of well into the future.

With that I will turn it over to Quentin for a review of the fourth quarter financials and discussion of the 'twenty and 'twenty one outlook Quentin.

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 on our IR website.

We reported worldwide revenue of $568 9 million for the fourth quarter compared to $462 8 million for the fourth quarter of 2019 representing growth of 23%.

Our team did a great job in maintaining momentum with new patient additions in the fourth quarter and accelerating our shift to the business into the pharmacy channel.

Even with the increase in Covid locked down to the quarter progressed, new patients for the fourth quarter were in line with our original expectations for the year, a new record and a great achievement for our team.

U S revenue grew 20% over the fourth quarter of 2019 totaling $451 million.

We were able to drive more volume into the pharmacy channel than we originally expected closing the year approaching 50% of our total U S commercial volume.

This means that we are making excellent progress to position the company for long term growth in the U S and an efficient operating model for the company and while there is channel mix, causing lower revenue per patient in the pharmacy channel the underlying strength of the business saw fourth quarter unit volumes grow significantly more than our revenue growth rate in the U S.

Our international business reached a new high watermark of $117 million in the fourth quarter of 2020 growing 35% over the fourth quarter of 2019.

This growth in food strong performance in both our direct and distributor markets.

We began and international DTC campaign in several of our markets in the fourth quarter and will continue to drive awareness of the benefits of our technology.

Only in the CGM market penetration internationally remains even less and in the U S.

Our fourth quarter gross profit was $399 1 million or 72% of revenue compared to 66, 8% of revenue in the fourth quarter of 2019.

And the 72% of revenue represents our highest gross margin quarter in the past five years. This is another demonstration of the ability of our teams to navigate our strategic shift to the pharmacy channel, while delivering strong profitability across the organization.

As Kevin noted our successful scale up and <unk> has been a key driver of this margin expansion, while also placing us in our strongest inventory position to date, allowing us to more aggressively target new users as we continue in 2021.

Operating expenses were $294 7 million for Q4 of 2020 compared to $205 7 million in Q4 2019 the.

The year over year expense growth in the fourth quarter consists of several key areas of strategic investment, which includes roughly $15 million of nonrecurring spend related to enhancing our software development efforts in automation of our production capabilities.

We also increased spending related to our DTC programs product sampling and the expansion of our U S sales force.

Even with significant investments throughout 2020 to prepare and <unk> com for future growth and efficiency total operating expense growth for the year total, 26% well below our 31% revenue growth for the year operating income was $104 4 million or 18, 4% of revenue in the fourth quarter of 2020 compared to $103 6 million.

Or 22, 4% of revenue in the same quarter of 2019.

For the year, we delivered more than 500 basis points of operating margin expansion with full year 2020 operating margin of 16, 6% exceeding our most recent guidance.

Adjusted EBITDA was $159 2 million or 28% of revenue for the fourth quarter compared to $141 7 million or 36% of revenue for the fourth quarter of 2019.

Our full year adjusted EBITDA margin of 26, 3% also exceeded our most recent guidance and came in more than 300 basis points better than our original 2020 guidance.

As our margin progress shows the significant steps and we have taken over the past few years are having a great impact in our ability to translate revenue growth and the profitability.

We are confident that the trend will continue over the long term as we move towards the five year targets that we laid out for you in a recent investor day, but simultaneously taking opportunities that arise to invest in the growth ahead of us.

Net income for the fourth quarter was $90 4 million or <unk> 91 per share.

We significantly increased operating cash flow in 2020 and remain in a strong cash position with greater than $2 7 billion of cash and cash equivalents on the balance sheet as we exit the year.

This gives us the flexibility to pursue the strategic investments that we believe will allow us to maintain our leadership position in our field.

These include some of the investments we discussed related to our fourth quarter activities.

The 2000 and 'twenty one guidance as we stated early last month, we anticipate full year revenues of $2 two one to $2 31 billion.

Representing growth of 15% to 20%.

We expect new patient growth to continue to exceed our revenue growth rate again in 2021 with our team extending their efforts to drive U S commercial business into a preferred pharmacy channel. We've also contemplated a potential benefits from our efforts to drive category awareness through our expanded sales force DTC advertising product sampling and integrated systems as well in general considerations.

Actions around the competitive environment.

Turning to margins, we have several considerations in 2021, as we position the business for efficient growth and long term margin expansion in line with what we outlined at our recent Investor day.

For 2021, we anticipate gross margins of approximately 65% in line with our long term expectations.

This anticipates a slight shift from our 67% full year 2020 results, which we expect to be driven by the success of our pharmacy channel initiatives as well as our 2021 investments in infrastructure related to our $2 seven and scale up and O U S manufacturing facility in Malaysia.

We expect operating margins of approximately 13%, reflecting our gross margin outlook as well as various investments we've contemplated in 2021.

As you know <unk> has advanced its profitability profile at a much faster pace than originally anticipated over the past few years, while at the same time building and infrastructure to scale the business profitably with the diabetes market is still underpenetrated and we're going on the offense with these investments we are continuing to invest in the growth of the business via DTC sampling new markets and the launch of new <unk>.

<unk> that we mentioned at our Investor day, including <unk> seven and we.

We are also making a significant investment in our global sales force, including doubling the size of our U S based commercial field team.

We will also casino and work on advanced research and development, which is looking into future generations of products and sensing capability.

We're making these investments to accelerate our ability to bring CGM to those in need and Additionally, we believe these investments will support the long term profitability objectives that we set at Investor day, while at the same time, yielding significant returns for our shareholders.

However, in the near term, we want to be prudent about incurring these upfront cost in our guidance and let the benefits play out.

We expect that adjusted EBITDA margins will be approximately 23% for 2021.

Finally, with the release of the valuation allowance on income taxes in 2020, and 2021, we will start to have a tax rate that is applicable to earnings we expect that rate absent any changes in tax laws to be in the low to mid 20% range.

I will now turn the call over to Steve for a strategic update thanks.

Thanks Glenn.

Kevin mentioned, our team did a great job executing on our strategic priorities throughout 2020, we quickly adapted to changes brought about by Covid and ensured not only at our existing patients could rely on their decks com supplies for the thousands of new patients could benefit from the use of <unk> six.

In fact, we closed the year with greater than 900000 customers globally more.

More than 38% over the end of 2019.

We're excited by this growth knowing the life changing impact that CGM and the software tools that we provide with it can have on our patients.

Just last month, we published three peer review studies in diabetes technology, and therapeutics that showed a greater than one <unk> reduction for customers and new <unk> CGM in as little as three months. This study includes both type one and type two intensive insulin users and the results validated the kind of outcomes, we have seen before.

Sure.

But we took it one step further we also saw a significant quality of life improvement for these patients as measured in terms of anxiety emotional distress and burden of disease management.

Results that affirm our corporate mission to empower our users.

We also demonstrated that the software tools, we are building around our sensors are driving improved outcomes.

Across our base, we see increased time and range for our users of real time share and follow apps, we see increased time and range for users who engage with our clarity software.

And we see increased time and range for users, who take advantage of our integration with Apple's Siri and virtual assistant.

In 2021, we will continue to work aggressively to expand our customer base, so that more and more people can experience. These improved outcomes with dex com as we outlined in our recent Investor day and in a conference presentation last month, we prioritize three pillars of growth in the near term and look forward to progress on all three fronts in 2021.

We also laid the foundation for longer term market expansion.

In our core business, which we define as people with type one diabetes and type two diabetes on intensive insulin therapy, we have several initiatives underway.

In the U S. We are nearing completion of our sales force expansion, which will enhance our footprint across the country, including our reach into primary care offices.

We'll continue our approach to prioritize the pharmacy channel, which is the most efficient channel for our patients clinicians and decks com and we will continue our efforts to drive greater access on the awareness of the benefits that <unk> offers including the DTC campaigns that we've been driving both the U S and international markets.

Outside the U S. We continue to advocate for greater access in several key markets and look forward to broadening our reach in places where we have had little presence to date. This.

This includes our expansion in France building from a positive recent reimbursement decision as well as in the launch of <unk> in Japan with true Moe is our distribution partner for our third pillar expanding the use of CGM in noninterest of type two diabetes, we are extending our efforts with level, two and kicking off commercial pilots with multiple partners on the digital health side.

Our work with other providers continues as well as we make the case for the clinical value of <unk> CGM in the broader type two population.

Recently ever Central point of the nation's largest providers of onsite health clinics announced that their health study and it will make <unk> CGM available to their members with type two diabetes.

This is a nice extension of our previous work with health debt following up on a pilot efforts that utilize CGM and in onsite health screening program.

We remain in increasingly confident in the market opportunity ahead for <unk> com and on this basis today, we announced the formation of <unk> Com ventures.

We have a chance to identify and accelerate the development of amazing technologies technologies that can truly make an impact to global health outcomes via innovation.

I could not be more excited to lead this effort I believe we are well positioned to advance our strategies and build connections that will make <unk> stronger in the years ahead.

Look for much more from us on this front over the next several years and in the meantime, I couldnt be more pleased to pass the torch on our day to day strategy and corporate development efforts to Clinton and his team.

With that I'll turn it back to Kevin.

Thank you Steve.

I think we've all grown tired of the 2000 twenty's from relative saw keeps US one brief we're proud of what we accomplished in 2020 and we're pressing forward with excitement for the year ahead in 2021.

Much of the discussion. This week is centered around our recent Super Bowl and we were incredibly pleased by the public response, which drove 11 times greater search volume compared to the average 2021 Super Bowl commercial the highest of any brand that advertise this year.

This is why we did the AD to drive awareness and ultimately bring CGM to more and more people who stand to benefit from this technology.

There may be more people talking about diabetes. This week in any other time in recent memory.

The conversation and that includes health care providers and insurance providers and people with diabetes themselves and we welcome. These conversations and look forward to advancing these discussions for greater access for all people in diabetes.

I would now like to open up the call for Q&A 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&A instructions.

If anyone has a question you can press Star then one on your Touchtone phone. Once again, if you have a question. Please press Star then one on your touch tone and Paul.

And our first question comes from Robbie Marcus from JP Morgan go ahead Robby.

Great.

Thanks for taking the question so I'm going to use my one Quentin.

The guidance came in in a little lower on the margin side for 2021.

Can you walk us through and whats the Delta on.

On gross margin and those expenses I realize the long term guide is 65, but I think people were thinking a little bit higher and in 2021 here and.

And then it seems like to get to 13% youre going to need a pretty big step up in SG&A.

So maybe just help us walk through SG&A, and R&D and what you're expecting in terms of investment how much DTC will be net 2021 versus 2020 and any other notable expenses debt.

And we should be thinking about.

Sure. Thanks Ravi.

I think the first thing I would mention is we've made incredible progress from a profitability perspective over the last couple of years. If you think back to our original analyst day, we set an expectation to be at a 25% EBITDA margin by the year 2023, and we delivered 26% EBITDA margin in the year 2020.

So we've made incredible progress and I would say progress even accelerated or went beyond what our original expectations were but we've always known there are investments we've got to make in this business to open up some of these incredible market opportunity that sit in front of us and I think more than anything. The fact that we're making these investments ought to be a testament to the fact that we know.

Believe in and we're seeing that these are going to be real opportunities for us. So we're excited about making that investment.

On the gross margin side Theres, a few things to point out this year that makes 2021, a little bit unique.

One we will continue to drive the normal efficiencies and leverage through the gross margin that we have in the last several years and I.

I would expect there's a couple of hundred basis points of efficiencies to continue to take out of it over the course of 'twenty one, but there is two headwinds that we have to navigate through.

One continues to be the move to the pharmacy channel. We expect that we will see a significant move over the course of this year, we've seen that pick up in terms of its momentum in the back part of last year. The other one is we're making significant investment in standing up our first international manufacturing capability in Malaysia.

We broke ground and there we have teams there as we speak starting to build out that capability, which is going to take.

As tens of millions of units of production capacity and turns it into hundreds of millions of units of production capacity for us, which we believe is going to be necessary as we open up these markets in and begin to really see results from them. So that's what's going to play out in the gross margin side that debt results in a couple of hundred basis points of headwind from the 67% back to 65.

On the Opex side I think it's important.

G&A is going to continue to lever nicely for us where the investment is going is purely into sales expense and into R&D and Theres really a few drivers that drive it there is the <unk>.

<unk> of the U S commercial field force that we've talked about that's pretty much done as we sit here today.

And those resources are going to be in place enable to start to contribute over the course of the year, but they obviously bring with it and expense load.

We're also turning up the DTC efforts, we've never been better positioned from an inventory perspective to really turn the dials on DTC and sampling in and giving our commercial team the tools they need to be as effective as possible. So we're excited to be able to do that and then finally I'll just remind you over the course of this year. We've got all the G. Seven expenses that are going on and we've got the trial expenses, we got the final.

And expenses and then we've got the commercial launch behind that as well. So all those things together drive the incremental investment from an opex perspective, but that's all going to show up in R&D and selling expense you will see leverage in G&A. So hope that answers the question for you.

And our.

Our next question comes from Jeff Johnson from Baird Go ahead, Jeff.

Thanks, guys good evening.

Wanted to follow up it's really going back even to the analyst day.

And at the time, you talked about seven to eight points in channel headwinds kind of through $2022 seven to eight points annually.

And I don't think you really talked about whether that would be front end loaded back end loaded how even loaded that might be over the two years. So one how much channel headwind are we thinking this year I think you might have said, 10% last quarter for 2021, I just want to check that and does that then if that's the right number does that imply a falloff in those channel headwinds and going into <unk>.

In two weeks, if you could just help us out there understand gating and thank you.

Yeah, Great question, 10% 10 points of headwinds is the right way to think about it primarily driven by the pharmacy.

Channel mix shift that continues to move towards the direction that is important for us to be able to scale the business over the long term I'd remind your profit dollars are higher in that channel, but yes. There is some gross margin pressure that comes with it but from a topline perspective, that's what's driving it is that pharmacy channel call. It roughly 10 points I do think youll.

See that evolve a little bit over the course of the year keep in mind in.

In the first part of last year, we went into the pharmacy channel to the same degree that we were as we exited the year. So you've got a tougher comp in Q1, and Q2 and you see that in the growth rates as well youre going to see tougher growth comps in the first half of 'twenty, one that will start to subside in the back half of the year. So I do think that youll see that evolve a bit as we start to anniversary some of the pharmacy shift that we saw.

In the back part of 'twenty into the back part of 'twenty, one as we head into 'twenty. Two look we'll talk about that as we get out there around that timeframe, but I do think theres a couple of years here stepping through it once we're through it I think youre going to see the unit volume growth of this business is going to be much more reflective of the overall dollar growth unit volume growth continues to be incredibly strong we were up 40%.

Sent in units in the fourth quarter by the time everything settled out and our unit volume growth in.

'twenty, one is right around that 25% to 30% growth. So very strong unit growth continues to drive the business.

And our next question comes from Margaret XR from Blair William Blair Go ahead Margaret.

Hey, good afternoon, guys. Thanks for taking the question.

So I'd like to shift maybe a little bit into the non intensively managed type two patients and in consumer health wellness and patients.

And I guess upfront and you guys have any sense of utilization and annual revenue per patient amongst these groups and I guess as you look at the different types of products or devices that these patients yes.

Yes, it might need is it different than what you've got right now and is that one of the goals I guess from the new venture fund or are there some internal efforts around that as well. Thanks.

Margaret This is Kevin I'll take that the annual revenue profile per patient and we think is going to vary based on condition and use case.

We believe internally or at least while we discuss internally as for type two non intensive patient for example, even have a full time use the revenue per year per patient is going to be a lower number because we're solving a different problem.

We're not managing the lives and the health and safety of these patients, but we are making them healthier and we are giving a better experience and they have and ultimately we will take costs from the system.

As far as what that number is going to be I don't have a number and completely we have numerous models and many of those depend upon the final use cases.

Also said numerous times and I'll stick to this as well I think the ultimate use case and the way we ultimately prices it'll be from full time use for these patients and if they choose to use it left less often and that'll be their choice on the health and wellness side again, many many more patients.

Lower annual revenue number, but more interactions with more different people and it completely.

Different distribution channel with respect to the products certainly the core technology a sense in glucose.

From our perspective Luka side will remain the same.

As those of you who listened to our Investor day heard when I had my chat with Dr. Peter It's here, we talked about accuracy and he said, it's actually more important for his patients because of Vale in the Gulf between 70 and 120.

20, <unk> is a big deal and.

And they would be making a wrong decision.

As far as their health and what they eat nutrition wise et cetera, with and accuracy. So we know that fundamental core technology needs to remain accurate.

Where we get into different products is the experience that we create and possibly even different wearables based on the category different places to receive the data and then as you look at the New ventures unit.

Steve will be working and then you look at software.

Software experiences for patients data platforms to get data to these.

These platforms better, possibly other things, we could sensor measure and add to glucose. So we believe these markets are going to require something different at the end of the day.

One size fits all it's not going to work for us as we try and expand and hit the goals we've laid out for everybody in the future we're going to have numerous experiences for.

And for these patient groups.

And our next question comes from Matthew Matthew O'brien from Piper Sandler go ahead Matthew.

Thanks for taking the question. So I guess just to follow up a little bit more quick and on the on the operating margin side of things.

I know you are running ahead of expectations.

On the operating margin side of things and I think everybody is looking at at the.

The guidance here and saying, Okay, you're making all these investments in a lot of different things in sales force and DTC first of all how do you measure whats.

Most effective between the two and then.

How does it not just from making these investments basically just to kind of run at the same pace that you've already laid out versus we're making these investments because we think and even.

Potentially a little bit better.

Yes, I think we're incredibly excited and bullish on the future opportunities, but at the same time. Our approach has always been we want to see those start to pan out and contribute and at that point and we'll start to reflect them into guidance. So as we open up some of these new markets and validate that we are able to generate the revenue from them and then hopefully we've got some very positive updates for.

You guys overtime I don't think we could be more excited around where we're making these investments we know for a fact that type two intensive space for exact four for example is going to come onto CGM therapy, we're seeing it happen in our results right now we're starting to see some of it with the non intensive it's a matter of fact, if you look at our new patient figures.

It's led by type two patients.

Patients. So we're starting to see some of that be validated but in order to reach those patients. For example in the sales force side, we've got to be in the primary care physician offices, and that's where those patients are seen and Thats, where our current commercial force does not really play and so as we've added those resources that is going to be their primary focus their primary target.

Similarly on the DTC side.

I'll continue to reiterate theres not a better investment that we make inside the four walls of <unk> com today that our DTC efforts and the returns that we see with the new patients that come out of it we're very confident that that that's the best investment we can possibly make now will that return on investment per individual per patient start to step down into the future. It may is there.

It gets harder to bring on.

Basically for the time being we have been very encouraged by that return that we've seen and will continue to pour resources in there until we see that change so I.

And I don't think Theres, a better place for us to be focusing our efforts right now and then to really build out the commercial force to see the right individuals where the patients are at and to continue to create awareness for these patients as well.

And our next question comes from Matt Taylor from UBS go ahead, Matt.

And thank you for taking the question so.

My question is about the international investments really stepping up with the.

And our support center.

And the new investments in Malaysia.

Can you talk about.

And the arc of that opportunity if you could frame anything in free.

Japan, and what that means for kind of in future expansion and international that would be really helpful.

Thanks for the question we've laid out international is one of our three primary pillars, and our Investor Conference and as you look at the progress we've made.

Recently, we prepared a speech for the sales guys were up 10 times, where we were five years ago.

From 40 plus million to over $400 million for 2020 and by every indicator one would say wow that is fabulous and in our minds as we look at it the opportunity is bigger than what we've addressed and we do need to build infrastructure and we also need to look at doing things more creatively I think for example, the Japan partnership with true whereby we're.

Really letting our partner take our business in that country that is.

And medical technology leader in that geography is going to be a great business model for us to watch in and look at it in France.

We get reimbursement for group of patients we will invest in there, but we have other international models, we're looking at we literally breakdown.

Every country in the type of bucket theres, great reimbursement here and here's how we need to attack. This one there is no reimbursement here and were making plans across all the geographies and other key investment internationally is going to be our ecommerce platform. We've had great results every place we've launched it so in geographies, where we're not where we go we'll probably.

Go first with an E commerce platform at all going forward.

And so we're investing on all fronts, there the Malaysia factory is truly and investment in scale for us and it will.

It's going to be ultra modern as is our Arizona manufacturing facility don't get me wrong, but we've learned a tremendous amount in building in Arizona that we can apply and in Malaysia, and really put ourselves in in a position.

To whereby we can go after these businesses one of the things that we are.

Often discuss as we sit and discuss that would've showed in <unk>.

And for better part of a year and a half as far as capacity, we are selling everything we built.

With the opportunity now with the inventory we have in our ops team being able to build as much as they can we think we can much more aggressively go. After these international markets just on a commercial strategy basis as well in and we're going to have going forward.

And our next question comes from Jayson Bedford from Raymond James Go ahead, Jason.

Thanks, and good afternoon.

You mentioned I think Kevin mentioned the goal is to launch two seven in the second half of this year.

Historically, you've referred to launching <unk> and in some markets in 'twenty, one and other markets in 'twenty. Two you didn't say that this time, maybe it was implied but is the expectation that the G. Seven lots in the second half.

Worldwide launch and just wondering what's changed around <unk> seven launch plans.

Really Jason and nothing has changed.

We are operating on schedule.

And as I've said, we completed in our first pivotal study and that will provide us enough data to file for a CE Mark we do not have enough data to file in the U S for IC ATM.

Approval and we're working on that with the studies, we have ongoing and it will continue to go on for a while much of this is a function of regulatory timeframe studies.

And whether you can see in the clinics, yes, or no. There is still some uncertainty around just.

Pulling off the execution necessary to get the submission prepared.

The abilities of the entities to review it and so we're marching to our schedule at the end of the day.

We've never been more bullish on the product.

And with investigators and patients who were our first studies in there and look they're done with G. Six now.

They do not want to wear in anymore, and we've told them they have to go back in there.

Is everything that we hoped it would be anything that <unk> seven will do better.

And for now it's just a question in the timing commercial availability in manufacturing and we're pretty tight lipped on these milestones as well.

Just not going to lay out the yellow brick road for everybody to know N cen and prepare for and we kind of like surprised a few people.

And our next question comes from David Lewis, David Lewis from Morgan Stanley Go ahead, David.

Good afternoon, and thanks for taking the question I just put in a quick one from me and you obviously talked about the 10 points of headwinds here and in 'twenty, one, which obviously implies 25% to 30% volume growth.

One of your competitors here on the competitive basically is talking about 40% growth here in 'twenty, one and I'm just trying to think about given the size of their business, which is a little larger from a volume perspective, and I think about the major investments youre, making in DTC. The major commercial investments how should investors react to sort of your 25% to 30 volume number relative to your larger competitor, saying that can grow from.

40%.

And so much.

Yeah, David and thanks for the question look I think my takeaway is I think we all see the market opportunity exactly the same way there is incredible runway sitting in front of US there is a lot of adoption and yet to be had in the intensive segments in the market in the non intensive is going to open up as well our approach to guidance is probably a little bit different and unique which is we're very bullish on <unk>.

Some of these new market opportunities and and contributions that can come from them, but we're not going to get ahead of ourselves with respect to those expectations as they play out over time, if that happens in 'twenty, one and fantastic it's going to be a terrific result, if it comes a bit later in 'twenty two it's still going to be a great result at the end of the day, we're very confident in what this ultimately has the potential look at look.

And we're going to make the investments to ensure it's a reality for us but at the same time, we're not going to get ahead of ourselves. So I think more than anything you've got two players in this space who are incredibly bullish on the opportunity wishes validates there is a lot of runway here and a lot of opportunity for all of us to have success together.

And our next question comes from Murray Tebow from BTG go head Marie.

Hi, Thank you for taking the questions. This evening my question has to do with the doubling of the sales force.

Certainly and impressive so I'm curious about what it means for the.

And the legacy sales force and in terms of the.

And the culture.

And so many new folks coming on and are those new folks concentrated in any specific geographies I know reimbursement is so important to targeting and the type two patient market. Thank you.

Yes. Thank you that's a great question and we have worked very hard to preserve that legacy and that culture and hire the same quality of individuals' I'm actually preparing for our virtual national sales meeting coming up.

Here in a couple of weeks in 2010, we had 26 territories.

And we're going to 260.

And of those 26 territories you'd be amazed at how many of those people are still here. So they are still a big influence on our company and our culture and training and teaching the new people to come in.

What's important in <unk> com and what are our values at the same time as the business is expanding rapidly our culture has to change from time to time, we've made moves over the years.

For example, if I go back we did away with having trainers and in every territory. In addition to our rep, which was different and everybody else in the industry, but we made that move in and proved very successful.

As we go to the pharmacy channel more and as we get access easier.

The job of our reps continues to evolve and change and it's our job to provide them with tools to whereby these jobs are meaningful and rewarding and they want to stay and they want to be with us and we're working very hard on that.

And this expansion and we're being very thoughtful about it we had many thousand candidates for these jobs.

And really feel we picked some fantastic people not only for the the field positions, but for some of the leadership positions that were opened up as well, we look forward to meeting with a group and being with them and we have high expectations.

And our next question comes from Danielle and Tel fees from SBB.

Yes, hi, good afternoon, everyone. Thanks, so much for taking the question.

And then I just wanted to.

We are something that it sounds like after the Super Bowl AD, which by the way I thought it was a great add I also do love Nick Jonas but.

And.

Total week.

Yes.

There was some controversy and sounds like or I don't know if you'd call it controversy, but just.

And chatter it sounds like around how we can even afford infill and how can we afford this technology and we spend a lot of time with you guys at the analyst day talking about how affordable actually the technology is there just a misunderstanding out there in the market.

<unk>.

Seeing this technology or where's the disconnect there.

Well I don't even know if that's a disconnect Daniela and and we talked about this a lot before we decided to run the AD and.

And we decided that running the AD.

And then get to this will be in my closing remarks, but running the AD, creating more awareness getting more people on the technology and more demand would actually lead to more accessibility ultimately lower costs for patients and get more product to them, but if you look at the life of our patients buying insulin and buying CGM, if they have a lot of them in.

Insulin delivery system.

And these people spend a lot of money and it's a large percent other income and it's hard it's just hard we empathize with those with those people we've done our best.

And with our pharmacy share for example.

And we gave some of these statistics at Investor Day, I think somewhere about 30% of our pharmacy patients have zero co pay.

And another group of them have less and $60.

A month on the copay side. So we've done what we can to bring cost down on our side and we have not only done it in bringing costs down, but we've done it while improving our margins. So we've we've really done the best we can here. We do think it is important technology community and.

And listen to them, but we also have to run a business in and ultimately we felt by making more people aware.

We'd have a much more positive effect in negative.

And our next question comes from Larry <unk> from Wells Fargo Go ahead Larry.

Good afternoon, and thanks for taking the question Kevin can you talk a little bit about debenture fund specifically the amount of funding how broad the focus will be it sounds like it's going to be broader than diabetes and.

And could we see and impact thanks for taking the question.

I'm going to hold Steve to the standard of when he made the investment in tandem many years ago.

And our return with respect with several times now and I'm just kidding.

We will focus on diabetes technologies.

Because that's what we do.

And there are things in this diabetes or in this healthcare world that can utilize our technology that we don't have time to develop that we need to look at and be friendly with and we have capital that we can invest we will also look at and other things that could fit into our business and our technology I don't see us going and acquiring share interest in 50 different company.

These that are all over the place, but I do see us with a very focused approach as far as the level of funding as I've chatted with our board, we're going to leave that open right now for the opportunities that we see and if our foot in the water and get going but we think we have some really good opportunities to give us platforms to expand our business over time and help some of these <unk>.

Company's growth, Steve and I think.

No. The only thing I would comment on is that we're very much approach and missed this corporate venture capital or would tell you kind of a strategic venture capital. So certainly well returns are important and I'll, let Kevin is holding me too ridiculous tendered out in Vegas.

And our returns aside look youre going to see us investing in opportunities that are not only.

Seeking out financial returns, but could have some sort of a technology development piece or and in licensing of technology piece of potentially commercial aspect to it. So that all makes sense many of them and you guys won't actually have visibility into unless and until we disclosed them but.

It's an exciting next step for me.

And our next question comes from Joanne Wuensch from.

Citibank.

Good afternoon, everybody and thank you for taking the question.

One which is can you comment if there are any changes on our net.

Observations on the competitive landscape and in any particular region that that may have shifted slightly more positively or slightly more negatively.

Joanne I would just say and is the competitive landscape and.

And we'll remain competitive.

We're both bulk as Abbott and quite frankly, Medtronic every all companies are aggressive here, we'll continue to push we we've done very well in.

All of our markets, we see opportunities to do better we see opportunities for improvement across the board.

We will continue to do that.

R R.

Our Super Bowl AD really achieved the result that we were looking for as far as creating awareness and you heard 11 times more searches in the average ads, we have an opportunity to drive some awareness in and we will do that but it is a very competitive landscape and it is not.

It's not going to change and we're up for it.

We have no problem with that it makes everybody better.

And our next question comes from Matthew Blackman from Stifel Go ahead Matthew.

Good afternoon, everybody. Thanks for taking the question I wanted to touch on the sales force expansion and just remind us.

And how quickly those new reps could start to contribute.

Tribute to that revenue and also remind us how is the sales force is going to be structured and <unk>.

And to call on all clinicians or somehow the bifurcated between <unk> and and then dose and specialists.

The way we structure the teams and in the field is very much based upon the number of people with diabetes and intensive insulin users that they see and that information is readily available through the <unk> data as far as the insulin prescriptions in the various territories and we use that those geographies and that data is to determine how we structure the territory.

And where we.

And we put our people that people in their territories will be responsible for.

All of the medical professionals.

Within that group and they will continue to do that.

Trying to think is that there is in other parts of those questions and we structure yes.

We structured similar to how we've done in the past we have regions in <unk> and <unk>.

Districts within the sales organization, we've increased the number of districts the number of regions from two to four.

And in a similar structure that way and then we worked out a comp plan that we think is very fair for everybody in and.

And our guys are willing to live with I think the most interesting piece for me.

And laying out the whole sales force expansion was how it was received by our team in the beginning Youre always leery of that when you start.

Instead, the team raised their hands and said we need more help.

And more exposure here, that's a good thing.

People, we don't call on so.

And we look forward to it and as far as time. It takes everybody time to get acclimated to the new position and new territory for those who have diabetes relationships and for example, if you hire somebody from an insulin and company.

And so on pump company. They can go back to office as they've already been too and they're up and running quite quickly for others. It takes more time and that's why we have our district managers and our regional managers to help in those relationships and.

And train those people. So there is there is a time and it varies based on the experience level of the rep before they start with us.

And we hit the ground running and go faster than the one before.

Others. It takes a little time, and we monitor that and we watch and give those more training they need it so.

Will be fun to watch unfold.

And our next question comes from Ravi Misra.

Alright. Thank you for taking the question. So just wanted to go back to the gross margin in the kind of Capex investments and scale up that youre looking to make.

Im trying to figure out Quentin.

And then Kevin in your building all this capacity, presumably for the next im guessing decade or so.

How do we think about that plan or the plants coming online in terms of what level of volume do you think you need to be when and when it comes to the kind of sales numbers that you've put out there for the long term debt.

And a really truly get those plans to lever the fixed cost investments they've made I guess, what I'm trying to ask is.

Net sales ramp faster than we've kind of modeled here is there upside to your gross margin and Conversely.

If it is kind of in line with the long term guidance.

<unk>.

What gets that 65 hires that contemplate these these capex investment in gold.

Back to you.

Yes, well I would rather it's a great question I'd remind you know the $4 to $4 $5 billion revenue figure, we put out there and out in.

2025, or so was more or less our base case, that's how we qualify debt to you folks and it started to open up a bit of the type two non intensive.

<unk>, but there is a massive market that sits in front of us in <unk>.

As we open that up in bigger ways as you start to open up things like hospital or gestation ohler or get further upstream into the diabetes.

Condition and get into pre diabetes, those volume numbers are incredible and so I mentioned earlier, we're talking about going from tens of millions of units to hundreds of millions of units of capability over time, and we're beginning to make those investments as we speak.

In terms of the Capex investment I think youre going to see roughly double this year, what we've seen in the last couple of years, we've seen about $200 million in capex in the last two years each year I think that is going to be north of $400 million, probably as we stand up is building and build out the capability that will then service for years to come into the future how.

Quickly.

We're ramping that is really going to be predicated on how quickly. We open up some of these markets, what we're not going to do and we've been very clear about this after having learned from the experience ourselves and we launched <unk> six we're not going to put ourselves in a position again to where we don't have the inventory to deliver to the patient and create a <unk> experience that is one that we want them to have and so.

We are investing ahead of that curve, but we're very confident that the curve is ultimately going to be realized I think the question is just nailing down that timing and know exactly what that's going to look like from our perspective, we're going to be ready when it's ready to go we're not going to be behind it. So.

Thanks, Kevin Let me add just a bit as I look at volumes and why hundreds of millions rather than tens as we look at the use of CGM for example, as a diagnostic for somebody who may have pre diabetes, but.

May not be share as part of their annual checkup.

There is hundreds of millions of people in the U S, who would need that checkup every year.

As you look at 30 million people with type two diabetes in the U S. I don't know my $30 million right, but it's close.

10% of those people in on sensors full time Youre looking at 60 to 90 million sensors, we'd be selling.

On an annual basis these opportunities are going to require scale and.

We've just made the decision going at this in a manner to whereby we do it gradually and hope we have enough when we get there. It's just not going to work and the opportunities are too big and the investment.

As required and that's why we've raised the money. That's why we've made the plan and that's why we've designed the product in.

So the relationships that we have we need to go after this in.

When you look at the size of the investment versus the size of the prize.

And these are the price is way bigger than the size in the investment.

And our next question comes from Steven Lichtman from Oppenheimer Go ahead Steven.

Thank you hi, guys.

And the increased focus on the primary care office here in near term with your sales force expansion and I assume means targeting non intensive type twos sooner rather than later.

First how should we think about the ramp in this patient population before reimbursement models are established broadly for these patients in and second do you have the back office.

Capability, yet I know Youre building out some more here to handle those patients over the next few years.

Yes, and this is Kevin I'll take that one too their focus will initially be.

On insulin and insulin using patients who have reimbursement for the technology and non insulin users will in fact tag along as they become aware and there are situations, where some of these patients who have coverage on the type two non intensive patient we've been very clear from the beginning that that we're going to go about that this market four different ways through <unk>.

Graham's payers clinicians and indirectly to patients and over the course of 2021, you will see those four initiatives unfold as we gather more data and launch more initiatives and so awareness will grow.

And as Quint said earlier.

And Steve.

A very reasonable number of our leads from the Super Bowl ads have been type two non intensive patients.

And whether we can serve them or not with reimbursement today remains to be seen but we certainly have a database of these names and people. We can call on as soon as we have the product offering we want to get in that space ready.

So I think we're preparing and getting ready for that more importantly, though as we make these conditions and where they can look for cases, where they can make it available to their patients who can look in situations where.

Somebody can appeal for coverage if there have type two diabetes in and out of control and in those appeals are in successful. So we're looking forward to going there and but these guys will focus on our core markets and where we play with reimbursement and first and foremost.

And our next question comes from Kyle Rose from Canaccord.

Great. Thank you for taking the question.

So I just wanted to ask a little bit more about just the investments in the SG&A side in in 'twenty 'twenty. One I think the sales force investments are well understood, but maybe just help us understand and specifically on DTC and sampling and how does that change.

The cost and the timeline.

Customer acquisition and then also maybe.

And the capture rate and the retention can you just give us some metrics to understand how to evaluate those investments in 2021.

Yes, well I think when you look at the overall investment in the areas you identified the most significant increases likely going to show up in doubling the size of that commercial field force and then right behind it is DTC and sampling sampling is a bit new to us we've never sampled historically, we just started to roll that out in the fourth quarter and.

And very early and seeing what that looks like but that's a pretty easy one for us to measure we're not going to give you. The specific results of what that looks like although the fact that we're going to continue to double down on it should tell you that we're incredibly happy with what we're seeing but that's as easy as knowing exactly where were drop in the samples in the field and knowing exactly what patients are utilizing those samples in.

Ultimately turn into recurring purchase for us. So those are easy measures and on the DTC side with social media and the leads that get created from that that ultimately turned into patients that becomes relatively easy to measure as well one of the things that I think was just really fascinating coming out of the Super Bowl AD is that.

We had five times more impressions in the last four days and we had it for the entire year of 2020 on the heels of debt I think it's just remarkable the type of reach that we're finding with our DTC efforts. So we're going to continue to monitor those things and measure those and hold ourselves accountable to them and as long as the return is there we're going to continue to invest aggressively there.

And if we see the returns start to dropdown and then we'll start to think differently, but we're not going to give specific return measures those sorts of things, but the fact that we're we're doubling down and these efforts I think got it.

Convey the confidence we have in these investments and what they are bringing to us.

Our next question comes from Bob Hopkins from Bank of America Go ahead Bob.

No. Thank you very much and I appreciate the opportunity and ask your question. It's getting late so quint and I will just ask a quick one of you and you may have just answered. This in response in the last question, but you said several times in this call how strong and inventory of your position you're in right now in and I'm. Just curious if you could talk a little bit specifically about what youre able to do in 2021 that you were.

Able to do in 2020 as a result of that very strong inventory position. Thank you.

Well look Bob I think it's a good question, but historically I think we've seen opportunity to sit in front of us in.

We knew they were available to us, but we couldnt aggressively pursuing because we knew we couldnt get patients to the right.

Product to the patient once day, they became aware of of the opportunity. So.

And you didn't want to do is create all this awareness and then be in a back order situation immediately and if you go back to 2019, we operated through most all of 19 in a back order situation and we came out of that early in 'twenty, which has now allowed us to build inventories and put ourselves in a position where we can start to get more aggressive with these things so.

I think it enables a whole lot of opportunities for us to get a whole lot more strategic and where we could historically just because those opportunities werent real we couldnt serve the patient at that point in time now we can.

And our next question comes from Chris Pasquale from Guggenheim Go ahead, Chris.

Thanks, I wanted to follow up on the question about non intensive type twos back at the analyst meeting you said, a pretty ambitious goal for that segment to contribute 15% of sales by 2025 can you tell us what that was in 2020, just as a baseline and what the gating.

Factors might be for starting to provide more visibility into how youre tracking towards that goal. Thanks.

Yes.

You really can't lay that out for 2020, I think the way you will get more visibility from US is our programmatic approaches take off you'll we'll be able to speak about revenues.

From the program's Additionally, as you look out to 2023, and it's my belief and intention.

$324 25, this will be a product that is distributed through our typical.

Distribution channels and there'll be visibility that way when we have meaningful revenues in the report.

And we'll certainly let you know.

That's going on but we don't.

Right now these are more investments and they are.

Our revenue opportunities, we need to gather data we need to show.

This works, we need to create relationships like we have in there.

And our Mt. In health care for example, where they are running a study right now to look in CGM in these patients in a couple of different ways.

Graham we talked about that we ran down in Florida internally.

That's now part of one of our programs warehouse stats offerings CGM to their type two patients up to this point, even though theres been volumes created here a lot of this stuff is just and really to invest and to learn.

Similar to what we did in our hospital business this year as well.

And it can take a while for these markets develop and eventually will.

And we'll break it out in a report for now.

We're just not ready to.

And our next question comes from Raj <unk> from Jefferies Go ahead, Brian.

Great.

Anthony for Raj and my question would be on gross margin and I'm wondering in the.

The 65% guide for 'twenty, one how much trapped overhead actually is in there from the Malaysia plant as that gets up and running.

But as you look out in that plant gets up to scale I'm wondering where the cost per sensor will trend for units coming out of that facility again once it gets up to scale.

Yes, good question.

In 2021, there is about 200 basis points of pressure that we're going to realize from the investments in standing up that Malaysia operating.

Capability, So I think that quantified for you very clearly what it will be as we look out into the future. We've said, we believe we can get the cost profile to less than $10 per day, and a 10 day.

And use case, so think about that is less than one dollar per day, Malaysia will certainly be below that offset by where we're at in the state. So it's.

It certainly is a very attractive profile for us and as we continue to think about ways to innovate there with automation and we're hopeful to take it even further but that's a big enabler of ultimately getting our cost profile down to those range as we've discussed both here today and in the past.

And we have no more questions at this time I would like to turn the call back to Kevin Sayer for final comments.

Thank you I did a bit of math, while we were doing this call. This is my 40th call with Steve.

And as he moves into a new role I just need to acknowledge what a wonderful job. He has done with our investors over the years I think back in our comps in the earlier or we'd sit around and go okay. What is it we're going to say today and.

And what is it we have to report this company has changed so much over those 40 calls.

Marvelous effort and some incredible work and he'll still be here, but he is going to have some different investors. Please and.

And we're excited about debt.

I do want to thank everybody for being on the call today as you can tell and we remain extremely bullish about our opportunities going forward one of our executives was having a conversation with me here one day and he said the way. He described <unk> Com is just as soon as we climb one mountain and we get to the top of it and on the other side there is a bigger one and.

And we started in other climb and I think as Quentin detailed our financial plans and what we have going on what we see as a great Big Mountain and a great big climb and we're preparing to do that we think we can do it very effectively.

We are very bullish about the future you know over the past several days a lot of the talk has been around the Super Bowl commercial here and I haven't gotten numerous pictures videos emails text messages from our patients and their parents or their caregivers, saying. Thank you for creating awareness kids in school or telling everybody remember that commercial eyewear that.

And I have that and this is how I manage my diabetes, we've seen such a positive reception to this and the positive energy has just been amazing so kudos to our marketing team to Nick Jonas and everybody for getting this done.

Our hospital initiatives and the new initiatives, we've talked about as I said their investments.

Now, we're getting numerous physicians, reaching out saying you got to get this everywhere it needs to be all throughout the hospital and needs to be borne by the patients when they go home.

And we can't have them coming back and monitoring glucose and can be very important and will continue to go after those efforts. Our new market efforts are are very strong and last and I'll go to the intensive type twos as well as I said, we created some awareness here I recently had a conversation I've had several conference sessions with people with type two diabetes.

Absolutely struggling with what to do.

What can I, possibly do to take care and myself because they just don't know.

And CGM telephone.

And it tells them what to do it tells them about foods. It tells them in diet exercise and tells them about stress and sleep and everything else.

And we are really excited for this opportunity you will see us have a lot of good things come to pass in 2021 on all these fronts, but thanks, everybody for continuing to listen and Great day, great year for <unk> com and our team. Thanks everybody.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

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