DexCom, Inc. (DXCM) Earnings Call Transcript & Summary

Welcome to the Morgan Stanley Healthcare conference 2020 here as we progress through the morning. My name is David Lewis, medical device analyst at Morgan Stanley. It's my pleasure to have with us here this morning, as we continue through the morning, DexCom and multiple members of management. We have a full house here. We have Quentin Blackford, the CFO and COO; Jereme Sylvain, SVP of Finance and Chief Accounting Officer; and Steve Pacelli, who just recently jumped in here last minute and is also going to help us out this morning. So with that, I want to jump straight into questions. We're not going to do our traditional preamble here.

Quentin, I wanted to start off very top line and we'll kind of jump into your core recovery in a bit. But look, we saw in the second quarter a 25% increase in sequential volumes in the business, despite kind of COVID-19. And I think we all know that TAM expanding drivers and broader CGM right now. I just wonder, if I had to say the 1 or 2 biggest drivers in the business right now that you saw last year or into this year, what would you say those are?

Yes, David, I think it continues to be down the path of what we've been speaking to over the last year or so, which is really the fact that patient awareness continues to grow, whether it's through our own efforts to continue to grow awareness through direct-to-consumer campaigns or we've got competitors who are out there doing the same thing. There's such a large market here that's so early yet in its saturation of the technology that the awareness continues to grow, and I think fuels the growth more than anything else that we're seeing. I think the other thing that is certainly contributing to it as well, although I still think we're in the early stages, is just this whole move towards the pharmacy. We continue to negotiate with our payers for increased access into the pharmacy channel. We believe over a period of time, that is going to be the primary way that this product is distributed into the marketplace. We're nowhere close to that being the case today. DME still represents a big part of our overall business. But certainly, the ease of access of that pharmacy channel is something that's going to continue to, I believe, fuel growth in this particular segment for quite a while yet. So I think those 2 things combined are what you're seeing drive the majority of the growth in this particular segment of the market right now. I would note, I think you look at Q2's performance, we stepped up roughly 25% from Q1. In many ways, you go back and you look at the historic seasonality, it's pretty comparable to what we've seen in the business. But to your point, you hit on something that I think when you start to accommodate it or think through and adjust for it is that COVID impact. Historically, you haven't seen that in Q2. So to be able to keep the same sequential increase into Q2 despite navigating through some of that COVID headwind, it just speaks to the strength and the underlying momentum in this overall marketplace.

And you brought up the pharmacy equipment. I know it's not a perfectly extractable number. But if I look at some of your pharmacy trends now versus sort of January, February, obviously, they're frankly a little better. Can we use that as a proxy for the overall recovery in the business?

Yes. I don't think that, that's necessarily the right way to look at the overall recovery of the business because you've got a global business clearly here with DexCom. But in our U.S. business, certainly, the trends we see in that pharmacy channel as we're trying to move some of the DME business over into pharmacy, it probably masks the overall performance in the overall market. So it's not the right way to look at it apples-to-apples, but it's an indicator for sure.

Okay. And the U.S. was very strong in the second quarter. And we saw this -- funny, I feel like it’s deja vu, a year ago at our conference, everyone was breaking out or worried about international business. I don't think there's that level of alarm, obviously, given the momentum in the business around international. But that was the one trend line in the second quarter, it didn't make complete sense. With the benefit of hindsight, what do you think transpired in the second quarter internationally from a growth perspective? And anything structurally there that you would call out?

Yes. I don't think there's anything structural in the business as we've dug into it and understand it as well as we possibly can. I think there's a few things to point out. One, I think the overall market certainly took a step back in that international business in Q2. I think you look across the competitive marketplace, for the most part, I think everybody was down, maybe one player was sequentially flat. I think based upon our analysis, I think even Abbott, if you kind of work through the noise of the BGM contribution in their revenue stream, I think their CGM business was probably taking a step back as well. So I think the overall market was down a bit in Q2 just as a result of COVID, where clearly COVID had a bigger impact in that market space. So I think you saw our performance come in line with the vast majority of what the market saw as well. I don't think we were an outlier there. I'd point the 2 specific things, though, that are more specific to DexCom. Q1, in particular, was a record quarter for us, far and away was our strongest international quarter we had seen, and it was fueled by this new patient momentum that we had seen in the business. There was underlying momentum being built there. And keep in mind, there's a big part of that international business for us that is still -- is presented through the distributor channel, right? It's not a direct business for us. So when these distributors see new patient volumes starting to grow and the momentum beginning to grow, they're trying to manage inventory levels to accommodate that. And when you take something like COVID, where it puts the brakes on everything very quickly in the second quarter, they've got to react to that. And so we did see a bit of impact in our distributor business in the second quarter. I would expect you'll see that come back. We saw orders come back early in Q3. I think the question is what happens with those orders that typically come late in Q3, do they stay or they fall into Q4? It's hard to predict how quickly all of that necessarily comes back. But I think that momentum will return itself once we navigate through the COVID headwinds. The other thing that is a bit more specific to DexCom is the fact that we've been very clear, we're going to step price down over time, both in the U.S. business as well as our international business. And we're doing that with the idea that we're opening up greater access, greater reimbursement. But for that model to work, as price comes down, that's a near-term hit that you take as soon as you flip that switch. If the new patient volumes aren't coming along with it, which, in this case, COVID kind of precluded that from being able to happen, you're going to feel the impact. And I think that's exactly what you saw play out in the second quarter for us was -- and probably a bit more specific to us was just the fact that those new patient volumes, while they slowed, it was a key pillar to part of the strategy. I still think it's the right long-term strategy, no question, but you have a temporal impact in the quarter that you couldn't offset the price headwind without those new patients. So I think those things explain kind of what happened in Q2. We're still very, very bullish on that international business. There's so much opportunity when you think about just where we're at from a saturation perspective of our technology in the marketplace, there's a lot of runway in front of us. And like I said, we're excited about it. And you're going to continue to see us invest in those areas in a significant way in that international business.

We're going to come back to this dynamic of reducing price to drive the TAM here several times I think in this presentation. That $150 million-ish or so when you identified this year in terms of pricing headwind, I'm just kind of curious, how much of that do you think is coming from international? Is it $25 million of that was probably international pricing as you think about the year?

Yes, I think you're thinking about it in the right direction. We haven't put out those specific numbers just in terms of what's OUS versus U.S., but I don't think you're far off in terms of how you're thinking about it. As I just pointed out, as we explained in the Q2 results, clearly, navigating price in that international market and some of these key markets for us is part of the pricing headwinds. But overall, I think that $150 million that we've put out there, we still feel very good about it. It seems to be tracking right in line with kind of what we anticipated coming into the year. So I think we've got that dialed in well, which I think also speaks to just this overall strategy to step price down over time. I think we've got that controlled well. We know how we're going to the payers to negotiate for increased access, for increased ability to navigate into the pharmacy channel in lieu of some of the price concession we're giving. So the fact that we see those things kind of coming together the way that we anticipated coming into the year, it just reinforces our confidence that we're managing this well. The strategy is playing out as we anticipated it would. And there haven't been much surprises there outside of COVID.

Okay. Very helpful. And you haven't been precise around sort of the impact of new patient starts here globally or in the U.S. I think you initially said early in COVID, people like me, and unfortunately, we're saying 40%, 50% hits to new patient starts. That was probably too heavy. But look, if I looked at your business this year, it looks like the guidance implies kind of 20%, 25% hit to new patient starts for the year. But then again, I feel like your new patient starts are kind of recovering to normal by the end of the second quarter. So it seems to me that expectation for 20% to 25% hit to new patient starts is too heavy for 2020, which would imply kind of $30 million, $40 million of upside to numbers. How are you feeling about new patient start recovery? And do you think you're doing a little better, frankly, than your guidance implies relates to new patient starts?

Yes. I don't want to get into resetting expectations around the quarter or the full year. But I will maybe just explain a little bit about how we came into the quarter and set those expectations around guidance. Clearly, as we exited Q1, we felt the impact of COVID. To your point, I don't think we saw the 40% to 50% hit that you guys might have anticipated, it was close to that 20%, 25% range. And that was the one data point -- to your point, as we exited Q2, we did see a recovery, but that was the one data point that we had in our arsenal to be able to look at guidance and say, okay, based upon experiences, we see COVID starting to ramp a bit here early in Q3, which is what we were seeing across the states, in particular. We have a data point that we understand how the business reacted or responded in this scenario, and that's the best data point we have. That's what we're going to use to drive guidance in the back half of the year. To the degree that we can manage through that more effectively or that COVID doesn't continue to kind of be prevalent at those rates. There's going to be the opportunity to outperform in the back half of the year. I'm not -- like I said, I'm not going to get into the quarter or where we're at relative to that. I think, overall, we've been pleased with the way we've navigated through it. But it clearly had an impact early in the quarter, there's no question about it. But I think we're getting better and learning how to navigate that.

Okay. I think, we're very clear. A big catalyst for next year, obviously, is G7. Where are you in terms of initiating that trial and getting back on track? So has the trial been initiated? When do you think the trial can be reinitiated? And how are you feeling about sort of that mid-ish '21 or better launch for G7?

Yes, we're making great progress on G7. We did come out and mentioned the fact that we were roughly 6 months delayed. We still continue to feel that, that's the right way to think about this overall. I'm not going to get into specific timing of when we'll launch G7. But I think if you take the 6-month time frame relative to those original assumptions, you can work into a time frame that's pretty much in line with the way we're thinking about it. Look, we've made great progress. We've got manufacturing lines. The first line is up and being used as we speak to produce units for our clinical trials. You're going to see those start here in the near term. And I think once those get started, you can pretty much work into time lines around what your trial length is assumed and then what the approval with the regulatory body would have to look like to get that product into the market. So I think you guys can do that math, but we haven't put specific dates out there. I'll tell you, once we go, we're looking to go in a big way. We're not looking to launch this in a small limited fashion of some small country just to check the box and say that it's launched. When we go, we're going to go. And I think we learned very clearly from G6 that with a game-changing technology, like we believe G7 is going to be like G6 was coming off of G5, the demand for the products is going to be incredibly high. And we are going to have the capacity in-house to be able to ensure that we could meet that right out of the gate. So we're ramping that as we speak. As I mentioned, we're producing products off the line. So we know it's capable. Now it's just a matter of reproducing that capability to increase the capacity. But we're very bullish on where this is going and what we believe the volumes will be out of the gate.

Okay. So no change to time lines, but you're ready to go when you go?

Yes. When we go. I think the question will be what does the OUS pathway look like? What's that compared to the U.S. pathway? Those are going to have different time lines associated with them just as a result of the trial and then working through the regulatory body. So how those phase in terms of launch, we'll get into more specifics as we get closer to it, but they're probably -- they're not going to be in conjunction with each other. We don't believe that timing is going to line up, but they're not going to be far off either.

And give a sense of which one's going to come first?

I don't know that we've gotten out in front of that. I don't think we're going to talk market-specific launch plans at this point in time.

Okay. Let me ask kind of a derivative question to this. I always was working on the assumption that G7 with some of the microelectronic manufacturing that was -- it was going to be a cheaper cost of goods product. One of the things that happened, Quentin, is that G6 at high volumes with some of the manufacturing improvements has also become kind of a low COGS product. And you've at least said that G6 is certainly at a $15 COG or maybe it's even lower than $15 comp. Is it still true today that G7 is going to have a lower -- at the same volume of manufacturing, G7 is going to have a lower COG? Or is that not true anymore just given some of the things you've seen out of G6 volumes?

Without question, G7 will be below G6. There's no question at all. I think the point that you're making, though, is relevant to both products, meaning the volumes that we were anticipating when we were talking about unit cost with G6, yes, they're much higher. And therefore, the unit cost is lower than where we might have anticipated it would have gotten to. But similarly, the unit volumes are going to be much greater on G7 than what we once anticipated as well, and so those unit volumes are going to drive lower unit cost. But there's no question the G7 unit cost will at scale be well below where we're at with G6. Now to your point, G6 is lower than what we had ever anticipated. And into the future, it creates an interesting opportunity for the company when you think about product differentiation in particular markets and how you use different products. We've never been in that position before. Usually, it's a single product in the market, whether it's G5 within transition over to G6. But with G6, a lot of the cost in this machinery and equipment is sunk at this point, and so the incremental cash cost to produce that next G6 unit is quite low. It's very attractive, which now opens a lot of these price-sensitive markets up in a way that G6 can go in there and serve those and still allow you to have your premium G7 product for your higher-priced markets and not start to create price contamination between markets as a result of that. I will tell you personally, that has me as excited about the future as probably any opportunity that we have because it now becomes clear how you start to address a lot of these very significant but lower-priced markets with a product that's very, very good in G6.

Okay. So it kind of suggests to me, and we've seen this with other companies as well, in the single-payer health care economies outside the U.S., fully depreciated G6, you just talked about this dynamic in the second quarter where you're lowering price to increase TAM, G6 heading into '21, seems like a pretty interesting opportunity to get a lot more aggressive ex U.S. on pricing with G6 and then bring G7 to the U.S. market at a premium. Does that not make the best sense?

Yes. We're not going to get into pricing strategies. What I will say is, I think it allows us to start to tackle new patients segments that maybe we haven't been able to open up in the past where price might have been an obstacle, right? And so the way I think about it, and again, we're not going to get into how we're going to position the products in any one particular market, but you start to open up a lot of new market opportunities that you might not have taken your premium product into at this point in time that you're not going to be able to go approach. So to me, it's market expanding and creates an opportunity just to go capture a whole lot more patients, which is -- if you think about the storyline we've been telling around capacity, we've been focused on doubling that G6 capacity and then doubling it again and then coming out of the gate with G7 capacity that rivals G6 because we know that the ramp is going to be significant. We're still going to have a lot of that G6 capacity to serve some of these new markets. So that's how I would describe the opportunity to G6 and then moving with G7 is going to create for this company.

Okay. And then would you say at the same unit of capacity, G7 could be a 50% COGS reduction over G6?

Yes. I don't think we've quantified what that's going to be. There's a lot of opportunity there. I think...

But materially lower, Quentin, would you say?