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

Good afternoon and thank you for joining us for the third day of the 2021 Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst and a member of the healthcare research team here at Morgan Stanley. It's my pleasure to have DexCom Chairman, President and CEO, Kevin Sayer, with us today. And quickly, before we begin, I'll run through our disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, Kevin, thank you for joining us today.

Well, thank you for having me. It's a pleasure to be here.

And I -- Kevin, I wanted to start with the announcement that came out this morning, Quentin's decision to pursue a CEO opportunity. I just wanted to open the floor to you to comment both on Quentin's decision, but also to ask about your current outlook with respect to filling Quentin's role and just your confidence in G7. We've got a lot of questions. So just anything you'd like to put to kind of the framework as you sit today.

Well, let's start off with a big thanks to Quentin. He's a major part of our team and we'll miss him. He's a very good leader. He's built a tremendous team around him. You guys are all very familiar with our finance team that Quentin built. Well, we've built the same type of team on the operation side. And when you have great talent, sometimes great talent moves on and takes other opportunities. And that's what's happened here. It's not something we're actually very used to at DexCom. So while it caught us a bit by surprise, we understand what Quentin is thinking. He was a major part of our future vision. As far as succession planning in the organization, he's a strong candidate for more responsibilities in the future, possibly even at the CEO job as one of our internal candidates. But we have a CEO. I haven't announced any plans, and I don't have any intention of announcing anything soon. So Quentin took a CEO job and position. And we wish him very well. We have a whole lot to do here at DexCom and a whole lot of things to accomplish over the next several years, so we're all very engaged and energized. What we'll do going forward as far as leadership planning is what we always do as a company. We will grow and develop our internal leaders and internal candidates for future responsibility. We'll also look on the outside. I haven't made any decisions. I have consulted with my Board members, though we haven't made any decisions exactly where we go from here, but we have options, and this is a great company. We know if we go outside, we can recruit great candidates. We also know inside, we have very talented people. So we'll create some great opportunities for others and Quentin will create his own, and that's kind of where we are today.

Good. Very clear, and I'm wishing Quentin all the best, too, in his new pursuits. And then I guess I'm turning now really to the business. I wanted to ask, start off with second half outlook, OUS, the initiatives you started to expand access. Can you speak to where you are today with respect to your targeted efforts? And any takeaways really from the negotiation processes or receptiveness you'd call out versus kind of your expectations?

Yes. And maybe I could start with a little background first. Because we brought this up in the first quarter, it wasn't very well understood. It's becoming much better understood going forward. As a company, when we launched G6 back in 2018, we went very quickly and literally spent 2 years under the gun with respect to the volumes and what we can do strategically to grow our business because we were literally operating on 3 days' inventory most of the time. Well, as we got to 2020, and this again speaks to the operations team that we have here, we realized we have -- in 2021, we realized we have capacity to get much more aggressive in these OUS markets in particular. We went back. We questioned ourselves, and challenged our leaders, how do we get access to more customers and more patients? And so we reached out and we've started speaking with the various reimbursement organizations to get access to people we didn't have access to before. Administrative burdens have been reduced. More than 1 million people have gained access to Dexcom's CGM, as 6x to 7x increase in some geographies. Some of the public access we've achieved has been demonstrated very well in Canada, with the British Columbia ruling for type 1 and type 2 patients, Quebec with type 1 patients. We looked at our international position and realized we needed to move out of just that high-risk category of people who use pumps and kids and really go to a much broader area. So these initiatives have gone very well. They progressed. We're seeing volumes come up. We will see patients enter the system at lower prices per year. But what we can tell you, and one of the things we have learned, is the value of DexCom performance remains recognized amongst those people we've spoken with. The payers and the reimbursement authorities in these geographies very much know that our product is the best technology on the market and have rewarded us as such with respect to the pricing that we have discussed with these groups. Granted it's lower than what we had before, but they certainly recognized the value of DexCom in these discussions.

Can I ask too just what really drove the timing to implement this? What were you seeing specifically that drove you to start making these moves?

Capacity. Having the ability to service these patients and service them and not have any concerns about having enough product, it was capacity that drove us to go do this. Having the capacity to make that decision is very important for us. That drove it more than anything else. That combined, I guess I would tell you, with our continued strong performance as we saw our financial performance, which has been outstanding. So far this year, continue to do well. You look at our gross profit line and our gross margin line, gross margins last quarter of 70% in the time when we're shifting the U.S. channel to more pharmacy, and again, the things we're doing in the OUS channel. We're able to achieve margin percentages that are acceptable while taking our average revenue per patient down because of the changes that we've made, combined with the capacity, it was the perfect time to go.

As you think about to 2022 mix headwinds, whether it's OUS or U.S. pharmacy, how would you quantify those, if you can today? And then as you look forward longer term, kind of how does that ultimately trend down as you see your business evolving, increasing mix into the pharmacy? Just curious kind of how you view those time lines today.

It's a good question. With respect to OUS, again, as we go broader into some of these geographies and lower revenue per patient, our goal is to get enough patients and enough sensor volume. Excuse me, let me just have a drink. Get enough volumes, that we cover that. We've been successful at doing that so far. So we'll move into new geographies. We'll increase access. And those are included in the 5-year plan that we presented last Investor Day. So that isn't anything new to what we've disclosed before. With respect to the U.S., again, our distribution channel goal has been to make things as simple as we possibly can for customers to get this life-saving technology. We've been in the DME channel forever, and there's a lot of paperwork required there, as many of you know. And we're still there for our Medicare users. That isn't going to change anytime soon. But we've had a great deal of success moving our commercial business to the pharmacy. We talked about earlier that about 50% of our volumes go through the pharmacy now, and our long-term goal is to get 75% of our commercial volumes through the pharmacy channel. Why do we do that? Well, a couple of reasons. First of all, it's much easier for our patients to go to the drugstore and pick up their product or to get it through an online pharmacy distribution system than it is what they've done with DME before. Second reason's our health care providers or the clinicians. Again, it's easier just to write a script, send it to the drugstore and be done than what the health care communities had to do before there. And third, it's just much more efficient for us internally. Our net operating margins remain very similar even though our revenue per patient comes down. As we look at timing in the pharmacy channel move, we expect this to continue during 2022 as the business continues to shift, as we get towards that long-term goal with it, more than likely starting to level out in 2023.

And just curious too on OUS. As you think about, you've talked about the $50 million of a headwind this year is, is a similar level as we think about 2022 realistic with your plans in place today?

I don't have -- I'm not going to give any '22 guidance today. We have a 5-year plan with some pretty aggressive goals. We'll get heavily into '22 when that rolls around. We've had a great 2021 so far. So we'll talk about that more later. I don't have a good answer for that today.

Understood. And I wanted to ask too, relative to the 2025 outlook you gave end of last year, with what you had contemplated at the time from an OUS sales contribution to your business, with these initiatives you've undertaken, does that potentially provide upside there? I'm just curious kind of what you were factoring in at the time versus kind of the shift to really expand access proactively and kind of how that could potentially impact your longer-term revenue contribution from OUS.

No. That's a great question. This was what we had planned in that 5-year plan. We planned on doing this. We accelerated it to take advantage of the opportunity and the name brand recognition that we have. We've had a couple of recent wins in the OUS markets aside from what I talked about earlier. We just launched in Japan with Terumo. So that's just starting. We have some reimbursement in France. We see that going. I think over time, there could be international upside if everything goes well. But we have to do this to get the international goals we have in that plan. We can't achieve them if we don't. So it really is part of the plan. We just pushed it up a bit.

And as you think too, you touched on Japan and kind of starting off there with your distributor. But are there other key markets as you think about continuing to expand your OUS presence, kind of near-term targets that you would call out as well?

Well, I definitely would go to France where we have some reimbursement. We have a very small presence there. So that will be one we look at in the future going forward. You'll see us continue to invest in our direct markets in the U.K., in Germany, where we -- in Canada, where we have taken over distributors and really grown a business in those countries. We look at numerous opportunities, either through distribution partners, distributors or even going direct into some. We've also developed an e-commerce platform. That's been very successful in Canada and the U.K., giving us the option of going live with an e-commerce platform into some of these countries without a tremendous amount of infrastructure. We've also established a global business services unit over in Lithuania so we can set up the proper tech support to go into more geographies and support more patients in the existing geographies where we serve. We already have it for APAC in the Philippines. So again, we are building the infrastructure necessary to do those things that we need to do.

I also wanted to ask too, just durable trend out of COVID, use in the inpatient hospital setting being one. But how can this use case possibly translate longer term into potential introduction of CGM use across different workflows or applications? Really factoring in, do you think about an increasing shift in consumer focus on health and wellness, too?

Well, this is a great question. There's 2 parts to it. So let me deal with the hospital part first. I think what I'd tell you first about the hospital during COVID times, and we're still operating under the exemption that the FDA gave us or the -- a nondiscretionary enforcement, they're willing to let us go there. We have learned a ton. There have been more than a dozen peer-reviewed published papers on the use of our technology in the hospital during COVID, and all those publications have been very positive. It's even much more positive if you talk to any physicians who use it because they just say, I don't know how we do this. We've learned that our core technology is absolutely good enough as far as accuracy to perform well in the hospital. And that was a question that we really heeded to make sure, giving all the possible interference of drugs or other things that go on in hospital care. So we're very comfortable with that. But what we also learned is we need to work on the configuration of our product to make it optimal in that setting. One of the simple examples I can give you is G7 warms up in 30 minutes. G6 warms up in 2 hours. I assure you, no one in the hospital is patient with a 2-hour warm-up, so G7 will answer that question and be very helpful. Connectivity. Right now, we connect to a phone and many of these hospitals have been running on phones that we actually provided. But you've got IT rules and hospital purchasing and security and things. We've got to figure out what the right product configuration is to go attack that market. We'd never know if we hadn't done this. So we think we have a very good base of learning the hospital market. We'll invest there going forward. But it's going to be a bit of a road to figure it all out and get there. On the health and wellness side, during COVID times, that hasn't changed much, but we've learned a lot again in health and wellness over the past several months as many groups with software apps are trying to incorporate Dexcom's CGM into what they do. Hence, our recent approval of a real-time API to whereby if you're running a DexCom app and you have another app, we can literally take your data from our cloud live into that other company's app and give a patient a health and wellness experience if that is what they choose to do. And so we've learned a lot there. We think this will be a good business opportunity for us going forward. It's a different kind of model than what we've had before. But we'll continue to do it. Also on the health care side, one of the other learnings in COVID for us in particular is the value of our CLARITY system, and that's our retrospective review of CGM data. Retrospective, I mean within 60 minutes, the data is uploaded, but physicians became very dependent upon that CLARITY system during these COVID times when they weren't having office visits. I had more than one physician call me up and say, "Do you know how great CLARITY is?" And I would say, "Well, yes, I do. Didn't you in the past?" And even anecdotal stories about somebody newly diagnosed, the first thing we're going to do is get you on CGM so we can get your data into CLARITY, so we can figure out what we're going to do and where you are in the development of the condition. So all those things are good learnings for our business and things that we'll capitalize on as we develop products going forward.

I wanted to ask too, G7. In the U.S., you completed the clinical trial. You talked about you're in process of submission. Relative to the sample of G7 data we saw presented at ATTD, you highlighted U.S. pivotal trials and ran under improved protocols. Can you add additional perspective on the differences and how this could ultimately translate into an impact relative to the outcomes between the 2 clinical sets?

Sure. And we have completed our U.S. pivotal study. We're preparing that data and analyzing for submission. There are 2 elements to the protocols here that I'll bring up just quickly. Number one, iCGM standards in the U.S. are different than the rules that apply for CE Mark. So by hitting the iCGM standards and disclosing the data in the manner which we'll disclose in the U.S., people have a very good indication of how this product performs. And we're very confident it will look great. As far as improved protocols, we can always get better. And by running the European pivotal and some other pre-pivotal studies before we launch the U.S. trial, we learned some things we could do to be much more efficient in the clinical trial process. And we incorporated those into our studies, hopefully getting a very representative data set for our patients and so they'll understand how this product works. We're very excited to get that submitted and published.

I wanted to ask too, just any interactions you've had with FDA. But if you get the sense that the FDA environment -- just from a processing standpoint, have you seen any signs that this is improving as we kind of get past some of the more major COVID headwinds?

We've had a couple of indications. We've had 2 things approved recently. Our real-time API and also another app. That's an app in an app program that's going to be used by UHG with their Level 2 program to whereby you'll run the Level 2 app. And when you want DexCom data, instead of going out of Level 2 into the DexCom app, there will be a widget right there. So those 2 things have been approved. We've been informed that they're accepting new filings, that things are still a little slower. But our history with the agency has always been, if we submit to them what we tell them we were going to submit, and the fact that we've always had interactive processes in our submissions, that they get through our submissions very quickly. This is going to be a full submission, Android and Apple apps. So there -- it is not going to be -- and we're not leaving anything out. Only time will tell. And I think the key to it will be obviously the strength of the clinical data. If the data supports a rapid review, we now have spent a lot of time talking about that, that will put us in a very good place.

Okay. Understood. And turning to OUS, you talked about G7 expect to launch by the end of 2021. Can you provide just a high-level outlook around the cadence and pace of launch, factoring in really time to scale production, timing of rollout, to different geographies? And really along those lines too, when can Malaysia reach full productivity from where you sit today?

The Malaysia question is the easiest to answer. We need clean rooms up and running by the end of 2022. We do not need Malaysia up and running for the first wave of our G7 launch. We will have adequate capacity here in The States. And we have tremendous flexibility with our G7 lines, the way we designed this product to be produced if we had to do something in the short term. So we have submitted for CE Mark. We expect to launch by the end of 2021, but not a material launch. From a revenue perspective, we are anticipating huge demand for this product from new and existing users, and we've got to balance that. We learned a lot from our G6 launch. We got an early approval. We established the iCGM standards at that point in time. Based on the early approval, we launched early and we spent literally 2 years chasing it. So we -- our learning from those circumstances, we're planning as vigorously as we can, getting equipment in, getting lines up, getting lines validated. And then we'll roll this out country by country. But we expect it to be a rather rapid launch. I mean we expect to roll G6 in very, very -- I mean G7, and very quickly over G6. And some geographies will have both of them. But this is going to be a very quick ramp for us.

Can you also speak just the shift to -- from G6 to G7, manufacturing logistics, to a certain degree, but then also pump integration, either with Tandem, with Omnipod 5? Just kind of how we think about those processes and time lines as well.

Well, and you are correct. This is something we have to consider. G7 is a completely new product, manufactured completely differently with new electronics and everything. We're already working with Tandem and Insulet to integrate G7 into the systems. And the beauty of it is, as an iCGM product, it will drop right into those systems without running another clinical study. But we do have work to do with respect to the communications and the cybersecurity we've implemented into the G7 platform and things of that nature, but we're working now. It will be an excellent integration opportunity for us. As far as shifting from G6 to G7, it's one of the bigger challenges we face internally, and we have numerous discussions regarding it because when somebody wears a G7, it's like, "Why am I wearing this other one anymore?" We're going to have to balance that capacity with geographies and markets and things of that nature. But if we schedule this right and do it right, our plan is to have adequate capacity to serve all those markets. That being said, we've been through this before. And if something goes wrong, we have plan B and C and such. But for now, we're planning a very organized shift and transition over. And so -- and in some of the markets, we will have both for quite some time because G6 is integrated with these great partners of ours. So that product can't go away. We'll have both of them.

Would you call out any nuances? As you think about kind of the transition from G5 to G6 and then now looking G6 to G7, have any other factors that either you can pull from your prior experience or challenges that may be not present previously that you'll have to deal with as you transition from G6 to G7?

I think there are some -- quite candidly, I think this is a bigger challenge of a transition because demand is going to be so hot that we are going to have to go. But we've learned so much going forward, for example, the contractual situation, at least, schedule out when we can flip G6 contracts to G7 and matching our customers' expectations. So look, you're going to have to wait until we get that contract done, and we can't negotiate contracts until we have approvals. But we are thinking through those things now and working through those things very robustly. We not only have a new sensor here, we have a completely new software platform. And so when this launches, it's not only going to be the hardware and the sensors and everything. The software platform is completely different as well. So we -- that's why, again, a quiet launch at the end of 2021 and then we roll it out into European countries to get broader experience before we have the big launch in the U.S. later next year -- sometime next year. We'll learn and we'll know more, whereas last time with G6, we went straight to our biggest market, and it was tough. So we have these things. And quite frankly, I should say, everything works on paper. The only thing I know for sure is there's absolutely something we haven't thought of and we'll just deal with it. This is a very, very good company adapting to whatever comes our way. So we'll just -- we'll go with it.

I wanted to ask too just talking about software. Just how do you think about DexCom as a software versus a sensor company? And how does the profile of the company continue to evolve from here?

Well, I think you've seen a bit of that evolution with those 2 approvals I just got. People are going to want sensor data in other platforms. And we've now got 2 really good tools to get it there with our real-time API and that other app. But over time, different users are going to have different needs. We know that. We've done a tremendous amount of customer experience work on the G7 app that will come out with G7. We've also done a lot of work on designing apps for other use cases such as type 2 diabetes. We're considering different software experiences for pregnancy and other uses of our sensor that more meet the needs of those customers. On top of that, we look at the software for the professional users as well. Our CLARITY system, while great for the endocrinology community, as we get down further into the PCP community, maybe too much, maybe too much information. And there might be a short version that sits better in that market. So we look at the customer experience we're trying to create, and we are then moving software in that direction. It is a transition. We'll always manufacture sensors, and we always demand of our team maybe the best in the industry. But that isn't the only experience that matters anymore. The software experience is going to matter every bit as much.

As you think to -- and I want to focus on the U.S., but just type 2 intensive slightly larger U.S. market than type 1. Where can type 2 mix, just looking at insulin-intensive patients in the U.S., trend over the next 3 to 5 years?

Well, I think it's going to get all the way up as high as the type 1 patients. Right now, it's only about 25% penetrated. But as these products become easier to use and more readily accessible and more reimbursed, and as we get to the right physicians from a calling point, we will get this to the intensive insulin users in the type 2 population. And once they get on it, they're very sticky. They really love the information they're providing because most of these patients have been managing diabetes for an extended period of time without this. And so when you give them this much information, they very much are buying into using CGM to manage their condition.

As you think about DTC versus broadening awareness versus the impact of your sales force expansion versus coverage, could you just break down the forces driving increased traction and acceleration in this type 2 patient population?

You bet. I think increased coverage is helpful, but I'd put it third on the list. I think for us, second on the list would be with the physicians. Our team has had great success in adding new prescribers to the base. We can get more into those details on the earnings call because I don't have them sitting in front of me. But we have many, many more new prescribers within the system and have identified other places where we can get more because that sales force has expanded. But by and large, driving awareness through DTC has been the biggest. As people learn about our product, they can come and get it and ask the question. So again, if I -- while I put that at the top, if you drive that without the other 2, all you create is a problem. I've had numerous people close to me give me a call, friends say, "Hey, my friend wanted your product. He went to the doctor and doctor didn't know what it was." Well, we have to fix that. And so all those things combined make it much better. We have to drive all 3, but I would rank them in that order.

Okay. And then type 2 non-intensive, just the path to getting payers, Medicare onboard. What was factored into your recent -- your long-term outlook out to 2025 and the growth contributions you model from this non-intensive type 2 patient population?

Well, there are 3 things that are going to drive this. The first one is going to be patient demand themselves. We think once individuals -- in fact, we don't think, we've got enough clinical data from the studies we've done. Once a non-intensive type 2 patient uses this product, they don't ever want to give it up. Again, they may have managed their condition for a very long period of time, with the only thing they've been told is eat less and exercise more and take your meds. Well, now they can see the effects of those things, and they don't want to give that product up. They find it very, very helpful in their treatment. So patient is first. Second, programs. You've seen the Level 2 program we've talked about at UnitedHealth Group. There are other programs such as WellDoc, Onduo, Verily. We believe they will drive type 2 non-intensive users into their programs who will use sensors as well. And then as this evidence grows and bounds, we can see this moving over to the payers as a reimbursed product. But that's how we see the cycle going. We're attacking it from all 3. At the end of it all, the question to ask, do you deliver an outcome that's better than what they had before? Look at the studies. In every case, patients are healthier. In every case, the payer is spending less money. So we're very confident we can get there. Business model may look different. It may feel different but we're very confident it's going to be a huge market for us over time.

Okay. With that, I know we're out of time. Kevin, I wanted to thank you for the time this afternoon. I appreciate the chance to get to speak with you.

Thank you for letting me speak. And have a great day, everybody.

Thank you.

Bye-bye.