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

Good afternoon, everyone. Thank you for joining us to end the day, at least this is the end to my day. My name is Danielle Antalffy. I'm the med tech analyst here at SVB Leerink. And we are very lucky to end the day with a new face for DexCom, at least new relative to -- I think, Brice, it's the first time we're meeting, Brice Bobzien. He is joining us from DexCom. He is the VP of Finance. So Brice, thanks so much for being here.

Yes. Thank you so much for having us, Danielle.

Just curious, how long have you been at DexCom?

So it was funny. I just hit my 4 years, so about 4 years and 2 months now. So I'm a wily veteran when you think about our growth.

Yes, seriously. I am thinking about -- so 4 years ago, you were like right around the time when we really seemed to hit that inflection point when Abbott was coming to market and everyone thought DexCom's going to $0. And instead of $0, it went to $600 something.

Yes, that's so true. I had plenty of conversations on the way in that, oh, geez, what are we doing here.

Yes. All right. Well, why don't we launch right into Q&A?

I think for my first question, it's a multipart question. And I just want to take a step back and look at where we are today from a penetration perspective. And it feels to me like there are 4 buckets of patients. There's the type 1 patient, that feels fairly well penetrated when I'm talking CGM; there is the insulin-intensive type 2 patients; there's basal-only insulin type 2 patients; and then you've got all other type 2 patients that are being managed via everything from just diet and exercise to oral meds. And I guess my first question to you would be, how would you characterize where we are in the adoption trajectory in each of these patient types? Like type 1, would you agree that we're pretty well penetrated there? Or do you think there's still room even in type 1?

No, I think it's a good question. And I think it's something we certainly pay very close attention to here internally. So we believe we're about 50% penetrated on the type 1 side and so the interesting dynamic with the penetration levels is that -- and we put this up at JPMorgan, but I think it's really interesting is that though 50% penetration sounds like, okay, well, you're starting to get to critical mass on what the penetration levels are, actually, the percentage that -- of penetration versus coverage hasn't changed that much in the last several years. So because coverage has continued to improve so much, that 50% is now, there's much more incremental capacity that can be gained there.

Okay. I got you. So you have more coverage from a reimbursement perspective. So when you're talking penetration in that 50%, that's of covered type 1, not of total type 1.

Exactly, effectively, yes. So 50%, again, we've long said we believe that, that percentage gets to close to 80%, though, I will tell you there's anecdotal conversations. And certainly, you hear from KOLs that in certain practices, we think that, that could be upwards of 100%, certainly with the type 2 patient population. So plenty of room to grow there, and that's just in the U.S., and it's much less penetrated outside the U.S. When you think about type 2 intensively managed, and I'm going to exclude basal for the time being because we really characterize that as nonintensive. But type 2 intensive, it's about 30%, and again, depending on the coverage -- or depending on the type of clinician they see, whether it's in endo or a PCP, we believe that penetration level can get to that 80% or even higher in certain cases, depending on who's prescribing it. So about 30% on the type 2 intensive. Type 2 basal, type 2 nonintensive basal, I'll call it, we haven't necessarily looked at penetration levels specific to basal though we know it's a subset of that $30 million or so type 2 nonintensive TAM that we've talked about. But overall, type 2 nonintensive is about 2% penetrated. We believe basal is probably a bit north of that because there are folks that are getting coverage are able to go to the clinician and ultimately get a script, but it's well below that 30% level that we see on the type 2 intensive side.

Got it. Okay. That's helpful. And just so you know, we actually hosted a panel on Monday, and it was all about the noninsulin-intensive type 2, so not even basal, excluding basal insulin. And we actually even had a patient, she's on a G6, and it was really fascinating to hear how that market -- it feels like it's imminent. I mean I'd be curious, I'm going a little off script here, but just would be curious if you think about that noninsulin-intensive type 2 market, appreciating there's still runway in type 1 and insulin-intensive, but it really feels like I came away from that panel, this market feels imminent. I mean how do you guys internally at DexCom feel or how close -- sorry, do you feel that we are to this market becoming a reality?

Yes, it's a great question. And frankly, it's the, I guess, million dollar or billion dollar question, honestly, because if you think about where we're at, our perspective is we absolutely believe that this technology is right for almost any patient with diabetes. Now again, unfortunately, only so much of it is in our control. We believe there's tranches that come on and with basal being the most imminent. And certainly, the MOBILE study is the conduit to that. And the clinical data associated with the MOBILE study was really second to none. It just -- it told us this is the right solution, which, again, remember, basal is about 3 million patients. That effectively doubles what the patient population is for type 1 intensive and type 2 intensive. And so you double your TAM overnight with just unlocking 10% of that non-IAT population. And so is it imminent? It's tough to say. And again, we would love to say, yes, absolutely, it's imminent. I do feel like the clinical data is there to support the basal piece now, and we're working every day to open up all the other aspects of that nonintensive population because, frankly, this is the best technology for that patient as well.

Got it. On the basal, so let's go back to sort of the -- what you said does feel imminent, the basal-only insulin. Penetration is still well, regardless of the fact that ADA guidelines have changed recently. What more needs to happen to ramp adoption in this patient population? Is it the blocking and tackling from a coverage perspective?

Yes. That's really what it is. And we think about it as really 3 steps, right? So first of all, we got to sort of prove to ourselves clinically that this makes sense, then we got to run a study, which we did with MOBILE. So first of all, that step 1 was clear to us a long time ago. We ran the MOBILE study. It proved our hypothesis that this is absolutely the right thing. Sort of 2a or 2b step is that ADA recommendation, that this is the appropriate solution for this patient population. And then finally, comes down to that coverage. And it's really 2 populations of folks that we need to convince. And it comes through clinical data, it comes through KOL support, it comes through ADA approval or ADA recommendation. But now it comes down to the payers. And it's really CMS from a Medicare perspective, helping them understand that there's cost benefits, but certainly patient benefits as well, but then those commercial payers as well, whether it be DME or pharmacy, that's where the blocking and tackling comes into play and that blocking and tackling is happening as we speak with our market access team. And again, it couldn't be more important to us to knock that down as quickly as possible. The problem is, is much like the FDA submission sort of out of our hands once we provide everything, and now we've just got to go through the steps.

Okay. Got it. I mean how much do ADA clinical guidelines matter from a coverage perspective? Do you look at this as a matter of not when, but -- or not if, but when it gets coverage for the basal-only patient population?

I think the ADA recommendation is absolutely important. I think that's definitely a piece of it. But I will tell you, convincing the payers is more than just that from a recommendation perspective. Usually, you have to show real world evidence of how this can actually benefit not only the patient, but again, the bottom line of those individual payers as well. And we have all the data we need to do that.

Okay. Got it. Another component of this is sort of if you think about the next wave of growth for DexCom or CGM really, is the call point. So thinking going from the endocrinologist to the primary care physicians office, and we had a primary care physician on our panel on Monday. When you look at CGM penetration from a prescriber perspective, where do you think we are with PCPs that manage a high volume of diabetics versus endos? I appreciate not all PCPs probably manage diabetics. So I don't know if you guys look at it that way, but curious if you can comment on that.

Yes. So we haven't necessarily put that information out there, but we certainly look at it from our call generation and our call point discussions. What are the targets? What makes the most sense for us to spend time on, both early on as well as we move further along sort of the curve of the PCPs and whom they see? So I would say it's much, much, much lower than the endos. And it's because the endos, that's what they deal with every day. And remember, there's 8,000 endocrinologists in the U.S. There's 225,000 PCPs. And so it's just a vast differential. DexCom is a household name in the endo world. DexCom, in certain situations, hasn't even been heard of by certain PCPs. So it is a big difference there.

Yes. Yes. So if you think about the call point to the PCP versus the endo, how does it differ? Like I'm thinking sort of level of service and support or number of times you've got to call on them? Sort of how do you guys target or prep your sales force to target that PCP versus the endo? Is it a different sales message?

Yes. Honestly, it really is. And we're learning every day, and this was the beauty of the investment we made in 2021 is doubling the sales force allowed us to just get more active in this area that we just hadn't played in all that much. And so the exciting thing about 2021, though we were dealing with some COVID dynamics and some other things that sort of prevented us from going probably as hard as what we would have liked, but what we're learning every day, there are certain PCPs that can make 5 minutes for us. And we take the 5 minutes, and we jam as much as we possibly can. We drop off some samples and we say, "Hey, here's what we have, and you let us know what you need." On the flip side, other PCPs, it may take 2 to 4 hours of us just sitting in the office, either waiting for that 5 minutes of time and/or just because they just don't even understand how the technology works. And so it's really pretty widespread, but I will tell you, the folks that have listened to us and the -- and I'm talking about the PCPs at this point, but the PCPs that have listened to us have really been compelled by what it can do for their patient population. We just got to get out there and 225,000 folks, it's a lot of runway to get out there.

Yes. Yes, totally. And one of the things we heard actually on Monday from this PCP, who clearly, I mean, he's already prescribing CGM. So I guess he'd be viewed as at least to the PCP community an early adopter. But it sounds like once you get over the initial hurdle from a PCP perspective of sort of learning about the device, training on the device, understanding how it works, the actual workflow of the practice is much more seamless because you have all this data at your fingertips every time the patient comes in. Is that the right way to think about it? Like actually, is part of the sales message to a PCP that look at it, this is going to make it easier for you to manage your diabetes patients.

It tends to be, and in certain situations it's as easy as that and, frankly, obviously, we love those. But in other instances, there may be other hurdles. Maybe they had prescribed to a specific patient. And for one reason or another, it wasn't quite as seamless as what they have liked. So now it takes convincing more, whereas endos are more apt to hear us. So it depends on the experience, and we're doing everything we can to make that experience as good as possible early on.

Yes. Okay. Okay. I'm curious, talking about all these different markets getting into the sort of more seemingly consumer-oriented noninsulin-intensive type 2 market. If you look ahead 5 to 10 years from now, how do you see DexCom's technology platform evolving? For example, you now have Dexcom ONE in Europe. That's a very just like consumer product. So do you think this is a product portfolio that's going to be tiered, different levels of features and costs tied to different patient population? How do we think about this?

Sure. Well, that's sort of been our view all along. And that's why we spent so much time building out the platform that we built out and the software solutions and the technologies and the ability to modularize some of these things. So certain features and functions are available in certain situations. The great thing about the whole thing is that we've proven the G6, the core product, non, I guess, adjusted, it has really been just a great solution for almost any person with diabetes. Now what I can tell you is with Dexcom ONE being our first foray into a differentiation through software solution, we've learned that that's even better. And that's sort of been our hypothesis all along is that not this -- not one size fits all. And I think we're probably ahead of the curve on the CGM side of thinking that way. You don't need connectivity for a type 2 non-intensive patient, right? They want data. They want to be able to change their behaviors. That doesn't come through connection to a pump, right? They don't need necessarily all the alerts and alarms because they don't want to be constantly bothered with some of this stuff. And our software platform allows us to do just that. So I think it's going to look very different over the years, but I think we're well ahead of anyone else in this aspect because we've thought about this all along.

Yes. Okay. Got it. Can we switch gears to 2022 and guidance? You guys reported full earnings last week. You gave that – you actually guided back in January. So I would love to clarify one point and that's the impact COVID had on new patient adds late in Q4. DexCom investors have gotten accustomed to DexCom playing a very massive piece. Q4 was -- you beat the numbers, but less meaningfully. So can you talk about how COVID had an impact on new patient adds late in Q4? And how that sort of transpired so far in 2022? And how that's contemplated in the '22 guidance that you gave?

Sure. It's a great question. So in Q4, there were certainly challenges. And I'll tell you, early Q4, and it's really late Q3, but early Q4, we had the Delta variant. And there was some increased rigor as to whom could come into the office during the Delta variant. And so we navigated through that relatively well. And in Q3, we put up record new patients. Q4, in December, most specifically, Omicron really, really started raging. And that's where it caused challenges. And frankly, in certain situations, we just weren't allowed into the offices. And all that said, Q4 was basically equivalent to Q3 from a new patient perspective. Though it was a little bit of what I would say, below our internal expectations, still really great result. And so -- but again, we strive to be the -- have record new patients every quarter. And so that's always our internal goals, if you will. And then in Q1, we had seen the same thing in January. One thing that gives me, I guess, a bit of relief is we started to see a thaw in February. And you're starting to see some of the mask mandates come off. And certainly, that's impacting who can come in and out of clinics and how that's working. We're starting to see it come back, which is just such a great thing. It's a great thing for everybody. So in -- with that being the case, we contemplated that in our guide. And we guided to 15% to 20%. And to your point, there's always been this expectation, DexCom hammers numbers and beats numbers and those sorts of things. And in all honesty, what we strive to do is that's our base case. That's what we want to hit, and that's what we believe we can hit. And we're going to have ebbs and flows and there's going to be certain times that are challenging, whether it be COVID or whether it be something else, right? But we need -- we want to hit that guide. But we also want to strive to get in and above that guide. And so that's how we built the guide, and it really contemplates both headwinds and tailwinds that always play through the year.

Yes. And I guess one thing I was contemplating when I was thinking about the guide and the new patient adds that came under some pressure, relatively speaking in Q4, is this is a recurring revenue model, right? So how to think of -- like should we be thinking about Q1 and Q2 as a little bit depressed because Q4 patient adds were lower than expected? Or is this a situation where you think there is some buildup or bolus of patients waiting to start? How do you think about that?

Yes. So we've tried to stay away from quarterly guidance, and I think that's just good practice just because there's going to be ebbs and flows. But I think your thought process is reasonable, is that in certain situations, in a recurring revenue business, there's going to be points where maybe you didn't meet an internal target, you met a guidance target, but you didn't meet in an internal target. So it puts a little bit pressure on future periods. To answer the question on whether there's a bolus, it's tough to say. Like I said, it's just starting to thaw. And so we don't know if, hey, this PCP was writing the right scripts for 10 folks, but they need to learn about it, it's tough to say. Certainly, we hope so. But again, we don't want to get ahead of ourselves.

Yes. Okay. That's fair. Can we touch on G7 for a second? I mean, we've now gone through, I don't know, it feels like 2 full years of pretty meaningful product approval delays on the diabetes side from FDA. You only just got the Omnipod 5 approval, the Tandem mobile app just got approved and all of these have taken longer than expected. I guess, I'd be curious to hear what gives you guys the confidence that things are progressing at ADA and that there won't be some sort of protracted delay with G7?

Yes. So I'll tell you what gives us the most confidence is, we've had a great relationship with the agency. And frankly, we've prided ourselves on just being communicative and transparent and thoughtful in having conversations along the way. And so what they've asked us to do is what we've done, and we believe this submission is probably better than any submission that we've certainly put together, but probably most of the submissions they receive. And so when you think about 39,000 matched payers. That's a ton of data that points to this being an excellent solution. So we just feel great about the submission that was put out there. Now unfortunately, once that submission is out of our hands, it's now into the agency's hands. Now I will tell you, I know they're working hard every day to move that through, and we've already started to have communications with them, which, to us, is a great sign. And so we feel great about the submission. We feel great about our relationship. Other than that, it's sort of outside of our control.

Okay. One of the other things when you've had new product launches in the past, the supply is always -- I don't know if a hurdle challenge, maybe that's overstating it. But getting supply up and running, especially because demand seems to always exceed expectations. So you're always playing catch-up from a supply perspective. Where are you guys from a supply -- ready to supply the market perspective for G7 with CE Mark's imminent, right? So...

Yes. Honestly, I'll tell you, rewind back 4 years when we -- that was when we started -- when I started, and G6, I can remember those days that we were lean. Man, it was tough. We were hand to mouth on a lot of these things. We really vowed to ourselves and to our patients that we would never put ourselves in a situation like that again. You've seen the CapEx investments play through the cash flow, you can see it in the Ks and the Qs. And we've invested here. We know it's incredibly important that we are able to operate at a reasonable scale early on, and we feel very confident we're able to get there.

Okay. Got it. And last question on G7 before we shift gears to the competitive landscape. In the past, I'd say really starting with the G4, almost it feels like, each new product launch seems to have been a pretty big inflection driver. And I'm curious if the G7, we're talking -- we're getting into law of large numbers now. You guys are doing $2 million in revenue. Is G7 going to be another growth inflection driver? Or are we just too big at this point to talk about it like that?

Yes. It's interesting. So I'll tell you, we're not necessarily thinking of it as a major inflection point. What we do know is that there are always a subset of the population that's sitting on the sidelines, waiting for something new, whether it be a new technology, new form factor, whatever it may be. We haven't built our guidance that there's going to be some major inflection point. If that were to be the case, we would be happy to beat the guide as we have in the past. But I will tell you, that's not the way we thought about it early on. Now again, I do think what we hear is the one challenge that we've had with G6, -- G6 is, in my opinion, and for most part, most people think this way, is the best technology on the market, right? The one challenge it's had is that the form factor is a bit larger than that of the competition. Now G7 is 60% smaller. And so that puts us right in line with where we need to be. And so I do feel like people that are sitting on the sidelines may get in. But to say it's a major inflection point, it's tough to say.

Yes. Okay. That's fair. So you touched on the competition. And I actually think there's a lot of confusion out there about how G6 stacks up versus the competition from a price perspective. There's a lot of questions around so what is the price differential between the Libre and the G6, and it depends on who you talk to. I mean can you help clear up some of this confusion in the marketplace? When you're talking about -- I care actually less about the patient right now because where it's covered, I think that there's not much of a differential, correct me if I'm wrong. But from a payer perspective, how much more is the payer paying for G6? Asking the question just to give you context here, because longer term, thinking about is there any risk to being a higher-priced product and a payer looking to cut costs and go with the cheaper product. That's what I'm kind of -- that's where I'm going at with this question.

Sure. It's a good one. And I think it needs a lot of clarification, frankly. I think there's a lot of misinformation out there. And I think -- so I'll first talk about the payer though I do think the patient is important. So I'd love to spend just a minute on that. But on the payer side, in a like-for-like channel, so I'm talking pharmacy coverage, actually getting the product at the pharmacy, there is not much of a differentiator. So it's certainly not the 200 to 300x you hear said out there in the marketplace. In a like-for-like channel, there's probably a 20% to 30% premium for the Dexcom device, which is absolutely warranted based on the accuracy and the features in which we provide. Now in a situation where our list price is compared to a pharmacy rebated price, of course, there's going to be a differential. But list price is for a DME-based benefit. It's not necessarily for a pharmacy-based benefit. And so again, there's a lot of misinformation out there. But I will tell you that the premium has narrowed significantly, and we've done that through scale. And for us to do just that, and we've talked about these channel mix headwinds all along and for us to continue to improve our gross margin in the face of channel mix headwinds, that's what we can do when we scale, and that's what we can do when we continue to provide more product. Now just real quickly on the patient side. So 30% of the patients who get the Dexcom CGM pay 0 co-pay, 0. 70% pay less than $60 per month. That is, by far and away, the best in class of any CGM in the market. And so again, there's a lot of misinformation out there that I think just needs to be clarified.

Yes. Well, and that's -- thank you for pointing that out because I guess the concern I have is, let's say, Libre 3.0 comes to market. It does narrow the -- let's see what Libre 3.0 does actually bring to the table. But if it does what they say, potentially narrows the technology gap, it gets more accurate, how sustainable is that best-in-class coverage for the Dexcom sensor, if you do have a 30% cheaper -- from a payer perspective, a 30% cheaper Libre 3.0 that does maybe almost the same thing?

It's a great question, and we'll continue to evaluate it. I will tell you, in the conversations with the payer, they absolutely see the benefit. We don't know what G -- sorry, L3 is. I mean we've seen it in Germany in a very small scale. So we'll certainly be able to react. And we've [ fermented ] a point that we're able, as we get to scale, that we're able to compete in any and all markets. So we feel confident about where we're at.

Okay. Okay. That's helpful. Last question for you in the minute we have remaining, and that's on to another area of investment besides the sales force has been on B2C campaigns. And no Super Bowl commercial this year, we try -- wanted to get Nick Jonas on our panel on Monday, but no dice on that. But I'm just curious how you guys are measuring the return on those B2C campaigns. Clearly, you're seeing some success because it sounds like you're spending -- continuing to spend there. So just curious about how to think about the success you are seeing there.

Yes. I mean there's been -- no one is more interested in this than me, if you think about my role in the organization. So the returns are great. We use a modified LTV/CAC calculation where we look at this component and how it ultimately returns benefit. And remember, there's a long-term value to this patient, especially with the retention rates in which we have, and so the investment has been great, and it will continue to be great. Though I do think it's important to point out the fact that we made 2021 a big investment year, and you saw it with DTC, and you saw it with the Super Bowl ad and those sorts of things. In 2022, we're actually going to improve op profit by about 100 basis points in the face of about 300 basis points of pressure on gross margin. So it's about 400 basis points of OpEx leverage. So we're levering and we're investing in the right places.

All right. Well, listen, Brice, that was awesome. Thank you so much for the time. Thank you, everyone, for joining us, and great to chat.

Wonderful. Thank you so much, Danielle. Thanks for having us.