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

Thank you. Good morning, everybody. And so our next presentation today is with Jereme Sylvain from Dexcom. Jereme, thank you so much for joining us today.

Thank you, Joanne. Happy to be here, and thanks for taking time with us today.

Wonderful. I was looking up, as I was preparing for this meeting, how long you've been the CFO. And you've been in this role now for over a year, if I count correctly.

It's been about a year. So it's been an interesting year. I could -- if someone was to ask me over the course of the past year, what would you want your first year to be like? And it certainly wouldn't necessarily be during a pandemic with the great resignations, supply chain changes. But it's been a year, and it's been an incredible year. So certainly, time flies by. There's no question.

And what do you think, other than the obvious pandemic, you see as the greatest challenge since you transitioned into the role?

It's a great question. The biggest challenge, I think, we have is there's so much opportunity out there in the space. You see all the unmet needs that really take place out there. And it's how do you align to go to those areas where the biggest needs are unmet. And there's only so many places you can go at the same time. And so we continue to do that is look at where can we go and make the most impact in the community and make the most impact on those customers of our product. And so it's a delicate balancing act. We certainly do -- we spend a lot of time thinking about it, a lot of time thinking about where best to go. That's probably been the biggest challenge beyond the typical pandemic issues out there, but it's certainly a good one to have. It's certainly a positive challenge and one we're happy to have that challenge as opposed to some of the alternatives.

So let's start a little bit with everybody's hot topic for Dexcom G7. What can you tell us about where you are and the timing for CE Mark and U.S. FDA approval?

Sure. So with the CE Mark, we've been in for a little while. And we expect the CE Mark, really here, at any time. Now it's really procedural at this point, and so we expect that to come here shortly. So any time here, and I know that it's a little bit outside of our control, just given it is a regulatory body, but we made incredible progress. In terms of the U.S. FDA, we submitted in Q4. And we've had good dialogue with the FDA. And so that dialogue has continued, and we continue to have that dialogue, which is a good thing. So you know the FDA, once they pick up your submission, that they generally focus and staff accordingly. And so as long as we're continuing to see that back and forth, which we continue to see, we expect that to go. I think we'll have a bit of a better readout for you in April as we get out into our Q1 earnings release, just given at that point, the FDA would have enough time to have more and more back and forth with us. But early feedback is positive that there are constructive dialogue working with us, and that's the big thing. I think everybody was concerned out there, is the FDA going to be swung? They've certainly staffed it, and they're working us. So we're very encouraged by that.

And I think the investment community, maybe based on management comments at a previous broker meeting, expects approval by ADA. Is that still a realistic time frame?

Yes. So to expect approval is a tough one since we're -- it's a regulatory body. So I'd step back from saying expect. I think someone did ask, is it a reasonable time frame? Is from a Q4 to a Q2 of 6 months later, if you will, approximately, a reasonable time frame for the FDA to go through it? I think it is. And I think that's what we're messaging out there. It's going to be a little bit dependent upon the back and forth that we have, which I think is where that April time frame to really give a little bit more feedback at our next earnings call will really be a good time to give a little bit more clarity as to -- a little bit of a more expected time line. But it's not unreasonable to expect that ADA that, that would be a time frame when we'd be looking to have some more conversations about that.

So given an any day approval or CE Mark and reasonable expectation in the United States, how does the company think about planning for that? And planning is broad. Planning is marketing materials like a printed, manufacturing, building inventory, all of that.

You've actually pointed on all of the tougher questions because I think a lot of times it's focused on, well, can you make enough. But I think you've keyed on all of the various issues, right, which is, one, we have to make enough, and we are in the process of setting aside certain G6 lines where our yields are so high on G6. We have the capacity to start looking at putting in G7 lines already. And so those lines, we've already got some up and running. We did that, obviously, to create some of the early-on goods associated with what we thought was going to be a bit of an earlier CE launch. We're not putting in more G7 lines as we speak. So from a manufacturing perspective, we are ramping up. From a regulatory perspective, the teams are all hands on deck, working with regulatory bodies to help usher it through. From a sales force and a reimbursement perspective, we've been thinking about those contracts for some time. And where possible, where you can say, "Hey, is CGM included as a category?" We've tried to think about categorically classifying our G series products, so G6 and G7 will be in the same series to help usher reimbursement a little bit quicker. At the same time, we know that some of these require NDC codes, which will take a little bit more time. And so our teams are all hands on deck thinking about that. And we can get into some of the specifics, if helpful, as to how we're thinking about that. And then from a marketing perspective, as you think about a launch, the last thing we want to do, and if Chad was on the call, he would say this to everybody, is the last thing you want to do is go out with a large marketing campaign when everything isn't set up, where someone might show up at a physician asking for the product and maybe they don't get access to it at that point. So we have to be very targeted in how we go after our marketing plans to make sure it aligns when this product becomes available in the various regions. So you're hitting on all of the things that the organization is doing. It's incredible to see it all working in concert. But each one of those various pieces, someone is working on to make sure that the launch goes as smoothly as it can.

So when you think about this launch, do you think that as a gradual adoption? Is there a weight per se or physicians saying to patients, "Hang out before I teach you how to use G6 because there's a G7 coming." Help me understand from the patient and from the physician standpoint, how they think about this.

Yes. So it depends on -- so I think it is -- well, it's going to depend upon which country. But let's put that aside for a second. So there's the marketing around the use of the product. And I think that one is going to be pretty straightforward. We're going to have enough collateral to get physicians in picking patients familiar with how to use the product. In terms of how we get in front of folks, it's really making sure that they understand the timing of the transition, who are the right people to move over. I'll give you a good example. You can go to a country -- countrywide where, say, you have government reimbursement and get both G6 and G7 approved. It's about ensuring you have the marketing collateral to understand, well, if you're on a Tandem pump or an Omnipod 5, you need to stay on a G6 until that integration is complete. So please, here's the collateral for this. However, if you're not, here's G7. And by the way, this is the date you have access to it, and making sure that we're in with both of those super crisp marketing. The last thing we want to do is have somebody go and get a G7 and try to connect it to a Control-IQ pump and have challenges doing so because that integration hasn't been built yet. Those are the types of things that the messages are being tailored specifically too so that the physician experience upon prescribing is seamless, but also the patient experience upon getting access to the product is seamless as well. That's the challenge we're navigating. So it's going to be multiple different streams of how we ultimately ensure the right people, the right product, not something that's been uncommon necessarily in a transitory space in this particular medical device field, but it's nevertheless a challenging thing that the teams are working through.

Do you anticipate that in building your manufacturing and awaiting FDA approval that the FDA will need to come through some of the facilities to review them?

That's not our expectation. In fact, the FDA has come out regularly and does its various inspections, and we've historically done very, very well with those. And so the factories themselves are certified. And so we expect that to continue to remain. So we don't expect to have some of those challenges associated with it. At least, that's our expectation now. And we haven't seen anything in any of our inspections that would lead us to believe otherwise.

Okay. In integrating G7 ultimately into the Control-IQ and as well as into Omnipod 5, what are the steps to doing that? And how long does that take?

Yes. It's going to be -- really, it's about how to get the transmitters to speak to the pump of the app. And so it's really working with our partners and making sure that, that connection goes seamless. And so it could take as short as a few months, a quarter or 2. It could take a little bit longer just depending on how it's resourced and staffed. We are highly incentivized to get as many folks from G6 to G7. So I don't think our staffing capability will be a challenge. I think it's really just going to be a function of getting down with our partners, sitting with them and working on it. And to be fair, we're already working on it today. And so it's just a function of how long it ultimately takes to do that, go through the regression testing, make sure that it's working well, get through the appropriate approvals and then launch at that point. So again, it could be as short as a quarter or 2, could be as long as say, 9 to 12 months. But we, again, Dexcom, we are highly incentivized folks off of the G6 platform on to that G7 platform.

One of the things which I've sort of tried to get my head around is how the company sells -- well, for a while there, it was just G6 and G7. But now, it's G6, G7 Dexcom ONE? And how do you start dividing either geographically or patient populations? Or help me think about this.

Sure. So I'll give you an example of maybe one that's a little bit more recent, and I think it will help kind of frame the conversation a little bit. Certainly, in Europe, it's a tender-based market. And you have various buckets of reimbursement based on patient need, customer need. And so the way we've really thought about it is, is there an opportunity to go after somebody who doesn't need all of the connectivity, who's really looking for maybe a product that has all the accuracy features, doesn't need Share/Follow, doesn't need to be connected to a pump, and can we target that population through the tender process? And then the tender process will have a higher reimbursement per patient for the more acute patient, which we would certainly look at that through the G series. Those are the types of ways we're thinking about it is kind of high/low based on need and going through into those tenders. And that's how we ultimately market it. In terms of thinking about how we change the marketing, it does shift to more brand awareness, in all fairness. And so while we used to market Dexcom G6 and all the commercials with Dexcom G6 , I think the answer now is we're starting to say, trust us with your sensing needs around glucose monitoring. And basically, there's a product for you depending on your acuity. And so that's a little bit how you see it shifting. The team has done an incredible job coming up with, okay, here's some specific marketing for this product, specific marketing for this product and then general brand awareness in markets where both of those take place. Right now, we don't have a lot of geographic overlap, but that will come over time where you start to have the geographic overlap where you have multiple products in the same country.

And as you think about that geographic overlap, are you thinking like the Super Bowl ad in the United States and some other ads in a different geography? I mean how do you do that?

Well, I think what we do is -- and our marketing team does, what they do is they do a mixed marketing study. They look at all the various avenues we use, all the way from Google Search down to individual TV advertising. And so depending on who we're trying to target, ultimately, that's how we do it. So if you want to target a large, broad, say, primary care physician or a type 2, you might go to a bigger-type ad, like a Super Bowl where you have lots of eyes on it. However, if you're really targeting certain people, you can go through Google, quite frankly, and you can assess how many people do a search on Google to track through how many [ ads ] will we ultimately make it to your website and then get on to the product where you might target certain folks through search or other forms of media. So it's going -- and so we've got all of those. We've got all the ROIs on each one. We've got the effectiveness of each one. And really, kudos to the marketing team. They know how to pull the levers to ultimately who are we trying to target. Okay, this is ultimately targeted to this population. And they do a great job looking at, okay, well, this is where we're going to funnel the dollars to get this message across versus this is what we're going to do it to get this message across.

Excellent. Anything else we should know about G7?

I think Kevin says it the best. It does what G6 does, but just everything better in a smaller form factor. So we're really excited about it. I think this is a product, and I think you've seen some of the early data come out, and we just published something recently with a little bit more data in Diabetes Technology & Therapeutics. We're just really proud of this product. I think when it gets out there, you're going to see a lot of folks just really gravitate towards its form factor, its accuracy, its ease of use. Just really excited about it. I think you see that as you're walking through the halls here, if we ever can meet in person again, I think you'll see it as you're walking through the halls, that there's an incredible amount of excitement around this product.

Do you have additional clinical data which is coming up over the coming months?

There will be more data that's come out. So we gave a little bit of data in our January presentation. Last week, there was a publication on the G7 data in Diabetes Technology & Therapeutics. It's publicly available. So I think you can search it. If you need the link, I can certainly send it. There'll be more coming out over time as is appropriate. But I think the good news is the data that's out there really demonstrates the data you saw us submit to the FDA, which incredibly compelling data.

Okay. One of the things that I was originally thinking of, and I'm not sure this is true anymore, was that G7 was more of a type 2 product. Do you -- is that the wrong way to think about it at this stage?

No. I don't think it's a wrong way to think about it. When you think about type 2, you're really thinking about how do you break down barriers, right? Because you have the intensive insulin user. You had willing to take on a little bit more, challenge in using it, whether it's software or Bluetooth connectivity form factor. Everything is about barriers to adoption. As you think about G7, the form factor, the ease of use, the disposable nature of it, it does break down barriers. And some of those barriers in the type 2 space were some of the things we talked about, which is beyond the body form factor, the reusable nature of it. With G7, because it is a onetime use, if you were using this for a diagnostic application, it's a lot easier from that perspective. You can use it in [ concert ]. So I think the form factor is a barrier reducer or the launch of the form factor, the entire product is a barrier reducer of that platform to the type 2 population. So I think you're thinking about it the right way. But it can be so much more. I think it's going to be also an expansion of quality of use into the type 1, type 2 intensive population as well. So it's just really a buoy across all what we think utilization cases.

All right. So let's do some numbers now. Percentage of patients who are using a CGM who are type 1 versus type 2? And then where do you think that changes in the coming years?

Yes. So we started in the U.S. And OUS, it's a little tougher. But in the U.S., I think we're approaching that 50% to 55% adoption in the type 1 space. On the type 2 intensive space, I think you're passing 30%, getting closer to the 35% as the year progresses. And the type 2 non-intensive, you're sub-5%. I mean it's down in the 2% or 3%. So it's very, very low. The way we think about the watermark on this is right around 80%. We think for the intensive population, both type 1 and type 2, that's ultimately where it gets. And the reimbursement is there today. So as you think about that adoption, one of the big challenges to getting to those levels is reimbursement. And in those markets, type 1, I think 99% of folks with insurance have type 1. And type 2 is getting up there. Type 2 intensive is getting up there pretty quickly. We still have some work to do in the Medicaid space. But Medicare is covering again the majority of the large commercial payers company. So those are the big ones there. In terms of the type 2 population, that's such a large population. It's going to be hard to give just one answer across it. But let's start with maybe the most logical next step, which is basal, right? Those folks are taking injectables in the morning for basal insulin, they're not included in our intensive insulin population. It's about 3 million people in the U.S. And if you have insurance coverage there, and there's not a lot of it now, there's small pockets here and there, but it's virtually none. If you have insurance coverage, that one certainly can get up into your 60%, 70% adoption, maybe it doesn't get quite to 80%. And then you will beyond that into type 2 and beyond, and that's really going to be a function of reimbursement and access to see what population that ultimately gets to.

Go ahead, you continue and then I'll ask.

And the reason why we're talking a little bit more about basal today than maybe in the past is really stemming off of our MOBILE study and the ADA standards of care. I think that's probably the one of the biggest things that came out of our most recent annual update, which was ADA has changed their standards of care now that real-time CGM, not flash, but real-time CGM is A-level criteria for caring for folks impacted by diabetes. So I think now what you're seeing is the standards of care are out there. There's a study out there that demonstrates the clinical efficiency as well as enough studies out there around economical efficiencies associated with putting folks on CGM. There's a lot of interest now in this basal population and how ultimately we get access for that group to have reimbursement.

Okay. And that's a U.S. analysis. Now let's go OUS with this.

Sure. So outside of the U.S., it's a bit of a mixed bag. But in general, the type 1 population is less than that in the U.S. Some countries are as high. You look at maybe Germany and the Nordics, and it's much, much similar to the U.S. But then you look at other countries, and it's not -- type 2 intensive is much lower. Most countries don't have a type 2 intensive program yet. Some do like Germany, but others do not. And then type 2 non-intensive is all cash based, so it's relatively [ low outside ] the U.S. So for the most part, blended average below the U.S. Type 2 intensive, much lower than the U.S. and type 2 is almost 0 outside the U.S.

And so what is the obstacle to expanding? Is it education? Is it reimbursement?

It's generally those 2 are the biggest. It's education and reimbursement. A lot of times when you found that reimbursement from central governments have taken place, adoption has kicked in. And so it's reimbursement. And that's not too dissimilar to what you find in the U.S. With reimbursement, to get that reimbursement, it comes with also education. And so it's working with KOLs, reimbursing bodies, whether it's government and/or private payers in these regions and really educating them on the benefits. I think you've seen some of that, as a good example, in Canada. We've talked about governmental wins really across the board in Canada as well as a lot of private payer wins in Canada around education, awareness and now reimbursement. And what you're seeing is Canada is one of our fastest-growing markets. So if we can get those types of things in place in a lot of these markets, that really is a recipe for growth and success.

And so just shifting a little bit, but not that much. The competitive landscape has always come up, all right? And some of it is product form factor, but some of it is pricing. It's not going to be a surprise that your primary competitor is looking to launch a next-generation product while you're looking to launch a next-generation product. How do you see this shaking out?

I think the first thing we would say is, and we've talked about this for some time, is the market is big enough for more than one player in this market. So I think we'd say that this is a big market. Most markets have 3 to 4 competitors. Right now, in our space, there's really 2 primary competitors. So I'd first say that it's not a binary answer to the 2. In terms of what we can control, I think what we can control is we need to launch a product that continues to have what we are, which is best technology, best connectivity, really what we think is a world-class product. And that's what we plan on launching with G7. We know our competitor will launch a product. And certainly, when we see that, we'll break it down and we have some early insights. But we can't control their timing. We can control ours. And I think when you see all the iterations we're making on G7, but also the software, right, we talked about form factor, we've been investing a lot in software. And you can see it in the R&D investments that we make as an organization. And you're seeing real-time API, the app in an app. You can certainly expect to see a brand-new form factor for the app itself, built on a brand-new platform in G7. We think that will continue to differentiate us because we don't think it's just the hardware on our feature comparison, we think it's also the ecosystem and the real-world capability. And point in case, I mean, think about G6 and the work that's been done thus far, we're going to be the CGM that powers the 2 leading AID pumps in the market. And that's just our strategy playing out. So I think you'll continue to see us go down that path. That's true to who we are. And at the end of the day, we think having the best product is certainly always a winning strategy. So we'll certainly keep going down that path.

Can we talk a little bit about the marriage of tech and medtech? I mean over the calls over most of 2021, there was sort of an increasing cadence of partnerships and applications. Can you just sort of refresh where you are with this and what we can look forward to?

Yes. So we've intended to be a company that is a partner of choice in the ecosystem. And that's why we've been investing in software for years. And I know you've mentioned kind of this tech, medtech and a blend of the 2, and I'd say, actually, that's our strategy coming right into focus, right? We believe that the software back end and the interface and the connectivity across these systems is absolutely at the core of delivering value to the end user. And we know that through all of this, we can be the CGM that delivers that value. We become the hardware that turns on the software, along with having our software differentiation. And so we'll continue to work on how do you feed an app that's really designed at health and wellness or addressing this? Well, you have to have a CGM of connectivity and provide real insights and data. We want to be your partner, and we'll be your partner. You want an app in an app to brand it your name? We'll do that as well. We can be that partner for you. You want connectivity? We will partner with you on an AID device, and we will be your partner of choice for connectivity. We believe and we've always believed that the advance of medical device is going to be, in some form or fashion, around the integration of technology and software. And so we've been on the forefront having an app on your phone that ultimately helps you see your CGM data, having obviously the connectivity, having the API. So we'll continue to work down that software angle. But I agree with you wholeheartedly, the marriage of the device and the software and the ease of use is the future. And Kevin will say it all the time, we're becoming more of a software company over time, and that's where we'll focus a lot of our efforts.

One of the things which came up on the fourth quarter earnings call was the impact of the pandemic to the primary care physician. And I think that, that took some investors by surprise. So can you flesh that out a little bit and help people understand why that was more notable on the fourth quarter call or fourth quarter? And how to think about that this year?

Yes. It was a good question, right? Because I'll rewind it 3 years and before COVID hit, and it'll help to get everybody kind of aligned to it is, 3 years ago, we were calling predominantly on endocrinologists. And that was really the focus. There wasn't really a lot of reimbursement in the type 2 intensive space. And so where did you call on folks? You call them there. And quite frankly, we had inventory capacity issues. We don't want to relive those again as well. And so we did what we could with the capacity we had, the reimbursement we had. COVID hits, and we do really well during that period. We were calling on, though, the same physicians that we had called on and met in person prior to COVID. We knew them. We had a relationship. We had established it over time. And so we did well. And ultimately, through 2020, that first kind of cut of COVID, it was a great year. We doubled the sales force moving into 2021. And we focused on that next phase of growth, which was your type 2 intensive, but also type 2. We wanted to build those relationships with the primary care physicians that see your type 2 population as we ready ourselves for our next phase of growth. And so we've done that. But in coming with that, we called on brand-new prescribers. And so in doing so, over the course of 2021, certainly earlier on in the year, we started to ramp up. And our expectations were that we'd ramp over time. What we found in Q3, starting in Q3, but really more pronounced in Q4, is the rise of the Delta variant started closing offices to us calling on these primary care physicians. Now if you have a relationship with an endocrinologist for 5 years and you can't see them for a quarter, it's not a big deal. When it's a brand-new primary care physician you may have never met before, you've met 1 or 2 times and you need to demonstrate utilization of the product, it takes a little bit of effort. And so what we found was Q3, some doors started to close. It didn't impact this month as much. But in Q4, as you saw the rise of Omicron, you saw a lot of physicians that were really just saying, "Look, we're not going to see any outside folks. We're just kind of putting a pause here over the holidays." And really, that impacted our new patients. And so we saw that a little bit more in Q4. We talked a little bit about it impacting January as well. And we're starting to see it fall here in February as more and more folks were able to get back in front of primary care physicians. That's why it was a little more pronounced in the fourth quarter because the new patients we ultimately call on and the physicians that we ultimately see, we weren't able to see as many of them. I would caveat that all with saying, every quarter in Q 2021 was a record new patient quarter, and Q4 was in line with Q3 in terms of a record patient quarter. So while we didn't necessarily break records, so it's still a high prescribing volume, but it just wasn't at the level of expectations that investors have for us.

So as Omicron thaws, to use your word, how does that -- do we just sort of see a natural pickup? Is there a pent-up demand in physician meetings? I mean play this out a little bit, please?

Sure. I think what you will start to see is us getting in front of these physicians again. And certainly, we'll get a little bit more knowledge about pent-up demand as we get in front of more and more of them over time. Certainly, we know that there still remains a robust demand for CGM technology. And as the awareness builds in our communities, we certainly see more and more of that. I think time will tell. But I think the big thing that's important, the first and foremost thing is for a primary care physician to unlock their prescribing habits. Sometimes, you got to get in there and train them. And once you train them, then the prescribing patterns really grow. And so what we're going to be doing over the course of the quarters, going forward, is really learning from 2021. Remember, this is a pretty big year for us to learn. Learning about what does work, what doesn't work in a sort of COVID-impacted environment, make sure we apply that to the rest of the sales populations. The teams are working on doing that today so we can be effective in those environments on the call points. And I think what you'll see over time is CGM demand is there. It hasn't waned. We still see it. And I think getting in front of these primary care physicians is really going to get us back on track for those expectations. So we do expect it to get those back over time. We expect the demand is there. We're going to have to just see how it plays out over these next couple of months and how many primary care physicians are opening their doors. But the expectation is we get those patients in as soon as we're able to see them.

And do you think you have the right sales size or sales force size now to do this now that you're a little bit smarter on how to penetrate that physician base?

We do. There might be some tweaking. We're always tweaking around the edges. We're pulling data, looking what prescribing patterns are, trying to understand our coverage models. For the most part, when we did the doubling of the size of our sales force, that's exactly what we did. And we believe we have a pretty good coverage model. That's not to say we won't think about how to tweak it or pilot program [indiscernible] about how to do it. But I think for the most part, we've got the right-sized sales force. It will be your typical normal growth patterns from there. But the thing you might see us doing is tweaking from our learnings about how we go to market, whether you look at targeting endos with a certain type of sales professional and PCPs, are they different? Or do you have your senior/junior rep relationship, one that you see work well in other medical device? We'll look at some of those as to whether they make sense or not. But I don't think it requires a material change in the sales force population.

So let's spend a minute on expenses then. Because one of the big takeaways from the fourth quarter call was the investments that are being made. And I think it's safe to say that I think some investors were taken aback by some of your expense commentary. Why is this the right level today? And this is a 2-part question. And do you think you started the year giving maybe conservative guidance given how you did hurdle past your expense metrics last year?

Sure. So I'll talk about all about Q4 because Q4 is a little bit more unique in the sense of some of those expenses. And then I think we'll talk about maybe the guide for the year, if that makes sense. So Q4 had really 3 unique things in it. And they all kind of played out, really associated with the launch of G7. So we'll put a little bit of that in our commentary. But we had some G6 lines, quite frankly, that we decided that we didn't need anymore. As we prepared for the launch of G7, our yields were so high. We saw a little bit of a charge in our COGS line with some of that. So that's not -- that's a onetime cost. It's a bit unique. It didn't really impact us too much, but I understand why if you're focused on the fourth quarter and in your [indiscernible] key on. The other piece is, is we actually realized our G7 lines could be more efficient by excluding some of the parts that we had originally purchased. Remember, we ordered [indiscernible] lead times in a lot of these products. Some came in and we realized, gee, we can actually run these machines quicker by taking some of these out. So we took a little bit of a charge there. And so between those 2, you're talking about $15-ish million, which you take that out, and you start to look at the quarter and it looks a little bit normalized. And then we did pull forward some sales and marketing collateral just in preparation for a G7 launch in the quarter. And again, that's more temporal in nature. So you kind of exclude all of those things, basically would have been in line with what we had guided to. So that was the Q4. I think there was some -- maybe some anomalies in there. We tried to allude to it a little bit on the call, but hopefully that's helpful. As you think about 2022, think about from a gross margin perspective, guiding to 65% gross margin. We exited the year over 68%. So there's a 300 basis point headwind on gross margin predominantly associated with the G7 launch. And I'd point to our G6 launch, you saw us kind of go down and those yields come up and you come right back from a margin perspective. And that's the predominant reason you see it stepping back. But despite that, we're giving 100 basis points of operating margin expansion, which means over 400 basis points of operating margin leverage you're seeing in 2022. So I totally understand the question, which is to say, well, gee, can we get there? I think what you're seeing is the investments we made, at least on the OpEx side, leveraging. And then the G7 margin, look, that's a function of us launching a new product. Yields generally aren't as high, scraps generally higher. Those types of things are higher early on in the launch that I think you'll see us get out of over time. Hopefully, that unpacks it for you. It really wasn't intended to be overly consistent. I think you can see the leverage really playing through.

It does. And in fact, if my memory serves correctly, at -- I don't want to say peak, but at sort of not start-up level, my memories of the G7 has pretty attractive gross margins to begin with.

It does. In fact, the G7 will produce, at least from a cost perspective, I'll start there and then we can get into margins. But from a cost perspective, the G7 is going to be $10 a day at standard cost, which is well below our G6 standard costs. So that you start to look at and at that scale. But to your point, you don't even have to be at scale to then surpass the G6 margins over time, the G6 cost over time. So you're right, and I always look to the proxy of our G6 launch. You saw it. You saw the throughput was slower. The scrap was higher. The yields -- so you didn't get the full absorption of depreciation. And then you saw -- and I think you saw us in the low 60s when we launched G6. And we moved into the high 60s, in some cases, into the 70s. We're going to have a similar situation when we launch G7, take a step back. But I think we've proven our manufacturing and R&D teams, when you give them a target to go eliminate costs from a production cycle and increase yields and throughputs, they can deliver. So we just need to give them time to do that.

So how long does it take for you to go from point A to point B? If you're absorbing 300 basis points right now during the start-up phase, and then you add on to that just naturally higher gross margins, I mean, I know you just gave '22 guidance. But for '23, do we start to hurdle that?

Well, I think we'll have to wait a little bit to get into what ultimately '23 looks like. I think the timing, so you're getting to the point is when does the timing hit? And I think it's the big question is going to be regulatory approval, reimbursement, and then I think it's going to be how quick do we get these AID systems from G6 to G7. Because I think all of those are meaningful step increases and throughput on those G7 lines that we know. At least, if we make as much G7 as we make of G6 today, we know the costs are lower. So you can already get to the idea of you've got to get to that level to reduce it. But we expect to blow past the G6 levels as we continue to expand. So you can see where it gets over time. But that gives you some cadence. I think some of the cadence here is going to depend on how quick the shift is from G6 to G7. But look, at the end of the day, long term, your finger is on the pulse. I think it's just a question of how quick we can make that long term a reality.

So we're running out of time, although I think we keep going on. Always happens. What do you think -- I mean you've spoken to a lot of investors since you reported. What do you think people are missing or that you're like, gee, I wish we spent more time focusing on this?

It's not that I don't think -- I think people are missing it. I do think what we have to step back always and think about is, there's this long-term end game here. And the long-term end game is CGM on a lot of people. I was laughing the other day. I went and got my car fixed. And I remember back when I had -- and I had, by the way, I had a car that broke down like every 300 miles, so I'd never recommend getting one. But I won't put the car company on blast here. But you'd go in and someone would turn on the car, and they would say, "I think it's carburetor." No, it's not. It's this. It's that. And it's trial and error just by turning something on and looking at it. And that's the way medicine works today, right? It's a lot of trial and error. But there are some areas where diagnostics are used, whether it's in a hospital setting. CGM is a diagnostic. And I think when we think about what it can do and all of the advancements that we're making in technology, this -- you'd never go into a car shop today and go, "Well, why are you just trialing it? Why don't you just connect the diagnostic to the computer in the car, it will tell you exactly what's wrong." These are the kind of things we're going forward. I just want to make sure that as folks kind of focus on the interim, how is G7 going to launch, when is it going to launch, what does that mean? At the end of the day, this is a product that is going to be incredible for not just the diabetic community, but the entire community. And so I think it's just important that over the long haul that there is an incredible need for this product. And I just -- I'd leave folks with we're going to focus on the short term, and we absolutely have to, and that's the role and let's talk about it. But I love talking about the unmet need just really across the entire population. And I hope folks can always make sure they keep an eye on that because it is, it's incredible. It's an incredible opportunity.

Excellent. Well, Jereme, thank you so much for joining us this morning. And I know you have a full day. I hope you enjoy it.

Yes. Thanks, Joanne. I appreciate it. Thanks for having us, and good seeing you again.

It is. Okay. Bye-bye.