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

I'm Travis Steed, medical device analyst at Bank of America Merrill Lynch. And up next, we're pleased to have DexCom, Jereme Sylvain, Executive Vice President and CFO. Welcome.

Thanks for being here. Thanks for having us here. Thanks, everybody, for coming out and seeing us. Good to see faces we recognize on screens, in-person again. So thank you.

Great. I don't know if there's anything you wanted to open with or just jump into questions.

No. Let's jump into questions. I think it's a good time to talk about DexCom. Maybe a tough market environment, but a good time to talk about the company.

Right. I think most people in the audience will agree with that.

Yes.

So looking at Q1, sort of January, February really impacted on new starts. Saw a pretty big recovery in March, it sounds like. Like, how are you seeing new start trends continue into April? If we look at script data, things seem to have improved quite a bit and seemed to be a lot more stable.

Yes. So the first quarter was a good quarter for us. I mean when we went into the quarter, there were a lot of concerns about Omicron and people getting out and being able to access product technology, their doctors. And accordingly, January was a tough month. And February was a little bit better. We were still able to exceed our expectations on the quarter. And so I think it gives you some confidence in how March ultimately came back. We don't see any change in some of the changes we saw in March in terms of patients going forward. And so it really gave us some confidence in the business coming out of the first quarter. We saw robust demand for G6. And G6 is now -- our product has been out for almost 4 years, and it still continues to have incredible demand. And so a great quarter, great outcome in light of what was, quite frankly, a challenging start to the quarter.

Yes. When you look at the full year, it didn't really quite raise guidance as much as to beat, it offset some FX. If you think about the kind of the full year trends, what are you thinking over the course of the year?

Yes. So we reiterated guidance, but there's about $15 million to $20 million of currency headwinds. And so we're going to grow through that. And so effectively, we call that raising the guide a little bit and that the beat in the first quarter was relatively strong. If you exclude currency, it was around $10 million to $12 million. And so we expect that to play through for the balance of the year. And so we felt confident coming out of the quarter that that's ultimately where we were going to go. And so we felt comfortable reiterating despite those currency headwinds. I know a lot of companies have come out and said, "Gee, we might take guidance down as a result of this." I think we felt comfortable growing through it. And the results in March gave us that comfort. That's exactly what we would do.

Yes. That's fair. And then this quarter, 40% volume growth, some of the mix shift headwinds start to go away after this year. Is that still the case? And is 2023 a year where we actually see volume growth and revenue growth be a lot more consistent with each other?

Yes. So first, I want to key on that 40% unit volume growth. I mean that's an amazing number 4 years after a product launch as much as we've grown, and that should just give you some comfort as to what you see. Going forward, as you think about the company, the growth, et cetera, we expect this year to be the final big year of our move, our channel mix move. And for those folks that are familiar with us and for those that are not, a lot of our patients are moving from the durable medical equipment or DME into pharmacy. And we've always talked about getting to the 75%, 25% mix. We're on that trajectory. And so this year, we're making progress towards that to the point where our new patient starts in the commercial channel are about in a 75-25 mix, which gives us comfort that's where the resting spot is. So the expectation is as we get to that resting spot, the delta between unit volume growth and revenue starts to shrink down to a more normalized approach. We still expect that in 2023 to normalize quite a bit more. So there's nothing that's changed from that thinking, and we're making the progress towards that as we move through this year.

So it sounds like there still could be some mix shift left in 2023, but maybe not as material?

It would be smaller, more micro type of stuff. I mean more consumer trends towards maybe more in pharmacy. That's where it's predominantly going to be. And you'll typically have your medical device headwinds and pricing that you generally would expect as a run rate. So we do expect to see some of those. But I think we'll be through the majority of the...

Like low single digits rather than like double digits, 10%?

Certainly on a pure price, absolutely low single digits.

Okay. That's fair. Well, will you take that in consideration, we're actually giving guidance at that point?

Sure. As we get into more 2023 guidance, we'll unpack the parts, the pieces that unit growth. We came out this year, we had talked about unit growth being in the low-30s as part of guidance, and that's what we had talked about. We'll give some of those contexts, including patients, as we get towards the end of the year. It will make sure that we have enough transparency so that folks can really look at the business.

Okay. That's fair. And then I do want to jump into the G7 event. It sounds like in -- ours, the message may have changed slightly on the margin. It's like it could have been an expectation for ADA, maybe no longer ADA now. I don't know if that was intentional or if there was more of just don't get an expectation that this is coming because we don't have control over it. If you go back and forth, was there a little bit of a time line change or some kind of shift in that?

Well, over wind, and this is partially maybe my fault because I said it. I said, is it unreasonable to expect it by ADA? So anything is possible, that's not unreasonable. And so I think some folks said, "Hey, look, ADA, we think that's kind of the line in the sand." I know the ADA and the FDA has generally looked to approve things around that time frame. We are actively involved in dialogue back and forth with the FDA. I mean it is -- they are engaged. They are working with us. They're tired. They're working a lot. They've got a lot on their plate. And so as we wanted to just really set expectations, we said, look, we don't expect it by ADA. We haven't given time frames for that exact reason. It is a little bit out of our control. But I do think the one thing we are encouraged by is the back-and-forth dialogue has been very, very good, which gives us a lot of confidence that there is going to be a material product launch in the U.S. in 2022.

Yes. And so you're still committed to sometime in 2022, but you're not quite ready to say maybe earlier second half versus later second half? I don't -- you won't give that color.

Right. We're just not ready to say exactly when. For that reason, it's a little bit out of our control. So we'll hold back on that, not because we're trying to deploy, but just because it is out of our control. And it'll be probably a little bit, I don't know, irresponsible to start making promises on behalf of other people.

Yes. No, that makes sense. When you think about the actual launch, once you do get it approved, how quickly can you go? What are some of the things you're doing now from a manufacturing perspective to make sure this goes full on?

Sure. So our fast lines is what we call them, those are ramping up as we speak. We have multiple that are up now for the CE mark and the impending launch that's coming out there. And we will continue to add those lines. We actually already have the equipment. It's a function of timing of when do we move the G6 lines out into the G7 lines. And so that's what we'll work on from a U.S. perspective. In terms of cadence, there's a couple of different things we're going to work on. And so -- for those that are familiar with the space, the AID pumps, the Omnipod 5 here, which is coming out shortly, certainly Control-IQ, those are going to be tethered to G6 until they're ready to launch. And so we have to be mindful of keeping the G6 lines up and available to support those folks until those pumps are ready to move to G7. That will be part of the baseline. For everybody else, the goal will be to move folks quickly through the reimbursement cycle. And so CMS and DME, our Medicare and our folks for the U.S. commercial channel, getting it through the durable medical equipment, that's generally going to be around a 90-day window. And so the expectation is after 90 days or so, those folks will start to make that migration. And then the pharmacy channel through the PBMs, that's going to be a little bit longer. And that's just a function of there's extra people involved in that channel, including employers that have to ultimately agree to it. And that can be as short as 6 months, it can be as long as 18 months. Generally, it's in the 9- to 12-month range. And so we'll work through those as well during that period. And I think that's going to be how we roll it out. Everyone will have access to it if you want it, but I think the reimbursement is the piece we're going to have to work with folks to make sure we get folks on it.

Okay. And is that going -- if we think about a new patient that's coming to DexCom. If they're in the pharmacy channel, they may actually have to wait 6 to 9 months or 18 months before they can get 7?

Could potentially, of course, if they're clamoring for it earlier and they want insurance coverage for it, they could always go to DME. The one great thing we have is we are generally dual benefit. And so if you're covered, you're generally covered in the pharmacy and the DME channel. And so if someone is really interested in trying to get on to the product early, I think that would be a faster way to do so. If they're comfortable with the pharmacy channel, we still think G6 is an incredible product. They can continue to do so until we work with their PBM [ Ds ] around formula.

Okay. And from a pricing perspective, if they come to the DME and then switch over to the pharmacy would there be another pricing headwind? Or is it you kind of moved down to pharma -- pharmacy pricing?

Well, if there's a massive switch there, it would be from pharmacy to DME, it actual be a price tailwind and then a headwind. So it would be a net neutral over the course of time. But there could be. There could be some of those. Again, we don't expect there to be too, too much of that. I think people are very comfortable in the manner in which they get their product. But if there is some of that, we'll certainly be able to talk to it over time.

Got it. That makes sense. And one of the questions I often get is if you look at the incremental change between G5 to G6, and it was a pretty big step change in technology, drove a huge acceleration in the market. Like, what's the step change from G6 to G7? And a lot of people say, maybe it's more incremental. Maybe it's -- the technology is obviously great, but is it going to actually drive an acceleration or an inflection in the market like G6 did?

So we believe it helps break barriers of entry. I think that's the big thing we obviously navigate through, and we've navigated through over time. So if you think about G5 to G6, no finger sticks, certainly a better app, connectivity, that helped break those down. With G7, it is an easier product to use. That helps break barriers down. The 30-minute warm up, the more -- the better accuracy, the form factor in all candor. So I think those are barrier breakers. In terms of how fast that ultimately does? But I think we have a bit of a governor at this time, which is the AID connections, right? And so you're really thinking about the MDI space that we're going after. So it might be a little bit more of a challenge to go as fast over the longer haul, we do think it continues to break those barriers down to getting to what we think is 80% adoption at a floor across all the intents and environment.

Okay. And then if you look at some of the initial feedback, G7 in Europe. Like, how is that launch going? How quickly can you roll it out in Europe? Is it becoming a bit more competitive with your competitor in Europe?

So what we're seeing with G7, so for those we have a limited launch in the U.K. going on right now with G7, and we had incredibly high expectations for G7 user experience and feedback that we've got through that limited launch, and we have not been surprised at all. It's been incredibly high as we expected. The feedback, everybody has really enjoyed using it. A lot of folks are asking how they can get their hands on it. They're not giving it back. So I think that gives us a lot of confidence going into a more broader launch. And we'll be getting into broader launches here over the near future, especially through the European markets. And so I think that's a great starting point. I think the other pieces that have really given us some encouragement is as folks have started to report on it, and you're seeing some of the early notes coming out, we're finding more and more folks in other countries really start to get interested and how can we get this and how can we ultimately bring it in earlier. So I think our expectation is G7 is going to be very well received. The lessons we've learned have really validated what we thought, which is it's going to be an incredible product. As you mentioned competitors, we think G7, there really is no competition. We believe it's got the best connectivity, the best real-world and -- accuracy both clinically and real world. Certainly, the form factor, the software, we think, is unparalleled. Once that comes out, I think you're going to -- I love our position here.

How does international pricing -- not from necessarily the total for your company, but if you look at the out-of-pocket cost for patients outside the U.S., some of the barriers by country, how does that compare to your competitor?

So it depends on -- to your point, it depends on the country. Some countries, it's entirely covered, irrespective of choice. And in a situation like that, we feel very good. Most countries where you have tender markets, it's predominantly covered in that space. There's really no out-of-pocket. And if there is out-of-pocket, it's relatively small, irrespective of us or a competitor. In areas where it's more private pay and not government tender pay or government reimbursement pay, copays vary, but generally, they're pretty small. And in our negotiations, one thing we've always tried to do is keep copays as low as possible. I think you see it in the U.S., and you certainly see it abroad. And so we're pretty excited about it. And again, in markets where there's no copay, we love our opportunities there.

Right. And you said broader launch in U.S. near-term. Any more color on what near-term is?

Near-term. It's going to be here pretty quick. The U.K. limited launch, we're getting data today. We're doing that obviously to make sure that the rollout goes well, and we would expect it to go well based on the feedback we've got. We won't get into specific dates, but we don't want to wait. You can imagine, we're as excited as anybody to get this product out. It's pretty obvious. Our first launch will be in the U.K. since that's where it is. And we will have multiple different launches in multiple different countries over the course of 2022 in Europe. So I would expect a lot more coming over the course of the year.

And do you think G7 drives an acceleration in international growth?

So I think we're already on a pretty good clip right now. And so I think what it does is it continues to fortify the growth rates that you're seeing today. I think having that product factor, having the access and now what we think is already the best best-in-class sensor with G6, but all the benefits of G7, we see no reasons why we wouldn't continue to do well there. To the point, I think I shared this a little bit earlier. Our OUS growth is now at a point where we're taking share. And I think because we haven't been the incumbent outside the U.S. I think it's a very exciting time, and we're doing it with G6 in markets where Libre 3 is available. I think we're really excited to see what G7 can do in those markets.

You're actually seeing Libre's patients move over to G7 or G6?

We've seen Libre patients move to G6, Libre 2 and Libre 3.

Okay. And then I guess just brought a bigger picture, if you look at G7, there's a huge basal patient opportunity, 4 million patients, but essentially the same size as your type 1 and type 2 intensive market. My math at least is like that market is probably high single digit penetrated, mostly with Libre patients today. I don't know if you would agree with that, but I'd love to see like how you think G7 helps you open that market up?

Yes. So I think -- so first off, that -- it's a little bit hard to know how much it is. We know whether it's basal or nonintensive. But there's less than 5% across the whole T2 population. And in that basal space, you're right, it's a little bit higher. In terms of what G7 does, again, it's about breaking down barriers to adoption and that form factor, that capability, if there's coverage, we see no reason why folks ultimately wouldn't want to migrate on to the product. I think then the big question in that space is coverage base. And we've been making some good headway on building evidence. It's always been in our long-term pathway, is to ultimately look at basal and get that coverage that's kind of the genesis of the mobile study, quite frankly. So for those who don't know, we had a mobile study that came out at ATTD last year to ultimately looked at the performance of our sensor population in nonintensive users. So this is basal and also folks on orals. And the feedback was incredible. A1cs were lower, time and range was increased. And we've been able to prove that the economics of that ultimately yield in a much significant lower cost of addressing folks with diabetes. On top of that, the ADA in December came out with standards of care indicating real-time CGM as a level of evidence with that is recommended. You put those 2 things together, that's the kind of evidence you need to sit in front of commercial payers as well as CMS. That's where we are today. So we have talked to CMS. We'll continue to talk to them. Timing of reimbursement is a little bit of up in the air. So that's something we'll have to work through. Our U.S. commercial payers, some have actually covered basal. It's a small amount, but some have started to move there because they can see the value. The big ones haven't yet. But continuing to have that body of evidence, that building body of evidence, I think, can help unlock that with G7 plus coverage that's a real opportunity for us.

How's the mechanics work with Medicare? Like is there a certain time period where Medicare makes these decisions, could come next month, later this year? Just trying to think about how the back and forth and how those -- how that process works?

Yes. It can depend a little bit on timing. So sometimes, they'll put out an exposure for commentary. It's not exposure. I can't remember the exact name of it, but ultimately, the approval can happen either with a special bulletin which ultimately, we say, "Hey, January 1, this is going to come under coverage." Remember, there's already a reimbursement code for it. And so it's a little bit different. There's already a CGM reimbursement code. The question is the criteria to qualify for it. And so that criteria can be really changed at any time. The question is going to be what are the normal decision-making patterns. And it's generally January, April, are the 2 that they look at. So we'll work with them over that time, but nothing prevents them from changing those windows because the reimbursement code already exists.

Okay. So probably more of a next year thing? Or is this year even possible for basal?

I don't think we want to time it yet, but we will work very, very hard, and it will be in people's goals to ultimately look to get that.

Do you see them using CGM, kind of the same level of intensity every day as your type 1 intensive patient?

What we're realizing through all of the work we're doing is that a basal patient is likely to wear it more full time. Certainly, intermittent wear, there makes some sense, but full-time wear is when you really see the benefits. And quite frankly, as a basal patient, you are at risk of hypoglycemic events. So I think what we've saw and I'll kind of point back to the mobile study, this is helpful. The mobile study came out and people improve their time and range by about 4 hours. It's about how much time and range was increased, which in a 24-hour day is a pretty meaningful increase. What happened was 6 months afterwards, we did a follow-up. We kept some people on CGM, took half of them off that were on that population group. The half we took off last 2 hours. So they were 2 hours better when they started, so that's stuck, but they didn't get the full 4 hours. Everybody that stayed on CGM, stayed at 4. In fact, some of them went up to 5. And so I think what you're finding is full-time wear is really meaningful, not only just to improving outcomes, but also to avoiding hypoglycemic events.

So on the small percent of commercial payers that are covering it, if you go and like look at the patients that have coverage there, what are you actually seeing with basal patients? Are they adopting CGM? How quickly is that happening?

It's going to take us a little bit of time to parse that out. We're seeing some of them get through, which is a good thing because the coverage is out there. In terms of parsing that out, it takes a little bit of time because people don't volunteer what they are necessarily. What you do is you use their prescription fills to ultimately make that assessment. So we'll have more of that as more comes across. It's relatively sporadic right now. But as we get more clarity on that, we'll certainly share them.

And if you look at your market share in the U.S. intensive market, versus Libre, like would you say that in basal population, the market share would look a lot different than intensive? Or would maybe Libre still get a bit more of that share, so maybe you get 1/3 of the market rather than half of the market?

So I think it's going to depend on coverage. Now in the intensive space where coverage exists, we're the market leader. If coverage is in that space, I like our chances.

Okay. And then if you look at historically, like 5 years ago, intensive market was essentially high single-digit penetration, that is close to 50%. Could you see a scenario like how likely do you think these is in the basal population 5 years from now we're at 50% penetration?

It is a good question. It's a case that we haven't been able to see yet. I would expect this. While I don't expect basal to reach the same levels as the core intensive that you see today, I see no reason why it shouldn't have a significant level of adoption. Whether it's as fast, I think the need is maybe a little bit less and people haven't progressed quite as far. But I do expect a significant amount of people in that population to ultimately adopt it through the coverage. It's a real opportunity for us, and it's an area that our team is focused on.

Okay. And then if you look at the primary care doctors, it's probably one of the areas that needs a bit of market development. And how is that gone now that -- codes come down in kind of March, April, you're getting a bit more traction there. It does seem like some of the survey data I looked at, like the awareness is just as low for you as it is for Libre.

Yes. That's where -- if you kind of rewind -- so there's 2 things, I think, to give you some anecdotal evidence, which is helpful. So you're running back to [ 2001 ], which is only a year ago, I know it feels like 5. But we doubled the size of our sales force, specifically with that intent, to get in front of the primary care physicians to increase awareness. What we didn't do -- what we knew at that time, and we didn't know quite how bad it was, it's just how many primary care physicians, despite prescribing a large amount of insulin, we're not aware of CGM. And so you fast forward a year, what we found is when we're able to get in front of those doctors, they really start to understand the benefit, the awareness, and it starts to really deal. So what we found now is we've got to do a better job of getting in front of more and more folks in educating them. Fast forward to March, one of the reasons I think you saw March performed the way it did is people were opening their doors to our reps. And that helped the new patients ultimately come on to our therapy. And I think that's a barometer of things to come, that education and kind of going deeper and deeper and deeper into that primary care space. Our team is aware of it. They're all over it. It's going to be the focus for 2022, quite frankly, 2023 and beyond. That's the population we've got to go win.

Especially saw an uptick in March from that patient or like doctor population.

It was a good quarter for getting in front of folks, and in turn, it was a good quarter for patient adds.

Yes. Does the Omnipod 5 launch, like is that -- are we going to see that in your business? Is it incremental to you? Or a lot of the patients already on CGM? I know it's a smaller patient population versus like overall CGM, but people have asked that.

Yes. No, we're really excited about that. I think you think about what -- so you kind of take a step back and look at the analog, right? Control-IQ, Control-IQ there is a large population of that patient base, obviously, on a CGM to derive the benefit of the pump, you need to be on a CGM. And quite frankly, you need to be on a connected CG. And so that was certainly something -- and by the way, that patient group is clearly the stickiest and the utilization is high, and the retention is low. I think as you fast forward to Omnipod 5, to get the full benefit out of Omnipod 5, irrespective of whether you're on a CGM, you have to be on a certain CGM to get the benefit of that. And so I think that is something we're excited about, not only from that factor, but then to get the benefit, you have to wear sensors year-around. If you enjoy the form factor, and we know folks will, you're likely going to be retaining on the product for a longer period. And so it's an absolute tailwind for us, something we're really excited about.

And some of the other opportunities, like you've made some progress on the hospital market with the FDA. I haven't heard a recent update on Level 2. How are those opportunities going? And I know basal's probably the biggest focus near term. Those are also important to you longer term?

Yes. So hospital, we continue to make headway. We've hired a GM who's now looking to run that business, developing really what the product offering is. As you saw, we got emergency use authorized -- breakthrough designation by the FDA for the right time when that product is available. We also have used our registry to capture data in the hospital. So we've captured a ton of data about what works and doesn't work. I think now the focus is designing the right product that fits into that workflow and that's the process we're working on right now. If you think about what we did during COVID is we bought a bunch of cell phones, put them in patient rooms and said, use this to connect and shoot it to the cloud and have somebody follow. That's a lot to ask somebody to do on top of everything else they're already doing. And so we're working on how to integrate that into workflow. There'll be more coming on that. But we feel good about it. That's why we felt comfortable hiring a GM who has experience in this space before. So we'll make progress there. Love where we're going there. In terms of Level 2, we continue to make progress with Level 2 and our other partners in terms of adoption. And even just for us, we're obviously a member of Level 2 as DexCom, and you'd expect that. But those folks that are participating in that program continue to do better and better, and we see it. And so I think it's an interesting one. And just even recently, I think WellDoc announced their partnership with a large Fortune -- I think 100 -- Fortune 50 company using our sensor to ultimately drive outcomes. These are the kind of partnerships behind the scenes we're working on and driving those partners because I think those are important as you get beyond the basal space and into really the population health. Making good progress.

Is 2023 year -- we all need to build a hospital line in the model is going to be incremental or we have to wait longer?

I think it's going to depend on working through the FDA for the right product. And so we're going to have to work through. We'll give you guys more clarity as that time comes forward. We're bullish on the opportunity. It's a huge unmet need. I think the big question is going to be how do we get to the right product to fit in there? You kind of get one chance to make a first impression. So we'll make sure we do that in the right way. But our product is the right product for there. The connectivity is critical.

And then last question here. I was -- I think a couple of quarters ago, you actually shared some numbers on -- number of sensors that you're building manufacturing capacity for. I was trying back of the envelope math of what that meant in patient numbers. And it was about 8 million patients. And today, you've got 1.5 million patients. Like, is my math, right? Are you actually building manufacturing capacity for 8 million patients?

I think your math might be a little high. But we said 200 million sensors. So it depends on how many you expect them to wear a year, but if you expect them to wear as many as you think, it's probably closer to 6 million. We're building a lot of capacity to build. Again, we've talked about 200 million sensors the capacity. As we build out Malaysia today, look, that's well over 1 million square feet of manufacturing facility space. So it is a huge undertaking, and it's going to be the driver for where we ultimately get to. We believe this market goes well beyond the intensive space. We believe it goes into the basal space. We believe it goes to the population health. Certainly, as you think about gestational management, how you work through that -- the hospital side of things, multiple analytes and ultimately using analytes to ultimately sense other things. We're building out for what we think is a sensing platform for the future. So yes, just if you're doing the math, is this is how many a year. This is many patients. It could be more than that for single use cases and other types of use cases. And quite frankly, if all those things come true, we may be building another factory at some point. So we're very bullish on the future. But you're right, 200 million is what we want our capacity to be. It's a big number.

Sounds like a big number. I think that's a good note to end it up. So thank you.

Thank you very much. Thanks, Travis. Thanks, everybody, for your interest. Appreciate it.