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

Last meeting of the day, so thank you for everyone for sticking with us, and thanks for Jereme to being here as well. Good afternoon, everyone. For those of you that haven't met me yet, my name is Margaret Kaczor and I am the research analyst here at William Blair & Company who covers DexCom. Before we begin, I do have to disclose the fact that I own -- personally own shares of DexCom. And beyond that, you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. As I said, we're very pleased to have CFO, Jereme Sylvain, here with us. DexCom has been a name that probably has been at this conference well over a decade and a core holding, obviously, for a lot of people at the firm and beyond that. But the stocks actually pulled back quite a lot with the recent market downturn. So even as we look out over the next 12-, 18-, 24-plus months, the ROI for us in DexCom is still well in front of us. And our thesis, while it still remains within type 1 and intensively managed type 2 patients, we believe that, that far larger non intensely managed type 2 population and even beyond that, is really poised for conversion over the next several years. They've got a next-gen G7 device that I'm sure we're going to go into as well that's going to launch later this year. So that adds a catalyst and field of fire especially for that pool of patients where ease of use is so important and that smaller form factors is so important. And then longer term, I think one of the most underappreciated things about DexCom is the fact that they've positioned themselves as a partner for digital health companies. And this opening up of APIs, I think you tell me, but I think it's going to be extremely important as you look out over the next 5 years, and we'll hear more and more of that. And that could be real-time coaching, it could be third-party partnerships. And all of that is just going to enabling the technology across the firm. So I'm going to leave it to Jereme to take it from there. Pressure's on.

Thank you very much. I appreciate it. And thanks, everybody, for your interest in coming out today. I know we're the last meeting today, so we won't -- we'll try not to disappoint. First and foremost, as I move forward, our safe harbor statement. I'm sure you guys can all read that. So we'll move into what DexCom is and what we do. And so for those that know a little bit about us, continuous glucose monitoring. And what we want to talk about today is diabetes care and the unmet need that exists today and why there ultimately is such an incredible TAM that we ultimately need to address to ultimately unlock the capability of folks really for our health care continuum to drive costs down over the longer term. We do want to talk a little bit about our U.S. market and why, as Margaret was referencing earlier, why type 1 and type 2 intensively managed still include an incredible opportunity for the organization. We want to talk about our international markets. And so for those of you that are familiar with our stock, our international markets tend to be an area where we've lagged the expansion of the markets over the course of the past 5 to 10 years. Not that growth hasn't been incredible. However, it's been a market where we've been a U.S.-based company, and so we were a little behind into the game. We want to talk about it being a platform technology. And what that means and why that's going to address the needs of many customers including those that want to be met in different environments than necessarily where our app is and it's the ecosystem that will help drive the future. And then the last thing we want to do is just give an introduction to G7 and talk about why that is the future and how that's going to impact things. So with that being said, we can move to the next slide, just talking about where we come from. It's just a brief summary around 2021. We had 27% revenue growth in 2021. And so that's about $2.44 billion or $2.5 billion last year. And we added over 300,000 net patients over the course of the year. We're serving 1.25 million people moving into 2022. And that continues, obviously, to grow throughout the course of time. Some initiatives that have come out there. We introduced a product called Dexcom ONE. We'll be talking about that in a second. Doubled our sales force. So now we have a sales force that really covers the endocrinology in the primary care market, which is really important. We're going to talk about that, why that's important in a second. We've meaningfully expanded access in our international markets. Historically, the company had so much growth opportunity and so much growth potential. We didn't have enough inventory, quite frankly, to service the international markets, and we didn't have the footprint. That's changed over time. And now we're in ability to be on the offensive. And we publish the results of MOBILE in a study in JAMA. Why is that important? It's how we ultimately support the type 2 basal population, which unlocks a much larger TAM. We'll talk about that. We enhanced our efficiency and scale. And why that's important is now we can make many, many more products to address the unmet need. And FDA cleared 2 clearances, really around software solutions. So as we referenced earlier, how software solution becomes the foundation for how we're able to move into new markets. We were able to do that in 2021, where we have 2 key pieces of software elements that we think are going to help drive the future. And as we think about this upcoming year, for those who know a little bit about us, we'll be approaching $3 billion. So you can see $2.82 billion to $2.94 billion. We plan on rolling out our brand-new product, G7. We've already been -- it's already been CE marked, and we're in limited launch in the U.K. That will be rolling out across the United States. We'll get into that in a little bit. Dexcom ONE will go to new markets. It's our product that addresses the tender markets as well as some opportunities where cash pay is an option. We'll talk about NIIT, non intensive insulin therapy through multiple different pathways. And we'll talk about scaling Malaysia. So with Malaysia, we expect to be able to make the combination of Malaysia and other factories, 200 million sensors per year. And so certainly, we have the capacity to grow. And we're well positioned to provide growth momentum in the future. But I first just want to talk about diabetes and just why it's such an uncontrolled problem. I think this slide really tells you why we're in the midst of an epidemic. So you think about diabetes diagnosis and costs. There was about 151 million people around the world that had it in 2000, 463 million just 18 years later. And over 2 years, just from 2019 to 2021, about another 70 million people impacted by diabetes. And it's expected to grow to 783 million people impacted by it. Now this is all in the backdrop of new drugs and new therapies and things coming out that are supposed to help tamp this. But this continues to grow at an alarming rate. And if you want to just think about what it costs to address it, almost $1 billion, and that's up nearly $200 billion over the course of 2 years. It's one of the fastest growing cost of health care and it needs to ultimately be addressed. So what does CGM do? This is a slide we've used a little bit. I think it helps monitor. These are the 4 points you might get when you're pricking your finger 4 times a day, the old therapy, the finger sticks that everybody knows that you can see in every drug store. This might tell you, you're doing a good job. And so most folks use this and they think they're okay. This is a type 1 graph. This is an actual graph. This is what actually happened. The patient went dangerously low over the course of the evening almost to the point where 40 megagrams a deciliter is almost inducing coma level, dangerously low woke up in the middle of the morning, took a finger stick, made some breakfast, thought they were fine. Turns out they were well above range for a very extended period of time. Took another finger stick as the day move on, never went back down into range. And by the end of the night came back into range. This is what happens every single day. 13.5 hours, this patient was outside of their natural glucose range. That has long-lasting impacts on folks. And long and very, very expensive impacts on our system. And that's the type 1 intensive. We talked about a new category, non-intensive type 2 where massive amounts of folks are sliding into here. And what you might get -- the regimen of care is one finger stick a day. This person would have thought they were just fine. But when you look at this level of glucose throughout the course of the day, the average glucose level for this person was [ 185 mg/dl ], that's uncontrolled. And the amount of costs that are going to come and the complications that come around this with eye care, foot care and all of the various cardiovascular issues that come with having glucose levels of this high ultimately cause massive cost for the system. Point is, is we can do more. This is a look at G7. We'll talk about this a little bit more. It's about the size of a nickel. By putting this on your body, you get those intermittent readings every 5 minutes. And it allows you to understand your relationships with insulin management, obviously, with glucose management, with food management. And so we have to do more for patients. So let's talk a little bit about the U.S. market. This is the market opportunity. The green -- if you look to the graph on your left, that is the amount of the market that is reimbursed. The green is people on therapy. And I think what you can see is despite the massive growth in this market and as you look at the folks that have done very well in the market, there's still a massively unmet need. The gray represents where folks are reimbursed, but they are not on therapy. Now we talked a little bit about basal insulin. Basal insulin is that next graph, where the dotted lines go up to the top. And basal insulin is the next frontier, certainly for us in a reimbursement perspective. As you think about what this means and why this becomes certainly important, our studies laid down the evidence for this excess growth. Certainly, as you think about the IIT market, it's up to 99% reimbursed in type 1 and 85% reimbursed in intensive type 2 managed and almost 0% reimbursed beyond that. And there's real opportunities for it. DexCom's MOBILE study, which we ran in 2001, in combination with ADA Guidelines, now is the standard of care based on the American Diabetes Association for type 2 basal. So it provides an incredible opportunity for us to work on getting folks onto therapy and a lot of runway. One of the ways we do it, and this is what you'll see running through our financials, is getting folks on the product through the pharmacy. Our goal is to make it easy for patients to meet them where they need to be met. And as part of that, what we need to do is our patients need to be met in the pharmacy. It's very difficult to get access to products, the durable medical equipment channel or DME. It's generally a long period. You have to go through a lot of prior authorizations and providing support, whereas the pharmacy channel, you show up and it can either be picked up there or mailed to your home. And what that does is it makes it easier to prescribe. Physicians can prescribe it, certainly for type 1s and type 2 intensives. But as we move forward, it's also super important to meet our primary care physicians for non-intensives and there's certainly a massive market that's available for us. When I say it broadens customer access, most folks get their therapy through the pharmacy. And so it's a natural augment to what takes place today. And for us, financially, it's a very efficient model. Certainly, we use wholesalers. It's big bulk pick packing and shipping, and it ultimately gets into the model that already exists today. Our expectation is 75% of our patients ultimately go through there, and we expect to get there by the end of the year, but it's a precursor for the future, which is your non-intensive patients as they ultimately access it to the therapy. So how are we addressing the type 2 epidemic? And what are we doing? Well, we've gone down the partners path. And so you can see here who our partners are over time. There are 30 million people. So we talked about basal being 3 million more people. There are 30 million people in the U.S. that are non-intensive type 2 diabetics not using insulin. The cost to the system, we talked about that, is nearly $20,000 per year for each one of these folks, that's their health care cost annually. And so what we're looking to do is looking at multiple partners and pathways to do that. By working with patients, by working with programs, we have relationships with WellDoc, Onduo, Teladoc, with Intermountain Healthcare and Everside that are providers, with Payers Level 2, which is a UnitedHealthcare program. Some of you guys will have access to it through your health care programs. And working through these partners, we can ultimately address these unmet needs. But more importantly, we can also work with these payers to help provide coverage or assistance, ways that we can ultimately get folks access to product over time. I will say having worn sensors before and having been part of many of the studies and seeing those, the awareness that comes by anybody wearing a sensor, it ultimately changes things. I can say I've changed my lifestyle, thinking things were healthy that were ultimately not. And I think you find that through all the folks wearing these sensors. It's an incredible way to get your arms around it to the point where we're now finding even things in beyond type 2 popping up, population health, health and wellness and even longevity, leveraging glucose at the center of this. So how are we going to get reimbursement? Well, there's 3 things we're going to have to do. User engagement is a big piece of it. And so as we think about studies and we think about marketing and where we ultimately go, the user has to feel like this is part of their life, it doesn't interfere with their life. And so we work on ways to do that. We work on NPS scores so that they're ultimately happy with the utilization of the product. And part of the reasons why we're going to the pharmacy is to make things easier. It's got to be easy. We have NPS scores of north of 80, which is very rare in a medical device company. And we work on that and we're very certainly proud of it. We know that, that is going to be part of the type 2 formula. We have to have health outcomes. And we'll talk about those in a second. But you've got to have better A1cs. And what we've noticed is people who put on sensors, they spend more time with lower A1cs and more time in range. It reduces complications with lifestyle. And we found, in many cases, folks go backwards in their diabetes journey and come off of other medications like hypertension and otherwise. And then lastly, we have to have a return on the investment. There's 30 million people. That's a lot of folks, and that's a lot of folks on therapy, and we believe they will all benefit. But we've got to demonstrate that those outcomes ultimately drive economics back to the payers and/or the self-insured providers. And so here's a couple of the studies that are ultimately out there. What we found is that we save about $420-ish across the 2 studies, 2 separate studies completely unrelated to each other by putting folks on a sensor and doing nothing else. The cost of it is a fraction of that. We also know that glucose has also changed medication. There's been weight loss associated with it. Just knowing that after dinner going for a walk changes your glucose, almost gamifies it in many ways, and we found a lot of people do just that. And the average time and range, just in the type 2. Again, no coaching, no anything, other than just making people aware of what's going on in their body. 3 hours per day, more time and range. Longer term, that has dramatic impacts on the body. And so we're working on type 2. And over time, we think it's going to be essential as part of taking care of our communities. Switching to OUS. So that's the U.S. business, and we're super bullish on it. But starting with the OUS. In 2020 at our Investor Day, there was about 6 million folks in our TAM in the markets we were addressing. Obviously, the TAM is much bigger than that. Our TAM is defined that those who use mealtime insulin, so intensive insulin diabetics, are people impacted by diabetes. By second half of 2023, we are going to increase that TAM by 13 million people for a total addressable market of 19 million people, and this is before getting into non-intensive. So our international expansion is right in the center of it. And it's going to be driven by looking at new geographies, reducing barriers, gaining reimbursement, using e-commerce and going direct in strategic markets. And what I mean by all of those is we have to make it easy, participate in tenders, make sure it's not difficult to access the product with your physician. I talked about DME earlier taking 4 to 5 weeks where your physician is also a part of it. And so we're making it easier to get access to the product. We have an e-commerce platform. So for those folks that are interested here in the U.S., you can't get it because its prescription is required. But outside the U.S., prescriptions are not required. And so we're using that e-commerce strategy to do so. And going direct in strategic markets. We've acquired our distributor in 2021 in Australia and New Zealand. We also acquired our Netherlands distributor -- or the Benelux distributor in that same period, using the balance sheet that we have, and we have approximately $3 billion in cash to go after these to ultimately fuel our growth. And one way we plan on going after it is Dexcom ONE. Historically, we only participated in the higher end market with our G Series. And we'll talk about our G Series in a second. G6 has been our workhorse over time. Dexcom ONE effectively is a G6 form factor with a different software experience. And so what it does is it makes it easier to use. For those folks in cash pay markets where government reimbursement doesn't exist, we can come in a lower price. We don't use third parties. We usually distribute it directly, so we can use those and [indiscernible] those savings on. It's matched with our competitors' price point and that's historically where we had a challenge. And it's a foray into a software differentiated portfolio. One of the things we plan on doing over time is making sure that we leverage our existing portfolio hardware and change the model with service -- changes in models of service as well as software. This is our first foray, and it's going to allow us to compete in tenders historically we haven't had the chance to do. We also have the capacity to do it. This all then plays into a product portfolio ecosystem and an area that we've been investing in very heavily. More than half of our R&D is now in software. And that's because we believe, over time, hardware, while incredibly important and will form the basis of it, differentiation via software and the capability to connect with other apps, to connect with pumps, to connect with employee health records, to allow caregivers to follow your glucose records. And if anybody here has a child that's impacted by diabetes, you'll know how difficult it is to wake up every 2 hours and prick their fingers and the night sleep you get by being able to track them on your phone with alarms. All of this connectivity has been built with a long-term strategy of penetrating markets, not only in the type 1 space, type 2 intensive space, but meeting people where they want to be met in the long term. So as you think beyond where we are today, having the ability to talk to other apps, to talk where, say, you have a weight loss app where you want to check your glucose levels, your food intake, your exercise regimen, being able to port that all into the app where folks want to be met, knowing we have an FDA-regulated API. These are the kind of things that we're working on from a software. We are the only third-party AID-integrated system, that's automated insulin delivery, that's connectivity to pumps. It's effectively the promise of an artificial pancreas. And our CGM helps drive those. And all of these things that are part of this ecosystem, we really believe provides a competitive differentiation moving to the DexCom system. And lastly, maybe what I'll do is I'll talk a little bit about G7 and where we really want to go with G7. So we believe that G7 is going to change things. It's about the size of a nickel. And so it looks on that screen, much bigger than that. But ultimately, it's the size of a nickel. It lasts 10 days, the expectation is over time, it will get to 15 days. But what it's going to do is it's got a redesign software. It's factory-calibrated. We can have it last longer and longer. We can provide personalized insights and let you know here is where your glucose has gone, here's some recommendations about what we would suggest you do, here are trend arrows as to where you're going. You might be running low, maybe it's time to grab a bite, get some juice, have an apple, whatever it is to ultimately move you up. It's fully disposable. One of the challenges we had with prior generations is transmitters are reusable. This is fully disposable, throw them in your bag and go. Real intuitive from an applicator perspective, it warms up in 30 seconds -- 30 minutes, 30 seconds would be incredible, 30 minutes. A lot of other competitors, 12 hours adjunctive, G6 was 2-hour warm-up. This is a 30-minute warm up. And so you put it on and you're immediately getting feedback. And for those AID connections over the long haul, where you're connected to pumps, that's super important because that's 2 hours where you're not dosing insulin based on an algorithm. And then lastly, we built it all to be 100% automated. So as we build our manufacturing plant in Malaysia, these systems will produce these units 100% automated. So it will allow us to reduce cost over the long haul. I think at the end of the day, this G7 also provides the form factor and the basis for moving into the type 2 markets and beyond. And certainly, growth drivers as we're moving into new parts of the reimbursement landscape. And ultimately, this will be the workhorse that's the baseline for our future product portfolio offerings. So with that said, I know I wanted to cover a quick 20 minutes. Any questions, happy to answer. But most importantly, this is our why. I think we're a company that happens to employ more folks impacted by diabetes as a per capita probably than anybody. And it's because of all the factors and all the people that we impact. There isn't a day that goes by. We just got back from New Orleans, we were at ADA. Surprising, the food in that city is not really complementary to -- but the amount of folks that were walking around the booth, just talking about lives that were impacted is incredible. My best friend's father was impacted by this, his life was saved by this product. So all of us have our stories as to why we do this. These are going to help millions and millions and millions of people. And I just think that's incredibly important and incredibly powerful as we move forward. So thank you very much. Thank you for coming out. Happy to answer any questions.

So maybe just to start, you guys were just at ADA. You were talking about G7 more and more. You referenced yourself the opportunity of going towards a 15-day sensor. How quickly can you get there? What does it require both from a regulatory perspective and manufacturing?

Sure. So today, we have a 10-day sensor. The reason to go to 15-day is really about there is some convenience for the user. But a 15-day sensor is really valuable for us. And if you think about it, 15-day sensors mean you send 2 a month instead of 3. So from a COGS perspective, it's very interesting. The key there is about survivability. And survivability is more of a question of adhesive. I mean if you think about these things, they're kind of like Band-Aids. And if you've worn a Band-Aid for more than 5 days, you understand some of the challenges that having on your skin through showers and swimming. And by the way, you wear these permanently. You don't take them off. So if you go swimming, you work out, you sweat, you've got it. And so it's really about survivability in adhesive. And so our plan is to launch with 10-day and then we work on actually the adhesive itself. It's more an adhesive question. And once we get that, there'll be a small clinical trial. So after we get G7 10-day approved, small clinical trial, another filing with the FDA. But it shouldn't take as long. And so we're very interested to get there. We're highly incentivized to get there from a profitability perspective. And we'll work on getting there very quickly.

Great. If there's any questions from the audience, feel free. But I want to maybe keep going down the path of new opportunities. So for example, the MOBILE study came out. Got a lot of, I think, great feedback from ENDOs and patients alike. So how do you commercialize that? And is reimbursement a part of that? And how quickly can you get it?

Sure, yes. The MOBILE study was really targeted at basal users. And what have we found was a basal user using the product with no other intervention spent 4 more hours time in range per day, which is a market improvement. And so we believe that, that study, combined with the ADA now changing its guidelines calling at A level or essentially standard of care based on ADA standards, we believe that, that forms a basis for reimbursement. Now you have to combine it with health outcomes. And we have economic studies that will show that we can take cost out of the system. I think we showed a little bit earlier that across an entire type 2 population, which includes less acute and more acute population, basal being on the more acute side, $500 or $420 a month. The basal population is even higher than that. So we'll be taking that information. We'll be going to payers. But the most important payer is likely CMS. And we've already gone to them with some of that information, and we'll work with them to get that coverage over time. Hard to know when it will happen. But last time we did this, Medicare surprised us and went pretty quickly. We're not necessarily expecting it in 2022. We do expect it sometime in the future. And quite frankly, are bullish that it will take place. And that's how we monetize it. And that's, by the way, 3 million incremental patients in the U.S. that have been subject to our TAM. That's about a 75% increase in our TAM.

Maybe as you guys were at ADA, the booths are absolutely packed for you all. And frankly, all diabetes technologies, but namely you. So maybe talk us through what people were excited about? I know it was one of the first -- new first in-person ADAs in a while.

Yes, I think people were just happy to be in New Orleans in person, that's the first thing. But where we found a lot of excitement was I think people understand now, and I think most folks that certainly, that part of the ADA circuit, understand the importance of CGM in type 1. That used to be the common is, should you or should you not? And how do we get there as quick as possible. That is morphed to other uses. And so we found a lot of people interested in how do I use CGM in the hospital setting. Certainly, we received the ability to do so on an emergency breakthrough as part of the pandemic. As folks were using a lot of protective equipment, finger sticking those using steroids in the ICU, and using insulin to ultimately keep glucose levels in range, it didn't make sense to go for nurses to expose themselves and prick fingers. But then it also begs a bigger question. Why does the nurse need to go at all? Why not put a sensor on them? And so we're finding that there's a lot of interest in that hospital environment. And folks have established workflows around it. And so now that we have breakthrough designation from the FDA in hospital, there is a lot of interest around hospital. Certainly, there was a lot of interest around utilizations and beyond intensive manage. So you found a lot around basal and even more around non-intensive. We talked a little bit earlier about applications of glucose going beyond typical insulin-driven diabetes decisions and into more health and wellness focus. Most of the posters were around studies and the efforts were around studies around how can we use glucose management in type 2 diabetes but also pre-diabetes, which is about 90 million people in the U.S. But then there's also folks starting to poke holes around health and wellness and longevity. There are multiple apps out there. You guys can probably find a few that use CGM at the center of longevity, in health and wellness and weight loss. We've invested in one by the name of Signos. These are the types of things that are out there that use CGM at the center of it, and there's a lot of excitement about where the future could go.

One of the things -- and I sort of referenced it at the beginning of my comments, as you guys have made kind of a true strategic decision to go down the path of APIs, partnerships and really keeping clinical, I guess, sort of at the core of the company and using the accuracy of that data. I think it's a great concept, but maybe try to tell us commercially what that means for you all.

Yes. So we will think software and connectivity go, okay, how hard is that and why. And when you're an FDA-regulated app, everything requires incredible levels of precision, whether cybersecurity and all of it has to go through the FDA. So it's very difficult to do. And one of the reasons we invested in software is we always believe there'd be a world where an ecosystem was necessary to meet the patient where you need to be met. So it all started with insulin delivery devices and connectivity, and that was something we worked on for years and years, and that's a real thing, Control-IQ and now in this room, Omnipod 5, Insulet was here earlier today. The connectivity in these automated insulin delivery devices. That's certainly part of the origination of the thought process around connectivity and software. But as times moved on, we've realized connecting to various different apps via the tool that ultimately draws the sensory unit out of your body, i.e. glucose in this sense, but it could be other things as time moves on, and being able to connect that incredibly important. Not a lot of folks can do this. There's really only a couple of companies in the world that have ever been able to do it, and no one has really matched the real-world accuracy of our company. And being able to then be a partner to many certainly then drives people wanting to be on our sensor platform. And so as you think about weight loss apps or type 2 apps, I'll use Level 2 is a good example since we talked about it. UnitedHealthcare has set a system around managing diabetics. And that system, it's called Level 2. It's an app, it's a coaching app, it's a medication app. But at the core of it all is glucose readings. In fact, you can't enter Level 2 without wearing our sensor. And so you enter the sensor, it helps understand them, it helps you identify what you're doing, medication levels, et cetera, to ultimately improve how your diabetes is addressed. And then ultimately, yield savings to Level 2, of course, but that's ultimately the promise is we can take cost out of the system through these interactions. And the connectivity that our device provides is the key to everything ultimately working. And so we saw that a long time ago and created it. And so we're the only company right now with real-time FDA-approved API.

Perfect. All right. Well, we are down to 26 seconds. I can ask one more question, but I won't. I'll save it for the breakout.

Sure. I think we're actually here for the breakout.

Well, then even better. To the folks on the line, sorry. But I appreciate it, and we'll just spend to the breakout. Thanks.