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

All right. Morning, everybody. Thanks so much for joining us. I'm Matt O'Brien. I'm a med tech analyst here at Piper. I'm really excited to have the Dexcom team with us today. From the company is Matt Dolan. He's the Executive Vice President, Corporate Strategy and Business Development; and then Sean as well -- Christensen, who's Head of IR, and then I think he's just got a new FP&A rule as well. So thanks for making the Cross-country trip over. I really do appreciate it.

Thanks for having us. It's good to be here in person again, and here this time of the year, it's beautiful.

Yes, I couldn't be more excited to be in person. 100% agree with that. So let me get this out of the way to start with, okay? So you've got a ton of momentum in the business. Domestics taking up international has been awesome for a while. G7's coming out. I was really praying for the approval of the last 2 days. We could talk about it today. So I'm a little upset at you guys about that. But basal will come in next year. Pricing headwinds are going to abate. Historically, you've been telling everybody, hey, we're a 15% to 20% grower. With all of those things behind you, I know numbers are getting bigger, but is the message on guidance going to be at or above that level for next year? And I guess why wouldn't it be even better than the 15 to 20 -- after 15% to 20% not poor at all?

Yes. So we'll get to '23 guidance at the right time. We're not going to get into that today. But I think -- with respect to your question, our long-term guidance, we feel very good about the progress we've made toward it. We're very bullish on a number of the variables that you pointed out. I think it's important to -- as we think about it, we're going to set up the year in a way that is thoughtful and really walks through all the various puts and takes. And a lot of this comes down to timing, how the global G7 rollout, which is underway, plays out, how coverage decisions come in. So this, for us, again, is very much a long-term sustainable growth company, and that's what we intend to deliver against, and that's how we think about it versus year-by-year. You do mention a couple of things that I think are important. One is product cycles and two is access. Certainly, we've had now G6 on the market for about four years or so, continues to put up great results. It's an incredible product. But we are very excited about this new cycle into G7. And I think that sets us up nicely into the future. The other piece is access, we were talking recently, if you go back to the first Medicare coverage decision, there were probably prior to that event, fewer covered lives globally than we now have in our user base globally. And it just speaks to the importance of continuing to build access not only in the U.S., but OUS, and I'm sure we'll get into some of that. So big picture, yes, there's a lot of things moving in the right direction, but I think we need to be thoughtful and consider it really to do this over the long term versus commenting specifically on next year.

Okay. Okay. Fair enough. I thought I would try.

Respectable.

All right. So let's talk about the resiliency of the domestic CGM business. I know everybody was worried about that a couple of quarters ago. 2-year stack here is basically 20% growth. Where is that growth coming from between type 1s, type 2s and then your pumping partners, which I think are underappreciated by investors as well?

So maybe I'll give a couple of general comments, and then Sean jump in on the stats. The last 2 years have been, I think, a good demonstration. You had COVID starting more than 2 years ago now, a good demonstration that there's recognition that CGM is a first-line therapy and we've really seen this wave of adoption towards clearly a standard of care and Dexcom leading the way there, particularly in the U.S. And so I think the validation we've seen, the continued growth, we're very proud of not only the growth rates you defined. But one of the key variables we look at is unit growth as a good proxy for the true underlying growth that takes out some of the pricing dynamics that we've talked about. So with all that said, I do think there's plenty of headroom. I think our type 1 penetration here in the U.S. as a category is somewhere roughly above 50%. And the type 2s on insulin are just above 1/3. So still plenty of room to run. Maybe, Sean, you can touch a little bit more on the shares between those groups and the pump partners.

Yes, I think if you look at our recent growth, I mean, from a -- we've talked about type 2 being a faster growth rate than type 1 at this point makes sense. It's a smaller part of our base. I think one key element to point out though is that that's not necessarily indicative of type 1 market saturation. And so you've heard us talk a lot about what we're doing to reinforce our field sales force with tools and making them more efficient in their calls, opening up the primary care windows, pharmacy is a key part of that. If you look at, to Matt's point on type 1 market penetration, what remains beyond the 50%, a lot of them are treated in primary care. And so you don't want to kind of separate the initiatives we have going on to really drive type 2 growth from the remainder of the type 1 market penetration, and we're seeing that with still some really good type 1 growth as well.

Got it. Okay. Appreciate that. I think you said -- I think Jereme said on the last call, volumes were up 30% in the U.S., mid-30s. So that would imply, again, a lot of pricing pressure on the channel side from a headwind perspective. What should we anticipate for pricing headwinds next year in the U.S. and then OUS, I'm a little bit afraid that investors are expecting it to go to like 2% or 3%? I think it's going to be more in that 6% to 7% range. Is my number, okay? Or any other color you can provide U.S. versus OUS.

So maybe to step back and then you can touch on the details. Pricing has been an important lever for us. And if we go back in the journey, I talked about access in terms of sheer numbers, but there's also the important variable of access in terms of ease of access, where the patient wants to be met, right? And that's where we've really pushed the business from DME or durable medical equipment channel into the pharmacy channel. And that's helped unlock a lot of demand. Some of that related to some pricing changes by channel, and that's allowed us to really continue on this growth curve that we've just discussed. And we'll continue to be. When you think about the size of the markets, we're unlocking their orders of magnitude bigger than where we played historically. So there's a play between price and volume that has worked out for us, and I think we'll continue to work out. So I just wanted to kind of give that strategic backdrop. And then Sean, if you want to touch on the nuance there in the near term.

Yes. And I think the strategic backdrop is helpful because the way we look at pricing is always on a -- historically, it's been on a channel basis. And now it's increasingly channel and product. Now that we have a product portfolio that's rolling out globally with Dexcom ONE. And so I think that's key for us is how do we create a portfolio that drives and maximizes volume growth that ultimately ties in with revenue growth. I think, Matt, to your question, in the U.S. in Q3, I think encouragingly to our strategy, we've talked about kind of exiting this year at a 75-25 patient split by channel in the U.S. for our commercial business. We're right on track for that. And so I think we'll be in a much more of a kind of what we view as a long-term steady state and less of these people switching from the historical DME category over to pharmacy, which causes some of that delta. So we actually saw a little bit of a closing in the gap even in Q3. Now granted, if somebody moves in 2022, we do lap that impact a little bit in 2023. So that you saw some of that. But I think the key thing for us to see is continuing to see that totally narrow over time.

Okay. So -- and I'm sorry, I just want to put a little bit more fine point on this. We shouldn't expect 15% have a headwind next year. We shouldn't expect 2% or 3% of that, somewhere in the middle, which we'll talk more about next year, but it's kind of an anticipation that I think a lot of investors should have. Is that fair?

Yes. I think we'll provide more color with the 2023 guide in terms of expectations, which is what we've done historically there. I think kind of that narrowing over time is the way to think about it. And obviously, as you lap out of this year's impact, you would exit next year at a lower rate.

Okay. Got it. Appreciate that. The international business, I think, is completely underappreciated by investors. You guys are flip-flopped as far as your, I think, patient numbers in the U.S. versus OUS compared to your biggest competitor. Talk about what's driving that international growth right now. My sense is it's more of the pricing changes you made in '21 versus really Dexcom ONE and then some more access as far as countries go. But what's driving all that growth. And then what can we expect out of the international business over the next couple of years?

Yes. We're excited about what we've seen in recent trends internationally and agree. We've been focused and Sean gave the proportions of U.S. versus OUS, but we know that international number, there's a lot of opportunity to improve that mix over time. The pricing changes that we implemented starting last year and spent some time discussing that certainly had an impact. And going back to some of the commentary around the pharmacy channel a similar dynamic there, giving some price for -- in exchange for volume, and that's worked out well in certain countries. I think there's more to it, though, there's been -- the team has been laser-focused on expanding access outside the U.S., you've seen wins in Germany with respect to the type 2 population. The U.K., Canada continues to see expansion there. So pricing is one part of it, but it's just been continued demonstration of our value proposition, the evidence that you need to continue to open those markets up. From a growth perspective, I think you have a lot more runway. There's less penetration there overall, maybe not on the type 1 side, but as we open up access to the type 2 IITs, as we've started to see here in the U.S. I think we can see some benefit there as well. So it's very holistic from an access and price perspective internationally. And then the other side is our new product, Dexcom ONE, which hasn't really driven the business yet. This has really been on the back of our G6 device, but I think that's what leaves us excited that there's even more opportunity to change those proportions in the future.

Okay. When do you think Dexcom ONE really going to kick in as far as the impact of the business? Is that more of a '23 event or even later than that?

Yes. So for those that aren't as close, Dexcom ONE, and I think the beauty of it is that it is a product built off our leading sensing technology that has a change in the software configuration and allows us to have different features for different customer needs. And what it's done from a commercial standpoint has allowed us to begin to launch into parts of the market that are available from an access and reimbursement perspective that we frankly just haven't been participating in. So a lot of countries in Western Europe have systems where this 2-tier product strategy really starts to make a lot of sense. And historically, we haven't really been pushing the product there. So that's what leaves us excited about that product going into the future just to kind of level set things there. I would say the impact has been modest so far. We started to use Dexcom ONE as a geographic expansion tool. We went into a few countries. And the outcome there was that, in fact, began to be reimbursed after starting with a cash pay product. So certainly, there's a geographic expansion element to it. But the key here is also being able to go deeper and wider into a number of these key markets that are going to be critical to the CGM landscape over the next several years.

Got it. Okay. Okay. Appreciate that. So let's pivot over to new products in G7. I mean G7, just to be clear, we're still expecting the end of the year. Approval for that product. Is that right? Okay. Okay. See you guys nodding just. Have to give verbal conformation. That's verbal...

Yes. Dialogue continues. The cooperation with the agency has been very productive. We still feel good about that.

Okay. Talk about the -- and that's great to hear the release of that product. I'm sure you're going to do a limited market release. And then how do you hand off this product to the hundreds of thousands of patients have here in the U.S. What kind of disruption could that cause to the business as we think about '23 and '24?

Yes. So I think in terms of the release of the product, in the U.S., Matt, just to clarify, we're talking about U.S. there because OUS, we have launched in 6 countries at this point. Within the U.S., I think when we think of a limited market release, do not think of something similar to what we did in the OUS in terms of length of time. We're expecting to be able to go relatively quickly and are preparing toward that goal of an early 2023 launch as quickly as we can. Now there's some work, and we've talked about the building of coverage, needing to take place right after you get that clearance from the FDA. And we've had very good discussions there to hopefully accelerate that quickly. So a lot of the work that we look at in terms of really making sure the product is ready to go and validating the apps and performance we can do quickly, some of that we can even do preclearance. So I think that's still our expectation is in early 2023 kind of broad launch in the U.S. And then in terms of the cadence of shifting our existing base from G6 to G7, there's a couple of natural points. Obviously, for our pump users, they have -- to have the integration capabilities with G7, which is collaborative work between us and the pump partners. So we'll let Tandem and Insulet on that side in the U.S. and talk to time lines from the partnership and that integration framework for MDI users, they -- it's really a pretty natural shift in terms of when your transmitter is over after 90 days. That's a natural shifting point plus coverage. So they will have that option. We'll look at ways to facilitate making that product available to them as quickly as we can.

Got it. Okay. Was the [ O 5 ] launch in the U.S., a big tailwind to your domestic business in the quarter? Is that something you can see?

I would say it's always a little bit challenging for us to quantify the impact in any quarter. I think one thing we've seen historically from our pump partners and our AID systems is that they seem to be some of our most loyal users in terms of utilization. Obviously, if you have an AID system, you're not going to take a sensor break because you lose the pump functionality. And so I don't know if we would necessarily call it out as a huge driver of the quarter. I think it certainly helps. It's also -- there's a little bit of a circularity to extrapolate that how many were existing Dexcom users and then went on Omnipod 5 et cetera. And So I think for us, it's a strength for us in our base. We've been the leader in AID connectivity and expect certainly to continue to be in that front, but we have a much broader base at this point as well and are getting good growth on all fronts.

How big a headwind do you think it will be once the Abbott eventually does integrate with these pump providers? Do you think it's to the point where most everybody realizes Dexcom is the premium sensor? It's the most reliable, both high and low to the point where it's not really going to be overly impactful to you at all? Or is it something that we should really worry about?

I think we're mindful of it, to Sean's point, these are important users. But I think there's a few key variables here that we need to kind of walk through. One is we've been competing in AID for many years with other competitors in the landscape and doing -- we've been holding our own doing pretty well. You've seen the share gains over the last several years with our partners. Two is that I think to your point, our leadership in the performance reliability accuracy side when we're talking about the titration of insulin in a closed loop or an automated insulin delivery system. That's where we should shine and will continue to. So we've been working hard with our partners. This is not an effort that happens overnight. It's been several years, maybe more in certain collaborations to get these products to market. And our goal is to make a customer experience together with our partners that really reduces that reason to switch. And I think we're well positioned there. There's other hurdles that the competitors would have to get through in order to put something on the market. But I think -- when you think about all of our opportunities, this is an area where we have an incredible right to win and should continue to have a strong position there.

Got it. I appreciate that. So let's transition over to basal. That was obviously a great update. Why does this patient population really need CGM? They're not intensive. They're not going to go -- most likely, they're not going to go low. CGM great for keeping you out of hypoglycemia. Why is this patient population really going to adopt CGM?

Well, I think what we've shown over the years is that, yes, CGM is helpful in reducing hypoglycemia and preventing you from going low, but there's many other outcomes that we've been able to demonstrate. Some of that is on the drug management side of things, whether it's insulin or other type 2 medications. But certainly, behavior management and outcomes that can be driven through other aspects that are not pharmaceuticals are something that we're seeing benefit across the entire diabetes landscape, things like reduction in A1c related to lifestyle changes like diet and exercise and sleep management, you can see a lot of that through your glucose data that we provide. So I think the advantage of our system and what we've realized really over the years is that this is truly a platform. We will see outcomes. The way to get there may be different, but we are going to see those important clinical and financial outcomes. And I think that's the key here to continuing to expand not only into basal but as we think about access beyond that population.

Okay. And I want to get to that with you here in a second, Matt, given your role. But just back to basal, I mean, what's the expectation on timing for coverage among Medicare? And then is it the typical 12 to 18 months later, we should start to see the privates come on board? What should we be expecting there?

Yes. I think in terms of the timing of the Medicare implementation, we've thought about that likely kicking in the second half of 2023 based on the timing. Historically, we've seen about 7 to 9 months from the point of kind of the initial proposal to when it can be implemented. So I think that's how we're approaching it at this point. And then on the commercial side, we don't have a huge proxy here in CGM of following Medicare. That was really just the one example. That we've built broad type 2 intensive coverage over really a couple of years after that ruling. And I think for us, certainly, our hope is that at this point, given how much more broadly, CGM is known in terms of the value that we provide and the broad value beyond type 1 diabetes. I think our hope is certainly that -- and we'll be working towards the goal of making that commercial coverage much quicker than it was in the past.

Got it. One thing I have heard in talking to some educators is that they think that Abbott here is going to probably prevail initially because they are so strong with the primary care physicians. It's something you've been addressing for a while now. Is there a way for you or is there extra investment that's needed to really push on the PCP side, so you can capture the basal opportunity as quickly as possible at Dexcom?

Yes. No, I think we feel very strong there, and this is an area we've been focused on for not months but years. We've continued to build out the sales infrastructure. We've doubled the group over the last couple of years and expanded that footprint. And a lot of that focus has been called on the primary care doctor. And so as we've moved outside of just the endocrinology specialty we're starting to see more patients come from primary care and frankly, some other offices as well. So we feel good about the coverage and the data shows it. We've seen a nice increase in our prescriber base. And the vast majority of that increase is coming from the primary care physicians. So we feel like we have a good formula to continue to build and compete there. I don't think we're ready to comment on where we're going in terms of headcount, but we continue to focus intensely on the PCP market.

Okay. Okay. I appreciate that. I guess final point on this, Sean. I mean I'm getting a little nervous just the patient population is huge, right? For basal and I'm starting to hear some big numbers for next year. It's basically in the second half of next year for you guys. I mean, is it in the low millions of dollars we should expect from basal next year? I've heard somebody said like $100 million, I'm like, are you insane, like it's crazy in year 1. Just want to make sure we're kind of level setting people's expectations for this for next year, I think '24 and '25 will be phenomenal.

Yes. I think, again, it's one more element that we'll comment on when we give our 2023 guidance. But I think the key thing for us, and I would say this applies back to our Dexcom ONE discussion as well is just the nature of our business model is recurring revenue. And so materiality is driven as you build your base. And so I would just say we're in -- this is a large patient population, we'll be incredibly focused on driving it, but you do -- the materiality is driven as you build your base. So we'll hit that starting point once that coverage is finalized, and you'll see the increasing materiality and contribution grow over time.

Okay. It makes total sense. So Matt, since we do have a year for a couple of more minutes. I know you're thinking more broadly about the sensing technology at Dexcom. What -- and there's a ton going on, I get it. Both domestically and internationally. But what else is next for Dexcom? Is it gestational? Is it hospital? Is it something outside of diabetes, what's next for the company maybe over the next several years that we should be thinking about?

No, thanks for the question. So for years, we've talked about the importance of glucose in a number of disease states and a number of applications. And I think what we've learned over the last few years is that there are many places where we can now take glucose sensing. So first and foremost, that is our focus. In the near and medium term. Areas that you mentioned, gestational is an area we look at it more holistically as pregnancy. Are there opportunities to help with diagnosing gestational diabetes earlier in the process. We think there's some gaps in the current care continuum there. Can we use CGM therapeutically to improve outcomes in gestational and then other high-risk pregnancies and that would expand the market significantly. So we feel very good about where we're headed in that extension for us. Hospital is another area where over the last past 2.5 years or so, we've had the ability to gather a ton of real-world evidence, dozens of studies through this enforcement discretion through the agency. And that's been incredibly valuable in teaching us that a; we do have a big role to play in that environment and b; the workflow and everything between the physicians, the nurses and the staff is important, and I think viable with our connected product and the Bluetooth and WiFi communications we can deliver. So I feel very good about those too in the near term. Longer term, you think about diabetes. The average person with diabetes has more than 3 comorbidities. So how do we give a picture of their whole health. We've seen glucose outcomes help drive other benefits like cardiovascular indicators, cholesterol, triglycerides can go down. We've even seen weight loss in certain studies. So as we think longer term, to your point, where else can we sense things on a proprietary basis that allows us to present not only glucose, but a full picture of their health. And we'll get more into that over time, but that's really what gets us excited and thinking about where this company can go in the long term.

Got it. That's great. Unfortunately, I think we're out of time so have to wrap it up there. Matt, Sean, I appreciate you guys with all the feedback here today.

Thank you, Matt.

Thanks.