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

Hello, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Thanks for joining here before lunch. Happy to have our next company, Dexcom. I'm going to introduce the CEO, Kevin Sayer for a presentation, and then we'll do some Q&A after. Kevin?

Thank you, Robbie, and thank you everyone for coming today. For those of you who know me, I've been in the diabetes business since 1994. That's when I saw my first glucose sensor. It was hardwired and attached to something that looked like a crude high school basketball scoreboard and dipped in a beaker of glucose solution. It showed the number and I thought the technology was done. My little naive financial mind wasn't quite where it was supposed to be because it's taken a long time to get where we are today, but oh how things have changed. Back then all we wanted to do is display that data on a pump. Now we display that data on a phone and it goes to the cloud. When it goes to the cloud, others can see it, it can be shared. It goes from the cloud to software that physicians use to monitor patients and if you want to hear about telehealth storage during COVID, call our doctors because Clarity provided a tremendous platform for them to monitor and see their patients. Now we don't just display on a pump with sophisticated algorithms, we control insulin delivery and have people safer and happier and better than they've ever been before. So we've done a great job in diabetes. But as we look forward and as we go forward, that's not going to be enough. We're barraged with requests to use this product in type 2 diabetes in health and wellness in the hospital, for pregnancy. So we've changed our core mission statement. We've gone from empowering people to take control of diabetes, which we will always focus on, but a broader definition in health. Let's take a look at the progress we made along that path in 2022. It was a great year for us. Our organic growth was 19%, and we finished revenues at approximately $2.91 billion for the year. That growth was fueled by, again, another strong presence in the U.S. and faster than accelerated growth in our U.S. markets. And our patient base is now 1.7 million customers globally. On the scale side, we picked up over 500 basis points of leverage on the operating expense line. But more important on the scale side, as you got up every morning, you read about customers with supply chain problems, not meeting their deliveries or their commitments to their customers. We met all of ours. Nobody went without a Dexcom. Some of our big wins this year were on the access front internationally, where we got a lot more coverage and also with the recent CMS recommendation that all insulin users be covered for the use of CGM. And finally, we had 2 key product launches. Dexcom ONE in Europe earlier in the year and then upon approval of G7 in Europe, and then we got G7 approved. It's here. We're very excited about what '23 presents for us going forward. Our guidance for the year is released this morning. Revenue growth of 15% to 20% for the year, and that's a revenue range of $3.35 billion to $3.49 billion for 2023. Couple of things included in that of note, about 1/3 of our new customer adds in Europe are going to come through the Dexcom ONE platform. We're very excited about that. With respect to the G7 launch, we're launching that in the U.S. We are going to have a temporary bridge program for G7 for some time to enable people to get access to that technology while we build out the reimbursement. One of the other questions we'll be taking, I'm sure even more later today is how does this effect of the basal insulin approval? How does that affect your guidance for the year? We've only got about 1% of our revenue related to that. We expect that approval to come in the second half of the year and grow from there. On the gross margin side, this is very much a transition year for Dexcom as we transition from G6 to G7. And whenever you transition from one product to another, you know there's going to be hiccups. This product will cost more to build in the early phases because we're not building it in quantity. But over time, the manufacturing costs come down, and it will be less expensive to build than G6, but not out of the gate. Add to that the fact that we're opening up a 900,000 square foot plant in Malaysia over the course of the year to start manufacturing from, which will also add cost to the manufacturing line. You can see how those margins got where they are. We'll also continue our operating leverage improvement with operating margins projected at 16.5%. We will not stop investing in our business on the infrastructure side commercially to get to more patients and get to more customers, but also on the R&D side as we develop new product offerings for the company going forward. We've sustained quite a growth rate here for several years, and that speaks to some pretty sobering statistics. Diabetes is a crisis that still is not at all under control. In 2000, there were 150 million people diagnosed with diabetes down the world -- around the world. As you look at 2021, it's over 500 million. as we get to 2045, it is approaching 800 million people. And as staggering is the number of patients who have diabetes is the cost of controlling them is even more staggering. An individual with diabetes costs the system nearly 2.5x more than somebody without it. And many of us, over the next several days, are going to stand over this microphone and tell you about all these great diabetes technological advancements on the pharmaceutical side and the device side. But the fact is, over the past 2 years, the global diabetes-related health expenditures are up 27%. It's getting more and more expensive. We believe at Dexcom, we are definitely part of the answer to this situation, not part of the problem. And this gives us really an opportunity to make a big impact going forward. Let me give you a couple of examples of how we make an impact. This is a typical intensive insulin user from the past who stuck their finger, woke up in the morning, sitting at 80, doing pretty well, spike right before or after lunch because they didn't take enough insulin after breakfast because I was so low, come down -- pretty good day. Patients will be very happy with this. Well, when this patient puts on a CGM, it's a completely different story. As this patient spends 13.5 hours above the recommended range of 140 on this chart and spent the entire night pretty much 80 and below. Somebody who has glucose values like this might have an A1c that looks reasonable. But the fact is it's not. And quite simply, all this time spent low, is very dangerous. One of the new measures in our industry now is called Time and Range, and that's the time you're within the target range recommended by professional societies. This patient spent less than 20% of their day in range. And if you think this technology is valuable for intensive insulin patients, let's take a look at somebody who's not on insulin, a type 2 patient. My mother suffered from type 2 diabetes for a long time, and she knew I was in the diabetes industry. Any time I went to visit, she would stick her finger and show me between 7 and 7:30 every morning that she was in control; yet, she really wasn't. And very similar to this patient, this is what her life was. 17 hours of the day is spent above the target range. Now type 2 patients don't typically have the risk of going low and don't have that acute risk of being hospitalized for going low. But this time spent high is extremely dangerous over the long term. This is what contributes to cardiovascular disease, kidney issues, amputations, blindness, you name it, across the board. These high glucose values are very, very dangerous. We can do more to help across the board. We can do more to help in type 2 diabetes by giving people information. We can do more in type 1 by driving more automated systems. Dexcom can do more to make this better, and that is how we're going to grow in the future by doing more in our G7 platform really gives us the opportunity to do that. As you look at our industry since I've been involved with Dexcom, and that's been an 11-year time frame, pretty much every significant technological advantage in the industry has come from within the walls of our company. The first reliable, accurate sensor that somebody can make decisions on came from us. The first ICGM standard meeting sensor with the FDA came from Dexcom, the first product directly to a phone came from Dexcom, sharing data came from us. Integration with other systems came from Dexcom. This is our next big thing on our next big advance within our company. There are a lot of great things with respect to G7 that we're very excited for. Over time, as I said earlier, manufacturing costs come down, it will be less expensive to build. It also is a 50% smaller plastics footprint with respect to the environment, which we think will be very important for us going forward in many reimbursements areas. It is the most accurate CGM ever launched on the market, and the performance will show that as patients use it. One of our core values of our company is to listen, and we listen to our customers in great detail as we got ready to launch this product. And this is what they're saying now, G7 is truly living up to expectations in the marketplace. People absolutely love the app. It provides more insights. Time and Range data is included in our software app. So you can see how you've done for a day, for 3 days, for a week, for a couple of weeks. That's a great feature for people. The 30-minute warm up is something that's widely accepted. People used to tell us the 2 hours they waited for the next sensor to warm up were the worst 2 hours of their month or their week or what have it. The accuracy is greatly appreciated. But the #1 feature people come back to us with, as you have heard us, you have made this much more simple. There's really only, I think, 3 steps to putting one on. And the small form factor, 60% smaller than what G6 was. All these things make this a more simple platform, then we can move on and we can do other things with going forward. It is absolutely meeting the expectations that we hoped it would meet. So what's next? We've launched in 6 countries in Europe. We rolled it out. We're now going to roll out more aggressively in those countries as we're through the holidays. We have waves planned for the rest of EMEA and those markets for 2023 and then rolling out into APAC in early 2024. With respect to the U.S. right now, the key thing for us is to build access and to gain reimbursement for our customers. The first channel where we'll have reimbursement will be the commercial DME channel. And our G6 contracts can migrate to G7 quite quickly. We've already filed the necessary paperwork for CMS to approve G7. We expect that approval probably in the first quarter, sometime early in the second quarter, so that should come. And then last, the DME commercial -- I mean, the pharmacy commercial channel in the U.S., where you have to go back and speak with payers, the PBMs and everybody else to get through that channel. But we expect broad reimbursement by mid-2023. In the meantime, we will do a bridging program to allow patients to buy this for cash, so they have access to that technology. We don't want to deprive it from anybody. When I see the word building in addition to building access, we're building inventory. And then last, the biggest question we get is when are you going to connect to my pump? That will come at the pace of our pump partners, but that should happen over the course of the next couple of years. You'll hear from Tandem and Insulet later on at this conference. We've been preparing for this day for a long time. We needed G7 to get here. But even with all the advances we've made in this market and in our core intensive insulin market in the U.S., only 50% of patients have CGM right now. By getting this basal access that CMS has now approved, we're actually doubling the size of our addressable U.S. reimbursement market reimbursed market today. We've never had a smaller penetration number in the U.S. than we have right now once this thing gets approved. So we will have a lot of room to grow in the U.S., and we're very excited about it. We've been planning for this for quite some time. Our commercial efforts is very much focused on making our products simpler to prescribe. And as we've gone down the pharmacy channel, we've done that. We work at every opportunity also to decrease paperwork on the DME side. With respect to pharmacy coverage, 75% of our commercial business now comes through the pharmacy channel. And 70% of those people pay equal to or less than they pay for our biggest competitor; a common misconception among many of you and even physicians and patients out there. On the DME side, we are working to expand and grow and make it more efficient in that channel as well. Many of our commercial patients still go through DME and almost all of our Medicare business goes through there, including the basal insulin opportunity that will come going forward. And for all of us, with an ICGM product, Medicare reimbursement is equal and the amount of co-pay by patient is also equal -- so the perception that we haven't dealt with or addressed co-pays is not a good one. We've done a very good job of that going forward. Dexcom is the #1 covered and reimbursed CGM on the market today. As I talked about us planning for this for a long time, I want to take you back a few steps. Many years ago, we started the mobile study to provide the data, the primary data for covering CGM for basal patients. That is a Dexcom study. On top of that, in 2021, we doubled the size of our U.S. sales force because we know most of these new patients on that graph are going to come from primary care offices, not necessarily from DME. I mean, not -- excuse me, necessarily from the endocrinology office. We've introduced our sampling program. We have great electronic tools to show these physicians and these healthcare professionals how easy we can get the product to them. And we've had great results. We've doubled our prescriber base on the PCP side and the number of patients that come from that over the past couple of years. We're not going to stop there. We'll continue to grow internationally. Our first focus in the international market will be in existing geographies where CGM is well known and reimbursed. We picked up a lot of business in those countries as we had accelerated growth in 2022. One of our key efforts is to reduce administrative barriers to get our product. As we started from next to nothing over there, and we've grown, we've had to get rid of a lot of paperwork that held us back from getting to many people. I'll talk a bit more about some of the reimbursement we've gained later, but we've also leveraged an e-commerce platform to a great length of some of the international markets. And we've gone direct in strategic markets on an OUS basis where it made sense. If you, again, go through our history, we've gone direct. We've gone from just Germany to Germany, the U.K., Benelux. We went direct in Spain. We acquired our distributor in Australia, and we're direct in Canada. So many direct efforts by us to position us better to grow infrastructure overseas. One of the things that we are very excited about is our new product portfolio strategy that we really rolled out in 2022. As we look at markets OUS, there are some that have very broad reimbursement. And for those, our G-Series product will be the product of choice, giving patients all the features and warranty and service that we've done in the past, we will continue to do. Other markets where we can't make an investment because there's just not enough infrastructure for us and where there won't be the support necessary for a G-Series product, we can launch the Dexcom ONE product on an e-commerce platform and get that going. One of the best things that happened in our e-commerce launch of Dexcom ONE earlier in 2022 is 2 of the 4 countries after seeing the demand approved it for reimbursement because we can grow those markets and gain traction. But across many of the mature CGM markets in Europe, it is a 2-tiered system. There are patients that are identified as high-risk patients who need a G-Series product that will attach to a pump or a pediatric patient or they're hypoglycemic unaware and they need the flexibility of the alerts and the alarms that we offer more than anything else. Then there's another category that we've not been able to participate in before. And that's just what I call regular CGM. Dexcom ONE is designed for that other category. And with this product portfolio strategy and our other efforts, we've gained a lot of access in our U.S. markets here. An additional 3.5 million people in international markets will have access to Dexcom technology than had it before and we've really done this through a number of factors. I talked about our direct business and going direct in some of these countries earlier. We provided great clinical evidence. Many studies that we've run have gone to drive reimbursement in these countries. The 2 product strategy is going to be very, very good for us. So all these things have helped us expand access in the international markets, and they'll provide a great growth opportunity for us going forward. We're very excited about it, but that's not it, that's not all. We're not going to stop with just the international growth and the type 1 intensive insulin growth in basal growth in the United States. We've had an eye on type 2 diabetes for a very long time. And all the studies we've done irrefutably say this product makes a huge difference in type 2 diabetes, a huge difference. Whenever we talk to patients after a study and after they've used this, and they've seen great improvements in their A1C and their life, we ask the question, "What happened?" and they all point to the CGM. The CGM gave me the information I've never had. Somebody with type 2 diabetes is told, as my mother was: eat less, exercise more and take your meds, never knowing the effects that those things have on their metabolism. CGM opens up that window. We know it's a different market. We know it's a different consumer. We know it's a different customer. Channels may be different, in fact, but we know there's 3 things we have to do to be successful here. The first one is user engagement. One of the key learnings in the mobile study. All the patients who did the best were the ones who wore the sensors all the time. And in these programs that we have run, continuous sensor wear leads to much more engagement and people doing much better. We have to provide outcomes. If the cost of a patient is 2.5x more with diabetes than without it, we can't just throw another cost on the pile and say, pay for it. We have to provide good outcomes with CGM. We are very confident that we will, and there has to be a return on investment. Many of these programs have shown cost savings to the tune of $400 a month with type 2 patients who wear continuous glucose monitors. I don't think you can show me a program that does better than that. We have to drive that and we'll drive that in the future going forward. Even as you get into health and wellness, we're seeing a lot of these programs that you read about incorporate CGM into their platforms, their software platforms, even some who are putting patients on diabetes drugs to lose weight. Over and over again, the response is the same. I couldn't figure out what was going on in my life and with my metabolism until I got put on a CGM. Connectivity is very important for us going forward. We aren't smart enough to have the answer for everything. Some of these software apps may, in fact, provide better experiences than we can. We connect with our direct customers on the pump side, on the pen side, and we offer several digital apps access to our data. It's important that we remain connected with caregivers in the system and medical providers. And we'll continue to do so. Connectivity is going to be very important for us going forward. And we offer several connectivity solutions, not just one. So as you look at our map and look at us trying to take control of health, what we do today in type 1 diabetes, type 2 intensive insulin therapy, and the basal market is a great business, and we are very bullish on what we'll be doing in these markets going forward. But where we're headed, these opportunities are huge and we are very excited to go after that. The G7 will make a big difference in giving us a platform with size and performance that will get us there. Everybody who goes to work at Dexcom every day knows why they go. We go to get a kid to go to their first sports camp. We're going to go to help somebody with type 2 diabetes actually have hope that they can do better. We come to work that someday we'll be in the hospital, and you don't have to get your finger stuck every 30 minutes for 5 days. That's 48 finger sticks a day for 5 days. Do the math, it's awful. We go to work to integrate with other systems. Thank you very much.

Well, you guys preannounced fourth quarter results earlier today and you gave some 2023 guidance. So I want to start there. Fourth quarter beat the Street by a little bit, maybe not as big as the third quarter, but still really good trends. What kind of color can you give us in terms of how new patients trended? Was there any impact from G7 deferral or as people are thinking about getting a G7 and any U.S. versus international commentary?

You want me take that?

Yes, go ahead, Jereme.

All right. So early on, I think the feedback was, certainly, it looks like strong unit volume growth consistent with what we saw in prior quarters. And so certainly, we were happy to see that. And so that would indicate that it's a strong patient quarter. Now we don't have the numbers yet, we're tabulating those. It's a little bit early to do so. But unit volume growth, which is a good indicator of underlying patient base, was strong. When you factor that into where folks were getting their product, we did see a lot of folks going through the pharmacy. So that continued move to the pharmacy is continuing to play out. Kevin mentioned, 75% of our patient base is now getting access to the pharmacy. So all in all, I think it was strong unit volume, strong patient, strong pharmacy coverage or strong pharmacy access and all in all, pleased with the quarter and the performance.

Occasionally, you guys will give us a year-end patient number. The patient numbers are a lot bigger now. So it might be a little more difficult to get to at this point so soon after the quarter, but any...

No, actually, if I didn't give it, it was on a slide, we're at 1.7 million.

Approximately 1.7 million.

Approximately, yes.

And that split between U.S. versus OUS?

We haven't given the split, we typically don't, but $1.25 million was the entryway and exiting at $1.7 million, anchored a little bit more on OUS as the OUS is growing at a little bit of a faster clip.

Okay. So as we take that growth and I'm not good at mental math, but it's a big number, year-over-year, you're at 75% in the pharmacy. So the mix shift headwind in the U.S. is pretty much done on a quarter-over-quarter basis, but still a little bit incremental in 2023 on a year-over-year basis. How do we reconcile that really strong patient growth, which I imagine will continue with all the tailwinds you talked about up here relative to the 15% to 20% sales growth?

Sure, yes. So I think the first thing we would say is we are very bullish on the business. And so when we provide guidance, our guidance is around providing that base case. And so certainly, the 15% to 20% will represent a base case. Do we expect to continue to grow? Yes, we do. Now there's a few factors that contribute to why we gave that guidance. So I think first and foremost is we talked about a bridge program. The bridge program, we expect to be about a $20 million to $30 million cost in the first quarter. And so that's something we're going to do. We're going to get folks access to this product, and that's what our intentions are. So as you start to contemplate the bridge program and you start to contemplate timing of basal, which we expect to be in the second half of the year, you factor those in, and that's why you ultimately end up in that 15% to 20%. But at the end of the day, the underlying unit volumes, we expect to be strong. We expect to see the delta over time shrink between unit volume and growth, but we also don't want to get ahead of ourselves.

No. And Robbie, one of the things I -- that everybody knows is we've looked at selected international markets, for example, if we have the opportunity to reduce price and increase volumes significantly, we've taken advantage of that. And we'll selectively pick opportunities like that if it improves access enough for us to go do it. But we don't expect a year of 15% to 20% volume growth. I can tell you that. We expect -- while the delta may come down, we're still planning on building a lot more centers than that 15% to 20% will show.

And that $20 million to $30 million cost you talked about, is that the contra revenue, is that on the top line that we'll see it?

Correct.

Yes.

Okay. Does that go away as you get some of those commercial plans moving forward?

That's exactly right. Exactly. And so exactly -- the thought process is folks are going to want to have access to this, and this is our way to ultimately get them access as we're working through those contracts. So the expectation is early on, it's bigger. It dissipates as those contracts come through. As Kevin mentioned, we expect to have a majority of the coverage really sitting in place by the end of the second quarter. And so it should dissipate after the first quarter into the second quarter and beyond.

It doesn't make sense to us if we have coverage and someone can go to, as I said earlier, 30% of pharmacy plans have 0 copay. It doesn't make sense for somebody to come in and pay when they have 0 co-pay. So as soon as we get coverage, we want to shift patients into the reimbursed model as aggressively as we can.

Makes sense. Type 2 basal, which is the numbers show a huge new market opportunity for you, just opened up reimbursement or should open up end of first quarter, second quarter you talked about. And it looks like there's about a percentage point of growth in the 15% to 20% for a type 2 basal. How should we think about that? Is that more of a -- it's a new market.

It's part of the base case scenario, Robbie. I mean we try and put a base case together. We estimate a July 1 approval for that. Well, as you look at July 1, the number of users we have today, the number of users we'll have then, just as a company and adding it on for this to make a significant numbers impact is pretty tough in 6 months. I think over time, it becomes a very significant business, but we kind of have to grow it and get it started. But this is a base case. Could we overachieve that? Yes. If it comes earlier, do we overachieve that? And are we ready? The answer to that is yes as well. We're building G7 inventory and getting ready for that. One of the things we have to have -- I didn't show it when I spoke, we have to have a receiver from Medicare, I've got my new Dexcom G7 receiver right here. And as we can tell, looking at this, I've got the old adrenaline spike going on. As I've gone from 90 to 132 sitting here on the stage. So if you want to learn about what speaking at this conference does to your health, just call me.

How should we think about commercial plans moving to basal type 2? And do you think you'll get as good kind of a label or an opening from the commercial plans as Medicare gave you?

It took time, the last time Medicare approved this. Actually, we were at this conference several years ago, and I said it would take 1.5 years and Medicare approved CGM on my plane ride home and we weren't ready at all, but it did take commercial plans almost 2 years to follow the type 2 intensive coverage that CMS provided. We would like it to go faster, but we'll plan on it taking some time. The difference here is so many of these patients are Medicare patients. Almost half of the basal population is a Medicare patient. So we're going to be able to address the majority of those people very quickly. We have the data capabilities to show what outcomes we're going to generate within this population, and we'll do that. We can download the data we get from those patients and present a very strong case to those payers. The other piece is the Medicare Advantage programs are going to follow along as well because, again, some of these patients are Medicare. So I'm optimistic it could go faster. Our previous experience was a couple of years.

Down the P&L, you also gave some 2023 guidance, I believe, 62%, 63% gross margin, 16.5% operating margin. Both of those came in just a hair below where consensus was. So maybe you could talk to us about some of the things we were overlooking and how we think about the cadence of that.

Yes. So I think -- so first and foremost, I think as you think about the operating margin guidance, it was fully a function of gross margin guidance. If you kind of strip that out, what you're seeing is continued operating expense leverage just like you saw this year. So we continue to do very, very well there. The way ultimately we played out in 62% to 63%, there's really 2 primary factors there. First off, in the first part of the year, as we talked about this bridging program that does have a bit of a weigh on gross margin. The other piece of that is it just so happened in timing of approval and timing when we're going to launch factories, not only launching G7, we're also opening our Malaysia factory, all within the same year. And so as those economy scales start to grow, we should start to graduate out of that. And so if Kevin mentioned it earlier, the first half of the year, we expect G7 to cost more than G6. That's on a per unit basis. However, exiting in the fourth quarter, we do expect G7 to come under and what you ultimately should then see is gross margins exiting the year should start to come back closer to more of our typical norm. So the cadence that helps you kind of understand the cadence on the balance of the year as well.