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

All right. Good afternoon. I think we'll get started. Thank you, and welcome to the 44th Annual Raymond James Institutional Investors Conference. I think there's a couple of seats up front if you guys are looking. But my name is Jayson Bedford. I cover the medical technology sector. And it's really our pleasure to have with us Dexcom who's been a loyal participant at this conference for many, many years, even when the market cap was much, much smaller. So congrats on all the success. With that, we have the company's CFO, Jereme Sylvain. So with that, I'll pass it off.

Thank you, Jayson. Appreciate it. Thanks to everybody that come out and spend a little time with us today. We'll cover a little bit about the background of the organization, just where we're going -- where we've been, where we're going and a few different angles as to where the organization you can expect to go in the future. Obviously, we have our safe harbor statement. I won't spend any time there, unless you guys really want to read the small print. Why don't we go and just get started in terms of what our mission is. And to those folks that don't know our company, Dexcom makes continuous glucose monitors. And as you think about what we want to address and what the unmet need is in the world today, it's really on empowering people to take control of their health. That used to read diabetes not long ago. But as the future matures and we realize glycemic control becomes a bigger and bigger part of really the solution of the economic problem, this is really at the forefront of that. And you can see that there are so many use cases for these sensors over time. We're going to take you through a little bit above those as we walk through the presentation. But I think there's a real opportunity to change the way we address health that's an ever-growing problem. And we'll take you through a few slides just to show you the economic proposition. But these sensors, we really believe can help change how we're addressing preventative care as well as, obviously, current care. Before we get there though, I really want to start with 2022. We had a really strong year in 2022. And for those that can't see it, we had organic growth of 20%, ending the year at about $2.9 billion -- $2.91 billion. And during that same process, as we are growing the organization and really going into channels where the reimbursement was at a different price point, we had 500 basis points of operating expansion leverage. That is the work we are doing around delivering ultimately cash flows back to shareholders, and we'll continue that effort over the upcoming years. We expanded access. This is a big piece of the story here. As more and more folks need access to our technology, providing that access, allowing folks to obtain it for reasonable rates, is something we believe is super important. And we launched 2 major products that are really going to boost the organization for the future. Our G7, launched outside the U.S.; and Dexcom ONE, launched outside the U.S. Subsequent to this, of course, G7 has launched in the U.S., which I think is an incredibly important catalyst for our future. Just talking a little bit about 2023, our guidance -- expected guidance of organic growth of 15% to 20%; gross margin, in the 62% to 63% range; and operating margin of 16.5%. Just a couple of things, as folks are thinking about it, that includes a global rollout of G7, both outside the U.S. but also here in the U.S. And by this point, you may have seen it, we launched in the U.S. in the middle of February. It really was off the backs of a Super Bowl commercial, which we launched during that, obviously, the week leading up to it and then during the commercial -- during the Super Bowl. We do believe that the bridge -- there's a bridge program in place. That bridge program is similar to pharmaceutical product launches, will help folks get access to the product while we get coverage. So we do assume that, that is in place. Gross margin progresses as G7 scales. G7 is going to be a massive product. Out of the gate, there are some margin challenges, but that's what -- that's contemplated in the guidance. We do believe Dexcom ONE, our product that is a more modest, I'd say, priced product, with a little bit of a different feature set, is going to be 1/3 of our OUS patient starts, which represents a massive opportunity for us in the future, and we'll talk about that. And then we talked about basal being -- starting midyear. Now for those that follow the company, basal was -- last Friday or Thursday was approved a little earlier than expectations. And so there is some opportunity there. But the assumption was about $30 million over the course of the year. 2023 is a transition year for our company. It really sets the stage for growth for many, many years to come. So we're really excited about what it has to offer. Now as we think about glycemic control and diabetes, I think this is the slide that really resonates with me. 783 million people across the world expected to have diabetes by the year 2045, over 500 million today. If you think about all of the people on CGM therapy today across the world, us and our competitors, about 1.5% adoption of that TAM. It's an incredible opportunity ahead of us. And there's $1 billion -- $1 trillion a year in 2021 in spending; $1 trillion in health care expenditures, addressing this ever-growing problem, and that's at 500 million people impacted. You can imagine that number grows over time as health care costs continue to expand. And so what does our product do? Well, ultimately, this is what you look at a Type 1 glucose range. This is 4 finger sticks over the course of a day. Some of you who follow the company have seen this slide before, but it resonates just as much today as it did back then. This is what you would see. Is that good? Is that bad? I don't know. With CGM, this is what you see. You know where your glucose levels are at any point over the course of the day. This person is outside of 140. That's a hyperglycemic range for 14 hours over the course of the day and had a dangerous low for 1 hour. No finger stick told them that. And this is our core market today. Our future markets, this is your Type 2. You take 1 finger stick a day in the morning when you wake up. Most likely, when the morning you wake up, that's your closest time to fasting. And this person would say they are in range. This person believe and spend the rest of the day assuming they are healthy. The reality is -- this is a normal graph. This is somebody who spent 17 hours outside of the normal range. The long-term complications associated with something like this are significant. Obviously, we know the complications of diabetes. Going hand-in-hand with the complications of diabetes are generally cardiovascular issues. There's an opportunity where we can get in front of these by giving folks the insight as to what's going on in their body. And I think the product that we can do is the Dexcom G7 series. This is going to be a product that allows us to do more. It's really tailored for everybody. The form factor is easier, the use period is -- the use rationale is much, much better. And as you look at all of the factors that relate to it, everything in here has been revolutionized: accuracy, disposable, simple application, 30-minute warm-up. We can build this thing for less than we can build our existing products. It was designed for scale. It is the most accurate CGM, which becomes really, really important as you think about controlling glycemic control over time. And so we're very, very excited about it. And just some of the early feedback. This is the direct feedback from Europe where we launched at the end of last year, where it's basically living up to expectations. Really across the board, what you're finding is positive feedback. Most importantly is that bottom line, 97% of new customers said it was easy to use. That becomes really important as you start to address new populations where ease of use tends to be the #1 complaint. But think of all the topics. You forgot it was there. The sensor warm-up was incredibly quick. There was comfort and convenience. All of these things play in. When met with all of the features in the world, leading accuracy, G7 is a product that we think is going to be an incredible win for the diabetes community, but really for the community in general. And so as we think about what's next for G7, massive product launch, years in the making. We've been working on it now for almost 7 years. And what you ultimately see here is the launch now will be in the international markets. We're going to be going into new geographies. Last year, we launched in about 6 markets. There will be another wave in the current year. Real opportunity to move into markets where we don't have significant presence or our presence exists predominantly with maybe either lesser exposure or a product that's not necessarily as popular with our G6 product, building access in the U.S. We're working on that today. So as you think about the launch in the U.S., one of the big things we've really focused on is that our product is the most covered CGM. We want co-pays to be low. We want the out-of-pocket for patients to be low, allow them to have access to it at all times, whether it's a recessionary environment or not. And that's something that will be critically important. So we're going through that process now, getting commercial DME coverage which, for the most part, is on track and expected to be in place this quarter; Medicare, which we've already announced is in place; and commercial pharmacy, which is ahead of schedule. And then expanding connected solutions we are the most connected CGM. We continue to connect to partners so we can meet folks where they want to be. And that is the next steps for this product. Why is that so important? This is the core U.S. market. And for those who have followed us, you've seen a similar version of this graph. This graph represents what's happened with the CMS basal approval. And ultimately, we had about 4 million, 4.5 million lives that were covered under intensive insulin use. This is mealtime insulin use. CMS guidance ultimately approved CMS coverage. It's about 3 million people. If you think about where we are today as a percentage of covered lives, we are at the lowest adoption rate since 2017 of people on therapy relative to covered lives. That's an -- despite all the growth you see in the category, we were at the lowest adoption rate. It's an incredible opportunity for us with basal insulin, and we're looking forward to it in the future. And how we go about it, well, this is the methodology. We want to be simple to prescribe, providing access to folks. This is one of the reasons why we went to the pharmacy route. For those that have followed us over time, we've moved from the DME to the pharmacy. We want to meet patients where they want to be met. It doesn't matter whether it's DME or pharmacy, both are valid. Broad customer access, again, the most covered CGM. This is incredibly important to us. As you think about where we're going over time, as more and more folks are accessing therapy in different points, different socioeconomic statuses always play into it. And the fact that we can offer this product at a low co-pay means a lot for stickiness and long-term retention. And lastly, the efficient service model. One of the things we plan on doing is, as we launch more and more through the DME, but more importantly, the pharmacy channel, is to be more efficient and ultimately deliver more profitability back to shareholders. And you continue to see that in our operating margin leverage over time. We are the most covered and reimbursed CGM in the market, and we expect it to continue to be that way, which is a critical part of our strategy going forward. And we've been preparing for this moment with basal coverage. We drove the evidence through our MOBILE study that ultimately allowed CGM to be covered. That was our study in a randomized controlled trial where we proved that folks that have used basal insulin would benefit tremendously through the use of CGM. We doubled the size of the sales force in 2021. Why? We wanted to call on primary care physicians, the battleground where this is ultimately going to be addressed. We introduced the sampling program so that folks could go in and see their physician, try the product and ultimately see what it does. And what you find is people that do sample the product, we have a very, very, very high rate of folks coming back and wanting to be put on therapy. And lastly, we've empowered the sales team with digital tools, all really done about targeting, making sure that we're addressing the right population. What's interesting is through all this, we've doubled the prescribing physicians in the past couple of years. It just goes to show the demand for this product is out there, and it continues to grow. Like I said, we're at the least percent of adoption since 2017 relative to covered lives despite all of this growth. So there's a real opportunity for us in the future. We're also gaining share internationally. As we move into new geographies and we reduce administrative barriers, one of the things we've really targeted on is -- in the past, we were really focused on this higher reimbursed area. We were a very, I'll call it, the pro product. As we've launched G7 and Dexcom ONE, we're certainly looking to reduce those administrative barriers, get people access to therapy, get reimbursement. And we find that across the board when we move into these new geographies -- a good example is we moved into the BELL countries, so Estonia, Latvia, Lithuania, Bulgaria. And in doing so, within a very short period, it was all cash pay, the government ultimately decided to reimburse. It's that clinical difference, that real change in the patient's life that ultimately drives reimbursement. And we will go direct in strategic markets. We've acquired distributors over the years as necessary to allow us to invest when investment may not be on top of mind for our distributors. We'll continue to look at those things ultimately to drive growth. And we're going to do it through a portfolio strategy. This is where I think some people have asked us questions in the past. How are you going to go to market in markets where there's tenders versus government reimbursement? And this is how. We have multiple different products, all based off of similar product platforms where software can differentiate the experience, service levels can differentiate the cost to us. This is the product portfolio of the future here as we launch G7 and Dexcom ONE. And we will be launching Dexcom ONE on a G7 form factor over time. So all of this will converge on a very common platform and really provide an opportunity to service everybody. And in doing so, this is what we've been able to do over the past 18 months. We've essentially added 3.5 million high-quality covered lives over the past 18 months outside the U.S. Those are folks that have either low or no co-pays. This is government and tender reimbursement. These are real opportunities for folks to get on therapy, and that's just in the last 18 months. And you can see the countries across the bottom, real opportunities and real wins, part of the reason we're able to take share over time. As you move outside of international and you kind of zoom back into what Type 2 opportunities are, the one thing we do believe is that there is an opportunity in Type 2 and beyond. And as you think about an effective solution for Type 2, where there's a massive unmet need, the opportunity is user engagement, health outcomes and a return on investment. You have to have folks use the sensor and engage with the sensor. And so we understand that that's going to require some work around software enablement. You have to have the health outcomes to drive the clinical need and, ultimately, the return on investment. So here's a few examples of things that we're doing. We see that user engagement in MOBILE suggested people want to use this sensor in this space. When we took it away at the end of the MOBILE study, there were many upset folks. The value that the sensor provided, insights into the body, were incredible. We also found that health outcomes through real-world evidence, we are able to drive performance. We are able to reduce metabolic outcomes or increased metabolic outcomes with glucose control. You really find across the board health improves when you put a sensor on. Just that simple awareness, that accountability partner that the sensor ultimately represents, continues to play. And return on investment, we have to show these payers that the return on investment, we continue to do so. We know that $400 to $500 per month, you can take out the cost of caring for somebody by putting on a sensor, a sensor which costs a fraction of that. That's meaningful contributions to a population to where, we talked about earlier, there's $1 trillion of spend in this space per year. We can help reverse that. And we believe in that space, we have the product to do so. And maybe lastly, connectivity is a competitive advantage. We built our product really around connectivity. It was a fundamental process. It's connectivity to pumps, it's connectivity to pens. It's connectivity to apps. It's connectivity to caregivers and parents and children. We really believe that unlocking the ability of understanding glycemic control, not just to the individual but the ecosystem around, is essential to making decisions to whether it's Type 1, Type 2 or beyond. And we've built that infrastructure to where the future, as we move into all markets, this connectivity is going to be a competitive advantage. So with that said, we talked a little bit about the background. I know there's -- where we are today, we really spend a lot of time in that Type 1, Type 2 intensive and basal only. But just so you guys know, we're really seeding the future about this. Type 2 non-insulin, prediabetes, gestational, patient monitoring, health and wellness, that's where the opportunity is, and we're just scratching the surface with what you see today. We talked at the beginning that 2023 is a transformational year. 2023 is where we set the foundation to allow for all of this. The launch of G7 allows for that software differentiation sitting on top of it. So we're really, really excited about the future and the opportunity at Dexcom. And maybe the one thing that gives us kind of pause, this is our why. I think at the end of the day, you won't find a company that is more patient focused and more focused on the clinical outcomes as Dexcom. I hope that when we -- when you see the products coming out over time, the amount of passion that we have in this organization for helping people and ultimately supporting the organization longer term, can be felt around every corner. That being said, happy to take any questions. I know we only have a few minutes here, but happy to do so.

Yes, I think we have about 10 minutes. So maybe just to hit a few topics here, Jereme, competition, there's another sensor that now has iCGM status. Maybe talk about why Dexcom -- and you certainly alluded to it. But why you're entrenched with the Type 1 user? And why will folks stick with Dexcom over competitors as they integrate with pumps?

Sure. I'll first start with the real-world outcomes that you see on our sensor continue to be far superior than that of our competitors. We lead with accuracy. We lead with clinical grade. We'll continue to do so. And as you're ultimately integrating with a pump, all of the pumps got their approval for integration using Dexcom sensor. All of this ecosystem was driven in concert. And so we believe that clinically, we have an opportunity to continue to win there. We have the mind share there. We certainly work closely with all of the prescribers in this space as well as our partners to create the best product. And we think that we'll be able to continue to offer that product. Over the long haul, I think it provides us an opportunity to continue to iterate on the sensor. I think having that connectivity will remain important. I think providing the utilization levels and the survivability levels that our product has will continue to demonstrate differentiation. And I think what you've seen, you can see there's a cautionary tale of what happens when you have a sensor that doesn't perform with a pump that is a high-quality pump, look no further than our competitor in Minneapolis, Medtronic certainly had some struggle keeping folks in their system because of the quality of the sensor. We believe the quality of our sensor far outweighs anything that you've seen on the market today.

So to be clear, Abbott's approval yesterday doesn't change the strategy in any way.

It doesn't. We've always expected it. It's always been part of the assumption. We take everybody and their commitments at face value, and we've been prepared for it. It's always been part of the plan, and we'll continue to operate as we have.

Okay. Basal, that was the positive surprise last week. Can you just talk about the timing, logistics in terms of when you'll see a benefit to the P&L?

Yes. We're really excited about that. So we talked a little bit earlier in the presentation, we expected basal coverage in basically July 1. Ultimately, CMS agreed to provide approval on April 16. And what that means is G7 is already covered by CMS. And now G7 will be covered by CMS for those folks on basal as well as hypoglycemic events, certain hypoglycemic events, starting on April 16. And so what that does is it provides a real opportunity to get ahead of that. Our G7 product is out there. It has a reader that is critically important for CMS. CMS requires a reader for reimbursement. And so we'll be taking advantage of that. It just so happened the approval came on the last day of our national sales meeting. So we are well in concert with our sales force, our marketing team. And we'll be looking to take advantage of that. It does provide opportunities ahead. We assumed it would be July 1, it's going to be earlier than that, so we have an opportunity to go get some patients in what is an absolutely massive growth driver for our organization earlier than otherwise expected.

And does this accelerate discussions with commercial payers?

It could. So if you think about commercial payers, the Medicare -- over 65 population, the population that would be subject to Medicare coverage, is about half of that basal population. Within that population, there's quite a few Medicare Advantage folks as well as those folks directly contracted with CMS. For those Medicare Advantage payers, as you start to have Medicare covering it, I think that accelerates some potential Medicare Advantage contracts. In terms of the general commercial space, I think it's going to take a little time. I don't know that it accelerates it in that space. But we do believe 18 to 24 months is about the time frame it takes to get the coverage in that space. And so we'll be looking to get that coverage. If there's an analog for it, Type 2 intensive followed a very similar pattern post Medicare approval, and we'll be looking to follow a very similar pattern.

And we're under the assumption that, let's call it, 7%, 8% of this patient population is already using CGM. Is the expectation that those folks convert to Dexcom? Or is it just pretty much open field running here and it's a penetration dynamic more than anything else?

Yes. It's a little bit of both. We're not counting on the 7% to 8%. But what we can say is 3 people switch to Dexcom for every 1 that switches to our competitor. We are the product that folks switch to. That all being said, we believe, over time, 60% of the basal market ultimately ends up on therapy. And so the bigger opportunity, rather than focusing on switchers, is focusing on new to category, which that will be the primary focus. But we will be paying very, very close attention also to those on competitive product and look for opportunities there, where possible.

And just remind me the economics to Dexcom of a basal user versus a T1 or T2 user?

Yes. In the commercial -- at least, I'm sorry, on the Medicare population that was approved, CMS kept the rates the same, and it's a monthly reimbursement for folks on therapy. And so the economics, at least in CMS space, are similar to that of Type 1 and Type 2 intensive. Over time, we'll continue to keep an eye on it. What we found over time is that the MOBILE study indicated those on basal wanted full-time wear. So we'll keep an eye. And I think there is an opportunity for full time were. I think there's an opportunity for intermittent wear. But as of right now, all indications look to full-time wear where the economics are similar, but we'll be prepared for volume conversation and all that.

And just from a marketing standpoint, is it a full court press now? Or do you wait for commercial coverage?

It will be a targeted full court press. And so you will target -- you will see us pushing right away. What we found is targeted full court press, looking for those areas where folks in that category may be more prevalent, is where we will focus our marketing dollars and we know where those are. But we will not be holding back. That was part of the reason the timing worked out fortuitously, but that was part of the reason for the Super Bowl ad. We knew G7 was coming out. We knew basal was eventually coming. Awareness is a very key part of this. And so there will be a full court press, but it will be targeted on that population.

And I'm guessing though that this approval and associated reimbursement has a bit of a halo effect on the rest of the business. I can't imagine it couldn't.

It certainly could. I think as you think about more and more folks on therapy and sharing their experiences and folks getting access to it and the advertising dollars seeping and leaking into other areas, there is an opportunity where as that awareness grows -- someone who's 63 and 66 might be watching the same program. They might be reading the same. We might target them with the same ad. That awareness grows based on some of that advertising and some of that reimbursement. As more primary care physicians get used to prescribing it and more comfortable with that, that also can grow and bleed into other areas. And so there are opportunities where kind of other similar wear cases could have a halo effect associated with it.

And I may have missed this in the presentation, but is basal reimbursed in Europe? And does the movement here in the U.S. impact or accelerate the opportunity in Europe?

Yes. So for the most part, basal is not reimbursed outside the U.S. in general. So in Japan and in pockets of Canada, you do find that basal is reimbursed. There's a few smaller pockets outside the U.S. But for the most part, it is not. So this represents an opportunity outside the U.S. We were just at ATTD not long ago, and it was interesting. Typically at ATTD, it's a European conference around diabetes. It is a heavy prevalence on clinical-grade evidence and it's really focused at the more acute cases. What came out of that conference was a majority of the conference was around the Type 2 basal and the Type 2 non-basal, non-insulin user as a significant part of it. So the appetite outside the U.S. is growing significantly. The reimbursement doesn't necessarily exist today, but I do think it's a real opportunity for us in the future, especially as the U.S. launches, and I think the world gets a little bit more comfortable with CGM therapy.

Just shifting gears a little bit to G7, I think on the fourth quarter call, Kevin mentioned that the majority of G7 users in Europe were new to Dexcom. And I just would have assumed most people would have converted from G6 to G7. So why is that? And is it TAM expansion here, getting folks from MDI or -- sorry, finger sticks? Or is it competitive capture?

It's a little bit of both. What we're finding is we're seeing competitive switching. We're also seeing some folks that maybe were on the sidelines because of some of the consumerism of G7. The form factor ultimately decided to come on to CGM therapy. And so we're really happy to say it's a little bit of both. We do know over time, there will be a large portion of G6 to G7 switchers, but I think early feedback would indicate we have a very, very, very amazing product that is winning over hearts and minds of folks in the space.

How long will it take for you to see an impact from the Super Bowl?

It's probably going to take really a few months to see a significant impact. And so the way it works is you do need a script in the U.S. The expectation is folks, after the Super Bowl commercial, can go out and get a script. Go see their physician, get that script and go have it adjudicated. You can get it today if you have a script. It just takes a little bit of time in some cases to see your doctor. But our expectation is, by the time our next earnings call comes up, we'll be able to give you a readout on what the leads looked like, what the performance looked like, was it a good return on investment. Obviously, that's where I spend a lot of my time. And I do expect that you're going to see -- I do expect it to be a good return on investment. The 2021 Super Bowl commercial certainly was. And based on early indication, this one is going to be as well.

Unfortunately, we're bumping up against our time. So thank you so much, Jereme. We're downstairs in I think Amarante 1 for the breakout. Thank you.

Thank you. Appreciate it.