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

Good morning, and welcome to day 2 of the 45th Annual Raymond James Institutional Investors Conference. I cover Medtech here. My name is Jayson Bedford. It's really our privilege to have with us the management team from DexCom. DexCom as some of you may know, has been one of the more disruptive success stories over the last 10, 15, 20 years. And with us today to tell about the DexCom story is Sean Christensen, VP of Finance.

Thank you, Jayson. Good morning, everyone. Good to be here with you in Orlando. Thank you to the Raymond James team, who always puts on a great conference. My name is Sean Christensen. As Jayson mentioned, I'm the Vice President of Finance and Investor Relations, and happy to be with you this morning to present on behalf of DexCom. I see some familiar faces in the crowd, but I also know that there's some who might not be perfectly familiar with the story. So I'm going to try to walk through in a little bit more detail. Again, for those of you who are familiar, bear with me as some of this might be, I think you know very well, but I want to make sure that everybody has a grasp on what we think is a very exciting and compelling story. Just as a reminder, this presentation does have forward-looking statements, so I encourage you to evaluate this in conjunction with our filings with the SEC. So as we think about operating as a company, one of the things that our CEO, Kevin, are constantly challenges us with, whether it's a meeting about product or thinking about strategy is what problem are we trying to solve. And the reality is that when we look at global diabetes prevalence, diabetes represents one of the greatest problems that the world faces in terms of health. You can see here, as of 2021, the International Diabetes Federation estimates greater than 500 million people in the world with diabetes, with that number projected by 2045 to grow to nearly 800 million. The trajectory that we are on, both in terms of overall number of people impacted, but also the cost to treat this population is unsustainable. In the United States, we spend 1 out of every 4 health care dollars on people with diabetes. And that, again, continues to increase both in terms of the dollars to spend per person, but also we have 1/3 of American adults to have prediabetes and are on a trajectory toward type 2 diabetes. And so as we think about a problem that we're trying to solve, we need to address 2 things together. We need to address both the health impact, but we also need to do so in a way that's economically viable and sustainable to have our broadest impact on global health. Let me give you a picture then of how our system works and what we bring to the equation. So here you have an example of how historically somebody with diabetes might treat their condition and assess their blood sugar levels. This was a person with type 2 diabetes who was treated with once-daily basal insulin. And so one injection of insulin per day, typically, what we see is for somebody who is complying in this population, they would wake up usually and take a fingerstick. Earlier stage type 2, they might take one fingerstick a day, but usually, people are just not really monitoring. But this individual takes one in the morning, again, pretty common, and they would see that they're doing pretty well. They're in their target range and they might conclude they're doing well and would go to their doctor in 6 months or a year and think that this was where they were at. We think of CGM though is kind of a full picture like a movie, whereas this is trying to explain a movie via a single image from the movie. So let me give you a full picture of what this individual actually -- what we saw when we put a CGM on them. So again, they're in target with their fingerstick. You put a CGM on, however, and they're above target for 17 hours of the day and more than 6 hours of the day is spent in severe hyperglycemia. And really, that's the levels that lead to the long-term comorbidities that you hear associated with diabetes, kidney impact, cardiovascular problems, retinopathy, neuropathy. So this is an individual who has given kind of a false picture and a false confidence in where they were treating, and this is why you hear some people so frustrated that when they go to their doctor and they get an A1C reading that's elevated because they thought they were doing well. So when we think about how do we treat the population, the data that we provide, we can provide them with a full picture. We provide them that full motion picture view of their lives so that they can make better decisions and have insights into their behavior and their food choices and all the things that impact glucose levels of which there are many. So to put it simply, when we think of our impact on human health, and we look at the population of people with diabetes, we believe quite strongly that we can do far more for this population. Our confidence in the future rests in what is a history of innovation that has been clear for our company. Most of the first for the CGM industry have been driven by DexCom over the years. And here you have several of these innovations, including the one at the bottom, which was announced just this morning as we became the first FDA-cleared CGM that can communicate directly from the sensor to an Apple Watch. So no longer say you wanted to go for a run in the morning, you no longer have to carry a phone with you because the sensor would be communicating directly to the watch as a primary display. We have the ability to do -- innovate like that on behalf of our customers and to drive certainly better health -- outcomes but really give optionality and the ability to minimize the disease burden that people have with diabetes, which is significant as they're trying to manage a complex condition. Moving forward. Because of that big picture vision and this innovation cycle, we have a core value at DexCom that is to think big. And this is what we exemplified last year, and we changed the mission of our company. It used to be that we would say we are empowering people to take control of diabetes. We actually changed that one word and said we want to empower people to take control of health. What we're challenging our employees to think about is what if we can move not only from a company that is assessing and treating a complex disease, what if we can move earlier in the stage of intervention, so we can move toward prevention, toward kind of minimizing that funnel of treatment toward the condition and really empowering the entire ecosystem of health. We don't -- we very specifically don't say empowering people taking control of their health because this doesn't impact only the customer. We're empowering [ parents ]. We're empowering clinicians. We are really moving throughout in kind of the journey of who we think about as a customer, even payers, again, with a sustainable solution in a population whose costs are rising quite significantly. So then let's look at performance. In 2023, as we execute on this vision, the sizable end market that we have, 2023 was an incredible year for DexCom. We put up greater than 24% organic revenue growth, closing the year at about $3.62 billion in revenue. We did that by growing our active user base greater than 35% globally. So we finished the year of 2023, with about 2.3 million active users around the world who are monitoring their glucose levels with a DexCom CGM. I think equally as important as we think about the long-term future for this business, not only we're growing that top line at a very high rate, but we're doing so with a business model that is gaining significant leverage. And so we had OpEx leverage of approximately 400 basis points in 2023, closing the year with a non-GAAP operating margin of 19.8%. We generated greater than $1 billion of adjusted EBITDA in 2023, and we grew our free cash flow by nearly 70%. And so we feel like we've set up a business model and been very thoughtful around this growth journey to ensuring that we are growing and scaling efficiently and well in conjunction with our ambition to serve millions of more people around the world. 2023 is also an incredible year for us as we think about access to our technology. As you'll see throughout this presentation, we had some reimbursement decisions that were amongst the largest in our company's history, and we've expanded the growth runway that we have by virtue of those decisions that enable people to access our technology at a lower cost. In doing so, and again, in conjunction with our ambition to serve millions of more people, we also opened our first international manufacturing facility in Malaysia last year, which significantly scales our production capacity and sets us up to capitalize and maximize our growth runway as patient demand escalates in the coming years. For 2024, we expect this significant growth to continue. We've guided our top line growth for the year to 16% to 21% organic growth. Gross margin for the year is 63% to 64%, which is relatively flat, slightly down versus 2023. Really, we're in the process of transitioning from our G6 hardware platform to our G7. And so as we build volumes, that will help us to scale and drive greater margin efficiency at the gross margin level, continued operating margin expansion to about 20% and adjusted EBITDA margin of 29% forecast for this year. You see some of the assumptions there. But I think for us, this is a year in which we build on the access expansion that we had last year and continue to capitalize both within the U.S. and internationally. If you think about then how do we execute on this vision and the strong growth opportunity, it really starts with an excellent product, and that's what we have in G7. With DexCom G7, we have what we believe to be new standard in CGM technology around the world. G7 is the most accurate CGM that has been cleared by the FDA and offering that standard DexCom performance that people have come to expect and trust over the years. G7 is incredibly simple. So it moves from a kind of durable 2-product platform into a single disposable product that offers very simple application and ease of use throughout the tenure of the sensor. It is a 30-minute warm up, which is the fastest in the industry, so you can put your CGM on and within 30 minutes, you have real-time CGM readings that do not require fingersticks right out of the gate. And DexCom CGM with G7 is also the most covered CGM in the U.S. We fought incredibly hard to ensure that our patients not only have access to the technology, but have as low of an out-of-pocket cost as possible, given that they rely on this for managing a complex condition. And in doing so, we've been able to really expand our coverage and lead the industry with robust coverage. But we're not sitting still on DexCom G7. We continue to expand and innovate. And so we've talked about expanding the sensor wear from the current 10.5 day to what we hope will be a 15-day sensor wear. That has entered kind of the clinical testing phase that we talked about last year when we introduced these enhancements to the G7 platform at our Investor Day, so we continue to build. And obviously, that would be a nice benefit for our users and certainly for us from a cost perspective, if we can move from a 3 sensor per month to 2 sensor per month dynamic. We also continue to make sure that we're driving the most volume to our G7 platform so that we can get the most out of the automated lines and manufacturing scale that we've built out in our San Diego, Mesa, Arizona and Malaysia manufacturing facilities. So that includes the current transitions that are underway with our pump -- integrated-pump partners with automated insulin delivery. So we have partners with Tandem, with Insulet, with Beta Bionics, with Ypsomed in Europe, and all of those are transitioning to G7 for their existing users. We're also moving DexCom ONE is a product that we have internationally, and that product is moving from our G6 hardware currently to DexCom ONE Plus, as you see here in this image with that launch having started in January, and market's transitioning then to our G7 hardware. All of these enable us to get volume efficiencies on our manufacturing lines. Some of the key -- when we think about investing in G7, enhancing the product, a lot of people focus on the form factor, the disposability of G7, the fast warm-up time. One of the ways that we've really enhanced the G7 system though is with the software platform. And those of you who've been around for us, you probably heard us talking about for at least 6 years now, how differentiation in the future is really going to revolve around software. So we've been investing in this significantly, and you see that with G7. We've moved from a really complex architecture of the G6 software to a global software platform that enables us to iterate very quickly. And so since we launched G7 in the U.S. in February, it's about a year ago in 2023, we've already introduced 13 software updates to the G7 software. The team targets 1 per month, bringing in features, bringing in enhancements, strengthening connectivity, all of those things. And this is going to enable us to continue to iterate whether it's G7 or any of our hardware platforms in the future, building around this type of approach and really driving better user engagement by focusing on the software and having that back-end architecture of that software able to support these quick rapid increases. As an example of some of the recent ones you'll see here on the screen, we built a connected pen platform with our software. So people who are using multiple daily injections of pen used to have to do manual logging of their insulin. This module allows somebody to see their glucose levels and their insulin levels together in a single app. So a really nice improvement to minimize, again, that disease burden for somebody who's managing diabetes. And then on the right, you see the ability to bring in other activity data, calories, this person going for a run through Apple Health, we see that ability to ingest data from other wearables into our system to overlay and give a broader picture alongside your glucose traces. We mentioned the direct-to-watch connection earlier in this presentation. So all of these updates are the kinds that drive the type of NPS and positive satisfaction that we have from our users because we're giving them optionality. We're giving them the ability to choose the type of experiences in the way that they see their data visualized in our platform. We think that those type of updates really enhance what has always been a competitive advantage for DexCom, which is our connectivity. You see this not only at the customer level, where we drive automated insulin delivery and have been the leader in automated insulin delivery now for several years for our customers, connected pen technologies but also the ability to empower, say, a parent who maybe has struggled with a child with type 1 diabetes and giving them the peace of mind to allow that child to go to a sleepover or go to -- to travel to an event. It's the peace of mind to a doctor to monitor and have a better picture and able to practice medicine with far greater data than they ever had before when somebody was managing with the fingerstick. And so these are the type of advantages that we hope to extend into the future across our systems. We're taking that competitive advantage then, and we're coming into a market in the U.S., and I talked about access expansion. You see it really visualized here on this graph. 2023 marks the largest expansion of reimbursed coverage from insurance companies in our company's history. And so I can stay here and Jayson talked about our history of growth we can say that despite the growth over the past 10 years in which we've had a revenue CAGR, I believe, in the high 30s, we still have more people today who are not on CGM and yet have insurance coverage for DexCom than we've ever had in our company's history. And so that gives us a nice growth runway, we think, to continue to extend over the next several years. This really drove -- in 2023, it was -- it started with Medicare covering based on a trial we had run called Mobile, people with type 2 diabetes on basal insulin only. So those once daily, long-acting insulin users, we really showed nice outcomes there. That's 3 million people in the U.S. in that patient population. And then after Medicare covered them, we saw the commercial payers quickly follow. But Medicare also covered people who are not on insulin, who have hypoglycemia risk, another population we think is about 3 million to 4 million people in the U.S. You see it pretty commonly with people with chronic kidney disease, for example. Again, this really just drives access for us in a way that we think will give us a nice growth runway for several years, and we're continuing to push to drive more expansion of coverage for our customers, knowing the type of benefits that we can drive. But not -- just having the access isn't enough. It's important for us to make sure that we're treating others within -- whether it's a payer or channel partners as customers as well. And we've done that with the expansion of our sales force. In 2021, we doubled the size of our U.S. sales force in anticipation of what you just saw, that 2023 coverage expansion. We knew that we needed to be not only in front of endocrinologists that treat people typically with type 1 diabetes, but we needed to broaden out into the primary care marketplace of physicians. Again, it's about 225,000 primary care physicians in the U.S. compared to maybe 7,000 endocrinologists. So we've had to be very selective in who we call on, knowing that to call on the right people and target the right doctors, but we've done that. And so in 2023, as we drove that revenue growth, we saw about a 40% expansion in our U.S. prescriber base last year. Overwhelmingly or think of that almost entirely as primary care physicians. And we saw greater than 70% of our new prescriptions in 2023, driven in primary care, primarily fulfilled through the pharmacy channel, which has been another strategic initiative of ours to open up really for the past 5 years and now we have broad access there. And so we continue to invest in anticipation of future coverage expansions coming as well. We continue to grow the U.S. sales force, but in a way that's targeted to be very efficient, making sure that we're calling on the right doctors and have a great ROI on those sales force additions that we do have moving forward. Our growth has also been very robust internationally as well. And here, you see kind of a general summary of what's been driving that. Targeted access expansion, driving reimbursement for people with type 1 diabetes and intensively managed type 2 diabetes. And increasingly so, again, following the U.S. as lead here, more and more basal coverage as well. We've talked about going direct in certain markets, and I'll give you an example of that here coming up. And we've talked about moving DexCom ONE to the G7 form factor to get volume efficiencies and be more competitive with the compelling smaller form factor that DexCom ONE Plus represents. The international markets are a little different than the U.S., and you see that here where we've had to adopt what we call a portfolio approach. So you have some markets internationally that have kind of broad coverage across the space. And so having a single product there makes sense, and we've had our G Series kind of our top-tier product go there. However, you have several markets internationally where they've chosen to stratify the market based on higher risk population. So think of that might be pediatrics. It might be people on pumps, automated-insulin delivery, various factors. And then the broader population might be referenced by people on multiple daily injections, for example, people who don't have high hypoglycemia risk have a different tier. So we have 2 tiers of product, the DexCom ONE product is targeted to be very simple to not have that full feature set. You don't need the connectivity and the firmware to drive automated-insulin delivery there. So that's where we've had a targeted approach to make sure that we're able to access both tiers that these countries have identified. That DexCom ONE product has also been a nice lever for us actually to drive reimbursement. So we've -- in 7 markets, we've launched that product where there was no coverage, but we launched it as a cash pay e-commerce platform. And we've seen 6 of those countries follow with reimbursement after the launch based on the uptake that we have of the sensor itself. So I think it's a creative strategy, and we're showing the impact of that, and you see that actually on the next slide and the results of how many people now have access to our technology, where we've expanded it by more than 4 million people internationally over the past 2 years. Again, a really nice growth opportunity here to take advantage of. You see Japan as a core example of this. There's 1 million people on insulin therapy in Japan. Reimbursement now exists for all of them, all the way down through Type 2 basal. Knowing that, that opportunity was there, we identified in the third quarter of last year that we would be transitioning from a distribution model with an in-market distributor to a direct business model, which will be starting here in the second quarter of 2024. So we're incredibly excited to take advantage of what we think will be really a key growth driver for us in our international markets for several years to come. So we have the U.S. markets, again, access expansion in international markets, access expansion, really nice growth runways for us to take advantage of. This raises the question, though, of what is next. And even though, again, we have these near-term catalysts, we need to be thinking longer term in mind as well. And we see a huge growth opportunity in the U.S. and internationally as well. But in the U.S., there's 25 million people with type 2 diabetes who are not on insulin therapy and who do not have hypoglycemia risk. We believe that we have a key role to play for the treatment of these individuals. And again, a way that addresses both the health outcomes and the economic outcomes that our product provides. So let me give you an example because we want to kind of help you guys think big picture about what our opportunity is and maybe reorient the way that we, as a culture, think about the treatment of type 2 diabetes. So as an example, let me give you this patient. This is a real patient. Again, we were just talking with a clinician. He said, "Hey, I had something in my office.'' So this is a patient journey that culminated in December, 2 months ago. This person came into this doctor. She had type 2 diabetes for 5 years at this point. She was a 56-year-old woman and she presented with elevated glucose levels in A1c that's above the target range. So ADA sets target range for an A1c should be about 7 for people with diabetes and elevated weight. And so right away, this doctor who's -- what we call a CGM first doctor, DexCom CGM first, he puts her on a DexCom. He initiates GLP-1, so puts her on Ozempic and puts her on Jardiance. So how is she doing? One year later, let's see the progression. Okay. So she's gone from 50% time in range to 88% time in range. Her average glucose is significantly down, her A1c is also significantly down into a great level. Her weight is -- lost weight as you might expect with the GLP-1 class as well. So at this point, the doctor says, "Let's keep her on the DexCom CGM. Let's keep her on Ozempic and we'll take away Jardiance for now. So what happens at the 2-year visit. Continued reduction in average glucose, continued reduction in A1c, continued reduction in weight loss. And so 90% time in range here. And so the doctor says, okay, the trend is great. What happens if we take her off medication entirely, what if we [ remove ] Ozempic, can the outcomes be sustained with just the CGM. So 6 months later, we did a shorter check in to just make sure that, that was sustained that she wasn't reverting and we saw 100% time in range. We saw a continued decrease in average glucose, A1c and further reduction in weight. So simply put, this is an individual who had learned and been able to see the impact of her behaviors and really embraced it and took advantage of that and is now at a 6.0% A1c. She technically does not have type 2 diabetes. So she has reversed back into a prediabetes level and in much greater health. We're not here to say this is necessarily normative that every -- this will be every individual's experience. But we think that this is possible, and we want to give this hope to individuals as to what you can do by giving somebody the full picture. Again, the full -- kind of the full motion picture view of their health alongside these drug classes that are emerging and doing very well. So if you think of this picture, and this is just -- again, this is one example, but this is something that doctors are seeing more and more often, and this is why we hear more and more doctors saying, "I want anybody who I can with diabetes to be on this technology, to be on CGM." So then thinking about the GLP-1 class, which has obviously been a huge topic of conversation for us all. You see on the left here, we've seen in the claims data that real-world outcomes are stronger when you combine GLP-1 and CGM. So doctors are seeing more cases like what I just showed. They're stronger with the 2 together than they are with the GLP-1 apart. And those are the newest generations. So that's just Ozempic and Mounjaro. And then if you look at the right, we, in particular, have seen an uptick in CGM starts once people start on GLP-1 therapy. So not only is this not kind of cannibalizing our market, we actually see -- and it's supported by the doctors saying that broadly speaking, doctors when given the opportunity, we would like to prescribe these 2 together. And so we've seen a little bit of a tailwind there. So for us, how do we take advantage of this? Well, again, we believe that we can do way more for this population. However, we need to increase access. We need to give doctors the ability to take advantage of what their preferred prescription or their preferred methodology is to treat these patients, most of whom do not have reimbursed access for the CGM today. And so the doctors can't take full advantage of it. Well, this is where Stelo comes into play for us. This summer, we are expecting to launch Stelo, which is a product that we have developed based on our existing hardware. So it's the same G7 sensor platform. And so we get the volume benefits of manufacturing, same accuracy, same performance that people have come to trust, but we've tailored the software to be custom made for people with type 2 diabetes who are not on insulin. These are people who have different needs. These are people who do more self-management of diabetes care than as opposed to being managed directly by their clinician. And we can give them greater data and greater ability to engage with their health with this product. This is a product that we expect to launch as a cash pay product right out of the gate, and we're going to use the data that we can generate from that to hopefully build reimbursement with payers over the next several years. We are incredibly excited to get going here because of the hope that we think this will bring to the population and the ability to put a dent in those rather disturbing trends that I mentioned in our first slide today, the ongoing proliferation of diabetes and the cost profile to treat this. So again, we look forward to Stelo having a great place to come in our growth story, but also the story of treating diabetes in the years to come. So to summarize that, I've run through a lot of material today in terms of access expansion in the U.S. international, our next growth runway in the type 2 non-insulin population. Frankly, there are things that we can't even begin to discuss in this half hour. We could go on, whether it's gestational diabetes treatment in a hospitalized setting for people who need to have glycemic control there, health and wellness broadly as a long-term opportunity. There are so many ways that we can take our hardware platform and really adapt it to drive a better health outcome. So I personally, am incredibly excited for our opportunity. Hopefully, you guys are as well, and I'm thankful to work at a great company like DexCom. So thank you very much.

Great. Sean, that was super. I think we got 2 minutes left. I'm going to ask one simple question. You covered a ton there. Eyeballing it, doing some math, it looks like CGM penetration in the U.S. is roughly 40% of people with diabetes taking insulin. The guidelines recommend pretty much that everyone who's taking insulin adopt to CGM. What is the hurdle? And is it just purely time?

Yes. I think time is part of it, Jayson. It's a great question. The other I would say is typically awareness. And I think it coincides with why we prioritize the primary care physician channel among endocrinologists who are so knowledgeable about diabetes technology. They tend to have great awareness and be the first to really move there. Primary care physicians has really been where we've targeted that expansion to make sure they're aware not only of what the technology can do but of the coverage that has come even faster than we expected. And so I think that's a key focus for ours as we continue to adapt and as these patient populations grow and the reimbursed coverage grows, then the doctors that we can target also grows as well because we can see who is writing and who's treating patients who have type 2 diabetes on basal insulin, for example. So that's one of the reasons we continue to invest in the sales force as we see that return and we see that opportunity to further drive awareness and really continue to move forward the category penetration.

Okay. Great presentation. The breakout is downstairs and I think, Amarante 2. So I appreciate it. Thanks, Sean.

Thanks, Jayson.