PHC Holdings Corporation (SENS) Earnings Call Transcript & Summary

Good evening to those joining us from the U.S., and good morning to those joining us from Japan. Welcome to the Eversense Investor and Analyst Day. Thank you for all your participation. My name is Tim Goodnow, and I serve as CEO for Senseonics. As our partners Ascensia and PHC play an important role in helping us build the Eversense franchise and increase our sales, and with Eversense CGM being an important part of Ascensia and PHC's growth initiatives, Senseonics technology and development pipeline are important to PHC's plans. Therefore, we felt it would be valuable for our respective shareholders to get to hear from each of the partners in our collaboration to round out a fuller view of our aligned vision, our respective capabilities and our shared plans to grow Eversense. In Senseonics, 2022 was a very productive year. We received both FDA approval and a CE Mark for our Eversense E3 180-day continuous glucose monitoring system. We launched the product globally with our commercial partners, Ascensia Diabetes Care, and we expanded Medicare and commercial payer coverage and completed enrollment of our pivotal trial for a 365-day sensor configuration. In today's event, we will discuss how these accomplishments position Eversense for success in the future, and we'll provide further detail on our strategic partnership, growth plans and product road map for Senseonics. We'll also review our fourth quarter 2022 full year performance, on which we just filed our quarterly earnings release. We are very pleased to be joined by the executive leadership of our partners today, including both our exclusive global commercial partner, Ascensia Diabetes Care and their parent company, PHC Holdings. In August of 2020, our organizations entered into a global collaboration agreement for the commercialization and distribution of Eversense. As a result, Senseonics is now able to primarily focus on our core competency, the design, development and manufacturing of the Eversense technology. Ascensia assumed the role of exclusive worldwide distributor with -- of Eversense, with PHC providing financing to Senseonics. And as we announced today, we'll speak to, later in the call, PHC has made an additional $15 million investment in Senseonics and has agreed to swap its debt for the equity position it would have converted into, which we see is enabling us to streamline our balance sheet and add focus to our development efforts. We'll take this opportunity today to let our partners introduce themselves and present their perspectives on the CGM market and how they will expand access to advanced technology for people with diabetes. The Eversense long-term CGM, our shared objective is to increase patient adoption of Eversense, and our organization are constantly collaborating and aligned on this vision, and we're 100% committed to driving growth of Eversense. We're happy to share more of these plans with each of our organizations investors today. In a minute, I'll turn the call over to Ko Sato, COO of PHC Holdings Corporation, for an overview of their organization and priorities for success for PHC and for the partnership. Then Rob Schumm, President of Ascensia Diabetes Care, will introduce ADC and will review the market opportunity, unique positioning and commercial strategy for Eversense. Finally, I'll outline Senseonics' future product pipeline. And our CFO, Rick Sullivan, will detail our fourth quarter 2022 financial results and key financial targets for the next 3 years. Then we will open it up for question and answers. Now let's remind everyone what makes Eversense so special. [Presentation]

You can clearly see why we're all excited about Eversense and why we believe this product and our future innovations represent a transformational leap forward for diabetes management. We recognize that through these differentiated features, we can improve glucose management for type 1 and type 2 people with diabetes that each have unique needs. Now I'll turn the call over to Ko.

Hello. I'm Ko Sato, Chief Operating Officer of PHC Holdings Corporation. Thank you for joining us today. PHC is a diversified health care company listed on the Tokyo Stock Exchange. We are headquartered in Japan, with operations around the globe. PHC based on a strong legacy with our origins in Panasonic. Our current company started in 2014, which carved out from Panasonic by KKR. Since then, we have developed our current business portfolio, which I look forward to discussing further with you today, and we became a publicly traded company in October 2021. What we do, an important foundation for the exciting initiatives, you will hear about today, including our cooperation with Sensonics. Our mission is we contribute to the health of a society through our diligent effort to create health care solutions that have a positive impact and improve the lives of the people. We are now facing critical challenges around the world with health care costs on the lines and the disparities seen in health care quality as well as access to the good health care. To address such challenges, the approach by value-based health care has gained popularity. This is a health care delivery model that seeks to maximize health care outcome for patients, while, at the same time, optimizing and reducing the medical costs. Our mission is to contribute to society by a positive impact. This is possible by leveraging our strengths of providing leading brand products and services to customers across the health care from research to diagnostics, treatment and prevention of the diseases. With that background on our mission, here is an overview of our group. For FY 2021 results, revenue was JPY 340 billion, roughly USD 2.5 billion. We provide products and services to more than 125 countries, with the majority of our revenue coming from outside of Japan. Our products and services are used by a wide range of the customer, such as pharmaceutical companies, universities, research institutions, hospitals, clinics, pharmacies, patients and individuals. We deliver strong recognizable brands. We enjoy a significant advantage of having the leading brands that's ranked in the top 3 for domestic and international markets in each business. As a global health care company with a heritage in Japan, we deliver solutions to help solve health care challenges around the world. Now I would like to turn specifically to diabetes management, which makes up about 1/3 of our company. Our diabetes management business is an integrated business of Ascensia and PHC. Ascensia was formerly the Bayer Diabetes Care business that became a part of PHC Group in 2016, and PHC was longstanding high-quality OEM supplier for Bayer at the time. We have a long history with this business. And now 32% of PHC's consolidated revenue come from this domain. Our BGM has been a leading offering in this domain, with our manufacturing capability developed in Japan and our global sales marketing capability. Our BGM business has delivered industry top-class measurement accuracy or the third largest global market share and is the leader in Japan. From this strong market position, expanding our solution to include the benefit of CGM is compelling strategy and natural expression of our mission to improve access to the good health care. In order to support that strategic step, that collaboration with Sensonics that you will hear more about today, was born. Partnering with Sensonics with its Eversense CGM solution is a natural expansion and the continuation of our strong diabetes legacy. It fits seaminglessly with a strong heritage based on globally distributing innovative, high accuracy products that's well regarded for improving the lives of the people. We knew that together, we could make a positive impact on health. So in August 2020, PHC made an investment through convertible note in Sensonics. Concurrently, our Ascensia business entered into a collaboration agreement to continue the global commercialization of Eversense. As I will describe further, this alliance forms an important component of PHC's growth initiatives. During our collaboration, we are exclusive worldwide partner for Eversense E3 and its future generation products, such as the 1-year CGM that Ascensia currently has in clinical trials. Developing the CGM market together with Sensonics is an important growth initiative in our midterm plan that we announced last November. Let me take a moment to provide an overview. The overview of our mid-term plan is shown on this slide. We currently operate in 3 domains: diabetes management, health care solutions; and diagnostics and life sciences. Our existing businesses in each domain enjoy high market shares and are the basis of our strengths, so we define them as our foundation. From there, we will expand our range of the customers, products and services as well as the synergies among our businesses. We have defined this adjacent area as a growth areas, where the markets are larger and offer higher growth opportunities. You can see on this slide that personalized testing and diagnostic solutions is one of our main growth areas, expanding from diabetes management business. Our key driver we are looking to for that growth is to focus on developing CGM sales in the United States during our midterm plan period. Eversense is our key platform to achieve CGM growth, so the Eversense platform is a top growth priority for PHC as we execute on our midterm plan. These are the revenue targets of our midterm plan, JPY 420 billion in 2025, roughly USD 3.1 billion. Our annual growth target of 5.4% is primarily driven by the growth area initiatives. Annual growth rate of around 27% is targeted for the growth areas, and we aim to achieve JPY 52.5 billion growth out of our total revenue growth target of JPY 80 billion. The CAGR of the growth area is plan to exceeded market, and we are targeting to increase the revenue in growth areas to around 20% of our total revenue. As you can see, personalized testing and diagnostic solutions, including CGM, is the biggest contributor to our midterm plan. So this is a key priority. We are committed to driving CGM business together with Sensonics to achieve our growth ambitions. Now I will hand over to Rob, Head of Diabetes Domain and President of Ascensia and PHC Group to explain more about how we intend to develop CGM sales in the United States and other key markets. Thank you very much.

Hello. I'm Rob Schumm, and I'm the President and CEO of Ascensia Diabetes Care and a Corporate Officer of the PHC Group. For those of you who don't know us, Ascensia Diabetes Care is a global innovator and leader in the blood glucose monitoring industry. Ascensia was formed with the sale of Bayer Healthcare's Diabetes business in 2016 to the PHC Group, Bayer's longtime partner for the leading Contour family of high accuracy blood glucose monitors. Today, Ascensia markets the #1 selling BGM test strip in the world, CONTOUR NEXT. We operate in over 100 countries and have a #1 or #2 position in the 18 out of 27 measured countries. Importantly, we continue to be successful in BGM, gaining market share in the majority of countries where this data is available. Our company has a strong sense of purpose. We invented the very first self-testing blood glucose monitor back in 1969. And as a company that is today 100% focused on diabetes, our people wake up every day with the mission of improving the lives of people living with diabetes around the world. Sharing that passion with the team at Senseonics is one of the things that makes the Eversense partnership compelling. While we see traditional BGM is playing an important role in the treatment of people with diabetes, even in the long term, we are extremely excited by the benefits of that CGM, particularly a long-term CGM such as Eversense can offer to millions of people. Before I talk about how we are approaching the market for Eversense, I'd like to give you a sense of why we pursued this partnership and why we are bullish about its future. First of all, as a leader in traditional blood glucose monitoring, we have assessed the CGM landscape from top to bottom, and we like the unique value proposition of Eversense. There are many technologies out there that claim to offer an advance in glucose measurement. But when you look more carefully, we see them as me-too technologies operating in a crowded intellectual property landscape. We believe other potential new technologies are still very far from working like a CGM. Eversense, on the other hand, is now on its third-generation product approved through regulatory bodies, and it delivers remarkable accuracy. As compared to other CGMs out there, it is highly differentiated, it's not a me-too product. Perhaps, most importantly, it is loved by the people who would use it. This was an important factor we considered when making our initial investment in Senseonics. Additionally, Eversense captures the imagination. When you think of what the CGM of the future looks like, it looks a lot like Eversense, and that's why we believe that the vast majority of type 1 and type 2 patients are open to an implantable CGM option. For these reasons, Eversense struck us as an ideal product, where leveraging our existing resources and capabilities in bringing high-accuracy, well-regarded BGM to the market. We could collaborate as a successful commercial partner with Senseonics. The opportunity for Eversense is quite attractive, and we have made long-term financial and strategic commitments to drive its adoption. Let's talk about the specifics. The CGM market is huge and growing. Today, it is about $8 billion globally and expected to exceed $14 billion in the coming years. Both the type 1 and type 2 markets present a large opportunity for Eversense. Our leads increasingly reflect the overall split in diabetes patient type. In fact, we are seeing increasing success with type 2s. And today, about half of our U.S. patients are people with type 2 diabetes. So how do we position Eversense to people with diabetes as well as health care professionals? Well, for type 2 patients on intensive insulin therapy, we see Eversense as 1 of 3 or 4 CGM options with meaningfully different benefits. With Eversense, you get the proven clinical benefits of real-time CGM, but it also allows patients to break free from various challenges that come along with other CGM options. That includes 6 months of wear. That means freedom from constantly changing your CGM and having to make sure you've got your next sensor with you if you're traveling or if you just haven't gotten to the pharmacy. Additionally, the first day of any CGM sensor requires a warm-up period. With Eversense E3, this generally happens twice a year, instead of 2 or 3 times per month. It provides freedom from aggressive adhesives that stay on the skin continuously for long periods of time. It offers freedom from -- to be unattached to a device, at least some of the time. Our users enjoy what they call a naked shower or to simply get a break from being connected to their diabetes device. The target patient for Eversense has a similar mindset to those people with diabetes who, despite advancing durable pump technology, choose to treat with multiple daily injections of insulin. They simply prefer not to be tethered 24/7. As you'll hear from Tim, Senseonics' pipeline is driving to build further on that promise, but Eversense E3 already brings important meaningful benefits in that area. So how are we approaching the marketing for Eversense? In our first phase, we have a high focus geographically. We are concentrating our initial sales efforts in the U.S., around key metro areas with high diabetes populations and access to inserter networks. Today, in the U.S., we have about 60 sales personnel, roughly half of whom are quota-carrying territory managers and the other half are inside sales roles, all 100% dedicated to Eversense. All are working to generate and convert leads in territories that cover a large part of the U.S. We have plans to scale that aggressively with expanded penetration over the next 2 to 3 years. Outside the U.S., we also use a similar geographical focus in our large markets, those where we see favorable tenders and that building on our existing business is useful. We are leveraging our sizable BGM sales forces, along with smaller mission-focused teams around CGM, to support their efforts. A key factor in driving U.S. demand is direct-to-consumer activities. We are spending significantly to drive targeted direct-to-consumer advertising to generate individual patient leads. Over the past year, we have generated tens of thousands of leads, representing individual patients who take the effort to fill out a form to get more information about Eversense. These are people who we believe are more interested in learning more about the unique benefits of Eversense. Right now, we are working to develop the processes and the systems to more effectively convert these leads to users. We believe these dynamics indicate that the broad -- there is truly a broad interest among people with diabetes for this novel technology, and it reflects their willingness to consider an implanted product. Of course, as with any truly innovative product, there are challenges, and our teams are working diligently to characterize and address these. The largest challenges we are addressing to grow this innovative product are inserters, converting insurance and sales force coverage. Let me speak a little bit more about these factors and some of the initiatives behind them. In the U.S., our insurance coverage is very strong. Aetna, Cigna, Humana, Elevance, many Blue Cross Blue Shields and HCSC currently cover Eversense, just to name a few. Medicare has also provided favorable reimbursement and convenient billing codes for E3, which have just taken effect in January of this year. UnitedHealthcare is only the major national insurer that still does not cover Eversense. We see this as typical of the slow adoption by this U.S. payer, but we have efforts underway seeking to expand their coverage. Even without UnitedHealthcare, we have 250 million covered lives for Eversense in the U.S. Importantly, I would note that once you have a covered account, you still need to actively convert positive policy coverage into smooth actual reimbursement for each patient. This is one area of friction that we've been working to address. The convenience of reimbursement differs by payer, and we have resources in place to actively work this issue as we partner with DME distributors to make that happen. It's important to note that under its 2023 fee schedule, Medicare has more straightforward reimbursement that provides a streamlined path for those patients to get access and onto treatment. Because of this favorable dynamic and the significant benefits that we see Eversense can bring to this population, Medicare patients are an important group for Eversense. The major difference between Eversense and other CGMs, as it pertains to the process of initiating patient treatment, is the extra step of the insertion procedure. We provide 2 ways of doing this, training endocrinologists and providing third-party options. We have approximately 230 certified inserters in the U.S. and over 600 outside the U.S. As noted, these are often endocrinologists who are comfortable doing procedures in their office and have worked them into their practice workflow. In case you're not familiar with what the actual insertion entails, here's a short video with a leading endocrinologist in the U.S., briefly showing how the actual procedure is done. [Presentation]

We also recognize that there are physicians who, while they recognize the benefits of Eversense for their patients, are less interested in doing the procedures themselves. Seeking to ensure that those providers' needs are met and that their patients have good access to Eversense, we also provide the option of having a third party take care the procedure, requiring simply a prescription from these physicians. As reported previously, Senseonics and Ascensia are working with the nurse practitioner group, a national firm of nurse practitioners who have started building a network of trained Eversense inserters in over 20 geographic markets to date across the country. This is a significant focus in 2023, and it's currently ramping into additional geographies around the U.S. We believe this third-party approach offers notable access benefits, substantially reducing the requirements for a prescriber to bring the unique benefits of Eversense to patients in their practice. Through NPG or other providers in the Certified Eversense specialist network, once the provider prescribes Eversense, the patients can have Eversense professionally inserted by certified clinicians who are focused on making convenient insertions available. Some of these procedures can even take place in the patient's home. Once a prescriber brings Eversense into their practice, whether they conduct the insertion procedures themselves or simply prescribe the product and have another certified inserter provide that service to the patients, the product not only has benefits for the patient, but there are additional benefits for prescriber who is treating them. Here's Dr. Corriere, a prominent endocrinologist in Maryland speaking about his experience and the benefits of Eversense for his patients. [Presentation]

We are making good progress and expect growth in the U.S. in both the number of new patients and our total user base. We are also expanding our sales force investment, having recently added 10 sales reps and planning to continue to expand our sales force with additional personnel and territories. With the newly announced Medicare coverage, the reimbursement focus and the expanded sales and marketing investment, we have significant plans to accelerate our progress in the U.S. over the course of fiscal 2023. Outside of the U.S., we've been encouraged by the execution and the progress made by our team in Italy, where we have seen the continued potential for attractive growth through the tender process in that market. Our largest market, however, is Germany, where we have faced pricing dynamics, reimbursement access and executional challenges that have led to a decline in our patient base that was not anticipated. We continue to make fundamental changes to that business, shifting our go-to-market approach and creating a model that creates both dedicated CGM focus, while building on our BGM resources there. We're focused on improving the operational structure, the reimbursement dynamics and commercial execution in Germany in 2023. While smaller, we also continue to focus on execution, tenders and awareness in the other European markets we serve, which include Spain, Sweden, Switzerland, Poland, the Netherlands and Norway. The net of these efforts in the U.S. and Europe are that, today, we have approximately 1,100 users on the Eversense E3 in the U.S. and approximately 2,000 outside the United States. With FDA approval just over 12 months ago, and the E3 CE mark last summer, we have now been able to lean into launching this product. So 2022 was certainly an important transition year for us, with many learnings around inserters, reimbursement and coverage in the U.S. and in Europe, go-to-market models and unique market dynamics. As a result, we experienced softer demand than anticipated in the third and fourth quarters. Consequently, we currently have greater inventory than we had planned, which we expect to be utilized in the first half of 2023, as we continue to execute on the plans I've just mentioned. For our fiscal year 2023, as we continue to drive E3 awareness, access and growth and build out the initiatives discussed here today, we expect the global patient count to be approximately 7,500, up from just over 3,000 today. We anticipate the vast majority of that growth to come from the U.S. Our perspective is that while this is significant growth, it only requires us to access a sliver of the enormous CGM market this year to achieve our goals. We believe we have the right team and the right plans in place to achieve this growth. And our goals don't stop there. We believe this business has the potential to grow to over $0.5 billion in Eversense sales in the next 5 years based on our plans for additional innovation coming through from Senseonics' development programs to provide growth enablers, such as pump integration, reduced calibration, a flash monitoring option and a 1-year sensor. With the right innovation and only a small share of the large growing CGM market needed to achieve significant growth, we believe in this opportunity. We envision a world where CGM patients have an open choice among 3 to 4 major standalone CGMs, with Eversense being one of them. At Ascensia Diabetes Care, making Eversense an unmitigated commercial and medical success is our #1 priority. Yes, our BGM business continues to be important, with additional opportunities, particularly in developing markets, but we are directing our resources and our focus heavily toward Eversense, which we see as the future of CGM. Additionally, our organization is excited and motivated behind this goal. When we became Ascensia in 2016, we rolled out the following mission statement, which is at the heart of who we are as a company, to simplify and improve the lives of people living with diabetes. I can think of no better way to realize that goal and the efforts that we are doing here. And I'm excited and proud to be partnering with Senseonics to make that vision a reality. Thank you. Now back to Tim.

Thanks, Rob. As Rob has spoken to, the Eversense E3 is a compelling product that offers many positive attributes for people with diabetes, and we're excited to see the new patients being added to the Eversense family. I'd like to spend some time now on our vision for the future of CGM. Senseonics has a strong history of driving true innovation and technology evolution to deliver new and differentiated products. Continuing to be the innovation engine of the Eversense franchise is our priority, and I'll now turn to our pipeline and our road map to further advance Eversense. Accuracy and measurement is key to Eversense as it has been for all of our products. We hold ourselves to an extremely high standard of delivering exceptional performance, patient safety and a track record of extending the world's longer-duration CGM sensors. Most recently, we delivered on these combined attributes in the E3 product with a demonstrated MARD of 8.5% in the pivotal PROMISE study. We are driven to set a new bar with long-term CGM and are working hard to dramatically push the boundaries of duration, all while never losing sight of also delivering on these safety and accuracy imperatives. As we previously announced, we are currently underway with our pivotal clinical trial of our next-generation 1-year product, while also advancing the design of our future generation systems. Each system is designed to further increase patient flexibility and freedom. Through this focus, we are developing products that are designed to require just one sensor change per year, while not requiring daily calibration. And importantly, we are actively working towards a future Eversense product with no transmitter, the first CGM without anything on the skin. This is the top requested attribute for people on are or considering using a CGM. To attain all of this, our technology platforms are being developed in an integrated approach to enable 3 planned future product configurations, the 365-day system, the Gemini system and the Freedom system. First, we continue to focus on significantly expanding sensor duration. We believe we have achieved in vivo stability for a single implanted sensor to last a full year and are excited to be in the pivotal trial. Doubling the duration of the E3 system to 1 year will make the product even more attractive to patients, the health care providers alike, and even further differentiates Eversense from the competing short-term products. As of last September, we were fully enrolled in ENHANCE pivotal clinical study to evaluate the safety and effectiveness of the 1-year system. This study is also structured for us to submit data at the 6-month mark for an iCGM indication. And if successful, we plan for FDA submission in the coming quarters. In parallel, the clinical study will continue. And when all patients have passed through 365 days of wear, we are planning to submit to the agency for the 1-year indication in early 2024. In addition, we have also received IDE approval to include a pediatric cohort into this ongoing study, and we'll begin enrolling participants shortly. Our second product configuration is develop, we call, Gemini. The Gemini design offers a new level of capability that will serve as the first solution for those users looking for the flexibility of having both on-demand intermittent glucose monitoring and full real-time CGM. The partnership is certainly excited about the product and with the potential to revolutionize the flexibility people can experience with CGM. Let's take a look at this product and how it will work. [Presentation]

As you can see, there is nothing else like Gemini available. Our market feedback indicates this product will appeal to a wide variety of users, and we expect we will significantly target the type 2 population with this product. Given our physician track record and technology, we believe we can be first to market with such a revolutionary offering. Currently, we are making progress and expect feasibility work to be done by the end of this year, and that would make an IDE submission possible in the beginning of 2024. Now to our third product, configuration in the pipeline, the Eversense Freedom system. We view this as the ultimate solution for glucose monitoring. And again, we want to be the first company to offer a system without the need for any on-body device for a full-featured, real-time CGM. Let's take a look at this vision of Eversense Freedom. [Presentation]

The Freedom system is truly remarkable and answers a top request for people on or considering using a CGM. And we recognize that removing the on-body component is simply not feasible for the transcutaneous technologies used in the other systems on the market. Senseonics is uniquely positioned to capture this opportunity. We see the Freedom System as a product with the most potential to meaningfully expand the CGM market. We are in the early stages of development with this product. At this point, we are focused on incorporating the additional battery power and circuitry required to run the internalized Bluetooth technology. Our current plan is to complete feasibility in 2024 and begin clinical trials in 2025. Senseonics has always been about bold advances in technology. Our innovation plans are robust. And as we've done in the past, we are working hard to make these a reality. Now I will turn it over to Rick to discuss the planned financials of the commercial strategy and pipeline development initiatives discussed today.

Thank you, Tim. Hello, everyone. Today, I'm going to cover our fourth quarter 2022 financial results and then provide near-term financial guidance. We're also going to take this opportunity to articulate important factors that impact our P&L as a result of the commercial collaboration. In the fourth quarter of 2022, net revenue was $5.6 million compared to $4 million in the prior year period. U.S. revenue for the fourth quarter was $3.6 million, and revenue outside the U.S. was $2 million. Fourth quarter results drove revenue for full year of $16.4 million, ahead of the midpoint of our guidance. Gross profit in Q4 2022 was $0.6 million, an increase of $1.1 million from a gross profit of negative $0.5 million in the prior year period. We're pleased that gross margins were positive 16.6% for full year 2022, demonstrating an important progression in our business. Research and development expenses in Q4 2022 were $11.6 million, an increase of $3.9 million compared to $7.7 million in the prior year period. The increase was primarily due to investments in our product development pipeline and ongoing clinical trials for our 365-day product. Fourth quarter 2022 selling, general and administrative expenses were $7.8 million, an increase of $2 million compared to $5.8 million in the prior year period. The increase was primarily the result of increased payroll and stock-based compensation expenses, offset by lower sales and marketing costs. For the 3 months ended December 31, 2022, operating loss was $18.9 million compared to $13.9 million in the fourth quarter of 2021. The decrease in the company's share price at the end of the fourth quarter as compared to the company's share price at the end of the third quarter of 2022 led to noncash gains in Q4. These gains were less than the gains from the prior year period and result in total other income decrease of $18.5 million related to noncash charges resulting from the accounting for embedded derivatives and fair value adjustments from the company's previous financings. As required by U.S. generally accepted accounting principles, we mark the value of these instruments to market for each reporting period, and the changes in these values are recorded as noncash charges to the income statement. Each quarter, the value of these noncash gains or losses will vary based on the volatility in the company's share price. So generally, as share price increases, we incur noncash loss. And as share price decreases, we recognize a noncash gain. For the 3 months ended December 31, 2022, total net income was $11.6 million or $0.02 per share compared to net income of $84.4 million or $0.19 per share in the fourth quarter of 2021. Net income decreased by $72.9 million due to the accounting for embedded derivatives and fair value adjustments previously mentioned. As of December 31, 2022, cash, cash equivalents and long and short-term investments totaled $156.3 million. For full year 2022, our net cash used in operating activities was approximately $66.5 million and favorable to the midpoint of our guidance provided at the beginning of the year, resulting from improved gross margins and operating efficiency. We closed 2022 with strong financial performance. And looking ahead, we plan to continue to be disciplined with our expense management as we increase our manufacturing volumes and prioritize investments in our robust product pipeline. Before turning to our expectations for 2023 and beyond, I want to take time to explain 2 aspects of the Ascensia or ADC commercial partnership that impact our revenue. First, Senseonics recognizes revenue when shipments are delivered to Ascensia, not when Eversense systems were provided to patients. This means that a portion of Senseonics' revenue is impacted by ADC's Eversense inventory. ADC's demand forecasts are updated regularly based on what they are seeing in the market, but a portion of the forecast is binding to align closely with our manufacturing process and commitments, which may cause ADC's inventory levels to vary. As Rob noted, Ascensia currently has more inventory than planned. ADC has more than their targeted 60 days of Eversense inventory. And throughout 2023, it is their goal to reduce inventory levels to closer to 60 days. Again, this will be subject to new patient forecasting, and we will continue to collaborate with ADC to ensure we are managing the channel as efficiently as possible. The graphic at the top half of this slide shows the expected flow of Eversense products from Senseonics through Ascensia and distributors to a patient. Second, as a reminder, we present revenues based on what we expect to be recognized by Senseonics and not what Eversense is generating in the market. As a result of our revenue sharing agreement with ADC, what Senseonics reports for revenue is not indicative of actual Eversense sales in the market. We recognize our revenue upon delivery to Ascensia based on what we expect our share of the revenue to be once it is sold through the channel. The Senseonics revenue percentage, which we also refer to as revenue share, generally declines over the term of the agreement and for each year is tiered based on the level of sales for that year, with ADC receiving a higher percentage of the revenue as sales increase. As ADC gains tenure in the partnership and generates higher Eversense sales, they earn an increasing percentage of the revenue. The percentage of Eversense revenue Senseonics receive ranges from a maximum of 85% to a minimum of 52.5% throughout the remaining 4-year term of the agreement, which may be automatically extended under certain circumstances. And for 2022, we ended up adding about 80% share of revenue it being early in the partnership tenure. In the coming years, Senseonics expects revenue growth and gross margin to be impacted by contractual decreases in our revenue share percentage, reflecting sales growth in the product to higher sales tiers that results in a greater share of revenue going to Ascensia. The graph at the bottom of the slide shows the anticipated revenue growth in the coming years for both Eversense and Senseonics and highlights the difference in estimated compound annual growth rates as a result of the projected change in revenue sharing. The benefit then of the partnership structure for Senseonics is our expectation of achieving higher operating margins given our plan for operating expenses to be relatively flat from 2023 through the agreements horizon, with ADC covering the sales and marketing expenses. With that as context, let's take a look at our financial outlook. Full year 2023 revenue is expected to be between $20 million and $24 million and reflects 3 factors: expected patient growth, which is expected to accelerate in the back half of the year; some expected destocking from ADC throughout the first half of the year, as they use inventory; and a decrease in Senseonics share of the Eversense revenue in 2023 compared to 2022 based on both sales growth and being later in the partnership. We feel it is helpful to show the anticipated decrease in our share of the Eversense revenue each year, which is based on our current revenue growth projections. Consistent with prior years, we expect full year 2023 revenue to be weighted towards the back half of the year, with the second half accounting for approximately 2/3 of the revenue. The vast majority of our growth will be in the U.S., and we expect the majority of our 2023 revenue to come from the U.S. Full year gross margins in 2023 are expected to be between 7.5% and 12.5%, and the year-over-year decrease in our gross profit margins are a result of the decrease in our share of the Eversense revenue described above. This is, in part, offset by expected scaling manufacturing volumes. So we're planning gross margins to improve throughout the year, but from a lower level. Operating expenses are expected to increase in 2023, almost entirely based on investments in research and development targeted to complete the adult 365-day trial, start the pediatric trial and make investments in our future products, Gemini and Freedom, described here today. Based on Ascensia's commercial forecast and market dynamics, we currently expect to see continued revenue acceleration, improvements in gross margins and leverage at the operating income level based on a relatively flat operating expenses in 2024 and 2025 relative to this year. This is also based on our current assumption to plan for the launch of the 365-day product at the end of 2024, subject to product development and regulatory approval. As Tim and Rob mentioned, we believe an up to 1-year product would represent another significant step forward and freedom for people with diabetes. We expect annual cash burn to continue to decrease each year, with expected increases in revenues and gross profit margins. And assuming the launch of the 365-day product by the end of 2024, we would expect our operations to turn cash flow positive in the first half of 2026. Announced earlier today the additional $15 million equity investment in agreement to exchange the PHC notes for equity bolsters our balance sheet and enhances our capital structure. We will continue to monitor our capital structure for future opportunities to provide financial flexibility. As you can see, we believe there's a meaningful opportunity in front of us and that Eversense positions us to both grow and take share in the global CGM market. With that, back to you, Tim.

Thanks, Rick. In wrapping up, I'd like to thank Ko and Rob for their presentations and participation today. This is just a small illustration of our extensive collaboration and the strong shared commitment we have towards delivering people with diabetes the benefits of Eversense. Together, we've launched a revolutionary product that is having meaningful impact on patient's lives. Awareness for the product is increasing, with the direct-to-consumer digital advertising and our interactions with the health care providers. We are jointly focused on continuing to build this awareness. Patient access has expanded materially, and we have trained new inserters. We've initiated an exciting partnership with the nurse practitioner group and increased Medicare and commercial payer coverage for Eversense. These are important initiatives to continue through 2023, and we are committed to drive patient adoption and we expect will increase in the creation of greater value across our organizations. With a uniquely differentiated product attracting significant patient interest, initiatives to facilitate greater access and a growing commercial team to service this demand, we are extremely excited for more patients to adopt Eversense and by its potential to win share and grow the CGM market. Looking ahead, our vision for the 365-day system, Gemini and Freedom, all represent additional transformative solutions we intend will provide unparalleled freedom to our users. Today, the PHC, ADC, Senseonics alliance has confirmed our strategic and mission alignment, including the substantial commitment to building the Eversense franchise and shared prioritization of Eversense growth for the years to come. Thanks for participating, and we'll now open up the presentation for questions.

Can you guys hear me okay?

We can hear you great, Colin. Thanks for taking the time today.

Absolutely. I just wanted to start with 2023 guidance. Obviously, a few puts and takes here. But first, if I annualize the revenue you put up in the fourth quarter, I get to around the middle of your 2023 guidance range. How should I interpret that? Should we be thinking about you guys having worked through a backlog of reinsertions at this point? Is it the 60-days inventory on Ascensia's part that's having a factor here in the first half? And should we be thinking about you guys growing in that 20% to 40% range until the launch of 365?

Yes. Well, Colin, there certainly is growth going on. There's a lot of work, as we described, in the commercial investment. What I'll do is let me ask Rick to go through the inventory situation, which I think does drive a lot of the first half versus second half dynamics.

Yes. So first, Colin, the target inventory is 60. We're a little bit ahead of that today. So that inventory will be worked down for the first half of 2023. And then the other item that I would reference is that the revenue share percentage has increased from -- it's gone from 80% of Senseonics to 70%. So we are going to recognize less revenue per sensor. And so those are really 2 of the reasons why the growth looks a little bit slower.

But as you said, the actual growth in patient count is actually attractive.

Right.

Okay. Great. And yes, I guess, I'm not sure revenue growth is necessarily the best way to track the progress on the E3 launch. So maybe if there are any metrics at the account level you'd be willing to provide, give us a sense of how the rollout is progressing, whether that be the number of accounts you're reengaging or anything to display your success in new accounts. Anything would be helpful there, and I have one more follow-up.

Sure. Rob, maybe you can talk about the U.S. rollout, where most of the attention is. Obviously, Europe is important for us as well, but we've got a lot of focus in the U.S.

Right. So I talked a little bit in the presentation about the -- our user base and how we see it growing. So we are continuing to see continuous growth of our user base in the U.S., and that is something that is going to be a key indicator for us. So it's going to be the -- it's important that you think about the growth really on the user side as opposed to necessarily looking at the Senseonics revenue as the original -- the key indicator there. So I don't want to go into a lot more detail about specific accounts, except to say that we've have expanded reimbursement recently, which has been a big enabler. And then the partnership with the nurse practitioner group provides us a whole new avenue of -- whole new opportunity to be able to facilitate insertions for the patients who are interested in getting on Eversense.

Okay. And I guess, lastly, on the financing with PHC. Why are warrants the right vehicle for this transaction? And where is Senseonics planning to use the funding in the business?

Yes. So PHC's preference was from warrants. And as we understand it has similar financial treatment to the original convertible note. There was no financial discount for the warrants, and we expect them to be equity classified, but do have to go through a technical accounting review. The use of proceeds is primarily for research and development. We're in the midst of our 365-day trial with the expected last patient to come out in September.

Our next question comes from Marie Thibault with BTIG.

Can you hear me?

We can, Marie.

Okay. Great, great. Tim, Koichiro, Rob and Rick, thank you for hosting this. I wanted to ask my first here on some of the commentary made around softer demand and, certainly, the patient number, the count that you gave us here at the end of 2022. Certainly understood that Germany has seen some challenges. But did you also see softer demand in the U.S.? And if so, what sort of gives you the confidence that patient growth is going to be so different in 2023? Because if I sort of total up 2021 and 2022, certainly, patient numbers for worldwide didn't really change too much. So help me understand where that confidence comes from.

Yes. So big dynamic was Medicare and the transition we went through. So Rob, maybe you can speak to our experience in the U.S. and in Europe.

Right. Well, first of all, the patient demand is strong in the U.S. And one of the indicators that we have of that is the number of leads that we are able to get from consumers. So we're hearing that we're getting a number of patients who are expressing an interest in taking measures to be able to get -- to learn more about Eversense, so that we can then convert them. One of the challenges we had in '20 -- in recent times is with -- one of the positives about Medicare coverage is that we have, as I mentioned, favorable Medicare coverage, with a very clean path to reimbursement for patients and for health care professionals who are helping to get their patients on that. So that's the positive. On the other hand, as you may know that the pricing doesn't take effect until January 1 for Medicare. So there was a period of time there where there was little bit of ambiguity on pricing, and we weren't able to leverage that as much as possible. Now that we're into 2023, that's been published, and we have a very strong path there. We see Medicare as a really big opportunity for Eversense. That population is one that can benefit very much from many of the key features and differentiations from -- of Eversense. So that will be an important growth opportunity going forward. You mentioned Germany, and, yes, Germany has been a little bit more of a challenge, and that's driven in part by the fact that our -- the original user base that we inherited was more skewed toward patients who are on automatic insulin delivery. And as that has taken off, that has been -- we've seen some attrition among some of those users. We however see the bigger opportunity for Eversense today with the multiple daily injector population, people who inject insulin. That user base is much larger than those people who are using pumps. And so one of the things we are needing to do in Germany is to pivot that a little bit, and that's taken a little bit of time and having to work then through some challenges in terms of the reimbursement landscape.

Okay. That's very helpful, Rob. I appreciate that very much. And then maybe I'll use my followup here to try to make sure we can rightsize some of the drivers of our model. Given all the changes, the really broad commercial coverage, switch to 180-day, what is sort of the proper ASP or revenue per patient we should be thinking about when we think about sensor and transmitter?

Yes, that is going to be a little bit complicated because of the revenue share, Marie, but maybe I'll let Rick talk about how we think about forecasting to help you guys to get a feel for what your model should look like.

Yes. So I mean, as we've mentioned, we collaborated pretty closely with Ascensia, and so we talk about the different sales channels in U.S. and OUS. And we know that the DME channel and the Medicare channel are the 2 channels we're in primarily today, and we blend those ASPs. And then based on that, we have shipping plans that we use to calculate what we expect the revenue to be, and then there's the revenue share perspective. I think we're still seeing from a commercial pay perspective, consistent pay as all the other competitors in the U.S., and certainly working through tender offerings outside the U.S. Yes. There's definitely a lot of variability in terms of that -- in terms of the pricing with various segments within the U.S., having different price points as well as various countries having various reimbursement areas, with countries like Italy being on the high end, countries like Germany being on the lower end, and that all balances out to our average ASP.

Okay. And the average ASP for sensors at about 3,000 a year or so. Am I in the ballpark here?

Yes. We've consistently seen about $10 a day and similar in Europe for an annual price per patient from a revenue perspective.

Yes. And then, Marie, you guys will need to model the revenue split, right? We'll give a little bit more guidance on that for the next 3 years. So that's the best way to get at it. As I said, there is some dynamics with different countries, as Rob indicated, as well as the payment level in Medicare is a little bit higher than in commercial pay. So our blend there has some influence as well.

The next question comes from Jayson Bedford with Raymond James.

We can, Jayson. We do. Rob, do you want to speak to the plans there?

Sure. Yes, we're excited about the opportunities both inside the U.S. and outside the U.S. So in many of our countries, we are seeing a growing user base, and we are looking to -- we are investing heavily across our -- all of our markets to be able to, a, have a focused team that is dedicated towards CGM. And while we have a heritage medium, this is the core priority for us, and we're putting a lot of investment behind that in terms of our people as well as spending. And Germany, as I mentioned, is one of those that will be -- that we are looking to turn that around from the attrition that we've seen. And again, this is one of our top BGM markets and one of our stronger areas where we can put our efforts of buying growth there. But by far, we see the biggest opportunity in the U.S., and that's where we're putting the bulk of our investment and see -- expect to see most of the growth over the next fiscal year. Yes, in terms of Medicare versus private pay, yes. No, I think the issue is simply consistent with what you typically see for a product like this in the market. Once you have policy coverage at the national level, you then need to -- there are various mechanisms by which you have a path to reimbursement, which varies from payer to payer. And navigating that with health care professionals is something that we need to be able to help our patients do and help our health care professional who serve them do. And that's something that we've put a lot of effort behind in terms of optimizing the process, creating the education pieces to address it and then pull those patients through. So it's just a typical process that you'd see for a product base.

And I think Medicare is probably a great example of that, right? In the middle of the year, we had the G-codes put in place to expand the 90- to 180-day product. And then January 1, they got changed back to the T code. So each and every one of those, Rob's team needs to be out there. Not only are they working with Medicare and all the other commercial payers, but they're also working with the clinicians to explain that process and get through. So it is the usual process of bringing a medical device and getting it reimbursed by all of the payers that we do need to go through. And it -- when you're launching a new product, until it's just a well-oiled machine with lots of experience, we're going to continue to invest in that, and Rob has got the right team to do that.

Consider this point. Traditional Medicare is a very clear path and a very -- makes it fairly easy to be able to get the patients on. So that's something that we're leaning into very heavily.

And is United expected to come on board in '23?

I'm not sure that we're ready to give our quotes on United at this point. As we're well aware, they tend to be one of the laggards in this space, but Rob's team is working real hard to convince them of the clinical benefit that we clearly know that we have for Eversense.

Yes. And I believe as they see increased patient demand, they'll see that it makes sense to cover Eversense.

Okay. And then maybe just last couple for Tim on the pipeline, and I appreciate the desire to get rid of the transmitter, but are there any efforts to make the transmitter smaller? And then the second one is just, where do you stand with pump integration?

Yes. So certainly, the transmitter is an important component for us today. It not only does all the powering, the communication and the calculation. We do have some efforts with some partnerships where we can look at the size. But quite frankly, taking that size to 0 is the most impressive thing that we can do and the most requested. So the predominance of our efforts are really focused on incorporating the battery, which we've made great progress on. We've got a great partner there. And then the second step is incorporating the Bluetooth. For the pump integration, we are working with some of the folks. The first step for us, of course, is to get the iCGM indication. And as you recall, the clinical testing is in place right now. The patients are -- will actually be through 180 days here in the end of March. Last patient was enrolled last September. So of course, 6 months later, they'll be through their 180 days. So we'll take that data. There is a process that needs to go through in regards to characterization, validation and then the -- writing that up and submitting it to the agency. So that's the next big step for us. And then the partnerships with the various companies where we remain on track for us.

From the patient standpoint, we don't see the size of the transmitter. We don't hear that as being a barrier at all. In fact, the benefit of that transmitter is that you can actually remove it, and that's something that's really appreciated by the patients.

Next question comes from Alex Nowak with Craig-Hallum.

Okay. There we go. So I want to ask a question to PHC to start. There's been a lot of history with Senseonics over the years. Eversense first had the 90-day sensor. It had its starts and stops. So as you were doing the work on Eversense, this was back in, call it, the 2020, 2021 time frame. How did you get comfort around that the 180-day was going to yield a different result as it relates to the market? And then how are you taking that interpretation around the 180-day and also thinking about the upcoming products at the 365, the Gemini, the Freedom product? So maybe just expand a little bit more into how you're kind of sizing up the investment when you made it initially.

Yes. So Ko, maybe you can speak to the work that PHC has done actually over many years, right, to get comfortable with the CGM and, obviously, importantly, the comfort with the Eversense.

Yes, yes. We are very excited about the tightening, the partnership with the Senseonics. And as we mentioned before, in our midterm plan, one of the core growth is the CGM, so we're very dedicated ourselves to grow this business. And in the 90 days and 180 days, it's a very tremendous progress. And then there are now additional investment into Senseonics, which allow them to focusing on developing the new generation products, which is more beneficial coming back to us. So that is very excited about the new opportunities.

Yes. No, that's helpful. And then since you made the investment, we've seen the competition change in the CGM landscape. DexCom, Abbott, they both come up with easier to use smaller sensors, easier to implant sensors put on the body. Now I get that Eversense is still the only implantable, but the competitive environment has changed, too. So I guess, just how does that change the thinking around the PHC side and maybe in Ascensia side? And also how does that change the kind of going into this year, how that's going to change the competitive landscape when you're going to try to sell physicians door-to-door?

Rob, maybe you can talk about the competitiveness of Eversense and how it stacks up. But I do want to reiterate and point out again that the investment we've made just today, as recent as today, from PHC into Senseonics. So it continues be very, very current. So...

So as it pertains to the 90-day, or they -- and the 180-day, so -- and the small -- and the competitiveness versus other products, while, yes, all products are going to get better and better. Traditional CGM and transcutaneous CGM, it's hard to imagine how that is going to be possible to be able to get to the duration benefit that Eversense has without becoming an implanted sensor. That is a unique benefit of Eversense and one that is highly motivating to the people who have expressed interest in it and to a broad percentage of the people with diabetes out there. The one thing that we've heard people diabetes say is they really want to not have -- be wearing something. That's the ideal situation. And a product like Eversense can uniquely deliver on that benefit, whether it's for a 6-month product or for a longer period of time. So we see that the path will potentially -- has a path to be able to get there, and that's something that we believe that Eversense can do that other sensors can't do.

Okay. Understood. And then I want to expand on the, call it, the 2027 guidance that was issued, calling for over $500 million of sales. Now I understand that's coming from the Ascensia side, and we had to break it down to what that means to Senseonics. But still, in rough math based off 2023 numbers, that's going to come in around a 90% growth CAGR. You're guiding to about 40% for 2023. Other than it really just being 5% of the market, it's going to take a lot of blocking and tackling, training prescribers, inserters, ramping up manufacturing to get to those numbers. So can you walk us through kind of that path? How do we go from where we're sitting today to ultimately that $500 million that you've outlined here this afternoon?

Sure. Well, to start with, I think you have to understand that we very much believe that there's no reason that Eversense can't be 1 of 3 or 4 options that most people with diabetes get when they're choosing to be on CGM or their doctors looking to have them start CGM therapy. And with that, even with our current 6-month product, which brings many benefits along with it, the idea of achieving simply a 5% share of the very large and growing CGM market is quite attainable, especially as we start to think about the new technologies that come on, the new -- the evolution of Gemini, et cetera, that makes that all that much more possible. So we believe that is a very realistic goal, given the benefits that Eversense can bring and the difference that it makes in people's lives.

And then, Tim, just maybe one more, if I can. Just the time line for the Freedom system and the Gemini system with FGM. I know you've outlined some of the kind of the clinical milestones you want to do there, but just any time lines for starting the pivotal study, and then we can start to figure it out from there. And then any reason why this 180-day product couldn't be an FGM today?

We're waiting. We're using the battery -- the implanted battery that's in development today. We are partnered with the leading designer and developer of implanted batteries for medical devices. So there is a design process they're in. We actually have our prototypes in-house today. They are powering the sensors. We're going through all the verification and validation work that it takes, demonstrate all of the safety for the regulatory bodies to approve it for the preliminary in-person testing, in human testing. We do anticipate that we'll get the IDE to do that approval towards the end of this year, and we look to do our pivotal trial next year on it. So we feel pretty excited about it. Of course, there's a lot of R&D that needs to happen, but we have the right team focused on it. We have the right partnerships, and we're going to continue to certainly drive it. And the 180-day alternative is something that we'll think very strongly about as we make progress in the development.

[Operator Instructions] There appears to be no more questions. I will hand the call back to Tim Goodnow, CEO of Senseonics, for closing remarks.

Well, great. I would like to once again thank everybody for the opportunity to spend time with us this evening. I again want to thank the folks from PHC and Ascensia that have been tremendous partners in this process, and we very much look forward to the exciting work that we're going to do together to bring Eversense to people with diabetes. And I want to thank everybody for the participation. I know that it was a relatively long process for tonight, but we hope that you get value at it and really have a clear vision of the value of the partnership, focus that we're going to have on it and help you get some metrics to understand where our growth is coming. So with that, I want to thank everyone and look forward to -- from both the PHC side to speaking with analysts and investors in May for their meeting, and we look forward to seeing our side in May as well when we deliver our Q2 results. So with that, thanks, all, and we look forward, as I said, to following up. Take care.