Senseonics Holdings, Inc. (SENS) Earnings Call Transcript & Summary

Thank you, everybody, for joining us for the second day of the Morgan Stanley Healthcare Conference. My name is Neha Begwani and I'm part of the Morgan Stanley Investment Banking team. I'm pleased to be joined by the Senseonics Group here. We have Tim Goodnow, CEO; and Rick Sullivan, CFO. Before we jump into today's discussion, I want to do the quick disclosure. So please see Morgan Stanley Research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representatives. And with that, maybe to kick us off, if you can give us a brief overview of the company, the Eversense technology. It's a very exciting, important platform So Just to kind of level set today's discussion.

Sure. Well, we appreciate the opportunity to speak today and thank to folks at Morgan Stanley for having us. So Senseonics is a medical technology company, obviously, in the continuous glucose monitoring space. We've been at this actually for quite some time. It's a highly differentiated technology where we've worked to solve a lot of the implantable technology elements that have really held back the space for quite some time. So we've been focused on extending the duration of our sensor. It's implanted just under the skin. We initially commercialized a 90-day product. We've recently received the approval for the 180-day product here in the United States, and we're actively working back in the labs on our 365-day product. So for us, it's about duration. If you're looking to help people with diabetes, you really want to do everything you can to take the complexity away from managing their disease, and we've been focused on that for a number of years.

Perfect. So maybe you can talk to us a bit about the accuracy and how does it compare to competitors?

Accuracy has always been key. I had the opportunity to be in the space for a number of years. And as many people know, when some of the early technologies came out, even if you go back to things like the GlucoWatch, they were great, they were innovative. But unfortunately, they didn't have that level of accuracy that people could rely on. If you're going to provide a continuous glucose monitor that intended to alarm people either of a very low condition or a high condition, before they get there, it's really important that it be accurate. So we learned early on that if you were going to play in the space, your first-generation product had to come out and to be really right out of point. So we focused on it. we feel very confident with the accuracy that we currently perform at. I don't like to say best-in-class, but it is very, very good and very much on par with where some of the later generation technologies have evolved to.

Perfect. And I'm guessing that's a huge part of why users choose your system over competitors, but are there any other factors that you'd highlight?

Yes, accuracy is key for everyone, you really do have to be there now. But for us, it's really about duration and freedom, right? You put it in and then you can forget about it. So when a patient comes into a doctor's office for a CGM, they make the decision, do I want to come in twice a year and do it, have the medical professional placement, or do I want to do it at home? And if you do it and come into the doctor's office, you just need to now do it twice a year. So that's the freedom, that's the flexibility. We win a lot of times when they're able to see that and make that decision.

Awesome. And maybe you can talk to us a little bit about the mix of your customers, type 1 versus type 2, younger versus older, people who are new to CGM versus those who've kind of navigated from other systems over to you just to give us a sense?

Yes, it's actually been pretty interesting to watch because as we transition here, especially post-COVID, it does also time with the Medicare coverage that we receive. We really are seeing a pretty significant shift in our population, whereas we were very typical. We started out with 90-plus percent type 1s. We're now seeing about 25%, 30% are actually type 2s. So it's our biggest and fastest-growing population. And obviously, when that happens as well, your age distribution transitions as well. So early on, we had a lot of very active people. Our ability -- since it's implanted the transmitter can come on and off, you can manage swimming, hiking, sweating is much more facile with a transmitter that you can adapt to. But now we're actually seeing people that, of course, are Medicare age. They tend to be in their 60s or later, and they're looking for that flexibility of the doctor putting it in. So we've had an opportunity to really -- to span both ends of the spectrum. And when you actually look at our decile distribution, it's incredibly even from 20 years old up to 70 years old.

Great. And I think many of us saw the announcement around the partnership with Ascensia, but maybe you could give us a little bit of an overview around some of the key components of that partnership?

Sure. So with -- at a basic level, it's a pretty classic commercialization partnership. So that leaves us with the ability to focus where our strength is, which is on the design, development, regulatory, clinical, whereas they bring the commercialization arm, which is the strength. As you're likely familiar, they are a global leader in glucose monitoring. They've got about 10 million people that are on their blood glucose meters and strips. So of course, that's a very important business for them. At the same time, they recognize that for the future of diabetes management, it's important to be in continuous glucose monitoring. So as a pure play, if you will, it was a great partnership. So we've got the ability to bring the products. They've got the ability to deliver them to the market.

Great. And so the Eversense E3 180 is FDA approved in CE Mark. Maybe you can talk to us about what are some of the early learnings from the commercial rollout as it's in its beginning stages?

Yes. So it's certainly been exciting. So we launched the product in April. And at that time, obviously, there's a lot of reeducation that had to go on out into the market and into the field. So the sales force through Ascensia has been focused on reengaging with the clinical site, getting people back into the clinic to do the insertions, but also training them on the new aspects of the CGM, the 180 days. So not only does it have duration. We talked about the accuracy component of it as well. But it also has a lot of other elements. We reduced the calibration requirement. So it's quite a bit of training that goes on in that process as well as the recertification of the insertion and removal process that we go through as well. So it really is a reintroduction of a new sales force that you've been through. And we're starting to see some encouraging results of the ramp-up of the new team that's in place now.

That's great. And maybe you can touch on reimbursement in the U.S. and Europe. How many covered lives, commercial and CMS?

Yes. So in the United States, we've actually -- we've been very happy with the progress we've made over the last couple of years. There is about 250 million covered lives that exist. Our most recent, we had a very large win with Anthem, just a month or so ago. So we're excited to be able to bring some more new folks to it. We also had another big advancement with Medicare. On July 1, they actually issued G code. So those are another form of temporary codes as they had given us the coverage and the payment level for the 90-day product on a T code. As we revved it to the 180-day product, they were very supportive. So July 1, they've gone to a G code that you can now use for billing for the 180-day product, which has been very advantageous for us as well. The two big gaps that we continue to work on, and it will be a big part of our clinical program will be the pediatric indication. And we'll start doing dose testing hopefully at the very beginning of next year. And then we do still have the United, which is the largest group that still has an investigational indication. So we're going to continue to work with them, continue to show them clinical data and hopefully, we'll get them over the goal line.

Great. And does reimbursement cover insertion and removal?

It does. It does. Actually, that was one of the key questions, obviously, we had when we launched the technology, but now the payers have been pretty accepting of the medical procedure. And what you do have to recognize is CGM has already typically been reimbursed as a durable medical equipment. So it doesn't necessarily have a place, but obviously, with an implanted product, it has to be done in the doctor's office. So it is reimbursed as generally as a different entity.

Okay. Perfect. Well, look, maybe we shift gears and move to pipeline because you guys obviously have quite an exciting avenue there. Maybe you can talk about your next-generation sensor technology, the 365, where you are on the clinical trial and FDA process?

Sure. So there's really three big chapters that we're going to knock down. And with each one of those, we think that there's very significant improvements, not only in the product, but obviously, the likability as well. You mentioned one. So duration is key for us. That's really our point of differentiation. So the 365, the 1-year time period, we think is a nice cycle. The doctors don't actually want it to get too, too long because they want to -- they're encouraged that the patients come back in and see them. So that duration is important. We've got pretty significant clinical testing that's going on in what we call the pre-pivotal. So it's human testing. It typically happens in our European clinical partners, where we're evaluating different configurations, and we'll test those to determine what's the right material that we're looking for, for the bio stability for long-term viability. So those are underway. We do anticipate that we'll get some of the 365 testing done here initiated for the FDA trial late this year or early next year. The second big chapter for us is really to eliminate the transmitter. We think that's going to be a home run product. We know that people -- the biggest feedback that you get from people going on a CGM is, "Geez, can I get rid of the transmitter that's on the body." So that -- and actually working with the partners that have a lot of experience with implantable batteries for medical devices for things such as pacemakers. So we're working with them and they're designing a custom battery for us so that we can actually incorporate it -- that into sensor as well. So that will allow us to have a product that you can interrogate on demand. So it will be implanted for a year, and then without anything on your body, you could interrogate it and you could recover the glucose value. And then the next step-up for us after that actually would be to include the actual Bluetooth so then you could have the continuous monitor right to the telephone itself. So that's what we're focused on. That will be our future. I know that will be very exciting for people with diabetes, and that's what we're going to deliver.

Perfect. And so this 365 technology, does it still require daily calibrations?

Not a daily calibration. Because it's such a long duration, we don't think that you can go that long and retain the accuracy that we started with. But we do -- we feel very comfortable, and this is part of the clinical work we're doing that we can now do one single finger stick a week. So our use process would be test it, get up on a Saturday morning and do your single finger stick. You'd stay in calibration for that time period. If you're ready to choose another technology, of course, you'd be at a 7-, 10- or 14-day cycle of replacing the entire system. So we feel real good about being able to be competitive with a product that's that longer duration with that minimal calibration.

Okay. And can you talk a bit about iCGM? When do we expect FDA approval for kind of controlled and...

Sure. So iCGM clinical testing is going on right now. We expect in the there are established standards for iCGM. And again, it comes back to how accurate you are that we feel very good about. So we think it should be a pretty straightforward review pending any complexities that we've seen with things like COVID in the past. But -- so that would give us something later in the year for iCGM approval, which then allows you, of course, to do the opened connectivity, if you will, to the pump technology. So...

Right. One of your competitors does a good job of selling a product, which doesn't -- how does that affect battery life and sensor size? And how do we think about that as kind of an area of development?

Yes. So first, the communication of the data is key. Not only do you need to act on it in real time, so we've all generally, as an industry, done a pretty good job of moving everything to the phone, right? Because we've all centralized on that. And that does require the Bluetooth. Unfortunately, Bluetooth as a technology is still -- from a battery power perspective, still pretty hungry. It takes quite a bit. And that's one of the things that as I said, that we're working key on so that we can actually implant the Bluetooth and use it from there, but it does drive your battery size up. So we're inventing some new technologies to minimize that where we can. But you see some of the other competitors are dealing with that complexity as well because it just is -- even though it seems like it's pretty simple, it is, it still takes a pretty significant amount of energy to make that happen.

Sure. So maybe shifting gears, we can talk a bit about financials. For 2022, your revenue guidance is $14 million to $18 million. How do we expect sequential quarter-over-quarter revenue growth to look throughout the year?

So Rick, do you want to cover that?

Yes, sure. So we did reiterate our guidance on our last earnings call, the 14% to 18% and do expect to see sequential growth quarter-over-quarter through the remainder of this year, and we'll provide 2023 guidance in an upcoming call.

Okay. Perfect. And when do you recognize revenue?

Yes. So we have a revenue-sharing arrangement with Ascensia. And so what that means is based on the total volume of revenues, Senseonics receives between 85% and 55% of that revenue and those change annually based on the total number of volume. And so in the earlier years, Senseonics is getting closer to that 85% of revenue. And if the agreement goes in length -- reduces based on the volume to closer to the 55%. We recognize revenue upon shipment of the product to Ascensia.

Okay. Great. And how -- with supply chain issues, everyone is also curious about inventory, inventory management. How should people be thinking about modeling out inventory?

So we do keep a very tight eye for a number of reasons on inventory, for sure. One just is for our supply chain. We have had, as everybody is having, a couple of supply chain issues in regard to just some pretty basic components. We try to manage that, obviously, like everyone does through active close contact with your suppliers and subsuppliers. But also, there's just some things that we're buying in inventory just so that we can make sure we don't have any issues with it. But ultimately, we would like to be at about 6 weeks or so inventory. That's what feels right in the channel. So we have not only our distribution partnership with Ascensia, it holds a little bit of product, but we also have it in the United States at least with some of the DME distributors that have contracts with the insurance companies and provide the product that way. So that's where we manage it. And obviously as facile as we can be to keep that short is our goal. But 6 to 8 weeks is really our sweet spot.

Okay. Great. Yes. And with the commercial launch and rollout, it's so important to have that strategy.

It is. It is.

Perfect. How do we think about sales and marketing expenses? Is that something that you guys incur? Or with the Ascensia relationship, how does that...

So why don't -- Rick, why don't you touch on what we're doing with the partnership, and I'll talk a little bit about what our marketing...

Sure, sure. So the partnership Ascensia is responsible for the majority of the commercialization. So that's sales, sales operation, marketing, market access. Senseonics does keep a little bit of sales operations and marketing, but not much. I think we see low single or single-digit millions in sales and marketing for the next several years.

Right. So -- and where we do focus is really on upstream marketing. We do product definition, the voice of the customer and really what are the right important attributes to have in the future generation products. So when you look at the P&L because of that, you'll actually see -- obviously, there is -- because of the revenue share, there is revenue that comes off from the Senseonics, but -- so you'll have a gross margin impact because of that revenue. But then there is very de minimis, so pretty small levels of sales or marketing really that we have this fund. So you actually see a much healthier contribution margin because of the partnership. So as long as people understand that, right, it really is a strong partnership because we just don't have that big sales expense with not having our own sales force.

Okay. And is there a minimum that Ascensia must spend on sales and marketing? Or is it mostly kind of addition of salespeople?

No, there is some commitments that they've made in the contract that as it grows, that they'll continue to their investment. Obviously, the United States is the biggest market. We have the highest penetration and the greatest clinical demonstration and the reimbursement is the strongest. So that's been our primary focus with them. They do have a dedicated team. And there are contractual commitments that exceed $0.25 billion over the 5-year horizon. So it's a meaningful contribution on their part for the partnership.

Great. And as we think about your balance sheet, what are your thoughts on when Senseonics can hit cash flow breakeven?

Last time we reported, we had $150 million in cash and equivalents on the balance sheet. So pretty happy with that number. We're working very closely with Ascensia. I don't know what a long-range plan looks like, now that we have the E3 product approved, both in the U.S. and OUS, and we'll come back on exactly when we think the cash needs are for the organization later this year.

Okay.

We are pretty happy with the progress of the organization. So we've reported the positive gross margins where we obviously intend to stay as we go forward. So it is definitely demonstrating an evolving maturing organization. So we are starting to generate cash and throw it off and be self funding. So...

Great. So for people living with diabetes, it's critical to be a part of their health care decisions and kind of own them. And you're seeing more and more about the DTC channel be an important part of marketing efforts. How do you see that evolving for you guys in terms of building up a pipeline of potential customers, but also just that customer feedback loop is so important in having that direct kind of connection to a voice of customer to steal your words?

Yes, that's exactly right. It's an important area for us and one that's certainly evolved as all companies have seen. We use it very significantly right now, or Ascensia will use it. We do very targeted, geo-targeted advertising on things like Facebook and Google and YouTube to the areas where we have high regional coverage for the insurance, and we have sales personnel in place. Right now, there's about 19 sales reps in the U.S. That's an area, obviously, we'd like to expand and Ascensia will be expanding over time. And as that happens, we'll bring in the targeted -- the geo-targeting DTC, where we see very effective. The cost per lead or cost per patient is obviously significantly reduced when you go through a social media program and the compliance of the doctor to prescribe that product is very high as well. So if a patient comes in to a doctor and says, "Hey, I'd like to have the Eversense." There's about a 90% chance that they're going to get it. So obviously, it's worth our investment to continue to drive that information out to them. And as you know as well, it's a very social and network community. So it is important that there will be people that try it, their experience and people get feedback on it. So obviously, Ascensia is doing a lot to support those efforts as well.

Okay. Great. And can you update us on your programs targeting accessibility and increasing accessibility in particular, UC2go pilot program. You mentioned a bit on your last earnings call, but just a little bit on how that's going?

Sure. So these are programs, and we're actually pretty excited. We don't have an announcement here today, but very soon, we're going to announce some additional efforts that we have in the area of bringing that ability to do the insertion and removal in a distributed basis. So what happens today, the predominance of our insertions and removals are done by the clinical staff that exists in your endocrinology practice. That's been very effective, but -- and they are the prescribers. But we're also seeing, especially as you go into the type 2 population, many of them are actually not seen by endocrinologists. They may be seen by primary care or in a more distributed basis. So what we've recognized and certainly our patients are telling us, if we can make it easier to do the insertions, it's a much more attractive option for us. So that's been -- it's been a big focus. UC2go is one example of that in Texas UC2go is a -- it's a firm that has medical clinics, but also has a mobile capability as well. So what will happen there is the nurse practitioner in a certain region will get input from the sales team or the clinical team that there are patients that are looking to do insertions and removing, and they'll actually send a mobile van or a mobile clinic to somebody's house to do the insertion and removal. So we've gotten great feedback here as we've been piloting it in a couple of Texas geographies about how much people love that. As you can imagine, you don't even have to go to the doctor's office to get the insertions done. So we're really excited about it, and we're, frankly, pretty active in looking to expand that since we have the nurse practitioner, physician assistant label ability to do that procedure as well.

Yes. No, that's great. And look, I think for this population, it's so important to make it as easy as possible to manage the disease and having access to the sensor and having somebody be able to come to your location and do that is a huge...

Yes. And it's just -- it's a big flexibility as well. And because of, as we had talked about the reimbursement, because the reimbursers do see the value of that. There's actually economics in there. So that UC2go can actually be remunerated for their investment to do it. So it works out extremely well.

Yes. And maybe we can pivot a bit to talk about the data and kind of the accessibility of the data. We saw your announcement that it's now available through Apple Health, which means that the connectivity to other platforms and applications is that much stronger. How does that drive, not only customer feedback, but ability for patients and providers to make better decisions around the care and everything that they need? Maybe you could talk a bit about that.

Yes. So you mentioned the iCGM. So it does start there with the data for all of us. And the iCGM specifically is focused on the accuracy of that glucose, but the communication of the glucose is key as well. So the Apple Health is a repository, if you will. And the reason that that's been advantageous for us is because, globally, there are so many other technologies, app developers that are -- if we're looking for access to the data and Apple is one environment that's been standardized on to it. So there are a number of technologies that will pull it now from the Apple environment. So we're excited to get that up, but we're also partnering with a lot of our larger clinics as well right? For their disease management, for their ability to actually collect information and frankly, be reimbursed for, it's important that, that connectivity to be there. So it's a big focus. Those don't necessarily get the press releases at the other ones do, but it's a big part of what we're focused on as well, again, for that accessibility.

Yes. And probably also just the feedback, right? You have some kind of insights around that.

Yes, for an individual patient or a doctor that's treating, for sure. I mean it's this typical now. Even, Fran Kaufman -- run CMO, the first thing she does when she sees the patient now is you look at the continuous monitor tracing. You don't go into the same old dialogue and inventory that you're used to. So it's absolutely key. Obviously, in real time, that ability to wake someone up in the middle of the night before they go hypo is really where the value of CGM started on a personal level. But the longitudinal data so that they can make in some adjustments, right? So they can get better A1cs that, at the end of the day, it's time and range, which is key, we're seeing significant improvements now, right? We're running in the 60% user population, right? You've seen as high as 70% when you put people on an artificial pancreas and AID system. So that all leads to better health for people with diabetes.

Yes. And look, I think that this is an area where many people, in this space and in other spaces are trying to figure out what is kind of the optimal set of data to have so that you're not overwhelming individuals, but rather making a really actionable outcomes. So everything you spoke about, I think, really resonates with this population, but even kind of broadly across the health care universe. So we talked a little bit about your inventory management, but maybe if you could just talk a bit about other metrics, and how you guys are dealing with the inflation, supply chain disruption, anything on that front?

Yes. So macroeconomics, of course, are -- we're just like everybody else. We've really seen two key impacts. One, obviously, we've seen inflationary aspects of salary. So we've had to do some considerations with that. It is a very tight labor market. We actually -- we've actually done a very good job at retention: one, because I think we've been proactive with the economics. But we've also -- there's a mission orient of working in health care and sin diabetes. So that certainly worked to our advantage as well. But there's obviously a cost to the business that we're all going to deal with. Secondarily, we certainly have seen supply costs passed on from our suppliers. So that's an impact to the -- our cost of goods. So we continue to work very hard to improve those. And as I said, the team has done a great job at getting us, frankly, ahead of schedule to a breakeven from a gross margin perspective and positive gross margin this year. So we feel good about it, but it's always going to be a struggle. Key for us, of course, to be successful is that duration, right? When we went from 4 sensors a year to 2 and then ultimately 2 sensors a year to 1 that fundamentally drives the economics of our business because instead of providing 50 sensors to keep the patient on a year's worth of CGM, we provide one.

Right. Okay. Great. Well, look, I think are there any key messages that you'd like people to focused on or aware of, there's obviously a number of things in your platform that are exciting with the new commercial rollout, but also in the pipeline itself. And I think you've given us great detail around that. But any other key messages you'd like focus...

I think we've covered on the key basics. We are fundamentally an innovation organization, as you would imagine, with a small medical device, but we're in a very exciting space. Unfortunately, diabetes is so large, you're seeing such a transition to everybody that's now on insulin. It used to be type 1 just a few years ago. Now everybody that's on insulin is a candidate and a good user for a CGM. So we're certainly excited about that, but you do need to be innovative. And that's really what we're going to deliver. As I said, when we get to the 365-day product, and you don't have a transmitter on the skin, this is going to be a highly, highly attractive alternative, and we're going to keep our eye on that prize and deliver that to people with diabetes.

Okay. Great. Well, thank you for the time today. It was great to get the update on the business and everything that you have coming forward. So...

Great. And we appreciate you having us here today.

Thank you very much.

Thanks.

Great.