DexCom, Inc. (DXCM) Earnings Call Transcript
November 16, 2020
Earnings Call Speaker Segments
All right, everybody. My name is Mat Blackman. Welcome to the session with Dexcom. I don't think I need a long intro with here for Dexcom other than to say thanks to Steve and Jereme and Sean, who may be in the background. Really do appreciate you are participating this year. I appreciate the time. We've got about 30 minutes to tackle several topics that I think are top of mind for investors. [Operator Instructions] It's already starting to populate a little bit. And I'll do my best to feather those in as appropriate. And so I guess, to start this off, just to sort of give you a framework for how I'm thinking about walking through this session, I just want to focus on basically 4 overarching themes and topics. I'll list them upfront, and then we can just power through them. But number one, obviously, updated views on revenue per patient headwinds, what you saw in the third quarter, maybe how it was different than perhaps the first half of the year trended and how it impacts the fourth quarter and beyond. Second, I'd like to talk a little bit about G7 and the competitive landscape when G7 comes, so timing, some thoughts on where duration and where to from here. But also, some of the data we saw last week at DTM, we should interpret any of that or all of that. Third, touch on the Analyst Day, what to expect and so on and so forth. And then if we have time, the fourth category would be some sort of odds and ends or miscellanea.
But before we dive in, maybe it's been about a month or a little under a month since we reported in the backdrop in the U.S. and internationally, it's become a little bit more uncertain. Maybe that's the best way to phrase it. And to the extent you're willing or want, is anything worth noting about trends? And I think particularly outside the U.S., where we're seeing lockdowns again and access to hospitals. Maybe a little bit more challenging in different countries. Just any thoughts there. And then I guess on top of that, we now have 2 vaccine updates. Not sure if that changes the calculus at all for how you're thinking about the fourth quarter or even sort of the first part of next year. But any thoughts?
Yes. Sure. I'll give you kind of my general thoughts. Steve, obviously, you can chime in. In terms of just an update from the last time we spoke, naturally, we already had to presume that there was -- last time we spoke, there was going to be a bit of a resurgence in COVID. And so, we embedded a little bit of that in our guidance. And so, there's nothing that's come out since the last time we spoke that would say, "Hey, we need to rethink about guidance." In fact, we had always assumed that Q4 was going to be -- during the cold weather, there was going to be a spike. You certainly see it happening both in the U.S. and outside the U.S. And we also know that in the areas -- and we talked a little bit about it on the call, there are certain areas where when we're reimbursed like DME, you kind of have to go through the natural see your physician, see your clinician, ultimately, go through the paperwork. And in those areas, it continues to be a challenge where COVID has slowed, I guess, the access to getting it. But nothing that's been outside of what we really guided to and nothing that would really change our viewpoints. We're paying a lot of attention to it. Clearly, the vaccine news was certainly something that was interesting. We are paying a lot of attention to that. To your comments on the vaccine, we're -- we hope it was quicker. I think the big question is, when is it going to be available? Certainly, great news to see some things out there. I think the big question is: one is, when is it available; two, if it's the Pfizer vaccine, for example, there's a bit of an inoculation period going through the various shots. So we don't necessarily know when exactly that ultimately changes things. But I think for now, what we would say is the guidance is the guidance. There hasn't been anything that's really changed in the world -- global landscape that would say that we missed it or that we didn't contemplate it appropriately when coming out with it. So hopefully, that answers the question before we get into the detail.
Yes. I would just add, if we learned anything during the first wave and the real walk down back in March, April, May time frame, people need our technology. And we were able to navigate it. We're not going to use the term headwinds anymore. That word is coming out of our vocabulary. But I think we navigated the first lockdown pretty well. And so, I think we're still extremely positive.
Good. All right. So I can't use the word headwinds. Let's see. So let's transition then and sort of talk about one of the bigger debates post the third quarter, which were updated views on price or revenue per patient, which I think is now tracking closer to $175 million. Previously, it was more in the $115 million annual sort of ballpark. So I just want to make sure we understand what happened, what is happening. And maybe to do that, just give us a little bit of background to the extent there's some folks that may not I fully appreciate what we're talking about here, but also sort of deconstruct the elements of this now higher headwind that you anticipate in the -- you saw in the third quarter, but also anticipate in the fourth quarter.
Yes. So pricing is near and dear to my heart. So I can take this one, Steve. So one of the things that happened this quarter is -- and we talked about it about a $60 million pricing headwind on the quarter, which was higher than our original expectations and our guide for the year. So we took it from $115 million to $175 million. And really, this is more about mix. And I think it's really important that everybody understands that. So just taking a step back, Dexcom was started in the DME space. In the DME space, there's more hurdles to getting access to product. So that was the reimbursement that was available at the time. It's how we started the company. Over time, as pharmacy benefits have become more prevalent in the CGM space, the goal has been to move folks from DME to pharmacy. In the pharmacy channel, our net operating profit is about the same, but the revenue is less because the cost ultimately supported less. Those are obviously offloaded to the pharmacy distribution model. And so what's happened is, is we've realized that the patient experience is better through the pharmacy. It's a more ironed-out process. It's easy to get access to the product. It's easier for the doctor to prescribe it. And so when you think about doctors, going through and thinking about, "Well, gee, I want to make sure I put these to do at patients on Dexcom CGM." The easier we can make it for them, the easier it is for them to ultimately prescribe it. And so in doing so, the goal was to move folks to the pharmacy. In doing so, there's this migration. And what's happened is, as we've always talked about, this migration is going to come with some price that we'd be willing to give to do it, again, knowing that the net operating profit ultimately end up being in the same position. And the timing of it is really a difficult one because you start in DME. We have distributors that are in DME, who have obviously made a business based on selling our products. And as they move into the pharmacy, they certainly lose their patients. So we just weren't able to fully peg the timing. What happened in Q3 is right in line with our strategy. We were able to move folks to the pharmacy, and we moved them a little faster. And so, I think that's the real big challenge. I think some folks presumed that meant that we were taking on more pure price. It was not. In fact, pure price generally stays relatively consistent. It was really the mix shift of moving more and more folks to pharmacy. So if anything, we were really proud of the fact that we did move folks. It was the goal to move folks, and they moved faster than we anticipated, which is why we drove up our pricing impact on the year. But -- and that's the other reason -- and that's the reason why we even said, "Well, gee, look at the unit growth." And we generally don't talk about unit growth. We talked about unit growth being 40%, which is a better indication of what the underlying patient base is doing. And so, I think that's where maybe people took that to say that, that is incremental pure price. It was actually more mix. And I'd say this is aligned with our strategy. How it goes into the future? There's only so many folks that are in the DME space. Once they're over into pharmacy, that pricing dissipates. And what you find is more unit economics. So we're going to continue to move folks. We want to move folks. We know the more folks we move, actually, the more new patients you likely get because you have physicians that are more active prescribed. And so it's the right long-term strategy. I think it's just a timing thing. Hopefully, that answers the question. It kind of gives you kind of the backdrop on it.
So the only thing I would add is it was a bit of a head scratcher for us, putting up $0.5 billion in revenue and a 68% gross margin. Even in light of the channel mix, pressures in different areas, I mean, the company is doing remarkably well. So it's a bit of a head scratcher to us where people were somehow disappointed with the results in the quarter.
Yes. You know the game. I guess -- and just to sort of sum that all up really is the point of equilibrium is the same. That price point is the same. The trajectory to get there is just steeper now or you're getting there faster is sort of the way to think about it.
That's absolutely the way to think about it is you only have so many patients in DME. And once they're in the pharmacy, you don't have that mix shift anymore.
And do you think COVID accelerated the shift to pharmacy? Or is this more successful contracting? Any reason for that seeing that sort of manifest in the third quarter as opposed to first half of the year?
There isn't necessarily one silver bullet. I mean certainly having COVID out there, it makes it easier to prescribe in the pharmacy. So to the extent that we're trying to make it easier on folks, I know physicians certainly will do that. Contracting, having more and more folks on contract, we have a lot of folks on pharmacy. It wasn't we had, had bunch of wins but ironing that out over time. And I think the other piece is, look, it's in our comp plans. We've incentivized folks to do this. And so those things take time to really permeate through the organization. But we've got an organization that's incentivized to move folks there. But when you have all those 3 things coming together, I think you -- really what you see is what we set out to do is what's now happening. It just took a little bit more time.
Got it. And then how do we think about -- and who knows when this is or -- and your guess is probably better than ours. But as we think about where sort of the mix of this business is going to do over the next several years, I guess, the first question really is where are we now? I know you don't necessarily break out mix by channel. But clearly, Medicare and pharmacy were big drivers this last quarter. Is there a way to sort of quantify the magnitude of and whether it's sort of in most recent quarters or in terms of the installed base, where you are in terms of pharmacy as a percent of mix and Medicare?
Well, I can tell you this, and I want to steal the thunder from Investor Day, but that's one of the things that we'll be telling. And so, I think that will be helpful. We obviously haven't released it yet, but we understand the challenge of looking at this business and folks trying to understand it. We are in the middle innings. I use baseball analogy just because we're kind of coming off of a World Series. If you had talked to us last year, we'd say, "Boy, we're in those beginning innings." I'd say now we're officially in the middle innings. And I think that at least helps folks frame it ahead of Investor Day. And then at Investor Day, we're going to give you a little bit more color about where we think it can go over time. Kevin has always talked about being in the 70% or 80% of all of it through the pharmacy channel. I don't think -- and that's of the U.S. commercial lives. I don't think that that's an unreasonable expectation over time, and we'll kind of give you an update as to where we are on that path at Investor Day.
Mat, I think that is really important, too, when we think about the business on a global basis. And again, we're going to give you some updated numbers at Investor Day. So I don't want to go into the details. But really, when you think pharmacy, you're really primarily thinking U.S. commercial business, right? Medicare is still a DME subscription-based model, probably -- maybe half the states in Medicaid are pharmacy. The other half more resemble a traditional DME model. Outside of the U.S., it's all over the map, right? I mean there's -- patients get it through the hospital channel. They get it through distribution. They get -- and so when we look at the pharmacy, in particular, right, it's really -- we're talking about maybe a couple of million patients on the commercial side in the U.S. only. So that's important.
And then is there a way to sort of frame just the relative pricing differential between those 3 major, just keep a commercial DME, commercial pharmacy and Medicare? Just how those stack up in terms of the relative revenue per patient, perhaps maybe is the best way to think about it? Just -- I don't need the absolute dollars, but just on a relative basis, how those 3 different segments stack up?
So Medicare is publicly available. So we can tell you that one. It's about $2,500 per year. And then the U.S. commercial DME channel is generally north of that. The U.S. commercial pharmacy channel and OUS channels are generally south of that. And that kind of gives you the cadence as to where those...
Got it. And Steve, you mentioned this earlier in passing but maybe worth expanding on it here is one of the things that got glossed over with all the focus on that revenue per patient headwind. Was that -- your gross margins were pretty remarkable -- remarkably strong in the quarter. And how should we be interpreting that? I obviously have my view as we think about the business today. But also importantly, as we look ahead to sort of G7 and as you sort of march your way into expanding into less intense type 2s and other CGM adjacencies, how important was it for us to see that strong gross margin despite some of the headwinds that you're absorbing?
Yes. I mean I'll start and then let Jereme, obviously, jump in. We're not changing our guidance. We've given kind of longer-term guidance around 65% as being a target, primarily in light of where we think pricing is going to go over time. With G7, obviously, the cost profile on G7, the sensor was -- the platform was designed for cost reduction. So if you think about it, we're hitting -- we had a 68% gross margin with the G6 platform that while we've done some automation, it isn't a fully automated manufacturing process, right? It isn't as efficient as we can be on G7. So G7 can take additional cost out of the sensor platform. But I still think, in light of all the mix shift and what we're seeing on the pricing front, I think we're not prepared to try to get you to think of kind of that north of 65%. And we're still working through what we're going to give you guys in terms of the 5-year horizon at Investor Day in a few weeks. But yes, I mean, it's -- we've done everything we've said, right? And what you're seeing is -- you guys know we lived kind of hand to mouth throughout 2019, capacity constrained. We doubled production in G6 over the course of '19. We doubled it again in the first half of this year. So we're now sitting in a great position from an inventory perspective. We've brought costs out of -- taking costs out of the G6 platform. But when we start ramping G7, it's going to have -- it's not going to come out of the gate at a 70% gross margin. And I think that's important. We don't want to get people ahead of themselves. I think the message is really, look, the business is doing quite well, even with a product that wasn't designed to take cost out. And in light of the channel mix, I'm not going to use that word, the channel mix that we're seeing.
Yes. I was going to say, it wasn't important -- we always do internally. We could design costs out of this product. We know we can. And we have folks that are really dedicated to doing it. And so I think the thing that maybe was helpful for folks outside of -- inside the organization to see, to Steve's point, is doing what we say we're going to do, which is showing we can scale. And when we scale, we can absorb those fixed costs. When we put in these automated machines, you can see leverage. And so in a period where we have the largest pricing headwinds we've had, we also have the largest gross margin since the launch of G6. I think it's just a demonstration that you, over time, can design these costs out. There's a lot of conversations about price and can you compete on price? And what's that going to do in your margins? We were always confident, but I hope this helps demonstrate everybody that, look, we can continue to compete where we need to on price because we know we can design costs out of this -- out of our product.
Yes. Makes sense. And just sort of last question I have on this section is, you did mention that the gap between unit growth and revenue growth is about 14 points this quarter, 40 versus 26. I mean how should we think about that gap? Is that -- was the third quarter the stiffest -- the steepest that we're going to see and maybe things improve over time? I'm just trying to get a sense of how to think about that sort of data point and where we go from here. Sort of appreciating that you're still in the middle innings, I think, as you phrased it in this sort of channel mix shift. But any way to think about that delta?
So we guided to $175 million. You'll imply it's $45 million to $50 million in back -- in the final quarter of the year. So -- and that's kind of what we guided to. We won't change that. But one of the reason why we guided to that number is a lot of the push to the pharmacy really started happening in the back half of last year. It's been going on for a while, but we really started to see that move. And so you start to anniversary some of these things over time. And so that's one of the reasons why we're there. Now if we're successful and we push folks faster, then we'll obviously comment on -- if we're not, we'll comment on it as well. But our guidance is our guidance. Naturally, we're going to try to move folks there. But that's the way to think about it is how successful are we in moving folks, and that's really going to be the cadence. And we'll kind of give you kind of when does that cadence stop. I think we'll give you an update at Investor Day, where you'll really be able to start implying when that's over. And then again, to your point, the unit economics start to come back, where you don't have the 14-point delta.
Yes. Okay. Great. So let's transition to G7. And I want to start, we did see some data, early feasibility study data at DTM last week. And if I'm capturing correctly, sub-9% MARD overall. MARD days 13 to 16 was, I think, it's up 8%. That's what we saw. Anything you would have us focus on? And I guess the real question that folks have is whether we can extrapolate from this data for the sort of the full-fledged data set, whenever that may be on G7? And what that may mean for things like iCGM and such? Any thoughts there?
Yes. So a couple of things. One of the takeaways that became pretty clear after the Q3 call is we could have been done a better job of explaining kind of the 10-day sensor launch versus the 14- or 15-day sensor launch and that if you had a 70% number that people didn't quite understand. The message there -- the first takeaway is this, that we expect the reliability of G7 to be something significantly better than where our competitor is. The 70% number is roughly where their sensors land in terms of how many sensors survive the full 14-day winter period. And to us, a 70% survivability means a 30% warranty problem, and that's not a good thing for us, right? So we would expect that when we launch the G7, it needs to be well north of a 70% survival rate. And so that was really the message that we were trying to convey on the call. We're very comfortable that we can launch a 10-day sensor in the very near term that has a significantly better survival and reliability rate. We will get to a sensor with a longer life. I don't want to give you a specific time frame. There's some clinical trial implications, depending on how we get through, but we're comfortable we're going to get there. I think from a performance perspective, it will meet an iCGM standard, right? I think the metrics that people are still focusing on overall MARD, they're probably focusing on the wrong thing. Really what they should be focusing on are the things that we're talking about. We'll show improvements in day 1 performance, for example, faster warm-up times. So the overall MARD is now that most of the folks on the call is something that people aren't as -- if you're sub-10% MARD, if you can take care of the outliers and make sure the sensors reliable over the course of the sensor wear -- and it meets the iCGM standard, you're kind of there. So I wouldn't read too much into the data. Obviously, we'll wait until the investigators are able to -- because they don't want to publish the pivotal trial or trials that we're currently conducting. They're going to want to publish that information. And so, we'll publish it when it's available. But we're comfortable that we meet the iCGM standard. You're going to have a sensor that performs reliably and meets -- frankly, meets our expectations.
Yes. For what it's worth, I think the takeaway, if you ask for kind of what a takeaway is, we told you it's a great sensor. It is. The only issue on the 14, 15 versus 10 days is really our high standard on survivability. It's not performance. Performance is excellent.
Yes. That's great. And I've got a question from the audience about whether you can use that G7 early feasibility data to file for CE Mark approval? Is that something that's possible?
I don't think we're going to comment specifically there. There's a number of things in the works right now that -- again, on the call, we use the term approval-support trials. There are multiple trials that are ongoing currently and will continue that it may not be as simple as just a single pivotal trial for CE Mark or a single pivotal trial for U.S. iCGM FDA approval. And that's kind of where we're going to leave it right now.
And then back to the wear duration. It doesn't seem like it's a performance issue that needs to be resolved, at least not fully. But what about some of these other little things? And I guess they're not really little things, but things like adhesives, things that do impact survivorship. Just give us a sense of, even if it's just the roughest terms, what still needs to be done? And how much heavy lifting is there really truly to do to get that to where you want it to be?
No. I guess that -- perfectly comfortable that the G7 from whether it's adhesive, whether it's chemistries, the survivability is where we need it to be. Honestly, adhesive is an issue. I mean Abbott has issues with their adhesive. Adhesives are a tough thing. I've said this before, in an ideal world, if the COGS profile worked, I would rather have 7-day sensor, right? Because you're wearing a band-aid for start wearing a single piece of tape for 10 days or 2 weeks, it becomes a little kind of ratty. And it would be great to be able to just change that once a week. But obviously, that's not where the market is. The market is at a couple-week sensor, and we'll be there. I think we're very comfortable that we get there from a performance perspective. The adhesive is always going to be an issue we've got, and we and others have ways to extend the adhesive. So I'm not concerned there. And some people have no issues. It depends on how active they are. The exercising is in summer. We see differences in wear in the summer months, right, when, particularly, in kids when they're out in the pool all the time or it's hot, humid. And so it's a challenge, but we're -- I think we're comfortable. I think from a sensor performance perspective, again, it's back to you, as I mentioned, as Jereme said, it's really living up to the Dexcom standard of performance that we want to make sure that these things perform the way patients have come to expect. Between the beginning of the sensor session, the first day performance, the hyper performance, which is particularly important compared to our competitor, which we still know they have some challenges there. So again, we're comfortable that we get there, and there's a combination of things that we're looking at from going from that kind of 10-day to 15-day to make sure that we have the same performance for the full sensor life.
Okay. I appreciate that. And maybe sort of just to wrap on this section on G7, taking a step back, there's been some new competitive launches, iterations, evolutions, whatever you want to call that, of the competitor platform. You've got G6. We have a flavor for what G7 is going to look like. Can you just take a step back and maybe not on a point-by-point basis, clearly, you're still confident in the Dexcom technology and just maybe help us understand where you see the biggest points of differentiation today and, certainly, as G7 comes as you continue to sort of differentiate yourselves from the competition?
So if you're asking specifically about the Libre 3 product, right, we don't really know what that is. It's really -- it's difficult to draw direct comparisons. We know what they've said. We've had another competitor in the market for the 15 years that I've been here, who has continually made claims that they're as good as Dexcom and they're producing some clinical data to suggest that they're as good as Dexcom, and yes, we get in the real world and the real-world usage and performance just doesn't match up. With Libre, in particular, the current embodiment of Libre and Libre 2, which is just launching in the U.S., favorable in Europe, it really is no different than anything we've heard from the field than Libre 1. In the U.S., it ships with the alarms turned on; OUS, it does not. But again, you still get an alert. You still have to scan. It still requires interaction on the part of the patient. From what they've said, it appears that Libre 3 may move closer to more of a real CGM as opposed to a flash glucose monitor. But until we actually get our hands on product, understand what it actually is, it's kind of hard to draw direct comparisons. I don't know, Jereme?
No. That's one of the big challenges. In terms of where our technology goes over time, I still think we're really confident. Steve kind of alluded to some of the G7 iterations; incremental connectivity, which is super important as you're connecting to multiple different devices; a shorter warm-up time, which is critically important when you have differentiation; all the software investments. So -- and we think G7 -- Kevin will say it time and time again, he wears them all the time. It's a fantastic device. It leaps and bounds above the G6, and the G6 is a fantastic device. So I think the way to look at it is we think we have the best-in-class technology now. I think G7 still puts us best-in-class technology. And that's without seeing Libre 3. But again, when we see it, we'll break it down at that point. But at this point, we're running our path, and we think we've got a great product lineup.
Okay. And I got a couple of questions here. I'll just feather in from the audience team relative to this theme, this topic. And I think they're both -- well, this was, certainly, G7, it says, "We know the sensors are great for anyone with type 2 -- type 1 diabetes. Can you elaborate a little bit about how the new G7 could also be useful to the type 2 customer now as well?"
Sure. I can certainly -- you want to start?
Yes. I would just say, we're -- I wouldn't lose focus on G7 being the type 2 category killer because we're going with G6. We're already there. We talked about north of 20% of our installed base today is type 2. Obviously, where there's insurance, we're seeing increasing insurance on the type 2-intensive insulin side. So that's been a great driver, both kind of Medicare and some of the larger commercial payers here in the U.S. But we're doing all sorts of work, like the Level2 program with United, the work we're doing with Intermountain. We've talked about our partnerships with folks like Livongo and Onduo. And there's a whole host of others that are really attacking the -- trying to attack the big whale, if you will, which is non-insulin-using type 2s. We're not waiting for G7. G7 is a better product platform for that patient population because of its form factor and disposability, et cetera. But we're not waiting. I mean we're going at this today in a very aggressive way with our G6 platform.
Got it. And then another question here is more of a sort of just a bigger-picture question about how to think about the portfolio and how it evolves. And so please describe how you will have different products. And I assume this is in the years to come for type 1s and type 2s. So I guess sort of a menu of options and how you can offer features that are needed by each separately. And can that be priced separately? Any sort of thoughts about a menu approach of having a portfolio of products for different...
Yes. I think, again, not just deal but thunder from some of the things we're going to show you guys in a few weeks at Investor Day. But I think that's right. We definitely -- one thing I will tell you is, unlike our competitor, we're not going to have a one-size-fits-all platform into our model. I do believe that over time, G7 becomes kind of the workhorse, like core on-body platform, right, where it's the core transmitter sensor combination. But it will absolutely be differentiated for the various markets, whether it's intensive insulin users who require significantly more information and bells and whistles, things like predictive hypoglycemia alerts and things like that. Whereas non-insulin-using type 2 probably doesn't have the same requirements. It probably has different needs in terms of the visualization, in terms of the information that we provide back in terms of that potential for providing advice on -- they're not -- we're not providing them advice on dosing insulin because they don't take insulin, right? But potentially an alert to maybe get up and walk around the block or even medication timing, making sure they took their medication. We can detect, right? If somebody isn't taking their medication at the right time or forgot to take their medication, we can identify that because we can tell by their glucose spike. So things like that. It will very much be differentiated by the software platform. But I think Gen 7 as a workhorse on-body experience will be around for quite a while as we scale it.
All right, guys. I think we hit the mark here. Really appreciate it. Thank you. Looking forward to Analyst Day, and enjoy the rest of your week. Appreciate it, guys.
Thank you, Mat.
No problem.
Take care.
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