DexCom, Inc. (DXCM) Earnings Call Transcript

Thanks, everyone. If you can take a seat, we can start the next session here. I am Robbie Marcus, the med tech analyst at JPMorgan. Very happy to introduce Kevin Sayer, the CEO of DexCom. Kevin is going to do a presentation and then me and Jereme will join him on stage for some Q&A after.

Thank you, Robbie. You know those who work with me often say I start our meetings by asking a very simple question, what problem are we trying to solve today? Well, diabetes is a big problem. With the estimated global population of people with diabetes growing from 150 million in the year 2000 to more than 500 million in year 2021 and approaching just under 800 million in the year 2045. This is a problem that's just not going away. And most of these people are still treated by fingersticks. And it's not just the growth in the population that's staggering, it's the cost associated with their care. It costs the system nearly 2.5x more to take care of somebody with diabetes than somebody without diabetes. And our recent numbers from ADA would indicate that the annual cost of somebody with diabetes is approximately $20,000 per year. It's no wonder with costs growing like that, that nearly 1/4 of all healthcare dollars in the United States are spent on diabetes care. For a long time, the standard of care for taking care of somebody with diabetes was fingersticks. And these fingersticks did not present a great picture of health, a few intermittent points a day, and you really didn't know what was going on. This slide truly depicts what we see going on in diabetes and what we see going on with CGM, particularly in those that use insulin. This is a basal insulin patient with type 2 diabetes, and it's very typical of a day for 1 of these people. This person takes a fingerstick a day when they wake up and sees if they are in range and says to themselves, you know what, I'm doing pretty well. I'm going to go about my day as I usually do. But as we've learned with many of these type 2 basal insulin patients that have gone on our system, that fingerstick paints a horrible picture for this individual. Spent 17 hours of their day above range was 6 of those hours in severe hyperglycemia. These high glucose values are what leads to the horrible complications of diabetes. Quite candidly, something I lost my mother and my maternal grandfather to. Cardiovascular disease, kidney disease, amputations, blindness, it's pretty bad. It's not good at all. It is only through CGM that people can make the decisions they need to make to treat this condition. First of all, I pretty much guarantee you before this patient had a CGM, they had no idea that they had these highs. Then after wearing a CGM, this individual can see, okay, I've made this decision. This is what has caused my glucose to go up. I can change my activity, I can change my meals, and I can figure out the effectiveness of my medications. There's been a large movement within the clinical community to introduce CGM earlier into the plan of care for people across all of diabetes. And we're very excited about this. We see CGM more and more. And it's a tool that really provides the information necessary for these people to make decisions. The bottom line, while we have grown tremendously and done well, we can do so much more to treat this condition. As you look at the CGM field, every major innovation that has advanced CGM has come from DexCom. We are confident in our future because of our historical past of leading this category, and we have no intention of giving up that leadership. Time and time again, we have launched features and hit performance milestones that have made DexCom CGM the first line of defense for those who manage insulin. And this innovation also includes product features that have greatly eased the burden of diabetes care, such as smartphone and smartwatch compatibility. But we're not going to stop there. We'll continue advancing and growing and developing our products and making it better, more and more solutions for individuals and tailored to the needs of the marketplaces we're going to serve. It's because of this, that we've adopted a much broader mission statement outside of diabetes management, this broad vision of innovation that we have as a company. We envision a day when continuous glucose monitoring by DexCom becomes a core component of metabolic health. And we can begin to work on things such as preventing diabetes and addressing the problem of this epidemic that I spoke to earlier. Quite simply put, we're empowering people to manage health. You know, visions are great, but they don't mean anything unless you execute. We reported earlier today our 2023 performance and it was a great year for us. In 2019, I spoke here and I announced our first $1 billion year. Well, today, I'm announcing our first $1 billion quarter. Our revenue for the year are over $3.61 billion. That is 24% growth over the previous year, and that growth is driven all over the world. On top of that, with 25% revenue growth, we increased our patient base 35%. That doesn't just indicate growth in revenues. That indicates tremendous operational excellence, as we were able to manufacture enough product to serve all these new people. Add to that, it was a great year of access wins for us. We launched our G7 product in the U.S. In a matter of months, we had insurance coverage and access equal to that what we had with G6. On top of that, the Medicare expansion, covering those on basal insulin and have hypoglycemia problems gives us great runway in the future. We did this responsibly picking up more than 200 basis points in operating margin. And on top of that, we opened a very, very large manufacturing facility in Malaysia that is now producing commercial product and gives us the capacity in the future to do all the things that we need to do. '23 was a great year, and it fuels right into '24. Also, as we announced earlier today, our guide for next year is revenue growth in the 16% to 21% range or $4.15 billion to $4.35 billion. This growth will come all over the world. I'll give you a little more color on that later. We do expect big push internationally with our DexCom ONE product launch over there as we move that to the G7 form factor. We're very excited to do that. We also expect to grow across all segments in the U.S. We're going to grow across automated insulin delivery, those Animas delivery and also we're very excited about our growth opportunity on the basal side. Our gross margins for the year are expected to be in the 63% to 64% range. We now have multiple product lines, something that we didn't have for a long time, but we are navigating now switching from G6 to G7 launching our DexCom ONE product, another product launch, I'm going to talk about later that's very exciting. We will do so responsibly yet again, and we have every intention of increasing our operating margins. But we will not sacrifice growth for huge operating margin expansion. We continue to invest in R&D, and we will continue to invest in commercial opportunities as they come before us so we can continue to grow the business. You can't achieve results like this, though, without having a great platform, and that's what our G7 is. Our G7 is a culmination of a number of years of work, and there are some incredible features in it. Any medical technology that comes out, the first thing you have to have is great science. And for G7, that great science starts with this accuracy. This is the most accurate sensor on the market today and the most accurate sensor that's ever been produced by us. Often people say, well, those were type 2, they're not going to need something that accurate? Absolutely wrong. These people haven't engaged with something like this before, and they need to try to trust and rely on that data. It's incredibly simple. The start-up procedure. The warm up is only 30 minutes. It's fully disposable. The software platform is easy engagement. We've combined everything into 1 app rather than 2. And this is the most covered sensor by insurance in the United States with the lowest out-of-pocket cost for patients. We felt it was absolutely critical to make sure this product was available to those who wanted it. We will not stop our G7 innovation and rest on our laurels here. We have a number of programs going forward to enhance this product. The first of which and the key priority you can ask anybody that works with us is to expand that life to 15 days for all of our user base. We're also driving future product enhancements. We look at algorithm development. We have some sensor technology that's actually in clinical testing that will greatly enhance the performance and extend the life. We will have much more connectivity with insulin systems next year, both on the pen front and on the unmet delivery front with insulin pump partners. And again, as I spoke earlier, we'll be switching the DexCom ONE to the G7 form factor, and that's going to happen just in the next couple of months, going to happen very quickly. Having great science doesn't matter if people don't engage. We have invested a great deal of money and I've talked a lot about this from the podium about our investment in software. We have greatly simplified our software infrastructure. From a technical perspective, our previous software with G6 literally was almost -- it was a different app for every language. So if we did an upgrade, it took forever to get it out to everybody. We now have a single platform, and that platform is applicable to G7 and to our DexCom ONE product. This enables us to iterate and make changes globally quite easily. Something you should note and something very important about this product, we've had 9 software upgrades since we launched that product. And each of those upgrades has included enhancements to our G7 technology to make it a better experience for our users. And we have a lot coming on that software front in the near term. If you take a look at what's coming just in the next 3 months, 1 of the things writing to the Apple we display and visualization of insulin data for some of our partners. So they'll be able to see their CGM and their insulin experience right on the Dexcom app. Another thing we're bringing into the software is activity data. If you're wearing another tracking device, an Apple Watch, a Fitbit, a Loop or a Ring, numerous of these devices that, that data goes to Apple Health or the Google Health platform will now be able to be visualized on the CGM app as well, giving patients a clearer picture of their health. And the last software integration I want to talk about that is very important to our users, we have submitted our direct-to-watch submission to the FDA. So very soon, DexCom users, if they want to go for a run, don't have to take their phone anymore. They can just take their watch and see where they are. We're very excited about that. Connectivity has long been a competitive advantage for DexCom. We were the first to connect to multiple products, and we will continue to use this an advantage. One of the key features of the G7 platform and our current electronics configuration is the ability to connect to 3 devices at the same time. I don't know how many devices you guys have with Bluetooth, but it's pretty tough to find something that connects to 3. If you're an automated insulin delivery system, you can connect to your insulin delivery device, your DexCom phone app where you share data with others, and directly to your Apple Watch. That is what connectivity is for us, giving people the information where they can use it. We don't limit that just to our devices and device experience. We connect to other software programs as well. And we'll continue with our software platform, this new software platform on the G-Series and DexCom wanting to do that. We connect to physicians, giving them the ability to see data in their offices in a very meaningful way. We connect with the patients. As I said earlier, we give patients a number of choices as to how they want to use their glucose data to best manage their health. And I think most interestingly for me is that sharing of data with diabetes communities as people watch others. I had a recent experience. I was with an attorney friend of mine. His 13-year-old daughter, while she doesn't have diabetes. She came home talking about DexCom. And goes, why are you talking about DexCom? Her best friend has just been diagnosed with type 1 diabetes. And so her best friend to manage her disease, has put all of her buddies on the follow-app. So there are 7 girls in middle school following this other girl to make sure she stays between the lines. That's connectivity, and that makes a difference. With respect to our growth in '24, I stood here a year ago and said we have more covered lives in insurance than we've ever had who have access to CGM who don't have it. That number has grown monumentally this year with the recent Medicare decision to cover those who are on basal insulin and those who experience hypoglycemia. And not only has Medicare done that, but payers have followed. So this is greatly expanding. We have twice as many people that have insurance and access to CGM, who don't have it than we have ever had in our history. Our commercial strategy has also enabled us to execute on this front as well. In 2021, we made a very big decision while the rest of the world is contracting after the pandemic, we saw the mobile data and knew that this would eventually come. We also knew we needed a bigger presence in PCP offices, so we greatly expanded the size of our U.S. sales force. And this commercial strategy has worked wonderfully. As you can see for 2023, we increased our prescriber base by 40% over what it was before, and 70% of our new scripts are now written by PCPs. We will continue to invest in our commercial strategy in the U.S. to get broader and to get more places. But we haven't just had a great commercial strategy in the U.S. In the OUS markets, we've gained significant market share, particularly in 2023. One of the reasons we've been able to drive these market share gains is the clinical evidence that DexCom provides. We have got over 1 million patient years on AID systems. That's a lot of years and a lot of data. That's very accepted in the European community and outcomes in addition to science and engagement are what drive broader attempts of medical technology and Dexcom has those outcomes, and they've been particularly useful for us in Europe. The other thing we have done is, again, I talked about our DexCom ONE product, and that has been very good for us in growing outside the U.S. We have a portfolio approach that we have adopted outside the U.S. We have our G Series platform, which is literally our premium product with all the bells and whistles and features and connectivity. In countries where that product is widely reimbursed that is the product that we offer, and that's our products available on the market. There are other markets where there's no reimbursement and very little access and very little coverage. That's where we started with our DexCom ONE product, and we have an e-commerce platform where we can sell in those markets. Ironically, of the first 7 countries where we launched that e-commerce platform, 6 of the governments now reimburse for CGM because it was so wildly accepted. Then we have other geographies, particularly in the EU, where it's a dual system. You have a low-risk population and a high-risk population. Our presence has always been in the high-risk population in those markets. And while we were growing rapidly, it wasn't fast enough. In these countries, now we offer a 2-tiered system for the lower-risk patients, those who aren't on automated insulin delivery, nonpediatric patients usually, those without high risks. We offer the DexCom ONE product at a lower price point, and then we offer our G series for the high-risk population, and we're getting great wins in those dual markets. Because of that portfolio strategy, by the way, over the past 2 years, we've expanded access in our OUS markets by 4 million lives. And 1 million of those lives rest in Japan here, which recently approved CGM for all people on insulin. We said earlier, we're going to go direct in this market. We announced that in Q3, we're gearing up to go direct in that market in the second quarter of this year. We will launch G7 in Japan before the end of the year. We're in our early stages. But we believe this is a medical device market where we can have a great impact and where medical devices are strongly reimbursed and there's a great population that we can go after. So with this great vision, this execution and this plan, what you will do next? Well, there are 25 million people in the U.S. alone who have diabetes, who are not on insulin, who we believe can benefit tremendously from CGM. And we believe that this is an opportunity for us to go after in the next several years. What are these patients like. They see primary care doctors. They're more likely to make a decision on a CGM by their own. They're tired of just being told exercise more and eat less and take your meds. They want insights to their health, so they can empower -- we can empower themselves to control health. This is a population that we know we can engage, and we can serve very well. Let me demonstrate that a bit with an example. This is an individual who is 5 years since their type 2 diabetes journey was on Metformin. Went to a primary care physician who incorporated CGM first in this treatment of people with the type 2 diabetes. The first thing that he did, and you can see her numbers up there was take her off a metformin and he put her on Ozempic, Jardiance and DexCom CGM. She went away for a year. Here's what we found in a year. We now have 88% time in range. We've had weight loss. We've had almost a 2-point reduction in A1c and a 30% reduction in average glucose over the course of 12 months. So the physician looked at that. He consulted with the patient, and he said, "You know what, this is great. Let's take you off Jardiance and keep you on Ozempic and CGM." So she came back in another year. And what do we see? Increased time in range, lowered A1c and continued weight loss. What a great win. So he consulted with the patient yet again. What do we do next? Let's take you off the GLP-1. She just had her 6-month visit, 100% time in range, continued weight loss, continued reduction of A1c. Technically, if you look at this person, she didn't have diabetes anymore, she's a prediabetic. This is what CGM in combination with these new therapies can do. We see it in the data. We see that physicians know this as they're prescribing more CGM with those patients that they put on GLP-1s than they had prescribed before. The A1c outcome for somebody on a GLP-1 with diabetes is better when a CGM is introduced in the equation. We firmly believe we're part of this solution. We are part of the solution for this market, and we will continue to be. So like I said, we can do more for these people. That's why today, I'm introducing Stelo. Stelo is the first continuous glucose monitor designed specifically for people with type 2 diabetes. It will be on the G7 platform. It will have the same performance and accuracy that our customers have come to expect, but it will be a 15-day product offering. It will have a custom software package geared more toward these individuals. They don't need the alerts and the alarms and all the activity that we offer with the G7 series, but will be geared to what they're expecting. It will be launched as a cash pay product initially as we obtain evidence and can find more and more and more stories like the one I just showed you. As patients engage with this technology, we know that's what we'll see. We have filed this product with the FDA in Q4. We are on target to launch it this summer, and we are very excited to do it. I said earlier in our guidance, a minimal contribution to the top line next year. This is a year of learning, but we will learn a lot, and the future is very bright here. So take a look at DexCom. When I started this journey, all we were about was type 1. We've moved down that healthcare acuity curve from type 1 to type 2 intensive. Now we're with basal and those who have hypoglycemia problems. We will cross to the other side, our next effort is type 2 people that are not on insulin. We can make a huge difference here. And then we'll expand this technology to others. I say the future is bright at DexCom, it is brighter every year. Thank you.

Well, great. Maybe we can kick it off with some of the results you preannounced today. Fourth quarter came in $30 million or so above street numbers at $1.30 billion, really strong growth year-over-year. Maybe you could just help us with some of the details, U.S. versus OUS and some of the underlying drivers for each of that?

Go ahead, Jereme. You start.

Yes. So I think what you'll see in the U.S. is you saw a 26% growth in the U.S., 27% outside the U.S. The U.S., again, continued strong underlying patient growth. We had talked about it in the past. We continue to see record new patient starts. Q4, we'd expect to follow that same trend over time. We'll get that over time. But this is the continued adoption, both in the type 1, type 2 intensive space, but it continues down that basal space and all the work that we've been doing around putting that product in front of folks and getting the appropriate coverage. Outside the U.S., in our markets that were direct another strong performance outside the U.S. I think what you'd say is in all the markets we've been direct, really strong performance, adoption, coverage, et cetera, continuation of what we've seen in prior quarters. The only caveat there is you do see us moving out of this non-CGM business, which we will move out of here in the coming weeks as well as going direct in Japan. So that has a little bit of an impact, but still very strong growth outside the U.S. of 27%, leading to what we think is a very strong quarter.

So record new patients in fourth quarter, again. Any way to size how much was basal versus nonbasal because our doc checks remain just so enthusiastic about CGM for these patients now with reimbursement. Any way to kind of compare the different groups?

Go ahead, again, Jereme you know better than me.

Yes. So as we think about those patients, and we'll get the full final patients numbers in soon. We know it's trending that way. You're seeing -- you're right. You're seeing a very strong adoption in the basal population, that unmet need is significant. And so you continue to see outperformance in basal, but you're also seeing a really strong performance continuing in the intensive markets, both type 1 and type 2. So I'd say really across all reimbursed pathways. We're really firing. And people are realizing the value of CGM. They really are Dexcom CGM.

All right. Maybe if we spend a minute on the intensives, both type 1 and type 2. Where do you think you are right now in penetration of type 1? And where are you in penetration of type 2? And I'm thinking more CGM as a category.

Yes. So in type 1, I think -- I'll start with the U.S. and then that's really where a lot of the data is. In the U.S., it's about 60% adopted. And that's -- there's some updated numbers coming out of CDC, so it's right in that area, it could be more or less based on the denominator, but about 60%. In the type 2 intensive market, we're tracking right around 50%. So it's moved from, I'll call it, starting last year into the 40%, 45% into a 50% and surpassing that. And then in basal, it's really only around 15%. And then as you go beyond basal, it's really sub-5%. So a lot of room there as you go outside the U.S., most markets are generally less adoption. The exception of a few of the more established international communities, Germany and the Nordics, where they are at in line with the U.S., if not maybe a little bit more. But the T2 intensive basal in all markets outside the U.S. is lower than the U.S.

I know it's still only 2.5 quarters since you've gotten Medicare and then started to roll in commercial reimbursement for basal in the U.S. here. But do you have data yet on whether DexCom is winning more than your fair share in the basal category?

You know what, we are doing well in the basal category. My fair shares all of them. So we'd like to win more. We win -- we do very well where we have coverage and penetration, and we know the physicians, and we know the community. And what we are working on is broader coverage and broader efforts to make sure we can win more places. When I said we're investing on the commercial side to get broader, and that's one of the things I'm inferring that we -- and we're looking for creative clever ways to do that. But we -- where we have a presence, we win very much.

All right. I want to shift the focus a little bit forward. And you gave 2024 guidance today, 16% to 21% sales growth year-over-year, 63% to 64% gross margin and about a 20% operating margin. So really healthy metrics down the P&L sales, a little above at the upper end where the Street is, operating margin above where the Street is. Maybe just talk about, one, what's incorporated at the low and the high end of the sales guidance range, what's in the gross margin that came just a hair below where consensus was. And then operating margin, you're clearly getting good OpEx leverage, again, what's in there?

Yes. So I think when you think about guidance, there's a couple of different things in there. So first and foremost, what is now excluded in that number, the raw top line number is our non-CGM business, with the expectation that, that comes out of the business. So there is an assumption there. In terms of that growth, it does assume another year of record new patients. So I think global record new patients. I think you can presume that there it does, when Kevin said a modest contribution from our non-insulin product, our 15-day product, we assume about 1 point of revenue associated with that. So that gives you some context around that. And the rest is healthy growth really across the board in basal and the intensive population globally. As you move down the line, you think about gross margin, if you rewind back to 2023, we really started 2023 with a 62% to 63% gross margin, and we're going to outpace that this year. Some of that is just due to the timing of transition from G6 to G7. So Kevin alluded to it earlier. The expectation is, as we move through that transition, there's a little bit of that. So some of that's embedded. It doesn't change our long-term plans. Ultimately, we are on track for the cost profile we would expect on G7 at $10 sensor. And I would expect us to continue to make progress. There is no 15-day intensive insulin or G-Series product assumptions on gross margin in there. So hopefully, that's a little bit helpful. And then the continuation of leverage through the P&L, I think you'd expect to continue to see us do that. We had a really strong year in 2022, 2023 in terms of driving leverage. That leverage continues as we move into 2024.

Maybe we could shift to that 15-day sensor because you unveiled -- we knew it was coming. You unveiled the product a little more completely today. You said you filed it in the fourth quarter. Let's start with one -- within that 1% of sales, are we thinking that has reimbursement, no reimbursement? Is it all out of pocket? And just any kind of P&L metrics?

We're starting with cash pay. And our assumption right now is it will be cash pay primarily over the 6 months. We will eventually seek reimbursement for a product in this category. We think it would be very useful. But the product does have different feature sets and quite candidly, it meets a different need, somebody on intensive insulin therapy, this is life and death. For these individuals, it is help. And so we're not sure where that pricing model works out over time. I can envision possibly a different reimbursement model. But we need to go down through the data. We produce studies, Robbie, with people in the type 2 space where we've demonstrated numerous times with UnitedHealthcare, with Intermountain Healthcare, with studies of our own, the CGM saves the system $400 to $500 a month in this type 2 patient group. So what we want to do is get this product out there, get it on people and then start discovering what outcomes that we can. On the profitability side, in all fairness, this is a launch of a brand-new technology and a brand-new market and a brand-new product. And if somebody came to my office and said, we're going to make money, I'd fire them. We need to invest, and we need to spend and we need to grow this thing, and that's exactly what we're going to do, and that is baked into the operating margin improvement. That's what we plan on doing for this year.

I didn't see a launch price up there. But your competitor, cash pay, my understanding is around $800, $900 a year plus or minus. Is that a good ballpark to be in?

We'll be competitive. We'll do what we need to do to be competitive.

Now guidance doesn't include a 15-day sensor for the G Series. Maybe talk about why you can start with a nonintensive 15-day sensor first. What has to happen for a 15-day G-Series? And you said it's not including guidance. Is it possible in '24 to see it?