Dexcom Inc

NASDAQ:DXCM

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the DexCom First Quarter 2023 Earnings Release Conference Call. My name is Abby and I will be your operator for today's call. [Operator Instructions].

I will now turn the call over to Sean Christensen, Vice President of Finance and Investor Relations. Mr. Christensen you may begin.

[Sean Christensen, Director, Corporate Affairs & Head of IR]

Thank you, Abby and welcome to DexCom's first quar 2023 earnings call. Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO who will summarize our recent highlights and ongoing strategic initiatives followed by a financial review and outlook from Jereme Sylvain, our Chief Financial Officer. Following our prepared remarks we will open the call up for your questions. At that time we ask the analyst to limit themselves to one question so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our first quarter performance on the DexCom's investor relations website on the events and presentations page.

With that, let's review our Safe Harbor statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to DexCom and are subject to various risks and uncertainties. And actual results could differ materially from those anticipated in the forward-looking statements.

The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-K, most recent quarterly report on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results.

Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash-based results. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to our tables in our earnings release and the slides accompanying our first quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure.

Now I will turn it over to Kevin.

[Kevin Sayer, Executive Chairman, CEO & President]

Thank you, Sean, and thank you, everyone, for joining us. Today, we reported another excellent quarter for DexCom with first quarter organic revenue growth of 19% compared to the first quarter of 2022. Momentum for global CGM adoption remains very high. and we continue to see a growing appreciation for the differentiated experience that DexCom provides. It has been an exciting start to 2023. Our teams advanced some of our most important strategic initiatives in the first quarter that will continue to build on our foundation for growth in the years ahead. There is growing momentum behind the rollout of our G7 system as we initiated our full launch of G7 in the U.S. This launch represents years of hard work to bring to market a product based on feedback from our customers that meets their specific needs. .

G7 is the most accurate CGM on the market. It is simple to use and is supported by the most covered CGM brand. We expect this differentiated feature set will add to our leading customer satisfaction metrics. We were thrilled with the opportunity to announce this launch on the biggest stage with our second ever Super Bowl commercial. Over 100 million people were watching the game on our commercial air and the customer clinician outreach that filled was incredibly encouraging as we expected it would be. The ad generated 3x as many impressions for DexCom as our 2021 Super Bowl commercial, exceeding our initial expectations on engagement and awareness.

We also heard from members of the diabetes community who shared their DexCom magic moments and pride in feeling represent on a platform of this size. Awareness remains a critical element to driving broader access and adoption for CGM, and we designed this campaign to demonstrate the life-changing potential of our system and a G7 product is incredibly simple to use. Millions of people with diabetes to not use CGM, and this provided us an opportunity to both connect with them and advocate on their behalf. While we are still early in our U.S. launch of G7, we have been very encouraged by the initial response. We have seen a steady ramp of new users and the initial feedback from both customers and clinicians has been consistently great.

We have also seen this product attracting new prescribers altogether. Already in the early weeks of this rollout, nearly 1,000 health care providers have prescribed G7 who previously were not prescribing DexCom CGM. Perhaps most encouraging is the progress we have made in building reimbursement for G7 in only a short period of time. Medicare coverage was established for G7 only days after our Super Bowl commercial, which coincided well with the timing of our launch and came in about a month earlier than anticipated.

We also finalized our commercial DME contracts relatively quickly and G7 commercial DME coverage is now already on par with G6 levels. Commercial pharmacy coverage has also progressed rapidly. In our reimbursement discussions, payers are clearly recognizing the value proposition that exists with DexCom G7. As a result, we already have more commercial pharmacy coverage established for G7 today than our competitor does for their sensor platform. Payers continue to value our premium feature set, leading customer engagement metrics, best-in-class performance and proven outcomes backed by robust clinical edits. Overall, we have advanced coverage more quickly than anticipated, and we expect G7 to be covered by all major PBMs by the end of the second quarter. These coverage decisions for G7 also position us well as our industry takes a significant step forward in terms of access for CGM.

In early March, CMS finalized their proposal to expand access to include people with type 2 diabetes using basal insulin only as well as certain noninsulin-using individuals that experience hypoglycemia. With coverage officially kicking in last week, this decision represented the largest single expansion of access to CGM in our industry's history. As a reminder, we size the basal-only type 2 population alone at around 3 million people in the U.S. with around half being of Medicare age. We are incredibly excited to start serving this population more broadly going forward as we see a significant opportunity to help these individuals live healthier lives.

Our mobile trial demonstrated meaningful improvements in timing range, A1c levels and hypoglycemic events among this population wearing DexCom sensors, as sensor engagement proved to produce behavior changes within this cohort that supported greater glycemic control. We are in a great position to compete as this market develops as accuracy, performance and customer engagement will continue to be the defining features of delivering outcomes.

Customers and clinicians have historically indicated a preference for a differentiated product where reimbursement exists, and we expect this dynamic to endures access continues to expand. Along those lines, we will continue to leverage our mobile data as well as the updated ADA standards of care to build broader coverage. We are in active discussions with private payers in the U.S. to establish basal reimbursement and will similarly advocate for broader coverage in international markets.

Our international G7 roll at also continues to go well with good initial uptake and high customer satisfaction rates. Majority of our international G7 customers continue to be new to DexCom altogether, suggesting the new form factor and feature set is attracting both people new to CGM as well as those using competitive systems. We view this as a very positive sign as we broaden our rollout in the coming months.

In the second quarter, we will be launching G7 in 8 new international markets as part of our strategic effort to get this product to as many peel as possible. From a capacity perspective, we remain in great shape to support this broader rollout. We are ramping up production quickly and have plenty of G7 inventory on hand to support our growth ambitions.

Additionally, we expect our Malaysia plant to start producing commercial product around midyear, which will further support our G7 scale up. Finally, we look forward to seeing many of you in June at the American Diabetes Association's 83rd Annual Scientific Sessions in our hometown of San Diego, California. We are always excited to connect with thought leaders across the industry at this event, as we collectively work to map out the future of DexCom CGM technology in Diabetes Care & Beyond.

In conjunction with the conference, we are planning an investor event where we will provide our latest vision around the future of DexCom and share incremental detail on many of our key strategic initiatives. We hope to see you there.

With that, I will turn it over to Jereme for a review of the first quarter financials. Jereme?

[Jereme Sylvain, EVP, CFO & CAO]

Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will discuss on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as our IR website.

For the first quarter of 2023, we reported worldwide revenue of $741 million compared to $629 million for the first quarter of 2022, representing growth of 19% on an organic basis. As a reminder, our definition of organic revenue excludes currency in addition to non-CGM revenue acquired in the trailing 12 months. U.S. revenue totaled $526 million for the first quarter compared to $451 million for the first quarter of 2022, representing growth of 17%. We experienced another quarter of strong new customer starts in Q1, as we saw a continuation of steady demand for our G6 as well as an encouraging initial uptake of G7 with our launch in the final weeks of the quarter.

As Kevin mentioned, we'll be able to progress our commercial pharmacy coverage for G7 faster than anticipated in the quarter. This caused the impact of our bridge program to be around half of the $15 million level we expected as more customers were able to access G7 through reimbursed channels.

Accordingly, the impact on revenue from this program should continue to shrink going forward given our established commercial coverage for G7. International revenue grew 21%, totaling $216 million in the first quarter. International organic revenue growth was 27% for the first quarter. For another quarter, we continued to gain share in international markets in Q1 as customers have been responding well to our broad access initiatives and new product launches. As anticipated, DexCom ONE is having a growing impact on our results as this product has enabled us to enter new markets and compete much more broadly within existing markets. In the U.K. access to DexCom ONE was recently simplified with the addition of the products transmitter to the national formulary with the entire system now covered by the drug tariff, this reduces the administrative steps for clinicians in a market where we already have considerable underlying momentum. We will continue to work on delivering these types of wins, making it easier and simpler for customers to get reimbursed access to DexCom products.

Our first quarter gross profit was $469.8 million or 63.4% of revenue compared to 63.3% of revenue in the first quarter of 2022. Our first quarter gross margin reflects the traditional step down relative to what we see in the fourth quarter as we serve a greater mix of pharmacy customers and less contribution from our DME users with high deductible health plans. This was a better-than-expected Q1 result for gross margin as we delivered incremental efficiencies in our G6 lines while managing production for our G7 launch. However, we continue to anticipate gross margins for the full year in line with our original guidance as we scale our global G7 production.

Operating expenses were $391.2 million for Q1 of 2023 compared to $347.8 million in Q1 of 2022. Operating expense management continues to be an ongoing point of emphasis for our team as part of our broader cost efforts, and it continues to be on display this quarter. In line with our expectations, we generated over 250 basis points of OpEx leverage in the first quarter even as we allocated greater commercial investment to support our G7 launch. We are very proud of the efforts our team has made and continue to make on these efficiency initiatives. Operating income was $78.6 million or 10.6% of revenue in the first quarter of 2023, compared to $50.3 million or 8% of revenue in the same quarter of 2022. Adjusted EBITDA was $145.9 million or 19.7% of revenue for the first quarter compared to $112.4 million or 17.9% of revenue for the first quarter of 2022. Net income for the first quarter was $68.5 million or $0.17 per share. We closed the quarter with approximately $2.6 billion worth of cash and cash equivalents remaining in a great financial position.

Our balance sheet provides us with significant flexibility to organically support our ongoing growth investments, including the build-out of our Malaysia manufacturing facility and continually assess our strategic uses of capital. As Kevin mentioned, we are expecting our Malaysia facility to start producing commercial product around midyear, which we view as a pivotal moment in our global manufacturing journey. This plant will provide a significant new capacity and be a key element of our long-term growth and cost reduction plans.

Turning to guidance. We are raising our full year 2023 revenue guidance to a range of $3.4 billion to $3.515 billion. For margins, we are reaffirming our prior full year guidance of gross profit margins in the range of 62% to 63%, operating margins of approximately 16.5% and adjusted EBITDA margins of approximately 26%. The increase of approximately $38 million at the midpoint of revenue guidance reflects our increased confidence in the business and the underlying market. This factors in our strong first quarter results as well as a benefit from CMS finalizing type 2 basal coverage earlier than originally anticipated.

With that, I will turn it back to Kevin.

[Kevin Sayer, Executive Chairman, CEO & President]

Thanks, Jereme. I would now like to open up the call for Q&A. Sean?

[Sean Christensen, Director, Corporate Affairs & Head of IR]

Thank you, Kevin. [Operator Instructions]. Abby, please provide the Q&A instructions.

[Operator]

[Operator Instructions]. And we will take our first question from Robbie Marcus with JPMorgan.

[Robert Marcus, JPMorgan Chase & Co.]

Congrats on a great quarter. Maybe to start, the focus is all on the type 2 basal expansion that just started at the beginning of last week. Maybe speak to the expectations and cadence of what's in guidance here what the initial -- what do you think the initial reception and awareness is and how much you and your other CGM competitor have to do to educate the market. And then maybe on the back of the Super Bowl ad, what you think is the patient awareness and also acceptance to wearing a CGM full time is for type 2 basal.

[Jereme Sylvain, EVP, CFO & CAO]

Thanks, Robbie. This is Jereme. Appreciate that. In terms of guidance, maybe I'll start there and then I can turn it over to Kevin in terms of thought process around wear times. In terms of guidance, we had talked about basal prior to approval if it started in the middle of the year being about 1%. And our updated guidance has us higher than 1%, certainly more in that 1.5-ish percent range, but not necessarily changing integer. So hopefully, that gives you some context to where that's going. Certainly, we expect it to be a market change in terms of what I would say is reimbursement for the longer term. In terms of adoption, we're obviously just getting in those approvals and just getting in the reimbursement. So it's going to take a little bit of time for us to ultimately see how that cadence of adoption is. But you've got our expectations. And over the long term, we expect adoption to be, quite frankly, very, very positive. Maybe I can turn it to Kevin in terms of awareness in the channel and in kind of where times longer term.

[Kevin Sayer, Executive Chairman, CEO & President]

Yes. Thanks, Jereme. With respect to wartime our best plan of reference is our mobile study that provided the really most important data in securing this approval. Over 90% of the individuals who were sensors during the study they want to give them up. They felt the information was very valuable, very useful and provided them very much a scoreboard and how they can manage their diabetes going forward. So it doesn't progress and they could have much better outcomes. And so we're very confident with the full-time were. From an educational perspective, we do have some work to do in the PCP community. We did a big sales force expansion last year in anticipation of going more broadly, we continue to evaluate our marketing and our full on direct distribution efforts to see what adjustments need to be made to create more awareness. We work very hard with our channel partners and believe we are in a very good position with them to go take on this front. So it's about creating awareness. It's about making it easier for patients to get their product and use it. I've been out in the field a few times.

And the one thing I'm definitely hearing as I speak with a lot of the primary care physicians who are going to serve this market is G7 is so much easier to use and so easy to use versus G6, they view this as a very real and a very strong opportunity for their patients to achieve better outcomes. So we know we have the right product. We'll just work on creating awareness at the proper places to get it out there. But we're comfortable that people will wear it all the time once they get started.

[Operator]

And we will take our next question from Jeff Johnson with Baird.

[Jeffrey Johnson, Robert W. Baird & Co.]

So Kevin, I heard you talk about or Jereme, I guess, probably it was you who talked about the Bridge program and kind of half the impact of that you thought originally in 1Q. You didn't hear anything on the cash pay program, we're starting to see on GoodRx and Amazon Pharmacy and that some of these price points roll out in the $170, $180 range per month for your product. Just any updated thinking what are the initial responses you're seeing to that cash pay program, how additive do you think that could be to revenue this year? And how to think about the margin implications at those discounted prices?

[Jereme Sylvain, EVP, CFO & CAO]

Sure. Yes. Thanks for asking the question. So you obviously updated the Bridge program. The Bridge program is where a significant amount of folks are taking advantage of it. That price point is a little bit lower at this point. And great news, of course, is the coverage has come in a little bit earlier. And so certainly, we haven't had to have folks take as much advantage of it. In terms of those cash pay programs, we have seen some encouraging initial adoption, but it is relatively initial. So as you see those start to come through, longer term, we think it can be additive, and we believe it will be. In the shorter term, it's really not a material contributor, but longer term, again, Jeff, we're very excited about what this opportunity offers to folks. Longer-term margins perspective, we feel good about the pricing in those cash pay programs. We don't expect it to have a long-term drag on margins. .

As you've seen in the quarter, we continue to do really, really well on designing cost out of our product, and we'll continue to work on doing that both with G6 and G7 to where these programs won't necessarily be dilutive to our long-term gross margin.

[Operator]

And we'll take our next question from Larry Biegelsen with Wells Fargo.

[Lawrence Biegelsen, Wells Fargo Securities]

Congrats on a nice start to the year here. Jereme, 2 parts for me. I mean, the first quarter was about 20% if you back out the bridging program the guidance, 17% to 21%. Can you talk about the cadence through the year? And is there any reason why growth wouldn't accelerate from Q1 with G7 and the basal launches -- and just separately, what was volume in the U.S. volume growth? People are going to compare and contrast your, call it, 18% growth in the U.S. adjusted for the bridging versus Abbott's 50%? Just any color on what you think is going on there.

[Jereme Sylvain, EVP, CFO & CAO]

Sure. Yes, I'll start with the volume question first. Well, we're not necessarily disclosing volume specifically in quarters going forward. What we can say is our patient base, if you look at where we were exiting 2022. Our patient base grew in the mid-30%. And so as we've talked about what that patient base looks like when we disclose patients, and we'll do that every year, so folks have an understanding. That continues to play through. To give you some context to the first quarter, the first quarter was a record for new patients. And so our unit volume growth continues to be very strong. So as you compare the 2, we feel very good about our unit volume growth relative to competitors, and we'll continue to feel good about that for the balance of the year.

In terms of how to think about the cadence of the year, I do think the cadence of the year will be a little bit heavier weighted into the back half relative to prior years. That's just given the timing of the basal approval and as that starts to get going. But as you think about Q2, we are -- we do recognize where The Street is today, and we realize that number will have to go up a little bit. And so as the overperformance you see in Q1, certainly record new patients, that will play through into Q2. And so you'll see some of the increase in guidance that is specifically related to some increase in expectations in Q2 performance. So hopefully, that covers your questions.

[Operator]

We will take our next question from Matt Taylor with Jefferies.

[Matthew Taylor, Jefferies]

So I wanted to ask you one about just how quickly the coverage has been established in the DME and the pharmacy channel. I thought it was an interesting comment that you made that you think you have more coverage in pharmacy than your competitor. Maybe you could compare that and talk about what that means for ultimately how much of the basal opportunity you think you can garner?

[Kevin Sayer, Executive Chairman, CEO & President]

Yes. This is Kevin. I'll take that, and Jereme can add a bit afterwards. On the basal opportunity, remember, Medicare sales process is durable medical equipment, and we have very good relationships with our distributors and in that channel, and we worked very hard to position them to be successful with the basal patients. And so we're very comfortable there.

With respect to our coverage, I think it's important to note our approach here. Our goal is to minimize the out-of-pocket cost of our customers. And by getting all this coverage, we've repeated the statistics several times, 30% of Dexcom users -- commercial users to go the pharmacy have 0 co-pay, and 70% have lower or at least equal to co-pay as our major competitor. Our goal is to get them through and to get them covered rather than rely on the bridging program forever. And our team is very successful and getting us through that. The bridging program is still out there, and it's still open, but many of the customers go to the drug store and don't need it. We've got that pharmacy coverage in place, which creates an opportunity then for them to spend less on a monthly basis, and it's very important to our users. That's why we've approached this coverage very aggressively. In all fairness, we've talked about G7 long enough, the payers were ready to have discussions. We were met with open arms. They're very excited at the opportunity to have this new product and in front of them again.

[Operator]

We'll take our next question from Margaret Kaczor with William Blair.

[Margaret Kaczor, William Blair & Company]

Kevin, I don't want to get too far away from basal which clearly a huge driver in the short term and where a lot of focus is. But I guess, can you give us some of the context on the steps that you're taking today to drive adoption and to even earlier stage type 2 patients, whether GLP-1s or orals and -- is this going to require a clinical data? Are you guys working on that? Or are the partnership programs, I guess, at this point, sufficient upscale where coverage can broaden, I guess, without something like a mobile study?

[Kevin Sayer, Executive Chairman, CEO & President]

We are working on all fronts there, Margaret. Thank you for the question. We see tremendous benefit to as type 2 diabetes treating gets more sophisticated. It's -- I was with the physician recently, and he talked about CGM being the scorecard. How do you do this? And how do you aggressively treat type 2 diabetes without knowing the scorecard and what's going on GM offers a tremendous opportunity. It offers an opportunity to reduce or increase medications for individuals who aren't succeeding and bring A1Cs down significantly in combination with therapies. We think it will become a vital part. We'll continue to gather data from programs like we have done in the past. We're contemplating studies but nothing we're ready to publish or announce. We don't announce our studies early on. We like to wait till we get done. But we are contemplating and seeing study proposals that could provide great data. The question is, do we want to go do 100,000 type 2 patient study and it takes 3 years, not right now. We don't think we need that type of evidence, but there is a very strong body of evidence in all of the individuals that we've seen that are on insulin that show CGM, again, provides a great benefit when you're using a DexCom sensor where you can rely on the acre information, and you can use it. So stay tuned on that market. We'll talk more about it in the future. But it is coming. We believe we play a vital role there in spite of all these advances that we're reading about.

[Operator]

We will take our next question from Matthew O'Brien with Piper Sandler.

[Matthew O'Brien, Piper Sandler & Co.]

Jereme, can you talk a little bit more about the pricing commentary that you just made? I think you said volumes up in the first quarter in the 30s, but yet overall, and this is a domestic question. overall, up 17%, 18% in total. So that would mean pricing came down quite a bit. Is that a trend we should anticipate? And then with your competitor take pricing up, are you really just trying to close the gap entirely here and just be done with this pricing delta between the 2 of you?

[Jereme Sylvain, EVP, CFO & CAO]

Yes. I appreciate the question. And that's not what I was necessarily trying to and I was talking about is our underlying patient base is up in the mid-30s. And that was based on the patient base we gave you as part of our kind of pegs we give you once a year. I wasn't necessarily coming on specific volume within the quarter. But what I would say is the volume in the quarter was relatively -- it was robust. It was another good quarter for us, and it was on the backs of a record new patient add. So I didn't want to get into specifics on volumes. What I can tell you, just in generalities around price. Price and volumes do tend -- are continuing to converge over time. That is us moving less from pharmacy -- I'm sorry, from DME to pharmacy, that channel has started to stabilize quite a bit. There is still some annualization going on. So make no mistake, we are still going through that annualization plus we have the -- what we talked about earlier, which is the bridge program playing through. albeit to a lesser extent. So the prices up is moving how we would have expected. So I won't really trying to insinuate that there was an increasing delta between the 2. I was just trying to give some context around a strong, robust underlying patient base for the quarter. So I didn't want to read too much into that, and I apologize if you gave you the wrong impression.

[Operator]

We'll take our next question from Danielle Antalffy with UBS.

[Danielle Antalffy, UBS]

Congratulations on a good start to the year. Just that -- I'm going to try to ask this question qualitatively, Kevin, because I appreciate you guys are going to give us an update in 2 months here at ADA. But as we look at the basal opportunity, we were kind of thinking of looking at insulin intensive type 2 as a proxy there. And I guess my question for you is, it looks like insulin-intensive type 2 is ramping to 50%-plus penetration around 5 years after securing Medicare coverage I mean, is there any reason to think that could be true as well for basal and arguably could basal ramp even faster given that we are significantly ahead of where we were in 2018 from a technology, from an awareness perspective. Anything you could say around that without front-running the Analyst Day?

[Kevin Sayer, Executive Chairman, CEO & President]

No, it's a good question, and it's one we discuss a lot internally. Remember, to start reimbursement with Medicare patients only, and that's about half the population. It has always been our experience that we've got to drive reimbursement from the private payers as well and then through the Medicaid programs also to get extensive penetration and with type 2 intensive insulin therapy. We're now pretty much there across most of the payer landscape. A bit of work to do on the Medicaid side still, but we're there with Medicare and the private payers. So you'll see reimbursement evolve early on, and we get more coverage. And then I think we've got to generate these experiences with these users over time. Danielle, but in a 5-year period, I can definitely see that. And maybe it does go faster because we have such a large group of end users who are going to have reimbursement on the Medicare side. At the same time, they're not all seeing endocrinologists. So we've got a broader base of education with respect to their health care providers that we have to cover as well. So we'll factor all that in as we go, and we'll talk more about it later. But those are all the factors we consider as we look at it.

[Operator]

We'll take our next question from Jayson Bedford with Raymond James.

[Jayson Bedford, Raymond James & Associates]

Just two quick questions that require short answers. Jereme, you mentioned I think 1Q was a record for new users. Just a little clarification there. That was for -- it was a 1Q record? Or are you saying that you added more new users in 1Q than you did in 4Q?

[Jereme Sylvain, EVP, CFO & CAO]

We've added more users in 1Q than we ever have in any quarter in DexCom's history.

[Jayson Bedford, Raymond James & Associates]

Very clear. And then, Kevin, I was intrigued by your comment around actively talking to payers in Europe around basal reimbursement. I'm just kind of curious, is this something that you would expect in '23? And if not, is this something that could happen in '24?

[Kevin Sayer, Executive Chairman, CEO & President]

It will take time. It's not going to happen overnight. Our outcomes data that we provided with the mobile study gives us a good first pass. I think as we see success with users in the United States and we see outcomes and possibly gather more economic data as we work some of these patients. It's going to require that type of evidence. So we don't have -- I don't think we have enough yet personally, the team may disagree with me, but I think we need to develop more. But certainly, it's on the table. And it's certainly something we can now discuss because when CMS approves the policy of this nature, the world takes note. And so we are now getting audiences to discuss that internationally, and we'll continue to push.

[Operator]

We will take our next question from Joanne Wuensch with Citibank.

[Joanne Wuensch, Citigroup]

Nice start to the year. I want to make sure I understood this new user comment. I'm going to assume that, that also includes DexCom ONE patients that are in there. that might be adding to the difference between the dollar growth and the user group. And then I'm curious in how many countries DexCom ONE is in currently?

[Jereme Sylvain, EVP, CFO & CAO]

Yes, sure. It does include DexCom ONE user. So this is the entire group. DexCom ONE is now, and I want to say it's about 12 countries, 10 to 12 countries. I'm trying to do the math in my head across all. It's about 10 to 12. We're starting to really see some uptick in some of those smaller countries that we initially launched. And then, of course, some of the bigger countries where we have coverage like the U.K., we're also seeing some nice uptick as well.

[Operator]

We'll take our next question from Cecilia Furlong with Morgan Stanley.

[Cecilia Furlong, Morgan Stanley]

Just a quick follow-up on DexCom as well. I know you talked about entering the year, thinking about 1/3 of new patient starts, OUS, stemming from DexCom ONE. Just curious if you could talk about where you are right now in 1Q? And then as you think about geographic expansion contributions to that going forward through the year, just your expectations there as well?

[Jereme Sylvain, EVP, CFO & CAO]

Yes, sure. So I can answer that. The expectation still is 1/3 of new patients. And as you can see, some of the encouraging things, for example, with the U.K. formulary decision to include transmitters, on there just makes it easier. And so the way easier we can make it, the easier it's going to be. So that's still our expectations. And right now, a majority of the DexCom ONE product is sitting in the EU region. So when you think of geographies, think of the European region, including the U.K. in that as well, where I think you'll expect to see most of the growth associated with DexCom ONE and really most of the growth for the foreseeable future until we can launch in other jurisdictions meaningfully across the world.

[Operator]

We will take our next question from Matthew Blackman with Stifel.

[Mathew Blackman, Stifel, Nicolaus & Company]

Another international one for me, just curious for an update on Japan now that you've got a broader reimbursement with G6. Can you really just give us a sense of how much that business is annualizing at and how important a component it is in your 2023 outlook?

[Kevin Sayer, Executive Chairman, CEO & President]

Yes. This is Kevin. I'll take it. It's still a relatively small component in our 2023 outlook. We are working with our partner, Terumo, there and with the broadened coverage we'll obviously see an increase, but it is not a material part of our plan this year. We're looking forward over time to getting G7 launched over there. We think G7 provides us a quite candidly a stronger opportunity in the Japanese market with all of its great features. We've grown a bit in Japan, not as much as we'd like. And so as we look at the year, we're looking at ways to go faster. G7 will be one of those. And be a bigger part of our '24 plan than it is '23 substantially.

[Operator]

And we will take our next question from Marie Kibble with BTIG.

[Marie Thibault, BTIG]

You started the call by describing how much prescribers seem to like the G7 format and that you had new prescribers coming on to DexCom. I just want to clarify, are these competitive wins are these prescribers coming completely new to CGM. And then how much of the launch or the intro is complete as and how many of the potential prescribers have you been able to get G7 in front of?

[Kevin Sayer, Executive Chairman, CEO & President]

Yes. This is Kevin. I'll take that. We have a lot of prescribers to go for G7 because it's going to be a very broadly used product, particularly as you look at the basal opportunity we have. ahead of us. We know we have new prescribers we have to gain and we structured our sales force and designed their workflow and goals for the year to, in fact, go after and to go educate those that we need to go to. A lot of the prescribers who are prescribing G7 could, in fact, be new to CGM. What we do know is they're new to DexCom and that's what's most important to us. So if they're new to DexCom, it's 1 of 2 things. Either they're new to CGM in general or they've come after using competitors' products, both of which we view are good. And with G7, again, the excitement in the doctor's office is the ease of use. It is just so easy to use and so easy for somebody to get started on G7 with a 0.5 hour warm up with the easy insertion with a small form factor that we have. If a patient chooses to use a receiver, that receiver experience is much better than what they've had before. We really are getting great feedback on the new receiver and the accuracy of the system. The system, what we're hearing back performs extremely well, and people are very happy with what they're seeing. So word of mouth has been very strong on this product. Our campaigns have obviously been aggressive, but the strength of the product has supported what we've said.

[Operator]

We will take our next question from Travis Steed with Bank of America.

[Travis Steed, Bank of America Merrill Lynch]

I guess, I wanted to touch on margins. Gross margin in Q1 was actually above the full year guidance. So I want to understand the bridge on gross margin? And then maybe talk a little bit about OpEx leverage while we're on the margin topic and maybe the potential to see upside longer term above that long-term margin guide.

[Jereme Sylvain, EVP, CFO & CAO]

Sure. Yes, thanks for the question. You're right, Q1 came ahead of expectations. And what we saw was we really saw continued efficiencies on our G6 lines that really played through in the quarter. which certainly is favorable. And given there's a large portion of our base, of course, that sits on those G6 lines that played through. So it was ahead of the full year. We do expect, as more and more folks move to over the course of the year as we're turning on Malaysia, ultimately ramping up our G7 launch and therefore, the throughputs on those lines. We will go through a bit of a margin dip as we make that transition. And so I still expect that over the course of the year, we still do expect the year to fall in line with the 62% to 63% gross margin. But you are right, Q1 came in strong. And I think it just -- just shows the capabilities of our teams. When you give them time what they can do in terms of designing cost out of product on manufacturing lines. We expect something similar to like that to happen on G7 into those future years.

In terms of margin profile, operating motion profile we gave the long-term guide certainly of getting to 20% margins by 2025. If you assume the year was at 65% gross margin, we're starting to get pretty close to there even in 2023. And that just goes to show you the leverage we're building into the business. While we're not in a position to change our long-term guide.

To your question, do we think that there's opportunities to lever this business over the long haul -- we do. And we're putting the levers in place in right now that's part of what we're doing as an organization. So we're very excited about that opportunity. I'm glad you pointed it out. We do believe there's opportunity in this business longer term to continue to generate more profits and we'll continue to work on doing so.

[Operator]

We will take our next question from Chris Pasquale with Nephron Research.

[Christopher Pasquale, Nephron Research]

I want to ask a couple of questions about the middle of the income statement. SG&A grew quite a bit faster than sales this quarter. Just was there anything specific that drove that. And then R&D spending has been down year-over-year now four quarters in a row. Should we expect that trend to continue? Or does it start to ramp back up as we go through this year?

[Jereme Sylvain, EVP, CFO & CAO]

Yes, it's a good question. It's really a function of timing. So I'll start with R&D. R&D, if you think about this time last year, we were wrapping up a lot of the work around G7 as well as wrapping up a lot of the work on prototype lines for development. And so what you saw running through the P&L was an elevated period of spend. And as you saw it go through the rest of the year, you saw R&D kind of come back down as those G7 costs started to either dissipate or move up into different areas of lines because you validate those lines as much anymore. And so you saw that change happening. Over the course of the year, I would not expect that type of leverage on R&D. We'll still continue to leverage it as a percentage of sales, but it won't be what you saw in this quarter. It's just the inverse for SG&A. So we -- obviously, last year, we did not have a Super Bowl commercial or a G7 launch in the first quarter. This year, we did in the U.S. And so you saw an elevated level of spend associated with that, which we expected in coming out with our long-term guide. It was all expected, but that's why you saw the change.

The other part is you do see the Malaysia costs as we're building up that factory, we're getting closer to go-live and so we're ramping up costs. But until we go live, those costs sit in G&A. So what you'll see is the -- we'll start to actually leverage SG&A a little bit more as the year goes on. And conversely, we'll leverage R&D a little bit less, but it still ultimately leads to leverage by the end of the year across both of those lines.

[Operator]

We will take our next question from Matt Miksic with Barclays.

[Matthew Miksic, Barclays Bank]

Some follow-up here on the basal opportunity. So clinicians we speak to describe something like a fair amount of pent-up demand in this community of Medicare patients on -- basal patients. If you -- just wondering if you have any sense of how long -- that's the way you are also seeing the set up? Like how long do you think it will take to work through that pent-up interest in the community? And then just if I could also on pricing and margin for this category, given that we're talking about sort of mix factor for all these different types of channels that you manage. What is this -- how does this compare to your sort of core business or maybe some of your other channels in terms of margins and pricing and mix?

[Kevin Sayer, Executive Chairman, CEO & President]

Yes, I'll start, and then I'll let Jereme go from there. We do see pent-up demand, and we do see people very excited for this opportunity. We've got to get as I said earlier, we worked very hard with our channel partners to prepare and so we're ready for that with our DME distributors to handle the influx of users that will come through that. With respect to pricing in models, Jereme can go a little more specific, again, this is the same Medicare pricing that we have in our Medicare business for those who are on intensive insulin therapy. So the only thing that would change is a larger portion of our patients could become Medicare patients and subject to Medicare reimbursement. And on an overall basis, Medicare is very favorable for us. So we're in a very good position there. with these patients. We're very excited to serve them. Jereme, do you want to add to that?

[Jereme Sylvain, EVP, CFO & CAO]

Yes, I think that's exactly. I mean, at the end of the day, it depends on what the reimbursement would come through at that will ultimately determine margins. Thus far, the reimbursement has come in generally in line in a favorable manner. Over the long term, we'll keep an eye on what that reimbursement looks like. And then we'll have that conversation to make sure you guys understand where this is going. But all throughout this process, we'll be looking at -- we'll be looking at reimbursed, and we'll also be looking at how we deliver our products at what we to be a lower cost. And so that will be our way of helping manage through that as well.

[Operator]

We will take our next question from Kyle Rose with Canaccord.

[Kyle Rose, Canaccord Genuity]

Great. Good evening, everyone. I guess I'll be the guy that asks what's next when you're in the early stages of a new product launch. But just wondered if you could set some expectations with respect to extending the days of use as well as adding back some of those software features that you pulled at the request of the FDA in the second half of last year, just help level set expectations for R&D on a go-forward basis here.

[Kevin Sayer, Executive Chairman, CEO & President]

Why don't I start on the software side. We've made significant investments in software. We'll be adding back, for example, the -- we shut the alarms off feature for up to 6 hours in the U.S., certainly before the end of the year. That feature will be added back to the app. And we're looking for a steady stream of upgrades to the app over the course of time. What you're going to see from our software team is continual upgrades and launches on a much more regular basis than we have in the past. Part of G7's engineering was to create a software platform that we could do more with and that we can upgrade much easier than we have done in the past. So that feature will be back before the end of the year, and we're excited for that as our -- as our users.

As far as what comes next, the #1 initiative in our R&D group is to get those extra days of sensor wear out there. As we've talked about this publicly, we've got some work to do on the patch. We have a new patch that we're going to put into manufacturing and it's a new manufacturing processes there, and we have a couple of other programs that we know can extend the life and make it better.

What we struggle with and the reason we started 10 days is we want the appropriate reliability experience for our users and what they expect. By upgrading the patch and a couple of other changes, we're quite confident we can be there. And you'll see that life extended here in the not-too-distant future. It is our #1 priority, and our team is making very good progress.

[Operator]

We will take our final question from Steve Lichtman with Oppenheimer.

[Steven Lichtman, Oppenheimer]

Guys I was wondering on -- as we think about the LCD, obviously, a lot of focus understandably on basal-only I was wondering how you're thinking about the opportunity within the noninsulin-using patients. I understand it's going to be a subset based on the LCD and hypoglycemia risk. But the overall numbers are very high. So just curious how you're thinking about that? And are you approaching commercial pay there as well?

[Jereme Sylvain, EVP, CFO & CAO]

Yes, it's a good question. Maybe I can start, and then certainly, Kevin can fill in. Obviously, massive market. And within that market, there's different use cases as you kind of go through the acuity, even the subacute within that market. So we are thinking about it from multiple different levels. from a combination of a few different areas. One, is it an area where we want to reimburse were we worried about hypo? Is there a software change we need to make to target maybe a hyperglycemic approach. So we're thinking about how to either fit form software and product feature and/or does the existing product makes sense, which, again, in many cases, we think it does. So we are working with payers and thinking about how we go after that market.

In terms of price point and use cases, I think that's the 1 we're still working on because the acuity level may be different. There may be someone who's kind of moving more on the acute side that's going to want to use it very similar to a basal or an intensive user, where it's going to help maybe reverse the progression of the disease as opposed to someone that's maybe more diagnostic on the front end to help maybe curb changes earlier on. That's something we are working through. I think there's going to be a bunch of different use cases. So it's hard to model that price out because I think it's going to be different based on who exactly is using it and what stage of the disease state they're in. Kevin, any other thoughts?

[Kevin Sayer, Executive Chairman, CEO & President]

No, Jereme, I think you've hit it very well. It is a different market, and it will be a different use case. And it's up to us to determine the proper value equation for that somebody is getting what they expect to be paying for. And the problem isn't as severe as somebody is integrated with an AID system.

On the other hand, the results can save the system as much, if not more, money over time. So we're looking at that balance and looking at how best to position our technology in that market. But we're very excited to address it in the future.

[Operator]

And ladies and gentlemen, that concludes our question-and-answer session for today. I will now turn the call back to Mr. Kevin Sayer for closing remarks.

[Kevin Sayer, Executive Chairman, CEO & President]

Listen, I want to thank everybody for listening today. This was a great quarter for us, record new patients, a great beat on the top line, continued leverage on our -- on the operating expense line in general, based on what we know, given the fact that it's the first quarter of the year, we couldn't be happier here, and it's going to be a great year for DexCom. Thanks for listening. Have a great day.

[Operator]

And ladies and gentlemen, this concludes today's conference, and we thank you for your participation. You may now disconnect.