Dexcom Inc

NASDAQ:DXCM

Earnings Call Transcript 2021-Q3

[Sean Christensen, Head of Investor Relations]

Thank you, Operator. And welcome to DexCom's Third Quarter 2021 Earnings Call. Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will provide a summary of our progress on our third quarter highlights and strategic initiatives, followed by a financial review and outlook from Jeremy Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions.

Our Chief Technology Officer, Jake Leach, will also be present with us for the Q&A period. We ask the analysts 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 third quarter performance on the DexCom 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, expectations, and assumptions 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, 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 for materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-Q. 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 the tables in our earnings release and the slides accompanying our third 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, Chairman, President and CEO]

Thank you, Sean. And thank you, everyone for joining us. Today we reported another strong quarter for DexCom with third-quarter revenue growth of 30% compared to the third quarter of 2020, and 28% growth on an organic basis. This revenue growth rate represents continued momentum per DexCom CGM adoption around the world as we once again achieved a record quarter of new customer growth.

The third quarter also saw several strategic accomplishments across our teams that laid the foundation for our future growth opportunities. In the U.S., we received FDA clearance for 2 key software solutions that continue to differentiate our connected products from those of our competitors and position us as a partner of choice across our healthcare and wearable’s ecosystem.

First in July, we received FDA clearance for our real-time API. For those of you who are not aware an API is the tool that allows one app to connect with another app. prior to this clearance, our customers and clinicians could only utilize our retrospective API, which integrated DexCom data into third-party apps on a three-hour delayed basis.

We believe that by putting the power of choice at our user’s fingertips with Reopine data, we can help ease the daily burden of diabetes management and significantly improved quality of life for our customers. This tool will be available to partners invited by DexCom. And we already have several that will began the development process to enable real-time displays for their communities.

This includes Garmin. Which became the first partner to launch apps connected to our real-time API 2 weeks ago, bringing DexCom ratings into their portfolio of wearable’s and cycling computers? Second, on the heels of the real-time API clearance, we received FDA clearance in August for the DexCom app and app module.

This module was specifically designed for people with non-intensive type 2 diabetes and can directly integrate into another third-party healthcare app. With the integrated DexCom app, it is now even easier for our partners to access and display our CGM data, enabling single app solutions that simplify the experiences for DexCom users.

United Health Group became our first partner to launch the integrated DexCom App and app module in late September, bringing the embedded app into their level 2 diabetes care program. Our connectivity software and data infrastructure solutions are a core strength of DexCom. These two recent FDA clearances reflect the increase investment that we put into software development, and we believe increase our competitive advantages moving forward.

In late September, we also announced the launch of DexCom ONE in four international markets, where we previously had no presence, Bulgaria, Latvia, Lithuania, and Estonia. DexCom ONE leverages the G6 hardware platform and a completely redesigned software experience that focuses on simplicity and ease-of-use for our customers.

This is the first product launch in our history that started exclusively through the DexCom e-commerce platform. A platform that has been embraced by our customers in Canada and the UK over the past two years. With the proven performance of our CGM systems, the new software experience and efficient e-commerce solution, and affordable pricing plans.

We believe that DexCom ONE will be an important product for us as we drive the business to where our long term targets. Most importantly, this differentiated product as a key step for us to bring DexCom CGM to significantly more people with diabetes who previously did not have access to our products.

Early feedback around the product has been very favorable and we look forward to seeing the full results from these launches as we leverage for the full breadth of our expanding product portfolio to achieve our 2020 Investor Day Goal of tripling our international addressable market by the end of 2023.

Building from the strength of our mobile trial that was published in the Journal of the American Medical Association in June, investigators published the results from the extension phase of the trial in diabetes care during the third quarter. In this extension phase, we re-randomized the population who are initially on CGM to see if the benefits would be retained for those who stayed on CGM compared to those who returned to Finger-Stick monitoring.

Once again, the results were clear. Those who stayed on our G6 systems, maintained greater time and range improvements over the 6 month extension phase compared to those who did not. The results confirmed that further significant population of people with type II diabetes on basal insulin, there is significant benefit in continuous CGM use to optimize therapy and support behavior modifications.

Our teams are working hard to leverage the conclusions from mobile into greater access to our technology for people with type two diabetes. And this is just one area in which we are building the foundation for our long-term growth. We are advancing our pilot efforts with United Health's level 2.

Teladoc's Lavango per diabetes, [Indiscernible] on dual and others. We are generating strong clinical evidence for expanded indications for CGM use in inpatient settings, and for women who are pregnant, we continue to leverage our advantages in connectivity by gaining new customers and progressing our pipeline of solutions with our leading insulin delivery partners.

Finally, we continue to advance our G7 scale up and regulatory efforts during the quarter. We have had excellent communication with our notified body in Europe and believe that we remain on track to begin the launch of our G7 system in the fourth quarter upon receiving CE mark clearance.

In the U.S. we've made great progress in preparation prior regulatory submission, and believe that we are now in the final stages of that effort. We look forward to the comprehensive G7-510K submission, including G7 hardware and full Android and IOS software to the FDA in the next few weeks. As you can see, our teams are working very hard and making great progress to advance our core strategic efforts.

Whether it is in expanding our product portfolio, creating differentiated user experiences, are laying the foundation for new market opportunities that will drive our future growth. So with that said, let me turn it over now to Jeremy for a review of our third quarter financial performance. Jeremy.

[Jereme Sylvain, Chief Financial Officer]

Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release, as well as on our IR website. For the third quarter of 2021, we reported worldwide revenue of $650 million compared to 501 million for the third quarter of 2020, representing growth of 30% on a reported basis and 28% on an organic basis.

In late July, we were proud to complete the acquisition of our distributor in Australia and New Zealand. With this acquisition, we began generating revenue for certain non-CGM healthcare product which we have categorizes inorganic growth for the quarter. This non-CGM distribution revenue contributed approximately 2% to our reported growth for the third quarter.

The transition from distributor markets to direct sales is one of several important strategic initiatives that we outlined at our 2020 Investor Day as we seek to significantly grow our international presence, We believe a larger direct international footprint will give us greater control to leverage our marketing strength, invest in accelerating our growth, and ensure that the direction of these core markets is aligned to our strategic interests.

In terms of financial impact of the third quarter acquisition, we expect the transaction to be approximately neutral to our operating margin for the full year as it was in the third quarter. U.S. revenue totaled 490 million in the third quarter compared to 399 million in the third quarter of 2020, representing growth of 23%.

We continue to see good momentum in the U.S. where we are benefiting from the increased market access and field presence that we have enabled over the past year. New customer growth remains strong across all segments of the population, including people with type 1 diabetes, intensively managed people with type 2 diabetes, where we have significantly expanded market access in the past year, and even early adopters in the type 2 non-intensive population.

Our international business grew 57% in the third quarter, totaling $161 million. Excluding the impact of non-CGM distribution revenue generated by our acquisition of our distributor in Australia, and New Zealand, growth for international business was 46% in the third quarter. We continue to see very encouraging growth across the board in our International Markets, with a majority of our markets delivering record sales in the Third Quarter.

Although it is still early, we believe that our strategic groups to broaden access in several markets have been very successful thus far and have left us well positioned to expand our growth profile internationally. And you see that reflected current quarter results. Along those lines are global volume growth in the third quarter remained strong, exceeding 40% for the Quarter.

This is well above our 28% organic revenue growth rate can supports the momentum behind DexCom CGM globally. As we aggressively seek to advance access to our technology and drive better health outcomes and quality of life for people with diabetes. As Kevin mentioned, the launch of DexCom one adds to our product portfolio and provides another key element of our strategy to expand access to CGM globally.

As we continue to scale our business in conjunction with our ambitious plans for customer growth, we are creating tools that allow us to serve our growing base in an efficient manner. And the use of our e-commerce platform for the initial DexCom ONE launch is a good example of that focus.

Our third quarter gross profit was $446.9 million or 68.7% of revenue compared to 68% of revenue in the third quarter of 2020. The year-over-year gross margin expansion is an impressive result, especially when you factor in our strategic efforts this year to drive greater mix through the pharmacy channel and expanded international access.

This is a credit to our teams who have innovated and embraced change where necessary to drive efficiencies and position us to maximize our strategic opportunities. We continue to demonstrate the ability to leverage both our manufacturing operations and R&D teams to be ever more efficient in the delivery of our products. Operating expenses were 323.1 million for Q3 2021 compared to 245.7 million in Q3 2020.

Operating expenses as a percentage of sales were relatively flat year-over-year as we offset investments in software development G7 scale-up, and our expanded global commercial sales force with strong leverage of our general and administrative functions. Operating income was 123.8 million in the Third Quarter of 2021 compared to 95 million in the same quarter of 2020, holding flat 19% of revenue.

As this result indicates, we've been able to retain much of our operating margin this year, even as we have significantly reinvested in our business. Adjusted EBITDA was 173.5 million or 26.7% of revenue for the third quarter, compared to 146.9 million or 29.3% of revenue for the third quarter of 2020. Net income for the third quarter was 89.5 million or $0.89 per share.

We closed the quarter with approximately 2.7 billion in cash and cash equivalents giving us great financial flexibility to drive our strategic initiatives. This includes the continued build-out of our manufacturing facility in Malaysia, and G7 scale up in Mesa, Arizona, as well as opportunities that are aligned our business objectives, such as our recent stricter acquisition.

Turning to guidance, our third quarter performance has placed us in a position to once again raise our full-year 2021 outlook for revenue and margins as we look to wrap up another excellent year. We now expect 2021 revenue to be between 2.4 - 5 and 2.45 billion, representing growth of 26% to 27% over 2020.

This guidance includes approximately 100 basis points of non-CGM in organic growth, related to our recent distributor acquisition. Turning to margins, we are increasing our full-year 2021 targets. This includes non-GAAP results to be approximately at the following levels, which include a neutral impact from our distributor acquisition.

Gross profit margins of approximately 68%, operating margins of approximately 16%, and adjusted EBITDA margins of approximately 25%. With that, I will now turn the call back to Kevin.

[Kevin Sayer, Chairman, President and CEO]

There are a number of things that we could celebrate and I'd like to take the time now to thank all of the teams at DexCom and specifically highlight a few things that we're proud of. First, to our new DexCom team members in Australia and New Zealand, we are absolutely thrilled to have you with us on our journey to empower people to take control of diabetes.

We look forward to working together and learning from you as we bring our technology to those in need in these key markets. Our operations team has provided another highlight in the third quarter as our G6 manufacturing yields reached all-time highs, and our warranty rates reached all-time lows.

Those are the metrics that lead to the margin improvements that we've seen and reflect countless hours of work from our talented employees. And finally, our R&D team continues to innovate with several updates to our sensor pipeline, as well as our leadership in data and software solutions.

The two FDA clearances this quarter are a testament to those efforts, and a nice validation of the strategy that we've discussed to leverage software as a competitive advantage and a key area of investment.

As Sean mentioned at the start of the call, we've invited Jake Leach, our Chief Technology Officer, to join us for the Q&A portion of the call in order to address any questions around these clearances, and our product innovation. I would now like to open the call up for Q&A. Sean.

[Sean Christensen, Head of Investor Relations]

Thank you, Kevin, as a reminder, we ask our audience to limit themselves to only 1 question at this time, and then reenter the queue if necessary. Operator, please provide the Q&A instructions.

[Quen Blackford, Chief Operating Officer]

[Operator Instructions] [Operator Instruction] And our first question comes from Jeff Johnson, from Baird, go ahead Jeff.

[Jeff Johnson, Baird]

Thank you. Good afternoon guys. I know we focus so much on T1 and attempt to T2 most of the time, but I wanted to ask this time maybe on the non-intensive in the pre -diabetes market. I guess I'm wondering more than anything, your latest thoughts on how big those 2 markets could be over the next year or 2.

Especially with so many, we see all these behavioral services popping up with levels and super sapiens and others in prediabetes, and obviously level too, and some of the others on the commercial side.

It feels like you're real-time API and your app and app approvals would be helpful for some of those programs. So just how do you see those 2 markets developing in the short run, 1 to 2 years in your market share in those 2 areas, maybe over the next couple of years as well? Thanks.

[Kevin Sayer, Chairman, President and CEO]

Thank you Jeff. This is Kevin. I'll take that one. We think those markets can develop nicely. We have some work to do on the product labeling side and some work to do with the FDA as we migrate down that path and we've had some of those discussions. But the results are spectacular as we've seen people use this product.

In fact, we recently got an email from a position, again, this isn't the type 2 world non-intensive but was telling us about a recent experience with a patient who had gone from an A1C in the 12s down to no medication to an A1C of 5.5 or something like that. It works there or it's also very much on the metabolic front-end general.

Anybody who wears a CGM and watches that data, and particularly if you set those lines narrow between like 7120, if you go above the 120 Mark, you ask yourself what you aid. You can usually figure out and go back to something that that you could do different. The effects of exercise, the effects of poor sleep, the effect of stress of an earnings call, can all be demonstrated in CGM graphs. I think it's a wonderful market opportunity.

The data has to be presented properly. That's where the live API and the approvals we talked about today come in. The API is a quick way to get there and Jake knows the technical stuff better than me, but the API also requires a person to run a DexCom app and the other app. With the other, the app and app module that we talked about today, some of these larger programs that again like Level two with United Health Group, you have one app experience.

With like a DexCom button or a DexCom experience right in the middle of it. So if you are branding a wellness situation and really want that to be your focal point, we can reside in that app and you can have that experience. We think both solutions, they offer speed, but they also offer different experiences and then we'll pick the partners we want to work with on both sides, those that have the best need for one versus the other.

So we're excited [Indiscernible], we're very excited for these markets and it's why we getting part of our long-term strategy. But we need the technology to get there and our product pipeline truly supports going there over time.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Robbie Marcus from JP Morgan. Go ahead, Robbie.

[Robbie Marcus, JP Morgan]

Hi, this is actually Lillian on for Robbie. Thanks for taking the question. Can you talk briefly about dynamics that you're seeing in Europe right now. You guys had a great quarter there. So any tangible stories of success from the increased page in access efforts that you've implemented over the last few months. Any call on that you could share would be helpful. Thanks.

[Kevin Sayer, Chairman, President and CEO]

Sure. Yes, and thanks for the question. What you see in Europe, and certainly it's really in all the markets we've gone in with our access strategy as we moved into various countries and obviously exchange price for access to populations that we historically haven't been able to get to.

What you see in the quarter, I think we talked a little bit about on the call is; it was a record revenue quarter in most of our international markets, so I think you see it playing through on the revenue front. Think you saw a 46% organic growth rate outside the U.S., which again another incredibly strong quarter, fueled by a lot of the access that we've been able to create, and then you look at the new patient growth.

It's another record quarter for new patient adds in this quarter. Again, all pointing to some of the access that we've created outside the U.S.. I think some of the examples I think we talked a little bit about them publicly last quarter with Canada, for example, in multiple different provinces, allowing us access through those publicly reimburse channels. And I think in those channels you are seeing just that, a lot of people had now have the access to DexCom CGM technology

[Jereme Sylvain, Chief Financial Officer]

And they're taking advantage of that. So we'll continue to expect that to play through it. It's why we ultimately made the decision to do it. And I think you've seen it play through in the financial results and our expectation as you continue to see a play through over the long haul.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Danielle Antalffy from SVB Leerink. Go ahead, Danielle.

[Danielle Antalffy, SVB Leerink]

Good afternoon guys. Thanks so much for taking the questions. Congrats on a really strong quarter. Jeremy, just a question for you. You guys have been investing pretty significantly in direct consumer. Marketing, and ramping up the sales force initiatives around primary care physician.

I'm wondering if you can talk now we're three quarters into this -- sort of more concerted effort in the U.S., and whether we can really talk about how you are seeing a return on that investment as far as incremental new patient adds and maybe just where we are from a primary care physician coverage perspective. Thanks so much.

[Kevin Sayer, Chairman, President and CEO]

Sure. Absolutely. So where we sit today and we talked a little bit about it last Quarter, but I want to reiterate it is, you know, in the U.S., we've doubled our covering prescriber coverage over the past 18 months. And so what I mean by that is the amount of physicians that are writing DexCom scripts has doubled in 18 months.

That's an a testament to the work that's being done by the U.S. commercial team, which has been fueled by multiple things, certainly direct-to-consumer advertising, doubling the size of the sales force. Those all really play into folks adopting the technology.

[Jereme Sylvain, Chief Financial Officer]

Just a couple of tangible things which I think are helpful to see again, another record quarter for new patient adds, I think you can see that playing through and in many ways that's driven by the sales force. So you see that continued momentum, I would say the one thing that we have noticed that hasn't prevented us from being at completely full effectiveness is some of the impacts of the Delta variant.

I think that's probably the only thing that we've seen that's been a challenge, and that's just getting access to some of these offices when you're no longer seeing folks in person. And so you've seen a lot of positions opening up and those locations we're doing incredibly well. So there's more to work through and that's a function of just navigating through these COVID landscapes more than anything else.

[Jereme Sylvain, Chief Financial Officer]

So I think in short, you're seeing the performance, you're seeing the growth, seeing the new patient adds and we've ramped up very nicely. It's been an incredible year for us thus far. I'm very bullish on what it means for next year. So I think that's really the feedback thus far and again, as we get more and more data, we'll continue to share it as it becomes available.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Matthew Blackman from Stifel. Go ahead, Matthew.

[Matthew Blackman, Stifel]

Good afternoon, everybody. Thanks for taking my question. I want to ask about the G6 rollout in Japan, Is there any commentary on early trends there? Could you also just remind us the sizing of the incremental opportunity in Japan and how meaningful or contribute do you think it could be to either worldwide growth OUS growth, however you want to frame it as we move into 2022? Thanks.

[Kevin Sayer, Chairman, President and CEO]

This is Kevin. You were early on in that launch with our partner Terumo. We've got some good traction, but literally with launch happening in earlier this summer, we're in a position of educating physicians, getting examples out there, really teaching people about our product. We think overtime that Japan market could be a very good one for us.

While there's not a tremendous amount of type 1 diabetes, there's also -- there is a large amount of type 2 diabetes. If we can get across that broad spectrum, with our product offerings, we can see this being one of our -- certainly one of our top 8 markets, possibly even a top 4 or 5 in the world as time goes on.

We also know from a technological perspective that physicians we've spoken with are very bullish on the performance of our product. And tremendously value the accuracy and precision of what we do, and the connectivity and all of those things.

So we believe we have the right system for the market, but we are in early phases right now. And just to give you, I know you asked for the size of the market, that's a market of around three to 400 thousand intensively managed patients across type one and type two. So at the large market with a lot of folks, a smaller prevalence of T1, but obviously a market that can be an incredible Landing spot for us and that space.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Margaret Cansol(ph), from William Blair. Go ahead, Margaret.

[Margaret Kaczor, William Blair]

Hi, good afternoon, guys. Thanks for taking the question. The question is a little bit more of a theme and an expansion maybe on some of the partnerships that you referenced in just getting a better sense around how many of your patients out today, for example, may come from these partnerships.

And when you talk about expanding them, is that enough form of covered lives or is it something else? And that is just as a follow-on, since shakes on the call, I guess, the products and subscription services that you guys may offer these partnerships.

How do those evolve, I guess over time and could that potentially accelerate some of the capabilities that deck Tom offers are the new products that they offer away from pure technology that you've been in the past towards some of these other software or other potential offerings you have. Thanks.

[Jereme Sylvain, Chief Financial Officer]

Sure. Yes. So let me start with maybe the financials side and how that migrates over time. And then Jake's obviously who will take you through the technical aspect of it. And why we're so excited about it. So today these partnerships are a combination of expanding TAM and expanding people that would want to access CGM technology over time.

And today it's in the form of sensors. But over time, and as we've demonstrated the couple other software features, we've obviously added over the past, 6 months or so. Software can be a part of that package.

And so we're really -- the monetization of that will come over time. Today is about how we get as many folks as possible on sensors to realize the value of CGM. So that's how we expand it, Jake, maybe you could take it through just kind of the general theme of, of where we're going in that space.

[Jake Leach, Chief Technology Officer]

Yeah, sure. Jeremy. Thanks for the question. So really the way we think about it is that the technology that we're bringing in the market through this software features is really about providing unique experiences for customer segments. And so if you think about the type 1 segment or the type 2 segment non-intensive.

You really -- you're solving different types of problems in those and so what these Software tools such as our lives API provide is a way for our partners to serve those needs with seed DexCom, CGM, and a connection to our product, the real-time API is a real advancement in our cloud strategy. And we're really excited about the list of partners that are working to integrate that into their systems to provide their customers with unique experiences.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Matthew O'Brien from Piper Sandler. Go ahead Matthew.

[Matthew O’Brien]

Thanks and thanks for taking my question. So a lot of moving parts here and I'm not sure if I'm doing the math right, but I'm getting like $60 to $70 million of a pricing headwind this quarter. And I'm not sure what the distributor conversion if that's right or not. I guess I'm just asking, is -- is that about right? Are we seeing a little bit more of the pricing headwind this quarter than we've seen over the last couple.

So we'll see maybe a little less next year getting pulled forward with the 21. And then the -- and the reason I'm asking is that, the increase sequentially from Q3 to Q4 is a little bit below trend line, is that because you're expecting more on the pricing headwinds to be seen here in '21 versus '22? Thank you.

[Jereme Sylvain, Chief Financial Officer]

Yes. So there's a couple of pieces, so I'll first and foremost reiterate the total pricing expectation for the year, the 250 million is still the expectation if anything, we might come a little bit light on that, but that still is the expectation. So then the pricing in Q3 was generally in line with prior quarters. A little bit elevated, but it's not a material step change, and that's a function of some of those OUS contracts kicking in.

So really, that's where we come from a pricing perspective. So it's not necessarily pulling anything in. We've often talked about 2022 being relatively similar to 2021. And we're still on that trajectory. So I wouldn't necessarily expect any of that. To your question on how Q4 plays out in the guide and doing the math there.

And you're doing the math, right. One of the things we're mindful of, and there's really two pieces to it as you think about it, there's the piece we talked about a little bit earlier, which is the delta variant and getting into new primary care offices and making sure that we're seeing that over time before we count on it.

So that's the first piece of it and we're mindful of that. And then the second piece of it is as more and more of our product is fulfilled through the pharmacy, the historical trends over time you're going to see start to migrate just a little bit. You saw it start this year in Q1.

If you look back to Q1, our sequential pullback from prior year Q4 into Q1 was a bit muted, and you're going to see the same thing in this Q4, which it means as more and more goes to the pharmacy, you no longer have folks in the DME space than all of them have the high-deductible health plans were folks are maximizing benefits at the end of the year.

So we expect a little bit less seasonality as we progress. And in turn, we expect a little seasonality in Q1 of next year. So that's what you're reading into. That's ultimately what comes through in the guidance. So you're doing the math, right. But those are some of the expectations that went into it.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Travis Steve from Barclays. Go ahead Travis.

[Travis Hayes, Barclays]

Hi, thanks for taking my question. Jeremy, just a follow-up on the distributor. It sounds like the revenue impact this quarter it was 13 million all in the offline and just curious how to model that going forward is at about 13 million a quarter for three more quarters. And then it gets into the base and how to think about like is there a pricing benefit here without the distributor margin. Just a little more color on the distributor acquisition If you all.

[Jereme Sylvain, Chief Financial Officer]

Sure. So we'll -- so of pricing. We don't necessarily break down the pricing USO, U.S. and the overall number. And so at the end of the day, we're on the trajectory of the total Company we talked about. And so obviously guys will do the math, but at the end of the day, we're on that same trajectory.

In terms of your question on the distributor. With the impact of the distributor acquisition on growth in the quarter in our CGM business, it rounds to 0%. It's because there was 2 months in the quarter, and that markup on the margin in the distributor market is relatively small. The question is, well, why do you and what do you it, and what -- it's our ability to control, penetrating deeper into these markets.

And that's ultimately why we do it. It's not try to get a margin uplift. It's actually to try to control investment. We're a Company that has cash on the Balance Sheet. We're willing to invest in these markets. And we want to continue to invest in these markets. So as we take them direct, the goal has been to reinvest in make sure that we're driving adoption.

So the impact of the distributor really nominal on our organic growth rate like I said, it rounds to 0. So the 28% is the organic growth rate even including that. So hopefully, that helps you around the acquisition. There isn't much there that changes the results this quarter.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Matt Taylor from UBS. Go ahead, Matt.

[Matt Taylor, UBS]

Great. Thanks for taking the questions. I was hoping you could give me more color on how things are going in the primary care channel. Could you give us any sense for how the sales force is maturing, how productive they are and if there's more to go there?

[Kevin Sayer, Chairman, President and CEO]

Yeah, this is Kevin. I'll take that. There's still more to go, but it is going very well. Our targets are going very well as far as those we've call on, we've also learned there are some we have not had on the target list and we're expanding that coverage as well. We've had numerous situations where it's taken our person several attempts to get into an office, but once they get in and once we get a person on a DexCom, their responses so good based on the quality of the product that we get more.

But it is a progressive effort, and it doesn't -- we don't walk in and all of sudden get, hey, here's 50 new patients this month. It takes a little time and we have to bet a lot of credibility. But the primary carrier audience, particularly with those on insulin, it's gone very well so far, but it is a process and it does take some time.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Joanne Wuensch, from Citi. Go head Joanne.

[Joanne Wuensch, Citi]

Thank you very much for taking my questions. It seems to me like the increasing clinical evidence that you are building is going to really help the Type-2 population. But could you give us sort of an update on where you think or what you think you'll need to get into the non-intensive type juice.

[Kevin Sayer, Chairman, President and CEO]

Yeah. This Kevin, I'll take that. We've taken several pronged approach to get in there and we're not going to deviate from that approach. We're working with healthcare professionals who are prescribing product for a non-intensive type [Indiscernible] right now and getting great outcomes.

We work with the payer network, for example, the level 2 program at UnitedHealth, that produce some very good results for them and very visible in their marketing materials, in their efforts. The programs and with the technologies Jake outlined that we got approved today, the app in the App and the API interfaces that will be great for partners because they do wanna control that experience for patients and ultimately getting to people directly.

We've been very successful on our DTC campaigns for the intensive insulin users, there will come a time when we will be able to go direct to those consumers in the type 2 NIIT as we call it.

Non-Intensive insulin therapy or non-insulin therapy, get to these guys as well, and we have a high level of confidence in the products we're designing and the things we're planning combined with the ability of our team to reach these markets once we turn them loose, once we have the opportunity to do so. So we'll go through all the steps, will continue on all four fronts. We're not going to back off on one of them.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Cecilia Furlong from Morgan Stanley, go the Cecilia.

[Cecilia Furlong, Morgan Stanley]

Thank you for taking our question. I wanted to ask just on Gross Margin as you think about 4Q, what is implied with your updated guidance step-down, but just what you're factoring in from the International access component versus G7 initial launch, not quite being at scale and how we should think about the trajectory heading into 2022. Thank you.

[Kevin Sayer, Chairman, President and CEO]

Sure. So the gross margin in Q4, we do expect to take a bit of a step back. Some of it is the international access as that ramps up. And the other piece to your point is the launch of G7 and turning on all of the machine, the depreciation and therefore the yields. A majority of that is going to be the G7 launch. And the reason why is we're not at full capacity at that point.

Now, once we get to full capacity, there's no reason why we don't get back to our long-term gross margin guides, and we'll get into 2022 when we get there. But there's nothing strong actually in those lines that would prevent us from meeting what we had talked about from our long-term gross margin guide. There may be ebbs and flows quarter-by-quarter as we ramp up.

But I don't expect there to be any issues there. So if you're asking the question well, how I would weigh the two most of the impact is upon the launch of G7. And in turning on those machines and the depreciation associated with it. As we get into 2022 and volumes start to build on those machines and you're able to absorb those fixed costs. There's nothing structurally that can't get us back to the gross margin profiles that we've set for an organization.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Jason Bedford, from Raymond James, go head Jason.

[Jayson Bedford, Raymond James]

Hi, this Povin (ph) for Jason and I have 2 quick questions here. First, will we see G7 clinical data before U.S. approval? And the second one is how close are you guys to get into the 75% of commercial payers into the pharmacy channel?

[Jake Leach, Chief Technology Officer]

So thanks for the question Jake, so the -- we presented actually earlier this year, we presented at ATTD G7 data. Joining a MARD of sub 9% and very strong [Indiscernible] accuracy, better than G6, in fact, so we're very excited and happy with the result of the U.S. pivotal. And we'll be releasing that in the future.

Yeah. So now that you've seen that data, I think you have a feel for it. And obviously, that data -- as these -- as more products launch over time, you'll get access to it. But I think some folks ask, well, how do I know what it's going to look like before, there is public -- data available at ATD that should set North Star.

In terms of the transition, the migration in the pharmacy, we talked about this glide path from approximately 50% turning into 2021 or at the end of 2020 into really 75% by the end of 2022, we're on that glide path right now. And so we're making headway, we haven't given a specific update as a percentage but as your charting that course, we're right where we'd be expected and right where you'd expect from a linear transition over time. So hopefully that helps.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Larry Biegelsen from Wells Fargo. Go ahead, Larry.

[Nathan Travis, Wells Fargo]

Hi, this is Nathan Travis call for Larry. Thank you for taking the question. Can you just provide us an update on how you're thinking about CGM for hospitals and gestational diabetes? Thanks.

[Jake Leach, Chief Technology Officer]

Yes, this is Jake, so let's start on the hospital first. So the way we are thinking about that is that, you really with the accuracy and reliability that we have built into the G6 and G7 systems. That it's a great CGM platform to then build a purpose built hospital products. So we're in the early stages of understanding what is the exact CGM that meets the needs in a hospital. We've seen good success with G6 under the times COVID used in the hospital.

It is really serving a need, but it's not exactly the right workflow for the our hospitals. And so what we want to do is better understand how rebuild a CGM that really meets the needs of that segment, On the pregnancy side, we're very excited about the building in pregnancy functionality and providing information that's important for expecting mothers into the G7 product. And so that's part of our roadmap and we're actively working on building that into the G7.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Steven Lichtman from Oppenheimer. Go ahead Steven.

[Steven Lichtman, Oppenheimer]

Thank you. Hi, guys. Kevin, you mentioned earlier all the work you continue to do on non-intensive with partners, payers, and collecting data. Wondering what your latest thoughts are on potential revenue per patient in that population or utilization overall for the non-intensive. Thanks.

[Kevin Sayer, Chairman, President and CEO]

At this point in time, the total revenue amount per year is still something we model out in a number of cases. What we've learned and what the data that we've seen most recently supports and we'll continue to talk about is continuous use of the system provides much better healthcare outcomes than intermittent or [Indiscernible] that the things had patients learn with this technology, having that feedback full time provides a much better outcome with respect to the long-term revenue model.

And again, I'm speculating a bit here, but I'll just repeat what I said to the team internally, we're solving a much different problem for somebody's not on insulin, it is not a life and death decision for them, so I can see them revenue per patient being lower for this group over time, even in continuous use. But I don't know how much yet.

There will certainly be intermittent use models that might be available and lead to good outcomes. But one of the mistakes that a lot of these programs make in the beginning, is they try and minimize the number of sensors because they're worried about the costs there trying to control when in reality the benefits that these patients and these customers use the system to get are derived from CGM data.

So we have to balance those things and balance that against our current business model as well but we do believe it's going to be a very good population and there's -- there was long a belief that all these patients will want to wear it all the time. Now, they do. They very much enjoy the data and really like knowing where they are. That has not been a problem at all.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Ravi Misra from Berenberg. Go ahead, Ravi.

[Ravi Misra, Berenberg]

Hi, thanks for taking the question. So I guess I'll use my one question on New Zealand, Australia distributor. Just curious, how quickly can you basically get through this I guess, inorganic revenue in terms of the impact of guidance like is there still kind of be non-CGM revenue that we assume and Quarter 4 and maybe help us think about, I guess what the market size that you think you're able to kind of go after with this acquisition or do you need to do more in this arena, this country or continent space to really get access to the population? Thank you.

[Kevin Sayer, Chairman, President and CEO]

Sure, I can take that. So when we acquired the distributor, the distributor had multiple different product lines. They have sales reps that cover these multiple different product lines. And ultimately a distributor is about people and it's an incredible group of people. And so the key here is making sure we keep everybody together. So we'll stay in that line.

What we tried to identify for you, is the contributions to the overall guide in basis points. And so in our guide, we talked about a 100 basis points on the full year. You'll do the math and figure out what the approximate impact is in Q4, and I think you'll have a pretty good feel for it. We'll make sure that we isolate it out over the long haul so that you're able to identify what is and what isn't out there. So I think you can feel comfortable there,

[Jake Leach, Chief Technology Officer]

Provided material in terms of the actual acquisition itself, and being able to get into the market. This was -- this is a group of folks who have done an incredible job with CGM adoption in that, in that country. And so when we when we get into these countries, we want to make sure one, we have the team, we make sure that they're eight.

There's nothing in their way from continuing to develop CGM awareness and developed CGM adoption. So there's nothing that prevents us under the structure. The only thing we mentioned in terms of investment is very similar to the way you've thought about our organization in the U.S. We know that investment in DTC and in sales reps where it makes sense and then sampling, and all of the things that we've put in place make great sense in other markets.

You've seen us do some of that in Europe, and certainly we've done some in Canada and we expect to do more of that and we take it direct, we can do a little bit more of that. And so that's really what we're talking about. So there's nothing structurally that prevents us from taking the acquisition and continuing to proliferate CGM adoption in those countries.

[Kevin Sayer, Chairman, President and CEO]

Yeah, this is Kevin, I would just add to that. One of the reasons we do things of this nature, take a look at our direct business in Canada. The wins we've just had with the provinces and reimbursement there. With our financial muscle at the corporate level, we can take much more risk than a distributor could on their own.

We view this investment in Australia and New Zealand as one where we're going to be able to go after broader market increased access reimbursement and really make an impact. Those -- this team needed our muscle to do that financially, and we needed their talent to do it as well so it works for both of us.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Maury Kibo. Go ahead, Maury from BTIG.

[Maury Kibo, BTIG]

Hi. Thank you for taking the questions. Spending a little bit of time on the DexCom one site, it strikes me as a very consumer-friendly website. And I'm just curious whether this is sort of a glimpse for the future. I know it's been launched into some Eastern European countries, but is this a model that you would look at in terms of flexible pricing and subscription plans and bulk order discounts? Is this something that's a preview of the broader appeal of CGM, maybe into pre -diabetes and consumer markets?

[Kevin Sayer, Chairman, President and CEO]

Yes, it's Kevin, this is a very important launch for us, is the first time we've launched their product on a new software platform and had a new product launch. We're in a position now volume and manufacturing wise that we want to get this product to as many people as we can.

And what DexCom one represents is really an opportunity where we can get DexCom technology into a geography, easier than we could if we went through our traditional means with our G Series products. So we're offering this and -- yeah as you talked about, flexible pricing plans, subscription models, and things of that nature, to get this product to this patient group.

It definitely can be a precursor of things we can do in the future, to take advantage of the scale that we've created within the business with our ability to manufacture more. And again, while the website is very easy to use, I assure you the App that Jake 's team and our marketing team has developed is every bit as easy to use as the website.

This truly is a step up for us from our product experience. And that we'll evaluate those opportunities over time where we have a market, where we can increase our volumes and gain more traction with this type of product offering rather than our traditional G-series, we will explore that.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Josh [Indiscernible] from Cowen. Go ahead, Josh.

[Neal, Cowen]

Hi, this is actually Neal (ph) on for Josh. Thanks for taking the question. And we've had some consultants recently talk about the potential for monitoring other analytes. I was just wondering if you can or maybe share any updates there in terms of any development plans or program for extending monitoring to [Indiscernible] outside of glucose, like Ketones?

[Jake Leach, Chief Technology Officer]

Sure. Yes. The wearable platform that we've developed with the electro -chemical sensors that can be extended to other analytes. And we do have active research programs within DexCom and also with some of our university colleagues that are researching other analytes that we could use on our platform. Today, we're not talking about exactly which ones, but we do feel that this platform can be extended to multiple analytes and provide more value around the CGM component.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Anthony Petrone, from Jefferies. Go ahead, Anthony.

[Anthony Petrone, Jefferies]

Great. Thanks and hope everyone is doing well. Two quick questions. One would be on supply chain constraints. I'm just wondering how that is expected to play out into 2022, hearing a lot about inflationary upward pressure on cost of goods sold. So wondering how that's playing out for DexCom, what the offsets are. And then as we look into the 05 launch, just maybe an update on what percent of existing Omnipod users are currently not users of DexCom solutions? Thank you.

[Kevin Sayer, Chairman, President and CEO]

Sure. So all go ahead and take the inflationary and supply chain. So I think everybody's, --nobody is immune to certain products and certain areas that do have pressure based on supply chain, supply and demand. One of the things I think our team has done, there's two pieces of it. One, do you have enough product and two, can you manage the cost? And I think our team has done an incredible job in lining up the product.

Now, that doesn't mean everybody's out of the woods that everybody has got supply chains and actually running through. But this team got ahead of it very early and has been working collaboratively, with all of our suppliers well in advance to make sure that we're properly communicating the value of our product and making sure that we're working with them to secure supply.

And that's ongoing, but that's work that's been done well in advance of everybody else jumping on us, we're very proud of that team. In terms of the inflationary measures, we're in a bit of a unique environment. There have been absolutely inflationary measures, but we're also making a lot more product.

And so you get economies of scale and purchasing power which offset some of the challenges associated with inflation. So our expectation is we're able to navigate both of those, and it will not impact our longer-term gross margins because of that nature. So hopefully I answered your question. Maybe I could turn it over to -- well actually, I can answer the Omnipod question. With Pod 5, there are a decent amount of folks using it.

There are some studies out there. I don't want to quote them just because I don't know how accurate they are. We generally have a good feel for it, although we haven't put it out there publicly, we can let Omnipod do that if they want to. But we do know once Omnipod 5 is launched and the integration associated with DexCom it could provide a catalyst certainly for us.

The one thing we will say is, we continue to say it all the time, is CGM first. We do believe that a lot of folks do come to CGM and then ultimately could choose to go onto an integrated system, and most folks that do get onto our product today now are MDI, and so a lot of those are out there. That all being said, another AID system

[Sean Christensen, Head of Investor Relations]

With one is novel as, as Omnipod I think is certainly something that's interesting and for patients that like patch pump, I think this is an incredible opportunity for folks to get on that platform.

[Quen Blackford, Chief Operating Officer]

Our next question comes from Kyle Rose, from Canaccord. Go ahead, Kyle.

[Kyle Rose, Canaccord]

Great. Thank you for taking the question. I just wanted to maybe ask another question on DexCom you've talked a couple of times about the patient experience being different and having a different app.

But I understand that the software’s obviously completely different on the e-commerce side, but maybe help us understand just what specifically is different from a patient facing perspective, with DexCom ONE versus what we've seen historically with the G6 and the previous generation products. Thank you.

[Jake Leach, Chief Technology Officer]

Jake, I will take that one. DexCom ONE from the beginning, our intent around the design of that product was to make it simple. And so that kind of flows through, as you mentioned, the e-commerce experience, but into the App, the mobile App itself. It's a new, --completely new App architecture for us, so it's a new piece of software.

And the first part that users will see that's quite different is the on-boarding module. We basically spent a lot of time studying human factors and how users use the products, particularly in those -- when they're first learning how to use it. So what onboard module does is really walks them through a simple process on how to get up and running quickly on their CGM.

The other thing about it, that's different than G6 is that has a simplified alert scheme. So it doesn't have some of the more sophisticated predictive alerts, the G6 does it, it has a very simple easy-to-use, approachable alerts scheme.

The other thing that we added is with our current G6 system, a lot of the data over time statistic are built into our clarity software with Dexcom ONE we've actually incorporated that into the Dexcom ONE absolute typical statistics like average glucose time and range estimated A1C, that's all built into the single Dexcom ONE up.

And then finally in that vein of simplicity, there's no AID connectivity for Dexcom ONE, it also doesn't have the share remote monitoring features, so it's really about bringing a simple CGM product to people who have never had access to Dexcom ONE CGM and haven't experienced life without fingersticks.

[Quen Blackford, Chief Operating Officer]

And our next question comes from Chris Pasquale from Guggenheim. Go ahead, Chris.

[Chris Pasquale, Guggenheim]

Thanks. I want to take you back on that last question. I think that that answer was constructive in terms of some of the differences here in, and so it leads me to wonder who you're targeting specifically with this platform. It sounds like with the loss of sharing, and predictive alerts this is probably not going to be a type 1 or pediatric product.

Do you see this as a way to get more into the type 2 population specifically, is it a way to approach some emerging market territories where reimbursement may not be in place. We just love some thoughts on, where you see this going over time, which this product's really for? Thanks.

[Kevin Sayer, Chairman, President and CEO]

It's all of those things. Certainly, you look at the 4 countries that you launched in, they're not huge countries but they're markets where we've never been before. So with the e-commerce platform and the creative pricing structures we have for subscription plans and things of that nature, it gives a group of people access to our technology they've never had it before.

And as far as the not sharing and not connecting today, ID systems you're exactly right. It -- is a lower level of technology with respect to connectivity, than what we offer and so it is targeted different people.

Certainly will have access to more type 2 patients, and access to insulin users. But again, some of these geographic play in countries where there isn't anything. We felt this simpler solution is a better product offer out of the gate, than the other one. And then we'll evaluate over time what products we offer where. So you are right on point with pretty much all your observation.

[Quen Blackford, Chief Operating Officer]

And we have no more questions at this time. I'd like to turn it back to Kevin Sayer for final comments.

[Kevin Sayer, Chairman, President and CEO]

Thank you. And thank you, everyone for your questions and continued interest and support at DexCom. We've once again reported a number of important developments to position DexCom for the future on top of outstanding financial performance and continued growth. Going to wax a bit philosophical today, but my father passed away in late 2020, but he never missed an earnings call. Our routine after the calls was very simple.

He'd call me up and he'd say, this is what you guys were trying to say. And he was pretty much always right on point. So preparing my closing remarks today, let me reiterate what we're trying to tell you. Leveraging growth continue, our 28% revenue growth achieved through sensor volume growth in excess of 40% demonstrates a continued commitment and talent of our commercial organization.

Profitability continues to improve as well, yet we remain mindful of the investments we need to make in the future. Our global access strategy is working. We continue to achieve the numbers we've achieved while we've expanded access to our product globally through strategically shifting our customers to channels which result in reduced revenue per customer annually and yet margins have increased.

Next, G7 is on schedule and it's coming. All of the efforts related G7 are moving at a frenetic pace around here. I've never seen our people so engaged in a single-minded purpose. And finally, our software development and data platform commitments are going to be critical in the future and you saw a big steps this quarter. We spent a great deal of time talking about software’s in differentiator today and we haven't over the past several months.

You're beginning to see -- you're seeing the beginning of a great change with Dexcom ONE and the data sharing. And experience enhancing technologies recently approved by the FDA also demonstrate this. It's only the beginning. Our long term focus has always been for the data generated from our devices to be consumed in a way that really makes an impact on people's lives on their healthcare in general. Thanks and everybody have a great day.

[Quen Blackford, Chief Operating Officer]

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.