DexCom Inc. Q3 2008 Earnings Call Transcript

| About: DexCom, Inc. (DXCM)

DexCom Inc. (NASDAQ:DXCM)

Q3 2008 Earnings Call

November 11, 2008 4:30 pm ET

Executives

Terry Gregg - President and Chief Executive Officer

Steve Pacelli - Vice President, Corporate Affairs

Jess Roper - Vice President and Chief Financial Officer

Analysts

Bill Plovanic - Canaccord Adams

Ben Andrew - William Blair

Amy Sullivan - Piper Jaffray

Mimi Pham - JMP Securities

Sara Michelmore - Cowen & Company

Shawn Fitz - Stephens Incorporated

Operator

Good day, everyone, and welcome to today’s DexCom [Third] Quarter Year 2008 Earnings Conference Call. Please be aware that today’s conference is being recorded.

At this time, I’d like to turn the conference over to Mr. Terry Gregg. Please go ahead.

Terry Gregg - President and Chief Executive Officer

Thank you, and welcome today to our third quarter investor conference call. Joining me today are Jess Roper, our Chief Financial Officer, and Steve Pacelli, our Senior Vice President of Corporate Affairs.

I will ask Steve to lead it off by addressing the Safe Harbor requirements.

Steve Pacelli - Vice President, Corporate Affairs

Thanks Terry. Some of the statements that we will make in today’s call may constitute forward-looking statements. These statements reflect management’s expectations about future events, operating plans, and performance, and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under risk factors and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Terry?

Terry Gregg - President and Chief Executive Officer

Thanks Steve. As always we will go through a financial review by Jess. We will talk about the Edward's collaboration that we announced shortly before the start of this meeting, a commercial and reimbursement update, give a brief insight into our insulin pump partnership, a clinical and regulatory update followed by a summary and conclusions and then we will open it for Q&A. Jess?

Jess Roper - Vice President and Chief Financial Officer

Thank you, Terry. DexCom reported product revenues of $1.9 million for the third quarter of 2008 compared to $1.2 million for the same quarter in 2007, an increase of 53%. Sequentially, product revenues remain flat compared to the second quarter of 2008. During Q3, we sold approximately 777 system starter kits. Sequentially, sensor revenues were down 5% from Q2 as total kit revenues were up 5% from Q2. Total revenue for third quarter of 2008 was $1.9 million and included a small amount of development grant revenue associated with our joint development agreement with Animas Corporations entered into during Q1.

Cost of sales for the third quarter of 2008 totaled $3.8 million, compared to $3.1 million for the same quarter in 2007. The increase was primarily due to higher sales volume and approximately 260,000 in development cost of sales. The increase in product cost of sales relating to additional product sales was offset primarily by increased manufacturing absorption.

Our gross margin loss for the third quarter of 2008 was 1.9 million, which remained flat as compared to the same quarter in 2007. Research and development expense increased by $1.7 million and totaled 5.4 million for the third quarter of 2008 compared to 3.7 million for the same quarter of 2007. Major elements of increased R&D expense included additional external development costs, facilities costs, and supply cost. Sequentially R&D costs increased by about 600,000 from Q2 due primarily to additional external development cost less supplies, as we continue with our in-hospital efforts.

Selling, general and administrative expense totaled 6.2 million in Q3 of 2008 compared to $5.9 million in 2007. The increase was primarily due to increased general and administrative costs. Major components of increased SG&A expense included approximately 500,000 higher salaries, 200,000 in increased facilities cost offset by 350,000 in lower sales commissions. Sequentially, SG&A expense decreased by about 600,000 from Q2 primarily due to lower commissions and share based compensation.

Net interest expense totaled 700,000 for the quarter, compared to net interest income of approximately 120,000 for the same quarter in 2007. The increase in net interest expense was primarily due to lower average balances of our cash and marketable securities combined with lower yields earned on those balances. Our net loss increased to 14.7 million for the third quarter of 2008, compared to 11.4 million during the same quarter in 2007. The net loss for the quarter included 2.7 million in non-cash expenses centered primarily in share based compensation.

During the quarter we invested about 610,000 in capital equipment in facilities to support our business. We ended the quarter with 30 million in cash, marketable securities and restricted cash and had working capital of 22 million. Cash, marketable security and restricted cash decreased by 13 million during the quarter. Cash consumption during the quarter included our twice per year $1.5 million interest payment associated with our convertible debt.

I would like to now turn it back to our President and CEO, Terry Gregg.

Terry Gregg - President and Chief Executive Officer

Thanks Jess. This afternoon we announced (technical difficulty) I am not sure I cut you off. So let me just go back to the last area. We have previously discussed the growing clinical evidence that the close monitoring of glucose levels in critically ill patients both with and without diabetes can positively impact the patient care and outcomes from a morbidity and mortality standpoint.

We know that the existing “in a minute” monitoring methods are not practical for hospitals to employ on a widespread basis. We believe that together with Edwards, we will develop technology to allow clinicians to better maintain tight license to control of patients in an operating room or intensive care unit setting. We believe this collaboration will combine our continuous glucose sensing technology with Edwards leadership in the monitoring of critical ill patients and knowledge of the critical care environment.

Under the terms of the agreement, Edwards will pay DexCom up to $36.5 million over the next three years in the form of licensing and development fees and regulatory milestones. Payments will include an initial upfront licensing and collaboration fee of $13 million. Additional research and development dollars of up to an 10.5 million paid during 2009 in the first half of 2010, milestone payments of up to an additional $13 million based on the achievement of certain regulatory approvals between 2009 and 2011. In addition, DexCom will receive either a profit sharing payment of 10% or royalty of up to 6% on commercial sales. Edwards will be responsible for global sales and marketing, which is expected to begin in 2010 and DexCom will be responsible for initial manufacturing.

Why Edwards Lifesciences? Edwards has been a world leader in critical care monitoring for more than 30 years dating back to the development of the Swan-Ganz line of hemodynamic monitoring devices for measuring heart pressure and output during surgical procedures and in-post surgical intensive care setting. Over the years, Edwards has introduced a broad portfolio of critical care products including advanced venous access products antimicrobial catheters, disposable pressure transducers and a blood management protection system. In choosing Edward as our partner for in-hospital continuous glucose monitoring system, we evaluated a number of factors.

During the development phase, we believe Edwards will bring a strong technical team focused on continuous glucose monitoring in the critical care setting. We believe Edwards has a deep understanding and working relationship with clinicians in this setting on a worldwide basis. We also believe Edwards will bring a strong manufacturing team to help DexCom scale up and refine our manufacturing processes. As we move to commercialization, we believe Edwards’ dedicated global sales force in critical care is the best avenue to drive rapid market adoption of the in-house glucose sensing business.

Over the past several months of due diligent, it became increasingly clear to me and our team that the technical teams operate extremely well together and we expect this effort to jump start a new level of cooperation now that our formal agreement is in place.

As Jess reported, the third quarter of 2008 was flat in terms of our revenue and our new patients adds were down slightly from previous several quarters. This was not a surprise to us and it was consistent with comments we made during our second quarter call regarding the shift in our business from a cash pay basis to a broad reimbursement model. During Q3, we continue to see tremendous progress on the reimbursement front with the adoption of a number of new coverage policies for CGM and the establishment of contracts to cover our products including key contracts with Blue Cross of California and Athena.

We estimate that today in United States there are over 100 million lives covered under CGM policies and expect that number to grow as we enter 2009. Yet these coverage policies and contracts have actually resulted in a short-term sales challenge. First, we are faced with a situation where our patients and physicians are increasingly aware of our reimbursement progress and are now much more reluctant to initiate a cash purchase. As we mentioned, this is not atypical in medical device situation where reimbursement is becoming more prevalent but is not yet universal.

Second and more importantly in spite of these positive coverage decisions, plans have made it administratively challenging for patients and their physicians to demonstrate medical necessity and ultimately receive reimbursement for CGM products. On average, we are now required to collect five to six new documents per patient and submit them as a package to the payor as part of the approval process. Required documentation can be as simple as an insurance card and an Assignment of Benefits Form, but it can also include the previous two to four months of the patient’s blood glucose logs, a Letter of Medical Necessity prepared by the physician as opposed to a DexCom form letter and a copy of the physician’s handwritten note regarding the specific patient. And all of this must be done under the format of HIPAA compliance.

Again, this is not atypical in medical device situations where reimbursement is still developing. In spite of these new requirements, the rate of new patients entering the system continues to increase. We believe patient demand for the SEVEN is real and is growing. Over the past several weeks, we have seen the number of successful authorizations for entrance reimbursement increase, and we believe that as the insurance companies gain experience in processing CGM claims they will gain a better understanding of what information is appropriate and necessary to make a coverage determination and ultimately we expect these administrative challenges to resolve themselves over the next several quarter.

Nevertheless, in order to ensure DexCom has sustained power to overcome these short-term challenges, we have taken steps effective immediately to reduce our cash burn by approximately 15 to 20% with a goal of reducing cash used in operations on a quarterly basis to approximately 11 to $12 million of the second half of 2009. We are taking important step today to improve our cash efficiency, optimize our internal return on investment, and ultimately ensure we have the resources to compete as a CGM market more fully developed.

A quick update on our insulin pump partnership with Animas Corporation. We continue to make substantial progress on the joint development of an integrated insulin pump CGM System with Animas Corporation. Our continued goal is to complete all development, clinical and regulatory efforts with Animas and be positioned to launch our first product during the summer of 2009. But, as you are well aware, the timing of regulatory process is uncertain.

We were extremely excited to see the study data presented by the Juvenile Diabetes Research Foundation at the 44th Annual Meeting of the European Association for the Study of Diabetes in Rome in September. For the first time, a truly independent study demonstrated that CGM is an effective tool to improve glucose control without increasing hypoglycemia, a common concern for patients employing intensive management. The 322 person, six-month, multi-center randomized trial included both pediatric and adult patients who used either insulin pumps or multiple daily injections to manage their diabetes.

Highlights from the data presented at EASD include: the adult population being the primary endpoint and achieving an A1c drop of 0.53%. The adult and pediatric population hitting their secondary endpoints with patients who either reaching an A1c less than 7%, achieving an A1c reduction of greater than 10% from baseline are achieving an overall absolute 0.5% reduction in A1c. Most importantly, this improvement in control was observed without an increase in hypoglycemia, which is a common concern in intensively managed patients trying to achieve improved glucose control.

Finally, while there was no significance observed in patients aged 15 to 25 due to low compliance, patients of all ages or in sensors for six days or greater per week at an average A1c reduction of greater than 0.5%. As the only company with an FDA approved seven-day sensor, we believe we are uniquely positioned to help patients achieve better glucose control. We applaud JDRF of their continued support of outcomes studies in the area of CGM technology and are extremely encouraged by their results.

In summary, CGM is here to stay. The data is clear. The study data presented by JDRF at the EASD meeting simply confirms the data presented in each our peer reviewed public studies showing significant improvement in glucose control and outcome. CGM is the first glucose monitoring technology to demonstrate both a reduction in hyper and hypoglycemia enabling more aggressive management of diabetes. The key thought leaders around the world in diabetes are saying CGM will be the standard of care in the next two to three years for broad segment of the diabetes population. Today we are renewing our commitment to the CGM category to patients and clinicians in both the hospital and in the ambulatory space into growing and important invaluable business franchise. With our leadership role and CGM, we must stay the course in building the category so that we will ultimately gain acceptance of our CGM products as the best standard of care for glucose management.

Thank you. I will now entertain questions.

Question-and-Answer Session

Operator

(Operator Instruction). The first question comes from Bill Plovanic with Canaccord Adams.

Bill Plovanic

Great, thanks. Good evening.

Terry Gregg

Hi, Bill.

Bill Plovanic

I will ask few questions and I will jump back in the queue. My few questions it is, number one, relative to reimbursement you mentioned 100 million plus lives covered today. What is your thoughts on timing of getting north of 120, 130 million covered lives, are you close, is this going to be end of ’09 relative to reimbursement? And then the second question is on your cash burn. You mentioned, I didn’t quite get it, you are reducing your cash burn by 15 to 20% in the second half of ’09, exactly what you are reducing it to, how are you doing that and it sounds like you are trying to stretch the money to last through to the end of ’09? Those are my questions. Thanks.

Terry Gregg

Okay, Bill. Let me answer those in the order you ask, and the first one with regards to reimbursement and I will address by saying it's always hard to look at crystal ball and determine when a coverage decision will actually be issued. That said, if you remember in January of this year, I stood up at the JP Morgan Conference (inaudible) I thought we would have one national payor by the end of 2008 and we’ve got four out of the national payors waiting only on United. I can’t speak for United addressing this in the next 60 days, but we continue to make good progress not only on coverage decisions but in initiating contracts once the coverage decision has been published. So, I think it’s continuing to grow and I think ultimately we will have not only the national payors but most of the tertiary, secondary tertiary payors that often times follow the national payors lead.

With regards to cash burn, I think I will take it from a top down look at it. As we went out and looked at where we were spending our money, obviously, we have historically been very focused R&D company that has commercial products. So we made a decision having gone through a lot of diligence with the good folks at Edwards to really focus on what was important, what’s going to drive near-term revenue for us. And although some of the R&D projects are explicit and we clearly have the best technology out there, our product class now well beyond seven days and clearly has the top hypoglycemia awareness capability and detection but alone the smallest footprint. But beyond that there are other areas in which we decided to either postpone the development from an R&D standpoint or in some cases if necessary eliminate it altogether. The reason that I had to focus on saying less than 12 million, somewhere in the 10 to 12 million per quarter by the second half, we have certain commitment that we have already made to our partners and in filings that we have already committed to the Food and Drug Administration and we need to fulfill those. Those should be forthcoming in the first and second quarter of 2009 and then obviously we will commercialize those in someway but reduce some of that expenditure. The other side of it is today we reduced our headcount effective this morning by some 10% in a number of different areas within the company to again try to increase our runway.

Bill Plovanic

Okay, that’s all I have. Thanks so much.

Operator

And next we will take a question from Ben Andrew with William Blair.

Ben Andrew

Good afternoon Terry and Steve and Jess. Maybe talk a little bit about Edward's transaction and kind of how we should expect the cash flow here? Is this the milestones you are just -- can you identify those anymore precisely for us, or is that confidential in terms of the timing and is the R&D like that is spread evenly over I think it’s basically 18 months that you identified?

Terry Gregg

I want to ask Steve address this, because he was the primary negotiator on our side of the equation.

Steven Pacelli

Yeah, Ben. The way it breaks down it’s effectively an upfront payment for kind of exclusivity and there is some R&D offset dollars that will basically flow on an amortized basis, on a monthly basis throughout 2009 and into 2010. And there is no specific performance metric tied to those in the sense of you know, it goes on -- I wouldn’t call them milestone basis as long as the development is pushing forward or continuing that to make progress that money was coming on a monthly basis. And then the milestone payments are tied to specifically to regulatory approvals and I think without being specific there is some money specifically tied to a CE mark approval and an FDA approval which would be sometime in '09 would be the goal. And then some money tied to a second generation product that the goal would be to get those approved in '10 timeframe. And that second generation would be integrated to Edwards System. We haven’t released the specifics on that yet.

Ben Andrew

Okay, fine. And then if you think about kind of the dollars you are spending here, does that largely offset your expense for the in-hospital product or are you still going to be absorbing a fair bit by yourself?

Steven Pacelli

Yeah and I interacted, it completely absorbs the expense on the R&D side, plus there is the exclusivity portion, and that may covers -- we have got some responsibilities on the clinical and the regulatory side, there is money in this – in these payments to offset expenses as well.

Ben Andrew

Okay. And that will be in R&D offsets or we see R&D come down, is that right or it will be on the revenue side?

Jess Roper

We have discussed that previously, but its likely that display would somewhere to what we did with Animus and that will have development grant revenues offset by development cost of sales.

Ben Andrew

Okay. And then….

Jess Roper

And then finalize that of course in Q4.

Ben Andrew

Sure. And then Terry the cuts that you made in headcount, can you describe sort of where they were and are there any particular projects or initiatives that that might have generated revenue in next couple of years that are impacted by them?

Terry Gregg

No, the back answer Ben is there was nothing in those developmental progress or programs that would result in any revenue over the next couple of years and that’s why we either elected to postponed them or elected to eliminate them all together. I think one of the challenges in developing discipline as the company, there are lot of unique technologies that we were pursuing that were very interesting. I am not sure that given the value preposition, they were worth the expenditure of dollars. So the cut obviously came a lot related to a reduction of those projects. There was some other just general I think tightening of the belt type reductions also as we looked at our business. I would say that as also when you look at the SG&A that we had increased some of the back office situation that we are now challenge with regards to the reimbursement, we have had to address that in many cases just what brute-force. But other than that its just been a general, like I said belt tightening on our part.

Ben Andrew

Okay. And if I can, one last question. Talking about the payers, you know, how come located as if to go through this logistical process with an individual patient and is there something that becomes routine very quickly for payer or is there 250 local insurance payers that you got to go through this process with every single one on a couple of times before they recognize it? So is this national or is this really a local battle, if required to brute-force you talked about?

Terry Gregg

No, it is national unfortunately. I really wish it were local. But as we have looked at this, we unfortunately have been forced into the old pump model because that's what the payor system was kind of forcing us into and so we have resisted as much as possible. We do need to streamline us. Brute force is only on a temporary basis. I would just say that we don't lack patience in the process. We have -- our sales force has done an outstanding job of driving business in through the doors. We've not been able to adequately process those to get them reimbursed and patients in this economy have dramatically shifted from a cash pay to a reimbursement. If they think they've got any chance of getting reimbursement, they will postpone their decision. It used to be just swipe the credit card. Now we are asking patients in that scenario that they are looking at, let's say $200 a month and over a year period when they are also trying to put food on the table or gas in their tank, it's just been a real struggle because of the economy that has shifted over to the reimbursement. And this is just the collection itself. And then having to transmit that information over a secure factors for HIPPAA compliance. And if one document is not in that package or one T is not crossed appropriately, the Letter of Medical Necessity or Certificate of Medical Need does not meet a standard, again you use the number 250, I'll say it's at least that, if not more, then we got to collect that information and resubmit it. It is a paperwork log jam that we are working through as quickly as possible. But certainly and I give a lot of credit to our sales force, we have more patients than we can possibly handle right now and that's been part of the problem.

Ben Andrew

Does the co-pay become a problem for any patients that you’ve heard about that might restrict uptake in this environment?

Terry Gregg

None whatsoever. The co-pay has been a blessing. I think we have had great coverage from that standpoint. I think it's just getting to that documentation and getting that prior authorization through the system has been the biggest barrier at this point.

Ben Andrew

Thank you.

Operator

Our next question comes from Tom Gunderson with Piper Jaffray.

Amy Sullivan

Hi guys. Actually it's Amy Sullivan in for Tom today. First of all, congratulations on the Edwards transaction.

Terry Gregg

Thank Amy.

Amy Sullivan

Couple of quick housekeeping things. At the beginning of the call you mentioned sensor revenues down, was that 5% or 7%? I missed that.

Terry Gregg

That was 5%, Amy.

Amy Sullivan

Okay. And then did you give a dollar amount as far as the total milestone payments with Edwards?

Terry Gregg

On the hospital side?

Amy Sullivan

Correct.

Terry Gregg

Yeah. It’s up to 13 million.

Amy Sullivan

Okay. And then you talk about being on track as far as the timeline with the Animas combination there. Does that mean that you are looking to submit before year end?

Terry Gregg

I think we are going through that process right now with Animas and in fact I'll be chatting with them to get an update this week, to be sure. But as far as we can tell at this point, all systems are go. We have a human use requirement. We've engaged that that's on track at this point and active. So unless there is something that we are not aware of, by either company at this point, again I always want to hesitate because this is a brand new product. But as far as we can tell, we are on track.

Amy Sullivan

Okay. And then just two final ones, if you can give us an update as far as where things are at with your work on getting CE Mark. Then I'm also curious as far as how your conversations with payors may have changed with all the new data that was released in Rome in September?

Terry Gregg

Well, CE Mark we have gone through our ISO audit. We have been informed by our notified body that they are recommending both certificate for ISO compliance and certification and simultaneously CE Mark authorization. And so I would expect, I think we have given Q4 as our date previously and we are holding to that date as we speak. The other question you had Amy, I'm sorry.

Amy Sullivan

Just with regards to the data that was presented in Rome?

Terry Gregg

On the payor, yeah. It's just been part of this compendium of data information that we have continued to submit as things get published. We add to our packet of information. I think it’s – the goal now is for the them to digest it, them being the payor system. And our goal is to demonstrate to them that if you look at the entry criteria for this population that were actually relatively well controlled that in average A1c upon entry of 7.6% and clearly demonstrate in a reduction of 0.5 in that plus if you look at secondary endpoints being met even more dramatically if they use the product six days or more. That information is going back to all of the payors with the – right now, as you well know, most of the companies decision are relatively limited to something about hypoglycemia, recurring hypoglycemia and awareness. We don’t think those coverage decision should be as restrictive and this data certainly clearly demonstrate that I think along with the JDRF campaign, public relations campaign, going back to all of the payor system to expand those indications for use, that’s where we are at at this point.

Amy Sullivan

Okay. Thank you.

Operator

Next we’ll hear from Mimi Pham with JMP Securities.

Mimi Pham

Hi good evening. In terms of Edwards product, would you be receiving any minimum payments on royalties if for some reason commercialization is delayed beyond 2010?

Jess Roper

Without going into specifics, Mimi that the royalty and profit sharing is based solely on the commercial launch, so the answer in that respect would be no. Again, we have divided this up. There is an upfront element, there is impairment R&D offset payment, probably I’m not using the right term from an accounting perspective, but they are funding on a monthly basis as they discuss to account for our R&D expenditures, and their milestone payments based on regulatory approval. If for some reason the approval would delay, those payments would not be payable until that we receive the approvals. If that answers your questions then yes, if there is a delayed approval there is some portion of the milestone payment that would be at risk for a delay or reduction depending on the nature of the delay.

Mimi Pham

Okay. And then, in terms of your 10% of the profit share or just under royalty, is that of the price of just the standalone system? Like if it is integrated into some other system or product, how does that lookout?

Jess Roper

It's based on the disposable sensor component of the system.

Mimi Pham

Okay. And then – just in disposable component?

Jess Roper

Yeah.

Mimi Pham

And then you mentioned just being responsible for the initial manufacturing in that something where you would potentially convert the manufacturing to Edwards, all of it?

Terry Gregg

I would tell you it’s our present intent to continue to manufacture sensors. Edwards have some rights under the contract to take over manufacturing at a future date, which is where shifts from a profit sharing world to a royalty world if and when that shift for manufacturing would occur, but I would tell you that it is our present intention I believe Edwards as well would prefer to have manufacturing the disposables.

Mimi Pham

Okay. And then a couple of questions on the homely side, can you give us an idea just generally of customer retention in terms of the patients on the SEVEN?

Terry Gregg

Yeah, we have never publicly disclosed the data and we are not inclined to for competitive reasons more than anything, Mimi.

Mimi Pham

Okay. Thank you very much.

Operator

(Operator Instruction). We will take our next question from Sara Michelmore with Cowen & Company.

Sara Michelmore

Well, Terry, I am interested in getting your thoughts on the JDRF data that was presented back in September in terms of the compliance factor in that data set, there were some age groupings that did better than others which was attributed to some differences in compliance. I am just wondering what your thoughts are there in terms of the impact of the device in certain each group particularly juveniles and what if anything does that mean in terms of device design going forward?

Terry Gregg

Well, certainly when you looked at the, what I’ll call that we had a lesson group. I think [Bill Timberland] from Yale summed it up perfectly by saying, my teenagers didn’t have diabetes and they were non-complaint as well. I think that’s part of this image issue that teenagers go through once, a much greater degree of privacy and that’s part of the psychological challenge. I don’t think it’s a product design issue if you look at pediatric group. Obviously a lot of parents are insisting on that. The design is more than accurate. Again, I wouldn’t say that there is any requirement for a design change. And patients basically from our perspective, we make it very convenient. If you look at the utilization of six days or greater to have the highest degree of results, all the other competitors have to change it at least once if not twice during that timeframe, we don’t. So we, in fact an interesting act though is we have previously said that once reimbursement was in place we felt that that would reduce the reliance of patients using the product beyond seven days. And I think now looking at some of the data we look at that may be wrong and that’s nothing to do with the costs that has really to do with convenience of not having to exchange it out and any timeframe we know they routinely use it more than 10 days and I think given the economy, they are probably stretching it even more than that. We certainly routinely here have used beyond two weeks on a single sensor. But the data I think was so powerful, there was a lot of speculation relative to the design of the trial reflecting back on the star one trial that probably failed because of lack of adequate compliance, not because of technology from that standpoint or even protocol design. If you really kind of carve out some of the non-compliance issues in the star one trial, it is highly statistically effective. But from our standpoint, I am very comfortable with the way that the trial was run and the fact that -- again remember at some point starting A1c is a lot harder to get down to a 0.53% reduction than if they were starting at 8.5. So I think the data itself was overwhelmingly positive.

Sara Michelmore

Okay. And started to answer my second question, which was related to center frequency and if you tend to sort of take an average, I understand that there is people that do use it for extended use. But what’s your best guess in terms of the length of time that folks are using the sensor? And are people using the sensors intermittently in your view or they are actually using it continuously? Thanks.

Terry Gregg

Yeah, I mean that’s a good question. I think that patients are using it longer than ever before and we have routinely here a bit more than 10 days. If they can get it out to two weeks, they will. I think you have where we begin to see stretch uses is obviously just analyzing from a cash pay group versus a reimbursement group than they’d be using it a bit longer. But I don’t see the – it’s hard to tell if it’s intermittent use. If somebody is using two a month, is that one week intermittent users have 100% 14 days at a time. We don’t have the optics on that sampling. But in terms of average utilization, we haven’t seen a change in that in the last two to three months.

Sara Michelmore

Okay. And any change in terms of dealing with the physicians and their receptiveness to the product, we talked a little about patients and insurers. Any changes going on on the physician side in terms of acceptance in the technology interest and kind of going through the hassle of dealing with the paperwork, et cetera?

Terry Gregg

Yeah, we have seen a dramatic uptake in physicians wanting to use it. I think once you got your key opinion leaders moving from only the most intensively managed patients to publicly stating all patients with diabetes should be using this as a standard of care in the next two to three years. That migrates into the decile list of insulin prescribers and we are beginning to get more and more request for information, more and more request for training and education at the physician level. So there is no – there is absolutely no lack of patient. I really wish and I am not going to disclose the number because the folks here won’t let me, but I will just suggest to you that our funnel is full, our sales force has done an outstanding job. We have sale them from an internal processing. The insurance companies have sale them from internal processing. They are not the physicians prescribing or the patients wanting. We do not lack for demand. It’s the ability to process it in a timely fashion but it is our #1 priority.

Sara Michelmore

Okay. And what loosens up the lock jam, Jerry, and what timeframe can we hope that things get cleared up a little bit here.

Terry Gregg

Well what loosens up the log jam is just processing more and more processing, just brute forcing those files to go and be receive by a claims adjuster. And I think its going to resolve it self over the next several quarters as I mentioned earlier. Its just -- its not, -- if its going to happen then when its going to happen. Again I can't tell you more distinctly then several quarters we have over the past probably six weeks, saw a dramatic improvement in terms of processing some of that as us, by throwing more resources at it. Some of that is system opening up a bit as insurance companies get a bit more comfortable with the whole process.

Sara Michelmore

Alright, thank you.

Operator

(Operator Instructions). Next we will hear from Shawn Fitz with Stephens Incorporated.

Shawn Fitz

Terry, just as you kind of drawn your expense, imagine to a similar reimbursement cycle on the pump side, is there anything unique you are seeing in terms of the administrative difficulties that you all are having to process through on the CGM side?

Terry Gregg

Not more difficult, actually less difficult. I see everything happening faster Shawn. And I think the real reason back in the old pump war days, utilization relative to pumps was not directly at the time before reimbursement was not as closely connected to the benefits of A1C improvement. Today nobody disputes that and that was really I think once pumps got reimbursed that was based on that you had a tool in which could lower A1C. There is nobody who doubts that improved A1C is better. I think now we are into a new paradigm where A1C where A1C is a surrogate marker. But it's probably not the best surrogate marker, because if you look at multiple patients with similar A1C's or glycemic variability profile or much, much different, one will be 80 to 150 another will be 40 to 400 and the value of that total glycemic exposures now coming into play. But that’s I think still at the scientific level and the key thought leader level of what to do about that, but clearly reducing A1C. So everything, again I remind everyone that in January we went out on a limb to say we thought one national payer would issue coverage decisions and quite frankly we would be from a financial standpoint as company probably and that economy and taken a down turn we would probably be in better shape in terms of the revenue number, because we would still be more skewed towards cash pay. This caught us all by surprise. I never thought when I stood up in January that we would have all of these coverage decisions and contracts in place and then be forced into a situation of data accumulation, manipulation and submission that we are bogged down with today.

Shawn Fitz

Right. And so Terry I guess as we look for way points in terms of adoption curve on CGM there is nothing that you are seeing right now that would make you think that that curve would be any lower, or less of slope than what you saw on the pump side of the world?

Terry Gregg

No, no far, it’s actually going to be steeper. And I think if you look at even next year was integrated a pump with Animus that’s going to drive adoption as well, because that’s a lowest of the low hanging fruit, in terms of that intensively managed population. Plus right now you know, I have said historically about 50/50 pump versus MDI use. My guess is today it’s probably 60% pump use in our population, 40% MDI. So clearly I don’t see anything other than a steeper adoption curve as we go forward and more information is even presented from that standpoint.

Shawn Fitz

Okay, great. And then one last question. Just as we look at your customer mix, could you give us a ballpark guess on kind of what you are self pay mix looks versus those who receiving the reimbursement from insurance?

Terry Gregg

Sure. Yeah I can tell you that. I just got this from the sales guys. And a bit ago we were 50/50, we are now probably 65/35 reimbursement versus cash and moving rapidly to more reimbursement less cash.

Shawn Fitz

Okay, great. Thanks for your time guys.

Operator

Next we will take a follow up question from Bill Plovanic with Canaccord Adams.

Bill Plovanic

Great, thanks. Just a couple of house keeping questions. On the first upfront payment, the $13 million you are receiving from Edwards, is that going to be amortized quarterly? And if so, how much per quarter?

Terry Gregg

Bill, we'll get that within 10 days. We signed the agreement today. It’s due within 10 days of signing.

Bill Plovanic

No. But I mean, how -- how long is the agreement for?

Terry Gregg

Yeah. You are asking how Jess is going to…

Jess Roper

How are we going to account for it, Bill?

Bill Plovanic

Yeah.

Jess Roper

I think it’s similar to what we did with Animas. It’s likely that the upfront three-year the 13 million will be over a period of time that all parties have the rights to update the spec on the product. So we are looking at two to three year time period. We have the development dollars, which will be – we will receive and then we will amortize those on a regular straight line and then we have the final payment of the milestones that will account for at the time of receipt.

Bill Plovanic

Okay. So on the upfront payment probably three years is a fair assumption to make is what you are saying?

Jess Roper

Two-three year, correct.

Bill Plovanic

Okay. And then on the headcount reduction, where there any sales and marketing folks cut with that?

Terry Gregg

No.

Bill Plovanic

So you are still -- how many reps you are carrying and where that is today? 25, right?

Terry Gregg

Yeah. We've got 47 in the field between sales reps and clinical education specialists. Constantly, I think that's sized appropriately at this point with where we are at on the reimbursement and we watch it. We are overlaying where we are getting better reimbursement over the sales territories. Obviously we don't have the best geographic coverage that I would like. Part of that we need to continue to leverage our partners in terms of both Animas, Insulet and potentially other partners in that same skew, but at this point I don't look to change to size the sales force any differently. On the marketing side, one of the things that we do need to do, and we are - part of our development is to and we really haven't had until Claudia Graham came on board last month, or September now, we didn't really have much of a marketing department to speak of. And I think that that's - we just couldn't find the right people. I won't say how long I chased her, but sufficed to say that that she was on my radar screen. In any event we need to improve in that particular area with regards to branding and messaging.

Bill Plovanic

Okay. And then Jess, the restricted cash on the balance sheet, it went up significantly it’s close to $5 million. What exactly is that for and why is that restricted?

Jess Roper

It did. It went up from about $914,000 at year-end to over 5 million what you see now, and that is for the - to secure the equipment lines that we have. We have two equipment lines from one single lender. And as that is repaid, approximately a little under $200,000 per month or a little under $600,000 per quarter falls off that restricted cash balance.

Bill Plovanic

Okay, so it's just coming off of it. And then as we look obviously the capital markets are challenging these days and congratulations on the deal with Edwards. It gives you some more cash in the bank. I mean, just looking at what you started with, and what you have added and what your current burn is, you have probably somewhere at the current burn, even when you start dropping it down a little about three to four quarters of cash. What's the strategy at this point to when you get to the end of '09 and into 2010 to bolster the balance sheet?

Terry Gregg

That's a great question. Obviously we are in constant communication with our Board of Directors on that, Bill. And at this point I would have to defer any discussion. The Board has asked us not to comment on that.

Bill Plovanic

All right, thanks, Terry. I appreciate it.

Terry Gregg

You bet.

Operator

And we have a follow-up question from Ben Andrew with William Blair.

Ben Andrew

A couple of quick things. Terry, maybe talk about the back office staff you have got in terms of if you can, number of people and how well sized is that for patient growth over the next year? And a related question and I guess maybe even answer first, would be given the backdrop, what should we expect patient adds to grow sequentially for few quarters or is going to take that long before you think it actually starts to get back up to 1,000 plus patients per quarter?

Terry Gregg

Yeah, I mean, you are right, I should – I’ll answer the second part of the question first. It certainly over what we did in the third quarter, we did SEVEN, SEVEN, SEVEN. I will tell you that we had a far greater number in Q than that number that we processed. I can’t describe how many more, but it was significant. I would hope to be able to get, if it’s the last six weeks are any indication of at least a bit of break in log jam then I would hope sequentially then that we are able to do better, but right it’s too early to really go out on too much of a limb to say that absolutely. I still think it’s a couple two to three quarters away that we completely get it down and get it processed. We are not – again we are not lacking. One of my biggest concern is we are working through the backlog now, but we are still getting patients in each and every day and so, they are adding to the backlog. Unfortunately we are still not at a point that we are processing them as fast as I would like us to. Some of it is our system, some of it – a lot of it is that the third party payer level that – and remember we also have to use [DME] suppliers in cases where we don’t have a contract for the particular payer yet and they do, they are in network system. So add to that the complexity of – take all of those information that we normally would submit to a payer and actually submitting it to the other third party for them then to process with the payer. So it’s pretty complicated right now, I don’t really want to go into staffing. It just equates I think we are adequately staffed in that particularly arena right now, it’s a matter streamlining. We have to become more efficient than we are today, and it’s more efficient not only on our side but also on the receiving end from the payer standpoint that they understand what these packages and they can turnaround. Remember who gets these packages, it’s a claims adjuster who is looking out a formulary document and saying, (inaudible) and if it get rejected for any reason whatsoever we go to appeal. So right now it’s at the early stages and we are having to work through a complicated issue right now. Again given my history and having gone through this previously in the pump world, its’ solvable, it’s frustrating, our sales force is frustrated because they are doing everything we ask them to do, but we are just continuing to force if there is a system that’s necessary. We do send sales forces into clinics to collect paper rather than selling, they are not happy with that, but that’s the way we have to do to clear the long jam, periodically we will send them in.

Ben Andrew

Okay, thank you.

Operator

At this time, there are no questions in the queue and I will now turn the conference over to our host for any closing or additional remarks.

Terry Gregg

Well, again, thank you for joining us today. Obviously, a very exciting time for DexCom. We believe that the partnership with Edwards allows us to take our technology into another particular area of glycemic control that is in reality far greater than our ambulatory world because the condition is called stress hypoglycemia, now it should relatively stable patient, have an inability to control their glucose levels and have to be instituted on intensive insulin therapy in order to stabilize them and the resulting better outcomes in morbidity and mortality, provide us with a unique opportunity. We believe we have the best system and Edwards certainly has looked at all the players in the space and chose us, because they too believe we have the best system. On the ambulatory side, we are making great strides and progress. It’s not without its frustration as we go through this, but the adoption is where we predicted it would be and it will be even north of that, but it’s a back office devils in the details that we are dealing with at this particular point in time, but there is a great future ahead of DexCom and thanks again for listening to and supporting us.

Operator

And that does conclude our conference call. Thank for joining us today.

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