DexCom's CEO Presents at Barclays Global Healthcare Conference (Transcript)

| About: DexCom, Inc. (DXCM)

DexCom, Inc. (NASDAQ:DXCM)

Barclays Global Healthcare Conference

March 13, 2013 02:30 pm ET

Executives

Terrance Gregg - CEO

Kevin Sayer - President & Chief Operating Officer

Analysts

Unidentified Analyst

Thanks for joining us this afternoon's session. I am really pleased to have DexCom with us today, and we have Terry Gregg, the CEO and Kevin Sayer, the President and COO. So, DexCom, as most of you probably know has had a lot of success lately in product approvals and partnerships and certainly has a lot going on in terms of making improvements both, on the top line and on the gross margin side, so we're hearing a lot of about that. Do you want to start off with just some opening comments in terms of the product launch that you are driving and as you report higher gross margins over the next few periods here?

Terrance Gregg

Sure. Well, as you know we got approval for fourth-generation glucose sensor last October, so we've been in that full launch mode since then. Here we are into the last weeks of the quarter and excited. That's the way I can describe it. Demand has remained strong. We live in a cyclical world with the DNA business whereas the first quarter sequentially after strong fourth quarter tends to be weaker. We certainly expect some of that, but as looking at the pipeline, what we pipeline having to do with the number of patients that have asked for the product going, go through benefits analysis for them. That remains as strong as ever we've ever seen.

It's certainly stronger than any first quarter following a strong fourth quarter, so all of that, and I'll have Kevin talk about margin, but all of that drives to volume and volume drives to improved margins. So, we're exceeding our expectations in the performance of product at the user level and at the prescriber level, and so we think that this really meets the criteria what CGM has been expected to be over the years, but really unfortunately including us failed to reach that criteria until the Gen4.

Kevin margins?

Kevin Sayer

On the margin side, our fourth-quarter margins were strong due to a number of factors. The volumes that we generated, a number of units that we produced, not just sales, but our manufacturing lines were very high in anticipation of the product launch as well.

As we move into the first quarter, those were offset by startup yields, which were acceptable as we planned on. As we moved into the first quarter so far, our margins targets, we're hitting them, our yields have been very strong on the Gen4 product. It was originally designed as a cost savings product evolution on our product pipeline and those cost savings, they are coming to fruition as we go.

Unidentified Analyst

You've been working on some pediatric communication, so?

Kevin Sayer

We filed our pediatric labeling indication in the first quarter with the agency, so we will go from there.

Unidentified Analyst

In Europe, you received CE Mark in the first quarter. Is that correct?

Terrance Gregg

Yes. We just felt the advanced technology meeting was in Paris two weeks ago. We had two sets of banners. One without pediatric indication and one with pediatric indication, we got it two days before going into the meeting, so we're now in the process of doing the necessary labeling updates and our goal is to allow our distributors who represent us in the European sector to begin calling on that population early in the second quarter.

Unidentified Analyst

Can you just help us frame that additional opportunity with having that indication in Europe and in the U.S.?

Terrance Gregg

Sure. Well, let's start with the U.S., because that's still our largest market, and today there are somewhere between 800 and 1,000 pediatric endocrinologists that we don’t call. We do have an installed base. Let's say roughly 10% of our population are individuals less than 17 years of age, but that’s off label use, therefore we don’t compensate our salespeople for that placement on that group of patients. We certainly don’t call on physicians to prescribe. It's the physician decision or the parent's decision, so we think this opens up a whole new opportunity. We scale our sales force up by 20 new territories this quarter in anticipation of that as well as better geographic satisfaction to the prescribers that we're calling on today, and so we think that's an uptick.

If you looked at our guidance, for the year about $120 million to $130 million, 35% to 40% over last year’s product revenue certainly some of that higher end towards the upper range of the guidance is based on the expectation of a pediatric claim approval later in the year.

Unidentified Analyst

And you mentioned most of your businesses in the U.S., can you talk a little bit about the strategy outside the U.S.

Kevin Sayer

Right now there is not strong reimbursement any place outside the U.S. and so it’s been used largely by physicians in clinics and by people who do cash pay, but our businesses is growing very consistently, and as we've disclosed on our calls our U.S. revenues are nearing 10% of the total pie. We'll continue to grow that more rapidly than the growth the U.S., but proportionate when you get into numbers. U.S. will still be bigger.

Our approach right now is we are not going direct anywhere. We have a very strong network of distributors who distribute our products in the various geographies and we'll add several new countries this year. We'll probably double the number of countries we are in from today by the end of this year, not all of them are huge, but nevertheless every time we do it more translation this it's more manual it's more operational issues as well, so we are expanding internationally. We have good distribution partners. Roche is a very good distribution partner for us in some of these geographies as well. They have been very instrumental in helping us for our business. It is a good network and it's a good way for us to start.

Unidentified Analyst

Maybe just let's talk about Roche and some of your other partnerships just because you do have a few that are growing and important to the company’s strategy. Do you want to just touch on kind of each one and where they stand today with the major three or four companies that you are partnering with?

Terrance Gregg

Obviously the J&J is the most important partner for us right now. They launched Vibe in the European sector, which is the combination of their 2020 pump and our Gen4 technology back in the summer of 2011.

I think on their fourth quarter call, they mentioned that in the countries that they have launched the Vibe in Europe, they were enjoying 35% to 50% growth in those countries, so they now look to parlay that same type of opportunity here in the United States. Their goal is to file a PMA with the agency. It is their filing by the end of this month and so we expect hopefully by the end of the year that they would be able to launch that product. And, yes, we think it has tremendous upside, gives patients a choice for sensor integrated systems and I think their expectation is that they will do well in that marketplace.

I’ll turn Tandem over to Kevin.

Kevin Sayer

Tandem, we signed them originally to integrate with our Gen5 system, looking for something more down the line. As we studied this and Tandem being within five miles of us, we realized that we could speed that up by integrating the Gen4 system with their current which they launch in 2012 and they appear to be doing very well with (Inaudible), so we hear, so we are working on development. In fact, we finished feasibility with Gen4 integrating with their pump and they are now developing the systems and all the documents and everything necessary to file their own PMA for a combined product and we hope to have that done by the end of the year as well, so we'll have two pump partners filed by the end of 2013.

Unidentified Analyst

I think, before an audience question we have a couple of questions in terms of the feedback on DexCom's prospect. So, the first one is, what do you view as the biggest source of upside for DexCom over the medium-term, some of the stuff we've already touched on. The choices are Gen4 launch, pediatric indications or U.S. expansion, Animas partnership and Roche or Gen5.

Terrance Gregg

All right. We agree with you by the way. Yes. That for us I think in 2013 is the greatest driver. The Gen4 launch has been tremendous. To us given to talk about the Gen5 system, but I would say that that clearly the order in which you have, I probably would put even G4 launch a little bit heavier from that standpoint, the overwhelming.

So, when I talk about meeting the expectations of CGM, Kevin and I were together back in '99 when the first CGM product retrospective product was approved when we running

MiniMed and we all had hopes and desires about what that could be. We've gone through four generations of sensor technology, DexCom so together we've been in it now for almost two decades and I clearly think that’s Gen4 is the first one to have met that promise.

What we are seeing in the marketplace is the demand for it that certainly bodes well for the company and for the future. And expanding that indication, now as we look at next-generation moving to Gen5.

Kevin Sayer

You know the next generation, as we want long discussed takes us directly to a cell phone and that’s been our goal and our plan for the Gen5 system forever rather than terry your DexCom receiver around that transmitter sends a signal directly just something that's part of your everyday life.

We think that drives revenue significantly, but I agree with Terri. Over the medium-term, Gen4 launch is only four months old. We tend to forget that we're still in the early phases of it there's some [drivers]. The Gen5 system talked to a cell phone, there are a few hurdles with respect to the FDA that no one’s ever jumped over and so we do, and so we're traveling new ground, so I’m a little bit cautious about having that be the medium-term driver particularly when have all these other things that are going to be very positive for our company.

We do believe when we get that phone reading and every time we talk to a customer or physician anybody, we discuss product launch that's exactly what we need. That’s exactly what we need, so we know from a pipeline perspective and a marketing perspective, we're delivering what the customer and the patient is going to want to. It will be a huge driver for us, but these other two are so much more short-term. The G4 launch in the pediatric even the Animas filing and the Animas approval, they will be focused on that certainly for 2013.

Unidentified Analyst

I know it's early. Can you talk a little bit about how launch has exceeded your expectations and how you are thinking about it or modeling it and what do you think is really driving out of it just product performance or?

Terrance Gregg

It's a number of things, but first and foremost accuracy counts. So, the fact that this is the most accurate sensor that's ever been commercially introduced in the world has driven more patient response and adoption than we would have expected.

When we built Gen4, we built it for scalability. Got the late FDA and original Gen 4.0 let’s call it so we decided that part of Gen5 system was a new membrane, new algorithm and we brought that back into the Gen4, which then became Gen4 PLATINUM, so that did increased the accuracy, 20% more accurate, 40 to 400 milligrams of detection Phase 1 through 7, 30% more accurate under 80 milligrams or hypoglycemia detection. And, not only is it more accurate, but I think patients now have determined that it’s more trustworthy, so a coefficient of variation in the manufacturing line is around 7%. That means that regardless of a lot the that center comes out of you can pretty much be assured that the performance of that sensor is going to be no different than the sensor lot that you used two months ago.

And I think what we’re getting from the feedback from the physician population, the patient population is that they are trusting it, more they trust it, more than they trust meters and that belief system has I think a frequency of used frequency certainly of reorder that is at a higher frequency than what we expected, so it is exceeding the expectations. I think two other factors one, the form factor for the receiver. It looks like an original iPod.

We didn’t think a lot about that in terms of yes, we need to drive to that. I don’t think we realize the form factor would be so attracted to people. Males be able to slip it into a pocket, females into a purse. That’s been a big deal. I think also transmission range, so SEVEN Plus system had 5 to 8 feet between the transmitter and receiver or you lost packets of data the G4 PLATINUM has 20 to 50 feet. What does that mean? You can leave it on your nightstand, you can go to the kitchen do whatever you want. Have your coffee, come back 30 minutes later and yet you haven't lost any data, so the lack of that loss of data give again more confident. It's a more robust sensor, more durable. All of these factors have translated into not only great clinical appeal, but human use appeal, so I think that that for me looking at it as really driven this whole launch and continues. And we said well, we are hired 10 more people at the end of the year post launch just to handle the phone triage. They were temporary. Now they are permanently, because we have not seen a decrease in the number of calls that we're having to triage through the system and a lot of new patients.

The upgrade are pretty much through the system other than those that are waiting to upgrade on their annual basis either the 12-month warranty period, but new to CGM that's also coming not only from physicians prescribing, but patient-to-patient communication hearing about the performance of the G4 through blogs, chat rooms and that and reaching out not only to us, but to their healthcare professionals asking for the product.

Unidentified Analyst

So, this certainly keep answering in terms of improving the performance and also driving ease-of-use, can you talk a little bit about the context of a very Gen4 lunch, how incrementally you think Gen5 is going to be.

Terrance Gregg

Gen5, we're going to use the same sensor in membrane system that we have with Gen4. There really are a couple ways we can make it better performance wise, either changing the membranes which we did when we lost Gen4 or changing the software, the algorithm that calculates the glucose signal. We have several algorithms under development now, so more than likely by the time we get the Gen5 and maybe even before we get to Gen5 we can file an algorithm that will add incrementally to the accuracy with system that we have, particularly improving the accuracy the first couple of days before the sensor settles in, so we will continue to improve performance that way. We won't change the sensor membranes until we go beyond the Gen5 sensor system.

With respect to convenience, there is really a couple of factors there. Connectivity would be the first one. If we can connect not only just cell phones, but have network systems where we can get data to physicians, the loved ones to patients before we get to Gen5, we announced that, what we call DexCom Share in January that we're working on now. That's a cradle that will allow our Gen4 receivers to communicate to a phone after a secure server and then down to others. That connectivity future will definitely be weekly convenience and make it very much more usable for patients.

The third thing is just simple things like size, and buttons and screens and things of that nature, we really haven’t addressed that much, because we've been so focused on making a better sensor. We're now starting to do the things that another electronics companies would do, like a cell phone manufacture looking at the transmitter going okay how do we make it smaller and what we do with this to make it more cost effective, so those things will be baked in to what we do continuously over the next two years.

Unidentified Analyst

Another audience question? I want to ask the audience about use of capital, so next question is what you believe DexCom should do with the excess cash, so the question would be actually the bolt-on M&A, larger M&A.

Terrance Gregg

I want some excess cash.

Unidentified Analyst

Dividends, investment and pay down. So, at this point seems like investment is the choice the audience, but certainly that seems like what you are doing as a company. Do you want a little bit about how you think about cash going forward as you do increase cash flow?

Terrance Gregg

I like the internal investment 67%. Certainly the things that that Kevin talks about are the things that we want to invest in. I would go beyond that, so today we're primarily focused type-1 diabetes market. There are studies out, peer reviewed studies talking about the role of CGM in the type-2 market not only insulin using type-2s, which is about probably 2.5 to 3 times the number type-1 patients will have to use insulin in order to survive and then another study that was out where insulin wasn’t part of the drug regimen, so these were oral agents and again sustainability the fact that CGM opens the opportunity for us.

Last week, ADA amounts 22 million people in the United States alone that were afflicted with diabetes $245 billion every year. We think we can have impact by these internal investment and things of reduced calibration all the way to factory calibration then we talked about reducing the size of the transmitter and imagine a day where you slap a sensor on easily one-handed application it lasts for 10 days, 14 days and transmits all your information to a phone. Those aren't things that are wishful thinking on our part. Those are things that we are doing today at a rudimentary level in the R&D, that certainly things that we believe are attainable all because of the sensor explicitness that we are able to create, so I think that's the way in which we see future use of that.

Full time M&A, when I think of that, I always think it is their disruptive technology in which we need to have in our and the answer is no. So again, we've been doing this almost 20 years. I look at lot of stuff, part of one my roles as CEO is to look at those privately funded companies that may have interesting technology and quite frankly I don’t see anything out there in the landscape that we would need that is better than what we’ve got either today or in our pipeline with Gen6 and Gen7 Gen8 that's being developed by our R&D science, so I really see that that internal investment as the way which to create more value for shareholders.

Unidentified Analyst

Can you talk a little about the future in terms of future systems, talk about all the specifically what's your vision for how these systems will continue to develop and evolve in more of a continuous system?

Terrance Gregg

Yes. I mean, basically I have one statement. We will replace finger sticks. We will eliminate the need for patient to use finger sticks. That has been our stated goal. We are doing trials with technology, expensive technology today, but the fact is we are doing trials in which we can factory calibrate we've had them in patients and surgery, again factory calibration, and that the remaining RDs at the end of 11, 12 days to single-digit, so that is just a matter of when it happens not if it happens and that's for us call it the holy grail, but I think that will change the way in which diabetes is treated a very large scale.

Unidentified Analyst

A couple more for you, so I wanted to ask about the changes that you make to the sales force.

Terrance Gregg

Sure. I can take care of that. When we founded our company, there was a lot of educational efforts with respect to CGM and our sales force consisted of sales reps, some junior sales reps in some territories and a lot of nurse educators. As we look at going forward and look at what we needed to do in the future, we didn’t feel that structure was necessary. Most of our patients train with online tools and DexCom materials and they can train to use CGM in less than an hour, and if you don't like our tools, you can go to YouTube and find several hundred people who also teach you how to use CGM.

Some of them may be as good as the ones that that we provide our patients, so the investment in training was one we felt we needed to continue to make, so we took our sales force and we redeployed some of our resources creating 20 new territories. We had 48 territories, we now have 68. We moved some of our educators to those sales roles if that's what they wanted to do, we've take the educational effort and made it more of a phone-based or online-type training system where we're going to have CDs available on phone with specific target phone calls. We're going to call our new customer within x next period of time to make sure they have been trained and they know what to do and if they haven’t we'll call them again surely thereafter and quarterly checkups to make sure that CGM is doing well, so we redeployed our resources to have more direct feet on the street, calling directly on physicians, combined with more of a training system where we can better deploy the technology tools available in today’s marketplace.

Unidentified Analyst

Then maybe just a final and I'll wrap up you mentioned the pediatric indication maybe contributor to the top end, but do you want to walk-through guidance and some of the biggest swing factors that would get to the higher end versus the middle or the lower end?

Terrance Gregg

Sales. It's real simple. Consensus right now has us in the first quarter about 27, and we did 18 in changed Q1 2012, so any upside that obviously kind of changes the next week. Look back historically and say well roughly 20% of our sales for the year have come in the first quarter because of the seasonality and any factor that drives that these territories get online quicker. All of these drive that sales number, so we took our base case of 120 based on our stated comments 35% to 40% growth sustainable at least for next couple of years we'll start running into law of larger numbers challenges, but Kevin and I firmly believe that we can sustain this growth over the next two to three years.

Then we looked at what’s incremental. Obviously, pediatric. We did not bake in Animas Vibe numbers. If that happens towards the third and fourth quarter, yes, there's some upside. I don't think they have their launch plans completely wedded, so we can’t predict if they got a third quarter approval when they would launch and how much contribution that we would receive from that in the fourth quarter, but I think that those are the drivers for the rest of 2013 in that upside.

Unidentified Analyst

Great. Thanks. Thanks for your time. We're going there.

Kevin Sayer

Thank you.

Question-and-Answer Session

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