DexCom's Management Presents at Bank of America Merrill Lynch 2013 Health Care Conference (Transcript)

| About: DexCom, Inc. (DXCM)


Bank of America Merrill Lynch 2013 Health Care Conference Call

May 16, 2013 1:00 PM ET


Kevin Sayer - President and Chief Operating Officer

Steven Pacelli - Executive Vice President, Strategy and Corporate Development


Robert Hopkins - Bank of America Merrill Lynch

Robert Hopkins - Bank of America Merrill Lynch

I'm Bob Hopkins from Bank of America. I'm very happy to have DexCom as the next company. Presenting, Kevin Sayer, the company's President is going to be speaking on behalf of the company. We have a presentation with DexCom, and then we'll walk our way into some Q&A, and Kevin, thanks for being here.

Kevin Sayer

Our Safe-Harbor Statement, DexCom is focused on diabetes, and particularly glucose monitoring and measuring glucose. Diabetes, as many of you know is in fact a global epidemic. I started in the diabetes industry in actually 1994, a year before this, when there were 135 million people diagnosed with diabetes of all kinds. As you go through the next few years, 50% increase in eight years from 1995 to 2003, doubled from 2003 to 2012, and as we look in 2030, 552 million people will be affected with this disease.

Steven Pacelli, who's with me, recently went to China to meet with potential partners, and the number that we heard from the Chinese was a 100 million people today affected in their country with diabetes. The U.S. epidemic is awful. One in three children born will develop diabetes at some point in time.

Everybody knows somebody, who's affected by diabetes. What's been interesting in my tenure at DexCom, I've been here two years, I have older children and grandbabies now, but as I've been talking about this with my own children, I'm getting all sorts of information from my sons. For example, my older son's father-in-law is experiencing kidney failure as a result of Type II diabetes. My second son is an attorney here in Vegas, and after he heard the message, he is out hitting [my sales call] (ph) for the year, he has actually referred four people who bought CGM kits, including the managing partner of his law office.

These consequences are horrible; amputations, blindness, kidney failure; one-in-ten healthcare dollars is going to be spent on the treatment of diabetes, and we have the tool that should be the first thing used in taking care of people with diabetes, and we can do three things that are very fundamental to treating this disease in today's environment.

Number one, this is one therapy that can reduce costs. Strictly, in the Type I population, when you think of somebody with Type I diabetes, one hypoglycemic event, where your hospitalized, costs the system between $15,000 and $20,000. A year of CGM is a lot less expensive than that hospitalization. We can also reduce costs by measuring the effectiveness of other therapies. We'll talk more about that later.

We can benefit all patients. CGM is often looked at by people as a Type I diabetes product only. That will not be the case over time. Again, uses of diagnostic or intermittently by people with Type II diabetes regardless of the medication they take, CGM can benefit them. And finally, it saves lives.

So, we talked a bit about diabetes in general, let's talk about the problem that our device addresses, our solution, and then what we plan for the future. The problem is simple. To treat diabetes, you've got to know where you're going. You just can't make wild guesses and expect you're going to get there at some point in time.

And the challenge in diabetes management is very much portrayed in this slide here. People who have diabetes try and stay within a target range, which is below 110 milligrams per deciliter in the fasting range. If they take too much insulin and they go too low, they experience hypoglycemia, which has very, very dramatic short-term effects with respect to lack of cognitive awareness, possibly death.

Consequently, to keep from having those acute events happen all the time, patients run very high. They let their blood sugars be much higher than the target range, because they don't have to deal with the short-term things, and that high blood sugar level or hyperglycemia is what leads to heart attacks, amputations, kidney failure, and all the other things.

Particularly, as we see our patient base and we'll get into this a little bit later, we are seeing our patient base age along with the rest of the population, and these consequences are very real. Diabetes is extremely expensive. The costs of poor control are huge. $174 billion in total costs to the system is related to diabetes, 2.3 times higher to take care of a patient with diabetes than to take care of a patient without diabetes.

Fingersticks just aren't enough information. Everybody's seen a blood glucose meter and we all know what they are. They are a single point in time measure. They are also kind of painful. You stick your finger a whole bunch of times after several days and then you will experience, and we all test all of these things ourselves in house, one day I stuck my own fingers 60 times to prove a point to somebody about the inaccuracy of fingersticks.

And I'll give you a perfect example. I am wearing a sensor today. I've got a couple of receivers with me. I ate a chocolate muffin before I came in to see if I could get myself to spike all (indiscernible).. It's just not going to take affect quickly enough. But if I am doing a finger stick without washing my hands, that meter could read a number off the charts, a 200 number, when there is absolutely nothing wrong with me.

With our system, you know where you're going. You get enough information to look over the past hour, three hours, six hours, 24 hours, to find out what's going on with your blood sugars, and with those arrows, you know that you're going up or down and how fast those changes are occurring.

Diabetes treatment in the U.S. just has not met the goals that have been established. The DCCT is a monumental study in diabetes treatment for Type I diabetes, concluded in 1993 that intensive management in Type I diabetes through pumps or multiple daily injections leads the better care and they set an A1C goal of less than 7%. Well, back in 1993, 37% of people with Type I diabetes had met that A1C goal, and after all these years, 20 years later, we've only picked up 7% of the population that is meeting those goals.

A1C is a nice number, but it is imperfect. This chart represents a number of patients who were on CGM, all of whom are within the A1C target range. And you can see some of these patients to get an A1C are bringing themselves very close to bad things happening to them, car accidents, potentially death, and some go very, very high. These patients all have met the target goal of A1C.

Our solution, Continuous Glucose Monitoring. The meter companies would have you believe that if you take four fingersticks a day and put them on a chart like this and put a graph between them, that represents your glucose. And if you watch television, the Verio meter of Johnson & Johnson, advertises that they have glucose patterns. That is a Johnson & Johnson glucose pattern. That is what really happened with that patient.

Blood sugars went way, way above targeted range approaching 350, and they were out of compliance for a very long time, above 210 for almost five hours, dangerously low for an hour, above their high-end target of a 140 for 13.5 hours. Finger sticks just do not tell the story. We had a video, but it didn't work on the system. So I'll just move on to the next.

G4 Platinum is our current product that we sell throughout the world, and it truly established our leadership in the Continuous Glucose Monitoring field in United States. A year ago at this conference, we had our filing in with the FDA, and we're optimistic we'll have it approved by the end of the year. Those were optimistic timeframes for us for a full 12-month review and then been approved till this March. That product was approved in 177 days and approved in October 2012.

DexCom received an approval letter on October 5; October 20 we were in full scale launch. It is the only CGM with a seven-day life, and it is by far away the smallest sensor that can be used by a patient with respect to sensor volume and the amount that sits under your skin. It's also the most accurate device available, 19% more accurate than our previous product and 30% more accurate when blood sugars are below 70 milligrams.

And more important than just accuracy is what we call internally reliability. The measurements on this thing, the miss points are almost non-existent. The only time you miss a point is if you're more than 50 feet away pretty much. The range as we say is 20 feet is what we are able to label. If you are in a straight shot, you can get past 50 feet. Patients have found that very valuable.

We've also learned that innovative design is helpful, the user friendly controls, the colors, little more customization has all gone very well with this product. JDRF study has already shown that CGM in fact is a good treatment for Type I diabetes and does lower A1Cs if used regularly, meaning, most every day.

CGM is useful in all patients. Again, here is a study also recently completed where it talks about the benefits of all insulin using patients using CGM, and the second study here is a Type II study that was released about a-year-and-a-half ago, where Type II patients and not restricted to insulin using Type II patients were put on CGM for a significant period of time to learn how their bodies reacted to foods, exercise, and other things that happen in their daily life, and also how their bodies reacted to the medications that they were taking.

The results showed that just that short period of time with the little intermittent use on CGM throughout the study, patients were able to reduce A1Cs, I think almost to 4 point. There are physician papers by all the leading diabetes authorities on the utility of CGM in treating diabetes. And finally, and good for us, payers have really started reimbursing for CGM.

We have national contracts with all the large payers except for one. We certainly have regional contract with most of the BlueCross BlueShield entities. And in most cases, where we don't have a direct contract, it's really more for distribution purposes rather than for rejection of the therapy. And we work continually on improving our reimbursement position with these people.

Our future and what we really do, I'd like to talk about DexCom. We believe that CGM can become the first line of therapy for all insulin taking patients some day and for all diabetes patients. I was at a conference a year ago and a doctor was talking to me, we were across on the Sanofi booth. And Sanofi had this continual real running of why everybody needs Lantus, and they did a demo, bothered a Type II diabetes patient. His metformin isn't working for him anymore, he needs Lantus.

And I watched that for a long time, and finally turned to the physician, I said, okay, how do you make that decision? And he kind of looked at me, and he goes, well, I've been at this for a number of years, and that was my question. My question is what they did to use to make that decision with A1C, well how high does it have to be?

The CGM will be a great tool for people in deciding what therapies to use. It should be the first line of treatment. In any approach, these new Type II compounds are not cheap. They are expensive. When it comes to cost savings in the system, a newly diagnosed patient wearing CGM for a week is absolutely a wonderful thing to happen. And they are physicians in the U.S. in particular, for every newly diagnosed patient, who walks into their office, walks out wearing a DexCom CGM for seven days, to find out exactly what they're going to do, and how far their diabetes has progressed.

Insulin taking patient, that's pretty simple. The method of taking insulin is not necessarily as important as knowing what you're glucose is. We had a mini-type investor (John Boston), where Greg was last week, with a number of investors and two positions at the Joslin Clinic. And one of the physicians was asked, well, pumps and CGM, they need to go together. The physician's answer was very simple. You don't need a pump. They are nice, but you don't need one. You need a CGM to take care of yourself. And attitudes like this are changing all over the country.

Finally, any patient undergoing a treatment or a medication adjustment, wearing CGM is a very effective way to tell them how well that works. How we're going to get there? How are we going to solve all these problems?

Our first target market is insulin pumpers and where we have played very well up to this point in our existence. And there is about 400,000 people in the U.S. use insulin pumps, and we have a good chunk of change in that marketplace. Our next group will be those who use insulin-only to treat their diabetes, and that will be all people with Type I diabetes and Type II diabetes insulin users. And as people with Type II diabetes use insulin for a number of years, they become every bit as difficult to manage as anybody with Type I iabetes. CGM is very attractive for those patients.

Next, it'd be the Type II group that uses some insulin and some oral meds to help insulin absorption. And then finally, anybody who has been diagnostic, it can be a wonderful diagnostic tool. That's how we are going after the U.S. market. And that we've played very well here so far, we're starting to expand our circular out here and overtime we'll go to the other two.

The undiagnosed, I forgot the last circle. The undiagnosed is also very useful. We participated with a large corporation, who wanted to learn more about CGM. The entire executive team went on CGM for a couple of weeks. One of the executives came back and we uploaded this CGM. It hasn't been below like 150 for the entire period, had no idea that he had diabetes. He is now doing much better.

Globally, most of our revenues of U.S. as we say on our conference calls, 5% to 10% of our revenues are based in all these foreign countries. We are getting approvals all over the globe. We are going to expand our global presence to at least 30 new countries this year, doubling out international business. We have to focus on studies in those countries to enhance reimbursement and to broaden use of the therapy.

What's most of us have seen now and we get a lot of questions about our Gen4 product launches. Why is it going so well? Patients are beginning to drive demand. This quote, for the first time, I can get on it, I'm unaccountable for my disease.

Second one, after the trial, and this was a Type II patient-quote. Now, the Type I patient-quote, DexCom, they took it away from me. It was like a funeral. And I might add an over 50 Type II patient. And finally, it's just a huge success for me. It gives me control over my diabetes.

At artificial pancreases meeting a few weeks ago in Washington D.C., it was time for question-and-answers, after one of our presentations and the first guy who got up and talk was a physician from Maryland who did not believe our data. And he read stuff about prior products and kind of tried to aggressively go after our medical director.

The next person who walked up to the microphone was from the press and our people were intense or were little nervous as somebody from the press is going to the microphone. She proceeded to tell us that her daughter had been diagnosed with Type I diabetes in 2008. And then she burst into tears and talked about how she sleeps, mom sleeps with the receiver under her pillow at night. Daughter is in the next room, never missed a hypo event, never missed any problem. The whole family is sleeping better.

Patients are driving this demand right now. And obviously, we still save lives and we get countless stories. This is a young girl. We told this story a number of times, her DexCom went off in the middle of the night and without it her parents would have lost her. Our product pipeline and where we have been, everybody is pretty familiar with this. This was our DexCom SEVEN. SEVEN PLUS that was out for a long time. We've had a whole series of CGM products approved over the course of many years.

Our Vibe launch in Europe in 2011 has been very successful. During the last conference call talked about the fact that in the European markets, where the Vibe has been launched, their revenues have increased between 30% and 50% over that time period. Our G4 plan that was launched in 2012 and here is where we're going.

We do have a partnership with Qualcomm. We're working on data capture, data transfer, producing better reports. We have filed for pediatric indication. And we've filed that earlier this year. We hope to receive that indication before the end of this year and that will be officially labeled for pediatrics. The Animas Vibe filing happened in 2013 earlier this year again. We're hoping that will be approved in the not too distant future.

I'm going to talk a little bit more about the next bullet point down here, DexCom Share, which we hope to launch in 2014. Tandem Diabetes and other pump partner will file this year before the end of the year and hopefully it will launch in 2014. And in the 2014 and '15 timeframe, we expect to be directly to the smartphone.

DexCom Share is our first step to connectivity. As we look at our future product offerings, we're going to focus on three fundamental principles, performance and continuing to make CGM better, connectivity to make CGM data available to more people in better forms and highly convenient to make this easier for patients.

DexCom Share is a cradle than your Gen4 receiver, I have one here, and what I often see the muffin has take effect. I shot up to 110 and the odds are going up. So this receiver will fit inside that cradle. That cradle has a Bluetooth chip in it, that cradle will speak directly to an app on an iPhone or an iPod Touch or even in iPad. That app will then send all that patients data to a secure server where it can be shared with up to five people who follow that patient.

When it will happen and right now it's depicted as an nighttime product. As we've done our human factor studies, we've heard from numerous people, I'm going to make my husband take that to work. He is going to take it with him when he travels. We are making our kids take this to school. This will be really our first path in mobile health. All the infrastructure that we have to build for this product will be applicable later on as we go directly from our transmitter to a smartphone.

Our progression to Gen5, we've launched Gen4 and one of the questions we frequently get asked is when is Gen5 coming in and what is it? And we've shared the features of our Gen5 product frequently, however, we've learned a lot over the past few couple of years as we did Gen4. The first thing we learned about this current sensor is really good. So we're not going to make a new sensor for Gen5. We'll use the Gen4 sensor platform.

However, we believe we can pick up the significant amount of accuracy with an algorithm change. So we'll file an algorithm as part of the Gen5 series at some point in time and implement that to our current users to have this receiver. We want to connect directly to the smartphone, the transmitter will change, it will store the data and do all the computing rather than an app on the phone. We feel that's much better from a regulatory process and will enable us to talk to more phones and work with more partners.

We've also got a new applicator that falls into the area I talked about earlier convenience. We'll make it much easier for patients to use. We have ongoing dialogues with the FDA on this. Moving a Class III medical device to a smartphone isn't something you're going to do overnight. We are the preferred partner of artificial pancreas development. Now there are about 25 of these programs going on in the world and over 20 of them use DexCom as the sensor of choice.

It's easy to diagram, it's much harder to show how they work, but you've got to have input from a sensor. They are control algorithms. They've entail the insulin pumps what to do. With all the algorithm, it's simple. It takes the CGM data stream, it also computes how much insulin is on board, based on the previous dosages their computations model that tells the pump what to do.

More importantly out of these programs, what we do believe, someday there will be an artificial pancreas or an equivalent or something along those lines. We're learning all sorts of things from these programs as we go. And the incremental steps of things that DexCom might be able to get approved or somebody else over the course of time at these studies is very promising.

Company performance, here is our historical annual performance. We did $93 million in revenue last year, a pretty big jump. Our fourth quarter of 2012 came in at $32 million, which is almost as big as our entire 2010 fiscal year. As far as current financial highlights, we just had our Q1 call, not long ago. $27.8 million in product revenue for the quarter, that's up 49% over the first quarter of year ago.

Our gross margins for the quarter were at 55%. That's why we're still supporting two manufacturing lines, the SEVEN PLUS sensors and Gen4. As volumes increases throughout the course of the year and as we get to the point where we can shut down that SEVEN PLUS line, we will continue to make progress towards our target margins. More importantly though, and one of the things that we have taken to heart is a very, very important challenge. It's to turn this business model around.

Running a business forever at 55% and approaching breakeven someday is that what you all had signed up, certainly why I was hired. We increased our revenues $9.2 million from the first quarter of year ago. And of that $9.2 million sales increase, $6 million fell to the bottomline, $6 million dropdown. When we start doing this in chunks like that, this business will not only return profitable, it will turn profitable fast. And that is the message we drive to our employees. You can ask anybody that had worked with us, each and every single day.

Our cash burn for the quarter consequently it was only $3.4 million. That's a little misleading. Q4 is a disaster of a quarter for us cash0wise, because of all the receivable build up we have with the year-end demand. So we collected all the receivables in Q1 and that more than offset any capital expenditures that we have.

And the major point in this slide, are the things I am talking about right now. Our business model is working. We're seeing it unfold right before our very eyes. I have loved this story a number of times personally in my career and it is on its way to happening here.

It is pretty easy to imagine where this company can go. With the minimum penetration we have today in the Type I market, imagine where we are, if we have 20% of Type I patients in the United States. Imagine where we are if we could just get to 10% in all the countries outside the United States. 5% into insulin using Type II atients, which it's not that big of a percentage, but it's a lot of people. And it's probably not that all in comparable with pump penetrations in that market.

And finally, as we penetrate the Type II market and pre-Type II-market more broadly with the diagnostics, the potential for DexCom is, we just feel, it's amazing. Our new motto, one step ahead. We're trying to stay ahead of everybody we work with. Stay one step ahead of bad glucose events, one step ahead of anything.

Thank you. Questions?

Question-and-Answer Session

Robert Hopkins - Bank of America Merrill Lynch

I'd like to just follow your dream there for a second. What if the revenue and profitability look like, if those things are realized, just for fun?

Kevin Sayer

Well, for fun, if we had 20% penetration at the U.S. Type I market, we'll be over $0.5 billion of revenue, pretty simple.

Robert Hopkins - Bank of America Merrill Lynch

How about the margin part?

Kevin Sayer

Sensors disposables will be at 80%. That's our target. The hardware margins for DexCom, I don't think we'll ever get those, Bob, to where they approach that 80% range. One of the interesting secrets of my other insulin company in Minimed, when Terry and I were there, we made more in the hardware than we did on the disposables as a margin of percentage. That won't be the case here. The hardware is driven by convenience and customers getting it, so if we're at the 50% range, we'll find our disposable targets at 80%.

Robert Hopkins - Bank of America Merrill Lynch

And then for the overall company on an operating margin basis?

Kevin Sayer

Operating margins, Terry and I have set a target of 25% -- being at 25% because we will always be investing heavily in R&D. It is not many companies, they have more engineers than sales people that are this size and we're still there, and that investment is going to payoff. We said on our last call, you can expect five launches over the next 18 months. That will payoff.

Robert Hopkins - Bank of America Merrill Lynch

And then can you just give us a sense as to how you think we should be looking at the competitive dynamic within your market?

Kevin Sayer

You bet. As far as somebody who doesn't have a sensor on the market today coming -- the most visible competitor would be Abbott. Abbott has a sensor that works very well. They have taken it off the market. It has been sleeping for a while. There are rumblings it's coming back.

In Europe, we have seen pictures of Navigator 2. We can't buy any, we have tried to go test it. They would be the most likely standalone CGM companies certainly in the next two to three years. Other than that, there are many other guys investing in sensor technology. The problem with it is, Bob, we're (inaudible)$350 million $400 million into this. (inaudible) of guys aren't going to $350 million to $400 million to develop a sensor.

With respect to Medtronic, their focus is on sensor-assisted or sensor-integrated pumps, where sensors deliver data to a pump that controls insulin delivery. They are attacking this market different than we are, and they are going after, for lack of a better term, the artificial pancreas graft . I think someday they will have the sensor augmented pump that works very well, and some day they will have sensors that will be as accurate as ours.

For today, they have filed their Enlite application. And as we've said on our earnings call, a year ago Enlite, we were told, they had an MARD similar to G4 Platinum. We were told in February in reality the online MARD is closer to 18%, which is not as good as SEVEN PLUS.

So, for today, as far as accurate sensing, there is nobody that compares to us. I think they will make strides and they will go after this pump market. We are hopeful that our pump partners, Animas has a sensor-assisted pump program in full development. We hope they go after that. We're not a pump company.

Robert Hopkins - Bank of America Merrill Lynch

One other question I have is just, you guys obviously have quite a vision for the next five-plus years in terms of expanding your technology. What are the capital requirements as you look forward over the next five years because you're really talking about transitioning almost to a real-broad based consumer level, and so I just want to understand how you think about capital requirement?

Kevin Sayer

That’s a great question. We're not looking to raise money right now. And if I had to come back to you guys in two years and say it's going so well, I need to build new factory, that's not a problem. We're not going to ask the Street to fund anymore of this. We want the business model to turn around. Then we'll look at the business model. It is highly likely in three years. We'll have to find another place to build sensors and probably buy new manufacturing equipment, which is very expensive. Moulds for the applicator alone are $3 million, if we go to the newer applicator.

But for today, we will manage our CapEx. We can expand our current facilities to probably about 10 million sensors a year with our current manufacturing technologies as we build out those clean room and stuff. 10 million sensors with an ASP of $70 a sensor, we'll be in pretty good shape.

Robert Hopkins - Bank of America Merrill Lynch

Thanks very much for coming. We really appreciate it. We can take a question or two.

Unidentified Analyst

(Inaudible) you're talking more about the Type II opportunity, has there been a shift from your sales force?

Kevin Sayer

No shift in the sales force. The shift that we've seen is anecdotal from the positions that we've talked to you. And as we gather more information, as we look at the future, where do we go. And you have got to have a future story on top of what we're doing. We think it's very applicable.

Robert Hopkins - Bank of America Merrill Lynch

Thanks, Kevin.

Kevin Sayer

Thank you.

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