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DexCom, Inc., (NASDAQ:DXCM)

Q2 2013 Earnings Call

August 7, 2013 4:30 pm ET

Executives

Terry Gregg - CEO

Steve Pacelli - EVP, Strategy & Corporate Development

Kevin Sayer - President & COO

Jess Roper - CFO

Analysts

Tom Gunderson - Piper Jaffray

Bill Plovanic - Canaccord

Ben Andrew - William Blair

Danielle Antalffy - Leerink Swann

Jason Bedford - Raymond James

Rosemary Liu - Oppenheimer

Anthony Petrone - Jefferies Group

Operator

Welcome to the DexCom Second Quarter 2013 Earnings Release Conference Call. My name is Richard and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now turn the call over to Mr. Terry Gregg. Mr. Gregg, you may begin.

Terry Gregg

Thank you, Richard and thanks to the audience for joining us today for our second quarter 2013 investor conference call. I'm going to have Steve Pacelli read our Safe Harbor statement. Steve?

Steve Pacelli

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 as filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason.

Additionally, we will discuss certain financial information that has not been prepared in accordance with GAAP with respect to our cash operating loss. This non-GAAP information is provided to enhance your overall understanding of our current financial performance. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Terry?

Terry Gregg

Thanks, Steve. Well joining me today is Kevin Sayer, our President and Chief Operating Officer; Jess Roper, our Chief Financial Officer; and you just heard from Steve Pacelli, our Executive Vice President of Strategy and Corporate Development.

Before I turn the call over to Kevin for a customary financial review and operations update, I'd like to comment briefly on our Q2 performance, and a couple of exciting, operating milestones reached during the quarter.

Obviously the commercial introduction of G4 Platinum continues to exceed our expectations. Our pipeline of new patient opportunities remains very robust and our sensory orders are stronger than ever.

Our financial results speak for themselves. During the second quarter, we achieved record sales, record margins, and our best operating results ever.

From an operations perspective, I'm pleased to report that in late July, we filed a PMA supplement with the Food and Drug Administration seeking approval of our DexCom Share System, a remote monitoring system developed to address the unique challenges faced by caregivers in assisting people with type I diabetes.

As a reminder, the DexCom Share System is a docking station for the G4 Platinum receiver, which enables wireless transmission of glucose information such as the patient's trend graph and alert notifications from the G4 Platinum to designated recipients, allowing the recipient to view the patient's data on their smartphone. We view DexCom Share as the first of many steps in bringing CGM to mobile devices and couldn't be more excited about this opportunity.

We are also pleased to announce that just last week we were awarded a $4 million grant from The Leona M. and Harry B. Helmsley Charitable Trust to accelerate the development of our Gen6 sensor technology. A goal of the Helmsley Charitable Trust is to advance the accuracy and reliability of CGM devices and develop artificial pancreas systems for people with type I diabetes. The funding is milestone based and is contingent on our meeting specific development milestones over the next several years.

The grant has been structured to allow the trust to recoup and redeploy a portion of any eventual proceeds from the successful commercialization of the Gen6 sensor. To that end, we have agreed with the trust that on successful commercialization of our Gen6 sensor in the U.S., we will pay a royalty of up to $2 million per year for four years or at our option a one-time payment of $6 million. We are extremely excited to engage in this collaboration, as it provides us with the opportunity to accelerate the development of more accurate, effective sensor technologies, to improve the outcomes and quality of life of people with diabetes.

With that, I would like to turn the call over to Kevin for a financial and operational update.

Kevin Sayer

Thanks, Terry. I'll start with the financial update. DexCom generated $35.5 million in product revenue for the second quarter of 2013, compared to $21.5 million for the same quarter in 2012, a $14 million or 65% increase. Sequentially, product revenue for Q2 of 2013 increased 28% from the prior quarter.

We know that in the second quarter, we recognized approximately $1.3 million in higher than expected revenue attributed to royalties from sales of Animas 5 system in Europe and revenues related to our first product sales of GlucoClear sensors to Edwards Lifesciences. We do not expect this level of Animas royalty or GlucoClear sensor sales in subsequent 2013 quarters.

Total revenue for the second quarter of 2013 was $35.8 million, compared to $23.4 million during the same quarter in 2012. Our product gross profit totaled $21.8 million, generating a product gross margin of 61% for the second quarter, compared to product gross profit of $10.6 million, and a product gross margin of 49% for the same quarter in the prior year.

Some final thoughts on our product revenues and our gross profits during Q2. Our split between consumable and durable revenues was again slightly more heavily weighted to durables in Q2, due primarily to existing patients upgraded to the G4 Platinum, with approximately 30% of our product revenues generated by sales of G4 Platinum hardware, and approximately 70% generated by the sales of sensors, primarily G4 Platinum.

ASP for sensors has stayed consistent at approximately $70 per sensor and the ASP for our hardware continued at approximately $800 to $850 for starter kit.

Our international business performed very well remaining consistent in Q2 and continues to represent between 5% and 10% of our total product revenue.

Research and development expense totaled $11.1 million for Q2 of 2013, which was up by $1.1 million compared to 2Q of 2012, with the increase due primarily to additional payroll related cost, completion of our work on DexCom Share, and other near term product launches. Sequentially, R&D expense was up 19% with the increase related to the same factors. We expect that R&D expense for the full year will be slightly up versus 2012.

Selling, general administrative expense totaled $20.7 million in Q2 of 2013, compared to $15.9 million during the same quarter in 2012. Of the $4.8 million increase, $900,000 is non-cash share-based compensation. The remaining increase was primarily related to expanded head count in our sales organization and other growth related expenses.

We will always consider adjusting our spending to take advantage of strategic development opportunities. Couple of examples, one important opportunity for us is clinical data. It has become obvious to us that we need more clinical data and we are nearly planning phases for studies that we believe will unequivocally support our position of CGM first from both the clinical and an economic perspective.

Another important opportunity is advanced technology development. As Terry mentioned in his introductory remarks, we are very pleased to be working with the Helmsley Charitable Trust to accelerate development on our Gen6 sensor. With the $4 million Helmsley grant, we will increase our internal spend on the Gen6 project, as well in order to accelerate commercialization of this transformative technology.

To paraphrase commentary by a member of senior management from another diabetes company during a recent presentation at a conference, the recent DexCom sensors are so good as that sensors are the only thing they do. We couldn't agree more and we intend to retain our position as the leader in sensor technology.

Our net loss for the second quarter of 2013 totaled $10.1 million, and included $9 million in non-cash expenses centered in share-based compensation, depreciation, and amortization. Absent these charges, our net loss would have been $11.1 million for Q2, 2013, compare this to a net loss of $7.6 million for Q2, 2012. In other words the $14 million increase in 2Q sale year-over-year, $6.5 million or close to 50% is dropped through to our cash phase financial results. Our business model continues to mature very nicely. Our loss per share for the quarter was $0.14.

With respect to our balance sheet, we ended the second quarter with $4.6 million in cash and marketable securities, an increase of $1.1 million from the end of Q1, 2013. We note that we received $2.3 million in proceeds related to the exercised employee stock options during the quarter slightly higher than in previous quarters.

We also had a very strong quarter in terms of working capital performance. Our DSOs were less than 45 days, and inventory levels are approximately the same as they were at the end of Q2, 2012, all this during a period of 65% growth with no periods of product backorder.

One last balance sheet note. Last year, we entered into a term loan and a revolving line of credit agreement with Silicon Valley Bank and other terms of the original agreement. We will require to draw the remaining $13 million under the term loan during a three month window commencing June 1st, 2013. Silicon Valley Bank has agreed to move our drawdown window to the three month period commencing January 1st, 2014.

The combination of cash available under the term loan, and under our receivables based line of credit, offer the company approximately $28 million in additional available capital. With approximately $40 million in cash on hand at the end of Q2, our debt availability, and most importantly our operating performance improvements for the first half of 2013, we remain very comfortable with our commitment not to raise additional equity funds in the near term.

Finally we'll take the opportunity to update our product revenue guidance for 2013 from a range of $120 million to $130 million, to an expected range of $130 million to $140 million. I note that, consistent with our prior practices in issuing product revenue guidance we will target the midpoint of our range. I also note that historically sequential product revenue growth from the second to third quarter is much more modest than the sequential growth from the first to the second quarter, rarely exceeding 10%

Now, for the business update, because we mentioned during our previous earnings call, during Q1 we filed a PMA supplement with the Food and Drug Administration seeking a pediatric indication for the G4 Platinum. With respect to our U.S. pediatric submission similar to our previous filings, we continue to have a regular open dialogue with the FDA. At this point, our discussions with the FDA for the pediatric indication sensor on appropriate labeling of the product specifically for children.

By way of background, we performed the clinical study requested by the FDA for the indicated use in patients ranging from 2 to 17 years of age. Due to the wide age range of these patients the pediatric study was not designed or powered to produce data comparable to our adult G4 Platinum clinical study. While the FDA has indicated that the study we performed includes enough data for approval, due to labeling nuances we believe that we will be required to create a separate pediatric product offering with labeling specific to children. We will be prepared to launch this product at the soonest possible date and remain hopeful that we'll receive approval prior to year-end.

We remain extremely excited about the prospects of the pediatric indications, as it not only significantly expands the number of endocrinologists we can call on in the U.S., we expect to be able to recommend this product to a wide range of patients all the way down to two years of age. We continue to make progress with respect to our reimbursement and distribution model, and have had two significant wins since our last conference call.

First, we have been awarded a position on Express Scripts National Preferred Prescription Drug Formulary. DexCom is the only CGM on this formulary. The contract will allow us to offer DexCom CGM as a pharmacy benefit to all ESI plans. Over 40% of prescriptions filled in the United States are processed through Express Scripts and payors who process through Express Scripts will now have the opportunity to treat DexCom CGM as a pharmacy benefit enabling them to better track utilization outcomes and costs. While we don't expect an immediate impact to our business, overtime this relationship has the potential to increase accessibility of CGM to more patients in the diabetes community, and create a much more efficient distribution model for DexCom.

Second, we are pleased to report that Humana a payer covering approximately 6.7 million lives has expanded their existing CGM policy to include coverage for all insulin using type 2 patients. As we stated many times in our prior calls over 98% of type 1 patients with private insurance have access to CGM, with much more limited coverage for type 2 patients. So, we are very pleased to see Humana's leadership in opening up CGM access to such an important patient group.

Turning to our future CGM product offerings, we remain focused on replacing finger sticks as our primary long-term objective. In the near term to achieve that goal we will focus on four things, improve sensor performance, patient convenience, expanded connectivity, and cost improvement. DexCom Share is the first step in what will be a number of innovative steps accumulating on what we call our Gen5 system. Gen5 is actually a series of system innovations that will include a new transmitter, new applicator, mobile platform user interface, combined with continued algorithm evolution. We are not currently planning any changes to the sensor and related membranes for Gen5. We expect this Gen5 system will be rolled out in several stages over the next two years.

As Terry mentioned in his opening remarks, with the funding from the Helmsley Charitable Trust we will also accelerate our work on the Gen6 system. The primary goal with Gen6 is to achieve labeling as a replacement for finger sticks and we will do this primarily through enhanced membrane and algorithm development.

Shifting to our integration partnerships, as mentioned during our last conference call, Animas has filed a PMA with the FDA seeking approval of the Animas 5 system in the U.S. Animas very recently received written questions from the FDA regarding the Vibe and the Animas regulatory team is currently in the process of evaluating those questions and formulating a response. We continue to work diligently with Tandem Diabetes Care to incorporate the G4 Platinum into the next generation version of Tandem's GSwim and we remain on track to assist Tandem in filing a PMA with the Food and Drug Administration before the end of this year.

I would now like to turn the call back over to Terry for some concluding remarks.

Terry Gregg

Thanks, Kevin. Well the second quarter was obviously a great quarter for DexCom. We continue to execute on all aspects of our business and our message of CGM first is resonating well beyond the endocrinology specialists, as we routinely see prescriptions for the G4 Platinum system from primary care physicians.

We've been referred to in the past as a one product company, but you can see from our discussion today, the Intel Inside philosophy is on the cusp of reaping huge benefits from our own internal programs and products as well as our partnerships.

I would like to acknowledge the hard work of our DexCom team, who all worked tirelessly to grow this category each and every day and bring us another step closer to establishing DexCom CGM as the standard of care for all people with diabetes. Our future remains very, very bright.

And with that, I'll turn it over for question-and-answers.

Question-and-Answer Session

Operator

Thank you. We'll now begin the question-and-answer session. (Operator Instructions) Our first question on line comes from Mr. Tom Gunderson from Piper Jaffray. Please go ahead.

Tom Gunderson - Piper Jaffray

I guess the patients like Gen4.

Terry Gregg

Yeah.

Steve Pacelli

Yeah.

Tom Gunderson - Piper Jaffray

So what's next, what's next is may be pediatric may be Share questions on both. On Share help us handicap what you're looking for from the FDA. I'm assuming no claims but this is just a broadcast of information through another medium and there isn't really anything there to do except check accuracy of that transfer is that close?

Terry Gregg

Tom, we very deliberately structured the Share product to make sure that the receiver remains the primary medical device, and the phone is a secondary, and display on the receiver, so that's exactly as you described it. We did some rather large filing that shows we did all the validation and verification of the software necessary to make sure that signal gets through it and is pushed through on a timely basis and warnings and what they claim to be.

The alarms on our Share system the people you share your signal with, can set their own alarms. They don't have to follow the alarms on the receiver. So, we've to show that all of those features work. But we took this as a very deliberate step so we can get something that we can approve a basic infrastructure that we can use in all our future product offerings hereafter.

Tom Gunderson - Piper Jaffray

And then, okay --

Terry Gregg

Go ahead, Tom.

Tom Gunderson - Piper Jaffray

Yeah on pediatric I think I get this but is, in my view a separate product would be a different package may be with a fixture of a kit on it and different insert but the actual sensor and receiver would be essentially the same is that right?

Terry Gregg

It will certainly be the same hardware. The final product configuration of packaging and IFU, and all those things are still in the middle of being determined.

Tom Gunderson - Piper Jaffray

Right but you don't have to have separate warning, the seller part?

Terry Gregg

No, no separate manufacturing line at all no.

Tom Gunderson - Piper Jaffray

And then last question and that is I assume you're in Philadelphia can you tell us any local color as far as AADE and how the educators were looking at the products?

Terry Gregg

We're in San Diego today. Our Philadelphia team has told us that we again receive the same response on G4 Platinum is what we're receiving from the investors on this call.

Operator

Thank you. Our next question online comes from Mr. Bill Plovanic from Canaccord. Please go ahead.

Bill Plovanic - Canaccord

Great. Thanks. Good evening. Can you hear me okay?

Terry Gregg

Yeah, fine Bill.

Bill Plovanic - Canaccord

Congratulations on a phenomenal quarter. I'm not allowed to ask. I'm just going to try to drill down a little. You mentioned a couple of things one that your durable consumable mix was 70, it was 30/40 with obviously the durable much whether you're at 30 or above 30. And then, when you give that, I'm sorry go ahead….

Steve Pacelli

It's in the -- it's 30% durable, 70% disposables.

Bill Plovanic - Canaccord

And then do you include that $1.3 million that you picked up from Edwards and international in that number?

Steve Pacelli

Its Edwards came from the royalties and no that's not in our, but it's in product revenues that’s not in that 70/30 mix that would be a separate calculation.

Bill Plovanic - Canaccord

And I know, I'm splitting revenues here, but is there any upgrade revenues in the quarter anything I know you've kind of picked some up over the last couple of quarters if I'm curious if that contributed?

Steve Pacelli

We were talking about that before we met. Our upgrade percentages is a percentage of hardware sales is probably around a third or close to that, that number has come down steadily since the fourth quarter of last year. That number and where we're today is really not a whole lot different than what we used to have for SEVEN PLUS. So, business remains pretty consistent as far as new patients versus upgraded.

And I also understand Bill my data is a bit limited because if somebody bought their first receiver from a distributor and their second receiver from us or vice versa we don't have everything but those are our approximations as we sit here today.

Bill Plovanic - Canaccord

And given that the total revenues were up the 65% year-over-year. Can you we assume that what's your new patients were at year-over-year. I think that's and that's what I'm trying to get at because I mean all the four awarded model is built on the new patients and if your new patients were up 65% I think that's well passed expectations. So, I'm just trying to get a mix between that and kind of what might have been utilization creeping backup or any of that and that's really what I'm trying to get at? Thanks.

Terry Gregg

You know what Bill I think it's a combination of all of it. Sensory utilization is clearly up. Based on our internal metrics, what we're seeing is patients are buying and using more sensors both existing patients and new patients as they signup. New patient growth is good. But when you look at the dollar growth in the models 70%, 30% so the sensor numbers are pretty staggering even if we add a bunch of new patients. So, it's really a combination of both.

Operator

Our next question on line comes from Mr. Ben Andrew from William Blair. Please go ahead.

Ben Andrew - William Blair

I want to talk a little bit about the Express Scripts relationship Terry first over what timeframe do you think that starts to move the needle in terms of patient access if it's not a near term event?

Terry Gregg

Well I think it's going to take at least another 18 to 24 months as other payor systems look at that and begin to have opportunities to utilize the Express Scripts. Our number one priority from a managed care going forward has been to move the disposal, at least the disposable component into the pharmacy benefit out of DME. There is a lot of benefit on both sides of the equation, transactional costs so on and so forth, from a patient standpoint greater access.

I think it just takes time. These organizations tend to be built in silos and so each one DME silo, pharmacy benefit silo have to be addressed. But this is the first time that we can begin to move the needle in that but it's -- it's not going to happen overnight.

Ben Andrew - William Blair

And I've got kind of mismatch the questions but the Helmsley grant maybe that's a question may be more for Jess but is that really an offset to the expense, which is why you took this on other than $4 billion bucks is $4 billion bucks. But you don't really need the money per se unless it helps you to offset it on the P&L is that fair?

Jess Roper

Well there is a business reason, which Terry can go into or Kevin but really in terms of the accounting for it, it's not a collaboration agreement like in Edwards, where we would record development grant revenue and then the expense it would be a net offset to the P&L. So, as we get milestone payments let's say $1 million, we put down in the balance sheet as liability and we would offset the current period R&D expense just related to the work as its outlined in the agreement. For this year, we would expect basically the P&L would be offset, it would be neutral.

Ben Andrew - William Blair

And then Terry, what's the business reason if you would, may be detail your thoughts on that?

Terry Gregg

Well sure. We, our goal is to get profitable. And so we've had this Gen6 technology as part of our long-term expectation in an R&D pipeline. We chatted obviously in numerous times with the Helmsley Charitable Trust. They have seen what we've been able to do with Gen4 Platinum in the AP programs, which I'll tell you although regulatorily our labeling says our MARD or in absolute relative difference is 13.2% in the well we're seeing reports of some 11% MARD with the G4 Platinum today. Obviously they see that. They are very tuned to that. When we recognize what we can do with the Gen6, they came to us and asked us what they could do to help us accelerate that in our project schedule. They analyzed the $4 million grant to put a dedicated team focused on accelerating that development of that new sensor technology.

Ben Andrew - William Blair

And then started change gears yet again but on the PED side I mean, it's kind of a six month delay in terms of expectations on the approval if it's really a labeling issue and packaging is that really the lead time for you all to prepare that the packaging as well as the insert or is there something else FDA wants that sort of dragging this process out?

Terry Gregg

Well first of all it's not a six month delay. We've always said that it was at the very least 180 day review, which will sell within that timeframe, since we submitted it. So, I at least characterize it appropriately.

From the standpoint, right now look at the landscape of diabetes, and I would just from a FDA is doing everything in their power to ensure that products produced across the spectrum of diabetes be it a pumps everybody is pretty much had a pump recall the glucose monitoring all the meter companies they have had some degree of recall. So you can understand there is heightened scrutiny from the FDA on to ensure because people are making life decisions based on some of this technology. I think therefore heightened sensors part of this.

We get the pivotal trial in adults and we were able to have patients come back for an extended period of time on three different days and we actually decreased their level of glucose by giving them insulin we can't do that with the two year old. And so the study really is fundamentally different and although we would like to have everything matchup from two years of age beyond all the way into adults, we've got a segment fees into different buckets. And I think that's where the discussion comes in and it really gets down that was in the details obviously but how you look at alert charts and various things and labeling that are very, very distinct.

But we're both sides are trying to understand and of course we look at even site-to-site differences in the clinical trial and all of that just have to be gone through. I think Kevin outlined the critical point that we certainly don't need to do anymore clinical trial work it's now about how we characterize the results and put it in a proper format for an instructions for use as part of the package.

Jess Roper

And Ben, just from a historical perspective, we got planning approval on the Gen4 Platinum labeling October 5th of last year and we're shipping October 21. We will be ready.

Ben Andrew - William Blair

Okay. All right so I mean you would file the PMA supplement on PEDs was it in February you're saying?

Jess Roper

We didn't identify the actual month but it was towards the end of the quarter.

Ben Andrew - William Blair

I thought I had it my head a little bit earlier in Q1. Okay. And then finally, the Edwards and the Animas royalties can, may be detail a little bit more what exactly that was coming out of Animas and why this won't occur but may be just give us a little bit more flavor on that?

Kevin Sayer

No, well we basically been what we said as we had about $1.3 million -- we had $1.3 million more than we expect to recur in future period. So as you look at the total product revenue for the quarter, and as you guys try and model going forward there are some recurring revenues that we don't expect to come back. There is a base level of Animas royalty revenues that we received the number we can't disclose due to our relationship with Animas and our number was far beyond the base and you combine that with the sensors that we sold to Edwards and those are numbers we wouldn't want you guys to build into your models going forward that's why we gave you that number.

Terry Gregg

Yeah and let me just give the little bit of color on the Edwards they as Mike has said from the Edwards side, they initiated this early market introduction of the GlucoClear product so they need a product in order to do that, but that's part of a clinical experience as they introduced this in limited fashion in Europe and they will continue to enroll these patients through the end of this year and then look for a more formal launch in 2014. So that's not going to be a repetitive type of build and use for the remainder of the next two quarters.

Operator

(Operator Instructions) Our next question comes from Mr. Danielle Antalffy from Leerink Swann. Please go ahead.

Danielle Antalffy - Leerink Swann

Hi, good afternoon guys, can you hear me okay?

Terry Gregg

We can.

Steve Pacelli

Absolutely.

Danielle Antalffy - Leerink Swann

Okay, great, congrats on a very awesome quarter, well done. And I just wanted to talk about what changed this quarter versus last but you had stronger past quarter but the quarter -- the growth this quarter was phenomenal I'm just wondering if you could give some color on where the growth is coming from, are you getting into new vendors prescribing the size, is it just existing your patients wearing more sensors per month, can you give a little bit of the breakdown on where the growth acceleration is coming from?

Terry Gregg

Well Danielle let's start with the physicians. It's a combination of everything, we monitor our high priced -- high prescribing physicians on a regular basis and what we would consider high prescriber this year we'll have more than twofold this year than we had last year. There are physicians who have really adopted Gen4 and our CGM first philosophy with their patients. So we got more high prescribers but that isn't where it stops. There are many thousand of physicians and healthcare professionals who prescribed G4 Platinum systems so we're seeing a broader usage as well in the physician community which means where you've got somebody who is prescribing a G4 Platinum for the first time, chances are some patients heard through word of mouth that we have to have this and they go and ask for and they get it.

With respect to patient numbers, every of piece of it is growing and we're getting all the percentage of upgrade versus new patient is a little higher but not tremendously higher than it's been in the past. We're getting hardware revenue from both segments new patients and patients who upgrade and we're getting more sensory utilization from everybody. Our internal statistics would show that we've a much greater base of patients, who are wearing these things 24X7 and not taking them off and that's where we've always wanted the model to go, so accuracy matters, and people trust this product and they use it to manage their life. So, the growth is occurring in every single piece of the business internationally I didn't say it on the call. Internationally well still 5% to 10% of our revenues our international business doubled this quarter.

Danielle Antalffy - Leerink Swann

So, it's really, it's really not bigger.

Terry Gregg

Very broad base.

Danielle Antalffy - Leerink Swann

And then I was hoping Jess actually you could help us with 2014 a little bit tougher comps obviously year-over-year but hopefully has pediatric in the IMS side. How do you think about 2014 growth and that's it from me? Thanks so much.

Jess Roper

We've been pretty consistent so that Steve and Terry smile at me. We've been pretty consistent over time saying it's our goal to grow this business 40% a year. And if we grow 40% a year we double every two years and there is a certain amount of growth of business is getting handled in a very efficient manner. We expect to stick with our plans from compounded 40% annual growth with Animas and PEDs next year possibly the Tandem approval with the Tandem filing late this year.

With a Share approval next year we see many opportunities to achieve that growth in 2014, and keep going, and then and move on from there. So, 40% target internal number and we're going to stick to that.

Operator

Thank you. Our next question on line comes from Mr. Jason Bedford from Raymond James. Please go ahead.

Jason Bedford - Raymond James

Just a few here. In terms of the new reps added or converted earlier this year where are they in terms of productivity meaning are they 60%, 70% of the more tenured rep and I guess when will they be at parity?

Terry Gregg

Well some of them were actually in our top 10 reps so. They're all throughout the Board. I think if you looked at our rep rankings you wouldn't be able to just pick out the new ones in any of the quartiles either spread all the way throughout. A lot of them had incredible success. We hired some very, very good people and we believe they are getting up to speed and growing their businesses very well. But there are certain territories where only new reps are just blowing it out and some of those are our internal people, who we converted from our educational specialist to be sales reps. They've done a phenomenal job so they're all doing very well.

Jason Bedford – Raymond James

And the incentive for the or the focus for these reps is it getting more in those on board here and just going wider or is it more deeper into existing accounts?

Kevin Sayer

Our reps today are compensated on the kits they place with patients and they are selling on hitting quarters of kits they place and it's up to them to develop their territory in a way to place the most possible kits. And what we've seen from the reps is largely what I described earlier we've seen many of them get deeper into some very good practices. We've also seen a broad smattering of more prescriptions as well by people, who are not prescribed earlier. So, their incentive to place kits and they manage the territories and we track them very closely.

Terry Gregg

I think the key metric is if we look at what we call champions and these are prescribing physicians, who hit a certain threshold I won't tell you what the threshold is but its significant. If we look at the number this year in contrast and this is just through the first six months of the year in contrast to all of last year the number of champions already reaching the goal is probably three or four times greater this year than last year.

So, they are obviously going deeper within the accounts that they currently call. And I think the other interesting statistic and Kevin mentioned it in terms of going outside of endocrinology I would tell you that the total number of prescribers in the first six months are --there is about 3,000 active clinical endocrinologists that actually see patients on a daily or weekly basis in the United States. The number of physicians that actually prescribe product of CGM DexCom G4 in the first half of this year was closer to 6,000 total prescribers and some of those are nurse practitioners or physicians assistance that have the right and the license to prescribe.

But obviously more than a handful are also either internal medicine, primary care, general type physician. So, we are seeing that expansion now obviously they are not at the champion level or anywhere close but they are being introduced to the product, which we believe is they are being introduced by patients certainly not by our sales force.

Jason Bedford – Raymond James

Terry you mentioned that 6,000 number do you have any idea of what that number was last year?

Terry Gregg

I'd say that number was probably not even close to half of that.

Jason Bedford - Raymond James

In terms of the new algorithm what's the timing on filing the supplement for that?

Terry Gregg

We're working on that as we speak. Our primary goal with the FDA is to get our PED labeling strained out and get that product out as soon as possible. Pediatric indication for the new algorithm weighs directly into any clinical study we have to do for it. So, we're going to sequentially take these steps to execute our plan in a most efficient order possible. So we're kind of waiting on that for right now.

Jason Bedford - Raymond James

Just last one from me and then I'll let someone else have a shot. You mentioned doing more studies earlier in the call what do you have in the work so these are more comparative versus other products out there these economic studies what do you think you need to produce here to keep this growth up?

Terry Gregg

Sure. I think the most compelling study that we've before outside of those that are required for regulatory submission. So, one in particular and we've been very, very successful with CGM first changing behavior patterns of physicians, who naturally migrate to some other technology first so. But based on that what we really want to do is a combination of both the role of CGM and economic component to it and using CGM first and be it with injection therapy, which still represents about 70% of the population in the U.S. that receive insulin through cell through injections versus pump. And we think that CGM first with injections can be a very effective tool and both from a clinical outcome standpoint obviously there has never been any study to demonstrate that its not as effective as pumping CGM. So, that’s number one demonstrate for once and for all the path is just.

And then, secondly, from an economic benefit to the payor system, CGM first will cost that system a lot less, and as we look at going forward in the healthcare challenges, the economic challenges we believe that that’s going to have a play in all of this as payors look to utilize the most effective tools and those that are cost effective as well.

Operator

Our next question on line comes from Mr. Steven Lichtman from Oppenheimer. Please go ahead.

Rosemary Liu – Oppenheimer

Hi, guys. This is Rosemary in for Steve. Can you hear me okay?

Terry Gregg

Yes.

Rosemary Liu – Oppenheimer

Okay, great. Just a quick question on the FDA update with Vibe. Based on these most recent questions and then speaking with Animas, do you guys still think Vibe is still on track for approval around yearend time frame?

Terry Gregg

We had initially said kind of year end will be best case for the first part of next year. We’re still getting these questions just came in from the FDA and we’re collectively still in the process of reviewing them. So, depending on how quickly we can turn the responses its really an Animas cohort to turn the responses most of the questions as we’ve seen really relate to the pumping side of the system not the CGM aspect of the system.

So, when someone can comment upon Animas to respond I mean, any doctor keep in mind that the larger, the diabetes franchises if you’ll J&J, Roche and finger stick guys they are all reeling right now. I mean we’re seeing reports of headcount reductions across Roche across J&J and et cetera. These guys are really, they are all really struggling internally. So, we know Animas as a separate company is really remaining focused on this but I can tell you all their businesses are struggling right now.

Rosemary Liu – Oppenheimer

Also I noticed your sensor ASP is a little bit stronger this quarter at around 70% versus I think you guys said 65% to 70% last quarter. Is this a good price to assume going forward and is there further upside from here?

Kevin Sayer

Yes. 70 is -- that’s an approximation. These contracts we’ve with payers on our centers are set for quite some period of time so 70 is a good number to model. We don’t see it growing up significantly in the near term.

Rosemary Liu – Oppenheimer

And finally from me, can you just quickly update an update on where you are in China and that’s it. Thanks guys.

Terry Gregg

Yeah I mean we’re still evaluating the path of entering both China and Japan. Quite frankly its really turning in both countries for different reasons on regulatory the appropriate regulatory pathway. In China, in particular, one of the key challenges is when you -- you need to have an approval FDA approval before you file a particular product in China. And then once you file that triggers somewhere between 2 to 2.5 half year regulatory review cycle.

So, you’ve seen over the past several years how quickly it even as we mentioned some of the product reiterations on this call how quickly reiterates the product the key question for us internally is at what point do we need kind of pencil down and file the appropriate approved product in the U.S. So, we’re still evaluating that. Its still something that’s very important on the radar over the next several years, but I’d wouldn’t characterize it as a near term source of new revenue for us.

Operator

(Operator Instructions) Our next question comes from Mr. Anthony Petrone from the Jefferies Group. Please go ahead.

Anthony Petrone - Jefferies Group

Thanks, gentlemen. Anthony in for Raj. Just a couple of questions. One on Animas and Tandem as those products are rolled out eventually as we look into 2014, 2015 just wondering how that plays out in the model is it you are selling inventory to those companies and they are manufacturing the integrated product and then handling all marketing just kind of want to get that how those relationships will play out over time?

Steve Pacelli

I’d tell you it’s a work in progress. We don’t currently have the commercial framework put in place for Tandem. We do have a commercial framework put in place with Animas, but as we’ve said on a couple of prior calls, we’re looking to potentially modify that. The current structure with Animas would have Animas manufacturing and selling the Vibe system and then handing the patient off to us to process and supply transmitter and sensors to that patient. We’re looking at modifying that to make it more seamless to the patient. We don’t really want to comment further until we get something put in writing with Animas. But assuming we’re successful putting that framework in place with Animas my guess is Tandem would fall in line into the same, same sort of business model.

Anthony Petrone - Jefferies Group

Okay and marketing?

Steve Pacelli

The marketing for the system will be done primarily by the pump partner. Our sales force will not be carrying the pump and again we’ve multiple partners. We’ve to remain somewhat neutral in terms of recommending one pump versus another pump. Our machine is to be, as Terry mentioned in his concluding remarks, the Intel Inside.

So, we’re going to provide pump partners with best-in-class CGM technology to enable and frankly to compete more effectively with Medtronic. But our sales force will have to the extent Animas or Tandem provide us with marketing literature for example that we could handoff to the endocrinologist, we would be certainly happy to help on that front but you won’t see that DexCom sales force carrying an insulin pump in the bag.

Anthony Petrone - Jefferies Group

Great, great. And then couple of follow-ups. So, just is there any and it doesn’t seem certainly your business not directly impacted by this but any high level comments on the new CMS rates for home diabetic supplies how that plays out?

Terry Gregg

Yeah, really it doesn’t impact us. Number one, we’re class three medical device so we’re not subject to competitive bidding. We’re not -- we have no actual technology assessment by CMS. As Kevin said more than 98% of our patients have some form of insurance coverage that 1.5% or 2% that don’t tend to be those patients unfortunately that are Medicare so they have to pay out of pocket. So, I don’t see those being impactful other than downstream when we’ll replace finger sticks entirely is what our stated goal has been as a company but outside of that I don’t see anything.

Operator

And at this time, I see, we have no further questions. Please continue with any final remarks.

Terry Gregg

Sure. Well, the fact of it is unfortunately growing at a unprecedented rates both in the type I and the type II population and although billons are being spent trying to correct that and curate and trying to do all these things it’s a insurmountable task at this point. Obviously the G4 Platinum consist of is extremely effective and I’d just close this with you the audience you know somebody in your family, your sphere of influence that has diabetes and you owe it to them to introduce the CGM and introduce some to the DexCom G4. You will certainly improve the quality of their life and you may in fact say it, and I’ll close with that.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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