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DexCom, Inc. (NASDAQ:DXCM)

Q3 2013 Earnings Conference Call

November 6, 2013 4:30 PM ET

Executives

Terrance H. Gregg – Chief Executive Officer

Kevin Sayer – President and Chief Operating Officer

Steven R. Pacelli – Executive Vice President, Strategy and Corporate Development

Analysts

Tom Gunderson – Piper Jaffray

Bill Plovanic – Canaccord Genuity

Ben Andrew – William Blair

Kim W. Gailun – JPMorgan Securities LLC

Danielle Antalffy – Leerink Swann

Jason Bedford – Raymond James

Jan Walsh – Benchmark

Raj Denhoy – Jefferies & Co.

Operator

Welcome to the DexCom Third Quarter 2013 Earnings Release Conference Call. My name is Atreen 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 this conference is being recorded.

I’ll now turn the call over to Terry Gregg, CEO. Terry Gregg, you may begin.

Terrance H. Gregg

Thank you and welcome to our third quarter 2013 earnings call. We will kick it off with Steve Pacelli and reading our Safe Harbor statement. Steve?

Steven R. 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?

Terrance H. Gregg

Thanks, Steve. Joining me today are 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. I assume by now most of you have seen our earnings press release. Our financial results speak for themselves. During the third quarter we achieved record sales, record margins and we were cash flow positive.

Before I turn the call over to Kevin to review our financial results in greater detail and provide a brief operations update, I’d like to update the investment community with some exciting news regarding a new addition to our Board of Directors, it is no secret that we have a tremendous amount of work in front of ourselves, our system evolves into display on a smart phone paired with robust data management tools.

To that end we are pleased to announce the addition of Steve Altman, Vice Chairman of Qualcomm and long time diabetes advocate to our Board. Steve brings unique and diversified expertise to an already dynamic board of directors, Steve has served on Qualcomm’s executive committee for nearly 15 years providing direction and guidance on key initiatives across all areas of the business as well as on overall Qualcomm vision and strategy, he joined Qualcomm in 1989 and his leadership roles have included General Counsel, President of Qualcomm Technology Licensing, President of Qualcomm and most recently as Vice Chairman of Qualcomm.

Throughout his 24 year tenure Steve’s contributions help to enable the successful growth, evolution and expansion of Qualcomm into a world leading mobile technology innovator and we are pleased to welcome him to the board. I would now like to turn the call over to Kevin.

Kevin Sayer

Thank you, Terry. I’ll start with the financial update, DexCom generated $42.5 million in product revenue for the third quarter of 2013 compared to $21.1 million for the same quarter and 2012 a $21.4 million or 101% increase, we remind investors that in the third quarter of 2012 we reserved $1.2 million for sales returns relating to our 30 day money back guarantee on SEVEN PLUS hardware in anticipation of the G4 PLATINUM launch.

Absent that increase in returns reserve our year-over-year product revenue growth would have been 91%, we also remind investors that we believe third quarter 2012 product revenues are somewhat suppressed because purchase decisions during Q3, 2012 are deferred as patients and healthcare providers anticipated the G4 PLATINUM introduction.

Sequentially product revenue for Q3 of 2013 increased 20% from the prior quarter and we know that if you back out the impact of approximately $1.3 million and higher than expected Q2, 2013 revenue attributed to Animas royalties and GlucoClear sensor sales our sequential improvement in product revenue would have been 24%.

Total revenue for the third quarter of 2013 was $42.9 million compared to $23.1 million during the same quarter in 2012. Our product gross profit totaled $27.7 million generating a product gross margin of 65% for the third quarter compared to product gross profit of $7.7 million and a product gross margin of 36% for the same quarter in the prior year.

As a reminder our product gross margin was artificially low in Q3, 2012 based on a number of one time charges and reserves we took in connection with our transition from the SEVEN PLUS G4 PLATINUM. Sequentially product gross margin for Q3 of 2013 increased four margin points from the prior quarter primarily the result of increased sensor volumes combined with continued improved operational performance. Some final thoughts on our product revenues and our gross profits are in Q3.

During Q3 we added more new patients and sold more sensors than in any prior quarter. Consumable and durable revenues both increased significantly from Q2, 2013 although sensor sales grew at a much faster rate than durable sales. We continue to see increased patient retention combined with increased sensor utilization with the G4 PLATINUM system compared to the SEVEN PLUS resulting in a very favorable impact upon gross margins and gross profits for the quarter, with respect to the split between consumable and durable revenues our mix is naturally shifted more towards consumable products and it’s now closer to 25% durable and 75% consumable.

ASP [ph] for sensors stayed consistent and approximately $70 per sensors and the ASP for our hardware continued at approximately $850 per starter kit. Our international business performance continued to exceed our expectations in Q3 as well as it was up approximately 100% year-over-year and continues to represent close to 10% product revenue.

Research and development expense totaled $11.8 million for Q3 of 2013, compared to $10.3 million in Q3 of 2012 with the increase due primarily to additional payroll related cost, that expenses related to work on our near term product pipeline. Sequentially, R&D expense was up 6% with the increase due primarily to non-cash charges related to our SweetSpot acquisition and share based compensation.

Selling, general and administrative expense totaled $21.6 million in Q3 of 2013, compared to $15.4 million during the same quarter in 2012. The increase was primarily related to selling in information technology expenses necessary to support growth, the increased also included $900,000 of additional non-cash share based compensation.

Our net loss for the third quarter of 2013 totaled $6 million and included $9.5 million in non-cash expenses centered in share based compensation, depreciation and amortization. Absent these non-cash charges, our net income would have been $3.5 million for Q3 2013 compare this to an adjusted cash based net loss of $9.7 million for the same quarter last year. We would also like to point out that year-to-date our cash operating loss is $1.5 million compared to a cash operating loss of $27 million before the first three quarters of last year.

Another way to look on our year-to-date performance our product revenues have increased by $44.6 million or 73% resulting in a gross profit increase of $37.6 million that’s more than doubled. The gross margin percentage on these additional revenues is actually an excess of 80%. Even with our robust investment in sales expansion and our continues investment in our R&D pipeline more than $25 million of these gross profits have fallen to our bottom line and into the bank.

Our loss per share for the quarter was $0.08 with respect to our balance sheet we ended the third quarter with $47.6 million in cash and marketable securities and increased the $1.2 million from the end of Q2, 2013 and we note that our cash and marketable securities balance at the end of Q3 is roughly where we started the year. With our cash on hand at the end of Q3, our debt availability of $28 million and most importantly our operating performance improvement through three quarters of 2013 we remain very comfortable with our commitment not to raise additional equity funds in the near term.

I would like to close the discussion of our financial results with some thoughts on Q4, while we are not formally adjusting our full-year guidance at this time, we are confident that we’ll exceed the top end of our current range of $140 million in product revenue that being status we look to the balance of the year there are a number of factors, some positive and some negative that will impact Q4 revenue growth.

Obviously, you are all aware that in September Medtronic received approval of its 530G insulin pump with thresholds to expand and is currently commercializing its system. While it remains to be seen whether this product will have a meaningful clinical impact over time, we expect Medtronic to aggressively market just of ice over the next several quarters as the first artificial pancreas; more to come on that from Terry.

This can impact the rate at which we are able to add new patients to our installed base, as clinicians and patients take time to evaluate this product it’s also important to remember that we sold an extraordinary amount of hardware during Q4 2012 in connection with the launch of G4 PLATINUM.

So for our year-over-year comparison in Q4 2013, we will be comparing against a quarter in which we launched our first new product into a years. We exceeded in Q3 what most analysts expected us to do in Q4. However I remind investors that we never suggested that we were continue to go at 65% year-over-year as we did in Q2 and certainly not the 100% that we experienced this quarter.

So for Q4 2013, given the comparison to our first quarter, G4 PLATINUM sales in Q4 2012, we expect our product revenue growth to begin to normalize a closer to 40% year-over-year as we’ve guided previously and we do not expect to exceed 50% year-over-year growth in Q4 2013.

With respect to operating expenses in the fourth quarter, we expect to increase our spending in a couple of very important commercial areas. As many of you know last year an early this year, we added approximately 20 sales territories to our U.S. sales force. Before the end of this year, we plan to add an additional 20 territories bringing our total U.S. field sales force to approximately 90 reps.

We’re also commencing a number of clinical studies designed to demonstrate both the clinical and economical benefits of CGM as a front-line therapy to support our physician that CGM is the most important and cost effective tool on the intensive management of insulin dependent diabetes.

Finally we note that our historical cash usage has always been high in Q4 as accounts receivable increase due to late Q4 sales and we pay on a number of recruit liabilities before year-end. Adding to factors this year inventories may increase in Q4 depending upon the timing of the approvals of our three pending FDA filings.

Now on to the business update; turning to our regulatory activities, I am very pleased to report that during Q3 we filed the PMA supplement with the FDA seeking and expanded indication for G4 PLATINUM for professional use. Professional CGM&A enables clinicians to gain better insight into their patience glycemic profiles.

Devices are owned by the healthcare professional and can be used either in blinded mode for simple collection in retrospective review of glucose stated by the clinician or in unblinded mode which allows the patient to experience the full benefits a real time CGM are still providing the doctor with an opportunity to review glucose data retrospectively with the patients.

Clinicians can use the insights gain from a professional CGM session to adjust therapy and to educate and motivate patients to modify their behavior after viewing the effects of specific foods, exercised stress and medications have on their glucose levels.

With respect to our pediatric indication, we continue to have regular open dialog with the FDA concerning our U.S. pediatric submission, our discussions continue to center on appropriate billing at the products specifically for children. And we remain optimistic that we will receive approval prior to year-end.

Finally with respect to our share filing, we have received written feedback from the FDA and we are currently preparing our responses to the questions post to us. These questions required some simple clarification and a bit more testing of the system and we expect our responses will be submitted to the FDA within a couple of weeks.

Turning to our future CGM product offerings, we remain focused on replacing finger sticks as our primary long-term objective and we continue to work on both Gen5 and Gen6 in an effort to achieve this goal.

We continue to believe that simplicity, patient convenience and expanded connectivity paired with our superior sensor technology will enable us to maintain our leadership position in the CGM market.

Shifting to our integration partnerships, Animas continues to work with the FDA on its PMA submission seeking approval of Animas 5 system in the U.S. Animas is currently completing additional verification and validation testing and additional human factors testing requested by the FDA and expected to have all additional testing done in response to submitted to the FDA by the end of January.

We continue to work diligently with Tandem Diabetes Care to incorporate the G4 PLATINUM into a next generation version of Tandem’s GSwim. Tandem’s PMA application has not yet been filed with the FDA, while the integrated system remains a top development and regulatory priority for them as we’re approaching year-end, we do not anticipate Tandem will file this quarter.

Although Tandem management is currently highly engaged in their IPO process, we continue to work closely with the Tandem team to complete verification and validation testing and submit of PMA application with the FDA as soon as possible.

I’d now like to turn the call over to Terry for some concluding remarks.

Terrance H. Gregg

Thanks Kevin. The third quarter was a record breaking quarter for DexCom, as we continue to execute on all aspects of our business via commercial, clinical, regulatory or with our R&D efforts. Further evidence that our business model is scalable and is evolving the way we always said it would. There has been a lot of buzz in the diabetes community of late with Medtronic’s announcement in September of approval of the 530G.

I’d like to briefly share my thoughts on this approval and its impact on DexCom. While a system that just spends into one when our local [indiscernible] holders breached is considered a first step to achieve a closed-loop or bionic pancreas. I do not believe the 530G adequately achieved that first step due to its four sensor accuracy and reliability.

In fact in my opinion the pursuit of an artificial pancreas has unfortunately been dealt a substantial blow with the introduction of this product. The diabetes community has already complaining that after seven years and hundreds of millions of dollars stepped is this the best industry could come up with, I share their frustration.

Patients deserve better. Since our accuracy is what matters and multiple independent studies, our G4 PLATINUM sensors anywhere from 40% to 70% more accurate than the new Medtronic’s sensor. At this point most investors are aware of the work done out of Boston, represented at the ADA Scientific Session meeting last summer where Dr. Steven Russell shared competitive data from patient simultaneously wearing the G4 PLATINUM and Medtronic’s Enlite and reported an MARD of 10.8% for the G4 PLATINUM and 17.9% for the Enlite.

And just lastly, at the Diabetes Technology Meeting in San Francisco, Dr. Gary Steil presented competitive sensor data, as part of the study examining the use of CGM in critically ill infants reporting an MARD for the in light of 17.8%, and an extremely high 81% early failure rate.

By comparison Dr. Gary Steil reported an MARD of only 11.7% for the G4 PLATINUM with no early failures. We expect additional studies with similar results will follow. Medtronics sight several different accuracy metrics in their labeling. But unfortunately it seems that no independent investigator can reproduce the Medtronic data and we believe the sensors poor performance will be obvious to patients who try the device, furthermore while Medtronics data raises a number of questions, we believe that to achieve any reasonable level of accuracy with this particular product patients will need to take up to four finger sticks calibrations per day, we know from our own market research that reducing or eliminating calibration is extremely important to patients.

We’ve also heard initial reports from patients that a considerable number of 530G alerts are false which is in line with one of the in light data tables where Medtronic discloses that more than 50% of the in light to alerts that 70 milligrams per deciliter within a 15 minute window are false as we learned with several of our prior products repeated in accurate or false alarms underlying a patient stress and state them as CGM system and our key factor in patients electing to quit using CGMs.

We are very prepared with our messaging in the field particularly around the benefits of CGM first but we are also cognizant of the fact that the Medtronic marketing machine is out in full force, as a result we do expect some impact to our new patient additions over the next several quarters as clinicians and healthcare providers evaluate this new product.

Diabetes is a burden, it is a burden for the patient 24/7/365 there are no holidays, there are no vacations, it is a life sentence and is challenging as it for patients loved ones, friends and colleagues are all impacted by diabetes. Our mission remains steadfast, replace finger sticks and in the process eliminate one of the most cumbersome and painful requirements of managing diabetes successfully.

For DexCom the future is about simplicity, patient convenience and con activity. Our goal is to continuing manicurize the footprint on the body to make the patient experience as minimally invasive as possible.

Our goal is to enable the patient to interact with their glucose data directly on a smartphone which will not only add to the overall patient experience but will enable parents to receive their glucose information during the night time.

During the school day from as a child while the parent is at work will allow the spouse to monitor a loved one while at work or when traveling. As I routinely tell our employees stay the course but there is substantially larger appeal presence, we expect our competition or attempt to create confusion in the marketplace with regards to sensor performance. But we are committed to compete toe to toe in marketing the superiority of our system in the end by presenting performance data that is truthful and accurate we will continue to win the hearts and minds and royalty of patients and healthcare providers.

Thank you and we’ll open it for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions). And we have Tom Gunderson from Piper Jaffray in line with the question. Please go ahead.

Tom Gunderson – Piper Jaffray

Hi, everybody so I’ll will be quick Terry and crew Kevin, number let’s see where do I want to go with this Terry on the Vibe and the PMA that J&J is doing has there been any correlation any changes in it and how you think that product is going to be launched given the reorg of the diabetes business at J&J?

Terrance H. Gregg

Tom I’m actually going to ask Steve and Steve heads our Steering Committee relationship with Animas and he would be better suited to answer that.

Steven Pacelli

Yes I think look the Vibe remains a critical priority, I mean they still talk about the Vibe not just at the diabetes franchise level but we here mention of the Vibe at all the way up to corporate chain, I think the real challenge right now for the diabetes franchise is being dragged down frankly by their finger sticks business as a lot of moving parts in that organization.

But I think first and foremost priority is to get the Vibe out, we are working and that is largely being driven by J&J, we are working on a more advanced system without disclosing too many details, there has been some limited data published but it’s certainly a more advanced product than the 530G, I can’t give you any specific timelines on that product because truly a J&J product remained not to disclose those yet, but yes J&J I think frankly that the launch of the 530G has reinvigorated particularly the Animas side of the diabetes franchise.

Tom Gunderson – Piper Jaffray

Thanks. And then Kevin you guys held back so long on earning reps and all of the sudden you are on quite a ramp here, can you help me understand or clarify of those 20 that you plan on adding before the end of the year 20 reps by the end but those commission generating sales guys territories calling on unique customers?

Kevin Sayer

That’s exactly what they are Tom, we’ve gone through a very detailed process of analyzing our demographics and where are current sales are coming from where physicians and patients are located based on the [indiscernible] reports and everything and we’ve again divided the country backup and added 20 more reps.

Tom Gunderson – Piper Jaffray

Thanks.

Terrance H. Gregg

So that is exactly what they are more commission based sales people.

Tom Gunderson – Piper Jaffray

Terrific. And then last really quick question you repeated the Pediatric FDA clearance approved order clearance by the end of the year? Are you prepared for an early 2014 launch of pediatric?

Terrance H. Gregg

Yeah we will be approved pediatric date and then we get the approval..

Kevin Sayer

It only took us three weeks to launch Gen4 Platinum last time we will get the thing out as absolutely quickly as possible.

Tom Gunderson – Piper Jaffray

Okay thanks guys.

Operator

And we have Bill Plovanic from Canaccord on line with the question. Please go ahead.

Bill Plovanic – Canaccord Genuity

Great guys, good evening, congratulations gentlemen.

Terrance H. Gregg

Thank you, Bill.

Bill Plovanic – Canaccord Genuity

So as we kind of pass through the numbers here, it wasn’t a loss. I mean I just want to get clarification if it’s the 75/25 mix your durable revenues growth is accelerating and your utilization went up significantly. Are my numbers that off or is that what we’re actually seeing?

Kevin Sayer

I’m not looking at your numbers. But what we’re seeing is our durable revenues went up, and our sensor revenues went up faster. So utilization and retention are doing very well for us right now.

Bill Plovanic – Canaccord Genuity

Are there any metrics you can share with us maybe even just sequentially like is your utilization going, improving X amount of sensors, a quarter or a percentage or just anything you can share to help to quantify. So we can understand because in my model looks like utilization metrics are going up, something like a 30% improvement on a quarter-on-quarter basis and that it seems a little high. But I’m just trying to get a clarification on drivers?

Kevin Sayer

I’m not sure that you’re that high though, I think again we have imperfect data, we share data with a lot of independent distributors and while they give us tracings. We’re still consolidating as best we can. What we reviewed earlier this week we sat down and went through all the data that we could come up with. We see patients using more sensors, one category that really struck me and Terry is there appeared to be a much higher number of patients for example who are purchasing enough sensors to wear a new sensor every seven days.

And if patients are wearing a new sensor every seven days, you can do the economics for that model that’s a very, very strong piece of evidence for us and as we have stratified our user base from those who use very few sensors to those who don’t even who buy the first kit and then don’t buy anything else.

What our goal all along was is to move everybody up the food chain to get everybody utilizing more sensors and that’s what’s happening everybody is moving up a notch and purchasing more. So this product is being utilized very regularly by the patients who have it and even our distributors had confirmed for us, because these guys they live to sell diabetes supplies, they are call centers, they track every to every call they make, every purchase made, our distributors have come back to us and told us the retention rate on this product is fabulous. So we’re not just coming up with that with our own numbers. We’re coming up that with our large distributors I verified that fact as well.

Bill Plovanic – Canaccord Genuity

Okay. And then again kind of more in the weeds, but as I look at the past couple of quarters you benefited from upgrades of patients I think last quarter you mentioned maybe a third of the patients were upgrades as you look at this quarter, is there any metric around that you are willing to share?

Kevin Sayer

Yeah, I can tell you upgrades are down. We added more new patients in this quarter than any quarter we’ve ever had. We’ve swapped out almost all of the SEVEN PLUS patient base at this point in time that is active, so upgrades as a percentage came down this quarter versus going up, this is a quarter of new patient growth more than upgrades.

Bill Plovanic – Canaccord Genuity

Okay. And then my last question and I will jump back into queue. But you generate cash in the quarter, you lose money only because you have a big DNA in stock comp. Do you know as you think about the business going forward is strategy to drive revenues and just keep the cash flow neutral, because revenues is what you’re valued on at the end of the day or do you expect that you would actually drive bigger positive cash flow and earnings, I mean what is the focus to management at this point?

Kevin Sayer

Yeah. They’ll all take a crack at it, I’m sure Terry can add we’ve been through this exercise before and we want to grow that top line as fast as we can. That will require significant investment on both the commercial side of the business and then our product pipeline. That being said we’ve been at this for a long time. It’s time to make some money. So we will manage our top line growth and work to manage our bottom line as well and try and keep a balance. And ultimately over the next few years we’d expect our bottom-line to grow faster than the top line. But we will never ignore the reinvestment back into that business.

We need to garner as much market share as we possibly can, over the next two year to three year period and get as many people on CGM as we can support within our system. So it will be balancing act but we are getting down to the bottom-line. Once we get here I don’t’ think there is a lot of turn back.

Terrance H. Gregg

No, you can’t go back. And obviously on the cash flow we’ve made comments about the full year 2014 and our Board as always maintained that the direction that we should go and then look at GAAP positive in 2015 and beyond. So it is always going to be an incremental goal to continue to make this business more profitable, but echoing Kevin’s comments not at the expense of having a robust R&D pipeline, not at the expense of achieving our goal of replacing fingers tips which I look on the horizon and see how close.

We think we are with some of the technology that we are currently developing and it would be a shame, I think it would be a – it’s our moral obligation to pursue this for people with diabetes.

Bill Plovanic – Canaccord Genuity

Great, thank you. And congratulations on a unbelievable quarter.

Terrance H. Gregg

Thanks.

Operator

And we have Ben Andrew from William Blair on the line with questions. Please go ahead.

Ben Andrew – William Blair

Not sure how to follow that prayers of sequence but I will do my best guys. Terry if you think about the productivity and the sales force could you add anybody in the third quarter that we are in terms of staffing or it is just a significant improvements in productivity by the reps. And so it’s usually extrapolate forward with the 20 ads. Can we again that multiplier sect in terms of the easy and patience on at this point with this new product?

Terrance H. Gregg

Ben it’s a combination of things. So number one, and the answer to your question. No we didn’t hire the additions in the third quarter that shows this difference. But I would like to contrast it by. We hired better reps and in terms of our attractiveness to the people that we hire. And the next 20 I am sure we are not lacking opportunities to hire some of the best particularly as we get some contraction in the diabetes world as a result of economic impact.

We get to kind of pick who we choose and I think that’s a implant that what that translates into is that they are more active, more successful more quickly. So you don’t have that long traditional and four to six month learning curve that new reps particularly those that are coming from outside of the CGM business tend to take in order to get them up to speed.

I think the second plan and my seals business contracts that the same docs that I called on a year ago that I called back on today and right along just that attitude towards CGM first has driven so many cases the product is selling itself. And the rep is certainly out promoting that that’s one of the reasons that Kevin and the team are made the decision to expand the sales force again. Because we are not completely serving the entire diabetes population that we should and now we’re enough awareness about the G4 PLATINUM that now is the time to drive that message to our larger group of physicians and prescribers.

Ben Andrew – William Blair

Okay, that’s helpful. Thank you, Terry. And then as you think about Kevin maybe the hardware components in the quarter you obviously gave us some insight into the mix of new patients and upgrade as SEVEN PLUS. Where do you think the steady state if there is one will be in terms of hardware for new patients and equipment upgrades for existing patients after SEVEN PLUS. So the transmitters and handful things like that?

Kevin Sayer

And that’s a very complex question with the G4 PLATINUM and I can give you one variable, when we launched G4 system one of the things that we get us we warranted the transmitter for six months building in an estimated shelf life, and then selling to approximately to distributor where there be another month shelf life and then to a patients. So we’ve given a six months guaranty.

The translators we shift last October by larger still working. And so we haven’t been enable to predict when the translator sales are going to come back and we were thinking originally we get two transmitters a year, our products works too well, good for the patient, little tough for us to model. I think over time then on the hardware cycle, it probably won’t be every year with the receiver maybe SEVEN PLUS, because I think this hardware will become more realizable.

On the flip side of that, we’ve got a lot of hardware innovation coming like the share system that we will launch again as soon as to prove that’s more hardware sales. I don’t know what that does to receiver and the transmitter revenues, but it could have a very positive impact and that’s we look out over time with another transmitter when we talk to a phone or additional improvements we have our hardware cycle may become little more traditional based on multiple product launches versus waiting three years for a new system. So for now our percentage we win 30% last quarter durable, creeping down closer towards 25 this quarter with huge sensor sale increases or just kind of play it by year.

Ben Andrew – William Blair

Okay. So the new patient revenue, it’s over 50% of the handheld revenues or is that 75% within that?

Kevin Sayer

We never broke it out, but it’s high, it’s higher than this another quarters.

Ben Andrew – William Blair

Okay, great. And then the last question and this is another kind of once I guess why would somebody take out at this sensor seven days, and you just surprised by that with the comfort or is it just kind of routine that get into? Thanks

Steven R. Pacelli

What I suspected is, I think new patients coming into the system that are different than the patients originally where the earlier adapters and high technology people they actually read the labeled instructions and use it according to indicated you.

So I think they’re just following the instructions appropriately. And they haven’t gone to the back, because we do actually at the end of the session, we get them advanced notice that the session is ending at this other group earlier adapters that figured that ways to trick the system to allow longer use. So I think there is a population that is behaving appropriately according the indications for use.

Ben Andrew – William Blair

Great, thank you.

Operator

And we have Kim Gailun from JPMorgan will have the question. Please go ahead.

Kim W. Gailun – JPMorgan Securities LLC

Great, hey, guys. Thanks for taking the questions. And congrats on the quarter, this is a nice one for me coming on board for my first quarter, so nice works there. And I guess the first question is for Kevin, just looking your comments for your full year outlook and kind of no formal change, but certainly exceeding the top end of the $140 million on product revenue.

I think that you also said in the fourth quarter you look to normalize toward the 40% growth in product revenues and not at the 50%. So are you essentially seeing then for the fourth quarter just based on those growth rate $44 million to $48 million and then for the full-year in product revenues that gives you $150 million to $153 million?

Kevin Sayer

We’ve created a frame that you can pay it anywhere you would like, yeah.

Kim W. Gailun – JPMorgan Securities LLC

Okay, but those number, I heard those numbers correctly?

Kevin Sayer

Yes, you heard the 40% and that exceeding 50% that’s correct.

Kim W. Gailun – JPMorgan Securities LLC

Okay, fantastic. And, how do you think that plays out as we go into 2014, I know broadly you said that 40% to 50% is kind of the right number for 2014 and how do you think about the Medtronic’s impact, I guess next year, as we move through the year?

Kevin Sayer

It’s little early to talk in, but we’ve been committed to 35% and 40% growth for next year for long-time here and we knew this product was coming. So it’s not like we’re completely got and aware, driving our growth next year obviously PEDs indication it’s going to be very helpful.

We believe our share system combined with the PEDs indication gives parents on opportunity to monitor their children life long and even when they go to school, when they take it with them. It will also be based on our market research use very extensively with spouses and other that will help drive revenue and combined that with possibly in J&J launch. We have a lot things in our favor that are good, good growth drivers for next year. Bottom line as we look to start next year, with this patient based buying a lot more sensors, we’ve got a pretty good start.

Kim W. Gailun – JPMorgan Securities LLC

Yeah, okay. And then just the follow-up on the gross margin, which was obviously also very strong in the quarter, was there anything onetime in there or is that kind of the level with the mix of business you’re seeing the that kind of level we should expect to grow offer going-forward.

Kevin Sayer

There were no one-time advance in there that had a material effect on margins. we’ve little one-time things every quarter. We’ve often set our margin target for our sensors within the 70% to 75% range in this. As you guys do the math and figure out hardware versus sensor sales does not too hard to reduced that we’ve got there. So again, we’ve achieved what we set we’re going to due primary margin perspective and we look to go forward from here.

Kim W. Gailun – JPMorgan Securities LLC

Okay, it’s great. Thanks guys.

Operator

And, we have [indiscernible] question. Please go ahead.

Unidentified Analyst

Hi, good afternoon. I appreciate on a top 10 in late, could you talked about margins sometime end of October, have you actually seeing them in your account base?

Kevin Sayer

Yeah, we’ve actually got fortune, I have screen shots that have been sent to me from patients showing the highly inaccurate in light sensor and direct screen shot with their own meter and our sensor and it’s alarming and I don’t mean that as a tongue and cheek tone, but the reports are the excessive alarms are remarkable.

Yeah, we’ve seen about that. And I think that’s in my comments are attributed to that type of information. The blogs are already populated with this thing as I’m working way Medtronic and IP net. And I think that’s disservice to the artificial bankers consortium they tries to get this out and pursue this.

Like I said, I think we’ve taken those of our sort of active in the AP world and suddenly learn 17 projects around the world, I think this over hyping by Medtronic is going to blow back on them, number one and I think number two its going to cause AP projects and patient efficacy groups to take us back in the lockout, where we come we’ve spend all of this money the patient efficacy groups like JDRF and others I think there is a question in everybody’s mind that this is the best we can do this is certainly dismal in my opinion.

Unidentified Analyst

And for patients looking for pump CGM integration how much can you say about the pending Vibe in the U.S. now I am assuming not?

Terrance H. Gregg

Yeah, I have to look at the use the international experience of the proxy, so the deals just come which is the 530G in European launch and its been there for about three years now, has not grown particularly the Vibe has taken share in every country that they are in I think the physicians recognize the lack of utility of that low glucose suspend over there low threshold here that when you are only suspending for an average of 11 minutes and overnight and that suspension represents probably less than a couple of units of insulin that you are, really not doing much.

So I don’t think it would necessarily harm a patient but all it’s going to do is just drive them crazy where alarms they wake up do a confirmatory finger stick recognized that and neon light sensor is wrong and so I think as more that happened the more frustrated and more alarms of session that patients engage in and that’s all going to come back to the blogs and give to healthcare providers.

Unidentified Analyst

I think and then…

Kevin Sayer

I think the Vibe well wants, wants share we’ll take share.

Unidentified Analyst

And should we be updating our model for Vibe to reflect more of a mid-2014? Launch next?

Terrance H. Gregg

Steve, I thought Steve had a great answer to that? This is driven by JNJ and although we are helping them every step of the way, it’s really their filing until that actually goes in and they’ve responded appropriately they would be inappropriate for us to comment on timing.

Unidentified Analyst

And then on this perhaps just a comment about the sales productivity increasing, have you reached the max sales productivity or just there lot more upside?

Terrance H. Gregg

There is a lot more upside I mean when you look at data that says where we are at has a penetration in a category we clearly mostly everybody things we’ve got more than 50% share in the U.S. and I don’t know whether that’s true or not true but as the category approaching 10% if you look pumps they are not quite at 30% so I would say our target has to be in order to pump so we’ve got a lot of runway get in front of us to achieve much better results.

Unidentified Analyst

Thank you.

Operator

And we have [indiscernible] line at the question. Please go ahead.

Unidentified Analyst

Yeah, hi good afternoon.

Kevin Sayer

Ted, so just to be clear then so in the current quarter – in the third quarter you really didn’t have much in terms of incremental six months transmitter type revenues.

Terrance H. Gregg

Not much.

Kevin Sayer

No. We have some but not a lot.

Unidentified Analyst

I mean you take that has it start hitting here in the fourth quarter?

Terrance H. Gregg

It’s started picking up a little bit in September and it’s gone a little faster here in October, November it’s still has the floodgates haven’t opened yet.

Unidentified Analyst

Got you okay, and then have you closed down the old sensor manufacturing 7?

Terrance H. Gregg

Yes, we have we don’t manufacture SEVEN PLUS sensors anymore, we’ve got a safety stock of inventory build primarily to service our professionally used patients until the G4 PLATINUM professional used system is approved and occasional one-off shipments to our patients we’re in the middle of implementing some very aggressive upgrade programs for the remainder of the SEVEN PLUS patients to get them switched over and those will be going out shortly. We’ll push pretty hard over the next six weeks.

Unidentified Analyst

Thank you. So it was in the Q3s gross margin number that still includes some of the deal manufacturing…

Kevin Sayer

Yeah so it does.

Unidentified Analyst

Okay. So then that’s better.

Kevin Sayer

Sure.

Unidentified Analyst

And then just lastly anything on GlucoClear if there is any updates there. Thanks.

Kevin Sayer

I can go ahead what they’re marketing it commercially on a limited basis in Europe and they appear as we hear comments in their calls in such to be very bullish on the product and we didn’t have much on the revenue side there. So it all appears to be going well.

Unidentified Analyst

And feedback – clinical feedback that’s all trending in the right direction?

Kevin Sayer

Yes. As far as we can tell we have to Mike [indiscernible] certainly has that as a key growth driver in his comments and I know they committed a lot of resources to launch the product in the European sector in a very limited way the goal is not only from the accuracy that which is exclusive, we are down laboratory reference accuracy with the sensor technology.

But there is other factor that they believe is important and that is changing behavior in the ICU to allow to be more functional by the nursing staff and the ICU staff and that’s what they’re trying to look at behavior modifications or the intensive anesthesiologist and how stacking and how they use it in an effective way, because it is quite a change for the behavior in that environment.

Unidentified Analyst

Okay, great, thank you very much.

Operator

And we have Danielle Antalffy from Leerink Swann in line of the question. Please go ahead.

Danielle Antalffy – Leerink Swann

Thanks, so much. Good afternoon guys and congrats on another great quarter, I just wanted to touch on the full-year guidance a little bit appreciating sort of the numbers that you gave but could you talk a little bit about in more detail about the variables driving the fact that you’re not sort of raising guidance when the numbers you provided would sort of imply a $10 million beat on the top line for the product revenue.

So I guess what’s keeping you from just going out and raising the guidance is it just conservatism against the Medtronic launch now we’re already sort of six weeks in I guess so could you give a little bit more color about your thinking there?

Kevin Sayer

This is a conservatism against the Medtronic launch this is just a look at our business and where we are and what we would anticipate for the fourth quarter. We typically in the past have never upgraded our year-end guidance in the fourth quarter and we’re going to stick with that policy because we do upgrade it specifically then we end up changing that year-end guidance and we don’t feel the need to do that, we feel we’ve given you enough of a frame and enough information to figure out where we think our numbers will be in that’s where we are.

Terrance H. Gregg

And the other impact not just we were transparent but if we gave you Q4 year outlook, Q1 2014 and that’s not what we want to do, we don’t want to give quarterly guidance.

Danielle Antalffy – Leerink Swann

Okay, got it thank you. And then as far as the Medronic launch does go a good number of your sensor wearers are Medtronic pump users. What are you seeing – and I actually not sure if you would disclose that number. If you could give us that number, but what are you seeing of those patients are you still managing to hold on to those patients are you seeing some of those patients switch over to Medtronic because Medtronic sometimes automatically upgrades patients I know, so not sure how that is playing out.

Terrance H. Gregg

Well I mean I will tell you, it’s been too early on their launch to really good optics on what it’s going to turn out to be that is why in Kevin’s comment, two to three quarters, you can’t come up building a standpoint got some issues to the individual component parts, transmitters and so forth that our patients have already been reimbursed for.

So Medtronic has built for some of those things.

I think it’s a very complicated scenario and I would expect that even in those that have upgraded and get to their own competitive analysis between the G4 PLATINUM and then light sensor, I worry less about the attrition of those based on few but we’ve received as I mentioned I get screenshots from patients making their own comparison and I think we will see more and more of that. So I’m not as concerned I believe as maybe some others are.

Danielle Antalffy – Leerink Swann

Okay thanks. Okay thanks so much.

Operator

And we have [indiscernible] of Stephens Incorporated. Please go ahead.

Unidentified Analyst

Hi, guys congrats on the triple digit quarter for an acquisition just going back to the J&J integrated launches, can you guys just speak around some color of how you guys see those two partners kind of supporting the launch whether they will be going after kind of their new patients versus converting their existing patient base and just kind of some color would be helpful?

Terrance H. Gregg

Yes, Steve I can’t speak with specifics for Tandem because we haven’t frankly, I haven’t talked to the Tandem business folks as to their specific launch plans but absolutely with Animas and with the Vibe product, their expectation is to go straight after the Medtronic installed base, I mean look it is not that the vast majority of pump patients in the U.S. were Medtronic pump, they probably have 65 plus percent market share. So every year the number of pumps sold in the U.S. is probably I would mentioned we have got those more pumps sold through to existing patients than our new patients through pump therapy.

So the lowest of the low hanging fruit is the patient who has already chosen to wear a pump but has just moved in just part of the upgrade cycle. So absolutely that will the Animas primary target then I know my guess is that Tandem will probably do the same, we have heard business publicly shared from Tandem that they have done a nice job in adding the patients they have added to-date in converting Medtronic patients. So I assume the Tandem would probably take the same approach.

Unidentified Analyst

Okay, that is really helpful and then just on pediatrics, can you guys just provide me color down how you kind of do that coming onboard and how quickly – next year you do the comment?

Terrance H. Gregg

Well again we continue to have discussions with the FDA the discussion center or labeling of products specifically for pediatric patients and they are requiring specific pediatric patent offering and a specific period patient product offering.

We are discussing those features with the agency and coming to where they want us to be as far as how that comes on Board again I go back to our past history, we announced G4 PLATINUM I believe on October 7 to 8 last year and we’re shipping October 20, we expect the same from our team here again and then once it comes onboard we can directly market to the pediatric endocrinologists and we believe over time that segment of our patient base will grow up from 8% to 10% than it is now three more reflective of the general diabetes population in the 20% and 30% range. So it’s a wonderful growth opportunity for us and with our accuracy of our product, with the connectivity and convenience in the communications feature we are about to offer we think it’s a wonderful area for us to go.

Unidentified Analyst

Great and then last one from me in terms of that the share product have you guys given or could you guys provide some color around how you expect the price that will be like a monthly, quarterly or how you guys are looking at that?

Terrance H. Gregg

To start with we’re going to – we have got some pricing models build, I rather or not disclosed now I need what my marketing team figure the way through that I can tell you our goal in this product is not to launch a product that people look at and go on, I can’t afford that, we want people to buy this and use it and buy more sensors, so it will be very economically feasible for the patients it will add some to our bottom line but ultimately our goal here is to sell more sensors and that’s what we’re choosing for.

Unidentified Analyst

Great. Thanks and congrats again.

Operator

And we have Jason Bedford from Raymond James in line with the question. Please go ahead.

Jason Bedford – Raymond James

Good afternoon thanks fort squeezing me in. I’ll be quick here but you mentioned increased retention is kind of one of the factors in the growth here is there any way to quantify the improvement in retention meaning is 5% or 10% higher than what you were seeing with SEVEN PLUS?

Terrance H. Gregg

We’ve never given a retention or attrition percentage in detail to anybody, it’s a lot better obviously when it had, it is a very significant improvement overall settle it for it.

Jason Bedford – Raymond James

Okay, internationally I think you talked in the past about adding 10 new countries I guess I realized it’s a small piece of the pie right now but are you seeing any contribution from these new countries there the growth that you’re seeing from kind of countries you’re already selling into?

Terrance H. Gregg

Lots of the growth this year has been in our core countries as the news countries come on board they will slow, but we are making progress in adding those 10 new countries by the end of the year we are confident we’ll approved in pretty much once we look to add and then we would expect those to account for decent piece of our international revenues next year. So we will finish that up. Every country is important and every one of these add is important to us total, we will build that business over time, so our team is doing exactly what we asked so.

Jason Bedford – Raymond James

Okay. And then just lastly on gross margin, I may have missed out but did you say that gross margin on the G4 PLATINUM sensor was 70% to 75% in the quarter?

Terrance H. Gregg

I said that it’s always been our target and then one can do is looking at 65% overall margins with the hardware and sensor mixed that were there well with in that target range.

Jason Bedford – Raymond James

Fair enough. Thank you.

Operator

And we have Jan Walsh from Benchmark – in the question. Please go ahead.

Jan Walsh – Benchmark

Good afternoon everyone and congratulation on the quarter it is exceptional. I just have a couple of quick questions most of the questions that I had were answered but one is just to make sure on the share submission the questions you are getting are benign right there is nothing untold or getting in a way of a smooth answer and response.

Terrance H. Gregg

We don’t see anything is major, but we also never see anything from the agency as benign either. So we’re giving them due diligence. They didn’t ask us anything we can’t answer. How is that?

Jan Walsh – Benchmark

That’s a good answer. I guess another question I had is, are there any updates on the clinical studies you have ongoing or planned? They seem to be important to your marketing strategy and I’m just wondering where they are?

Terrance H. Gregg

We’re going to give more color on that next year, once few things get rolling. I think we’re in a phase. In the fourth quarter, we’re running some pilot studies. We’re doing a lot of trial design and consultation. I think next year as we go forward, you’ll hear a lot more on these studies. But right now it’s a little early to tell you anything.

Jan Walsh – Benchmark

Okay. And just in terms of your sales force, you have 90 reps now, you had a 20.

Terrance H. Gregg

No.

Jan Walsh – Benchmark

How do we see the…

Kevin Sayer

No, we’ll have – when we get…

Jan Walsh – Benchmark

When we had 20 or 90?

Kevin Sayer

Yeah.

Jan Walsh – Benchmark

Okay, sorry. How do you see the sales force growing over the next couple of years? Are you there and ready with the leverage or a lot more territories and lot more leverage opportunities even if you had?

Terrance H. Gregg

Well, as pointed out earlier, these guys were putting leverage this quarter as we didn’t add any bodies that are up 24% when comparing to the quarter before. I think we’re getting more leverage out of this group all the time particularly as we continue again to some more sensors.

But I also don’t see it stopping or expansion either. There will be at some point in time, we’ll get to the right mix and more of the like would be done. But the time is not now, it’s certainly not next year and we probably don’t see it being through 2016. We think we can continue to grow. And internationally we use distributors everywhere. We’ve got a pretty small effective international step right now. There is investments to be made in that area as well.

Jan Walsh – Benchmark

So if you’re thinking about the sales force additions over time, we should just kind of considered what you’re doing now as what we should see over the next year to two years?

Terrance H. Gregg

As we look at our spending and it’s a good question. We spend a whole bunch of years before, 2010 investing a whole bunch and trying to give product developed and product right. And what we’re doing right now to a large extent, even though we continue to spend on a product front.

It’s now time for the commercial side of our business to catch up, not only you’re going to see continued investment in the sales force as we grow it. But we had become a marketing company due and there will be not only investing in sales. But you asked about the clinical studies. We’ve never run a clinical study other than the product approvals.

We got to do things that support the value and again support our fundament beliefs as CGM is the most important technology in diabetes. And it’s the most important thing for anybody will take so independent diabetes to manage their condition. And so some of those studies we’re going to do, it’s different than what we’ve done before. We’ve done a best on things like than addition to salespeople.

So as you look at where we grow our dollar spending wise, we will more than likely grow dollars as much of not more on the commercial side then we will be others over the next few years, while we get to kind of an equilibrium and then we’ll see where we are after that.

Jan Walsh – Benchmark

Well, and that goes back to previous discussion. I think where you were talking growing the top line, but also recognizing now that you going to have to return some earnings sooner than later, probably by 2015. So I guess this going to affect, which going to be able to add to the bottom line. How do you see that going in the next year to two years?

Kevin Sayer

I see that just being it’s a bouncing act and we’ve got some great people here to manage it, and you know Jerry and I have bee through this a few times before as I have many of the people on this team and we any project we take on, we look at the payback, we look at the return, and we sometimes learned to say no. We do.

Jan Walsh – Benchmark

All right, well thank you very much and again congratulations on the quarter.

Kevin Sayer

You bet.

Operator

And we have Raj Denhoy from Jefferies in line with the question. Please go ahead.

Raj Denhoy – Jefferies & Co.

Hi good afternoon, I’m just curious about some of the trends we are seeing with the launch of the G4 and things like higher sensor utilization, the low attrition rates and then curious how that compares back to the experience in the launch of the SEVEN PLUS and in particular is there a concern that some of those very robust trends may slow as patients get more experience with the device or it move beyond kind of initial, mid initial launch here?

Kevin Sayer

You know I will speak. I think it’s exactly the opposite, sensor satisfaction and satisfaction with the product I guess is determined very quickly and patients find this product reliable, informative had a tool to manage their lives if they are happy they stay on. And so early usage is probably the more important indicator versus long-term with something like CGM or pumps or anything like that and so in this case the early history of the Gen4 launch where it has performance better than SEVEN PLUS did in the beginning. With retention sensor realization and those trends is truly a positive trend for us. I don’t know Terry if you have anything?

Terrance H. Gregg

I agree with Kevin as we’re getting moving beyond the early adopters, so means we are also on CGM 1 with physicians and patients coming in naïve to technology and it’s becoming a part of the fabric of their diabetes armamentarium, so they don’t know any different and that fact that they’ve never been on CGM and the first one they go on G4 extremely happy if they have been on SEVEN PLUS and they’ve moved to G4 they’re even happier because they have a benchmark for which to compare as they have been on anybody else’s sensor then they are even happier to come to G4 because they have yet another wonderful experience. All of that goes to reduction of attrition and continued use on a more sensors per month basis we’re seeing. So I don’t think any headwinds associated with that quite the contrary.

Raj Denhoy – Jefferies & Co.

The trends you are seeing are being experienced in both the brand new patients but in also the upgrade patients in terms of these metrics?

Terrance H. Gregg

I don’t think we have [indiscernible] answer that adequately to say absolutely and then comments that we have from the metrics are overall we haven’t dug down into see which patients are using the sensors more frequently and naïve patients are muted Gen4 versus SEVEN PLUS upgrade. We don’t have that data.

Raj Denhoy – Jefferies & Co.

Okay, thank you.

Operator

And we have Hugh Littman from Oppenheimer online with the question. Please go ahead.

Unidentified Analyst

Hi guys it’s [indiscernible] for Steve. Can you hear me okay.

Terrance H. Gregg

Yes.

Unidentified Analyst

Thanks for squeezing me and just quickly on the Tandem PMA filing can you elaborate on the type of validation testing that is being done in generally how long do you think this testing would take?

Terrance H. Gregg

No I can’t give any more specifics other than we talked previously about talk about this Tandem and Animas remember the moving from 510K environment to a PMA environment and the level of systems testing required of a PMA company versus a 510K is substantially greater.

So there is just a lot of work to do and I think both unanimous previously and December on tandem probably under estimates the magnitude of the work that has to be done in order to complete an adequate PMA to submit to the FDA. So I can go to the specifics of the detail that has to be embraced let’s just say they are very attentive and we were hopped on, on everywhere we can to get to the following deficit as possible.

Unidentified Analyst

Okay, fair enough and Terry can you talk a little more about the opportunity for G4 and professional use I mean how much more of an opportunity is G4 versus SEVEN PLUS in this professional U.S. market?

Terrance H. Gregg

Well, I think there is a tremendous opportunity for G4 and professional use physicians enjoy the opportunity to put patients on the sensor we have the opportunity to do it either on a blinded or unblinded manner we prefer unblinded I think the majority of and College of Physicians today use the unblinded way as a preference because that allows both the physician and the patient to experience the levels of glycemic variability and a get better understanding and I would remind physicians who want to have such control that they only see their patients at best four times a year.

And so the patient has left to be responsible for their own diabetes the 361 days here if they don’t see a physician and so it’s better to have more information than less information with the health and education from the healthcare professional but having that technology available to them will enable them to get more patients start who may in fact be hesitant to go on CGM and this is kind of causes crossing the cross threshold and realize how valuable the information as they migrate into their own personal system.

Unidentified Analyst

All right, thanks for the color.

Operator

I will now turn the call back over to Terry Gregg.

Terrance H. Gregg

Thank you and thanks for joining us. Obviously, this was as I think one of you maybe Bill Plovanic allow. We agree Bill love. So we’ve been everything we said we were going to do and then some. This technology is the most exquisite and the management team is the best that I’ve ever been associated with and I my last team was pretty good.

We know we are being chased by others who want to be the lead doc because if you are not the lead doc the view never changes well those who chase us should perdue or flatten my accuracy for example we’ve already said our sights and are busily engaged in therapeutic accuracy followed by reduced or factory calibrated sensors. So to the $350 million people with diabetes today help is on the way and it will have a DexCom label. Thank you.

Operator

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

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