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DexCom, Inc. (NASDAQ:DXCM)

2013 Credit Suisse Healthcare Conference Transcript

November 13, 2013, 17:30 PM ET

Executives

Kevin Sayer – President and Chief Operating Officer

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

Analyst

Bruce Nudell - Medtech Analyst, Credit Suisse

Bruce Nudell - Medtech Analyst, Credit Suisse

Good afternoon. I am Bruce Nudell, Medtech Analyst at Credit Suisse. We have great pleasure of having DexCom present, Kevin Sayer; President and Chief Operating Officer and Steven Pacelli; Executive VP of Strategy and Corporate Development.

Kevin Sayer

Thank you, Bruce. We will go through the presentation. Hope we have little time left for questions here at the end.

Diabetes is a big problem. It's a global epidemic. Every one of us in this room has been affected by somebody whose life has been changed by diabetes and every time I give this speech, I have a new story. In the past month, I have a cousin I am quite close to [a firm] in Idaho. His 12-year-old daughter lost 13 pounds in one week and was diagnosed with type I diabetes. When they got her to the hospital, her glucose levels were like 600 and she is very worried about what's going to happen in her life and I got her a sensor immediately and hopefully things will go well.

My daughter-in-law is pregnant with twins and she was diagnosed with gestational diabetes last week. I will be putting her on a CGM as well. Insurance is going to cover it. So I will be paying for that one, but I want those twin babies to come out perfect. It is everywhere.

A while ago, 130 million people were diagnosed. Then in 2003, it's up to 194 million, 366 million today and in another 20 years it's going to be up half a million -- over half a million people with some form of diabetes.

In the U.S., it's even more pronounced. One in three children born will develop diabetes at some point in time. 55 people will go blind, 230 amputations, one in 10 healthcare dollars. In our system in the U.S., they spend on treating diabetes and we believe we have a tool that should be the first thing is in the [arm] of treating diabetes.

We can reduce complications. We can reduce cost over time and there are very few treatments that can make that promise and finally we can save lives.

We frame our presentation around three things, what the problem is, what our solution is and then what we are [headed] in the future to make it even better. Problem, to effectively treat diabetes you got to know where you are going and you got to be able to figure out where you are going before you figure out how to get there.

The conundrum for diabetes management is very simple. You've got to target range you want to be at. Your fasting glucose below 110 milligrams per decilitre. If one is too high and does not have enough insulin on board, then you develop hyperglycemia and one of the short term effects of hyperglycemia unless you get really higher and not visible, remaining at too higher level over a period of time leads to major complications. Cardiovascular disease, blindness, kidney failure, all those things we read about that costs a lot of money.

Conversely, if you are too low and take too much insulin to avoid the complication of hyperglycemia, you have very, very acute short term effects, you can lose consciousness, lose memory, moodiness, possibly die and the cost of poor control are huge, $89 billion and this is just in the U.S. are spent on treating, on direct care, chronic complications and the other cost and the indirect cost of diabetes are even higher.

We see as a company, the indirect cost from time to time just with employees and missed work days. The average person with diabetes cost a system 2.3 times more on an annual basis to take of than one without.

Finger sticks have been around for a long, long time. For any of you who has not ever used a finger stick instrument or a glucose meter, I would suggest you to do it some time. It's quite an experience. I am going to try and play golf tomorrow, but I’ve been sticking my finger with a lancet. I am wearing a censor to calibrate it and just sticking your fingers twice a day, is very painful, but the information can be very misleading.

This meter, this reading says a 120. Our DexCom system, while it gives you the same number as 118, looks completely different. As you can see at the top where it says 118, there are two arrows pointing down. What those two arrows mean, is you are going down at a very, very rapid rate and the graph that you see on this chart, shows your glucose measurements over time, and you can relate those back to what you eat and what activities you're participated in.

I started in diabetes in 1994. I was the Chief Financial Officer at MiniMed with Altman and worked with Terry Gregg there as well. I teased Terry. I was actually in diabetes three months longer than he was before he started.

But before I started at MiniMed, every investment banker in the universe or as I first started in '94 came to me and said because of the DCCT is out, you guys are going to have the biggest company ever, you are going to be rich. Everybody is going to come, buy an insulin pump tomorrow because they've got to achieve greater control; they've got to get this A1c below seven. And the only way to do that is with intensive management. Today, almost 20 years later, we went from 37% of the people with type 1 diabetes having an A1c below seven to only 44%. Tools that we provided have not been good enough to this point in time.

Here's why a good A1c doesn't necessarily mean good glucose control. You can see all these squiggly lines on this chart. These are a number of patients, nine patients over a 24-hour period who have A1cs below seven. They would be viewed to be in good glycemic control. But if you look at that orange line that goes way upon the top, for example, or if you look at all the other lines that go down into the red, those people down in the red are all having hyperglycemic events, which can lead to some very bad things. The patient going up too high, complications there from hyperglycemia over time can be huge. The solution to the problem.

In today's world many -- the meter companies talk about patterns and pattern recognition. If you stick your finger four times a day this is what your pattern looks like. And our meter competitors or our meter friends, we view them as competitors, because ultimately our goal is to replace finger sticks, will draw line between those four dots and say this is your glucose pattern, have a great day.

In reality, when a patient wears a continuous glucose monitor, they can find out what their glucose pattern really is. And again, this is just readings every five minutes. But take a look at some of the statistics here. This person was dangerously low for an hour. They were above 210 for 4.8 hours. This statistics go on and on. You can't know where you are going by sticking your finger four times a day and making decisions. It just doesn't work. I'm going to show a quick video about our Gen4 system right here.

[Video Presentation]

I was here a year ago, two weeks after this product was approved. Since then, our revenues have increased on a year-over-year basis over 70%. I'll get to the financials later. The former CFO are on it to move the numbers up to the front, but Steve said, I will talk about the product a little more.

This is the most accurate CGM device ever on the market and it is the only one labelled to last for seven days. The transmitter transmits a signal that goes out. It's labelled for 20 feet. Quite honestly, if my receiver were back there, you could still get my data, even from here to the back of this room and the hyperglycemia alerts are much louder and much better than they used to be.

There have been studies that support the use of CGM to reduce A1cs. There was a landmark study by the JDRF quite some time ago that shows you can improve A1cs with CGM. We believe these studies while good are somewhat flawed because the devices used to run those studies are not near as good as what we have today. There've been benefit papers written in journals showing that CGM leads to sustain A1c reduction in patients and definitely is recommended for type 1 patients.

We are covered today by most all commercial insurance payers. In fact, 98% of people with private pay insurance have access to CGM in some form of reimbursement. We are not covered by Medicare yet. We're working on Medicare approval, same with the other governmental programs.

Future; we believe that CGM will become the first line of therapy for all insulin taking patients one day; all diabetes patients, not just type 1 patients. This should be used first in any approach.

I was at a conference not too long ago, a medical meeting, and I was standing next to the Sanofi booth. It was right next to ours. And a physician -- and they have this running video that talks about why patients should use Lantus instead of something else and why they need to move to insulin. And I asked the physician next to me, how do you decide to move somebody to insulin?

He looked at me and he said, well, 20 years experience. And I said do you ever put him on a sensor? Well, no. I haven't thought of that. I said, what would happen if you did? So, well, that would be much better than what I'm doing now. We have a lot of work to do to change this dynamic, but it should be used by everybody and it has tremendous users all the way across the Board.

In the U.S. there are several markets that we'll be going after. Originally we focused on the 400,000 pumpers. They you look at the insulin taking patients; 2.25 million of those type 1 and type 2s that aren't just -- that aren’t using pumps. Then you've got the type 2 population that’s on a combination of insulin and orals. And you can see how large that population becomes. Not all of them are going to use the sensor every week. Some of them will use it for diagnostic purposes. But nevertheless, our product can address all those markets in different ways.

We are all around the world. We said, by the end of this year we'd be in around 30 countries. We're close to that number now. Our near-term launches will be out in India very soon, a couple of Latin American countries. We just launched in Canada. We expect to launch in Mexico sometime early next year. So we are getting around the world.

And patients are driving the demand. These quotes are real. For the first time in my life, I can now be accountable for my diabetes. This quote from this patient, she has -- this patient had worn a CGM for six months and seen their A1c drop over three points and felt like their best friend and had been taken away. Again, control my hyperglycemia.

And this last one, well thank you, thank you. That's easy. You saved our little girl's life. We recently got an email from a patient who got on a pump and a sensor at the same time. She wrote to say how grateful she was to have been put on a CGM and how responsive we've been in her training. Her second night on CGM she woke up because our sensor told her she was too low. She said okay, I guess I'll go have a pear or a peach.

When it had a piece of fruit decided with her fancy new insulin pump she'd gave herself a bolus. She thought to then looked up for a table or whatever decided to give herself a bolus. Unfortunately, she gave herself 10 times the amount of insulin that she should have given herself. The sensor went off again in 20 minutes waking up her and her husband as they sat up all night feeding her different forms of carbohydrates to keep her from going too low. She basically said given what she's done she would be dead without her sensor. Her and her husband are forever grateful.

We've had four different generations of sensors approved over time. As you can see, the seven series -- the three-day sensor first, then the seven series. Our European combination product with J&J has been on the market now for two years. Our G4 Platinum was approved last year. We've got a partnership with Qualcomm. We're working on to develop some better data platforms.

Our pump partners we'd expect to launch more in the '14 timeframe at this point in time. We filed for a pediatric label expansion and continue to work with the FDA. We're hoping to get that approved later this year with a launch late this year if we get the approval. If not, it certainly should be a big factor in 2014 and then we intend to go mobile.

Our DexCom share system is our first way to connect with patients. This system is very well thought out. We wanted to take an interim step as we went to mobile platforms, mainly to manage the agency more than anything else. With this cradle, you will put your receiver inside of it. I have my receiver here that will fit inside this cradle. That cradle will then with Bluetooth technology communicate with an Apple device sitting next to it and the signal will go to secure servers and then you can share them with up to five other people.

For a parent with a child who wants to go spend a night somewhere, basically for a parent with a child who sleeps in a different part of the house, for a spouse, whose spouse travels all the time, this is a wonderful product and it gives us a great entry into mobile platforms without changing everything else that we do and going for a very large scale approval.

Our next generation Gen5, after we had gone through Gen4 is going to have the same sensors to Gen4 system, but is going to connect directly to a smartphone and we call the devise that used to connect with it a smart transmitter, that transmitter will have all the computing power in the chip and instead of sending an electrical signal to a receiver, it will send really basically a glucose number and then it will be displayed on the screens. Then it changes over time and of our display and the information we present will be apps rather than full-on system changes. We will also have a new applicator to easy insertion and we've had several meetings with the FDA about this path.

You certainly heard many things about the term artificial pancreas in our marketplace for the past couple of weeks. There are about 20 artificial pancreas programs around the world, where academicians and physicians are trying to develop artificial pancreas. Approximately, 17 of those programs have chose the DexCom sensor versus a DexCom of the company that claims to have the first artificial pancreas, which I find a little bit interesting.

These systems are in trials everywhere and the results have been very promising. The components of a [cause root] system never change. It all starts with good glucose information. Then there are algorhythms that control insulin delivery. The pump is then told to deliver insulin. You've got inputs, the CGM data stream, the insulin on-board calculations.

These things have been around forever and now they are really getting pushed to a much higher level. So we are actively participating in those programs as a component and we look for them to be successful. Now let's go to my favourite slides again, our numbers.

You can see in 2010, we did $40 million in revenue. Our last quarter was $42.5 million versus consensus of $35 million. For the first quarter in the history of our company, we were cash flow positive from operations and in fact, if you add Q2 and Q3, we far exceeded what we did in 2011, which was my first six months back in the diabetes business.

Our cash loss year-to-date is $1.5 million versus $27 million for the same time in the first three quarters of 2012. In the middle of the sales expansion, there was about a 35% sales force increase and a product launch of a brand new product platform and an increase in R&D spending and our product revenue up $42 million over $21 million.

Gross profits and gross margins, our margins were 65% last quarter. We've long said, we get our disposable margins to the 70% to 75% range. You can tell by this overall margin that we've done that.

As I said earlier, cash based net income, if you take out all the equity charges and amortization depreciation, $3.5 million positive this quarter, a comparable number in Q3 of 2012 would have been a loss of about -- between $9 million and $10 million.

Our business model is working like we said it was going to and it's very -- it's pretty exciting to work there and be part of this. So imagine a world where we get to 20% type 1 patient population penetration. We are not close to that yet and you can see the economics and the number of our model now.

Imagine a time when we get 10% penetration in type 1 outside the U.S. I understand our OUS business is about 10% of our revenues and almost all those patients are just writing checks because they find this system so useful or its physicians using it for diagnostic purposes. We will be doing studies in Europe to obtain reimbursement over 2014.

Our first such endeavours, the only studies we've ever done in the past were to get products approved. 5% penetration in insulin using type 2 patients, big population, you don’t have to get too many patients. Then we go to our more broad based type 2 population for diagnostic purposes.

I was talking to a friend -- a friend in investment banking I’ve known for a long time and he is in the middle of a diabetes feel and I said what have you learnt and he said even I’ve talked to every one of these drug companies about a bunch of stuff because I’ve learnt one thing about your company. Everybody knows who you are [because] and bottom line is all diabetes technology one way or another can go through DexCom and you better not screw it up.

We won't. Thank you for your time and we’ll take some questions.

Bruce Nudell - Medtech Analyst, Credit Suisse

Kevin, just as by way of background, among the CGM users in the United States, what percent are pumpers are what percent are multiple daily injectors?

Kevin Sayer

Probably about 60% are pumpers.

Bruce Nudell - Medtech Analyst, Credit Suisse

Okay.

Kevin Sayer

Between 60% and 65%.

Bruce Nudell - Medtech Analyst, Credit Suisse

And just like from a background perspective, you would think that pumpers might be easier to obtain in the sense that they may be more diligent about their glucose control. On the other hand, it seems like you are making progress among the injectors, how do you describe that dynamic?

Kevin Sayer

It's a good question. I don’t know that the pumpers are more compliant. I think they are more apps to be recommended by their physician because if you are pumper, you've already accepted some level of technology. And so when they go through the thought process of who shall I put on CGM, they’ll go to a pumper who has had control before anybody else because hey, the person has already accepted one level of technology, maybe we can them to accept another one.

We have other practices and particularly with the [active] Gen4 system where we've seen that change rather dramatically where the practice has said, before I give you a pump, we are going to put you on a sensor and find out what's going on with your body and those practices have had wild success.

We are now seeing a trend where patients and particularly with the accuracy of Gen4 are putting their pumps away. I know what I am at. I know what my body is telling me. I don’t need this anymore. I don’t need to be attached to this thing. So the thing is across the board.

Bruce Nudell - Medtech Analyst, Credit Suisse

And I guess the brewing controversy in the stock despite the fantastic performance you've [chaired] in, is Medtronic's release of the 530G, the Low Glucose Suspend Alarm, and basically could you just frame that for people here in terms of how much of your installed based is like potentially at risk and some of the -- your views of performance of that system and the alarm burden etcetera, etcetera?

Kevin Sayer

Well, we go to bed at night thinking every patient at risk and treat them all accordingly. Certainly, within the pump segment of our patients we have quite a few Medtronic pumpers. We heard Medtronic management say at one meeting we were at; about half of their patients try CGM. This is before our 530G and less than 10% of those patients would stay on. So we do have a lot of Medtronic patients who use our system.

When it comes to the product itself, and then I'll frame how we feel about it, what it does and what it's designed to do is if your glucose gets below a certain level and you don't take action after some alarms, it shuts off insulin delivery. It’s a nice concept and the clinical data they publish do appear rather positive. As we've got into the data, I'll talk about the clinical data first.

The average shut off of the pump at night was 11 minutes. If your basal rate is a unit per hour, you basically avoided 0.3 units of insulin. That isn't going to change a hyperglycemic event at all. And during the day, when the alarms went off, the average shut down was about two minutes. So again, the shut off of the pump isn't necessarily driving anything spectacular based on what we've read or they have you believe differently.

Our view on this, first of all, is actually congratulations to Medtronic for getting a pump that takes sensor data and makes an action. This will make everything better for everybody with the FDA. So that we don't regret and we think that is great.

Here's the problem. If you read their own literature, when your glucose levels are at 70, which is hyperglycemic, 50% of the alarms that you experience are false, 50%. We have talked to numerous patients who have got this thing because Medtronic has said, you want a new pump you can't have a new pump unless you buy our sensor. So they buy it, they try it. They email us back.

One girl wrote us last week this thing goes off so many times. I've had to turn the alarms off. She's been on it for four days. She turned all the alarms off. I can't deal with this anymore because it tells me I'm low all night now.

She was in a dressing room in a shopping center. That's obviously DexCom advocates. I'm a little bias here. She said my low glucose [system] was about to go off, which sounds like a siren, which means I thought I might get arrested for shoplifting. So I shut the thing down very quickly.

Her Medtronic trainer told her, that even though she had been on sensors and pumps for a number of years, she probably wasn't sophisticated enough to use their device. To what she responded, no, I'm a patient used to driving a BMW and you've given me a Ford Focus and told me I have to like it. So she is now trying to figure out how to get back on our system.

Over time, if the sensor works right, this is a wonderful step for patients. It really is. But when the sensor doesn't work and the alarms go off excessively and it's not accurate, it is no wonderful step for patients, and could cause more problems for the industry than it does good. Only time will tell. And again, I'm sure our results and our views are very biased towards our own product.

Some day Medtronic will have a great sensor. We don't doubt that and we don't worry about that. We just have to be better ourselves. So we need to get a pump partner out there. We have the relationship with Tandem, a relationship with J&J. Both of those are working on advanced platforms. And some day they'll have a competitive advanced platform where their sensor helps the pump make decisions to combat that.

So right now we just came off a record quarter, business is good. There is some confusion. When you pick up your newspaper and it says the artificial pancreas has been approved, pretty much every parent in America would want an artificial pancreas for their kid. So we have to go through some noise and some marketing battles and that will continue for a while. But over time, the accuracy of the sensor will stand on its own.

Bruce Nudell - Medtech Analyst, Credit Suisse

And I guess, just one broad question before we go to breakout is the Medicare reimbursement for strips has come way down. You are in the middle of negotiations with the agency CMS to, you know, get procure a reimbursement for your sensor system, is there any interplay between their decision on strips and more broader relationship between that…

Kevin Sayer

Great question.

Bruce Nudell - Medtech Analyst, Credit Suisse

…and continuous sensing pricing?

Kevin Sayer

We are a Class III medical device, so theoretically we're not subject to competitive bidding. And we say that theoretically because that's how it is, it's theoretical. At some point in time, we know and we tell our people they are going to come after prices.

We've designed our whole portfolio for the next five years in anticipation of some day that somebody will come after sensor pricing, sensor pricing to make sensors more accessible, last longer and give us a little bit of flexibility. As of today, there isn't any. Who knows where we are in three years.

Bruce Nudell - Medtech Analyst, Credit Suisse

Thanks so much. We're going to breakout now.

Question-and-Answer Session

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Source: DexCom's Management Presents at the 2013 Credit Suisse Healthcare Conference (Transcript)

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