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DexCom, Inc. (NASDAQ:DXCM)

Q4 2013 Results Earnings Conference Call

February 20, 2014, 04:30 AM ET

Executives

Terrance H. Gregg - Chief Executive Officer

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

Kevin Sayer - President and Chief Operating Officer

Analysts

Ben Andrew - William Blair & Co.

Bill Plovanic - Canaccord Genuity

Kimberly W. Gailun - JPMorgan Securities LLC

Danielle Antalffy – Leerink Swann

Michael Rich – Raymond James & Associates, Inc.

Mimi Pham - ABR

Anthony Petrone - Jefferies Group

Tao Levy - Wedbush Securities & Co.

Operator

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

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

Terrance H. Gregg

Thank you operator and thanks to everyone for joining DexCom for our fourth quarter 2013 earnings call. As usual I will ask Steve Pacelli to provide you with our Safe Harbor statement.

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

Thank you, 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.

Our agenda for today's call is fairly typical. I will provide some introductory thoughts; Kevin will review our detailed fourth quarter 2013 financial results and provide our customary operations update and then I will offer some concluding thoughts. At the JP Morgan Healthcare Conference in January, we announced Q4 and full year 2013 product revenue of approximately $51 million and $157 million respectively. What we did not disclosed at JP Morgan that I am pleased to announce today is that for the second straight quarter and for all fiscal 2013 DexCom was cash flow positive.

Before I turn the call over to Kevin I would like to update the investment community on my evolving role at DexCom. As you know I joined DexCom in 2005 as an Independent Member of the Board and came out of my then retirement in 2007 to become the President and CEO. As a management team we have grown the business over the past several years and enjoying a lead status in the med tech space.

In 2011, we added Kevin Sayer as our President and he assumed the title of Chief Operating Officer in 2012 with the expectation that he would mature into the role of Chief Executive Officer as my successor and I would move to position of Executive Chairman. As most of you are aware over the last several years my role has become increasing external. I have spent the vast majority of my time in the field being with clinicians and other key stakeholders in diabetes.

During that time, Kevin has been larger responsible for the day-to-day operations of DexCom and he has done a remarkable job as witnessed by our growth and success. So on behalf of the Board of Directors I am pleased to announce that effective January 1, 2015 Kevin will assume the title of President and Chief Executive Officer and I will transition in to my role as Executive Chairman remaining of course as an employee and active member of the senior management team.

With that I would like to turn the call over to Kevin Sayer.

Kevin Sayer

Thank you, Terry. I'll start off with our financial update. DexCom generated $51.3 million in product revenue for the fourth quarter of 2013 compared to $31.7 million for the same quarter in 2012, a $19.6 million or 62% increase. We are especially pleased with our year-over-year financial performance when you consider that we're comparing the fourth quarter of 2013 to a quarter in which we had very robust product sales in connection with our Q4 2012 launch of the G4 PLATINUM. Sequentially product revenue for Q4 of 2013 increased 21% from the prior quarter.

Total revenue for the fourth quarter of 2013 was $51.7 million compared to $33.3 million during the same quarter in 2012. Our product gross profit totaled $34.1 million generating a product gross margin of 66% for the fourth quarter of 2013 compared to product gross profit of $17.2 million and a product gross margin of 54% for the same quarter in the prior year.

Sequentially product gross margin for Q4 2013 increased only slightly from the prior quarter. Although we are now achieving our gross margin targets of 70% to 75% on our sensor disposables and approximately 50% on our hardware going forward we will continue to see improved gross margins through increased volumes continued manufacturing improvements, the continued shift of the sales mix to more disposable revenue along with our future product designs.

Some final thoughts on our product revenue and gross profits. During Q4 we added more new patients and sold more sensors than any other previous quarter. Consumable and durable revenues both increased significantly from Q3, 2013. The improvements in patient retention and increased sensor utilization with the G4 PLATINUM system we spoke up during our last earnings call held steady during Q4.

Our mix between durable and consumable products is approximately 30% durable and 70% consumable, a mix we expect to remain fairly consistent going forward. ASP for sensor has stayed consistent at approximately $70 per sensor and the ASP for our hardware continued at approximately $850 per starter kit.

Finally our international business performance exceeded our expectations in 2013 as it was up approximately 80% year-over-year and represents approximately 8% of product revenue. Research and development expense totaled $12.6 million for Q4 of 2013 compared to $8.6 million in Q4 of 2012 with the increase due primarily to additional payroll related costs and expenses related to work on near term product pipeline.

Sequentially R&D expense was up 7% with the increase primarily due to additional payroll cost and non-cash charges related to our SweetSpot acquisition and share based compensation expense. As we move forward into 2014 we expect that R&D expense for the full year will be up between 10% to 20% versus 2013. Some expenses such overhead and our share-based compensation expense will increase as a cost of doing business.

Additional increases will depend upon our development progress and regulatory timelines with respect to continued system performance improvements, development of our G5 and G6 systems, our mobile and cloud based data platforms and a variety of clinical trial opportunities we expect to explore during 2014.

Selling, general and administrative expense totaled $23.8 million in Q4 of 2013 compared to $17.3 million during the same quarter in 2012. The increase was primarily related to increased headcount in our sales organization and increased variable compensation for the sales team related to our robust product sales during the quarter.

The increase also included $1.1 million of additional non-cash share-based compensation. As we look to fiscal 2014, we expect an increase in SG&A expense of approximately 20% to support our growth driven primarily by increased share based compensation expense as well as investments in sales and marketing and infrastructure necessary to support growth.

Our net loss for the fourth quarter of 2013 totaled $2.6 million and included $9.3 million in non-cash expenses centered in share-based compensation, depreciation and amortization. Absent these charges our net income would have been $6.7 million for Q4, 2013. Also absent our non-cash charges our net income for fiscal 2013 would have been $5.2 million. Compare this to an adjusted cash based net loss of $2.2 million for the same quarter last year and adjusted cash based net loss of $29.2 million for the full year in 2012.

If I could summarize our operating performance it’s pretty simple. During 2013 our product revenues increased by $64 million and our cash based operating results increased by $34 million so it’s an amazing accomplishment for our team. Our loss per share for the quarter was $0.04. With respect to our balance sheet we ended the fourth quarter with $54.6 million in cash and marketable securities and debt availability of $28 million.

I would like to close the discussion of our financial results with some thoughts on the first quarter of 2014. While we do not give specific quarterly guidance as we discussed on numerous occasions the fourth quarter was typically the strongest in the year for those in the durable medical equipment business. As annual deductibles have generally been met and flexible spending account deadlines loom so patients who participate in this employer sponsor program most utilize any excess funds they save prior to year end.

Just as a point of reference our Q4 2013 product revenue exceeded our total product revenue for 2010 by over $10 million. Obviously our strong Q4 performance begs the question, what will our growth will be in 2014? As a reminder at the JP Morgan Healthcare Conference in January we issued guidance of estimated full year 2014 product revenue ranging from $205 million to $225 million and we remain comfortable with that guidance.

While we do not provide specific quarterly guidance I remind investors that the first quarter is traditionally a seasonally slow quarter for our business as annual insurance deductibles reset and flexible spending accounts are largely unfunded. As a result, our patients typically purchase as much product as they can during the fourth quarter and 2013 was no exception.

We now have data to support that the average out of pocket expense for a patient during the first quarter of a given year is approximately 40% to 50 percent higher than the average out of pocket expense for a patient during the fourth quarter of the prior and that out of pocket expense decreases gradually through each quarter over the course of the year. I also remind investors that in past years including 2013 approximately 40% to 45% of our product revenue was generated in the first half of the year and 55% to 60% was generated in the second half and we do not view 2014 any differently.

Finally last year Q1 accounted for approximately 20% of our annual revenue and we would expect similar performance in the first quarter this year. I will move onto our business update.

I am pleased to share that we have achieved another significant operational milestone. Just two weeks ago we received FDA approval of an expanded indication for our G4 PLATINIUM to include patients as young as two years of age. We began taking orders for our pediatric product immediately upon approval and we completed our initial shipments to patients within a matter of days.

I would like to acknowledge the hard work of the people at DexCom, especially our outstanding clinical regulatory and operations teams who have enabled DexCom to bring such an important technology to virtually all people with diabetes. We have several additional filings pending before the FDA including a PMA supplement seeking approval of the DexCom share systems and a PMA supplement seeking an expanding indication for G4 PLATINIUM for professional use. We continue to have active dialog with the agency regarding these important products.

Turning to our future CGM product offering we remain focused on increasing connectivity and convenience is a near-term goal and replacing finger sticks as our primary long-term objective and we continue to work on both Gen5 and Gen6 in an effort to achieve these goals. We continue to believe that simplicity, patient convenience and expanded connectivity paired with our superior technology will enable us to maintain our leadership position in the CGM market.

Shifting to our integration partnerships, both Animas and Tandem continue to press forward with final development, testing and regulatory matters with their respective sensor augmented pump systems and we continue to assist them in these endeavors when asked.

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

Terrance H. Gregg

Thanks Kevin. Well I'd like to start by highlighting our 2013 financial performance. Product revenues clearly exceeded our expectations, both in Q4 and for the full year but I am equally pleased by our operating performance. As you know our Board set a stretched goal for us to reach cash operating breakeven for full year 2013 and we achieved that goal. Needless to say am I excited by the long-term profitability profile we believe we can achieve here at DexCom.

Having just returned from the Annual ATTD Meeting in Europe we remain convinced that sensor accuracy is what matters most. And while the competition tries to confuse the issue in multiple independent studies our G4 PLATINUM sensor is significantly more accurate than Medtronic’s Enlite sensor. At this time most investors are aware of the work by Boston University where Dr. Steven Russell shared comparative data from patients simultaneously wearing the G4 PLATINUM and Medtronic’s Enlite with reported MARD of 10.8% for the G4 PLATINUM and 17.9% for the Enlite.

And during our last earnings call we discussed data presented by Hardwood Children's Hospital examining the use of CGM in critically ill infants and reporting an MARD for the Enlite of 17.8% and an MARD of 11.7% for the G4 PLATINUM. Well earlier this month an ATTD data from SPACE-2 study was presented. SPACE-2 is yet another independent head-to-head study and this time the data showed an MARD range of 12.2% to 13.6% for the G4 PLATINUM and 16.6% to 19.9% for the Enlite. This data also showed particularly poor hypoglycemia performance for the Enlite.

Yet again it seems that no independent investigator can reproduce the Medtronic data. And while we continue to see some distraction in the field by and large we have not seen much of an impact to our business as a result for the 530G launch.

As I close this conference call I would like to add some additional color on my transition to Executive Chairman at the end of this year. One of my key personal goals was to help the company achieve positive cash flow and as we presented today we have achieved that for the full year in 2013, a year earlier than predicted. I remain passionate about DexCom. My wife has often referred to DexCom as my mistress. As Executive Chairman I will continue to provide DexCom with vision and strategy as we continue to lead the category with superior technology and outstanding execution. But Kevin and his leadership team must continue to focus on our core business.

The growth opportunity for CGM in both the type 1 and type 2 diabetes population is tremendous. We had over 7,000 unique prescribers in 2013 and yet we called on only approximately 2,000 prescribers with our sales force. It is clear that patients are pulling the product to the channel as we predicted and we need to expand our efforts to reach this growing population.

I will remain intimately involved with Kevin and his leadership team in driving our core business but I also believe our technology is expandable for other markets. As an example I mentioned the above study involving 900 critically infants with diabetes utilizing our G4 PLATINUM CGM and the ICU at Hardwood Children's Hospital. The results were remarkable and convinced us once again that glucose is a vital sign in this environment along with the more traditional vital sign measurement.

We also know that there is tremendous benefit to non-insulin using Type 2 patients utilizing CGM as a diagnostic behavior modification tool. I am excited to explore these and other opportunities in greater depth.

Just last summer we used our G5 system to monitor 30 cyclists remotely from San Diego for over 13 days during a race from Brussels to Barcelona. I want to accelerate that capability on a global basis and we are exploring opportunities with broadband carriers as part of that effort.

For the last several seasons of the reality show The Biggest Loser, our CGM technology has been utilized as a part of this weight loss program. I believe CGM can play a very important role in the obesity market, particularly with behavior modification. These are all areas I will focus as an Executive Chairman and I will be actively involved in helping DexCom develop programs to address these markets as our product evolve along a well-planned developmental pipeline.

I have been called a dreamer at times, but many of my dreams have come true. Over the last three years I have been involved in several companies that have grown to some $15 billion of market cap. It is rare when a CEO has the opportunity to handshake his successor, work with him to build a world class organization and hand the rains over with complete confidence in his leadership skills and his vision for the company.

I also remind the audience, that I remain the largest individual shareholder of DexCom stock, so I have a significant incentive to remain engaged to see that DexCom continues to be highly successful. I am not retiring, I am just graduating.

Thank you. And now, I will turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question here is from Mr. Ben Andrew from William Blair. Please go ahead, sir.

Ben Andrew - William Blair & Co.

Good afternoon guys. Thanks for taking the question. I wanted to ask a little bit on two topics. First is peds ramp and Terry do I have some sense of what percentage of clinics are reflexively prescribing CGM on diagnosis at this point, you got some high performance examples? Is that becoming more commonplace?

Terrance H. Gregg

Obviously, I will take the second question and turn the first question back over to Kevin. I mean obviously when you look at the large number of prescribers we don't call on, it's clear to us that, there is an opportunity there to grow that market and I think it's reflective of the tools that we need to develop from electronic activity as well to reach out and expand that capability.

Kevin Sayer

With respect to the peds ramp Ben as we said earlier, currently our patient base is between 8% and 10% pediatric patients and we expect it to grow to be about 30%. That ramp will take some time as we begin to call on these pediatric endocrinologists we haven't called on before. We will build trust with a few patients on the system. We expect it to take-off from there, but it will take a little bit of time.

Our team is focused on calling on these clinics. They made initial calls as we look at our daily reads that come in, we are seeing a lot of pediatric patients. But it's not widely disproportionate to our regular patients. It is growing and it's growing gradually and it's growing very nicely.

Ben Andrew - William Blair & Co.

So Kevin, 30% of your users will be just a little bit pretty close to overall type one population. So, is that -- and what happened in the year, I mean are you talking two, three, four years in your view, two to three?

Kevin Sayer

Yeah.

Ben Andrew - William Blair & Co.

Okay. And then as we think about again this notion of utilization and retention remain remaining steady I think what you comment in the commentary, was that remained in the fourth quarter specifically so was flattish you I didn't see deliver the revenue growth without seeing increase in utilization or retention versus Q3?

Kevin Sayer

The trends are consistent over time, Ben. Our point is we are certainly we're certainly not better than we were a year ago as far as specific percentage increase. Things look very good if anything patients bought more sensors in Q4 than they did in Q3 so if we were to look at that raw data from an individual point and time it would look higher just of volumes but I wouldn't skew that because the year-end purchases. So we'll look this over time and things sort of things are very good to what we want to do.

Ben Andrew - William Blair & Co.

Okay great. And then last question is you mentioned that on the progress with G5 and G6 anything in particular on the timing of those or when we might see a regulatory submission or studies? Thanks.

Kevin Sayer

We run early phase studies on our technologies before we go to publication we are running early phase studies on several different versions of these products in the pipeline now. But as far as timing when I need to get share approved first and that is really our first foray into the Gen5 market that will be our first cloud-based mobile application where you can share your data with others.

I think once we get that approval that will trigger a lot of efforts and a lot of thoughts on our partners to how we think accelerate things and how fast we can go. So now those product lines are both in pretty heavy development right now.

Ben Andrew - William Blair & Co.

Thank you.

Operator

And our next question comes from Mr. Bill Plovanic from Canaccord. Please go head.

Bill Plovanic - Canaccord Genuity

Great, thanks good evening. A couple of questions gentlemen first just can you separate out the specifics of G5 like what exactly will be the benefit G5 over G4 and then the same for G6? And I have one follow up question.

Kevin Sayer

G5 is going to be focused largely on connectivity, mobility and convenience. And it will come out more than likely as a series of launches rather than one big launch with the end goal of G5 being a simplified application system at the end, combined with connectivity to a phone in addition to be in connected to your receiver and cloud-based data. We'll go there in a series of steps.

That system will use the Gen4 sensors currently configure but with new algorithms that we've developed over the course of the past few years that will improve accuracy and reliability.

With respect to the Gen6 system that's our first step towards doing a couple of three things, culminating some of the calibrations, getting the replacement claim or dosing claim so you can dose insulin and then ultimately eliminating finger sticks altogether.

As far as accuracy we'll see how much better we can get I mean as you heard comparing on the clinical data we've had on for example at ATTD Steven Russell where he did 10 which is pretty close to our meters anyway and lab instruments are the whole lot better than that. So we will continue to \pick up accuracy points.

The other thing that we know with Gen6 in the future is we'll eliminate the interference that we have some contraindications for and this goes along with what Terry said as we get to Gen6 sensor we can go to these other markets, we can go to the hospital because that sensor will block the effect of all the compounds that those patients are taking.

We can also go to may be a type two market as you would need necessarily all to calibration and if we get advanced enough as we talk about eliminating and that becomes a very simple system for some of the type 2 diabetes from type 2 diagnostics. So as far as timing we're going to keep that pretty much under wraps for now.

Bill Plovanic - Canaccord Genuity

Okay. And then my second question is just to talk on disposable manufacturing. You are obviously printing a lot of disposables at this point probably somewhere near 0.5 million a quarter you probably sold may be a little more than that. And the question is what is correct capacity per quarter and what do you need to do to extend that? Thank you.

Kevin Sayer

Bill we're not even on two shifts yet and our capacity is certainly above what we disclosed as 0.5 million a quarter. The manufacturing processes have begun much more robust and much more standard we've got plenty of space. We can replicate any of these equipment lines quite quickly. We grew 69% of our share on an operating plan that was 40% and we never missed the shipment. I don't think if -- flexible in this one so we are not concerned about that.

Bill Plovanic - Canaccord Genuity

Excellent thank you.

Operator

Our next question comes from Kim Gailun with JPMorgan. Please go head.

Kimberly W. Gailun - JPMorgan Securities LLC

Great thanks and congratulations to you both Kevin and Terry on today's announcement.

So I guess first question, I just wanted to follow up on the commentary around the attrition and the utilization. So in my model I’ve got attrition and I know you don't call it out, but I’ve got the attrition trending down pretty consistent recent saw on G4, and then the census for patients actually picking out modestly from third quarter to fourth quarter. So I guess, does that seem about right to you and just as we think about ’14, understanding the comments you made on the first quarter and the seasonality do you think that these two trends continue to improve or do you think you’ve reached a kind of stable working point.

Steven R. Pacelli

So Kim this is Steve. I’ll take that one. So on the first point on you had attrition kind of trending down. I’m not sure that's actually the right way to look at it. I think what we saw is a pretty dramatic shift starting with the launch of the G4 PLATINUM and attrition becoming into a much more what I would call normalized world. And I think what we’ve talked about publicly before we’re not to about again giving specific numbers. Kind of what the game here saw [inaudible] something that we are just more comfortable with, certainly attrition on the SEVEN PLUS was much worse potentially even than we expected as we converted the base over.

On the utilization side, the way you need to look at utilization at a point and I think you have been over that, the question is utilization continuing to improve, there is gone be a point at which we know not all patients are gone use sensors all the time. We think most patients or much greater number of patients are using sensors and virtually all of the time now as opposed to SEVEN PLUS where it was much more sporadic. But if you know today, patient can still extend the life.

So you’re never going to see a point where patients are using, where all patients or a vast majority are using four sensors a month. I think we used to quote kind a 2 to 2.5 sensors a month on average. And that’s probably bumped up, but I don’t think we expect going forward I don’t think we expect utilization per se to pick up dramatically. But what’s important is we continue to add new patients to the base and those patients continue to use sensors virtually all the time. So in essence utilization continues to be very robust. Does that make sense?

Kimberly W. Gailun - JPMorgan Securities LLC

Yes, that’s helpful. So I mean the implication is that yes there is a little bit of room for improvement.

Steven R. Pacelli

Yeah. I mean look at some point patients are gone continue to extend the life of the sensors. So there is no -- I mean I guess we can improve utilization by putting them….

Terrance H. Gregg

Anecdotally we ask about almost every patient we meet how long do you wear your sensors. And we very seldom hear I swap it out every seven days.

Steven R. Pacelli

Yes they’re wearing it 10 days or 10 or so days that’s what three sensors a month and 14 days is two sensors a month. So it’s somewhere in between that.

Kimberly W. Gailun - JPMorgan Securities LLC

Yes, okay. And just a follow up I don’t know if you guys updated your expectations for the timing of buys in the U.S.

Terrance H. Gregg

No we didn’t. I mean they are still working diligently. I would kind a point you one of things we made the decision publicly not to speak on behalf of our partners. I mean I would kind of defer you to Animas and Tandem for specifics on timing, particularly Tandem as a newly public company we don’t want to step on their toes. So I would defer you to the partner.

Kimberly W. Gailun - JPMorgan Securities LLC

Okay. Thank you.

Operator

And our next question here comes from Danielle Antalffy from Leerink Partners. Please go ahead.

Danielle Antalffy – Leerink Swann

Thank you so much and thanks guys for taking the question. Congrats to you Terry on graduating and Kevin on your upcoming new role, that’s great. So I wanted to follow up on Animas 5 and Tandem. I understand you can't talk about timing. But how do we think about progression through the year on, I guess maybe not in 2014, but in 2015 and beyond. How do we think about the impact in new patient adds from both of those products?

Steven R. Pacelli

So I think we said when we gave our guidance at JP Morgan we were pretty clear that we don’t have any contribution from our pump partners domestically in our guidance for ’14. There is some contribution obviously from Animas, it's been commercial in Europe for several years now. I think we’ve said this on multiple conferences, I think the relative importance of our pump partners sitting within where we are in 2014 and going forward is frankly it’s just less than it used to be.

Back in 2008, 2009 we were a much smaller organization with a much smaller sales force. Today we out man Animas probably is close to two to one in field. And Tandem is doing a great job of growing their sales force. So I think Tandem could certainly be more additive there. But I think the way I would really look at the pump partnerships going forward is they are kind of additive. I can’t give you specifics on how additive in terms of specific numbers of patients. I think you need to look and extrapolate what Tandem is going to give in terms of guidance and to the extent you can get information from Animas.

You know I think we look at additive they are certainly not transformative to us and I think particularly as we look to Gen5 and we move to the phone we believe patients are going to more than likely prefer to use their iPhone as the means of display and interaction with their CGM data than pulling out their pump. We even have some data that suggests in Europe patients who have been purchasing the [vial] can actually purchase a separate DexCom G4 PLATINUM receiver because often times patients try to hide their pump and it’s easier just to pull a G4 PLATINUM receiver out of their pockets.

So as we move to the phone I think that’s really as Kevin mentioned in the prepared remarks the convenience and connectivity of the phone is really where our future lies.

Danielle Antalffy – Leerink Swann

Great and then the next question is so obviously Medtronic is pursuing a [inaudible] or sustained role as sort of the next step towards the artificial pancreas. Just curious so now that you guys are working on integrating with pump companies what your view is as it relates to the next step to the artificial pancreas. Do you guys pursue a sort of low glucose type technology or what’s next with the integrated system?

Terrance H. Gregg

This is Terry. You know as we have said it before we are obviously the premier sensor component the overwhelming majority of artificial pancreas programs that are in place around the world, most of these are academic-based and they use a wide variety of different insulin delivery devices.

Certainly Tandem, [Insulot] is in that group, Roche is in that group, Animas is also in that group and in many ways we are somewhat agnostic from that perspective so any ultimate commercialization of a technology that within this classification of artificial pancreas will it be driven by the commercialization partner, not by DexCom we are happy to support those efforts or happy to lend our expertise but the reality of what our mission statement is and that’s to replace finger sticks.

And so we never lose sight of that, each and every day we look at the global market and the increase in total number of patients either having diabetes over the next 10-20 years developing diabetes what we do really well is we develop advanced technology in censor capability and that’s what we will continue to focus our energies on.

Danielle Antalffy – Leerink Swann

All right, thank you so much guys.

Terrance H. Gregg

Sure.

Operator

Our next question here comes from Mr. Jason Bedford from Raymond James. Please go ahead.

Michael Rich – Raymond James & Associates, Inc.

Hi, guys this is Mike Rich calling for Jason. Can you hear me okay?

Terrance H. Gregg

Absolutely.

Michael Rich – Raymond James & Associates, Inc.

Great, thanks for taking the questions. Since your gross margins were a highlight of 2013, it’s overlooked. I was wondering if you can give us an idea where you think that can exit 2014 and then maybe now that you think you can trend above that previous 75% range do you have a longer term goal?

Kevin Sayer

You know Terry and I have made the statement before as evolve into next generation of sensors we think we can get closer to 80% and that will require some changes in the fundamental assembly process and some moldings, some tooling so there’s a lot that’s got to go on there and we are working on all those things. One of the things that is just kind of an easy base hit for us the fact is being in San Diego with our overhead rates volume increases do a lot to help us on the censor manufacturing side.

So as we continue to grow it at very healthy percentages we pick up margin points there, we get more efficient. So right now we think as we look at ’14 we move to the higher end of our 70% to 75% range and over time we would have targets to go from 75% to 80% again assuming pricing remains the same and we have got plans to do that. There’s no question our guys are working on that and very cognizant of that on a daily basis.

Michael Rich – Raymond James & Associates, Inc.

Okay, great that’s helpful and then just as a house-keeping item. Kevin, can you give us an idea what percent of your hardware revenue in the quarter went to new patients?

Michael Rich – Raymond James & Associates, Inc.

You know we gave the number at JP Morgan that we sold 60,000 G4 kits since the launch of the product in 2012 and that's kind of what we are and we gave 10% of those were the patients who already have one G4 system. So, that's where we stand with that. Obviously, as we sell more transmitters and have more patients buy a second transmitter because the first one runs out. Those numbers become even more cloudy for us internally. So, start with 60,000 G4 kit number we gave out in early January and can work back from there.

Michael Rich – Raymond James & Associates, Inc.

Okay. Thank you.

Operator

And our next question comes from Mimi Pham from ABR HealthCo. Please go ahead.

Mimi Pham - ABR

Hi. Good afternoon and congratulations Kevin and Terry. Just regarding Medtronic comment on their quarterly call about taking four points of sequential share in the pump and CGM market. Can you address that, is that somewhat consistent with your commentary, are they talking about perhaps some centers beyond your focused 2000?

Terrance H. Gregg

Mimi it's Terry, thank you. It's always good to graduate. A couple of comments, and the first one, it's always difficult when you hear somebody from Medtronic speak at how they calculate anything and it always reminds me of Pinocchio quite frankly when I hear a Medtronic person speak. So it's very difficult for me to, as I mentioned three independent investigators have far different numbers than Medtronic have assigned. So I don't know what they are talking about. I mean I read their transcript it said that pump CGM for percentage points.

We obviously didn't see $251 million quarter, we saw more patients than we ever seeing before. We are not feeling I mean we do channel checks to our customers. We still have a lot of Medtronic patients. They may have tried it because Medtronic force them to buy sensor component so may be some of that calculated into their numbers. We will see I think the recurring obviously a lot of Medtronic patients who tried to steal our patients because they actually want an accurate sensor. And so I think from that standpoint, the time will tell, time will tell.

Mimi Pham - ABR

Just regarding also going to the ATTD, do you see any data or hear any feedback on they talk about their NextGen enhanced CGM, can you talk on that?

Terrance H. Gregg

No. I mean quite frankly we listen to whatever they have to say and we saw nothing they said they've launched in five or six countries. We haven't seen any from our international group anybody commenting on it, looked at whatever data they presented. They didn't appear to be all that different than the Enlite one. So I am not sure, again experience alone will determine what is truth and what is fiction.

Mimi Pham - ABR

And then last, you talked more about your CGM first strategy at the ADE can you talk about how that having any impact or any centers that might be implementing that more?

Terrance H. Gregg

Yes. I think obviously by our number it's been pretty successful. I think we have impacted and in face and it take some of largest sensors in the United States in particular where now it is the standard operating procedure to put a patient in CGN well in advance pump and let the patient ultimately decide on what method of delivery that they want that pumps are in fact a secondary lifestyle choice not necessarily a need that when you talking about glycemic variability you have to know about your glycemic variability in order to do something about it.

Our pumps are convenience and so I think that is finally resonating. We have it at now over a year since we started messaging and again $157 million for the year I think we are pretty successful versus a little under $100 million in 2013.

Mimi Pham - ABR

Thank you so much.

Operator

And our next question here comes from Mr. Anthony Petrone with Jefferies Group. Please go ahead.

Anthony Petrone - Jefferies Group

Thanks gentlemen and congratulations again on the new appointments. May be just a little bit on the headcount need for pediatrics on approval in the U.S. 800 to 1,000 pediatric endocrinologist so just wondering how should we thinking about SG&A specifically leverage you are looking to 2014 based on the needs to extend the sales force there a bit.

And may be just a comment on utilization And then maybe just a comment on utilization specifically within the pediatric market and where is that today within that 8% of total sensor volumes today and just seems to me if that would be extrapolated throughout the pediatric user base as that expands. And then one quick follow-up on potential Gen5 and Gen6 products.

Steven R. Pacelli

Well with respect to the sales force expansion we took care of that Q4. We added literally 30% more field bodies than we had before and that expansion was for intents complete by mid-Jan just a couple left to hire in early January and those have been hired. We have expanded as far as – at least today for 2013 and that expansion wasn't just really pediatric driven it was driven by all of our business territories and all of our reps who sell pediatric and regular patients. But our territories have been redone, our new reps are on the ground and doing very well, so the expansion has occurred with respect to utilization in pediatric patients.

We don't have separate data broken out anecdotally that I can speak and Terry or Kevin can add. In a very young pediatric patient you have a parent that's driving therapy, so a parent is going to make the decision to have the child use the sensor all the time as the pediatric patients get older particularly in their teenage years that utilization becomes little bit different as kids don't want to have everything connected to their bodies all the time. But our utilization should be at least equal to if not better than it is for adults in the pediatric market particularly as you look at the younger segment.

Anthony Petrone - Jefferies Group

That's helpful. And then just the follow-ups on G5 and G6 maybe that's a little premature. You had the sensor ASP around $70 overall today on the G4 and I am just curious just a thought on pricing G5 and then G6 were beyond potentially when we do move away completely from finger sticks where you envision sensor pricing can go overall? Thanks.

Steven R. Pacelli

Well sensor prices are computed on a per day reimbursement rate with our payers and that $70 reflects an average of about $10 a day for our sensor-ware. As we go out further overtime our best chance for price increases is probably extending the wear more days versus 7 days and getting a price increase that way. On a per day basis possibly if we made calibrations we could get some of that but ultimately we are committed to the fact that this therapy is going to have to save money in our current healthcare environment if it's going to continue to grow and be successful.

So we are running our business planning on driving our cost down, being as efficient as possible and being able to deal with whatever pricing scenario comes our way. If we can replace finger sticks and have a sub 10 MARD with our sensor it might be feasible that we go ask for more pricing but we are not focused on that today, we need to get there first.

Anthony Petrone - Jefferies Group

So maybe just if I could just add one in there about gross margin and it seems you like have pretty good sort of volume coverage to reduce overhead in the factory. Some -- maybe just a little bit more detail on gross margin again for maybe sensor specifically and where potentially how do you get from the level today to where the vision is for potentially 80% gross margins on sensors is if it's not necessarily price driven?

Steven R. Pacelli

And then again we have never had our margin -- we never as we talked about margins going up driven them up based on increased prices. It's always been on improvement in our processes. The key word there is automation. A lot of the things that we do today we still assemble applicators and there is still a lot of manual processes in the things that we do. We have plans to automate a lot of those things overtime that are largely dependent how quickly we go with our future product generations.

Another thing that will help margins overtime, just margins as a percentage when we go to the cell phone model of Gen5 the receiver won't be as intricate. We may lose a few dollars on the revenue side with respect to selling fewer receivers that will pick up or as we add more customers and sell more sensors to those customers. So you would see a mix shift in the sales of our disposable products. But automation gets us there, on our future product designs we don't design anything without it being cost effective and more cost effective that what it's replacing.

So these guys have been innovating for a number of years, in fact we kind of joke about it. We've got everything stacked, we've got five years of innovation stacked right on top of each other. But we need to get out the door and get through the agency. These designs are lot more cost effective than what we do today.

Anthony Petrone - Jefferies Group

Helpful, thanks again.

Operator

And our next question here comes from [Ken Wald] from Benchmark Company. Please go head.

Unidentified Analyst

Good afternoon and congratulations on the quarter and congratulations on promotions and all that things. I may be the last to wish you, I guess I have a couple of questions a lot questions have already been asked but it seems to be that the revenue versus OpEx has well you have a nice ratio there 64 in sales, 30 in OpEx, something around those line, should we see continued improvement in that and if so how are you going to try to specially the OpEx side of that ratio?

Kevin Sayer

That's a very good question. As we look at going forward as Terry's graduated and I am just starting school I guess would be the best way to describe it we have to balance three things. This continued accelerated revenue growth, our goal is always to grow the bottom line faster than the top and we will run the business that way. But the third piece of that is getting this innovation out to the market and how much do we spend to get these new products out and how much do we spend to expand our field efforts and get this get more people aware of our technology. So we are always balancing those three things.

Our ratios have clearly improved in 2013 we would hope to continue in 2014 and certainly that's our plan. That being said as we look at our innovation opportunities as we look at clinical studies we plan to do as we look at possibly additional field expansion of things go very well, we'll kind of wait and see how those ratios shake out for next year. We really feel the need to keep going fast and go faster. And so that's how we look at it day-to-day. Okay.

Unidentified Analyst

And just may be question on the European markets how do you -- what's going to be your approach for expansion there how are you going to attract those markets?

Kevin Sayer

What our biggest win there over the past few months is we're starting to gain traction to get reimbursement from the reimbursement authorities for CGM as a standalone. Couple of countries Switzerland and Slovenia have now approved CGM for patients and there are efforts ongoing in several of the larger countries as well because they see the benefit of that.

Right now our European business is to a large extent cash pay from patients or also physicians who uses diagnostic they are not getting reimbursed by insurance as we get reimbursement and the European companies that will be our biggest driver in those other markets.

Unidentified Analyst

Thank you very much and congratulations again.

Kevin Sayer

Thank you.

Operator

And the next question here comes from Tao Levy from Wedbush.

Tao Levy - Wedbush Securities & Co.

Yeah, hi, good afternoon. Just a couple of quick questions I think in prior calls you've talked about the penetration of CGM in the type 1 diabetes in the U.S. market kind of in the upper or single-digits kind of close to 10% and assuming you are splitting share with Medtronic we're kind of still at that level, were your guestimates may be off last year may be the penetration was lower than you thought or was it just a lot of attrition of CGM patients in prior years?

Steven R. Pacelli

I don't think our estimates were off per say I do think we had a bigger attrition policy here is the other factors. We don't have great visibility in the Medtronic numbers we know what our numbers are and look pretty comfortable at what percentage penetration we have into the type 1 market in the U.S. And I think while our attrition on SEVEN PLUS may be have been little bit worse than we had initially anticipated as we converted.

I think we remain very comfortable with our prior statements where we were and particularly over the course of this past year and 2013 and where we're very growing it's hard sometime I think to compare apples-to-apples between our numbers and the numbers that Medtronic puts out because our patients go on CGM and they continue to use CGM on a go forward basis.

We believe that Medtronic numbers are a number of things patients who made private sensor may fall off to sensor but also they record revenues in sensor utilization for a completely different product for their iPro product which is really just a diagnostic product.

If they lump that into kind of patients using CGM it's not really apples-to-apples because these are not patients who are using CGM on real time basis going forward. These are patients who might use it once a quarter or once or twice a year. So it's hard to characterize those in my opinion as real time CGM users. So it gets really tough to quantify when we don’t have great visibility into their numbers as to have what the overall CGM penetration into the type one spaces.

Tao Levy - Wedbush Securities & Co.

Okay. And so basically I mean it's the mass and how you’re seeing the attrition now for G4. Penetration rate should necessarily move higher.

Steven R. Pacelli

We’ve gave the guidance that’s obviously and that guidance assumes a pretty healthy new patient add rate. And over the course of the year and we’re talked about our reduced attrition rate et cetera. So yes, I mean we assume that we at DexCom are going to continue to penetrate and grow our share of the type I space in the US for sure.

Tao Levy - Wedbush Securities & Co.

Great and just one big picture question. So as more providers start entering into accountable care type arrangements rent and potentially share some of those cost savings type 2 patient achieving certain A1C levels. There is a discussion with the doctors start to revolve around the use of CGM, their ability to get their patients levels down and for doctors and return, obviously they paid more from insurance company and patients do well obviously DexCom as well. Are we there or is it still is it too early on the conversations?

Steven R. Pacelli

Well, it’s not too early for the conversation, it is too early for the implementation. But we have long been of the position that we are quite willing to go at risk with the payer opportunity, to say to the payers set forth to your strategy the patient group that you would like as to address. And we are willing I said go at risk. And along with that in the end if we save the payer system money we want to share in the savings. So I think that's what is eventually going to happen and are going to first see that physician level from payment. They’re going to get paid for success.

But I’m not of the belief personally that the industry that is addressing this population are also going to have to have some skin in the game in the future as part of this whole payment structure. And I do believe and it’s pretty clear that to use A12 as the criteria, every -- that you’ve ever seen to my knowledge that’s not probably met analysis but in direct studies demonstrate a significant reduction in A1C depending upon the patient entering baseline, but reduction in A1C with the utilization of CGM versus any other technology within the diabetes space.

So I do see that as something coming forward. And we’re happy being part of that question. I think it’s a great opportunity for us than to really showcase what we can do at that environment, but it’s literally at a discussion stage not in an implementation stage. That said, I will diverge just for a second and that is in the hospital market. And why I get so excited about G4 is good enough to be in the hospital and some of the attributes that Kevin talked about will drive it even further.

That market is clearly one in which if there is [recidivism] of a patient than the hospital doesn’t get paid. So they already are experienced that pushback from the government. And there is a lot of dialog that’s going on at the endocrinology level about trying to achieve a certain level not only of A1C, but actual recording of average glucose levels in order to keep them between a certain bandwidth where they started to allow that to ease up to around 180. And then on some of the criterias as we want these patients back closer to 140. And so there is -- as how do you get them to 140 without starving them basically while they’re in the hospital.

And that is actually a very active dialog that is being communicated amongst endocrinology population. And that’s what we sit in quite easily. I mean there is better way to get a patient to 140. Keep them north of 80 to below 140 and what CGM. And then you have to really worry about what’s the reading and last thing you want to do is start the patient in a hospital setting just to achieve some artificial level of glycemic control.

Tao Levy - Wedbush Securities & Co.

Thank you for the colors.

Operator

And at this time, I’m showing no further questions.

Terrance H. Gregg

Well thanks everyone. Obviously an exciting call for us and I always have this kind of reflection as a transition to this new role so here is my reflection for today so look at statistics and today 1 in 10 adults in US has diabetes and its projected that one in three will have diabetes by the year 2015. So according to the pharmaceutical research and manufacturers of America Association US biopharmaceutical research companies are currently developing 180 new medicines for diabetes.

The cost to bring a new medicine from concept to reality is well over billion dollars and yet today here is DexCom with tools in the field that improve here again glycemic variability with only drugs we already do it. So we feel that we are extremely well placed to expand in our opportunities and as Kevin mentioned in his comments you hear has talk about how accurate we are today, you hear us talk about the ability to expand connectivity and convenience and that’s driving right into the sweet spot of this expansion of diabetes care but we have tools and are developing tools not research so much but as developmental tools because we have already done the research to get a highly accurate sensor. Now we can expand on that to make things simple to use by much larger audience. So I am thrilled about the prospects.

Obviously we have to get to cash flow positive and ultimately to profitable but until that day arrives and we are certainly at a pace we now have the leverage to expand our capability to a much larger market. So with that I will sign off and say thank you.

Operator

And thank you ladies and gentlemen. This concludes today’s conference. Thank you for your participation and you may now disconnect.

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