DexCom's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: DexCom, Inc. (DXCM)

DexCom, Inc. (NASDAQ:DXCM)

Q1 2014 Results Earnings Conference Call

May 1, 2014 4:30 PM ET

Executives

Terry Gregg - Chief Executive Officer

Kevin Sayer - President and COO

Jess Roper - Chief Financial Officer

Steve Pacelli - Executive Vice President, Strategy and Corporate Development

Analysts

Tom Gunderson - Piper Jaffray

William Plovanic - Canaccord Genuity

Ben Andrew - William Blair

Robbie Marcus - J.P. Morgan

Raj Denhoy - Jefferies

Mimi Pham - ABR Health

Danielle Antalffy - Leerink Partners

Greg Chodaczek - Sterne Agee

Jayson Bedford - Raymond James

Operator

Welcome to the DexCom First Quarter 2014 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Terry Gregg. You may begin.

Terry Gregg

Thank you and thanks for joining us. As is our standard practice, I am going to ask Steve Pacelli read our Safe Harbor statement. Steve?

Steve Pacelli

Thanks, Terry. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's expectations about future events, operating plans and performance, and speak only as of the date hereof.

These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under Risk Factors and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other reports 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 performance. This non-GAAP information is provided to enhance your overall understanding of our current financial performance. Presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Terry?

Terry Gregg

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

As we just held our Q4 2013 earnings call in late February, today's call will be largely a financial update with Kevin reviewing our first quarter 2014 financial results and providing a brief business update. I will then follow with some concluding thoughts. Kevin?

Kevin Sayer

Thank you, Terry. We will start with the financial update. DexCom generated $46.7 million in product revenue for the first quarter of 2014, compared to $27.8 million for the same quarter in 2013 and $18.9 million or 68% increase. Sequentially product revenue for Q1 of 2014 decreased 9% from the prior quarter and improvement over the 12% decrease we experienced from Q4 2012 to Q1 2013.

This seasonality is not unexpected as annual insurance deductibles reset and flexible spending accounts are largely unfunded in the first quarter requiring patient to spend more out of pocket dollars to obtain our products.

Total revenue for the first quarter of 2014 was $47.1 million, compared to $29.6 million during the same quarter in 2013. Our product gross profit totaled $29.8 million generating a product gross margin of 64% for the first quarter 2014, compared to product gross profit of $15.4 million and product gross margin of 55% for the same quarter in the prior year.

Sequentially product gross margin in Q1 2014 decreased slightly from the prior quarter. The decrease is attributable to lower product sales during Q1 and a slight shift in our mix of durable and consumable sales resulting from an increase in replacement transmitter sales.

During Q1 2014 our mix between durable and consumable products was approximately 32% durable and 68% consumable. Consistent with prior periods we anticipate that margins will improve over the course of year as volumes continue to increase, particularly consumable product sales.

Some final thoughts on our product revenue and gross profits, ASP for sensors has stayed consistent at approximately $7 per sensor and the ASP for our hardware continued at approximately $850 per starter kit.

Q1 2014 also represents the first quarter where we have seen a significant increase in standalone transmitter sales and the ASP on standalone -- on a standalone transmitter is between $400 and $500 depending upon the payer mix during a given quarter.

Finally, our international business continues to exceed our expectations. In the first quarter grew faster than our domestic sales.

Turning to our expenses, our total operating expenses for the first quarter were $42.1 million, compared to total operating expenses of $27.4 million during Q1 2013 and $36.4 million for the preceding quarter. The major component of this increase relates to non-cash share-based compensation expense, which is largely tied to the performance of our stock price through the end of March 2014.

We know better share price more than doubled from the end of Q1 2013 and increased 17% during the first quarter of 2014 alone. As a result, our total non-cash equity related charges for Q1 2014 were $9.9 million, compared to $7.1 million in Q4 2013 and compared to just $5.3 million in Q1 2013.

Research and development expense totaled $14.5 million for Q1 of 2014, compared to $9.3 million in Q1 of 2013 and $12.6 million in Q4 of 2013. The year-over-year increase in R&D expense includes a $2.1 million increase in non-cash equity related expense.

The remaining increase relates to continued investment in the product pipeline, focusing upon increase accuracy, improved connectivity, patient convenience and lower cost with our ultimate goal of replacing finger sticks.

For example, during Q1 2013, we were not running any major clinical studies and had no open submissions with the FDA. Compare that to Q1 2014, where we conducted a number of clinical studies related future technology, new sensors, new algorithms, enhance labeling, failure connectivity and general product improvements.

And we have a number of pending submissions with the FDA at this time, including DexCom SHARE, the DexCom G4 system for professional use, the SweetSpot cloud-based system and several others. We believe all of these efforts will ultimately lead to better experience for our patients and enhance our future growth and profitability.

Sequentially, R&D expense was up 15% or 66% of the increase were $1.2 million centered in incremental non-cash equity related expense.

Selling, general and administrative expense totaled $27.6 million in Q1 of 2014, compared to $18.1 million during the same quarter in 2013, an increase of $9.5 million. SG&A expense for the preceding quarter was $23.8 million, again compared to $27.6 million this quarter. The increased SG&A expense relates primarily to additional headcount for our commercial infrastructure as we scale the business for continued revenue growth.

We started 2013 with 48 sales territories. We now have close to 90 sales territories adding 22 -- 20 new territories near the end of 2013 and early 2014. In addition to the increased number of feet on the street, we have also added corresponding in-house infrastructure to support this growth.

We continue to make significant investments in personnel to manage our payer and distributor relationships. Our headcount in this group is more than doubled since the beginning of 2013.

This team has been extremely successful over the past several months as we continue to secure more and better direct contracts with payers, strengthen relationships with our current distributors and lay the foundation for CGM to become as a pharmacy benefit.

Finally, the increase in SG&A expense year-over-year included $2.3 million increase in non-cash share-based compensation, sequentially non-cash share-based compensation expense increased by $1.3 million.

Our net loss for the first quarter of 2014 totaled $12.5 million and included $12 million even in non-cash expenses centered in share-based compensation, depreciation and amortization.

Absent these charges our net loss would have been approximately $500,000 for Q1 2014, down from the preceding quarter due to the seasonal sequential decline in our product revenue and our investments for future growth. But this compares quite favorably to our cash base net loss for Q1 2013 of $3.9 million.

Our loss per share for the quarter was $0.17. It is worth noting that while our loss per share was higher than consensus the Street consensus OpEx number for Q1 was actually less than our Q4 2013 OpEx been.

While we do not provide detailed P&L guidance, we did said during our last call that we entered Q1 with an additional 20 sales reps and we provided guidance that we expect that R&D expense for 2014 to be up between 10% to 20% versus 2013 and we anticipated an increase in SG&A expense of approximately 20% just for the growth. Additionally, we should clarify that the expense guidance we gave during our last call did not include the significant increases in equity related expenses I just discussed.

In conclusion, we are very pleased with the first quarter financial performance. Our revenue growth is unparalleled. We continue to make significant investments on our commercial infrastructure and our product pipeline to position DexCom for future long-term objectives.

On top of that our cash based profitability continues to improve as we develop a new category seek to disrupt an entire industry not just build company or product line.

With respect to our balance sheet, we ended the first quarter with $57.4 million in cash and marketable securities, up $2.8 million sequentially and with our continued debt availability we are quite comfortable with our cash position.

Finally, we remain very comfortable with our current full year revenue guidance at this time and consistent with our past practices we will evaluate our range at the end of the second quarter and expect to provide an update on our next call.

Now for the business update. As you know in February, we received FDA approval of an expanded indication for our G4 Platinum 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.

We are very pleased by the initial response of parents and practitioners to the pediatric product offering. We have seen the percentage of orders from pediatric patients continue to grow to approximately 20% of our current pipeline opportunities.

However as we’ve learnt, we have a lot of work ahead of us. Since April, we’ve met with a number of pediatric endocrinologist in the field and other headquarters in San Diego to better understand this market. While many of these clinics are very excited for the pediatric opportunity, we believe it will take time to properly educate parents and caregivers about the benefits of CGM generally and about the superior performance of our system more specifically to grow the pediatric market at a level where it should be.

We continue to have an active dialogue with the Food and Drug Administration regarding our current filings, the major ones being the DexCom share system and the expanded indication for G4 Platinum for professional use. We believe both are in the final stages of review.

As you know in March, we received a warning letter from the FDA resulting from of November 2013 inspection of our facilities. The warning letter cites administrative efficiencies in our MDR reporting. There were no sanctions levied by the FDA and the warning letter does not impact our ability to manufacture and sell our product nor does it affect any of our pending or future submissions for product approvals.

We are pleased to report that within three weeks of the receipt of this warning letter, we had submitted all materials we believe are necessary to demonstrate to the FDA satisfaction that we're in compliance with our reporting obligations. And we expect to close out the warning letter in due course.

Turning to our future CGM product offerings. We remain focused on increased connectivity and convenience as a near-term goal and are 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.

As we continue to advance our technology, we were very pleased to learn just last week that the FDA is formulating a new Expedited Access PMA program for medical devices that address major unmet clinical needs. This program will feature earlier and more interactive engagement with FDA staff that collaboratively developed plan for collecting data, to support approval, reduced premarket requirements and a priority review.

While it remains to be seen whether and to what extent CGM will apply, this program certainly appears to be a significant effort by the FDA to further the availability of life-saving and life-changing products for patients. And we view this as a big step forward.

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

Terry Gregg

Thanks Kevin. I'll start my comments by reflecting on something Kevin said earlier. At DexCom, we are developing an entirely new category seeking to disrupt an entire industry. There are some 25.8 million people in the United States living with diabetes, 1.5 to 1.7 5 million with type 1, 7 million undiagnosed and 80 million designated with pre-diabetes.

Research published earlier this year showed a 70% increase in diagnosis of type 1 diabetes in children under the age of six during the period from 1985 to 2004. Expanding that globally, over 382 million people are affected with diabetes and that number is expected to pass 592 million in the next 15 years.

What do all of these people have in common? They all suffer from the inability to adequately regulate their glucose levels. Why? Because episodic finger stick measurement simply aren't good enough.

During the last decade, the number of people in the United States with insulin-treated diabetes rose by more than 50% and today it is estimated that one-third of patients with diabetes use insulin. But as insulin use has increased, so has the frequency of severe hypoglycemia. In fact, it is estimated that approximately 100,000 emergency room visits and 30,000 hospitalizations occur each year in the U.S. due to hypoglycemia.

During the period from 2007 to 2011, approximately 9.2% of emergency room visits were for insulin-related hypoglycemia. Severe neurologic sequelae described a shock, loss of consciousness, seizure, associated injury or fall and hypoglycemia-altered mental states were documented in more than 60% of these cases and almost a third required hospital admission or transfer to another facility.

With the average cost of a hospital admission for hypoglycemia at $17,000 and 30,000 admissions per year, the healthcare bill for this is over $0.5 billion and growing. Adding to the potential problem, there are over 400,000 new insulin users each year. You get the picture. So why I’m telling you this? Because DexCom is the leading company in the world, addressing the challenges of maintaining adequate glucose control.

Finger sticks can't do it alone, neither can an insulin pump. So when you look at DexCom and you look at our current product offerings or our robust pipeline, what you see is the evolution of an entirely new category in the market with enormous unmet needs.

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. We are here now investing in tools to make diabetes management less complicated, less burdensome.

We are not here solely as an accessory to an insulin pump or as a component to an artificial pancreas. And while we certainly are supportive of the efforts to develop an artificial pancreas, in fact we are the key enabling component of virtually all artificial pancreas research being conducted around the globe.

We believe we also have a duty to support the vast majority of patients who either not up to use this technology due to the complexity or will never have access to it due to cost. These patients deserve better tools to manage their glucose levels as well. And we intend to develop products to meet the needs of all patients.

There is growing consensus that transitioning to outcomes-based payment is fundamental to driving cost reducing innovation among providers in achieving a financially sustainable healthcare system. Almost everyone agrees that we must migrate from a largely fee-for-service system to one focused on delivering the best patient outcomes at the lowest possible cost.

Medical device company such as ours need to be cognizant of this as we approach R&D. We will be successful only to the extent that we generate true cost reducing innovations. We believe our strategic initiatives such as superior accuracy and performance to obtain finger stick replacement open connectivity, miniaturization, and ultimately cost reduction will set DexCom apart.

Our CGM first message has continued to change the behavior of healthcare practitioners to help them better understand glycemic variability and how to manage it more effectively. I have stated on many occasions that diabetes is a mystery to the patients who deal with it every single day and have to act dozens of times each day to address the challenges of glucose control.

This evolution has never been fast enough for me. Although when I became CEO in 2007, the CGM market was negligible and today is approaching 10% penetration of the U.S. type 1 patient population. I'm of course proud to say that DexCom has a majority market share.

Thank you. And with that, I will turn it over for a question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question from Tom Gunderson from Piper Jaffray. Please go ahead.

Tom Gunderson - Piper Jaffray

Hi. Good afternoon everybody. On the comment on transmitters has been a meaningful for the first time. Is that a slow rise or did that have something to do with last year especially in first quarter, a lot of people upgraded to Gen4 to get a whole new transmitter announced a year later. In other words, should we look for higher transmitter sales for the rest of the year or was this a one-off event?

Kevin Sayer

We believe there will be higher transmitter sales over the course of the year, Tom. Remember when we launched this, the labeled indication for it is six months. Our transmitters have been vastly lasting longer than that. So there is rise in transmitter sales. It’s actually bit delayed over what we thought would happen. So yeah, we look for that to continue over the course of the year.

Tom Gunderson - Piper Jaffray

Got it. Thanks Kevin. And then my last question is can you comment a little on competition to the extent that we’re getting a little bit more media attention both on Medtronic and on Flash?

Kevin Sayer

Yeah. I mean, one thing I can say Tom is that if we look at what we did in the first quarter. We obviously did not feel much pressure in my opinion from a competitive landscape, either domestically or internationally in record quarters on both the U.S. as well as O-US. So that would be about the summation of my comment.

Tom Gunderson - Piper Jaffray

Okay. Thank you. That’s it for me guys.

Operator

The next question is from William Plovanic from Canaccord Genuity. Please go ahead.

William Plovanic - Canaccord Genuity

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

Kevin Sayer

Yeah.

William Plovanic - Canaccord Genuity

Perfect. So just two -- couple of questions. First is pediatric, just what is -- how is this strategy different from pediatric. I think you told us it will roll out a little slower but how do you approach that market differently than your current adult population?

Kevin Sayer

Bill, Terry and I've both been out on visit pediatric clinics and we are approaching them with the same sales team that we approach the adult ones with. What we both noted is we haven’t been there before. We’ve not been an active presence in those clinics. We've complied with our labeling by not actively pursuing all of those. So although familiar with CGM, there is an educational component as we get parent, physicians, other caregivers up to speed and get them used to the experience in DexCom’s CGM. Even if they prescribed a few, they are not ready to move too many until they get little more experience with us. So it’s kind of like going into new territory, lack of a better example. We are kind of starting from scratch.

William Plovanic - Canaccord Genuity

But you did say and I guess I want to make sure, I’m clear that 20% of your patients in the quarter were pediatric?

Kevin Sayer

No, I said 20% of the pipeline of our other pipelines.

William Plovanic - Canaccord Genuity

So, as I think of the quarter, I think historically you're running around 10% for peds. Did you move off of that? Has that increased a lot or?

Kevin Sayer

Somewhere between 10% and 20% would be a good number at this point in time.

William Plovanic - Canaccord Genuity

That’s a nice tight range. Thank you. And then as we look -- if we look at the quarter, that was a very impressive durable number. And I think we are all going to try to find out or at least try to figure it out if, how much of that is new patient, how much of that is transmitter upgrade and I know you won't answer the question? So, I’ll ask it this way. One, what type of year-over-year growth did you see in your new patient adds? And two, is there any type of mix that you might share with us for a revenue component, of that roughly $15 million of durables? 70% of it was new patient versus upgrades, transmitters, receiver, I mean, it’s all those types of things?

Kevin Sayer

You are correct. The first time, we will not share the new patient changes about the guidance between upgrades and new patients. Certainly on the kit side, we’ve said in previous calls that we typically run into 70%, 30% ratio over time. It may fluctuate more on one quarter to another based on deductibles. I think this quarter’s really relatively typical of what we’ve seen in the past. The increase in the durable sales really relates to more transmitters than a shift in new patients and upgrades or anything like that.

William Plovanic - Canaccord Genuity

So, would that mean inside that durable number, kind of, what’s the mix of new patients to the therapy, just to the therapy versus your existing customers, all they are upgrading so. It was $5 million of these transmitters and upgrades and what have you of the $15 million?

Terry Gregg

What Kevin was saying was that again, there was a 70-30 split, consumable to durable. But what he’s also saying that we’ve historically run close to the same split within new patients to upgrade patients. Some are between 20% to 30% of any quarter, is going to be upgrade patients. The durable revenue is going to be upgraded patients.

William Plovanic - Canaccord Genuity

So the change in the mix, this quarter were because of the increase in the replacement trend?

Terry Gregg

There was a bump up closer to 32% of durable revenue this quarter, was attributable to increase transmitter sales. That’s right.

William Plovanic - Canaccord Genuity

Yeah. It’s very helpful. Thank you very much. And last question if I may? Is just, have you seen any change in your attrition rate and anything you'd like to quantify with us and that’s all I had? Thank you.

Kevin Sayer

No. The things are about the same as what we said at year end. The attrition rates certainly on the G4 PLATINUM system, is much better than it ever was on SEVEN PLUS and we continue to see good reorder patterns.

William Plovanic - Canaccord Genuity

Great. Thank you very much.

Operator

The next question is from Ben Andrew from William Blair. Please go ahead.

Ben Andrew - William Blair

Good afternoon. Just following up on that same topic, if I was correcting on modeling, there was probably about $4 million of hardware replacement revenue in the fourth quarter, so the change in percentage of the totals this quarter would suggest something more like $6 million or $7 million of hardware replacement for existing patients. Is that in the ballpark?

Kevin Sayer

We are giving as much as we are going to give you.

Ben Andrew - William Blair

Okay. That’s fine. We’ll try something else. So let’s talk about the SEVEN PLUS station who choose not to upgrade for whatever reason. Do you feel that at some point you will get another shot on goal with them, with the improved accuracy of the G4 or for whatever other reason?

Kevin Sayer

I think for some of them we will. One of the things -- one of the reasons some of the patients are not upgraded and again, we’ve seen this as we look at the various, eight segments of our population. There some eight segments that tends to drop-off more than other. And some of those who choose not to upgrade may have choose not to upgrade for other reasons and may come back. We see a lot of our patients who had dropped off SEVEN PLUS for years, when we launched Gen 4 come back to us and become patients again and we actually can pose as new patients because we had lost them for a couple years. And so, I think as we come out with our new technologies, again with more accuracy, with more connectivity with surface smaller, I think a lot of the patients we lost will come back.

Terry Gregg

Yeah. I would just add to that in terms of the age demographics. Obviously, we continue to push at a level to get reimbursement from the Medicare system and some of these patients unfortunately have moved from having traditional third-party payer coverage to Medicare coverage and that’s around fixed income. There's been some challenges there. But we always look forward to the opportunity to better serve them in the future as well as we push that agenda at the highest levels in CMS, as well as in Congress.

Ben Andrew - William Blair

Okay. And then, Kevin, maybe talk a little bit about the gross margin sequentially. Obviously, you made a huge progress last year. The volumes in the first quarter we know would be lower. Where do you see that trajectory over the course of the year? Do we exit closer to that 70% range or can you give us some thoughts?

Kevin Sayer

Yeah, we think we will move up from here, Ben. We were 66% in Q4, with the large revenue number that we hung up there and we are quite confident they will continue to go up over the course of the year. A lot of that is volume related, as we can apply more cost to more stuff that goes out the door. And as we get our other improvement programs in place, our target margins for our sensors has always been in the 70% to 75% range.

And while we are running at 64% to 66% in the last two quarters, it’s pretty obvious our sensors are there within that range and we just need to look our ways to keep pushing on that. So we’ve been working on improvements. We are not going to see sequential 10-point improvements like we did last year. But we can see sequential improvements as we go over the course of the year.

Ben Andrew - William Blair

Okay. And then last question for me. Can you give us some rough sense on what the margin is on hardware, as soon as we can backend to it if we use that range for sensors? Is it a 10-point or 15-point difference?

Kevin Sayer

It’s closer to 50%, Ben, when all said and done.

Ben Andrew - William Blair

Okay. Thanks a lot, guys. Take care.

Kevin Sayer

I didn’t know, my guys messed up. I’m sorry.

Ben Andrew - William Blair

No worries. Thanks Kevin.

Operator

We have a question from Mike Weinstein from J.P. Morgan. Please go ahead.

Robbie Marcus - J.P. Morgan

Hi. This is Robbie Marcus in for Mike. Congrats on the quarter. Can you talk about -- I you touched on it briefly, but maybe just what you're seeing in terms of Medtronic competition with the 530G system and how were G4 sales transmitted in Medtronic pump users?

Kevin Sayer

We were 67% this quarter and that would speak to the strength of our business and how well we did. We certainly hear a lot of Medtronic 530G noise, but I think our 67% number supports itself. With respect to Medtronic pump users, should use G4 systems, there is a lot of them. It represents a significant piece of our pump patient base. Medtronic pump patients who use G4 sensors and they are very happy, so numbers speak for themselves.

Robbie Marcus - J.P. Morgan

Okay. Great. And maybe just a follow-up. You’ve gotten some pretty good reimbursement on Type 2 patients recently. Can you talk about trends and what you are seeing there and although you are increasing as a percentage of your base and kind of, where are they right now?

Kevin Sayer

We attempt to get insulin -- any insulin using patient covered in all the contracts that we had entered and we have had some good success in getting that. Type 2s haven’t become a real large part of our business but it does continue to grow. I think the most encouraging thing about the Type 2 business that I have seen in my travels on the anecdotal stories we’ve heard, we have a huge impact on these patients because once they can see, if they are insulin using. Once they can see the effect of the diet and the activities and the other things they do on their glucose levels, they can make some pretty radical changes that have very immediate outcomes.

I talked with people on the field who are seeing Type 2s go from an A1C of 10 down to 6.5 very rapidly, are just with changes in diet and activity. And then they get off someday or compounds. So we are very excited about the opportunity and it also provides. It’s just going to take us while to grow it. But it is good. It will be a great market for us over time.

Terry Gregg

And I would just add. Again, when we look at the number of new insulin start some 400,000 a year now, obviously the majority of those patients are Type 2 patients that have for whatever reason migrated either insulin in addition to oral agents who are gone directly to insulin because the oral agents were not sustaining, that gives us yet another bonus opportunity as we look at our product configuration and really build some products in the future directly, for patients with Type 2, particularly those on insulin. But we certainly wouldn’t exclude and the data suggest that even if you are on oral agents with Type 2 you can benefit from CGM.

Robbie Marcus - J.P. Morgan

Thanks.

Operator

The next question is from Raj Denhoy from Jefferies. Please go ahead.

Raj Denhoy - Jefferies

Hi, good afternoon. I wonder if I could ask couple questions. First on the operating expense lines, I think you did a fair job explaining about the heavier stock-based comp in the quarter. And I’m curious about how we should think about the progression of expenses as we move through the year, particularly as I think consensus numbers have you guys getting on operational basis or at least I should say on earnings basis positive by the end of the year. Is that in keeping with what you guys are seeing?

Jess Roper

Last year, by the end of the year we were cash flow positive from operations when we dropped all the non-cash charges from our P&L. And our goal this year was to grow that cash-based net income significantly higher rate than we grow our top line. We achieved that in the first quarter going from almost $4 million loss in the first quarter of last year, net cash loss to $500,000 net cash loss in the first quarter of this year and we hope to see that improve over the course of the year.

With a GAAP perspective, when you got a range of high end range of $225 million in revenue and 65% gross profit, with non-cash expenses in excess of $12 million a quarter, that profitability has not happened in this year, and that’s not been our goal for a while. We would work towards heading ’15. And again if the equity comp number continues to be so high, GAAP profitability maybe pushed out a bit, but we focused very heavily on that cash profitability number and make sure we are adding more to the bank account than we are spending and we saw that this quarter. So, it’s good.

Raj Denhoy - Jefferies

No, I don’t know that I actually get that, just in terms of just making sure that we model it correctly. And I guess we do, and I think everybody does have or most people actually getting EPS profitable by fourth quarter on a GAAP basis. But if I am hearing you correctly, we shouldn’t be assuming that given the non-cash expenses?

Jess Roper

Yes, if everything was a same non-cash-wise, I think we could be cost getting there, but with the significant increase in non-cash expenses that we’re experiencing again due to the stock price and...

Raj Denhoy - Jefferies

No, I get you. Just couple on the product side, I think you’ve been increasingly talking about this product called share, which I guess is one of the features that’s going to be on the G5. And I am curious if there is any updates on the timing of that, it sounds like it’s at the FDA. And then subsequent to that, if and when it does get approved, really any expectations around whether that could be as positive as a catalyst as we’ve seen in the G4 and some other advances?

Terry Gregg

It is at the FDA. And as we said in our comments, we think we are on a homestretch here not going with. We certainly won’t give a data, speak to them. Again, the share system is our first venture in the mobile connectivity. Bearing the receiver inside a cradle with an Apple device and then sending data to secure servers that can be shared with people looking forward your glucose levels all the time. We think it will have a very good impact on our business, particularly in repeat patients where parents aren’t going to follow their children. We talked to a number of people over the past few months whose child has never been on a sleepover, but of course they don’t dare while them leave their house without being able to watch them.

Big uptake in that segment, we think it will help us. It will also help us really with anybody you travels or is away from somebody who is a caregiver. We see a very good use for that product. We are not looking for huge changes in our revenue model for this. That cradle itself is going to be about a $400 charge starting out of the gate. Our goal with this is to make a system that will greatly enhance our patient’s ability to manage their glucose, to better care if themselves. And from a business side, sell more sensors. So that is we are hoping to happen. It won’t have the impact as G4 launch, I can quantify that, but it will -- we think it will help us. We have pretty high expectations here. We need to hit it pretty well. So we think it will be helpful.

Raj Denhoy - Jefferies

And just some clear, that’s a feature, it will work with the current G4, so it, there is no upgrade on that transmitter, you just need it by the cradle and it all works?

Terry Gregg

Yes, by the cradle and help.

Raj Denhoy - Jefferies

And just lastly, and I know it’s in your partners hands, but any updates on timing on the combined products that use the tandem device?

Terry Gregg

As we talked about Raj a quarter or two ago, we are going to start deferring to the partners on timing. These filings are in their hands, and so I think we will let tandem and analysts speak to themselves.

Raj Denhoy - Jefferies

Fair enough. Thank you.

Operator

We have a question from Mimi Pham from ABR Health. Please go ahead.

Mimi Pham - ABR Health

Hi, good afternoon. What percent of the 800 USPD pediatric endocrinologists you talked about have prescribed the G4 since March and February versus April and February?

Terry Gregg

I couldn’t quantify that and we don’t have that.

Mimi Pham - ABR Health

Would be fair to say that our goal by year end is to get half of them could be in their first prescriptions or closer to majority of them just based on your comments about the little more measurable…

Terry Gregg

So maybe I think we got to keep more as a percentage of the patient base as we build our models rather than just focusing on individual positions and we want to see the patient base over time of up to 30% of the overall patient base. We would expect the patient base to move from 10 this year up closer to 20 and then move up over to 2 years higher than that. I haven’t gone so far this year is to break it down by physician in the clinic.

Mimi Pham - ABR Health

Okay. And then in terms of the pediatric ramp, I know it’s still early, but do you get a sense as these are stickier patients just more likely to use CGM 24/7 periodically?

Terry Gregg

We think particularly those really young patients cared by their parents are extremely sticky. That’s also been a very good patient group for us even when the product was prescribed off-label. We know what teenagers. It doesn’t matter what the device or the therapy or whatever you tell teenagers to do, sticky is kind of a difficult word, but we do well with them and they certainly do our system. So we’ll just see how it works over time.

Mimi Pham - ABR Health

Thanks. And then last question to follow up, I think, Tom’s, question on the flash, can you just give us your thoughts on the additional data presented on Abbott Flash at the ATTD meeting back in summer. Does it seem like it might keep more folks long-term internationally just using for glucose meters?

Terry Gregg

I understand the flash is definitely not CGM. The flash doesn’t provide the patient with real-time information, doesn’t provide with hyperglycemia work, etcetera. So it’s not really a direct comparison to our product offering. I do think there could be an interesting application for flash, we’re watching it.

With respect to the data, I think the latest data presented by Abbott frankly wasn’t quite as good as the first round of data we saw, but we are keeping an eye on it. I think as we said in the past that if Abbott finds a niche for this product particularly and more of a diagnostic marketplace for perhaps for non-insulin using type 2 or something like that, it’s something it could be great to have Abbott help us, help build the category for once. We have done all the heavy lifting in this category for years and years and years. It would be great to have someone else coming in and help build the category that we could come in as a fast follower.

So we are keeping an eye and we haven’t frankly -- I don’t think anybody has seen much of the product itself yet. So it’s a little bit early to tell, they’ve stated publicly that they expect to launch it in Europe in the second half of this year. They’ve have given no U.S. timeline for a launch or commercialization. So I think we are in a more by maybe by EASD this year in the latter half of the year.

Mimi Pham - ABR Health

Thank you very much.

Operator

We have a question from Danielle Antalffy from Leerink Partners. Please go ahead.

Danielle Antalffy - Leerink Partners

Thanks so much. Good afternoon, guys. And thanks for taking the questions. I was hoping you could comment on utilization trend. So the last few quarters we’ve seen utilization trends. I wanted to see if they were persisting and how we think about utilizations trends evolving over the next few quarters as we got it at via pediatrics to, you would think based on the younger age group with use the sensor more frequently, share should contribute to utilization. So where can we get to utilization ultimately with all these products extended indication hit?

Terry Gregg

So you got to be careful Danielle when you talk about utilization trends because remember patients are probably wearing it longer than seven days. So there is plan which patients. Even if all patients wearing it all the time, you are still not going to have patients wearing 4 sensors per month. So what we said with G4 over the course of the last 18 months has been what we’ve seen as a combination of more patients wearing it all of the time and reduction in nutrition, but that doesn’t necessarily mean that all patients are wearing, for example three sensors in a month or 3.5 sensors per month. So you got to be really careful about trying to expect utilization meaning sensors per months to go up in any meaningful fashion, patients what we do think is we moved the buckets of patients were before patient might wear it periodically might wear it one sensor a month and take a break, that patient maybe wearing 2 or 2.5 or 3 sensors a month because they are wearing all the time, but you can’t expect utilization in that sense to keep rising because if the patient is wearing it all the time but extending the life, the utilization is not going to go ahead. What we said is that and Kevin said it in his remarks is that attrition trends remain very positive and patients are using continuing to utilize sensors and...

Kevin Sayer

The average as a whole sensors used per month per patient has gone up, but like Steve said that if we think it’s probably because patients are having a better experience overall, we have not seen a reduction in the amount of days people use it across the board. We know people extend to wear.

Danielle Antalffy - Leerink Partners

Okay, great. Thanks so much. I just wanted to ask you guys about ADA is coming up here, I guess next month. I’m wondering if there is anything coming out at ADA from you guys or from the artificial pancreas side of things that we should be paying attention to.

Kevin Sayer

Well, we have about that a poster presentation at AVA. We’ll be very busy. But and please come and take a look at on that, we’ll keep that under reps. So we get there. With respect to the artificial pancreas, certainly there will a lot of discussions about that and again will be program we’re heavily involve with. With groups that are seeing tremendous result and measurement from our CGM to drive the success of those programs. So, there will be a lot, there will be very busy show for DexCom, you’ll hear a lot about us there.

Danielle Antalffy - Leerink Partners

Okay. Thanks so much.

Operator

The next question is from Greg Chodaczek from Sterne Agee. Please go ahead.

Greg Chodaczek - Sterne Agee

Hey, guys. Most of my questions have been answered. But just one quick one. Kevin, in terms of operating expense growth X or excluding non-cash equity, what was that growth -- those growth rates you recorded again?

Kevin Sayer

We said last year that it will be a 10% to 20% growth on the R&D side of the -- on the cash side and we said, we would -- we’ll trying to keep SG&A around 20% on both cases and I’ll be very kind with you, we look at opportunities to spend money, to find growth for the future.

As you heard about the build-out of the commercial team over the past 12 months that’s alone went to 20% increase. We manage to keep that down in the 20% range because we haven’t spent very much on the G&A side. But we will continue to make investments, where we think it’s going to grow our business or it’s going to grow our business where we need to.

Net expenses growth we will stick to that guidance now. We’ll take a look at where we are in six months and give you a little bit of more -- a bit more. But if you just go back to Q4, the growth from Q4 is very much dialed into the expansion of the sales force for the full quarter and those efforts that we undertook.

And on the R&D side, the growth of the R&D expense is very much tight, really just to the share-based compensation that was almost 70% of the sequential R&D growth. So, we’re looking at that and we’ll probably give you a little more update on that spending once we get six months of the year.

Greg Chodaczek - Sterne Agee

Okay. Thank you for the clarification. And in terms of pediatrics, your long-term goal is roughly about 30% of your revenue is coming from pediatrics?

Kevin Sayer

Yes. It is.

Greg Chodaczek - Sterne Agee

Okay. That’s all I have. Thanks guys.

Kevin Sayer

Thank you.

Operator

(Operator Instructions) And we have a question from Jayson Bedford from Raymond James. Please go ahead.

Jayson Bedford - Raymond James

Good afternoon and thanks for taking the questions. I don’t mean to be repetitive here, but just on the sequential jump in SG&A spending. It was a big number, I’m just realized the $2.3 million in stock-based comp to 20 new reps? But did you increase your marketing efforts there or increase cost associated with the pediatric launch at all in the first quarter?

Kevin Sayer

Certainly, we’ve got that in there and again when you talk to sequential, you’d be talking Q4 to Q1 versus Q1 of last year. We’re going to compare Q1 of last year to Q1 of this year. You need to go back to my remarks. We have 48 reps in the field at the start of Q1 of 2013. We have almost 90 by the end of Q1 in 2014 and all those were in place early in the year.

So you almost doubled feet on the street there. We’ve more than doubled the size of our distribution channel management team with respect to payers, distributors and all the other things associated with getting pharmacy reimbursement overtime.

We have built a marketing team up as well. Not to the significant rebuilt up the sales side of those expenses will probably come more over the course of the year as we do more marketing campaigns and as we run some clinical studies here towards positioning the product for better reimbursement overtime, which will be part of R&D.

So as you're comparing to last year, think 48 to almost 90 reps, think double the number of people on the reimbursement side. That's where that growth comes from on the cash side. If you go from Q4 of last year to Q1, its probably 20 new reps and a few people on the other side and the growth isn't there as much. I think the issue with the OpEx as you compare this year last year. We are a lot bigger than we were a year ago. We just are, there is no other way to describe it.

Jayson Bedford - Raymond James

Right. Okay. Okay. That’s helpful Kevin. I guess, the international strength, was it largely due to the entry of new countries or is same country sales growth tracking also tracking above U.S. growth level?

Kevin Sayer

You don’t expose, we do very well and we have some core markets Germany, Italy Sweden, the Netherlands, we do extremely well in Europe and elsewhere and the other markets are growing as well. Those were kind of the backbone of our European business.

On top of that, we got into Canada in late ‘13 and did very, very well in Q1 of ‘14 in Canada, both with our standalone CGM and system. So Canada is really been a very positive long trust.

Jayson Bedford - Raymond James

Okay. And then lastly for me, just on the pediatric strategy, maybe getting into your sales comp structure here? But is the focus here on a portion of the pediatric endocrinologists up there and to go deep into those physicians or is it more of a blank approach where the goal is to, hey, lets touch them all by year end?

Kevin Sayer

Our focus with respect to compensation is to grow the business in total. We reward our team for -- we have obviously a model. The biggest reward in our compensation structure is adding new patient to the company. If our reps are achieving pediatric or adult patients, they’re compensated the same. We will watch and we will monitor and make sure those reps that we have out there are going into both areas. And if we see somebody not doing it adults or not doing ped, obviously, we’ll go check on the territory but they are rewarded the same for both.

They have again very high numbers to meet our expectations. So I can tell you these guys are trying to get deep into everywhere they call and also call on a number of clinics. They are measured on both, the number of calls that they do and the number of physicians they call on and also how deep they go and our term for that is a DexCom Champion. How many champions do you have and how many can you create. And so all these guys are measured on a number of factors that really meet our overall company and business goals. Our goals are very congruent.

Jayson Bedford - Raymond James

Okay. That’s helpful. Thank you.

Operator

And next question is from William Plovanic from Canaccord Genuity. Please go ahead.

William Plovanic - Canaccord Genuity

Great. Thanks for taking this. Just what was D&A and stock comp in the quarter? And my second question is the depreciation, amortization and stock comp overall for the quarter and because there is not a cash flow out?

Kevin Sayer

Bill, you’re going to see that probably in about nearly five minutes when we file the Q. The share-based compensation was $8.7 million for the quarter. And then we had depreciation and amortization of $1.9 million. All non-cash charges remain for the quarter, which includes accretion change in fair value for some contingent liabilities we have for sweet spot et cetera. So the total non-cash expenses are 12.1.

William Plovanic - Canaccord Genuity

Okay. And then just on the pediatric, you’ve provided your strategy kind of what you're doing, you said that you expect us to kind of ramp a little slower. When do you expect the peds to really gain momentum?

Terry Gregg

I think -- I think, we all believe that there is significant momentum. And I think Steve characterized it and Kevin as well that in the adult population, as an example, when we call on account, they are well informed, not only about CGM but particularly about G4 because we’ve been calling on them for the last several years as you go into a pediatric account. Number one is a new account for ourselves reps for the most part in terms of that they were co-located with an adult pediatric and adult practice and often times we know them but we never called on them.

So there's a relationship management that has to be established as well as the technology understanding. So it is a bit of going back as I think Kevin said, not starting over but certainly not the same type of awareness that you have in an adult population. All that takes time, it lakes repeated business by the sales force to gain, quite frankly the trust of their physician population, which we in some cases, it’s a first time business. I mean, when we’ve been out in the field, lately from a management standpoint calling on pediatric clinics it's amazing. In fact because I have been doing this for so long and the most startling thing to me is it’s just like holy cow, they don’t understand this.

We've got to be sure that they understand the basics of CGM at that level in order for them to be successful. So it is literally a step back in time but we do expect that to ramp up very quickly.

Kevin Sayer

Yeah. I think, the cautionary to the extend you read any cautionary language into our prepared remarks. It’s really just making sure the street doesn't get ahead of itself and thinking it was just going to be a foot for switch launch and kind of within a month or two we were going to have 30% to 40% penetration into the peds market. That’s all, its ramping just fine.

William Plovanic - Canaccord Genuity

Perfect. That’s all I had. Thank you very much.

Operator

We have no further questions at this time. I will now turn the call back to Terry Gregg for final remarks.

Terry Gregg

Thank you and thanks for joining us today. I’m mostly proud of what we have accomplished. You noticed during the course of the conversation, we said nothing about inclement weather having an impact on us. We blew through that obviously and overcame that even when offices were closed and still had a quarter to standby and very proud of the company. And I would say this again for DexCom, we say what we’re going to do and then we go out and execute it. And that’s the best thing that I can say about a company performing at this level. So with that I'll close. Thank you.

Operator

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

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