DexCom Inc. Q2 2008 Earnings Call Transcript

Aug. 5.08 | About: DexCom, Inc. (DXCM)

DexCom Inc. (NASDAQ:DXCM)

Q2 2008 Earnings Call

August 5, 2008 4:30 pm ET

Executives

Terry Gregg - President and Chief Executive Officer

Steve Pacelli - Vice President, Corporate Affairs

Jess Roper - Vice President and Chief Financial Officer

Analysts

Tom Gunderson - Piper Jaffray

Sara Michelmore - Cowen & Company

Mimi Pham - JMP Securities

Bill Plovanic - Canaccord Adams

Steve Ogilvie - Thinkpanmure

Suraj Kalia - Sanders Morris Harris

Operator

Good day, everyone, and welcome to today’s DexCom Second Quarter Year 2008 Earnings Conference Call. Please be aware that today’s conference is being recorded.

At this time, I’d like to turn the conference over to Mr. Terry Gregg. Please go ahead, sir.

Terry Gregg - President and Chief Executive Officer

Thank you, operator and thanks for joining us today for the second quarter update. Joining me today is Steve Pacelli, our Senior Vice President, Corporate Affairs, Jess Roper, Vice President, Chief Financial Officer and start off with Steve on a Safe Harbor review.

Steve Pacelli – Vice President, Corporate Affairs

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. Terry?

Terry Gregg - President and Chief Executive Officer

On the agenda today, customary order, financial review by Jess then I’ll go into the update for commercial and reimbursement and hospital partnership and insulin pump partnership, development and regulatory update, close it out with summary and conclusions and then we will have a Q&A. Jess?

Jess Roper – Vice President, Chief Financial Officer

Great, thank you, Terry. DexCom reported product revenues of $1.9 million for the second quarter of 2008, compared to $863,000 for the same quarter in 2007, an increase of a 125%. Sequentially, product revenue increased by 6% in the first quarter of 2008. During Q2 we sold approximately 1,057 system starter kits. As of Q2 2008, we have upgraded approximately 600 first generation three-day customers to our second generation seven product. Sequentially, sensor revenues were up 15% from Q1. Total revenue for the second quarter of 2008 was $2 million included a small amount of development grant revenue associated with our joint development agreement with Animas Corporations entered into during Q1.

Cost of sales for the second quarter of 2008 totaled $3.4 million compared to $2.9 million for the same quarter in 2007. The increase was primarily due to higher sales volume and approximately $250,000 in development cost of sales. The increase in product cost of sales relating to additional product sales was offset by lower direct labor costs and increased manufacturing absorption.

Our gross margin loss for the second quarter of 2008 was $1.4 million compared to a loss of $2.0 in 2007. Research and development expense increased by about $800,000 and totaled $4.8 million for the second quarter of 2008 compared to $4 million in the same quarter of 2007. Major elements of R&D expense included increased facilities costs, clinical trial costs and consulting fees. Sequentially R&D costs remains flat from Q1.

Selling, general and administrative expense totaled $7.2 million in Q2 of 2008 compared to $5.5 million in 2007. The increase was primarily due to increased sales and marketing costs. Major components of the increased SG&A expense included approximately 550,000 higher share based compensation, 233,000 in increased trade show costs and 231,000 in additional sales commissions. Sequentially, SG&A expense increased by about 826,000 from Q1 due primarily to additional marketing and trade show related costs.

Net interest expense totaled 619,000 for the quarter compared to net interest income of 204,000 for the same quarter in 2007. The increase in net interest expense was primarily due to lower average balances of our cash and marketable securities combined with lower yields earned on those balances. Our net loss increased to 14.1 million for the second quarter of 2008 compared to a 11.3 million during the same quarter in 2007. The net loss for the quarter included 2.8 million in non-cash expenses centered primarily in share based compensation.

During the quarter we invested about 400,000 of capital equipment in facilities to support our business. We ended the quarter with 43 million in cash, marketable securities and restricted cash and had working capital of 34 million. Cash and security balances decreased by 13.3 million during the quarter. The increased consumption of cash during the quarter as compared to prior quarters was primarily due to increased sales activity and marketing cost, additional inventory and payment towards annual insurance premiums.

In anticipation of moving all of our manufacturing operations to our new facility and to meet forecasted sales we increased our inventory levels to about 2.8 million. This represented an increase of about $1 million from the prior quarter. We do not expect any significant increase in inventory in the near future.

I would like to now turn it back to our President and CEO, Terry Gregg.

Terry Gregg - President and Chief Executive Officer

Thanks, Jess. The second quarter of 2008 represented yet another quarter of sustained sequential growth for DexCom. As we look to the second half of 2008, we continue to see momentum building on the reimbursement front and more than ever we believe broad based reimbursement for CGM will be a key driver of increased sales going forward. We were extremely to announce last week that we have entered into a contract with Blue Cross of California. This contract will enable us to process claims on behalf of qualified patients throughout much of the Anthem Blue Cross network not just those patients residing in California. We are also pleased to learn in early July that Anthem has adopted a positive coverage decision for continuous glucose monitoring and we are in the final stages of contract negotiation with that now.

While the coverage policies adopted to-date are limited in scope we believe these policies are an important first step to achieving broad base coverage for CGM as a category. And while we are extremely about the progress we have made on the reimbursement front to ensure the long term success of our business, we believe these all initial coverage policies may actually present a short term sales challenge. To-date our CGM business has largely been a cash pay model with patients purchasing the seven system and disposable sensors with their credit card and any reimbursement received by these patients was largely on a one-off basis.

Now, we are faced with the situation where reimbursement is accelerating and patients and physicians who are aware of this are becoming much more reluctant to initiate a cash purchase knowing that reimbursement maybe just around the corner. This is not a typical and medical device situation where reimbursement is becoming more prevalent but is not universal yet. As more third-party payers issue coverage decisions and DexCom enters into contracts with these payers we expect this challenge to resolve itself.

In addition we continue to caution that even as payers adopt coverage policies and we enter into contracts, it will take time for patients and their physicians to learn about these coverage decisions demonstrate medical necessity and ultimately receive reimbursement for their CGM products. Nonetheless the recent decision by adding that reinforces our belief that other large payers will be forced to adopt coverage policies for continuous glucose monitoring or risk losing to compete in an insurance plan. As we work to define our commercial strategy for the balance of 2008 and look out to 2009 we are pleased to announce the appointment of two new members of the executive team who will be joining us in September both have worked from it previously.

[Claudia Graham] will join us as Vice President of marketing responsible for all aspects of DexCom’s marketing effort. Claudia has extensive experience in the diabetes space. I initially hired Claudia in 1999 Park Davis to lead our marketing as insulin pumps were gaining traction in adoption and reimbursement. She remained with Medtronic MiniMed post acquisition and expanded her role to Vice President, Global Therapy Access.

On the international front, [Peter Gare Hudson] will join us as Vice President of International Business Development where he will be responsible for the expansion of our business outside of the United States. Peter has spent 23 years in a number of global leadership positions with Nova Nordisk, while I was there at MiniMed, Peter ran our business in Scandinavia for five years before returning to Nova post acquisition about three years ago.

These two individuals are season professionals with their significant presence in diabetes on a global basis. I feel very fortunate they are rejoining me to help lead DexCom as we expand our business across the globe. We also announced today the departure of Rod Kellogg, our Vice President of Sales and note that on an interim basis I will assume responsibility for the DexCom sales organization and I expect to work closely with Claudia as we refine our messaging going forward.

Our mission for the balance of 2008 is simple. We must continue to educate physician and diabetes educators on the need to reduce glycemic variability and patients with the utilization of CGM. As I have stated previously we are closely evaluating the size of our sales force and as reimbursement expands we will strategically address our sales coverage and adjust accordingly.

We must refine our messaging further to educate patients on the benefits of continuous glucose monitoring. Shortly, we will be introducing a new patient centric web portal and patient tutorial to assist patients in better understanding the value of CGM. We must also continue to educate the private payer community on the role of CGM and assisting patients to better manage their glucose excursions and we must work to obtain additional coverage decisions for CGM and enter into contracts with payers to reimburse our products.

We continue to see reimbursement as one of the key challenges to achieving widespread adoption of CGM although we are extremely pleased that several significant national payers have taken the lead in adopting positive coverage decisions, we reiterate that it will take time for this and other positive coverage decisions to filter down to patients and physicians and translate into sales and it will take time for DexCom to secure contract with these payers as coverage decisions are released.

I want to move on to the discussion on the in-hospital continuous glucose monitoring system. We continue to be extremely and pleased with the rapid development of in-hospital glucose monitoring system, we recently completed yet another in-clinic human feasibility trial in which we were again able to demonstrate prospective accuracy that exceeded the ISO standard with therapeutic use. We continued to make significant advances in our membrane technologies that will allow us to block most common sources of drug related interference in the critical care setting including Acetaminophen.

We are on track to complete our development efforts for the first generation product and commence a pivotal trial before the end of 2008. We believe this would enable us to commercialize our first product in the critical care setting by the end of 2009. We remain committed to commercializing our in-hospital product through an established partner with experience in the critical care marketing.

In our last earnings call I said that we expected to complete technical and business due diligence and finalize negotiations with the chosen partner within a 90-day period. My primary motivation for this self imposed deadline was to push potential partners many of them are very large organizations accustom them to operate in glacial speed to move more rapidly if they were serious about a deal of DexCom. My statement has had the desire to effect. We are now in late stage negotiations and expect to be in a position to announce the deal by the end of this quarter or early next quarter.

Moving on to our insulin pump partnership update, we continue to make significant and substantial progress on the joint development of integrated insulin pump CGM systems with both Animas Corporations and Insulet. Our continued goal is to complete all development, clinical and regulatory efforts with Animas and be positioned to launch our first product during the summer of 2009. But, as you are well aware, the timing of the regulatory process is uncertain we would expect to combine product with Insulet to follow later in 2009. In the interim we continue to work on an informal basis with each of our insulin pump partners to promote our respective products within our target markets.

We are also pleased to report that we have filed a PMA supplement for a third generation continuous glucose monitoring system with the Food and Drug Administration. Data from our approval support trial demonstrated significant improvements in system on time and improved accuracy as compared to our current product. In addition our third generation system will include twin doors to complement our turn graph and event entry capabilities such insulin intake, (inaudible) exercise as well as configurable alarms.

Keep inline with generation alliterations we continue to make progress on our fourth generation product. We expect this design to incorporate an enhanced membrane system, we have been greater accuracy and be suited for large volume production. Additionally our fifth generation sensor is now being tested in humans in connection with our in-hospital product.

Finally, we continue to pursue a CE mark for the seven, we are currently in the midst of isolated and hope to granted a CE mark before the end of the year. This would enable us to begin conducting clinical trials in Europe later this year or very early next year.

In summary, I have now been on the job for 13 months and as I look back over than period of time I have seen the tremendous transformation in the attitude of the key opinion leaders on the benefits CGM. At the 2007 American Diabetes Association meeting CGM was described from the podium as “interesting technology, probably for the most intensively managed patient with reimbursement at least to the three away” fast forward to today and those same thought leaders are now saying CGM will be the standard of care in the next two to three years by broad segment of the diabetes population. They now understand that the value of reducing glycemic variability in patients on a daily basis is rapidly replacing the utilization of A1C as a major glucose control.

And reimbursement is here and rapidly gaining traction, we continue to create positive experiences for patients and healthcare professional almost daily hire reports of patients achieving the best ever glucose control without increasing their to hypoglycemia. With our leadership role in CGM we must stay the course in building the category so that we will ultimately gain acceptance of CGM as the best standard of care for diabetes management.

Thank you. We will now take questions.

Question-and-Answer Session

Operator

Thank you. [Operator instructions]. And first we will go to Tom Gunderson with Piper Jaffray.

Tom Gunderson

Hi, good afternoon. Just a couple quick checks here on what you said. You said inventory, you didn’t expect inventory to go up from here but since you, I think raised inventory to accommodate the move and give you a little safety stack, is it fair to assume that it might decrease in the second half, Terry?

Terry Gregg

Well, I mean that’s a goal. We would like to be in ultimately time to adjusting the time kind of manufacturing environment. We are not there yet, I mean some of the other items that we had to go forward on are some of our longer lead items, which we increased in terms of that inventory because we are not at this point given our run rate able to take complete advantage of some of our longer lead items. We had buy those in advance bulk in order to get some price considerations but also we’ll those and they translate into inventory. I don’t expect at this point to have to re-buy some of those and in the next quarter we will adjust our inventory levels accordingly. But, at this point it was -- as we transition from one facility and bring everything in-house, I didn’t want to run the risk of jeopardy of going into back orders. So, I would say we are not going to build it, we would like to kind of bring it down a bit but we are going to keep a watchful eye on it.

Tom Gunderson

Got it, thanks for that. And then, clarification on sales and marketing management, you’re going to be interim head of sales, will that fall under Claudia’s job description or do you still need ahead of US sales?

Terry Gregg

It does not fall under Claudia’s description. I have three regional sales directors in the field now, two of them have been with me and my formal life ahead of MiniMed I want to truly understand what their needs are in order to be more successful, I think we have done an outstanding job of driving the push from the key opinion leaders as evidenced by my, kind of my summary comments. I think now, its part of why I want Claudia on board in particular and staffing up a bit more in the marketing side is to move that messaging to now what we need is the patient poll and she is specs on at delivering that message, she has done it for me and for Medtronic MiniMed, I think from that standpoint we will continue look at potential candidates but I am not in any rush to go out and hire somebody. I know this business quite well, these guys have two out of three have reported to me previously and so I want to get a better feel with me in the street for a while before we make a decision to go in a different direction.

Tom Gunderson

Okay. And then, last question broader one, it ties into sort of the economy and the paying out of pocket you mentioned sort of this switch to reimbursement and less of a willingness by some to pay out of pocket when they know reimbursement might be coming soon, I understand that, have you gotten anything from the field that tells you that because the economy is tough out there, because this can be considered sort of a medical consumer product in some ways that they are either using the sensor or longer pushing the limits for using it only part of the months kind of thing any change simply because of the cost of it or is it just pretty steady as she goes from previous trends.

Terry Gregg

No, I think obviously is playing and having a bearing on some of those, certainly I will you that today our sensors are the most reliable that they have ever been in the history of this company that’s both obviously excellent news from the standpoint that our technology is best that’s on the market. The other side of that is there are using a longer, when we look at, its not uncommon now, we use to say 7 to 10 days I’m saying probably the average is north of that. So, we are not getting re-order, we do in a large portion of population when we look at re-orders we know they are using 24/7 from that standpoint, others are using them empathetically, we do have a decent business with physicians that have acquired the hardware, the durable, now quick patients on to test and allow the patients to utilize the products for a couple of weeks. So, we have got a number of different categories. But since, as you described it a bit elective, we do see a bit of that, we are asking patients once they have acquired the durable piece to spend in the case if they don’t have reimbursement upwards $2,000 and I think that they are looking at the economy and their durable spending just like anybody else, I think as we move more towards the reimbursement model their resistance to that diminishes accordingly. But there are significant group of people who regardless of the economy way they have got to utilize the product 24/7 and that value proposition is something that in terms of messaging tone that there is a reason that they do that and they have found great benefit to justify their utilization. Obviously we have got to message that more appropriately to the rest of the diabetes population.

Tom Gunderson

Got it, thank you.

Operator

And moving on from Cowen we will go to the Sara Michelmore.

Sara Michelmore

Yes, thank you. Terry you talked a little bit about sales and marketing staff, can you talk about to the organization that focuses some of these reimbursement issues whether the focus involved in contracting or educating payers, can you just describe the evolution there in terms of the staffing?

Terry Gregg

Sure. Let’s look at it from the first part and that’s the external grew that reports Steve Pacelli, they are still out in the field, they are staffed by three individuals who are professional in the managed care arena and they continued to call on the third-party payer system they are the ones get to the point of the contract and then of course, obviously Steve’s group internal, the inside group we have here negotiate the terms of the contract. On the reimbursement side that’s one if you look at the increase in expenses on the sales side we really flow that through and we have had to increase the staffing on that quite frankly on the reimbursement side as we move to more contracting we are going to have to continue to be sure that we have adequate staff remove that whole distribution cycle from as an example from one of our DME suppliers once we have a contract in place then these patients still have to undergo prior authorization. But that is done by us. So, that means that paperwork comes in to us, the group inside has to process that paperwork back to the managed care provider and once we then have prior authorization we can ship product going that will get paid from the third-party payer and 45 day to 60 day kind of timeframe. But that does require a back office support system that we are building. None of that existed here. A year ago none of it existed. So, we are building that as part of the overall organizational structure as we move forward commercially.

Sara Michelmore

Okay. And in terms of the coverage policies I guess, it does seem that a lot of these first past coverage policies are for infrequent or perhaps intermittent use of the devices and I am just wondering what you think its going to take those policies to the next level in terms of broader coverage and continue with uses that devices were initially conceived to be used?

Terry Gregg

Well, I don’t think they are intermittent, Sara, I would classify them, they have specific policies for continuous use and actually if you are to talk about intermittent use there is another whole diagnostic capability of these product that we could obviously explore with the physician population and certainly even in other diabetes related, gestational diabetes as an example, things that we have actually engaged in clinical trails on that, I really haven’t addressed during this call. But as we look at the types of coverage it has comments like recurring hypoglycemia and things of that nature I would say that when we look at data point our patients and every patients effected with diabetes have episodes of recurring hypoglycemia established by the policies. So, I think although those are the target because they are the most achieved in terms of the implications you also notice that none of the coverage decisions have anything to do or any criteria related at this point to A1C. so, its quite a broad policy what we have to do is try to make the physicians understand we done well at the key opinion leaders, we now need to message to that next tier of healthcare professional about the benefits of it as far as the policy coverage there is ample to cover very large portion of the diabetes population.

Sara Michelmore

And you talked a little bit about international business can you just remind us what your latest thoughts are and how you plan to develop that business space during that you’re not conceiving doing a large direct build out, but if you could just give us a thought of where you head?

Terry Gregg

Sure. Obviously Peter has worked for me in the past, who ran our Scandinavian operations and is broad based throughout Europe, Middle East and Africa which is domain for Nova Nordisk. So, what we intend to do right now we are looking at in two different ways one do something what they are very large multinational company, who already has a number of feed on the street and those discussions are ongoing and you can think of who they are in that world. Or secondly, we have approached now, I think the number is somewhere close to a 100 different distributors throughout the world that have made enquiry about the opportunities to distribute our products in a wide domain obviously we are in those discussions. There is a large meeting occurring next month in Rome, European Association for the study of diabetes, Peter and I and others are pretty much booked solid with a number of potential distributors and also engaged with key physician in each of those countries that already have some relationship with the distributor, they have made introductions. So, we will go about it one or other way of combination of both but we are not going to hire a direct sales force.

Sara Michelmore

Great. And it sounds like we could get some visibility and what you plan to be there by the end of the year?

Terry Gregg

It hinges on our successful migration through this ISO certification and when we say we are literally in the middle of it, it started yesterday has been tended to end tomorrow. So, assuming we pass that then we would apply for CE mark, we would get that hopefully in the fourth quarter and begin putting in the mechanism in place which allows us then the market approval to go into the EU, obviously we are looking at only a handful of countries in EU that we believe where reimbursement is such that would necessitate or be worthwhile for us to enter in the first year. We are talking typically those would be the UK obviously, Germany, France, The Netherlands, possibly some of the Scandinavian countries.

Sara Michelmore

Great thank you, Terry.

Operator

And moving on we will go to Mimi Pham with JMP Securities.

Mimi Pham

Hi, good afternoon. Regarding [IBT] are you seeing them in the top IBT centers that you’re in during the second quarter and can give us sense of their helping and developing the US market and convert additional thought leaders to CGM?

Terry Gregg

Mainly they have not had much of a presence, they have no sales force, they are using Smiths to distribute the product and some of the traditional DME suppliers. But, we have not seen as active and effort on their part, I talked physician its very spotty as to their availability of product and so I think they have done some target introduction that hopefully has a -- it always, as I have always cautioned everyone going from an R&D environment to a production environment is never linear and I think that most companies stumble a little bit when they move from R&D to a production. So, they want to limit their exposure, I think the other and I can’t for IBT but I was going to say that product was originally attempted to be filed with the FDA back in 2003, it probably needs some upgrade to their product in order to be more competitive with the two products that are currently in the market.

Mimi Pham

Okay. And then, the current coverage decisions being somewhat in scope, can you give us your estimate of what percent of the diabetics in US you feel that they get back the current coverage criteria?

Terry Gregg

Well, I mean I would tell you that based on the data that I have seen wide variety of clinical trials north of 95% and if you look at how many patients go below 70 on a daily basis, probably most patients. How many go about 250? Most patients. So, its wide continuing a problem with A1C as an example as a target marker patients will attempt to do their best efforts to get below 7 because that’s what ADA has established as a goal, when they get there and still running 40 to 400 so unfortunately as they try to drive their A1C down to an acceptable level, they also increase the risk of hyperglycemia because the band just moves down. And so, I would say that an over running majority of patient would qualify under the condition set forth by these coverage decisions by the national payers.

Mimi Pham

Okay, I’m sorry but I thought it was limited, but it sounds like --?0

Terry Gregg

I don’t think its limited at all, I think its just the office that, I’m very comfortable with the coverage decisions that have been issued, I think they’re great they’re actually more expansive than I would have estimated and predicted earlier, when I said I thought the first one, first coverage decision would come in Q4 ‘08 and I said back even in January that I thought it would be very limited and in fact, they are much more expenses then I thought.

Mimi Pham

And, then the last question that three day our [STS3] having yet approved to the seven, have you actually gone back to each of them to see if they are interested in the seven and then is it something where you know as you get more national coverage you have their contact information go back to and reference to them to see if they are just in buying seven?

Terry Gregg

We reached out to them to the extent that we provided some upgrade opportunities for them, I would say at this point if they haven’t upgraded, that be their last interest potentially they have migrated to possible Medtronic with the pump or that they are now at this point. We always have the opportunity to go back to them, I think given more right now we need to focus more on new patients then the remaining patients are former STS3 patients.

Mimi Pham

Okay, thank you very much.

Operator

And moving on, we’ll go to Bill Plovanic with Canaccord Adams.

Bill Plovanic

Great, thank you good evening.

Terry Gregg

Did you change your name Bill.

Bill Plovanic

Off course not, okay. Just in terms of coverage that you gotten a lot of coverage thus far much faster than expected or there any major payers or any surprises you could see in the back half of this year. I know that you have been saying that I think by the end of next year kind of everything will be in place, but where do you kind of think will be at the end of this year and maybe mid next year, just saying milestones by the majors payers coming?

Terry Gregg

Yeah, we know we’re under going test assessment, couple of the national payers, assuming that it gets through the process. I would expect at least one more this year, as within the last five months of the year. I could be surprised to listen I don’t have the right crystal ball, and earlier this year I said, first one in Q4, we got two now. So, I think everything is just happening a bit faster then we predicted because I think the number one, the numbers of claims being process has increased dramatically at those payers, I think if those payers have also had to go to external review, they are spending money for those external reviews and the last to lot more those reviews, than ever one that causing them to take a second thoughts, I think you could probably see another one for the end of the year.

Bill Plovanic

Okay. And then, any thoughts on the JDRF data that if you’re going to be coming out of ADE this week or be the EASD in Rome, what thought you may have on that?

Terry Gregg

Yeah, I’m sure that first time you’re going to heard from the podium is going to be EASD I don’t hear anything from JDRF at this point, but there will be an early announcement that ADE this week. They are very tight lipped about the results I have talked some of the trial investigators and they are not even given me a link or a nod as to (inaudible). We do know that in terms of looking at time spent in target zone that we’re very happy with that, that’s the secondary endpoint and we don’t have optics on the primary endpoint. Other than that it’s an interesting development though because the more we talk about A1C the less, universally accepted it is in fact, and we are going through now an issue with the scientist who don’t want to use A1C at all they want to now glucose exposure and trying to come up with yet a new number. So, I don’t know how that’s all going to teeth out in terms of utilization of A1C anyhow though, I think its more press, it’s a lot more important. I think you have seen the coverage decisions that are being made today by the reduction of time spent in hypoglycemia and more time spent in Uglycemia are target zone.

Bill Plovanic

Terry. I am sorry and then last year’s, you talk about the Gen4 being more manufacturable does that mean that you would expect the gross margins on that product in more of the 75% or is that how you get to a 75% gross margin at scale.

Terry Gregg

That is certainly how we get to robust gross margins, I don’t want to put an absolute number on it because we are not there yet. But, looking at what we have predicted, the folks we have got that we brought over actually from the buyer side organization now running our manufacturing environment certainly we have got to move. So, that type of manufacturing in order to achieve those kinds of gross margin. And this is the way we’re going out, I mentioned earlier. We have never seen such reliable product that we have right now and the result, why is that, that’s because we’re going to these manufacturing upgrades as we speak in anticipation never happens over and we always do it sequentially and that’s what we are experiencing sale, anytime we can get higher reliability that directly translates back into our cogs and the whole process, so that’s flexible.

Operator

And, moving on from Steve Ogilvie with Thinkpanmure.

Steve Ogilvie

Hi, guys. Just a couple of questions. First, just kind of wondering if the JDRF data is in, as we hope, as you hope what DexCom response for if there is some sort of contingency plan and then the second question would be if could talk about headcount and how that’s changed in the 13 months since you have been in-charge and looking forward if you see any major dynamics, just there? Thanks.

Terry Gregg

Well, contingency with regards to JDRF no I think that if you look at the world of publication not only from my aspect from MiniMed, from Animas there is overwhelming data to suggest the improvement in glucose control as a result from time spent improvement in target zone from hypoglycemia and hyperglycemia and I would surprised if the outcome of the JDRF trial didn’t reinforce that they are dozens of studies that have already demonstrated. But, I think the real question on the JDRF trial that has been ventured about is where they reach the primary end point of a 0.5 reduction in A1C and we have the history so to speak of the star one trial from MiniMed in which globally they did not reach their primary end point but I think if you really tease that data and look at patients that have complied new supplier that was significantly positive if you look at the star two trial which was a precursor to their star three trial again demonstrating with proper patients election and representative use, the star two trial for MiniMed was also significantly positive and we don’t have the results from the star three trial yet. So I don’t know what the outcome of the working a day one see but even if they don’t need primary end point, I am not sure that matters any more. They didn’t have when the JDRF trial was designed, we still thought A1C was a goal standard and that was something because we didn’t have any other standard, with the outcome of CGM we now find A1C as a terrible surrogate marker. So I am not sure how valid it is we are participating in a number of drug trials with our sensor that is still using A1C as a criteria because that what’s FDA utilizes for effectiveness, but we [soaks] one sensor data that demonstrate reduction in glycemic variability because they believe that regardless of their outcome as on A1C, if they show reduction and glycemic variability that’s going to be more powerful than reduction in A1C because of its lack of consistency.

Steve Ogilvie

And if I could just stall for quick, do you think CMS will be able to look beyond A1C like you are speaking up?

Terry Gregg

Yeah I think so, we have to do that trial as that’s age related population that we haven’t what is interesting and CMS issued a decision with respect to they won’t pay for two hospitals for lack of good glucose control; because they recognize that glucose control is important and that’s have been a recent decision on their part and we need to understand that better; as what it relates to us but certainly its obvious on a global prospective that CMS understand that number one the value of good glucose control on that setting, and the in-hospital setting which is important and what it means to encourage the hospital sectors to pay more close attention to that which goes well in terms of the efforts that we have got in the hospital sector.

Steve Ogilvie

I am sorry, then just quickly on headcount? Thanks.

Terry Gregg

I mean the bulk of the headcount increase quite frankly has been temporary on the manufacturing side. So, we are gauging that, we really don’t have tremendous increase in terms of total number of bodies. I think we have been selective, but we had deficiencies, Steve; we improved an upped in some cases but particularly in the engineering group, I would say we’ve added some bodies then also in terms of the quality group. As we have moved to ISO standards as an organization, we had to implement better quality systems and that didn’t exist before I got here. So, once we got it to the point what we believe we can pass an ISO certification, we got to have sustainability of those processes and validation. So, that would be the primary area. The other area expects to I want to add and the marketing area one or two more bodies than we have today, which today we have one. So, I think that from that starting standpoint, but we are pretty well set other than that. Again, want to look at the sales force that we get greater reimbursement coverage. You know, right now we do not have tremendous geographical coverage. We are expanding beyond the hundred key target plans, but that’s not enough, and we are leveraging relationships with both Animus and Insulet. Animas has got 200 people in the field and the Insulet at a 100, but that’s going to pump for all then we still think them the eyes are extremely important to us so as we need we will try to leverage where we can, but if it justifies expansion not a huge number, but we will begin looking at in to the territories and what they are doing and are they able to do more.

Operator

And our final question will come from Suraj Kalia with Sanders Morris Harris.

Suraj Kalia

Hi guys.

Terry Gregg

Hi Suraj.

Suraj Kalia

Can we just given that part me I jumped a little later on the call, so if you have answered those my apologies, but just given the macro economic environment and if we are doing the math right, given the cash burn in the current securities available for sale on the balance sheet. Can you just help us with what kind of exposure do you all have for those securities and also as a subset of that question. How do you look upon, you know, potential cash raise, given this environment two quarters down the line?

Terry Gregg

Well, I am going to ask Jess talk about the exposure on the securities, which I think we have always been ultraconservative from that standpoint, but I can’t comment obviously on any financing situations we review that with the Board on a literally monthly basis. I would just say this and the discussions that we have previously had with the hospital sector; that will and the discussions we are having now and in terms of the, I would say we are in the very late stage negotiations. There is an upfront payment for exclusivity in that which will impact us in a positive way from a cash infusion secondarily the condition there are R&D related payments that, when you look at the expenses that in the second quarter and even in the first quarter. We are spending more on the R&D side quiet frankly on the hospital sector, as we pushed to get that product in to a position in order to negotiated definitive contract. Now I shall and both of those I think there are some mitigation of that. Looking into just anything else on debt securities, I mean they are very stake we don’t do anything in a risky on our securities that we use or bet best done.

Jess Roper

Yeah that’s right just to clarify, we have a very short term portfolio and our philosophy is to preserve our cash and capital not try to maximize our yields on those, we haven’t had any downgrades in securities and we don’t hold any auction rate securities, or have any exposure on that side.

Suraj Kalia

Okay fair enough, and Terry on the JDRF trail, you know given that are multiple CGM systems used you know free style DexCom, you are not the Medtronic system; how do you look up on the data as an aggregate. When you use different systems with difference specificities, sensitivities you know, let’s see you get a certain aggregate data set. Is there any subset analysis plans specifically related to the DexCom data. You know, because the overall might may or may not give you a positive picture and then you know everyone was going to be slicing and dicing the data and looking separately, how would you what’s the thought process in terms of looking at data specifically for DexCom or is that even planned at all?

Terry Gregg

Well I mean, let me put at this way. We have asked for that data to be segregated out at the time when they have concluded with it so that we can do exactly as you are suggesting. We don’t own that trial. All we did was provide product as did MiniMed and Abott so we don’t have the authority under that contractual relationship with JDRF to demand that. Again, we have asked I think in an area of cooperation hopefully that they will grant us that request as I am sure MiniMed and Abott would like as well because there are as you stated there is big delta between the different technologies and obviously if there were some reason the other two systems weren’t performing as well as ours. We would want to be able to stand on our own. Obviously, we are at seven days and the others are less frequent. One of the things that we are doing really attributes that we have that we have a grade with JDRF, we have the ability to look at on time, that time the patients actually look at their receiver screen. And the other companies don’t have that ability. So, hopefully our quidpro (ph) type of course we will that information to JDRF, they are download software. So, I’m hoping that we will be able to download that appropriately, but no guarantees.

Steve Ogilvie

And finally, how would you quantify or maybe you’ll have already mentioned this. How would you’ll quantify your relationship with Insulet and Animas, specifically related to this quarter and what do you see in the next two quarters?

Terry Gregg

Well, I -- in both of them I only have high regard and my comments on both companies are tremendous I know in particular the good folks at Animas, we need worth weekly either end person or telephonically, teams are highly integrated and driving this product for they’ve got lot more resources to bear on this. And the Insulet folks again were actively engaged with Insulet, as well. They had obviously as they moved to utilize the omni pod for our fertility drug with fairing labs. They were concentrated in that particular endeavor and filed on separate 510K for that. So, I think there was a little bit of resource allocation but we are actively talking to them as well. I mean we talked to JDRF in combination with probably those entities about an artificial pancreas program that Insulet is interested in as well as Animas, and both of them used our sensors part of that effort. In both relationships, high degree of complements.

Operator

And that does conclude our question and answer session. Mr. Gregg, I’ll turn the call back to you for any additional or closing comments.

Terry Gregg

Sure, thank you, operator. And thanks for joining us today. I just want to point out as we look at where we’ve been, where we are going. We’ve really had an opportunity I think to change the way in which folks 3-diabetes today. We’ve done and the industry has done a good job key opinion leaders and now we need to take that to the next level of prescribers beyond just (inaudible) world, internal medicine treats a large portion of this diabetes population and that’s obviously a target goal. We talked about you know, the additions that we’ve added. We need to improve our marketing, messaging and have Claudia to do that globally, we need to move into more aggressive way and Peter will help us in that domain as well as others. But really focused on what we have accomplished based on the expenditures that we have done in the last year since I’ve been on board into our third generation filed with the FDA with clinical trial. We already have the best technology out there. I think more importantly as I look at the hospital censoring our effort there. We have accomplished so much when I came on board, it was an R&D project and here we are planning a pivotal trial have been in over a 100 patients now. And we’ve really done that on quite a limited budget. If you look at it from a global standpoint, we are really two companies. We’ve leveraged our technology from both the ambulatory as well as the IBBG and accomplished more than other companies with far greater resources, that’s why we are deep in these negotiations particularly on the hospital side. So, I’m quite proud of where we are, I’m quite proud of the accomplishments that we have made in this 13 months that I’ve been on board. So, thanks for your support and look forward to the future. Thank you, operator.

Operator

And thank you. That will conclude today’s conference. We’d like to thank you all for your participation.

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