DexCom, Inc. (DXCM) CEO Kevin Sayer on Q1 2019 Results - Earnings Call Transcript

|
About: DexCom, Inc. (DXCM)
by: SA Transcripts
Subscribers Only
Earning Call Audio

DexCom, Inc. (NASDAQ:DXCM) Q1 2019 Results Conference Call May 1, 2019 4:30 PM ET

Company Participants

Matt Dolan - Vice President, Corporate Development

Kevin Sayer - Chairman, President and Chief Executive Officer

Quentin Blackford - Executive Vice President and Chief Financial Officer

Steve Pacelli - Executive Vice President of Strategy and Corporate Development

Conference Call Participants

Jason Bradford - Raymond James

Robbie Marcus - JP Morgan

Danielle Antalffy - Leerink

J. P. McKim - Piper Jaffray

David Lewis - Morgan Stanley

Joanne Wuensch - BMO Capital Markets

Margaret Kaczor - William Blair

Jeff Johnson - Baird

Ryan Blicker - Cowen

Chris Pasquale - Guggenheim

Raj Denhoy - Jefferies

Ravi Misra - Berenberg Capital

Matt Taylor - UBS

Steve Lichtman - Oppenheimer

Suraj Kalia - Northland Securities

Operator

Welcome to the DexCom First Quarter 2019 Earnings Release Conference Call. My name is Adrienne and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded.

I'll now turn the call over to Matt Dolan. Matt Dolan you may begin.

Matt Dolan

Thank you, operator, and welcome to DexCom's first quarter 2019 earnings call. Our agenda begin with Kevin Sayer, DexCom's Chairman, President, and CEO, who will provide a summary of the quarter, followed by a financial review and outlook from Quentin Blackford, our Executive Vice President and CFO; and then a strategic update from Steve Pacelli, our Executive Vice President of Strategy and Corporate Development.

Following our prepared remarks, we will open up the call for your questions. At that time, we ask the analysts to limit themselves to one question and a follow-up so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our first quarter performance on the DexCom Investor Relations website on the Events and Presentations page.

With that, let's review our Safe Harbor. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs and expectations about future event, strategies, competition, products, operating plans and performance.

All forward-looking statements included in this presentation are made as of the date hereof, based on information currently available to DexCom, and are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements.

The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's Annual Report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results.

Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash based results. Unless otherwise noted all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for our results or superior to results prepared in accordance with GAAP.

Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

Now, I will turn it over to Kevin.

Kevin Sayer

Thank you Matt, and thank you everyone for joining us. We are off to a great start in 2019 with much of the momentum that we experienced in 2018, continuing into our first quarter. First quarter revenues grew to $280 million, a 52% increase over the first quarter of 2018. Once again, this strong performance was broad based, as increased volumes in both U.S. and OUS businesses drove results above our expectations, even as we absorb the pricing headwinds that we have anticipated.

We've spent years developing our innovative technology and demonstrating real world clinical outcomes. And as awareness build, demand for DexCom CGM is very strong among both new and existing patients. We remain confident that the Company is well positioned to drive toward a long-term target particularly as we expand the rollout of G6 and improve access to CGM. With this growing demand in mind, we're on track to meet our goal of doubling our G6 capacity by the end of 2019.

From a cost perspective, we're demonstrating good expense control with revenue growth outpacing the increase in operating expense growth by more than two times. We continue to believe that patient outcomes demonstrate the true value of a CGM. In the first quarter, we showed real world data that demonstrates the effectiveness of our Urgent Low Soon Alert in the G6, which provides an actionable warning in advance on a dangerous hypoglycemia low, not only have we seen a further decrease in hypoglycemia among G6 users with this feature, but this has been achieved regardless of the users frequency of screened used. We also show the correlation between users of DexCom share and follow apps and better time arrange for children and adolescents with diabetes, once again highlighting the importance of this feature to our user base.

As these outcomes such as these that have contributed to DexCom’s great reputation among clinicians and allow us to capitalize on the increasing global awareness around CGM Technology, the kind of demand we’re experiencing can also bring certain challenges. This is especially the case in the first quarter of every year as we must reconfirm benefits and document clinical necessity for each patient. The process can be burden sometimes with our teams going back and forth with clinicians and payers on the patients’ behalf.

To our customers, we understand the fundamental importance of DexCom’s CGM in your lives and are working around the clock to make sure that you are cared for. We saw improvement in our ability to meet demand and serve our customers. As the quarter progress, I believe that the initiatives that we introduced to expand our customer support infrastructure are progressing well with several areas showing meaningful productivity improvements. Considering the significant level of demand of DexCom’s CGM and the strength of our first quarter, we're very pleased to be able to increase our revenue outlook for 2019.

I will now turn the call over to Quentin who will provide detail on this outlook as well as a review of our financials.

Quentin Blackford

Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics that I discussed today will be presented on a non-GAAP basis in reconciliations to GAAP can be found that today's earnings release as well as on our IR website.

Today, we reported worldwide revenue of $280.5 million for the first quarter of 2019 compared to $184.4 million for the same quarter in 2018, representing growth of 52% on a reporting basis and 53% on a constant currency basis or $96 million of absolute dollar growth. Clearly, the growing awareness for CGM continued into the New Year. Geographically, U.S. and international revenues both demonstrated strong growth of 35% and 79% respectively over the first quarter of 2018.

International revenues grew 86% excluding the impact of currency at least 25% of total company revenues in the first quarter, representing a high watermark for the business and tracking towards the long-term expectations that we highlighted at our Investor Day late last year. We have seen continued success and shifting to the pharmacy channel consisting with our expectations at the start of the year, and we will continue to prioritize this initiative as we seek to drive improved access to DexCom’s CGM

Our first quarter gross profit was $168.8 million or 60.2% of sales. The sequential decline from the fourth quarter of 2018 was consistent with what we have seen in prior years. Relative to the first quarter of 2018, gross Margin was negatively impacted by incremental investments to scale infrastructure, as we drive significant capacity expansion in 2019 and the continued shift in our mix towards the U.S. pharmacy and international business. As demand continues to exceed expectations, we're accelerating investments to increase capacity which is putting some additional pressure on gross margins. We now expect gross margins for the year of 64% to 65% as we speed up our capacity ramp to meet the growing demand.

We remain confident in our ability to bring costs out of the system as the year progresses and over the long-term. Beginning with the introduction of our new G6 transmitter and continued implementation of automation into the manufacturing process which will allow us to exit the year with gross margins approaching 70%. These improvements provided us with strategic flexibility to be proactive with payers and to navigate future uncertainties in the pricing environment as we continue to push for greater access to CGM.

Operating expenses were a $176.4 million for the first quarter 2019 compared to a $147.6 million in the same period last year. This reflects an increase of 20% year over year and compares favorably to our 52% revenue growth in the quarter, resulting in significant operating expense leverage from the prior year. Operating loss was $7.6 million in the first quarter of 2019 compared to $28.7 million in the same quarter of 2018. Our improved operational discipline resulted in a 1290 basis point improvement in operating margins from the prior year.

Adjusted EBITDA was $26.1 million or 9.3% of revenue for the first quarter compared to $4.5 million or 2.4% of revenue for the first quarter of 2018. As we said throughout 2018, we believe that there's an opportunity to drive significant operating leverage toward our long-term target in both our first quarter adjusted EBITDA and operating margin reflect great progress towards these goals. However, we are not pursuing this leverage at the expense of the growth in our business, we remain confident in the opportunity that lies ahead, not only for our core business, but also the application of CGM technology to new markets.

We will continue to invest in these initiatives, our R&D pipeline and other strategic opportunities in order to maximize DexCom's long-term potential. Our net loss was $4.6 million or $0.05 per share and our balance sheet remains strong having ended the quarter with approximately $1.4 billion in cash and equivalents and no borrowing against our $200 million revolving line of credit. As mentioned, we continue to prioritize investment into our capacity expansion initiatives and automation of manufacturing which will add to $39 million of CapEx in the first quarter.

Looking at the remainder of the year, given the strength of our first quarter performance and the growing demand that we are seeing for DexCom real-time CGM, we are increasing our full-year revenue expectations by $75 million and now anticipate total revenue of approximately $1.25 billion to $1.3 billion for the year, reflecting reported growth of 21% to 26%. As I mentioned previously, we anticipate full year gross margins to approximate 64% to 65% for 2019 showing meaningful improvement in the back half of the year as we look to exit the year approaching 70%.

We now expect operating margins of approximately 6% and remain comfortable with our original target of adjusted EBITDA margins of approximately 18%. Our restructuring efforts associated with setting up operations in the Philippines are progressing well with nearly 200 employees now on the ground in Manila. We've been extremely pleased with early indications demonstrating significant efficiency and scale and benefits. We now expect the restructuring related cost to come in at approximately $15 to $20 million for the year with the majority in the first half and now slightly below our original estimate.

With that, I will now turn the call over to Steve for a strategic update.

Steve Pacelli

Thank you, Quentin. As our first quarter performance indicates global awareness and demand for real time CGM continues to increase dramatically, not only in the U.S., but also in international markets like Germany, the UK and Australia. In February, DexCom stood front in center at the annual Advanced Technologies and Treatments for Diabetes or ATTD conference with DexCom products utilized in numerous clinical studies and presentations from key leaders in the diabetes community.

As anyone in attendance can attest, there is genuine excitement toward our efforts around decision support, app enhancement and of course the G6 platform. The global rollout of G6 remained a key strategic objective in 2019. As Kevin noted, we are doubling G6 capacity by the end of 2019. Given the level of performance and ease-of-use that the G6 system brings, we expect G6 to continue to function as a platform product for DexCom for many years to come, even in certain markets beyond the launch of our next gen G7 product.

Yet as we push the rollout in production of G6, our teams are also making significant progress toward finalizing G7 and we remain on track for a late 2020 or early 2021 initial launch. As a reminder, G7 will be an entirely new sense platform for DexCom, one that meets the iCGM standards and further extends our leadership with a significantly reduced form factor and extended wear in a fully disposable one-piece wearable. Strong therapeutic cost saving outcomes utilizing CGM continued to present themselves across the healthcare landscape.

For several quarters, we have discussed CGM usage in non-intensive type II diabetes, pre-diabetes, gestational diabetes, broad potential deployment in the hospital and application in overall wellness. Well, there is now time for an increased focus and investment in these areas particularly since we know that these opportunities will require completely different business models and distribution channels.

In order to leave this effort, I'm pleased to announce that we have appointed in Matt Dolan, as General Manager of New Markets. As many of you are already aware, there is involvement with our investor relations and corporate development efforts. Matt is a great leader and we are confident that he and his dedicated team are the right people to guide these key growth initiatives for DexCom.

Coming back to our core business, we have proven ourselves to be early advocates of the principle of interoperability and patient choice, having established partnerships with multiple insulin delivery players, and we will continue to leverage the iCGM designation. We are seeing significant progress from this collaboration and look forward to the launch of a few of these connected products over the 12 months. We are especially prone for our patients as these innovative products stand ready to minimize the burden of diabetes management and we are proud that DexCom stands at the center of this progress.

With that, I will pass it back to Kevin.

Kevin Sayer

Thanks Steve. This is obviously an exciting to work at DexCom not only are we working hard to bring our technology to the increasing number of people with diabetes who see the benefit of real-time CGM, but we are very actively exploring possible applications of our sensor technology to additional populations. My personal expectations for our new markets group are very high. We need together as much clinical and cost-based evidence as possible with our G6 platforms so that we are truly prepared to attack these markets in a big way with C7.

In the meantime, we are capitalizing on the continued momentum in our core business, leading to the significant increase in our annual revenue guidance. With this success, we have put everybody on the DexCom team to a lot in the first quarter from the commercial team, to manufacturing, to customer support, to R&D and beyond. We know you’re working incredibly high and we thank you.

In summary, we are very pleased with the DexCom's performance to start the year and believe that we are well positioned for another great year of revenue growth, technology advancement and increasing comparability.

I would now like to open up the call up for Q&A. Matt?

Matt Dolan

Thank you, Kevin. As a reminder, we ask our audience to limit themselves to only one question and one follow-up. Operator?

Question-and-Answer Session

Operator

Thank you. We will now being the question-and-answer session. [Operator Instructions] Our first question comes from Jason Bradford from Raymond James. Your line is open.

Jason Bradford

So, I'll ask my question and related follow-up upfront here. First Quentin just to imply the initial guidance was about a 100 million in assumed pricing headwinds due to the mix in the pharmacy international et cetera. Is that what still baked into the new guidance? And then second, in terms of the move to the pharmacy, I realize the inherent in benefits for existing users migrating to what should be a lower cost setting, but receiver growth continues to be quite strong. So my question is. Do you think the move to the pharmacy is stimulated incremental growth in new patient adds? And any color that you would provide around the pharmacy dynamic in the quarter would be great?

Quentin Blackford

So, yes, Jason, to your points the 100 million that we talked about on the initial call for the year setting their original expectations that's still consistent with how we think about it over the course of the year, so no change there. Obviously, we've got a consorted effort in place to move to the pharmacy channel and that's playing out about just like we anticipated that it would. Your point on new patient growth, I am certain that you know the pharmacy channel makes access more easy and more convenient for folks, I'm certain that's a part of the driver. And when you look at the overall growth in the Company, there's no question that the primary driver of our growth is new patient volume. So I am sure it’s connected.

Operator

And our next question comes from Travis Steed from Bank of America. Your line is open.

Travis Steed

Just looking at your Q1 revenue, it seems typical seasonality is just 20% of Q1 for the full year. Just trying to think about that suggests about a 100 million more than you're guiding to for 2019. So is that just the typical conservatism that you have? Or is there anything else we should consider as we model our 2019?

Kevin Sayer

I think the right way to think about it and I know we talked about 20% back on the last call, see a few things came through in the quarter. We talked about the strength in the fourth quarter being really driven by new patient additions that came in late in the quarter, and if you recall at that point time, we had shared that we expected those folks may be back with their next reorder really early in the second quarter. We saw a lot of that end up coming through in the month of March, was a bit ahead of our expectation a great signal and great outcome, but at the end of the day that was a bit of the upside surprise.

I think the other thing to keep in mind just around seasonality is that, as we continue to move more into the pharmacy channel and as we continue to see the OUS business become a bigger part of the overall business and as that Medicare continues to grow faster than the commercial business, all of those have very different seasonal patterns to them, generally which might have more revenue early in the year.

So, we're trying to be thoughtful around all of those different dynamics in the business as we set expectations for the full year. Certainly not trying to signal anything, we know what your math would indicate, that you laid out there, but we're just being mindful of some of the shifts in the mix of the business.

Travis Steed

And then, I want to make sure I heard you correctly, you're exiting the year with 70% roughly gross margin. Just kind of give us a little bit more info on how you're going to get there? And is that sustainable into next year? And also does it give you little bit more flexibility on pricing, if needed?

Kevin Sayer

Yes. So, I think this is -- the 70% ability to get into that number by the end of year is in line with the plan that we've always had around our gross margin progression into the future. You go back to our investor day and we laid out the path that arguably could take us up north to 70% and then you have the headwinds that continue to play in with the revenue per patient, mix challenges that we envision as we continue to move into the pharmacy or OUS becomes more significant. So there's nothing out of the ordinary here its right in line with what we plan to be able to do. The big enabler for us and we talked about this lower-cost design transmitter for some time now. You're going to see that start to play through in the fourth quarter.

So the teams have done an incredible job of designing cost out of the system. We will start to produce that in the back half of the year. You'll actually see us start to get produced in the third quarter, that'll get hung up in inventory a bit, we will start to sell through it in the fourth quarter and the benefit will start to play through. So you know it's in line with the plans that we had. I think in terms of next year, I would just tell you, let's stick in the mid 60s at this point in time, I think it absolutely gives the flexibility to continue to navigate the pricing environment and do what we need to do that ultimately generate the most significant growth of the Company. But it’s these kind of things that give us those strategic opportunity to be flexible and how we think about positioning ourselves.

Operator

And our next question comes from Robbie Marcus with JP Morgan.

Robbie Marcus

Congrats on a great quarter, thanks for taking the question. I want to address a question that's been impacting the stock and clearly top of mind for investors lately and that's the potential intending approval of your competitors Libre 2.0 product. And there is a lot of questions out there about. What is it looked like? Does it get iCGM? And how those alerts and alarms will compare as a product versus G6 today and eventually G7? So I'd love to get your thoughts here and any clarity or insight you could give us would be as much appreciated.

Kevin Sayer

Robbie, this is Kevin. I’ll take that one. Let's go back a bit it was a about a year-ago at this time that we talked about the iCGM standalone for the first time, and we remain very bullish on the fact the FDA did give us guidance and standards by which we can develop products in the future that will be safe and in the best interest of our patients and we stand by that. We wanted the standards and guidance for years. So, we know what the bar is to shoot at and we actively look at that.

We never assumed when we started this process that we would be the only iCGM company in the world that eventually others would have their game to get that approval and in the event that have it, does get approval on, on the iCGM standards that they've obviously provided enough clinical evidence to do so with the FDA. If you look at back at the history of our company and we are reminiscing about this today as we’re preparing for the call. Ever since I've been here, we've always had a competitive offering from another company in the field and they claim to be as good as a DexCom.

But you'll notice the claims that those companies have always been aware as good as the DexCom never as good as somebody else aware as good as a DexCom. Realize used in the field is proven over and over again and our technology leads the way. Another actual real world clinical performance on body and on patients has always been the best and has always surprising given us the position to do that.

We are very confident that our product will remain top of the line and will do and it will be extremely well received. We have not seen a lot of Libre 2 in Europe where it’s been launched. So we don’t have a lot of answers and we're not going to speak for the characteristics of their products. We know a lot about ours. We have enhancements coming for G6 over the course of the year that we're making the even better product offerings and overtime as we offer decision support. And other things for our patients, we intend to have the best experience either the patient can possibly have with G6.

When we move to G7 and its size advantage of the body wearable, the one piece component but we don’t have to put a transmitter in the system anymore, the lightweight nature of it and many of you know I -- where the G7 quite a bit now as I've always been a sensor snob. It is a patient experience it's a bigger leap than from G5 to G6, it's been in the -- in our previous history. So, we know that product will be widely competitive and have all the features and benefits of a current G6 system and more. So, we -- our pipeline is fabulous, it's a great market opportunity and there is room for a number of participants and number of products not just one.

Robbie Marcus

That's really clear. Appreciate the thoughts, Kevin. And then just a follow-up, maybe not too far off a bit. But can you give us some flavor of what your discussions with payers are like? Are the payers focused on cost avoidance of diabetes adverse events and improving patient outcomes? Or are they just simply focused on moving reimbursement to a lowest cost denominator here?

Kevin Sayer

It depends on the meeting and it depends on the payer. We've been very successful in our payer discussions over the past several months and I had wins on numerous payer discussions for example. Cigna just gave us pharmacy coverage and pharmacy benefit. We do not issue press releases every time we have a win because that's our job that's normal course of business for us. But we have great coverage here and some local payers in pharmacy coverage. We do spend a lot of time discussing outcomes and educating payers and I think over time as we get more data and as we can build a better case, we can get those type of contracts in place.

I would put the onus for that back on us rather than on the payers. We just need better measurables and better data, it's taken us years to develop that clinical evidence that the Diamond study that we talked about for the first time a couple years ago was really our first endeavor to do that and now with all this data coming to our servers through our mobile platforms we believe we will be able to make some very strong real-world evidence just from our patients as we look at time and range logistics and compliance with the system and how well they do on hypo avoidance.

I gave an example in my prepared remarks of the predictive alert that we have in the G6 system and how we're seeing a significant reduction of hypoglycemia because of that alert. That type of evidence is something we really haven't presented in the past and we will do that going forward, now that we have so much data from the mobile systems. We're very comfortable playing in that realm because we know the outcomes that our device provides to patients are outstanding.

Operator

And our next question comes from Danielle Antalffy from Leerink. Your line is open.

Danielle Antalffy

Just a question and this is sort of following up on the question around the impact of a competitor potentially getting iCGM, but just curious if you can give any color directionally or what have you on the percent of your installed base domestically today and/or new patient adds that are MDI versus pumpers? I think historically you said the majority of the patients coming on to DexCom are MDI and not actually pumpers. Anything you can say to that?

Kevin Sayer

The majority of our new adds now are MDI patients Danielle, by a reasonable margin, as we're getting a much larger patient base, we're going over into those who are not on the pump systems for more of the new adds. But I anticipate as our partners get new systems out that we will see significant growth in that segment as well as the systems do more than just deliver insulin, but actually have algorithms that can improve outcomes. Right now, our new patient adds are primarily MDI patients.

Danielle Antalffy

And then just a question on the G7 and I want to make sure I'm understanding correctly how pricing is going to change with G7, I know you guys haven’t sort of outlined your go to market strategy per se, but I think you said in the past that you know. At some point, you're expecting to be, well, tell me if this is correct. Are you expecting to eventually be pricing at parity with the competition as we look down, further down the line to G7 and beyond? Or do you think that even with G7 you'll still be pricing at a premium?

Kevin Sayer

I am not going to outline all the specific details regarding that, but here's our strategy and here's how we look at that. We look at the annual revenue per patient per year program and what is the appropriate amount to charge a patient. For example, as we've gone from G7 to G6 that's how we look at that product offering as annual revenue per year rather than pricing on the individual components. With respect to how we price G7, there's a lot of variables involved here. We have a decision support tools that lead to better outcomes. Does that justify a premium, does it not.

I think we will have to see it overtime. Let's what's important for the investment community now that from a cost basis we have a lot of flexibility with you Kevin. We design that product for manufacturing we design that to be a lower cost product offering than we have today. Particularly with the extended work, we’re prepared so what the market will do but we will study this a great length and have a very decent we've got our markets changed before we go, but I can't commit to anybody anything specifically now. We're very optimistic about all the directions we can go.

Operator

And the next question comes from J. P. McKim from Piper Jaffray. Your line is open.

J. P. McKim

I wanted to ask one just Kevin you made a comment that you -- that I think, you’re wearing a G7 now, so it feels a little more real to me. And so, maybe initial thoughts on that? And then will we see a trial start for G7 this year? Or is that still something that will happen in 2020?

Kevin Sayer

Look, we run trials with G7 all the time, but there is small trials that we're gathering data to learn and fine tune the features of the system. With respect to the experience, regulatory people probably going to kill me with their legal guidance first, but it really is spectacular. The wearable is pretty much not existing on your body. As I look at projects we've started and innovation that we've attempted during my term with this company, this is the biggest leap we’ve ever taken and it’s a huge leap and kudos to all the people involved in it because, if I were to design what I would hope CGM would have been when I started in this business. Yes, in 25 years ago, this week, I would have designed this and so we're finally here.

J. P. McKim

And then maybe just on affected -- on just the non-intensive programs. The several trials that we should see some data at ADA around, I mean, either Matt or Kevin, how do you -- how do you define success in those trials? Is it our payers are really keen on recent amount of medications? Or they -- is it going to be the time arranged with the metric? Or I guess how do you -- how should we look at those trails as successful?

Matt Dolan

Yes, I would say, you have to take the individual markets and kind of look market-by-market, so certainly in the non-insulin using non-intensive type to market, reduction of drug cost is fair paramount. Right, in the hospital and in the length of the stay, reduced nursing time is important but reducing length of stay, getting people out of the ICU down to a step down ward into the general ward and out of the hospital. And actually, as important these days prevention of hyperglycemia in the hospital setting is becoming increasingly important as on CMS as radar as a key metric for hospitals to reduction of hypoglycemic into the important going forward in that market.

Gestational diabetes, we're still early in exploring opportunities there. I'd love to tell you that at some point, the CGM session will actually replace the old glucose tolerance test that’s going to take some time and effort and some clinical trial work on our product. So there is no kind of one size fits all in the new markets development opportunities, but Matt has developed and will continue to develop a pretty robust team to tackle all this markets. And clearly over the next several years 3 to 5 years time horizon, those markets become increasingly important for us.

Operator

And our next question comes from David Lewis from Morgan Stanley. Your line is open.

David Lewis

Quentin, just I want to come back to gross margin. I appreciate your commentary but that 75% to the back half of the year and mid-60s next year. But if I take the LRP it's obviously as you’re aware with 65% 2023 scaling in innovation about 700 basis points to that, so it actually feels like both of those factors are playing a pretty powerful role in the back half of 19. Is it safe to assume that 65% 2023 number given you seen earlier scaling innovation is now a conservative number in which you think about that number being kind of materially higher?

Quentin Blackford

Yes, I don’t want to get out to five years out from now and talk about whether it's conservative or aggressive. I think what we try to lay out for you is that, we are very clear lines of sight to some very specific improvement efforts that will drive gross margins higher over time, what becomes a bit more of a variable that we're prepared to be able to address the revenue per patient headwind. And as the mix between different channels, we're going to have more than enough leverage going through the GOGS profile of our business be able to address that very aggressively and still produce a very attractive gross margin profile.

So, we’re happy with where things are at, the lower cost transmitter coming in the back half of this year has always been something that we plan for and knew that we’d see a nice benefit from the Kevin's point earlier. You're going to see an incremental benefit coming from G7 as well as that’s been design to be the more cost effective. There's a lot of nice leverage in front of us that gives us the opportunities to come back some of the headwinds that might be out there.

David Lewis

Just quick follow-up on the pharmacy benefit and the pair dynamics, can you update us Steve maybe where you are into the pharmacy benefit coverage? I think it was 50% last quarter, more specifically a lot of we made into the quarter about first provider or primary provider relationship. Can you sort of talk about whether preferential provider forming relationships are having any impact on U.S demand? And sort of how you see the future of preferred provider relationships in the channels of the -- where you are in mix and what you would say on preferred provider? Thanks so much.

Kevin Sayer

I will answer the second part of that question first which the answer is, no. I mean we’ve seen some isolated instances of companies trying to negotiate for preferred status, but that certainly not something we're seeing as a trend as we move to the pharmacy benefit. As for commercial lives under coverage, we’re certainly north of 50%. We haven’t given a more granular number than that and we're still not processing in terms of our commercial business. We're not processing close to 50% through the pharmacy channel at this point. We're working hard to move more and more patients in that channel. So when we say we have north 50% of the commercial lives covered, we’re certainly still not processing 50%.

Operator

And the next question comes from Joanne Wuensch from BMO Capital Markets. Your line is now open.

Joanne Wuensch

Thank you for taking the question very nice quarter. Two questions really at the ADM meeting in June, can you give us a feel for what we should be looking for there?

Kevin Sayer

Steve, why don’t you take that one?

Steve Pacelli

I would say that the most exciting data set if you will that we hope to see at ADA will be really a combined data set together with Tandem where we should get at least a first peek, if not a full-blown deal at the iDCL data. So, again that’s Tandem’s X2 pump with the DexCom G6 and the DexCom’s TypeZero algorithm running hybrid closed loop system. So, that’s probably the highlight for us and for Tandem collectively at ADA. There will be a number of additional poster and some podium presentations, but from a data perspective that’s really what we're looking forward to.

Kevin Sayer

Yes, I will just add the other thing Joanne that we're going to continue to see is anybody's stands up to speak starts talking about CGM, every outcome, every trial, everything going on CGM is clearly becoming the standard of evaluating diabetes care across the board. And I believe that trend is going to continue at ADA, and you will see CGM pretty much and are well done everywhere with everything that’s done.

Joanne Wuensch

That's helpful. And then my second question has to do with markets. Growth was strong there again this quarter and I'm just trying to get an idea of sustainability and into what other regions you might be looking to venture into?

Kevin Sayer

You were talking about the OUS market?

Steve Pacelli

International.

Kevin Sayer

Clearly, the growth was strong there and I think you look at overall adoption of CGM in that overall marketplace, it’s probably still sub 10% in terms of the long range opportunity, and so there is a huge amount of runway that continues to exist in front of us. And our core markets continue to drive the primary growth for us today. Germany was another standout performer in the quarter leading the way for us, but there is significant another new markets that are coming online. We just saw a significant growth coming out of the Nordic markets for example. We saw incremental reimbursement approved in Australia that will add significant amounts of contribution over the course of later part of this year and into next year.

And then you get into some of the Asian markets where we haven't started to see the contribution yet, but expect nice tailwinds coming out of Japan and Korea for example. So, there is several new market opportunities or even markets that were in today that it is growing at a incredible rates and paces of growth in a relatively untapped market opportunities. So, I think there is several channels for overall growth in that international business to get it to the point where in our long range plans we talked about it at the end closer to 30% to 35% of the overall business which means it's going to be growing faster than the U.S. business I think there is a lot of channel that will continue to make that available to us.

Operator

And our next question comes from Margaret Kaczor from William Blair. Your line is open.

Margaret Kaczor

So first one for me is more bigger picture perspective because we've now seen several quarters of strong patient growth that. So what I'm curious about is whether you guys are seeing a change in prescription patterns in the market whether it’s endo or patients and irrespective more pharmacy or G6 that is CGM really becoming widely expected in a go to for most Type 1 patients?

Kevin Sayer

Margaret, this is Kevin. I believe it's becoming much more widely accepting in prescription patterns arising across the board. It's just becoming and towards the manager insulin delivery and it's not while it is becoming a tool and more accepted penetration rates are somewhat at the point where we need to step back and worry. In the type one market we think the penetration rates in the U.S. are still in the 30% range across the board and type two intensive insulin using it's still not that bigger number either.

So overtime there is plenty of market runway here to continue to go on in that international front penetration rates I mean intensive population or unfolds the venue at Huwaii. But we think it is much more accepted then it was before we think G6 has had a very positive impact for us and these are the markets because it is much easier to use the low calibration feature the easier insertion for rectifying connectivity all the things we built into G6 were design to drive this market and were seeing the benefits to that as we go forward.

Margaret Kaczor

And so just to follow-up on that it seems like you guys have got nice improvement for the end of selecting patients that they think that will see the most benefits from that and what else maybe do you need I know you mentioned the new connected product launch in this year I don’t know if it was a digital software or hardware.

Kevin Sayer

It's interesting I just spend some time with several of the folks from the field and I would tell you lot of this varies territory-to-territory. It varies practice-to-practice still there is not a standard guideline where all the doctors are identifying different patients and having different criteria I would say like anything it’s changing rapidly. When I first went out in the field when I started here, the only Patient recommended for CGM was a pumper, I would ask doctors who do you put on CGM they say somebody with pump is where we start that certainly is not the case anymore. And so it varies across the board but it is much more equivalent then it used to be. There is still plenty of room.

Operator

And our next question comes from Jeff Johnson from Baird. Your line is now open.

Jeff Johnson

Kevin, I want to go back and ask you a question on the MDI versus pump mix that was talked about earlier. You especially within the MDI category, have you seen any change in that patient base or you wining any competitive convert there? Are those all native first-time users of CGM that you're wining on that MDI side.

Kevin Sayer

I don’t have a good piece of data here.

Kevin Sayer

Yes, I would say anecdotally so obviously coming out of our national sales meeting and talking to our field force, who really do on the front line. That you hear anecdotal stories that you ask people would try Libre and if they are content with an on body experience with a sensor experience that they do migrate to a DexCom, but we don’t have any real metrics to kind of give you what sort of conversion rate we have on Abbott to DexCom. With respect to Medtronic, they’ve launched a standalone system but we obviously we just don’t see that system out in the market place at all.

Jeff Johnson

Fair enough. And then on Medicare, we didn’t get much color on that this quarter. Any update there on stick rates on demand trends things like that? I know G6 is push so later this year in that channel. Has that been impacting on your term demand? Just any updates would be helpful. Thanks.

Kevin Sayer

No change in trends there, Jeff. I would say our stick rates remain very, very high. I mean we’re incredibly encouraged by what we're seeing there and the new face funnel continued to be very full. So, pushing the G6 launch out into the later in the year has not impacted any trends that we’ve seen in that Medicare business right now.

Operator

And our next question comes from Doug Schenkel with Cowen. Your line is now open.

Ryan Blicker

Hi, this is Ryan now for Doug. Thanks for taking my questions. And first of Mike congrats on the new role. You referenced G6 enhancement coming this year earlier in the call. I talked about new algorithm on the last quarterly call. Can you provide any more detail? Should we expect algorithm to noticeably improve the performance metrics of G6 during 2019? And then, should we expect extended wear for G6 during 2019?

Matt Dolan

You know what, let’s us -- we’re going to keep that close for the rest an outlay afterward the road map. In the U.S., I can tell you in 2019 we don’t expect extended wear for G6 in 2019. The decisions that we're making around things that would require extensive trials of that nature are very interesting. Do we commit those resources to G6? Or do we commit those resources to accelerating G7. And in many cases, we’re choosing the G7 acceleration over that. But there are new features coming out in the fall on G6 and we will -- we're kind of way we have before we leave with those all out to everybody.

Operator

And your next question comes from Chris Pasquale from Guggenheim. Your line is now open.

Chris Pasquale

Just want a follow-up on the comments about the gross margin, Quentin. And why we shouldn't assume the 70% is a good number? Going forward, I’m assuming some of that has to do with the continuation of the pharmacy dynamic next year. But just kind of flush out, how much you have to upstream to maintain margins in the mid 60s? And what you are thinking about next call it 18 months?

Quentin Blackford

Yes, without getting into specifics around 2020 maybe I'll just point here to one of the dynamics that we feel on the business right now, which is somewhat considerable to what we saw last year as well. For the full year, when we set margin expectations, we talked about they’re being roughly a 200 basis points headwind relative to the revenue per patient impact of moving into some of these other channels, both pharmacy and OUS. I think based upon what we know at this point in time, that’s probably the right way to continue to think about that headwind as we roll into next year.

Clearly, we will refine that as we learn more as we exit the year, but they start to push up into the 70s with the lower price transmitter. It clearly gives us opportunities to be more thoughtful around pricing strategies into the future. So that's why I come back into the mid-60s for the time being, but in terms of the pressure we're feeling from the mix channels, couple of 100 basis points right now is what we're seeing. So you can model from there where you want, but I still think the mid-60s is the right way to think about it of long-term.

Chris Pasquale

And then on the new markets, I am assuming this is going to be a little while before we see some real data and some of these new indications. But at this point, is there a lead candidate that you guys think is most promising or that you think you want to go after first?

Kevin Sayer

I would say we're already commercial to some extent in the non-intensive type 2. I mean we've characterized some of the work we're doing particularly with United Healthcare as pilot studies, but we're talking about multiple 1000s of patients. So there are large pilot studies. With respect to the work being done by United, Onduo et cetera, you are not going to see any data. In fact, they hold some of that the findings and the learnings there to be highly proprietary, so they are not going to share that with anybody. To the extent, we’re going to run the more formalized clinical protocol for hospital, hospital indication or a gestational indication something like that, that data may become available. But right now, I don’t think we have any plans to grow at a tip if I had to, to our potential competitors and in those markets as well.

Operator

And our next question comes from Raj Denhoy from Jefferies. Your line is open.

Raj Denhoy

Just we want to ask about the leverage in the middle of the income statements. You guys are talking about and I appreciate the comments on the increase sort of folks in the Philippines now, so couple of questions there. One is, if you think about the environment getting potentially more competitive, one of the concerns is that your customer service for guys has always been such as a really strong suite. And as you move that now offshore and how you maintain that? And so, I'm curious if you have any kind of really data or anything can offer in terms of how that transition is going?

Kevin Sayer

Yes, Raj, we've been incredibly impressed by the team that’s being built over there, and we paid very close attention to not only quantitative assessment and performance metrics, but also qualitative. And so, we try to take the opportunity with every single patient as they work with our folks over there, to get feedback from them on how the calls went and what we can do better. And I can tell you out of the gate, our qualitative scores are higher than what we've seen in our domestic teams. So, we're seeing great results and something that we’re paying very close attention to.

From an efficiency perspective, we've been beyond to be quite honest what we anticipated we might have been able to recognize in the early stages there. You look at some of the work coming out of our customer advocacy or complaints area, our tech support and other back office functions and the efficiencies are significant that lead us to believe that it's going to make it much easier to scale, much more quickly, and clearly and more effectively.

So we couldn’t be more encouraged by what we're seeing out of that effort there. I believe that overtime that becomes a real strategic asset to this company and allows us to be more aggressive and how we think about other strategic opportunities in markets we might want to pursue or how we just compete in the local markets that we are in already. So I'm very encouraged by what we're seeing there.

Operator

And your next question from Ravi Misra from Berenberg Capital.

Ravi Misra

My first one is again on gross margins. Just hoping Quentin maybe you could give us a little bridge between the first quarter and fourth quarter ramp? And then on the first quarter, what are the headwinds that showed up in that margins they’re going to follow away or maybe break it down versus year-over-year versus or mix shift or underutilized overhead?

Quentin Blackford

Ravi, when you're talking fourth quarter, you’re talking about from Q1 this year to Q4 of ‘19.

Ravi Misra

Yes, that’s exactly.

Quentin Blackford

Sure. So, I think, let me just thought year-over-year real fast, Q1 to Q1 around some of the headwinds that we had, there is about 200 basis points of impact related to the continued shift towards pharmacy and the U.S business bigger part of the overall contribution and there is about 200 basis point associated with really our focus on doubling capacity and we talked about the fact that with demand being beyond what we had anticipated were accelerated some of that spend so we pull some of that forward , not all of that is capitalized or mentor able and so its run through the P&L a bit early than what we had anticipated.

So I think you will see Q1 will be that low watermark I think I start to see improved a bit in Q2 and some real improvements in Q3 and on Q4 and really what drives that in Q3 you're going to get just the benefit of levering the fixed overhead that we put in place right now to find design the automated manufacturing capabilities and Q4 leverage while you're getting some of the benefit of that leverage or the fixed overhead you're really going to start to get the place of the benefit of the low cost transmitter.

So hopefully that gives you a bit of a bridge over the course of the year in terms of what the contributing factors are but I think for us we can see clear line of side of getting close to 70% range as the year.

Ravi Misra

Great thanks I can ask some follow-up off-line. Then my second question is just around type 2 usage and some of the commentary you had around moving patients from the ward to ward, just curious what is the take on the proposed rule changes around the new technology add on payments, do you see a space for your CGM products to fit into that designation and what could that meaning from a reimbursement or from an prospective.

Quentin Blackford

Absolutely, particularly in hospital setting as I mentioned, CMS has a renewed focus and as identified hypoglycemia in the inpatient setting as a huge problem. So, you are not going to detect hypoglycemia with finger stick even if you’re taking a couple of finger sticks an hour, right. So, I think the CGM plays perfectly into that environment. We long know that recurring hyperglycemia in the hospital is problem reduce feeling times, we can get CGM put on it, the idea would be to get CGM put on these patients, potentially preop get them into the hospital with the sensor already on, get the blood sugar under control before a procedure and get them in and out of the hospitals as quickly as possible. We think there is great application there. We think also and the disposable nature of G7 is the perfect product opportunity there.

Operator

And the next question is from Matt Taylor from UBS. Your line is now open.

Matt Taylor

So I want to ask Quentin a question, see if you can give us a little bit more detail on, what changed your sequentially in terms of some of the assumptions that are embedded in the revenue guidance for the year? You did address a little bit of this from the earlier question about the pricing headwinds, but can you just give us a sense for what has changed and if you could provide broad stroke from the different component that will be helpful?

Quentin Blackford

Yes, it’s really quite simple to be honest with you, it’s not a lot of different moving pieces it comes down to new patient volume or was it anything else I think the demand that we continue to see in the business coming up in Q4 and the strong Q1. This continues increase our confidence in the adoption of this technology in the marketplace and so it's really new patient volumes that are driving the incremental growth. I think that you'll see a lot of that come through on the commercial business through the pharmacy channel from our experience, but we believe that for the majority ends up showing up and then that international business is a bit strong as well. So those two channels are the primary drivers and at the end of the day it's all new patient volumes that are driving it. The pricing assumption I talked about earlier, no change in terms of the 100 million headwinds.

Matt Taylor

And then maybe just to follow up with the head of new markets here and just for the team. Can you talk about which off the new markets you think it's really going to be able to bear fruit for the Company in the near-term and you can share on the strategy or that's change since you talked about some of those things at investor day?

Kevin Sayer

I'm not as concerned bearing fruit on the revenue side, as I am building a long-term case. So our efforts this year as we rolled a step out as I've said earlier in my prepared remarks are to develop the outcomes the cost base evidence, that shows these are markets where we're going to save patients nine delivered better outcomes so it will be largely developing that evidence in those business models establishing a relationships we need to go to distributing into these markets and taking some steps like that over 2019 and early 2020.

And then when we roll out G7, we expect to roll that out to these other places as well. And that becomes more of a commercial thing. Right now and again I will echo something that, that Steve said earlier we haven't just been sitting around on this and not working we had some of our best people working on these efforts for quit sometime now what we've done is formalize the structure and said you guys have a whole new have a group you have some goals go get this done. And we're going to start measuring that progress more rather than just as projects and as while we're expecting in this return.

Operator

And the next question comes from Steve Lichtman from Oppenheimer. Your line is open.

Steven Lichtman

Kevin, on intensive type 2 where do you think were at penetration wise today and any updated color on your discussions with commercial payers like spending access to those patients?

Kevin Sayer

We continue to pursue that with the payers and certainly using the CMS rolling as a basis for that gives us the very good start. I don’t think penetration is very deep there right now I can give you a number I think it's less than 10% in general. However a lot of those type 2 intensive patients are Medicare patients, and as we launched -- as we look at launching G6 into Medicare later in the year for example we think we have an opportunity to grow that significantly and that's a nice opportunity for us going forward in the future.

I can tell you that the type 2 intensive patients on the system Quentin referred to this stickiness of our Medicare patients it's been extremely good so far so they are getting very good outcomes both to use it, so we are happy with it, it is a tremendous opportunity for us and I where we look forward to more coverage it's getting the insurance companies to pay more and spend more money is never simple.

Steven Lichtman

And then, you also talked about the positive results you are seeing from the predictive hypo alerts. When do you think we could see data aggregated and published around the benefit there?

Kevin Sayer

I believe Steve predictive hypo alert paper was presented at ATTD, so that’s already add the G6 has been the patient that experienced with hypoglycemia with the predictive alert.

Operator

And the next question comes from Suraj Kalia from Northland Securities.

Suraj Kalia

Good afternoon everyone congrats on a great quarter. So lot of my questions have been asked, maybe I will just kind of lump both my questions into one. And forgive me if you all have mentioned this on the call, what are the expectations for U.S. versus OUS contribution in FY19? I would love to get some perspective on how you will see the margins for these two different buckets? And roughly speaking, the math tells me that roughly 400, a little over 400 would be OUS, the remaining would be US. Maybe you can kind of parse out for us, how we should think about this? How the gross margins for the different buckets would be? And finally the transmitter that is expected to bump up gross margins to 70% in Q4, what is the incremental gross margins contribution from this transmitter? I would love to get some color, if possible. Thank you for taking my questions.

Kevin Sayer

Sure, so in terms of U.S. versus OUS split on the full year our OUS business is expected to grow in the mid to high 30s range, which infers the U.S. business growing in the teens that the 20% or so that’s about what we expected on the course of the full year. We haven't given specific gross margin data point on the U.S. are OUS business and we're not going to put that out there. And that shift honestly quarter to quarter just based upon the mix of the revenue within says OUS you got a direct marketing, you got a distributor business well. It just fluctuate based upon the mix, so we haven’t put those data point out there and nor we going to right now.

In terms of the incremental benefit associated with the transmitter, the G6 low cost transmitter without giving you the exact specific cost differential we can tell you it's more than 50% cheaper that what the G6 existing transmitter is today. So in terms of orders of magnitude I think it is clearly a very significant benefit for us that drive the overall improvement in the gross margin in that fourth quarter timeframe we talked about.

Operator

And that concludes the question and answer session. I'll turn the call back over to Kevin Sayer for final remarks.

Kevin Sayer

Thank you very much and thanks everyone for being on the call today. I actually wanted to stop the call at 52% growth and 95 million plus in incremental revenue over Q1 of last year, but we decided we would keep going.

Much of the discussion around this call in recent months has focused upon two things. The pricing environment and anticipated competitive offerings in the space and I think too often we forget one thing. This market opportunity is huge, it is extremely large not only in insulin space but also in the type 2 space in the other areas were looking at all the way down to health and wellness. We continue to see people now buying our system getting a prescription because they want to manage their nutrition on the side and then and they are paying cash and using it, but seeing some very interesting things.

We truly see that when CGM in multiple configurations and forms becomes a very useful tool across all healthcare and truly the standard of care in the intensive management of diabetes. With respect to pricing, our channel impaired teams are doing very well at DexCom. I talked earlier about the recent win with Cigna, we're hitting on all cylinders here and that team has gone very well.

Given the size and the opportunity with respect to the competitive environment as I said earlier, we didn’t expect to remain the sole voice of CGM forever. We always knew other would come, an increased awareness generated by all parties move patients to the technology the best meets their needs and that technology remains DexCom. With G6, our plan enhancements coming later this year, our next gen G7 offering in the technologies that it'll be following that. We expect to be the leader in this industry in the space for a very long time. Thank again everybody and have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.