DexCom, Inc. (DXCM) Earnings Call Transcript
September 9, 2020
Earnings Call Speaker Segments
All right, guys. I think we are live. I'm just trying to get my screens set over to my laptop, and there I go. I'm good. So good afternoon, everyone. Sorry, a little technical difficulty there. But I think we'll get started. My name is Jeff Johnson. I'm the Senior Medical Technology Analyst at Baird. Our next presentation this afternoon is from DexCom, a continuous glucose monitor manufacturer that currently enjoys a leading share of the nearly $4 billion global CGM market. With us today from DexCom, we're pleased to have Executive Vice President of Strategy and Corporate Development, Steve Pacelli; and Senior Vice President of Finance and Chief Accounting Officer, Jereme Sylvain. So guys, I think we're just going to go straight into Q&A, and we're running a couple of minutes behind, so why don't we just do that. So thank you for joining us. It's good to see you.
It's been a crazy year, I know. I just want to focus on a few different things. The first thing I want to focus on, and it was talked about a little bit earlier today, but it's just the T2 nonintensive opportunity. And Kelly Close obviously does great work in the space. And I think she had one of the biggest gets I've seen in a while, and that was an interview with the Level2 CEO, Dr. Amy Meister. And I think Chief Growth Officer, Will Ferguson, was in that interview as well. Probably one of the most compelling interviews I've read in a long time or most compelling updates I've read in diabetes technology in a while. But from that interview, it sounds like Level2 is really moving along well on the nonintensive type 2, over 13,000 users of your CGM already since October until today. I mean those are numbers we haven't heard before. Just high level, are you as excited about Level2 as I was when I read some of this stuff? Is it really got a big future here for driving nonintensive type 2?
Yes. Let me start, and I'll let Jereme jump in. Obviously, it's hugely exciting, right? I think it was -- I was trying to guess, maybe 3 years ago at CES when I first, I think, during an interview, I first announced the pilot concept that we were piloting our sensors with United in the nonintensive insulin -- noninsulin-using type 2 space. So we've obviously come a long way. Level2 is the first kind of real commercial iteration outside of what we characterized before as the pilot. So super exciting to have United behind this. What we're trying to do now, and again, United is pretty close to the vest in terms of the data that they're going to present to us, to you, to the outside world, to Wall Street. But clearly, United is seeing, in terms of cost savings in a program like this, savings similar to what we saw, for example, in the Intermountain data that we talked about kind of the beginning of this year, where significant reductions in drug expenses, in lab expenses, in hospitalizations, across the board. And so super excited to see this enroll. Today, United is rolling this out through as many fully insured programs -- fully insured customers as they can. Our hope would be that as this expands and as they have the data to support it, that we expand this out far beyond the employer plans to. Potentially, the holy grail would be to their Medicare beneficiaries, for example, but even broader to some self-insured companies. So super exciting. This is kind of the first big commercial exercise as to what we've been talking about for the last couple of years, where we knew there would be opportunity in nonintensive, noninsulin-using type 2s. This is our first big move into that market together with UnitedHealthcare. So super excited.
Yes. And I thought, Steve, one of the interesting things I thought in that, United is actually paying their users through gift cards, through other financial incentives to stick with the program. That's got to say something, number one, if you're willing to pay people to use your sensor. And I think you guys are exclusive on that sensor, is that right? But -- if you can help me out there.
That's correct.
Yes, all right. Great. But I mean some of the cool stuff I was hearing -- and we always -- and Steve, you mentioned like the holy grail and all that. We've always thought that someday, could we get to this. But they're already talking about with their doctors on staff using the data that you guys pull out there, the sensor data you pull out, being able to change medications, going from 3 medications to 2. I was surprised even doctors on staff at Level2 then reaching out to the patients, maybe taking them off the antihypertensive or a cholesterol drug or something. I mean those are legitimate cost savings and legitimate probably benefits to the patient as well. How do you guys not monetize that over the near to intermediate term? I mean those are real cost savings that, if it weren't for your data, they wouldn't be able to realize.
I think that's a great question. I think the business model is very much still in its infancy. Today, we're just selling sensors to United. They're deploying them into the program. But you're right, as the data set evolves, as the clinical outcomes evolve, and we show the significant cost savings that the sensor itself can drive, we would love to share that. We would love to look to some sort of an at-risk relationship, right, where we may provide sensors either at no cost or at a significant discount into the program in order to benefit on the back end for the cost savings. But you're right, the money they're saving, you take someone off of one of these more recent type 2 compounds, you could save $5,000, $6,000 a year, just taking them off of 1 drug. So yes, the cost savings on the drug side are enormous. I would say today, we're not in a place with any of our current partners where we're actually kind of risk sharing, but we're absolutely would be open to that over time.
Yes. And I mean it even sounds like they're trying a policy to get down to just metformin, which obviously is a much more inexpensive type 2...
Yes. I mean I think the first goal for any of these folks would be to get them off of insulin. So if they're on a basal insulin, right, not talking about MDI patients, but of basal insulin, get them off of insulin being the key, and then reducing drugs on top of that. But yes, if you can get someone with our sensor, a combination of diet, exercise and properly timed metformin dosing, yes, you can actually get them back into great control and dramatically reduce the cost for these patients.
And I think the interesting part that you kind of tag on top of that, I think you hit the nail on the head, as you start taking folks off their nontraditional diabetic type medication. And so when you think about the -- we always talk about, hey, how can we get somebody off of insulin or a GLP or SGLT or -- and one of those various drugs that are used to treat it, but then you start getting into things like hypertension and cholesterol, which are a complete subset of drugs, where once you get your glucose levels under control, they've been able to pull folks off a lot of those particular drugs as well. So I think we're scratching the surface as to what these sensors can ultimately do beyond even glucose and using glucose as a way to solve the whole.
Yes. Yes. Well, if we start talking other analytes, Jereme, then my head starts exploding even more because, I mean, that's obviously a huge other TAMs and all that. So maybe we'll come back to that point in a second. But the other thing I found interesting in the interview and the comments from Level2, is these patients are wearing these sensors every day. Now I know Intermountain's got their 1,500 patient study, and they're going to look at a Q3 month, a Q6 month, twice a year, once a year, kind of wear schedules. They're going to go through all that with their 1,500 patients. But right now, Level2 patients are wearing these every single day. So even if the at-risk model doesn't develop over the next 12 or 18 months, it seems like there's still a good monetization path when we look at the type 2 market, not intensive as 10x the size of T1, T2 intensive combined.
Yes. And I think there is a good opportunity there. The one thing we always caution you is, is to get into the Level2 program, you have to wear a sensor. I think over time, similar to what most folks may go, is they may titrate it to maybe not every single day, but some sort of intermittent for a certain subset of the population. But you're right, the early-on feedback, which is the early-on adopters of Level2, and it's a newer program, they're wearing it. And a lot of the outcomes, we believe, are driven by the CGM. So I think it's a good indication for wearing it as often as they ultimately can to ultimately drive those outcomes.
Yes. And I mean, obviously, it's such a nascent market opportunity right now. Abbott could always come in or something like that. So it's not like you guys can play a real strict, competitive argument here. But without the data, they don't get these cost savings. Isn't that fair? I mean how else do they get the data if it's not a sensor? And now granted, maybe there's some other sensor company that could come along or Abbott could jump in there. But I would have to think you guys aren't in a terrible negotiating position.
Yes. That's right. And that's where when you look at United versus some of these other folks trying to attack the problem from a different angle using other data analytics and maybe some coaching and things. United has the claims data. That's the -- from their side, they actually have the data to support the cost savings, as opposed to people sitting on the outside including DexCom, right? They don't show that data with us. So they have the holistic picture of not only our sensor data that are putting these patients on other activity trackers and things like that. They have the coaching on staff. I mean United has hundreds of coaches through their Optum subsidiary who actually proactively engage in coaching today. So they've got the infrastructure. They've got the set up for this. They're perfectly positioned for this, plus they have the claims data. So they truly have a picture of what is the savings look like to that when they go talk to an employer -- or when they go talk to a potential new customer, what does that savings really look like.
And there's no surprise that with their fully insured book of business, they've obviously applied this. So you can tell they're incredibly confident in the cost savings they can ultimately drive through the CGM.
Right. Because there -- yes, there are risks in this program today.
Yes. No. That makes sense. And then obviously United oftentimes leaves this stuff -- Intermountain, the data you talked about, Steve, of $5,000 cost savings. They've got the bigger trial open and enrolling right now. Are there other payers that will be fast followers here? Or other payers going to sit back and take a few years to think about things? Just are you in any other relationships? And how to think about relationships with other payers outside United and the smaller Intermountain?
Yes. Nothing that we've talked about publicly. I would tell you -- I don't know that I would tell you it's years. I think United certainly has a big head start here, as does Intermountain, being very thoughtful on how they're applying sensors to these programs. But yes, I mean when United -- and United the reason they don't share much of the data is because they deem this to be very proprietary, right? Their -- the analytics engine underlying all of this stuff is super proprietary to them and they're just -- they're not going to share the data with anybody. But I do think you'll see -- necessarily we'll see other payers adopt similar programs. I would expect to see the DexCom sensors involved in those programs. And potentially others, right? I mean you're naive to think that Abbott and/or Medtronic may not get their sensor into some of these programs down the road. So...
Okay. Well, maybe a segue to some other CGM market opportunities. So on the hospital side, I know Kevin said hospital was not a big contributor to 2Q or wasn't meaningful. We have seen hospitalizations spike in July and at least through the first part of August. Thankfully, it seems to be coming down some now. But over 40%, I think -- the data I've seen, over 40% of hospitalized patients with COVID do have diabetes or have some other glucose issues pre-diabetes, something like that. So could it be a big contributor in 3Q? And whether or not you answer that question or whether or not it is, do you still feel like hospitalization, use of CGM, has been accelerating here? Is there a way to move this outside of ICU to other parts of the hospital sooner rather than later?
Yes. So it's a great question. I'm obviously not going to comment on Q3 specifically. But I will stick to what we've said previously is that we don't think, even through the balance of this year, that our hospital program is going to be a meaningful revenue contributor. Remember, pre-COVID, we were actually excluded from the hospital by our labeling. The FDA, because of COVID, allowed -- loosened up the restrictions, allowed us to go in. I still think they're not just going to open this up blindly going forward. The sooner we come out at the backend of this pandemic at some point, we're still going to have to do the work. We're going to have to do all of exchanges that we've had with the FDA in terms of the types of testing, potential drug interferences that you see in the hospital. But it's a much more rigorous set of standards to get the sensor approved for hospital use. We're going to have to go through all that. But I will tell you, the learnings that we're seeing out of what we're doing in the hospital had been incredible. I mean we've learned -- if nothing else, we've learned that there is absolutely not a one-size-fits-all product for the hospital, whether it's how it communicates with the hospital's infrastructure, whether it's how the nurses want to incorporate it into their workflow, whether it's a phone -- we've seen phones attached to the bedside. They'd love to have it a central nurses' station, for example. These are all things that we're developing, a massive body of learning through this process. But again, it's still early. We still have a lot of work to do before we start talking about hospital as a DexCom product that we're truly rolling out as a meaningful product offering. I think that's still a couple of years out simply because of the FDA work we'd need to do.
Okay. That's interesting. And do you need to get kind of worked in to a diagnostic company, hospital supply company's display? Would it make sense to partner there with a GE, a Philips, somebody else who has like display capabilities so the nurse can be looking at pulse ox and blood pressure and glucose there, number one. And number two, do you think in a couple of years if you start to roll out more of a broader hospital product, would it be isolated to just diabetes patients? Does it make sense to track glucose levels on all patients who could be volatile if they're compromised elsewhere?
Yes. So let me take the first. We're doing the research now, whether we -- I think you may see a combination of the go-to-market strategy being a combination of partnership and potentially some direct. We don't have the resources. We don't have the -- frankly, the wherewithal today internally to sell into the hospital. We're learning a lot with a very small group of folks who are kind of tasked during this COVID pandemic of bringing the product into the hospital. But by and large, we don't have a dedicated sales force selling into the hospital channel at this point. So it probably does make sense to partner, whether it's with a display company, an infusion pump company or something like that, at least initially. But I think there could over time be an opportunity for us to go direct into the hospital as well. And then on your...
To your second question, which is the use case, with all the admissions, I think you -- certainly the first part you would target was certainly folks with diabetes. But to your point, over time there's a lot of folks who are admitted who either don't know they have diabetes or pre-diabetic or have other sort of reactions to various items, whether it's steroids or et cetera, that ultimately would change their glucose levels. And those changes in glucose levels ultimately are what drive some of the inability to heal timely. And so you've kind of got a tie with glucose levels and hospital lengths based on recovery. So I think the start is, is really focusing on those folks that clearly have it because there's an immediate need. But I don't think that precludes you from going after the entire hospital population and simply using those sensors as another way of keeping track of where folks are going and ultimately reducing recovery time. So we see an opportunity in both, really, it doesn't necessarily mean you have to have diabetes for it to be an interesting option in the hospital.
Yes. I mean I think we've looked at a lot of -- or not a lot, but several big studies out of Barnes down in St. Louis, some others that show even after cardiothoracic surgery, a hypoglycemic crisis can add 1 extra day on a ventilator, 1.5 days of additional length of stay, things like that. I mean that's real dollar.
You want to talk about cost savings, exactly.
Yes. Okay. All right. Fair enough. I want to shift over to competition, maybe. You guys have been somewhat agnostic here with pump and smart pen partners here in the last few years. You've been open to partnering with a wide variety of companies. Over the next few years, does that wide swath of partners continue to provide tailwinds? Is that the right strategy? Do you see Abbott and some others coming in, Medtronic buying Companion? Is your partner base going to shrink down at all? Just how to think about competition and kind of your broad partnering strategy over the next few years?
Yes. So I mean, I think where we sit today, there's nothing going to change in our current thinking on the partnership strategy, right? We've got the Control-IQ product in the market, which is performing quite well for Tandem. Expect to launch the Horizon product with Insulet sometime next year. We're still working with Companion. I would table that one for now because we don't know once that acquisition is closed, it will be a discussion with Medtronic, how that relationship goes forward. We would probably intend to continue to support them if that's something they're open to. But no, I don't think that -- absent like one of the current partners getting taken out by another player that then excluded us, I don't think that would change. I don't think -- in fact, we earlier this year, announced an additional pump partner relationship with Ypsomed, who's a big player in Europe. So I would actually suggest that the partner landscape could actually expand, not contract. And then we're working with the various insulin companies as they develop their own smart pen technology. I think you'd expect to see those in the coming next year or so come to market that, again, also incorporate our sensor data into the patient's app experience. So yes, I think we're kind of status quo on the insulin delivery side, kind of with the sensor we need to provide the best sensor to help drive, whether it's automated insulin delivery using a pump or kind of semi automated insulin delivery using a pen or a pen cap or otherwise, I think we're going to focus on the sensing technology for now.
Okay. That's helpful. And then barriers to entry, I think a couple of years ago, clearly it was accuracy. It was precision. It was alerts and alarms. Whether Abbott ever gets there, whether they've really addressed in hypo, some of those issues or not, I'm sure we could debate, and I'm sure you might have a different take than others on that. But what are the barriers over the next 3 to 5 to 10 years? We do see some other companies making some progress, whether it's WaveForm, whether it's Medtronic, even with their new sensors, Medtrum, some of these other names we kind of hear. What's going to kind of keep DexCom -- probably keep DexCom and Abbott at the forefront of really driving this penetration and being the big market leaders in this space? What are those barriers?
Yes. So it's obviously continued superior performance, but I would suggest that the biggest barrier to entry we have now is size and scale. As does Abbott, and I wouldn't rule out Medtronic on that front either, right? If Medtronic gets their act together on the sensor, and it looks like they're making some progress, I think. Where we've seen at least in their presentation materials of late is that they're making some progress. They're still a ways behind. But you can't count Medtronic out because they do have the financial wherewithal and the ability to scale. What you've seen -- look at our business over the last 12 to 18 months working to scale G6. We put ourselves in a huge hole in the back half of last year. We managed to double capacity coming out of the year. We've doubled it again in the first half of this year. So we're in a great position from an inventory perspective, but that came at a cost. You've seen the money we've spent on the infrastructure. It is not trivial to -- it's building a -- running a clinical trial, producing some data on 10 or even 50 or 100 patients is one thing, building tens to hundreds of millions of sensors to provide on a global scale is really, really challenging. And I would suggest that outside of Abbott and Medtronic, these other companies are going to have a tough go of it. There's a lot -- I mean you've seen our balance sheet. You've seen how much money we've had to raise to get to where we are today. That's a pretty big moat at this point, I would argue. I don't know, Jereme?
Well, yes, Jereme, before you answer, before Steve throws it to you, not to put you on the spot, but if I'm one of those smaller of the -- beyond the big 3 on the CGM side, if we're being nice to Medtronic, I'm going to throw that -- them in the big 3 for that comment, how much do you think I'd have to spend today to at least be marginally competitive? What would be my layout -- outlay of CapEx dollars for manufacturing and working capital and all that to really compete against one of the big 3?
I think you've seen kind of what we've been spending on capital just in the trailing few years, and we're about to spend, but it's hundreds of millions of dollars. And that's to scale G6, and we'll be spending hundreds of millions more to put together G7 and a factory ultimately to support it. And that doesn't include the R&D burden, of course, that you see our company has. And so I know -- when you look at our operating margin profile, a big chunk of that is spent on R&D and the R&D spend per year was anywhere from 15% to 20% of revenue based on what quarter you're looking at it. So those are big, significant investments that continue to take place, stay ahead and to build, again, better product, can you invest in the manufacturing capacity to support this organization. So I think you have to raise a lot of money, and you have to have people that are really, really passionate about this. And I think that's the other part that I think being a company focused on CGM that was really born in CGM also helps, where you don't have to fight the organization for dollars. You don't need to fight for priority. We are the priority. And building a great product is the priority of everybody here.
And Jeff, you're focused on -- we're focused on manufacturing operations here. Then you got to talk about scaling commercial operations, which is another huge, huge, huge hurdle. So...
Yes. No, understood. One other thing I just want to make sure I understand kind of the DTC strategy or the -- yes, I guess, it's DTC. What -- some of those markets, Eastern Europe, things like that, where you're going to have a storefront in place now, web-based purchasing, things like that. What markets are you going to with that kind of strategy? Is it just the low-priced markets where you're not going to -- you don't see a path to reimbursement in any kind of reasonable level over the next 5 or 10 years so you go and sell direct there? Or how to think about that strategy?
I think at first it's going to be started with a focus on areas where there is reimbursement, but there is no presence to ultimately take advantage of it. And so I'll give you a good example. In Canada, in a private pay market, you can buy a product on e-commerce and you take your receipt, you submit it to your insurance company and they pay you back. And so ultimately, you can take advantage of e-commerce sites to do that. And so I think at first, we're going to be doing things like that where there is targeted reimbursement, where there is a potential cash pay market, where there's folks that would be interested in paying a more significant price for a subscription model. I think over time, though, you'll see us continue to expand that store into the lower cost markets where you necessarily don't need the footprint in-country to service the patient. But rather, you just need an easy way for them to get it. And that's what we're just going to have to think about our 2 tier product strategy and approach once we launch G7. I think we've talked about what do we do with G7. Where do we go. We've always talked about really going to your more higher end markets. And then we've talked about G6 with this depreciated equipment, all this capital we've talked about investing and going into maybe these lower cost markets where the incremental cost of the sensor is very, very low because the cost of depreciation is now 0. And that's ultimately what we're trying to look at. We're going to test it out over time, but we've really started with an e-commerce channel in Canada and U.K. So these are more established markets. But now we're looking at other markets where there is some reimbursement. We'll start there, but to your point, eventually, that will be how we service the lower reimbursement or lower cost markets over time.
And by shutting off some of those features then you protect against any kind of gray marketing, things like that?
Exactly.
Yes. And then just you mentioned the depreciation. I think that's an underappreciated point of your story that Quentin put some pretty aggressive depreciation schedules on those G6 lines. That is going to help here over the next few years as that drops off. Your only data point I know at medtech is that in contact lenses, depreciation is about 10% or 15% of manufacturing cost. Is there any -- is that ballpark accurate for how to think about manufacturing cost for G6? Or any kind of ballpark you can give us?
We haven't provided a ballpark, but I think if you take something like $100 million, I think we spent $180 million last year on CapEx, and a good chunk of that did go into equipment machinery and facilities. And so if you presume how long you expect G6 to [ lure on ] and you can figure out what the annual run rate is and divided it in, you'll start to get a good feel for how much that depreciation cost is. We haven't publicly stated it, but you're starting to get into the ballpark by doing that math. And I think you'll start to see the depreciation -- zero depreciation can be a very meaningful piece of it, especially when you consider all the automation we've invested in to G6. It's -- a significant amount of the kitting is now done all by machine, which used to be done predominantly by hand. And so I think that's going to be incredibly helpful. It also helps us from a cost perspective over the long haul, just on pure labor cost.
Yes. All right. Well, I think we're out of time. Steve, I'm going to throw one more out there. You've got an analyst meeting not until later this year. I know you'll report 3Q results before then. But you're already at your long-term plan on the operating margin side. I mean would it be fair to think you could update some things at that analyst meeting on kind of LRPs?
Yes. I think we're going to update you across the board on the numbers. That would be our plan at that meeting for sure.
Yes. All right. Well, I think I'll leave it there since we are out of time, and I've got another presentation in 4 minutes. So good talking to you guys as always. Thanks for the time, thanks for spending the day with us and we'll talk soon.
Take care.
All right. Thanks.
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