DexCom, Inc. (DXCM) Earnings Call Transcript & Summary

Well, everybody, thank you so much for coming back for the next session in the 2021 Citi Healthcare Virtual Conference. I am very thrilled to have with us the management of Dexcom. And we're going to start with the CFO and COO, Quentin Blackford. Quentin, how are you?

I'm doing terrific, Joanne, and thanks for having us. It's good just to be able to get out and interact with folks a bit more than we do here in the office. So I appreciate the opportunity to be here with you, guys.

I know. I wish you were all in person, but I guess this is it for right now.

As good as it gets for the time being, I suppose.

I know. When I was putting together these questions for you, I was trying to figure out when it was that you joined Dexcom. And I was like, it was just like last year, and then I realized it was 4 years ago.

[ Kind of busy ].

So a few things have changed at Dexcom, not a lot since you arrived. But if you were to reflect back on the changes that you've seen maybe versus your expectations or just generally, what would you say?

Yes. No, you're right. It's hard to believe that it's been 4 years since coming on board. It's been an amazing 4 years. I think that coming into the opportunity and into the organization, we were incredibly bullish at the time on our ability to really address a need in that intensive insulin space. We knew we had a product profile and a road map in front of us. Gen 6 wasn't in the market just yet, but we were incredibly excited about it. I think what's changed, to be honest with you, is just one, how good of a product Gen 6 has really been. And the reality is we have completely eliminated the need for the finger stick. And when you start to think about that, the application of the technology starts to go far beyond just the intensive insulin-using patient, far more into the nonintensive, but even beyond that. And so I think probably what's changed more than anything is this realization that we have a platform technology here that's going to be able to address so much more than just kind of that core market we once thought of addressing call it, 4 years ago, but further back in the day. So that gets incredibly exciting when you think about where this can go. And I honestly believe that the market opportunities are large enough that we've laid them out for you. We've articulated what those are going to be over the next 3 to 5 years. But even when we get to that point, I still think we're on the very early cusp of where this can potentially go if we're opening up these markets. So the runway here is, I believe, far greater than anything I ever expected and even us as a leadership team had anticipated back at that point in time.

So when we're here together in the next 3 years and we're looking backwards, what do you think will have been accomplished?

Look, I think that there's going to be several things that will have been accomplished. I do believe the vast majority of the intensive insulin folks are going to be on CGM to some degree. I believe in our models. We anticipate that's going to get close to 60% or so, Joanne. I would love to say it's going to be 100%. There's no reason really why it shouldn't be, but at the same time, we know that getting 100% of any market to convert is likely not going to happen. So we haven't pegged it at 100%. But the therapy is that good. It ought to be. I think we're all going to be sitting here surprised, frankly, at just how great the adoption or the application of this technology is going to be in the nonintensive space. We're seeing it in our data as we speak, in our partner programs. Every one of our key partners who have launched an effort into a type 2 nonintensive space have expanded their programs based upon what they've seen. It's incredibly encouraging. The awareness is building in that community, folks are coming on to the therapy. I think that's only going to continue to grow. So I think in 3 years, we're going to be excited about this nonintensive opportunity and how it's coming into fruition. Honestly, I think there's a whole another market beyond that, but still within the diabetes realm, which is this whole pre-diabetic patient. The sooner you can get to that patient and potentially keep them from coming on to more intensive measures of trying to control their glucose levels, there's a whole another market there that sits. 90 million people in the U.S. alone suffer from prediabetes. So you're seeing will start to play out with a lot of these folks who are really studying the impact there. Those are massive, massive opportunities. And then you start to translate that into opportunities beyond the States. And the same thing is applicable outside of the U.S. So as I said, the market opportunities are massive. And I think you're seeing us prepare for that. When we talk about building out a capability in Malaysia, we're not talking about in terms of production. We're not talking about simply producing tens of millions of units. We are planning to build hundreds of millions of units to reach these markets. So that's what I think in 3, 4, 5 years, we're all going to be sitting here really excited about the markets that have opened up, but also talking about the fact that there's still a lot of runway in front of those markets.

One of the things that's interesting is my models from the diabetes companies' most talk right now just about Dexcom. That TAM that I have in each of the models has changed like 5 times in the last 5 years. We started off with 1.6 million type 1s and 1.6 million type 2s, then we had a worldwide opportunity. I mean so when you add it all up, just what you're seeing today, what's that number? What's the magic number?

I can break it down a little bit for you. I mean you take the States alone, to your point, 3.5 million, 4 million patients between type 1, type 2 intensive insulin-using patients, that's their therapy. You look at the type 2 in the States alone, nearly 30 million folks. You start to think about that outside the States, another 30 million, 40 million folks. And then you start to get into this whole prediabetes space, hospital. There's real application for this capability in the hospital. You think about gestational, there's north of 100 million people in that population alone really in the States alone. And then you start to think about what that looks like outside the States. So we're talking about hundreds of millions of patients who can utilize this therapy that we're just learning about. And I guess if you wanted to take it further, Joanne, and I think there's application here, but hard to quantify all of this market opportunity, but there's no question we're going to be measuring other analytes off of this platform in time. It's going to go beyond just glucose. So that starts to expand the opportunity even more significantly. So these are hundreds of millions of patients using sensors many, many times over, over the course of the year, which you can imagine, turns into a very big sensor number.

So what is it that's needed to get to these patients? And I want to break it down specifically between -- I'll give you my ideas, but then I'd like to hear yours. Technology, reimbursement and price.

Yes. So it's a great question. I think the technology, we're on the cusp of the technology. And what I mean by that is the Gen 6 product is a wonderful product. But the Gen 6 form factor and the wear profile is not the perfect product for a type 2 nonintensive. A type 2 nonintensive may not want to wear it continuously for 90 days, which is the duration of our transmitter today in the G6 wear profile of our product. You get the Gen 7, 10-day profile, you're using, disposing of it the entire product. It's easier in a better wear profile for that population. So I think the technology is very, very close. And look, it's -- we're demonstrating this today. Gen 6 is good enough for a good amount of those folks in that nonintensive space already. They're willing to deal with the fact that the profile is not perfect because they see the value of the technology. You remove that hurdle with Gen 7, and I think the application becomes even stronger. So I think the technology is very, very close. It's not -- I don't think it's really holding us back in a meaningful way yet, but it's going to be a real opportunity, I believe, with Gen 7. Price, we've been very clear with price and our intentions. We know that we needed to step price down over time. A big part of that, Joanne, was we coupled it together with our move into the pharmacy channel. We historically had been a DME company at a much higher price point. We knew we had to bring price down, and we knew we had to make it easier to get on to our product. And that's where we really started to approach the pharmacy channel. So in conjunction with each other, we said, "Look, as we sit down with payers and we're going to open up access into the pharmacy, we're willing to concede price to let that happen." That price point that we're walking to is also the long-term price point of how we think about pricing Gen 7. So we're stepping right into a price profile that we think is going to be long term, very viable and scalable for this business. So there's not this other headwind to be realized when Gen 7 comes, it's part of the strategy that we're talking into. And that's the channel mix headwinds that we talked to and have been talking to for the last couple of years here. That's stepping into that pharmacy model that Gen 7 will step right into as well. And we're going to be priced very comparably to any of the competition in the marketplace at that point in time. I think we're probably a couple of years away from it. You're going to see that price or that channel headwind continue to exist in '21. I think there's a bit of it in '22, but then I think we're at a very comparable price point to our competition. And the other thing I'd point out, and I think it's important is, many times, price is seen as an inhibitor of getting on to the Dexcom product. Look, 70% of our patients are getting on to our product at $60 or less out of their pocket every month. 30% of folks are getting on with zero co-pay. So the price issue that's been identified or that folks like to talk about is not a price issue to the patient. The patient has been addressed for the most part, where the price is realized is today with the payer. And if you sat down with payers, particularly in the U.S., they continue to see a very different product offering between the Dexcom product and the Abbott product. So price has not been an issue. This has been more strategic about our effort to step it down into that pharmacy model over time and set us up to go into the future. But I think it's being addressed. I don't think there's much more that has to be done there, Joanne, to be honest, to open up that opportunity. I think probably the biggest thing is creating awareness in that space. The reality is that the type 1-intensive diabetic, the vast majority are seen by endos. Type 2-intensive diabetics are seen by endos, but the vast majority of the primary care physicians, and certainly, the nonintensive folks are seen by the primary care physicians. A big part of our strategic effort this year was to really focus our efforts on doubling that commercial force and put those sales reps directly into the primary care physician offices so we could educate and start to really bring those patients on to our therapy. So part of it and probably the biggest opportunity to open up that opportunity in type 2 nonintensive is really awareness.

And reimbursement was one I threw out there, but it doesn't seem to be as much of a hurdle.

I don't believe it is. Honestly, there's -- in that nonintensive space, being able to define exactly what that model looks like long term is a little bit difficult, to be honest, because there's the aspect of going directly to the consumer. We know there's viability in that. Those patients are getting on to the therapy today, and we're going to continue to approach it that way. But what the payers are seeing in our programs that we have launched with them, whether that's the United level 2 program, whether that's Intermountain, whether that's Healthstats, is really, really encouraging. I think I mentioned it earlier, every one of those programs have now been expanded to bring more patients into that population because of what they're seeing in terms of bringing down the cost of care. So what the reimbursement world has to look like and how you tackle that is what we're sorting through. I think ultimately, in that nonintensive space, you're going to have multiple models that are probably playing out, which is a direct sell into a payer program that's putting CGM therapy on that entire population. There's a portion of that, that's going to go direct to the consumer as well like we do today. So we'll learn more about that over the next probably 18, 24, 36 months as we go, but I believe you're going to see multiple models in that space, which look, it's a massive market. There's opportunity for multiple models to have a lot of success there. But I wish I could give you more clarity on exactly how it's going to land. We don't know yet, but there's a lot of value there to be captured. So we'll define that model as we keep going forward.

So when your salespeople walk into a primary care physician and say, "Hey, look, you have a type 2 population who probably are not insulin dependent. How are you managing them? Or how do you recommend managing them?" Is there a pushback? Is there just sort of a "No, they're fine." don't need to change my day, it's difficult enough."

Yes. Look, most of these primary care physicians have 15 minutes to see their patient. I mean they're cranking patients through very quickly. I think what we have to do is educate on the value of CGM. And that means spending time with that primary care physician and making it as easy as possible for them to prescribe the technology, which means historically, the DME pathway was never going to be entertained by that population. They weren't going to spend the time to work through it. Now that it's a pharmacy benefit, now that we can drop a sample and leave it in the office and simply educate the primary care physician but also share, "Look, just place the sample on your patient, let them go experience it." That's an easy transaction. We weren't able to do any of that sampling up until really the back part of the fourth quarter last year. We're now able to do it and we're now starting to sample in these offices in a very meaningful way. I think that's what is important to enable it. So it was creating access in the pharmacy channel that was important for this PCP population, but also the ability to really sample and educate at that level and make it easy for them and remove any obstacle of putting them on the technology. So I think as that awareness continues to grow, you're going to see more and more folks come on. The reality is, there are some plans out there that aren't specifically targeted towards that nonintensive population but don't have the requirements that make it available for some folks to come on to the therapy, and you're seeing that happen as well and play out in the space. So how quick it goes? I think that's the question. I think we all have a high degree of confidence. It's absolutely going to be a market that's going to utilize CGM. I just wish I could tell you how fast it goes.

Well, I was just going to ask you. It's hard to know the timeline, but is there a tipping point? Is there a moment where either the physician or the patient goes, "Yes, I want this."

Yes. I think there will be. What causes that is hard to say, but let me give you an example that I think makes it hard for other payers not to follow suit. When you take something like a United level 2 program and they come to a Dexcom, where we're on their level 2 program as we speak. And they sit across the table and they lay out the financial model around level 2, and they say, "Look, we're willing to guarantee you 5%, 10% cost savings off of your prior year cost baseline for your population of patients if you put them into our level 2 program and we keep the benefit beyond that." So they're guaranteeing a cost savings. Clients are going to sign up for that. Companies are going to get behind that, particularly those that are self-insured, but you're going to see this start to grow. And I think as they have success with that, other payers, while they might not have the same data that a United might have or they haven't captured it, they're going to follow suit because they're going to see that they have to stay competitive in that realm. So I think there are several things that causes it potentially to move at a different pace. It's just when that happens, I don't -- I can't tell you. But I do believe it happens.

And you sort of tapped into a theme that we've been working with, which is data collection and how we now have the technology to collect all sorts of data and how do we use quantitative analysis to think about it. I mean what kind of data collection does either a United have or a Dexcom have in terms of being able to say, "Here are your patients. This is what they're using and here are the outcomes when you use a Dexcom CGM."

It's a great question. And the reality is, Joanne, it's different by partner. Every partner shares different levels of information with us, so our access to that information is a bit unique tied to each partner. But that information goes far beyond just simply glucose readings coming from the sensor to diet and exercise and lifestyle. We're a big believer that over time, the way Dexcom will differentiate itself is going to be much more through a customer experience versus just simply hardware. And that speaks to this whole focus on software. If you can start to put that information into the hands of your patients and they can change the way they're managing their disease and results and better outcomes, I think that's where the value will ultimately be long term. So there's all sorts of different data points that we're looking at. There's various software opportunities that we're looking at in terms of building out those capabilities and putting that information back into our patients' hands. But I think that becomes a real differentiator in the future.

Okay. I want to spend just a little bit more time digging into the pharmacy channel because we've been tracking it as you have over the last couple of earnings calls, almost 2 years now. And you reached the 50% mark in the fourth quarter. Does that ultimately become 70%, 80%? I mean is there a point?

Yes. Look, our models, when we kind of laid out our long-range plan was to see roughly 75% of that U.S. commercial business moving through the pharmacy. I would love to see that at 100%, if I could get it there, to be honest with you, because the economics are far better and superior in that model from a cash flow per patient. And the ease to get onto the therapy is a whole lot easier, so I think you can reach more patients that way. We've modeled 75% is our best estimate. We know there are some payers, Joanne, who don't see it as a pharmacy benefit. They see it as a DME benefit. They've been hesitant to move. So I don't know that you're ever going to get to 100%, but we'd love to see it get as close as it can. Our models are 75%. I think if we're moving north of 75%, that's all upside to the way we've thought about the future of our business. We want it all to go there, but we're modeling 75%. And I think to get to 75%, you got to realize that last 25% conversion are moving into pharmacy from the 50% we're at today is on a growing base of patients, right? So it's a bigger, bigger number of patients that are either coming to you as a first-time new patient in the pharmacy model or you're still converting your old business. So I think there's probably a couple of years here of channel headwinds that are still in front of us. We've talked about it in our '21 guidance, roughly $200 million. It's pretty comparable to what we saw last year. And I think there's probably 1 more year beyond that in '22 that we're going to continue to step into it. But then I think we're generally there. And I think that becomes a point in time where I believe our volume growth starts to become much more reflective of the revenue growth. Look, our guidance this year was 15% to 20%. Our unit volume growth is in the high 20s, pushing on 30%, and it's because of these channel mix headwinds we're stepping into. But there's going to be a day when I believe the volume growth will be much more reflective of the dollar growth once we get through this channel mix headwind. So I think there's a couple of years here, but it's the right thing long term. We're making more profit dollar per patient as we step into it and is the right long-term model.

So when I think about the next not quarter, but the next 12 quarters, let's put it that way, you're going to be spending most of this year doing 2 things, eating through, eating through is my term the volume headwind mix while you're starting to ramp your G7 either in the background or ultimately into launch. And then when you get into next year, you've got -- again, my words, a pretty robust year with the G7 launch and having gotten through most of that volume price design. Is that the right way to think about it?

Well, I think you have 2 things coming in. I think you're continuing to step into that pharmacy channel, which creates that volume price/mix headwind, right, with the existing patient base but your new patients are also coming to you at that pharmacy price point, right, which is lower than maybe where a new patient came to you historically if they were still coming through the DME channel at all. So you're bringing on new patients at a lower price point than what you maybe had historically, and you're converting your old patient base at the same time. So once you get through a year of that and you've transitioned it, it's no longer a headwind and you anniversary it, and you don't have that challenge into future years. But I think you're still going to see a bit of headwinds clearly over '21 and into '22.

And let's talk a little bit about G7. I feel like we've been talking about that for a bit of time. Do you think investors understand or appreciate it to the level you think they should?

In what respect? I mean in terms of capabilities, feature set?

Everything. Capabilities, features or how it's going to impact the P&L.