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

Great. Good afternoon, everyone. Thank you so much for joining us for our annual SVB Leerink Global Healthcare Conference. My name is Danielle Antalffy. I'm one of the senior medtech analysts here at Leerink. And we are very lucky to have with us today Dexcom. We have Jereme Sylvain. And Jereme, I am a jerk. What is your title exactly?

SVP Finance, Chief Accounting Officer.

I was like, do you want to work at SVB? Is that where you're going with that? And Sean Christensen, Head of Investor Relations. Jereme, I'm so sorry about that. But listen, thanks for joining us.

And I thought maybe a good place to start is on -- well, maybe a good place to start with you, just give us a quick snapshot of sort of where we are. You guys reported Q4 earnings a few, when was it like 2 weeks ago now, I guess, and you provided 2021 guidance. So maybe just give us a quick snapshot of what happened in Q4? And what you're thinking as we look ahead to 2021?

Sure. Yes. So Q4, another strong quarter for us. We grew globally around 23%. Unit growth was around 40%. We obviously try to put that out there because we want folks to understand that, that really is indicative of the patient capture year-over-year. So I think it's really important. All in all, we thought 2020 was a fantastic year. The full year kind of came out at around 30%, and that was both in the U.S. and internationally. So really strong all around. And all of that was despite really pricing headwinds that came out, with channel mix headwinds for that matter, they came out to about $190 million. And so when you take that into account, you apply what the ultimate unit growth was. For the full year, it was around 40%, and that was impacted by COVID. So as we came out of that, we really guided towards 2021. And as you're thinking about 2021, how do we think about it? We thought about 2021 with our 15% to 20% sales growth, so it's $2.21 billion to $2.31 billion. And that includes about $200 million of pricing pressure, and that's, again, same channel mix pressure as opposed to traditional pricing pressure. And so as you think about it, it's another continued strong year. We assumed that our patient adds would be about the same as we had in 2020. And so you'll ultimately see that playing through in those figures. And then on top of that, we had about $200 million of pricing headwinds that we've applied. So that implies around 25% to 30% annual growth. We also guided to operating margins of around 13%, which is a little bit of a step back from where we exited 2021. That's really on the back of some investments we're making. And we've talked long about that. Danielle, we're happy to go into more, if you'd like, but really, those investments are around our sales force, DTC, a lot of our sampling programs. And as you know, we're launching G7 in the back half of the year. We're still making investments around clinical trials. And then the new markets that we're ultimately going into. And so there's quite a few new markets that we're trying to advance. We try to take advantage of some of the hospital entry. We've been able to get through the COVID process and really turn that into more of a product offering. So we'll continue to make those types of investments throughout the course of the year. I'll pause there. I know there's a lot there, but happy to answer any questions or going to a little more details if you'd like.

Awesome. Yes. No, that was a great snapshot, and that gives me a good jumping off point. And maybe the first place I want to look is, so you mentioned in that 15% to 20% sales growth guidance, you're -- you guys are reflecting just the same number of new patients as what you saw in 2020. And that's in the midst -- that's now coming out of this pandemic. I acknowledge you guys did a pretty good job by continuing to add patients through the pandemic. But you had that headwind last year. And on top of that, you do have all these incremental investments in 2021, expanding the sales force, B2C, advertising that you're really ramping up a Super Bowl commercial with my good buddy, Nick Jonas, who, by the way, Sean, I thought was coming -- I thought he was coming on for -- I like you a lot, Jeremy, but where is Nick Jonas?

Next time. Maybe next time.

Yes. Anyways, so if we think about -- help us reconcile why new patients actually wouldn't move higher -- the number of new patients has -- be greater this year, given all those investments and the easing of the COVID headwind than what we saw in 2020.

Yes. It's a fair question. It's one that we certainly contemplated quite a bit. The way we've generally thought about guidance is, first and foremost, when we gave guidance, we first gave it around January. And recall, we were in a bit of a lockdown at that point. And those have really throughout Europe and as well as some of the U.S. cities were having difficulties with COVID remission. So I think when we gave guidance, we had some assumptions that we'll see when COVID ultimately dissipates. And to the extent that COVID dissipates faster than expected, there could be some opportunities there, there's no question. The other part, and then you asked the question around investments in DTC, sampling and sales force, we are going to double the size of our sales force. We've made those announcements, and we're well underway there. So we're very excited about what that means for the adoption of CGM. And we are going to be spending on DTC, and we are spending on samples. If you recall, we couldn't really sample until the back half of last year. So those investments in sampling will take place. But what we are -- what we do have to do is we do have to train up the sales force. We do have to reallocate territories and ultimately make sure that we're calling on deeper into the PCPs, which is one of the reasons for doubling the size of that sales force. And so consistent with what we want to do is we try to put out guidance where we know that, that is really the base case. We want to make sure that it's prudent and thoughtful and let upside play out. And when it does play out, we'll pass it along to our investors. But getting ahead of it, not knowing necessarily when those -- the sales force will be effective, when those samples might actually yield folks who ultimately want to come on to the product in a more full-time basis, counting on that is something we didn't believe was appropriate to do in setting guidance.

Okay. All right. Understood. Well, you have -- so over the last few years, you guys have taken -- it seems like the same approach to guidance. You significantly beat guidance every single time. I guess maybe help us understand what happened better, faster, what have you, over the last few years relative to your guidance. And is this year any different to how -- from an approach to guidance perspective than the last few years?

Yes. So the last few years, the adoption curve has really ramped up. And when we made some of our assumptions in prior years, you make assumptions around new patients. And if you're able to exceed those new patients, clearly, which we have been able to, we've been passing those along. I wouldn't necessarily say that we had a crystal ball as to say, well, CGM is absolutely going to uptake faster than any year in the past. And so that's one of the reasons why is that kind of tailwind, if you will, of adoption has been really effective. Going forward into 2021, we've been very clear about what we're assuming, which is the new patient adds or similars to 2020. If we're able to go faster than that and leverage all of the tools that we put out there, we absolutely can beat it. I think this year, what we've done is we just wanted to be even crystal clear around our assumptions. Because we realize that with COVID and all the variables kind of in and out, it was important for us to provide that clarity. So that's the thought process. I think there are potential opportunities to exceed. And if we are able to be effective with the spend we're making, we potentially can. But for now that's our guidance, and that's ultimately the assumptions that go.

Totally fair. Okay. As it relates to G7 and launch timing there, I mean FDA is also a bit -- with COVID, FDA is a little distracted. I mean who knows what will happen. But just as far as how much is the guidance predicated on timing of the G7 launch, if at all. Can you comment on that?

It really isn't. There is some assumptions that G7 will obviously launch in the back half of the year. But because it launches in the back half of the year, there isn't really a lot in our guidance around that. And so it shouldn't have an impact one way or the other in terms of our meeting our new patient needs. And we still believe with G6, we have a market-leading solution, especially as we think about what we're competing against today, that should ultimately support it. So we don't necessarily need it. It's a nice add, if you will, over time. We think it lowers those barriers to adoption. So really, it comes back to new patient adds. But again, it's not a huge contributor, just given it's in the back half of the year. And we talked about it being a limited launch. And so it doesn't really play in significantly to what our expected new patients are for the year.

Okay. Understood. All right. I just want to peel back the onion a little bit on the ramping investments that you guys talked about. And sort of how you're approaching -- so first on B2C advertising, how you're approaching? What counts as a success -- like how are you going to measure success versus not a success? We're going to scale back investment. What's the time frame with which you're trying to gauge, how successful this is?

Yes. And our marketing team does a wonderful job of this. I think what we do a lot of is we take a look at how leads ultimately come in. And certainly, we try to capture why the lead came in, but we also see those leads as they come in. And you can generally tie leads and website hits to when you're actually introducing advertising into the market. So a good example is the Super Bowl. That's an obvious one. But what you ultimately can see is changes in leads based on that advertising. As you go overseas, there's certainly programs. You'll see as those programs run, hits to the website immediately spike up. And so you start to see those feed in. And based on those leads, you look at conversion cycles and then the average lifetime value of customer, and you're really comparing that to the cost of investments and the cost of ultimately servicing it. And that's all we're making the ROI assessments. And so you can generally see that, now it takes a little bit of time, right? Once you get the lead, you've got to then cycle it through. They've got to get their hands on product. But I think that's how we're looking at it. I think the ROIC, as you see those out the gate, has been incredibly strong. We're in the process of capturing all the DTC leading up to the Super Bowl, the various other outlets. We'll be capturing the DTC associated with the Super Bowl over the next few weeks. Clearly, it takes a little bit of time for us to see those patients ultimately flow through. So we'll be capturing that. And as long as it meets the internal rate of requirements we have, we'll continue to do it, and so far, it's exceeded it by multiples. And so we're not -- it's been a nice and an interesting way to invest. But that's how we'll keep an eye on that. To the extent it starts to lower down, that's when we'll modulate accordingly and make sure we're getting the most bang for the buck on behalf of both the company and our investors.

Okay. Okay. Got it. One of the questions I've been getting as it relates to the D2C advertising is that each incremental new patient is going to cost more for Dexcom, patient acquisition costs are moving higher. Can you comment on that and how you guys are managing through that? Is that the right way, wrong way to think about this?

So it could over time. We haven't seen it yet. The law of saturating a market ultimately would indicate over time, you've got to hunt a little more to find that. I don't think we're there yet today, though. We talk about market penetration, even in the intensive space, it's really only around 25%. So right now, it's a pretty open market to go after. So today, we don't see it. Over time, could -- as the market becomes more and more adoptive of technology, finding that next patient be a little bit more difficult, perhaps. But we think we're quite a ways away from that being where there's a material inflection in cost per patient acquisition.

Okay. Understood. All right. And then the other area of investment on the sales force expansion. And if you could talk a little bit about that and where the target is. And my understanding, and again, correct me if I'm wrong, is it's really around the primary care physicians that are managing the type 2 patient population. But help us understand where the focus is? How long these reps you expect them to become fully productive? What a fully productive rep looks like?

Yes. So what we can do is we can go into a little bit about how we thought about it. So we went and looked at really our sales force. We're doubling the size of the sales force. So think about it that way. And as you double the size of the sales force, most endocrinologists were already being called upon. In fact, I think, pretty much all of them called upon a number of territories. But as you're having those territories and you're calling on the endos, you really don't have a lot of capacity to go service all the PCPs in the area. And so what we're doing is we're resubdividing up the territories, doubling the size of the sales force. So that instead of being a majority of your calling points being endocrinologist, it now flips, the majority of your calling points will now be primary care physician offices, which makes sense, there's a lot more of them and that's where those call points are. And so in hiring, that's what we really focused on. So we went and work with outside parties and really thought through the call points and really did a meaningful territory realignment across the board. And so that's what we really did here in January. And so the sales force is up and running. In fact, we're having our national sales meeting right now as we speak. In terms of how long it takes to get productive, we're going to find out. We talked a little bit about this. Over the past 3 years, our sales force has remained the same size. And so -- and we've been in this world where we haven't had a material change in ultimately how we go-to-market and service. I think we're going to find out. And the expectation is, if you're an experienced rep or you have call points on primary care physicians, whether through pharma or diabetes, and primary care physicians would have been your call points, we expect you to be a little more effective earlier on. You go through training, get used to the product, be able to make sure we can ultimately communicate the value. For those that maybe don't have touch points in the area with those primary care physicians, it's going to take a little bit longer. So we don't have a specific time frame. So could some contribute earlier in the year? They absolutely could. Could some take 6 to 9 months to fully get up to speed, maybe even a year, they could. And I think that's where, as you circle back to our guidance, why we're assuming a similar patient adds as last year, even though we're doubling the sales force, it's because, it's hard to guess the timing as we get the -- when you get to full utilization. But again, if it happens quicker, we'll be able to pass along incremental value, of course, to our shareholders.

Okay. Okay. That's perfect. So long-term guidance. You guys provided or updated your long-term guidance back in December. And my question around that, so just to level set everyone here. I think what's baked into your $4 billion to $4.5 billion long-term guidance, long-term being 2020 -- by 2025, is basically a doubling or so of penetration in the insulin-intensive patient population, if I'm thinking about that correctly but it doubled -- that penetration doubled over just the last, like 1.5 years, 2 years. So I appreciate the law of large numbers, but it actually feels like with all the investments that are going behind CGM therapy. I mean, it feels like the snowball is rolling down the hill. This is becoming an avalanche. Why will it take 4 years, 5 years from now to double from here?

Yes. It's a fair question. We basically said in the intensive market, our guidance assumes about a 60% penetration rate. And today, we're around that 25% penetration rate across type 1 and type 2. So it a little more than doubles over the next 4 years. And you're right, the adoption curve has been growing. I think the way we thought about it was just like you go through your normal adoption curve, you have your early adopters, you have then the fast followers, then you have the reluctance to technology. We've thought about that in the context of how this market adopts CGM. And while we believe, if you talk to Kevin, if you talk to our leadership team, 80% over the long-haul is where folks ultimately land. It's hard to know when exactly that 80% hits. Does it hit in 2025? Does it a 2027? Does it hit -- does it hit sooner than both of those? We really don't have that crystal ball because this is a new technology in a new market. So we've really drawn parallels to others in making some of those assumptions. And the way we really wanted to make sure that we gave everybody confidence, our investors, and we just called it out. We said, look, we assumed 60% based on what we're seeing today, based on other technologies and based on what we know from the leads coming in over time. So those are assumptions. There's nothing structurally that prevents it. We believe, over time, adoption gets much higher. I think it's only really the question on timing. And you know us well enough to know that we don't want to get ahead of ourselves in terms of providing what that adoption curve looks like, what those new patient looks like. We really aim to deliver the base case to our investors. And if we can deliver more to them, then that's just gravy on top.

Got it. Okay. That's fair. That's fair. All right. What about -- shifting gears to the pharmacy channel. That shift has moved faster than expected, but you guys are still talking about just about 75%, I think, of the installed base going through the pharmacy. Why is it capped at 75%? Could it actually be higher than that? Or is that something you guys don't want more than 75% to go through the pharmacy?

No, I think that's just our best estimates based on where ultimately we think insurance companies land, where we think patients land. So we're clearly very bullish on the technology and bullish on the adoption and really bullish on the experience as you get through the pharmacy channel. It's -- all of our market studies would say, go that route. But there are some -- there's 2 different factors, I think, that play in here. I just think it's important to know. One is we built our business around DME, and we have a lot of DME distributors out there that really ironed out decreases in terms of working with some of their patients in terms of how to get the product. So for some of them, they may not want to switch. And clearly, with distributors have an incentive to make this switch. We're mindful of that. We know that, that's potentially out there. We also know if you get your pump -- if you get your pumps through a DME provider and you're in a high-deductible health plan, there's a very good chance you hit your deductible pretty early on in the year, and then you may want to go through that channel because you no longer have a copay. And so there's a couple of different reasons for ultimately doing so. And so we think some people stick behind. We do think a majority ultimately go the pharmacy route. And clearly, it's an easier way to go. So it's easier for primary care physicians to prescribe it. But there is a type 1 population in a population that's already on DME that may lag behind. It could be -- Danielle, it could be 80%, it could be 73%, it could be 77%. We've put out 75% because we think it's our best kind of estimate. But -- and we think that's where the bolus goes. After them, we'll ultimately see how it goes over time.