DexCom, Inc. (DXCM) Earnings Call Transcript

Great. Good morning, and welcome back to the 42nd Annual Canaccord Genuity Global Growth Conference. I'm Kyle Rose. I'm one of the medical technology analysts here at Canaccord. Very glad to be back in person and see some faces rather than just Zoom screens. But I'm joined this morning by Dexcom. Dexcom is a leader and innovator in the design, development and commercialization of continuous glucose monitoring, which has really been one of the largest growth segments within med tech over the course of the last decade. So very pleased to be joined by the CFO, Jereme Sylvain; as well as the Head of Investor Relations, Sean Christensen. So we've got a fireside chat format here. I've got a list of questions I want to work through. I want to make it as interactive as possible. So raise your hand, and I'll do my best to weave anything in. And then just before we jump into questions here, just need to give the obligatory compliance disclosures that any disclosures if and where applicable, you can find those on either our conference and/or our firm website.

So gentlemen, thank you very much for joining us. I think the place that I want to start is just on the Q2, you reported good Q2 numbers a few weeks ago. Maybe just kind of refresh us on the growth you've seen through the first half and kind of the setup as we head into the second half of the year.

Yes. Thanks. And thanks, everyone, for joining us today. Really great seeing faces again. Q2 -- really Q2 results, as you think about what the key takeaways were, I think what it does is it really positions us for a springboard for the balance of the year. So I'll kind of cover the really the -- what I'll say is the takeaways is. Outside the U.S., something that maybe we didn't talk about as much in the follow-up calls, an incredible quarter, 34% growth on an organic basis excluding currency. So certainly for us, that continues to hit on all cylinders. And that doesn't include the new product launches, a really much contribution from new product launches, both Dexcom ONE and G7. So we certainly have a lot of momentum outside the U.S. and continue to be excited about what that opportunity brings. In the U.S., we had about an 11% growth quarter. That's on a mid-30% unit volume growth. So still very strong unit volume growth. But I think the big takeaway is we had record new patients in the second quarter and a record by a significant margin in the U.S. And so that sets us up for momentum really coming into the back half of the year as well inside the U.S. as a recurring revenue business, clearly, that starts to play out. And so I think in short, the takeaways are solid quarter, able to reiterate full year gross margin, full year operating margins. We were able to navigate through all the economic challenges folks are facing. As we come out the back half of the year and how we're set up for success for the back half of the year, we expect the U.S. to reaccelerate in terms of growth rate. And we expect the OUS to continue to be very, very strong. So we feel we exit in a great position and really excited for the new product launches that we have coming over the next 6 to 12 months.

Yes. And it's great to hear about the expectations for momentum for the U.S. to accelerate in the second half, particularly given -- we did get an update on the Q2 call just about G7 being pushed out a little bit. I mean that was one of the -- that's where I took the majority of my questions from investors. So maybe just help us understand or remind us what the sticking point was with the FDA on the changes you're making with G7 and then just the overall confidence that you have that after we make these changes, you can still launch before year-end.

Yes, I'm happy to take that one. And look, that was probably where some of the conversation took place. And so we'll reiterate, we submitted with the FDA back in Q4 of last year, products in wonderful shape. As typical in the review process with the FDA, there's back and forth questions. They asked us some questions, and we think we've been able to address all those with the exception of one, which was a software feature which allowed for alarm management. And effectively, it was the equivalent of a snooze button. It's probably one of the more requested features out there. Ultimately, we decided the best answer was to simply remove it. And that was the quickest path to ultimate approval. So the process of removing it and doing verification and validation before we then submit all of our responses to the FDA, we're going through that process right now. So it does create a little bit of a delay. I think the reason why it gives us confidence in a Q4 approval is we've got the questions. We know what those questions are. We know what the answers are, and we believe we've answered those. The one thing that we didn't have was the software change, which ultimately we are making, and that's within our control. So we believe we'll be able to respond here pretty quickly, and we believe that Q4 approval is untapped given what we know.

Great. So I want to touch on just a couple of more macro like supply chain issues and before digging into the rest of the business. But you -- obviously, you have an extensive supply chain, U.S. manufacturing, OUS manufacturing. You're on the cusp of launching a new product in the U.S. and internationally. So just overall, where is the state of the supply chain as it stands now? Do you have enough to support your global launches? And how should we think about any of those potential areas for pressure over the coming 6 months?

Yes. Sure, I can take this one. And Sean, augment as you see fit.

Sure.

One of the things I'll give our supply chain team a lot of credit for is we saw the issues, and the biggest issue we would have exposure to would be the semiconductor industry, certainly, the chips that are used in our product. Our team really saw that coming and leveraged, quite frankly, our balance sheet to make sure that we had enough inventory to get through 2022 and really into 2023. And so we've got the inventory, and so we'll be able to manufacture those. We've also built out enough capacity both in the U.S., but also with Malaysia, our third manufacturing location coming live next year, that we can scale up and scale down as needed. Certainly, the expectation is scaling up. And so having the chips, having the supply chain, having been the footprint, the manufacturing footprint to do so, we've been in a really good position. And because we were ahead of it, that's why we were able to reiterate full year gross margin and operating margin. So we were able to do that through this process and navigate through those pricing challenges because of that forward-looking thinking. Doesn't mean we're all out of the woods yet as you think about longer term. Certainly, semiconductor industry and demand on chips is going to be something that persists for some time. But I do think thinking years ahead, not months ahead, has allowed us to really navigate this in a pretty well manner.

And I would just add on to Jereme's point, everything for Dexcom relates back to the customer. And one of the things we tried to point out on our first quarter call related to the supply chain dynamics and global macroeconomic influences is that our on-time delivery rate for our shipments was 99.7. So we are executing incredibly well, and that's something we're proud of, given the gravity of diabetes management for our customers and how significant a role our product plays in their lives.

Yes. And I guess the upside to G7 being delayed a little bit is the fact that you have very strong manufacturing margins on the G6 given you're 3, 4 years in the launch there. So let's talk just a little bit about G7. I think we understand the FDA, I guess, landscape over the course of the next 6 months, but you received CE Mark earlier this year. You launched into the U.K. I guess maybe early learnings that you're seeing as far as the commercial response from the G7 launch and then other territories, I guess, outside the United States that you're thinking about over the course of the next 6 to 12 months.

Yes, Sean, do you want to cover the U.K. learnings?

Yes. It's been a great process for us. Fun to watch. We have a daily dashboard where we're tracking various metrics in terms of user experiences. We're soliciting feedback from our users in that limited launch. The great news is that the overwhelming majority of the feedback is incredibly positive. People do not want to give up their G7 sensors. They're impressed with the form factor with the 30-minute warmup, with the app functionality across the board. When we talk about it being a step-up from our G6 experience, that's been validated by our initial customers. You supplement that with feedback that's helpful for the broader launch. And I'll give you a couple of examples, and you have 2 finance people up here who could tell you the cost of every phone call that we get. When we are training our customers, and most of that is done via videos, self-training now, one of the things we heard was with the applicator, you just have to put a little bit of pressure down as you push the button. We had people who -- that wasn't intuitive whereas we thought it was. So that's the kind of what I might call micro feedback that we take very seriously because then we can supplement our training materials and make that onboarding experience for our customers that much better just by welcoming that kind of feedback. So I'd use that as a very simple example of the kind of learnings that we have. But overwhelmingly, the feedback has been positive, and we look forward to extending this launch in the coming weeks.

In terms of the rollout, while we're not going to get into specific countries, expect -- the U.K. is an obvious one. It's one where the limited launch has taken place. But expect us to be in multiple countries with G7 as well as with Dexcom ONE. And so we've got a sequenced rollout for competitive reasons, we won't necessarily roll it out, but expect multiple countries on multiple different iterations of our various product lines. So it's very exciting outside the U.S.

And one of the things that the FDA clearance brings is it starts the reimbursement process, right? So you're -- yes, you're delayed on getting the launch to market, but then that also kind of pushes out some of the reimbursement conversations that you can have. So I guess can you maybe just talk about what, if anything, you're able to do from a reimbursement or contracting perspective prelaunch at least in the U.S. to help drive that faster?

Sure. Yes, I can start, and certainly, Sean can augment this. Generally, you're right, a lot of the contracts require an NDC code. NDC codes generally come with an FDA approval. But ahead of time, because we know this is coming and we have that level of confidence, a lot of the contracting around pricing has already been completed. We already know what the pricing is going to be. And really, what we're asking is for a very similar price to what we pay for G6. And so that process is part of the normal cadence in having these conversations. The paperwork and how we set up the annual renewals has already been set up in a way to where we can slide G7, and we just need to fill in the codes. So yes, there are certain things around the actual administrative process of getting the NDC through the entire PBM process, certainly in the pharmacy channel. But all of the other admin negotiation rates, et cetera, that has all been pulled forward. And those conversations are ongoing well ahead of approval, which gives us the confidence that we'll be able to get the kind of approval and the reimbursement in closer to 6 months as opposed to the typical 6 to 12 months. We're thinking it really gravitates closer to 6 because of the acceleration. Certainly, helpful for a large broader, faster commercial launch once we get approval.

And let's stay on the products, the product side of things in transition from G7 to Dexcom ONE because -- and then maybe just remind us all what Dexcom ONE is because it's similar, but it's also -- there's very nuanced differences. So -- and maybe flesh out why that's important and how it's positioned commercially.

Yes. Maybe I can start on this one, and Jeremy, certainly welcome your feedback here as well. So Dexcom ONE, for those of you who may be unfamiliar, historically, we've had our G Series product. Dexcom ONE is software-differentiated product. So leveraging the same currently G6 hardware. Eventually, we'll move to the G7 hardware over time, so we have the manufacturing efficiencies. The software is differentiated in that it does not have pump connectivity, and some of the premium features that we have on our core system, share and follow and also predictive alerts would be the third kind of key features. We hesitate a little bit to call it a defeatured product necessarily, though, because it also has a completely redesigned app experience, which I would say is even a step forward from our G6 app and more commensurate with our G7 app that our customers will experience. So great products. The reason this product makes sense in several of our markets is take a market like the U.K. where we announced last week that we have been included in the U.K. drug formulary, which is a kind of broader access. You have tiers of reimbursement that exist in certain of our OUS markets, not all of them, but some of them. And this is a product that allows us to access kind of a lower tier where, historically, we've been unable to compete. It's also a product as we move into kind of more low- and middle-income countries where diabetes is proliferating, it gives us easier access whether we can go in, in a cash pay product as we've done in 4 Eastern European countries who've subsequently adopted reimbursement for the type 1 population after seeing the initial uptake of the product. So it's a creative way to leverage software differentiation to really significantly broaden access to health care globally.

And when we think about that, I mean, you launched it initially into some Eastern European countries, then very encouraging to see reimbursement actually follow some of those. But then you've also gone into some of your traditional G Series countries as well like U.K., Spain. I think you're talking about going to Italy with a partner now. So how do you see the product segmentation within those markets from a G Series perspective to a Dexcom ONE? And how do you make sure that you're not cannibalizing one for the other?

Yes. So it's a great question. I think as we look at these type of markets, it's important to understand that the reimbursement and the tiering nature largely already exists there. So it's not like we're creating tiers of access and different choice. They're largely slotted in. And I would go back to those 3 features that I mentioned, the pump connectivity, the share, follow and predictive alerts. Depending on one's diabetes experience, how they're administering their insulin, things like are they hypo unaware, are they prone to hypoglycemia? Are they pediatric? These are really the determinants from a clinical standpoint that determine where they slot in from an access perspective currently. So the expanded product portfolio gives us now the opportunity to not only address the premium tier of the segment, those on pumps, those who are hypo unaware, those who are pediatric where we have done well now and continue to grow. But it allows us the majority of the population. We now have a product to compete there as well. And that's, frankly, not an area where our competitors have been operating unfettered previously. So again, something we're really excited about, very early, but something we hope is a nice catalyst for the next several years.

Yes. So you're expanding the TAM but then -- by entering new countries, but then you're also expanding the TAM in countries you've previously been in.

Correct.