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

And you -- Larry, you started the question with your comments around Stelo, and we have been kind of happy with how Stelo has performed. We just lapped the 12-month anniversary of the launch. So we launched Stelo last year in August. And in the first 12 months, we've done $100 million in revenue. There's a few wearables, I think, that have been able to do that in the first 12 months. And we really are just starting to get going. We've made quite a bit of updates to the app. We've brought in nutrition information. We're now the photo meal logging where you can take a picture of the app. We're going to bring in all kinds of additional insight around nutrition because we really think that, that's one of the opportunities as we look broadly at the Stelo opportunity to bring that nutrition in.

So to follow up on Stelo, $100 million in the first 12 months. That's new to me. I don't know if you've disclosed that before. Any way to think about peak sales in the next 5 years? And how big can this product be?

Yes. We'll get to that when we give you the LRP soon. And when we have that, we'll ultimately give you some context. The reason why we want to talk about it that we do want to lay it out because we talked about type 2 coverage coming in. That's a great win for us because ultimately, we know when there's coverage, we know that folks tend to use the product more often. And so we're going to combine that with the Stelo platform. We're also going to bring Stelo outside the United States. And so we want to lay that all out for you in an LRP, but it's not 100. Obviously, it's hundreds and hundreds of millions is what we expect it to be. But give us time. We'll give you a specific number in the LRP, which I think will give you some comfort around it. It's a big, massive opportunity for us.

Soon, of course. soon.

Yes. We do intend also to bring that product to international markets. Today, it's only available in the U.S. That's been our focus. But as time goes on, we want to launch it in multiple different geographies.

That's helpful. So type 2, a few questions. I guess, before the RCT and the CMS coverage. You have 6-million-or-so covered lives or expected by the end of this year. How -- are you able to access those? I mean, are you seeing a benefit? Are you accessing those patients today? You're able to target the right physicians and patients? Talk about the opportunity before CMS coverage?

Yes. We -- it's a big expansion in the number of lives that have access to CGM. And so as we look at, we are seeing traction there. We're taking share certainly in the non-insulin using space where we historically haven't been. And one of the keys to success here is making sure when a doctor writes a prescription for one of these patients, they have confidence that they're going to be covered when they go into the physician's office. So the idea of writing a prescription and having a patient go to the pharmacy and be quoted a cash pay price because they're not covered is not something a physician wants. So our sales force carries tools to help physicians better understand exactly who in their practices are covered, what insurance coverage looks like, and that's only going to continue to improve. And that awareness around the out-of-pocket cost and the benefit of CGM is something that's part of the main message for our sales force as we've expanded to primary care.

So if I think about the big catalysts that investors are excited about with DexCom, one is the type 2 non-insulin opportunity. The other is the gross margin opportunity with 15 Day. So we'll get to that later. But on type 2, my question is non-insulin, you're doing the RCT. I don't think you've disclosed kind of the design. So it's hard for us to assess. But how confident are you that, that study is going to be positive. We're going to see results like we saw in MOBILE. Anything you can say?

Sure. Yes. So it's a randomized controlled trial that we're running in patients that have type 2 but don't use insulin. And it's a pretty large swath of users. So you think about folks that are taking GLP-1s, people that are on oral medications, the whole SGLT2s. It's the whole gamut of type 2 diabetes. And what we're powered it for is showing benefit in A1c reduction as well as time and range of metrics for this population. And based on everything we've seen in previously run studies and previous evidence is that there will be a strong benefit. We're shooting for as good or maybe even better than what we saw in the MOBILE study. That study -- our RCT will read out the first part of next year. And so we look forward to sharing that with everyone. That evidence will be used to support a number of different access submissions for type 2 around the globe, just as we've used the previous studies like MOBILE to gain access in countries outside the U.S. as well as in the U.S.

So if it reads out early next year, ATTD or ADA, any -- which one is more likely for presentation?

We may do it there. We may do a unique presentation. We'll see. It depends on when we finally get the last patients out, but it will be in the first half of the year for sure. The other important aspect is CMS coverage may come before that trial is done. We're running it because we know the importance of that evidence for the future of DexCom. But in previous years, we've been surprised at how coverage has come. We do see that commercial coverage is moving pretty fast in this category. So CMS wants to be able to offer their beneficiaries the best opportunities to take care of themselves. So who knows it could move faster.

So that's new to me. Maybe I'm just not paying close attention. What is giving you the confidence that -- or what signals are you seeing that suggest CMS coverage might come before early next year?

There's a lot of groundswell out there. I mean if you look at -- it's funny, CGM has somehow made it into late-night talk show conversations. I don't think we ever thought that was going to happen before. Certainly, you hear it on the agenda of the current administration, all different levels of it. And so we've been meeting over time with CMS and other various legislative bodies. And we know there's interest in ultimately bending this curve. That's a bit of a challenge to really the entire population. We also know based on our history, all the approvals that have taken place in CMS coverage expansion have happened on non-normal cycles to where they publish kind of out sort of normal trends. So I think while we know the RCT and going that process and getting ADA coverage to move from B evidence to A evidence and pulling that package together is the most sure fire way to follow it. There's been a lot of groundswell and interest in CGM and expanding it to the population. And so it gives us some confidence that, hey, maybe things could happen earlier. We're planning for it as if it doesn't. We're also planning for it capacity-wise in case it does.

So MOBILE, it happened 3 to 6 months after the data was presented, something like that?

Yes, It was quick.

It was very quick.

I think it was 3 months actually.

It sounds like you're hopeful that it could be at least it might be -- that's almost like a worst-case scenario, but it could be even better?

We -- yes, our goal is to be ready when it does come, make sure we've got the capability to make the product and get it to patients. I mean if I'm CMS and I'm looking at my beneficiary population, there's 1 in 3 of the population has diabetes, 3 out of 4 have diabetes or prediabetes. So that's a pretty significant issue for CMS to manage. And so I think we all know how the benefits of CGM. And so it's just a matter of time.

That's helpful. And then -- so -- okay, let me ask about then the other -- which is G8, the other pipeline product. And in the context of dual ketones and additional analytes, I mean you know as well as I, there's concerns about Abbott coming out with the dual ketone glucose sensor sometime next year. There's debate about the clinical utility of that. But I think investors are concerned that they're going to have something you don't have. What can you put -- you've talked about G8 being able to measure multiple analytes, but I don't think you've said is ketone one of those analytes. And I don't think you've been very precise on the timing. Maybe just talk about the competitive threat there and anything else you can say on when you can kind of neutralize that?

Sure. Yes. When you mentioned concern, I thought you're talking there is definitely concern about the idea of continuous ketone sensing and the actual outcomes you can drive with it, what does it actually provide? How do you -- there's no clinical guidelines out there for it. So how is this going to work with a glucose signal and a ketone sensor signal. So I think that is an important issue to tackle. But when it comes to our G8 product, G8 is a super important part of our product pipeline. It is the next generation of our wearable. So it will go across -- we call it G8, but it will go across all of our products like Stelo and the Dexcom ONE+ and other products similar to the way we've done that with our G7. That platform is 50% smaller, but has a whole lot more functionality built into it. It's got a new generation of electronics in it. So it's lower power. That's how we make the device smaller, but it also has additional functionality for multiple analytes. So you have the capability to do that. It also has some really advanced features in order to enhance accuracy and reliability even further because as we've seen over time, accuracy and reliability is one of the most important things CGM does, whether it's powering an AID system or it's someone who is determining, hey, do I have an issue with my metabolic health. Accuracy and reliability is key for that, and that's part of that G8 platform. To the specifics on the analytes that there are multiple that we're working on, we see a multitude of use cases for a wearable that can measure glucose continuously as well as other analytes. Ketones is certainly one of those. When I think about ketones, though I think about there's opportunity outside of diabetes more in the ketogenic diets, people who are doing intermittent fasting, it really could be a benefit to have a continuous ketone sensor in that type of an environment alongside of a glucose sensor. I think that's one of the things we're exploring. We're also looking at alternate analyte technologies to put inside glucose to look at other chronic diseases, kidney disease, liver disease. There's some opportunities there that we feel we could make an impact. And so we're in the process of both looking at those business opportunities as well as the technology to drive it. But G8 is certainly designed to be a multi-analyte platform.

So Jereme, remind me on the timing. You gave some window after G7, I don't know, it's like 2 to 4 years or something like that. Can you be -- can you remind us of what you've said that window? And could you be -- talk about whether it's on the early or later end because it's pretty wide?

We typically -- in terms of -- you're talking about G8 launch time frame. So we typically go in 4-, 4.5-year launch cycles. And so we launched G7 late '22, early '23, and we typically go in those 4-, 4.5-year launch cycles. And this wouldn't -- this is tracking in that general ballpark. We'll have more specifics as we get closer to it. We've got a history, right? G6 launched in 2018, 4.5 years later, we launched G7. Certainly, G5 to G6 was about a similar time frame, a little shorter than that. So we've shown you that's about the windows that make sense. And that's how we typically plan our business and our capital investment cycles, et cetera.

So it sounds like if, for example, G8 comes out in 2027 and Abbott's out with the dual ketone glucose sensor in '26, you don't think this is a big competitive threat to you at least in '26?

No, not really because the way you got to think about it is the patient population and the products. And if you look at G7 and what it offers people with diabetes, particularly on insulin, which is what we're talking about here, the most important safety feature of a product for someone with diabetes on insulin is hypoglycemia safety, right? Safety from going low. That can be deadly if not managed properly. And G7 has the Urgent Low Soon alert, which gives our users a heads-up alert when they're going low so that they can actually treat that low before it actually occurs. That's a really critical clinically proven feature of G7 that resonates really well with prescribers and patients. And that's obviously something you give up if you're going to try a different product. There's all the other features around G7 as well. When you think about diabetes, ketoacidosis, DKA, and that's a lot of what we're talking about here with ketone sensing levels, the #1 way to avoid DKA is to maintain normal blood glucose levels. And the best way to predict the ketone level is off of a glucose level. So we do think that in all the clinical studies that we've seen, especially the ones that we've run with DexCom, DKA events go down to almost 0 when you've got someone using a CGM sensor because they're managing their glucose and they're not getting into this condition where their body glucose is too high, they can't use it, so they're using -- producing ketones. So we do feel that while a part of the portfolio going forward, we're not concerned about that. We'll obviously watch it and we'll watch how the clinical environment evolves over time and how standards evolve. But at this point in time, we're comfortable with our portfolio and how it's going to compete.

Okay. That's helpful. Let's move to 2026. We talked a little bit about the LRP already. The Street is modeling about 16% next year growth versus about 14% this year. Talk about just kind of the puts and takes and just kind of reaction to where you think where consensus is right now?

Yes. So we don't want to get into 2026 until we provide guidance for it. And so -- and I understand the questions out there. It's why when we talk about an LRP and Jake is alluding to strong double-digit growth, as we are very, very bullish on this business. I mean, to the point, I mean, we're buying shares back right now. So for what it's worth, I know our share buybacks out there. We're buying them because we do believe in this business. In terms of how you're thinking about 2026 and what the factors are, look, the factors are we've got the biggest expansion we've ever had in coverage in type 2 NID. Just really starting in this third quarter is our third PBM. All of those things annualize as you move into next year. So those are certainly interesting tailwinds. A lot of the price volume deltas we've even talked about start to peel off a bit. We talked about the drivers in the back half of this year. All of those annualize as you move into next year, and there's multiple wins that are coming. We also know behind the scenes we're getting more wins in the non-insulin space as we go into the renewal cycle. So the major formularies have covered us, but then the sub-formularies, we're in the process of winning across those as well. So you've got massive expansions in coverage. A sales force that's finally got a year underneath their belt is able to really get out and get on to those call points, samples in the covered, supply ultimately coming up to the levels we'd expect it to do. International wins as well as we move out there, product portfolio with both G7, Dexcom ONE+ competing in tenders. But again, remember, these tenders some in 3-year cycles, and we're winning more and more tenders as we move out there. There's a lot of opportunities in that growth algorithm to really finish out 2025 strong. And the best way to have a great 2026 is to finish 2025 out strong. So that's what we're working on right now. And we'll give you the 2026 numbers as we get closer.

That's helpful. Jereme, on the margins, I mean, the guidance this year implies you kind of exit this year at like 66% gross margin, somewhere in that ballpark. And I think that's come up on maybe one of the last few earnings calls. Pretty steep ramp. My question is with 15 Day we can all do the math, that's a big gross margin tailwind. I think the guidance this year is about 62% and it's for the full year. You exited 66% about. How should we think about next year? You were at 65%, I think, peak. It seems like given the exit rate here in 15 Day, you should at least be at 65% next year?

Yes. So again, we'll give 2026 guidance, but let me give you some detail points, which I think is helpful as you start to think about it. Clearly, we talked about getting to a $10 sensor and then going beyond that over time. And we talked about doing that by the end of 2025 into 2026. We're right on that pathway in our standard costs. So that's an excellent driver. That becomes part of all of our plans around margin. Then you throw in a 15 Day sensor, right? That's a significant opportunity as well. So those 2 opportunities plus some of the -- again, the channel mix dynamics kind of slowing down over the course of future years really puts us in a great position from a margin perspective. So while we're not ready to give margin numbers for '26 and beyond, it will be part of the LRP. We will be going through it, but there's a lot of tailwinds, right? We had a pretty tough first half of the year with some -- I'm not call them standard COGS, but OCOGS. So your classic freight and we had some write-offs. We had a recall reserve that we put on the books in the second quarter. That was about 100 bps of a headwind. So I think when you start to think those things and you peel all of those off, you can see how our trajectory over the course of the year is moving, and that's consistent with the volume [ you see ] going through the channels, the economies of scale you see playing out in Malaysia, the standard cost coming down to 10, 15 Day just continuing to be a bigger and bigger piece of our P&L going forward. All those things leave us excited for '26, and we'll give you some numbers around that and future years here soon.

Yes. Just some additional color around. We're still expediting quite a bit of freight for this year. That's continuing to decrease as we get to the back half of the year it's helping. We will be starting up our new factory in Ireland next year. So that will be a part of the gross margin. I'll factor in there, too. But I think as we look at the business going forward, 15 Day and ultimately, our G8 product, G8 has been designed with very aggressive cost targets that Jereme talked about the $10 sensor on the G7 -- standard cost on G7. Obviously, G8 is set below that by a pretty aggressive target. And the team is doing a really nice job kind of coming in line with what we want we targeted for it. So there's a lot of opportunity for gross margin expansion there over time as we continue to look at it.

And I just wanted to ask about competitive bidding before we run out of time. I believe you submitted comments. I don't think they've posted publicly yet. Is there anything you could share on what you're recommending to CMS?

Sure. So as we look at competitive bidding, there's the proposal that was out there, there's a lot of different aspects to it. I think our #1 focus here is ensuring that there's not an interruption of beneficiaries. Today, there are thousands of DME suppliers, over 2,000 that supply CGM to beneficiaries and bill Medicare. And so as part of this proposal is to reduce that number to a smaller set. And our goal there in thinking about that is let's -- how would you do that and not be disruptive. So we've actually recommended that CMS delay this process and think more about the supplier base as well as some of the changes in the categorization of CGM moving to the pay-as-you-go, the rental type model, which we think is not a bad idea because it allows people access to the latest technologies. But it's something that needs to be taken carefully because this is -- could be quite disruptive and the last thing CMS or DexCom or anybody really wants is disruption to beneficiaries.

That's perfect. So Jake, about 30 seconds left, feel free to go a little bit over, but I want to give you the last word here, really a good discussion. Appreciate you being here, both you and Jereme. Any closing remarks? Anything you want to highlight that we didn't touch upon?

Yes. I would just say, as we look to the future, it's extremely bright. We have this tremendous opportunity with the current market as well as continued coverage expansion. And I think if you look at -- as an investor, if you look at the -- how DexCom is valued at this point in time, I think our growth rates of strong double digit into the future are maybe not reflective in the current valuation.

All right. Perfect. We'll end it there. Thank you.