Dexcom 4Q12 – Product revenue up 52%; CE Mark for pediatric indication and 2H13 approval in US; Insulet and Roche partnerships dissolve – February 26, 2013

Executive Highlights

  • Product revenue totaled $32 million, a striking 52% increase from 4Q11 sales of $21 million and a significant 50% sequential increase from 3Q12 sales of $21 million.
  • Dexcom received CE Mark for the pediatric label expansion for the G4 Platinum in Europe, a big win. A PMA supplement for a pediatric label was submitted to FDA; approval is expected in 2H13.
  • Dexcom’s pump integration partnerships with Insulet and Roche have dissolved, reflecting Dexcom’s progress towards displaying glucose information on a mobile platform.
  • A PMA supplement for Dexcom’s remote monitoring system, Dexcom Share, will be filed in 3Q13.

Dexcom CEO Terry Gregg led the company’s 4Q12 financial update late last week. Product revenue totaled $32 million, up a striking 52% from $21 million in 4Q11 and up 50% sequentially from $21 million in 3Q12. The strong 4Q12 results were driven by multiple factors related to the approval and commercial introduction of the G4 Platinum CGM in the US in October 2012. Product gross margin (consumables plus durables) came in at 54% in 4Q12. For the G4 Platinum sensor, management expects to achieve 65% product gross margin by year-end. Product revenue for 2012 exceeded previous forecasts, growing 41% to reach $93 million in 2012. Looking ahead, management expects strong growth in 2013, guiding for a full year revenue in the range of $120-$130 million, a 29%-40% increase over 2012. Importantly, the timing of the US approval for the G4 Platinum pediatric indication seems to weigh the heaviest on where Dexcom revenues will fall in that range. Management strongly believes it will reach cash flow profitability as volumes continue to increase, and is optimistic it could happen in late 2013.

Turning to Dexcom’s product pipeline, on an exciting note, the company recently received CE Mark for its G4 Platinum pediatric label expansion. Management expects to update the label and begin marketing the product by the end of 1Q13. In the US, Dexcom submitted the PMA supplement during the beginning of 2013 and anticipates a 2H13 approval. This should provide a nice catalyst for the company, since Dexcom has not historically been able to call on pediatric endocrinologists or advertise at important pediatric meetings. At JPM in January, Dexcom CEO Terry Gregg characterized this as “a major driver in 2013” and a “huge opportunity”. Complementing Dexcom’s pediatric labeling, we learned that the company intends to submit its remote monitoring device, Dexcom Share, to the FDA in 3Q13. The system enables designated recipients to receive glucose information and alerts on their smart phone – wow! We think this will especially appeal to parents, and the smartphone element could be an important advantage over Medtronic’s bedside-based mySentry. On the partnership front, J&J will file a full PMA application for the Animas Vibe, as per FDA’s request – this departs from Dexcom’s expectation for the last year that it would be a PMA supplement. The companies are finalizing the PMA and expect to submit by the end of 1Q13 – based on the G4 Platinum’s slightly less than 180-day review, a 2013 approval could still be possible. On the Edwards partnership, the GlucoClear 2 critical care CGM received CE Mark at the beginning of the year. While sales are not expected to be substantial in 2013, Edwards expects to complete additional accuracy studies and gain greater clarity on a US regulatory pathway. Disappointingly, Dexcom’s pump integration partnerships with Insulet and Roche are dissolving; it is difficult to speculate but it appears these are largely motivated by Dexcom’s intent to send CGM data to mobile platforms in future generation devices. Were glad to see Dexcom still at work with Animas and Tandem, especially because both companies are developing closed-loop products though we wish that the Dexcom technology would be available on other pump platforms as well.


  • Dexcom product revenue grew to $32 million in 4Q12, up 52% from 4Q11 revenue of$21 million. Impressively, 4Q12 product revenue was nearly on par with full year 2010 revenue of $40 million.
    • Multiple factors contributed to the record performance, including: 1) additional demand in the quarter due to CGM purchase decisions that were deferred in 3Q12 in anticipation of the new G4 Platinum product; 2) the 4Q12 seasonal boon from patients making purchases to take advantage of their insurance payment structure; and 3) a $1.2 million reversal of a sales return reserve Dexcom recorded in 3Q12 relating to 30- day money back guarantee on Dexcom hardware.
    • Dexcom has continued to see strong demand through February for the G4 Platinum system. While the company expects “softness” in first quarter product sales, as is typical for medical device companies (due to the resetting of deductibles and flexible spending accounts), in contrast to previous years, Dexcom said it exited the quarter feeling like it still had patients to sell to.

Worldwide Product Revenue








Product Revenue (millions)







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  • Sequentially, product revenue in 4Q12 grew 50% from 3Q12 sales, a significant increase over 3Q12’s sequential decline of 1.9%. Echoing comments made during Dexcom’s 3Q12 update and as noted above, 3Q12 sales were hampered by a few factors: patients who deferred purchase decisions in anticipation of the G4 Platinum, by a $1.2 million sales return reserve, and generally lower upside vs. 4Q12 (i.e., sales were all about a new product).
  • Total 4Q12 revenue was $33.3 million, up 49% year over year. Sequentially, revenue grew 44%. Management noted that they received additional funding from Edwards in 4Q12 outside of the development grant agreement. Dexcom has “effectively completed” the development arrangement with Edwards. Looking forward, Dexcom forecasts $1 million to $1.1 million in development grants in 1Q13; however, through 2014, Dexcom expects revenue from development grant revenue to decline to ~$100,000 per quarter, reflecting the dissolving Insulet and Roche agreements (see below).


Worldwide Total Revenue








Total Revenue (millions)







Year-Over-Year Growth







Sequential Growth





-1.7 %


  • Full-year product revenue totaled $93 million, up 41% from 2011 revenue of $66 million. Full-year 2012 product revenue exceeded 2006-2010 revenues combined (!) and also exceeded management’s expectations for 2012 revenue (management had forecasted 2012 product revenue to be $88.5 million (i.e., at the midpoint of its original forecast of $85.0-$92.0 million). Full-year total revenue reached $99.9 million, reflecting 31% growth from $76.3 million in 2011.

2012 Performance


Product Revenue

Total Revenue

Revenue (millions)



Reported Growth from 2011



  • Looking forward, management guided for 2013 product revenue in the range of $120-$130 million, representing a 29%-40% increase over 2012 performance. Management emphasized that the timing of its G4 Platinum pediatric indication approval in the US will largely determine at which end of the guidance revenue falls. Notably, the pediatric indication could potentially even push the company outside the upper-end of the guidance range. Dexcom also noted that the guidance does not assume an Animas Vibe approval.
  • Management does not believe a Medtronic Enlite/MiniMed 530G low glucose suspend system approval this year would affect guidance, emphasizing that Medtronic and Dexcom address two different markets. Whereas Medtronic focuses on the pump market and offers an integrated system with the Veo, Dexcom has positioned its system as a standalone product independent of the method of insulin administration (according to remarks in Q&A, the company’s current installed base split is 60% pumpers, 40% MDI; 40%+ of Dexcom pumpers are on Animas, 30% are on Medtronic, and most of the remaining 30% is on Insulet). That said, of course, some patients might have previously chosen two systems including a Medtronic pump and a Dexcom sensor but may go for the 530G because that sensor is much improved from the previous one.
    • As for Medtronic’s standalone Enlite, said management, “I think even looking at the clinical results of Enlite versus G4, I would say most of the academic and clinical community have been disappointed in the performance of the Enlite.” We would imagine however that many of the same academics and clinicians would be happy to see the improvement of the Enlite vs. the previous Medtronic sensor. While both Animas and Tandem would have to compete with the integrated offering of Medtronic’s Veo, Dexcom management remarked that J&J has been able to capture pump sales from Medtronic in markets where the Veo is already available. As of Medtronic F3Q13 call, FDA approval of the MiniMed 530G is expected “later this spring or summer.” We note that when approved in the EU, Medtronic sensor sales doubled; at this point, of course, given how low CGM penetration is, we assume all new products are good for the entire CGM industry.
    • As far as the broader pump market goes, management said in Q&A that Animas, Insulet, and Tandem are likely stealing market share from Medtronic. In Tandem’s first three or four months, the company told Dexcom that about 50% of t:slim patients were Medtronic users, 25% were patients new to pump therapy, and the remaining 25% came from cannibalization of Animas, Insulet, Roche, and Smith. This is the first detail we’ve ever heard on Tandem’s patient population, and supports the view that the company is indeed helping grow the pump market.
  • Using the same language as the previous two quarters, the international business continued to “perform well,” accounting for between 5-10% of total product revenue. Previously, OUS sales have accounted for just below 10% of product revenue and management remarked that the US G4 Platinum launch “somewhat overshadowed” consistent OUS growth. Still, Dexcom spoke to good traction with the standalone G4 Platinum and an increasing number of patients who are willing to pay out of pocket for the device.


  • Dexcom’s 4Q12 product gross profit totaled $17.2 million (a 54% product gross margin) compared to $10.2 million (49% product gross margin) in 4Q11 and $7.7 million (36% product gross margin) in 3Q12. Management attributed the quarter’s relatively lower gross margin to factors associated with the G4 Platinum launch, including: 1) the$399 warranty upgrade program; 2) manufacturing scale up activities for the G4 Platinum; 3)high manufacturing costs (including continued support of Seven Plus manufacturing); and 4) early-stage, lower-than-average production yields. For the full year, product gross profit reached$44.7 million in 2012, up 53% from $29.3 million in 2011, reflecting a gross margin improvement from 44% in 2011 to 48% in 2012.
  • For the G4 Platinum sensor, management continues to forecast 65%-75% gross product gross margins when manufacturing at large volumes. By the end of the year, management expects to be at the lower range of the 65%-75% product gross margin and in the longer term, management is “more comfortable than ever” that Dexcom can achieve the higher end of that range.
  • Durables contributed to 32% of product revenue, slightly higher than the 25%-30% that Dexcom has seen in previous quarters. Management attributed the change in balance to the G4 Platinum launch. Said management, without the $399 upgrade program and the $1.2 million sales reserve, durable product revenues would have fallen within the 25-30% range. The 32% durable product revenue was from G4 Platinum hardware sales and the 68% attributed to consumable sales were credited to both Seven Plus and G4 Platinum sensor sales. While the Average Selling Price (ASP) for sensors remained constant (the Seven Plus and G4 Platinum have the same sensor price of ~$260 for four sensors), ASP for hardware was negatively affected by the$399 in-warranty upgrade program.
  • Product cost of sales totaled $15.8 million in 4Q12, up 35% from $11.7 million in 4Q11. Sequentially, product costs of sales increased 18% from 3Q12 ($13.4 million). For the year2012, cost of sales were $53.3 million, up 32% from $40.4 million in 2011. The press release pointed to additional product sales, which of course, is encouraging for the company.
  • Dexcom spent $8.7 million on R&D in 4Q12, down 5% from $9.2 million 4Q11. Management pointed to lower clinical trial costs and G4 Platinum development expenses. On a sequential basis, R&D expenses declined 18% from $10.6 million in 3Q12, which the company attributed to reduced outside consulting services in addition to the same factors contributing the year-over-year decline.
    • For the full year, Dexcom R&D expenses were $39.5 million, up 28% from $30.8 million in 2011, reflecting a fall from 47% of sales in 2011 to 43% of sales in 2012. Looking forward, management guided for flat R&D growth in 2013 compared to 2012, with the caveat that R&D spending will be subject to regulatory factors and opportunities. Certainly, Dexcom’s robust pipeline will mean continued investment in R&D, especially as the company moves forward with development of its two next- generation sensors, Tandem pump integration plans, mobile and cloud-based platforms, and the impending filing of the Animas Vibe and Dexcom Share (see below).
  • SG&A costs were $17.2 million in 4Q12, up 26% from $13.7 million in 4Q11. Sequentially, SG&A spending grew 14% from 3Q12 ($15.1 million). Management explained that the increase was necessary to support revenue growth. In 2012, SG&A expenditure totaled $62.8 million, up 26% from $49.9 million, reflecting a reduction from 76% of sales in 2011 to 68% of sales in 2012. This exceeded managements full-year 2012 forecast for spending to be less than 20% higher than in 2011 (i.e., less than $59.9 million). Looking forward, management guided for a 20% increase in SG&A expenditure in 2013; we are eager to know if they have higher confidence in hitting this since they missed this goal in 2012.
    • Dexcom has begun to restructure its sales strategy by increasing the number of US sales territories from 48 to 68, such that a single sales representative is responsible for a single territory (versus multiple sales representatives sharing territories). In part, the expected pediatric label expansion (see below) motivated the US restructuring. Dexcom believes that with smaller territories, representatives will have the bandwidth to reach out to 100% of the 800 to 1,000 pediatric endocrinologists in the US. Further, Dexcom’s clinical support staff will be operating via phones and online as opposed to in the field. Management explained that the shift makes sense strategically given that most patients turn to online CGM training tools. Overall, the restructuring is expected to complete in early 2Q13 and result in a 15% increase in Dexcom’s sales team (which includes both sales representatives and clinical support).
  • Net loss was $8.5 million in 4Q12, a 30% improvement from the 4Q11 net loss of $12.2 million. Sequentially, net loss fell by 51% from $17.3 million in 3Q12. During the call, management emphasized that excluding non-cash charges, net loss would have totaled just $2.2 million, compared to $7.2 million and $9.8 million by the same metric in 4Q11 and 3Q12, respectively. Management expects that higher sales volumes can translate to operating cash profitability, and optimistically expects this could happen near the end of 2013.
  • Net loss of $54.5 million for 2012 represented a 22% increase over $44.7 million in 2011. Management said that the net loss was primarily due to share-based compensation, depreciation, and amortization.
  • As of December 31, Dexcom held $48.7 million in cash, cash equivalents, and marketable securities, a cash burn of $4.7 million from $53.4 million at the end of 3Q12. Management did not provide granularity on Dexcom’s timeline for reaching positive cash flow, but as noted above, was confident that with higher volumes the company could achieve profitability. We believe that G4 sales will continue strong; the word-of-mouth among patients is very positive, the phone lines are busy when one calls Dexcom and we agree with many KOLs who say that the G4 is now delivering the actual promise of CGM that has been a goal for a very long time.



  • Dexcom received CE Mark for a G4 Platinum pediatric indication the week before it reported 4Q12 results, and submitted the PMA supplement for the expanded indication to the FDA in early 2013. In Europe, the company sounds like it is moving quickly as it says it intends to update its G4 Platinum label and begin marketing the device before the close of 1Q13. Management expects significant growth opportunity with the label expansion. Currently, said management, pediatric patients account for only 10%-15% of the company’s installed base, and with 300,000-400,000 patients with type 1 diabetes under age 18 in the US alone, Dexcom understandably sees significant opportunity. As noted above, the pediatric indication will significantly expand the number of endocrinologists Dexcom can call on, and the timing of the approval is expected to be the driving factor for whether Dexcom can reach the upper range of its 2013 product revenue guidance.
    • “The clock has started” on the 180-day FDA filing – management expects approval in 2H13, slightly later than the mid-2013 timeline we’ve heard previously. Based on the discussion in Q&A, Dexcom appears confident that the FDA wants to see this indication in the US – “their [FDA’s] belief is that every child should be on a CGM device as part of the diabetes therapy model.” We certainly agree. As a reminder, the pediatric label update will allow Dexcom to recommend CGM to patients as young as two years old.
  • In 4Q12, 60%-65% of new G4 Platinum starter kits went to new patients. Impressively, the number of shipments to new patients represented a 50% increase over kits shipped to new patients in 4Q11. As a reminder, the FDA approved the G4 Platinum on October 5 and began initial shipments in late October. To read our diaTribe #48 test drive on the G4 Platinum, please visit: For greater detail on the approval and pricing, see our Dexcom 3Q12 report at
  • Dexcom expects approval of the G4 Platinum in Canada and India “shortly.” As stated in previous calls, the company is exploring opportunities in China, Japan, and other Asian geographies. We’ll be especially interested to hear more about China – while the world’s most populous country does have ~100 million people with diabetes (not to mention many with prediabetes), we wonder what reimbursement will look like on the government side. Dexcom’s entrance into China’s market could potentially mirror its experience in Europe. Despite only moderate-to-low government reimbursement for CGM in Europe, the company has seen growing traction of its standalone system and an increasing number of patients willing to pay out of pocket for the device. With China’s growing middle class, we would expect the same there.
  • Dexcom is seeing “greater utilization” with the G4 Platinum sensor than the Seven Plus. While Dexcom has not completely analyzed the metrics around this observation, it believes that it could potentially be attributed to greater trust in sensor accuracy and reduced CGM holidays among its patient base. This is a very key metric for the company, and we will belistening closely on future calls for more details as well as watching for dQ&A data on it – greater sensor utilization not only directly translates into more sales for Dexcom, but it increases the stickiness of Dexcom’s product. The result is patients are less likely to quit or change to another manufacturer. Combined with Dexcom’s observation that patients are increasingly driving demand for the G4 Platinum, it seems that this sensor iteration could indeed be overcoming some of the initial barriers to CGM adoption seen with earlier-generation devices. At the end of the day, we hope to see greater category penetration beyond the 6-7% current rate (per Dexcom’s 3Q12 call).


  • Dexcom expects that the PMA for the Animas Vibe with G4 Platinum integration will be submitted before the close of 1Q13. At this point, development and systems testing has completed and the PMA application is being finalized. This will be submitted by J&J, as opposed to a PMA supplement by Dexcom (the previous expectation). The change is motivated by clarity provided by the FDA, who has asked for a full PMA application. The FDA is allowing J&J to reference information provided in the G4 Platinum filing, which we hope will speed the approval process. From an “operations perspective,” Dexcom framed the regulatory request in a positive light, since it places J&J fully at the helm of the regulatory process for manufacturing operation considerations concerning the pump.
    • During J&J’s 4Q12 update, management commented that in markets where the Vibe is available, the company has seen 35% to 50% average sales growth for pumps compared to markets where the product has not yet launched
  • Dexcom confirmed that Tandem would expand the companies’ partnership to integrate the G4 Platinum into the t:slim pump platform. As a reminder, the original Tandem-Dexcom agreement was to integrate the Gen 5 sensor into a Tandem insulin pump. Gen 5 is simpler to integrate with partners because all of the intelligence is in the transmitter. Conversely, integration with the G4 Platinum transmitter requires pump partners to put additional hardware into the handheld or durable pump. We’re glad to see this moving forward and believe it is a win-win-win for both companies and for patients.
  • Dexcom also confirmed comments made by Insulet management during JP Morgan 2013 that Insulet is no longer pursuing Dexcom CGM integration into the OmniPod handheld. The contract has not been “formally” terminated, but given Insulet’s new future CGM integration plans, the partnership has effectively ended. Management explained that the dissolution is motivated by three factors: 1) Dexcom’s progress towards displaying glucose information directly onto a smartphone essentially makes OmniPod’s Personal Diabetes Manager unnecessary; 2) Insulet is pursuing physical integration of CGM into the disposable Pod, which would require Dexcom to transfer its intellectual property to Insulet; and 3) Dexcom is pursuing a 10- to 14-day sensor making integration into a three-day disposable Pod economically unappealing. Restating Insulet management comments at JP Morgan, Dexcom noted that Insulet is working with a different glucose sensor company, the identity of which has not been disclosed. For Insulet CEO Duane DeSisto’s JP Morgan discussion on CGM integration, see page 57 of our full report at From a patient perspective, we see this as unfortunate for two reasons: 1) Insulet’s proprietary CGM integration will take several years at minimum to make it to market; and 2) Dexcom’s smartphone system also likelywon’t be available for several years. We believe many patients would appreciate the integration, aside from Dexcom’s future plans for the smartphone.
  • In a similar vein, Roche has opted not to integrate Dexcom’s CGM technology into its next-generation handheld diabetes management system. The company has decided that the expense of integrating the G4 Platinum sensor was not justifiable considering Dexcom’s progress on the Gen 5. Further, like Insulet, Dexcom’s future goal of displaying glucose information on a smartphone renders Roche’s handheld obsolete. Dexcom also stated that pricing pressure from competitive bidding has motivated Roche to direct its resources to its “core business.” For our discussion on new competitive bidding payment amounts for diabetes testing supplies, see our coverage at: We also wonder whether Roche has made progress on its proprietary sensor, and is confident it can build a viable product – the company will be presenting on its CGM in development in session seven on day two of ATTD 2013. See our preview at
  • Dexcom anticipates that its second partnership with Roche, in which Roche markets the Dexcom Seven Plus to physician offices for diagnostic use, will “wind down” as Dexcom similarly “wind[s] down” its support of the Seven plus product. In Q&A, management characterized the professional use system that Roche has carried as “less than successful.” The G4 Platinum is not yet labeled for multiple patient use, and while Dexcom said the indication is on its “R&D radar screen,” management commented that they were not sure whether Roche would be the right partner to market the device for professional use. Management emphasized, however, that Roche remains a strong partnership for Dexcom internationally. We would like to see much more diagnostic use of CGM, so we found this disappointing.
  • Dexcom/Edwards’ second-generation GlucoClear critical-care continuous glucose monitor received CE Mark. Edwards CEO Michael Mussalem first announced the approval during the company’s 4Q12 results call. Using the same language as Edwards, Dexcom did not expect “significant sales” for the year. (As we understand it, the product will be rolled out in the EU in a small launch later this year.) Still, 2013 will be “pivotal,” as Edwards will focus on conducting additional accuracy studies in Europe and gaining greater clarity on the path towards approval in the US. Certainly, with respect to defining a US pathway, Dexcom’s open and communicative relationship with the Agency should bode well for the companies. Currently, Dexcom sells Edwards the sensors at an undisclosed transfer price and Edwards sells them commercially. For greater discussion on the approval and hospital CGM space, see our Edwards 4Q12 report at


  • Dexcom’s pipeline has a steady stream of products coming in the next few years. We believe the company is well positioned to capitalize on a number of fronts and shore up current areas of comparative weakness – pediatrics, pump patients that demand CGM integration, cloud- based software (especially for HCPs and clinical trials), and hospital patients. The table is informed by the 4Q12 update, JP Morgan Healthcare conference, and previous coverage of the company.


Dexcom/Edwards GlucoClear 2

CE Marked; US timeline unclear.


G4 Platinum Pediatric Indication

CE Marked; PMA supplement filed with FDA;

approval expected in 2H13.

Animas Vibe with G4 Platinum CGM integration

PMA submission to FDA by the end of 1Q13

SweetSpot Cloud-based Data Management Platform

As of 3Q12, goal was FDA submission by end of 2012. We have not been updated on SweetSpot platform progress since.

Qualcomm Remote Cloud Computing Platform        

2013-2014  (Launch)
Dexcom Share (remote monitoring)

3Q13 PMA supplement filing; 2014 (Launch)

Tandem pump with G4 Platinum CGM integration

Gen 5 sensor with smartphone integration Late 2014-2015 (Launch)
Gen 6 sensor                  


Roche insulin pump with CGM integration Partnership  Dissolved
Insulet OmniPod with CGM integration Partnership  Dissolved

Dexcom intends to file a PMA supplement for its remote monitoring system Dexcom Share in 3Q13. The Share is a docking station for the G4 Platinum receiver such that glucose information (both trends and alert notifications) are sent wirelessly from the G4 Platinum to designated recipients who can then view the information on the smart phone. “The idea is simple,” said Mr. Gregg, “connecting Dexcom users to people who care about them.” Potentially, this could put approval into 1Q14. Given the speed with which Dexcom takes products from approval to market, the combined marketing of the Share with the expected pediatric label indication in the US could have a significant impact on Dexcom’s growth in early 2014 – and of course, a very positive impact on patients with type 1 diabetes and their families.

  • Using the same language as last quarter, the Gen 5 sensor “is in a very strong position to become the first class 3 medical device to communicate directly to a mobile platform.” Dexcom is continuing to have discussions with FDA on this front and we are optimistic considering the company’s open relationship with FDA and the amount of time both parties seem to have invested in this.
  • Management did not update its timeline for the SweetSpot cloud-based data management platform, but did comment that its mobile and cloud-based platforms would be a focus of R&D during 2013. We continue to believe that cloud-based software is a critical area in which Medtronic has an advantage over Dexcom. Anecdotally, we know of many healthcare providers that choose to put their patients on Medtronic CGM because of the convenience of CareLink. SweetSpot should help level the playing field in this respect, and we look forward to seeing what smart data analysis features it includes. There is a lot of room to make CGM data interpretation easier, and if SweetSpot can indeed make big gains in this area, we suspect many more providers would be willing to recommend CGM for their patients.
  • Dexcom is working on its algorithms for a 10-day sensor indication, however filing for a 10-day indication will not be a focus in 2013. Dexcom characterized the project as being “off the main path.” A 10-day indication would give Dexcom an advantage over competitors Medtronic (seven days) and Abbott (five days; outside the US only). Of course, many patients are already wearing their sensors for longer than the prescribed seven days, so it’s tough to know if this would materially affect customer habits on a broad scale.
  • “We will replace fingersticks. Not if, when.” According to an Insulin Nation interview with Mr. Gregg, this could come in 2017 with the Gen 6 sensor (see setter-dexcom-ceo-terry-gregg/#.USbd8aDC5E8). This would be an impressive feat indeed, but given Dexcom’s steadfast commitment to improving its sensor and the substantial accuracy improvements it has made with each sensor iteration, we think the company is perhaps the best positioned to achieve this claim. We wonder how insurance companies would respond to the achievement – would companies provide necessary reimbursement to make the technology truly accessible at cost moderately comparable to strips? Will reimbursement for strips for patients with type 1 diabetes be affected? Certainly, Dexcom’s future product pipeline stands to initiate a therapy paradigm shift, and we believe it’s only a matter of time before the product improve, enough data is collected, and the costs come down.
  • “We believe CGM will become the first line of therapy for all insulin-taking patients, and one day for all diabetes patients.” Mr. Gregg underscored that the method of insulin administration is less important than being able to appropriately titrate and dose that insulin, for which it is critical to understand a patient’s glucose profile. Further, Mr. Gregg believes that CGM can help inform oral medication prescriptions and lifestyle changes as well – certainly, Dr. Robert Vigersky’s study at ADA 2011 (Diabetes Care 2011) underscored this point quite well. For more information on the positive impact of intermittent CGM use in that study, see our report at We would like to see much more “episodic use” of CGM for type 2 patients to see if their therapy is working and we believe that more use of CGM is already being seen in clinical trials for both type 1 and type 2 therapy.
    • In the diabetes device industry, we’re glad to see an increasing focus on the value of more frequent and better-informed insulin titration. Mr. Gregg’s comment reminds us of Hygieia’s d-Nav system, for example, which combines an insulin guidance system with blood glucose monitoring to give insulin dosing recommendations based on glucose patterns (for detail on the system, see our October 2012 Closer Look at
    • The potential of CGM data to inform therapy decisions and best practices is a sentiment that we’ve heard echoed in the hospital arena as well. At the Society of Critical Care Medicine (SCCM) Annual Congress, Dr. Judith Jacobi, past president of SCCM and Chair of the society’s Insulin Infusion Guidelines task force, expressed her hope that in the critical care environment, CGM will provide more information on the moment-by-moment effects of insulin therapies and dextrose administration, which could potentially clarify best practices (and we think potentially settle the longstanding debate around the appropriateness of tight glycemic control in different critical care patient groups). “In lieu of CGM,” said Dr. Jacobi, “we can’t really know what’s going on with our patients when we’re not looking.” For our coverage of Dr. Jacobi’s presentation, see page 2 of our report at


Questions and Answers

Q: Could you talk a little bit more about the patient dynamics as you are going through the launch and how it's changing? You gave some statistics relative to the percent that were shipped on the new version, but can you give us a sense what the installed base is, or any other metrics that we can use to project forward from here?

A: We've never given direct installed base. You guys all kind of make up your models, and quite frankly, you're pretty good at that. So I don't think we'll help you out in that. That's what you get paid. I will say just one – the most interesting dynamic as you're preparing new models, is that fact that we're seeing greater utilization of sensors in the G4 than we did with the Seven Plus. So, what does that mean? Are they using it more frequently? Possibly. Certainly, I think there is a trust level with the accuracy of the technology, which is encouraging patients not to take as many holidays possibly. But we don’t have all the metrics yet to analyze it as completely as we would like. But that is one interesting think that we're seeing post the launch and certainly moving in to this first quarter.

Q: Is it different in the newer patients in that dynamic, or is it still too early to say?

A: It’s still too early to say. We haven’t dialed down the metrics to that level yet.

Q: You talked about some changes in the field organization. Can you give us a bit more detail there, and what that will do through the P&L relative to bringing more people on a commission basis?

A: As we look at our structure, we just felt we needed more coverage. We had a field clinical sales team, and as we looked at how our product gets used, the fact is that most of our patients train with our support materials online. We felt we could best deploy our resources in the field, with feet on the street. So in essence, we will have 68 territories. We're also adding to the in-house team. We gave them a goal as to how much more they could spend. We won't spend more than 20% total on SG&A but that will flow through the P&L a little bit in the first quarter, more in the second, and then you will have the full throttle certainly for the entire third and fourth quarter. The variable expenses will go up obviously as they did this quarter when we have a successful quarter and sell a lot of product.

There's about somewhere between 800 and 1,000 pediatric endocrinologists that today we don't call on. Part of this structure change and expansion was to give our sales reps the bandwidth to go call on that endocrinology group. The good news is that they tend to be centered in areas geographically that we can address at the smaller territory without having to really expand more sales reps than moving from the 48 to the 68 territories.

Q: When you get the pediatric indication in the US and then bring on the Vibe, how should we think about the timing of those rollouts? Would they take some time to have an impact on patient adds?

A: We just launched a new product 20 days after it got approved, so when we get peds approval, we’ll roll it out pretty fast. When it comes to how it will affect our numbers, we gave a range of $120 to $130 million in revenue, and literally that range is kind of variable based upon these approvals – if we got no peds approval, that $120 million number would be our target, or $125 million or something lower, and peds takes us up into the higher end of that range. New patients will jump on board pretty quickly with the peds approval. That will not be something we wait for. With Animas Vibe, we think patients will sign up pretty quickly. We know Animas will have very aggressive upgrade programs to get their patients to upgrade to stay on the Animas Vibe system. Some of those patients already use Dexcom sensors. We really haven't modeled a lot of that out, and we don't have any of it in our 2013 numbers, so we'll give you more guidance on that as the year goes on.


Q: On gross margins, as you ramp up the manufacturing of this product, at this point what type of margins do you think you can hit on the disposables at scale, and when is that at- scale timeframe?

A: We've long maintained we can earn between 65% and 75% margin on these G4 disposables. That scale- up should really start to occur about the end of this year. We will be continuing our Seven Plus manufacturing line next door, so we still have to weigh those two things against each other. We talked a bit about start-up yields for the fourth quarter. We can tell you, in the first quarter, our team is doing a spectacular job of getting yields much better than what we've targeted. So kudos to those guys. So we think this process is much more robust than anything we've had for Seven Plus. So that is something that will be a positive factor as well. We believe as we start hitting the end of this year, we'll be getting growth on our disposable margin targets. We certainly should be at the lower end of the 65% to 75% range anyway.

Q: And you’re still comfortable with that range to the higher end over time, now that you have a little experience?

A: I am more comfortable today than I've ever been, absolutely. We're doing a very good job.

Q: On R&D, I think the one thing I didn't hear you talk about was the 10-day indication, and I was wondering if we could get some color on that.

A: Our focus for next year will not be on the 10-day. Our filings this year will be the things we talked about: the Gen 4 sensor (getting these partnership products filed and out the door), and a little work on our Gen 6 sensor in addition to the Gen 5. The 10-day is something that we kind of do off the main path. We're working on our algorithms in our software, and we need to decide when we're going to drop that in; we have not made a decision on that front yet.

Q: It seems like as you put together your 2013 budgets, you are extremely focused on driving this to cash flow breakeven or profitability. Is that a fair kind of statement?

A: That is a very fair assessment, and we're very focused on that.

Q: On regulatory, the supplement that you filed for the pediatric indication – can you narrow that down a little bit for timing so we can model that in?

A: Well statutorily, it's a 180-day filing, and we got to stand by that not having a crystal ball. Obviously, we are taking bets as we did with G4 as to when that will get approval. The only kind of factor that you might want to think about is the fact that they've already seen the adult data. So we’re really just comparing the pediatric data to the adult data and submitting that. I know that they are anxious and we are anxious to receive the file, because their belief is that every child should be on a CGM device as part of the diabetes therapy model.

Q: And what's the start time for the 180 days?

A: We've filed the PMA application this quarter; it's already in, so the clock has started.

Q: When you were describing Animas, I got a little confused. Is that a supplement as well, and is it a supplement submitted by Dexcom, or is that a new PMA submitted by J&J?

A: So this has been a moving target, but now we have some clarity out of the FDA, and frankly it was extremely positive. You'll recall, probably a year or so ago, we had this concept we were going to try to file a supplement on top of the PMA. We were guided during the G4 Platinum review that we should wait until Gen 4 Platinum was approved before we filed the Animas Vibe. What the FDA determined is that it would be a full PMA. But what they also determined is that Animas can file the Vibe system and actually, rather than include all of the detailed information regarding G4 Platinum, they can actually just reference our PMA submission. So it's really just a PMA filing that will be conducted by Animas referencing the G4 Platinum. Why is that a benefit to both of us? As you'll recall, as the Vibe moves the Animas pump platform from a 510(k) product to a PMA product, which means Animas becomes subject to all the change control procedures and requirements. Basically, they become a PMA company and have to file every change they make with respect to their manufacturing operation and things like that. By allowing Animas to file a PMA separate and distinct from ours (but able to reference ours), that enables Animas to control the regulatory process on their front with respect to ongoing manufacturing operations related to the pumps – we don't have to be in the middle of that. So this is all kind of new information to us within the last three to six months, but it's actually very positive from an operations perspective.

Q: On Roche, I understand what you said in the prepared remarks, but didn't hear any reference to the in-office CGM that you have partnership with. Is that still ongoing or is that dissolving?

A: It is. I wouldn't read too much into the Roche announcement. Roche is a very strong partner for us internationally. Roche has some direct distribution rights in some countries, and they frankly work with our distributors and our distribution network in other countries. They've been a very strong partner and will continue to be. We said before the Seven Plus professional use system that Roche has carried in the bag has been less than successful. We know that we’ve been saying that for several quarters now. I think that program is still ongoing, but look as we look to wind down the Seven Plus naturally, that program would look to wind down some time this year. One of the other items on our R&D radar screen would be moving the G4 Platinum to a professional use model, but it currently today is not labeled for multiple patient use, so that's something that we're looking at obtaining a labeled indication. We’re not sure whether Roche should be the partner there or not, but we would evaluate that at the time we got an approval.

Q: The $120 to $130 million-product revenue guidance that you gave out a month ago clearly assumes a pediatric approval. Does it assume the Vibe is approved this year or would that be upside?

A: It does not assume Vibe approval this year. There is no Animas number baked into that, and the pediatric impact is really something again that would push it to the upper end of the range, or even outside the upper end of the range. Our numbers have built pretty solidly from the ground up.

Q: Are there going to be charges that we should think about with the change on Insulet and Roche?

A: No, there won't be any one-time charges with respect to that. There will be some changes with the development grant revenue. If you look at Edwards, we have effectively completed that development arrangement and recognized revenue through December. We won't have any going forward. As in Q1, we have development grant revenue of about $1 million. Going forward, we expect development grant revenue of about $100,000 a quarter through 2014, as we stand here today.

Q: When we think about product revenue guidance for the year, should we think about a normal split between consumables and hardware that we've seen historically? Just any additional color you could provide there would be great.

A: We've stated in the past that our split is typically 25% to 30% on the durable and the rest on the disposable side. We did 32% this quarter as we launched a new product. But in all reality, if we didn't have the $399 upgrade program and also the $1.2 million that we recognized from the September patients [Editor’s note: this refers to the 3Q12 sales return reserve] the ratios would have been within that range in 25% to 30%. So I think things remain relatively consistent on that front, 25% to 30% durables and the rest of it for the consumable products.

Q: I know you guys don't give quarterly guidance. First quarter is usually a down quarter sequentially given deductibles resetting, etc. You have a lot of momentum going into the first quarter. How do we think about the launch continuing to progress, versus the trend of resetting deductibles and how that might offset things?

A: Certainly, we are challenged with the seasonality with deductibles and flexible spending accounts, and that's not going to change. We did $18 million in 1Q12. That was down from $21 million in 4Q11. We did $32 million in 4Q12. We're going to be down from that standpoint. If I gave you what we think we're going do this quarter, then every single quarter going forward we're going to have to do the same thing, and we don't want to get in to that. But I would say that it is on the one hand, the same type of softness that we see. I commented that we had solid sales through the end of February. I think in terms of word of mouth from patient-to-patient communication, we've seen more in the last three months than we have ever with the Seven Plus – that there is that interest level.

The opportunities in the pipeline are as full as we've ever seen them in the history of the company. That doesn't mean that they absolutely translate into a new starter kit sale, but certainly the interest level is there. But again, as we look at the landscape of deductibles, they've gone up a bit, but it's still single digit this year as far as we can tell from that standpoint. I think there are some of those headwinds, but we are doing okay.

Let's just go back to 4Q12 revenue, because there are some things that won’t reappear. We had the $1.2 million we carried over from 3Q12. We also had some pent up demand, but I really can't quantify in 3Q12 the number of patients who did not buy and waited to buy in 4Q12; however, that makes things a little bit different, plus we had the $399 upgrade programs. So we have a group of patients who are non- repeatable. That being said, as we've come out of most years, I can tell you we have sold to most every patient we can ever find. We came out of 4Q12 this year that was not the case. We still had a very robust pipeline going into the year and we are still getting a lot of phone calls. We are getting very favorable reactions not only from our patient customers, but our distribution partners and dealers, who are ordering regularly. Basically, we can't keep this thing on the shelf. So, while all the issues exist with the deductibles and co-pays and all these other things, it just appears that patients are a little more excited about this new product and might be able to deal with those issues and make investment in their care earlier than they have in the past. So you combine all the positives with all the things that are floating, and we're very excited about the quarter, but there is a bit of uncertainty still.

Q: If I look at your product revenue guidance for 2013, the $120 million to $130 million, beyond Animas Vibe coming online this year, and the earlier pediatric indication, what are the other variables that could get you towards the higher end of that range? For example, you mentioned more sensors being used. Is that something that could continue and if it does, is that something that can get you to the higher end, or is that more something that get you within the middle? Any color on that?

A: I think higher utilization would move us up a bit into the range, but probably doesn't get to the very end; but I think it's very helpful. If we can add a point to the retention rate, shave a point off the attrition rate, that's certainly very helpful. We know the G4 does that. So far from what we've seen, people really like this thing and appear to be using it very regularly. Earlier pediatric approval helps more than anything else we could do right now, and we can't predict that and certainly we don't have any Vibe numbers in what we've got. Those are really the levers we could pull. We're going to have more coverage with more sales reps and more territories, so we’ll be calling on people we haven't called on in the past, or going more deeply into practices where we've had to be relatively shallow before. So we might be able to go deeper and again get more from there. Bottom line is we've got a 40% target on our backs; we're going to have to execute pretty well just to do that. Another thing I would comment on is peer-to-peer, which we're beginning to see in early stages of that communication is then driving some sales outside of our normal call patterns, which we hope is the vision of the future.

Q: Can you clarify what percent of those 1,000 pediatric endocrinologists you would be able to access with your reorganized sales force later this year?

A: 100%.

Q: Regarding your guidance for $120 to $130 in CGM sales, can you talk about whether you anticipate any hits on your growth due to Medtronic’s next-gen CGM launch in the summer if they get approval of the Enlite? Have you taken that into your guidance?

A: We address two different markets. They're really addressing the pump market, and that is something that as you know just based on their latest quarter announcement was declining. They have really never had a standalone product that was a competitive product, and I think even looking at the clinical results of Enlite versus G4, I would say most of the academic and clinical community has been disappointed in the performance of the Enlite. We've seen data even in head-to-head competition by independent researchers, and it looks like it's approaching the same kind of accuracy the Seven Plus had achieved. But in terms of comparing that and contrasting that to the current data we're getting from G4, we're 70% more accurate overall between 40 and 400 milligrams of detection. We're really getting down below close to that 10% MARD range. So I think that from the user standpoint, accuracy really counts. And they're really trying to sell it as part of an integrated system.

I think our pump partners will have to address that, both Animas and Tandem. So they've had the system approved in Europe for some time now. And yet, based on what J&J presented in their first quarter call was that in places where they've launched the Vibe, they're growing at anywhere from 35% to 50%. Their informal comments to us are that they're not very impressed with the Veo system. They don't find it as a competitive threat, and they're not seemingly having any problem replacing Medtronic pumps in that space. Whether that is going to translate to the same in the US remains to be seen.

Q: But we should assume if they announce approval mid-summer, that necessarily doesn't change your guidance or expectation.

A: That doesn't change our guidance at all. Again I want to differentiate what we are versus the pump world. The pump world is a $2 billion market. Glucose monitoring is somewhere between $10 and $12 billion. We are in the glucose monitoring market. Our program this year for 2013 is CGM first. If you look at the US pump market, it’s maybe 28% penetrated. That means there is 60%+ still using injections.

We need to move the dynamic that when a patient walks in regardless of their insulin delivery mechanism, that the physician says I need to know more about your glucose first because that's really the goal. I mean if you look at the pharmaceutical companies, and all of the billions of dollars that they are spending on drugs, it’s all about trying to figure out how to reduce glycemic variability. We do that every day, and so I think we have to get to get that point across to the prescribing population to say how important it truly is about glucose. And that's really what we are focused. I don't see the pending approval as being a competitive threat for us whatsoever.

Q: In terms of the international 10% of sales, is the majority of that associated with the Vibe or are you getting a ramp in the standalone G4 sales?

A: We're getting good traction with the standalone. Quite happily so, because that's a tough reimbursement market. And so for the first time as part of that contribution, we are routinely seeing patients willing to pay out of pocket, which is something that is very unusual in a socialized medicine situation where they get all of their supplies for diabetes either from the clinic or certainly reimbursed by the government. The value proposition is such that many of these patients are electing to pay out of pocket in order to maintain the product on an ongoing basis.

Q: Regarding the Share system, we've heard about there being a strong demand for something like that for a while from parents. Is this a PMA supplement or is there is an easier FDA path?

A: A PMA supplement.

Q: In terms of the Vibe in the US, with the change in the structure of the filing, if it is a full PMA, does that change your timing of potential by end of the year?

A: No, again statutorily it’s 180 days. Look at our performance on the G4 Platinum – 177 days. If you look at the Vibe combination, the Vibe system is effectively the G4 Platinum with their pump with some modifications. So you could argue that it's basically two approved products just talking to each other. So I don't think there is anything that gives us reason to believe that it's going to be an extended review cycle, even though it's classified as a full PMA.

Q: As you move on to Gen 5, do you need to re-file with Animas and Tandem, or how will that work when that gets through?

A: They reference our PMA, but they would need to file a subsequent filing with each sensor iteration that we achieve. So they will always be for some period of time a generation behind us while their filing is pending.

Q: And you haven't indicated anything about the timing of the Gen 5, right?

A: We didn't give any timelines today, no.

Q: Do you expect any upgrades in Q1 or Q2, or has that program been exhausted at this point?

A: The $399 program, the in-warranty upgrade, is done. We ended that on January 31. Upgrades of patients out of warranty will occur all year long. There are a lot of patients who are sitting there in the fourth quarter looking at their insurance dollars and saying, okay, I can pay $399 now or I can wait till the first quarter and my co-pay is going to be $275, I'm going to wait till the first quarter and go for $275. We gave the patients the option if they wanted to speed it up and they wanted to get on the G4 system, we gave them the opportunity. A lot of them chose not to take it; they'll upgrade throughout the course of the year and take advantage of their co-pays or their deductibles and the other things. So we will have upgrades all year. But our goal is very clear – we want everybody on Gen 4 before the end of this year.

Q: So will see some more of those in Q1, because it ended in January 31?

A: Yeah, but not many. Not much.

Q: The development revenues were pretty big this quarter. Was that Edwards? What was the extra amount that you received in Q4, and then the extra that you're picking up in Q1?

A: Yes, that's right. So we received additional funding from Edwards in Q4 just like we have in the prior quarters outside of the development grant agreement. We expect that to really go away in Q1. If we do have any, we don't expect it at this time to be overly significant. I think you might have heard a comment before, but in Q1 as we sit here today we expect about $1 million to $1.1 million in development grant revenue, and then going forward through 2014 we expect about $100,000 a quarter.

Q: On the accounts receivable, you did address it in your opening comments, but it was a pretty big jump sequentially year-over-year and I'm just curious if you can explain that a little?

A: We sold a lot of stuff in December. When you have a quarter that big, as big as our $32 million quarter, compared to $20 million last year, and $21 million in Q3, we upped the sales number $9 million and as with particularly every quarter I've been at a diabetes company, December is biggest month of the year. So when you just look at straight timing, our receivables grew just based on the business activity and there was no other reason. Most of those receivables are directly with payors, and we're billing and collecting that. The first quarter should be a very good collection quarter. We expect that to go down as we get into the first quarter, and then manage it the same way throughout the other quarters of the year. There's nothing unusual there.

Q: Historically I think your mix has been 70% non-pumpers and 30% pumpers. Is that mix changing now with G4? Do you expect that mix to change outside of your partners, as we look forward?

A: In the installed base, those numbers have really been 60% pumpers, 40% MDI patients. Obviously, as the pumpers come on, we would expect some of that shift to happen. But I'm cautious, because we've been pretty steady state on that ratio for some time. With regards to once the Vibe is launched, if you look at the dynamics of that 60%, some 40+% of those are already on Animas, about 30% are on Medtronic, the rest on Insulet, and we've got some on Roche and even some on the old Deltec pump. So we've already got pretty significant share of the Animas population. But going forward, having them promoting the product, we would like to stand up thick there as well. I don't think the ratios are going to change all that much.

Q: And as we think of the Animas opportunity, how many pumpers do you think they have or how big is the pump market in your opinion, and what percent share do you think they have?

A: I think in the US, the pump market is probably somewhere around 400,000 in total. My guess is they've got about 18 to 20% share of that market. Now, the challenge with the market is it's not growing. It's actually, if anything, having a bit of a decline. So if you're not growing, it's hard to predict where the share is shifting. We certainly know that if you listen to Animas or Insulet, they seem to be adding pumpers, so that means if organic growth isn’t growing, they’ve got to be cannibalizing from Medtronic. If you listen to Tandem, their first three or four months, they told us that about 50% of their patients that they put on the t:slim were Medtronic patients, 25% were patients new to pump therapy, and the remaining 25% came from cannibalization of Animas, Insulet, Roche, and Smith. So I think that's kind of the landscape that we look at going forward.

Q: As you think of the pediatric label, if you have approval on that, do you have to wait for that to submit to Animas, or would that approval for a ped automatically roll on to the Animas?

A: Remember with the Animas Vibe, that FDA’s clinical trial requirement, if you will, is more a human factors trial, basically button pushing. Animas will have to do a supplemental human factors trial with pediatric patients and then file that. And they will have to wait until we receive our approval, so they can reference our approved product. So there will be a gap. That doesn't mean that holds up the initial Vibe, they will go forward with the initial Vibe filing as soon as possible. They will have to supplement their PMA submission with a peds submission at some point down the road.

Q: If I look at the Animas, from a reimbursement standpoint, it's great that you have daily reimbursement, and they have their reimbursement set up. But as you think of them selling the pumps in the US, are they going to get the reimbursement approval for the CGM, or are you going to do it, and then how do you get the product to the patient? Has that all been worked out at this point?

A: I would tell you that it is to be determined. There is a contract in place, but we are exploring different ways that we might make it more seamless for the patient. So what I would tell you is to table that question until probably the next conference call and we will have some more clarity there. From a reimbursement standpoint, the codes are established, so there is a mechanism if we got approval tomorrow – as an example, even if this wasn't worked out. It's really from a patient convenience standpoint, not from a reimbursement standpoint.

-- by Kira Maker, Adam Brown, and Vincent Wu, and Kelly Close


Editors note: Information on product gross margin was changed from our initial report to accurately reflect that the 54% margin in 4Q12 corresponded to the overall business, not to the G4 Platinum.