Memorandum

Dexcom 2Q13 - Record sales of $36 million up striking 65%; Dexcom Share filed with FDA; Helmsley grant for Gen 6; FDA questions on Vibe - August 8, 2013

Executive Highlights

  • Dexcom’s 2Q13 product revenue reached a record $36 million, up a striking 65% year-over-year and 28% sequentially. Net loss was $1.1 million (excluding non-cash expenses) vs. $7.6 million in 2Q12.
  • Dexcom received a $4 million grant from the Helmsley Charitable Trust to accelerate the development of its Gen 6 sensor. The company also filed a PMA supplement in late July seeking approval of the Dexcom Share remote monitoring system.
  • FDA approval of the G4 Platinum pediatric indication is now targeted for the end of 2013 (back from 2H13). Animas just received a round of written questions from the FDA regarding approval of the Animas Vibe insulin pump. No updated timeline for the pump or further granularity was provided.

In a call led by CEO Terry Gregg, Dexcom reported 2Q13 results today. The company had an outstanding quarter on the financial side, with 2Q13 product revenue reaching a record $36 million, up a striking 65% year-over-year and 28% sequentially. Management attributed the results to a combination of new patients on the G4 Platinum (especially through word of mouth and more prescribers; see below) and higher sensor utilization among existing patients. Said Mr Gregg, “The commercial introduction of G4 Platinum continues to exceed our expectations…Our financial results speak for themselves.” Boy, do they. President Kevin Sayer emphasized the drive towards profitability, noting that the net loss (excluding non-cash expenses) in 2Q13 was just $1.1 million, a big improvement over the $7.6 million net loss in 2Q12. Notably, the international business doubled in the quarter, representing 5-10% of product revenue. Notably, management increased the full year revenue guidance from a previous estimate of $120-130 million to an expected $130-140 million – the latter represents a 40-50% increase over full-year 2012 revenues of $93 million. Dexcom’s internal target for 2014 is ~40% growth.

On the reimbursement and distribution front, Dexcom CGM was added as a pharmacy benefit to Express Scripts’ national preferred drug formulary. Additionally, and extremely notably, Humana expanded its existing CGM policy to cover all insulin using type 2 diabetes patients. Both big wins. Importantly, the number of “high prescribing physicians” (not defined) has more than doubled this year, and close to 6,000 HCPs (MDs, NPs, PAs, etc.) wrote G4 Platinum prescriptions in the first six months of 2013 – that’s more than double the number in 2012. These are all clearly moves in the right direction as this technology moves from early adopters to the early majority.

On the pipeline side, Dexcom received a $4 million grant from the Helmsley Charitable Trust to accelerate the development of its Gen 6 sensor. This was big news. In late July, the company filed a PMA supplement seeking approval of the Dexcom Share remote monitoring system (right on par with prior guidance). Meanwhile, FDA approval of the G4 Platinum pediatric indication is now targeted for the “end of 2013,” slightly amended from the previous “2H13” timeline; Dexcom is currently having a “regular, open dialogue with the FDA” regarding the appropriate labeling for children. Last, Animas just received a round of written questions from the FDA regarding approval of the Vibe insulin pump. The Animas regulatory team is currently evaluating those questions, as they “just came in.” Dexcom did not give an amended timeline, only noting that the ball is “really in Animas’ court.”

 

 

FINANCIALS

  • Dexcom’s 2Q13 product revenue of $36 million rose a striking 65% from 2Q12 revenue of $22 million, when growth was 42%. Analysts were clearly wowed by the quarter’s 65% growth and pegged management with questions during Q&A; no one factor was singled out. Management attributed the results to a combination of new patients getting on the G4 Platinum (especially through word of mouth and more prescribers; see below) and higher sensor utilization among patients. “Accuracy matters and people trust this product. We’re seeing growth in every piece of the business.”
  • Sequentially, product revenue in 2Q13 rose a strong 28% from 1Q13 sales, nearly double the 16% sequential gain seen in 2Q12. Of course, this likely reflects the ongoing G4 Platinum launch, as last year did not see the product introduced until late October.
    • In 2Q13, Dexcom recognized $1.3 million in “higher-than-expected” revenue royalties from sales of the Animas Vibe in Europe and the shipment of GlucoClear sensors to Edwards for the EU accuracy study. Dexcom management emphasized that investors should not expect this level of royalty from Animas sales or Edwards GlucoClear sensors in 3Q13 or 4Q13.

Worldwide Product Revenue

 

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Product Revenue (millions)

$18.6

$21.5

$21.1

$31.7

$27.8

$35.5

Year-over-Year Growth

42%

42%

27%

52%

49%

65%

Sequential Growth

-11%

16%

-2%

50%

-12%

28%

  • Total 2Q13 revenue was $36 million, up 53% year-over-year. As a reminder, total revenue includes “development grant and other revenue,” which totaled $300,000 this quarter (management did not identify where this came from). Sequentially, total revenue rose 21%, consistent with 2Q12’s 17% sequential gain.

Worldwide Total Revenue

 

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Total Revenue (millions)

$20.1

$23.5

$23.1

$33.3

$29.6

$35.8

Year-Over-Year Growth

42%

9%

26%

49%

47%

53%

Sequential Growth

-10%

17%

-2 %

44%

-11%

21%

  • “Our business model continues to mature very nicely,” according to President Kevin Sayer. This is an understatement. Net loss in 2Q13 was $10.1 million and included $9 million in non-cash expenses centered in share-based compensation, depreciation, and amortization. Absent these charges, net loss would have been just $1.1 million, a big improvement over the $7.6 million net loss in 2Q12. “In other words, of the $14 million increase in Q2 sales (year-over-year),$6.5 million – or close to 50% – dropped through to Dexcom’s cash based financial results.
  • Product gross profit totaled $22 million 2Q13, up 105% over $11 million in 2Q12. Product gross margin rose similarly strikingly – up to 61% in 2Q13, vs. 49% in 2Q12 and 55% in 1Q13.
  • “We remain very comfortable with our commitment not to raise additional equity funds in the near term.” As of June 30, Dexcom held $46.4 million in cash, cash equivalents, and marketable securities, a cash increase of $1.1 million from the end of 1Q13. Dexcom also has access to an additional $28 million in available capital between a term loan with Silicon Valley bank and receivables. Certainly, the company seems well capitalized to execute on its near-term product pipeline.
  • The international business “performed very well,” with sales “doubling” in 2Q13. Overall, this segment accounted for 5-10% of total product revenue ($1.8-3.6 million). Management did not specify if the sales doubling was sequential or year-over-year; we assume it was year-over-year, as 1Q13 product revenue was also 5-10% international. The 2Q12 call one year ago highlighted that international sales were approaching 10% of total product revenue; given this quarter’s 5-10% mix, we would infer that this segment of the business is growing fairly consistently over time.
  • Management increased the full year revenue guidance from a previous estimate of$120-130 million to an expected $130-140 million (a 40-50% increase over full-year 2012 revenues of $93 million). For context, Dexcom targets the midpoint of the range. Management emphasized that historically, sequential growth between the second and third quarter has been much more modest, “rarely exceeding 10%.” In the 4Q12 call, 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 – given that the guidance is now more optimistic, we wonder if management is more confident this indication will be approved near- term. In 4Q12, Dexcom also noted that the guidance did not assume an Animas Vibe approval; this was very smart, as it does not seem like the Vibe will launch in time to boost 2013 sales
  • “We have many opportunities to achieve growth in 2014; 40% is our internal target. We’re going to stick to that.” While the year-over-year comparisons will certainly be challenging come 2014, there are a number of upcoming catalysts that should help: FDA approvals of the G4 Platinum-integrated Animas Vibe (submitted; FDA just responded with a round of questions) and Tandem t:slim (submission by end of 2013), Dexcom Share (submitted; approval expected next year), and the G4 Platinum pediatric indication (submitted; approval expected by end of 2013).

 

REIMBURSEMENT AND DISTRIBUTION

  • Dexcom has had “two significant wins” on the reimbursement and distribution side with Express Scripts and Humana. These wins aside, management emphasized that over 98% of type 1 diabetes patients with commercial insurance have CGM coverage.
    • First, Dexcom CGM has been added as a pharmacy benefit to Express Scripts’ national preferred drug formulary. Notably, Dexcom is the only CGM on Express’ drug formulary, and approximately 40% of prescriptions in the US flow through the company. The move to a pharmacy benefit will allow better tracking of CGM utilization, outcomes, and cost. It is not expected to have an immediate impact on the business (management estimated 18-24 months; “it takes time”), but over the long term, will increase patient access to CGM and create a much more efficient distribution model for Dexcom.
    • Second, Humana has expanded its existing CGM policy to cover all insulin using type 2 diabetes patients. Said management, “We’re very pleased to see Humana’s leadership in opening up patient access.”
  • The number ofhigh prescribing physicians” has more than doubled this year (management did not define “high prescribing” specifically). Additionally, the number of “champions” (prescribing physicians who hit a certain threshold; also not defined, but “it’s significant”) is already three to four times greater this year than for all of 2012.
    • Close to 6,000 HCPs (MDs, NPs, PAs, etc.) wrote G4 Platinum prescriptions in the first six months of 2013, more than double the number in 2012. Management contrasted this number with the ~3,000 active clinical endocrinologists that see patients in the US. Besides the strong growth, the key implication is that prescriptions have spread outside the endocrinologist setting.
  • Dexcom is “still evaluating the path of entering China and Japan.” In China, the key challenge is that you need to have an FDA approval before you file a particular product. Once that process commences, it kicks off a two or 2.5-year regulatory review – we couldn’t believe this. Based on Dexcom’s upcoming pipeline, the company is still deciding at what point to file the appropriate approved product. Said management, “I wouldn’t characterize it as a near term source of new revenue.”

 

PRODUCT PIPELINE

 

Product          Timeline
G4 Platinum Pediatric Indication        

CE Marked; FDA approval by the end of 2013, pending ongoing labeling discussions.

Animas Vibe insulin pump with G4 Platinum CGM integration PMA filed with the FDA in 1Q13; FDA just responded with a round of questions; ~late 2013/early 2014 launch at Animas’ discretion

Dexcom Share

 

[Remote monitoring via docking cradle, Bluetooth, and smartphone app]

PMA supplement filed at end of July 2013; 2014 launch
Tandem t:slim insulin pump with G4 Platinum CGM integration PMA filing expected before the end of 2013; ~2014 launch

Updated G4 Platinum algorithm

 

[MARD improvement by two percentage points; remote software update]

On hold until pediatric indication is approved by the FDA. The 1Q13 call targeted FDA filing in late 2013/early 2014, with a 2014 launch.

Dexcom/Edwards GlucoClear 2

 

[Critical care CGM]

CE Marked; European accuracy study to finish enrollment by end of 2013; US timeline unclear.

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

Gen 5 system

 

[Mobile platform, new transmitter, new algorithm, improved applicator; G4 Platinum sensor]

To be “rolled out in several stages over the next two years”

Gen 6 sensor

 

[New sensor]

$4 million development grant from Helmsley Charitable Trust based on milestones over “next several years”; ~2017 launch

 

 
  • Just last week, Dexcom received a $4 million grant from the Helmsley Charitable Trust to accelerate the development of its Gen 6 sensor. The funding is contingent on meeting specific development milestones over the next several years (not specified). Upon successful commercialization of Gen 6 in the US, Dexcom can choose to pay Helmsley a royalty of up to $2 million per year for four years (i.e., up to $8 million) or a one-time payment of $6 million. The funds will allow Dexcom to increase internal spending on the Gen 6 project to “accelerate commercialization of this transformative technology.” Management affirmed that the primary goal with Gen 6 is a replacement claim for fingersticks – yes! As a reminder, Gen 6 will include a new sensor membrane with interferent blocking capabilities, and will thus be a full PMA. We expect it will have a sub-10% MARD.
    • The Helmsley grant is not a collaboration agreement like Edwards; the milestone payments will offset R&D expenses, leaving a neutral effect on the P&L. CEO Terry Gregg emphasized that Dexcom’s “goal is to get profitable.” The company has had this Gen 6 technology in the long-term R&D pipeline, and this grant will help accelerate it.
    • Notably, Helmsley approached Dexcom and asked how the Trust could help the company move Gen 6 faster. We view the news as a significant endorsement of Dexcom’s R&D capabilities and another sign of how much of an impact the Helmsley Charitable Trust is having on type 1 diabetes. As a reminder, Helmsley also has CGM partnerships with BD (optical-based CGM; combined insulin infusion/CGM) and Medtronic (combination glucose oxidase/optical sensor).
  • In late July, Dexcom filed a PMA supplement seeking approval of the Dexcom Share remote monitoring system (“We couldn’t be more excited”). This timing was right on par with comments in 1Q13 that called for a 3Q13 filing. As a reminder, Dexcom Share is adocking station for the G4 Platinum receiver that enables wireless transmission of glucose information to designated recipients. The recipients can then view the CGM data using a smartphone app.
    • Management re-emphasized Share’s role as a baby step towards the Gen 5 mobile platform. Share has been deliberately designed to make sure the G4 Platinum receiver is still the primary medical device, with the phone(s) as a secondary display(s). Still, Dexcom “did submit a rather large filing” that contains all the software validation and verification (e.g., that the CGM signal gets through, that the warnings are what they claim to be, etc.). Recipients can customize the types of alarms they get on the Share system (e.g., only alarms for hypos), so Dexcom had to show all those features work.
  • FDA approval of the G4 Platinum pediatric indication is now targeted for the “end of 2013,” slightly amended from the previous “2H13” timeline. Dexcom is currently having a “regular, open dialogue with the FDA” regarding the appropriate G4 Platinum labeling for children. Due to differences in the adult and pediatric clinical studies, the label for the pediatric G4 Platinum will be different (e.g., two-year-olds were not subjected to the same forced glucose swings as in the adult study). Management was quick to point out that this is not a delay per se, as Dexcom is still within the 180-day PMA supplement review.
    • Dexcom may need to produce a separate pediatric product with different packaging and inserts (the G4 Platinum sensor and hardware would be exactly the same). Importantly, the FDA has indicated that the pediatric study includes enough data for approval, so Dexcom will not need to conduct any additional clinical studies. Management emphasized that FDA has had a slew of pump and meter recalls recently, which has led to a “heightened sense of scrutiny.”
  • Animas just received a round of written questions from the FDA regarding approval of the Animas Vibe insulin pump with G4 Platinum integration. The Animas regulatory team is currently evaluating those questions, as they “just came in.” Dexcom management said that the ball is “really in Animas’ court,” as most of the questions relate to the pumping side of the system. Dexcom management did not further characterize the nature of the questions, the number, or provide an updated approval timeline. The Dexcom 1Q13 call targeted a potential launch in 4Q13 or early 2014 at Animas’ discretion. We would guess it’s the latter at this point.
    • Executive VP Steve Pacelli also highlighted the internal challenges that competitive bidding has thrust upon the SMBG industry – “All the fingersticks guys are reeling. There are headcount reductions across Roche and J&J, and they are all really struggling internally.” While Animas is a separate operating company from LifeScan, competitive bidding has no doubt had an impact on internal bandwidth for the Vibe.
  • Dexcom is “working as we speak” on the updated algorithm for the G4 Platinum, though it is on hold until FDA approves the pediatric indication. The 1Q13 update called for an FDA filing of the new algorithm in late 2013/early 2014, with a 2014 launch. Assuming the pediatric indication goes through as planned, Dexcom should be on track to meet this previous timeline. As a reminder, this algorithm is expected to improve the G4 Platinum’s MARD by a full two percentage points, meaning it should have some days during the week with a sub-10% MARD. As of the 1Q13 update, the new algorithm will be offered as a remote software upgrade, meaning no new receiver will be required.
  • Dexcom expects to file a PMA with the FDA for the G4 Platinum-integrated Tandem t:slim before the end of this year. This was consistent with prior timelines.
  • The Gen 5 mobile platform will be “rolled out in several stages over the next two years.” As a reminder, this will include a series of innovations: a new transmitter, the mobile platform that sends CGM data direct to a smartphone, a new sensor applicator, and continued algorithm evolution. There are no planned changes to the G4 Platinum sensor or membrane. As of the last formal update, launch of Gen 5 was targeted for late 2014-2015; this staged approach to rolling out the Gen 5 product was new news.
  • Edwards continues to enroll patients in the European accuracy study of the GlucoClear critical-care CGM; enrollment will finish by the end of 2013, with a more formal launch in 2014. In 2Q13, Dexcom recognized a total of $1.3 million in higher than expected revenue royalties from sales of the Animas Vibe in Europe and shipment of GlucoClear sensors to Edwards. No further granularity was given on the revenue mix by partner, though Dexcom management emphasized not to expect this level of royalties in 3Q13 or 4Q13.
  • We were psyched to hear that Dexcom is in the “early planning phases for studies that will unequivocally support ‘CGM first’ from both a clinical and economic perspective.” Management did not give specific details, though it sounds like at least one study will examine adding CGM to MDI therapy – the goal would be to change the perception that a pump should come before adding CGM. We look forward to learning much more, since much of the most cited and landmark CGM data uses previous-generation technology. It was particularly great to hear that an economic piece will be incorporated as well, as the current environment is so cost-conscious and CGM has so much potential to alleviate very expensive severe events.

-- by Adam Brown and Kelly Close