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Edited Transcript of DXCM earnings conference call or presentation 2-May-17 8:30pm GMT

Q1 2017 DexCom Inc Earnings Call

San Diego Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of DexCom Inc earnings conference call or presentation Tuesday, May 2, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin R. Sayer

DexCom, Inc. - CEO, President and Director

* Steven R. Pacelli

DexCom, Inc. - EVP of Strategy & Corporate Development

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Conference Call Participants

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* Christopher Cook Cooley

Stephens Inc., Research Division - MD

* Danielle Antalffy

Leerink Partners LLC, Research Division - Director, Medical Supplies and Devices

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

* Jeffrey D. Johnson

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Joanne Karen Wuensch

BMO Capital Markets Equity Research - MD and Research Analyst

* Kyle William Rose

Canaccord Genuity Limited, Research Division - Senior Analyst

* Margaret Maria Kaczor

William Blair & Company L.L.C., Research Division - Research Analyst

* Michael N. Weinstein

JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research

* Ryan Blicker

Cowen and Company, LLC, Research Division - Associate

* Steven M. Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Tao Levy

Wedbush Securities Inc., Research Division - MD, Equity Research

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Presentation

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Operator [1]

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Welcome to the DexCom First Quarter 2017 Earnings Release Conference Call. My name is Danielle, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Kevin Sayer. Mr. Sayer, you may begin.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [2]

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Thank you, Danielle, and welcome, everyone, to DexCom's First Quarter 2017 Earnings Call. We'll start with our safe harbor statement from Steve Pacelli.

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [3]

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Thanks, Kevin. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. All forward-looking statements included in this presentation are made as of the date thereof based on information currently available to DexCom and are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our cash-based operating results. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Kevin?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [4]

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Thank you, Steve. Joining me today are Steve Pacelli, our Executive Vice President of Strategy and Corporate Development; and Kevin Sun, our Vice President of Finance and Interim CFO.

Before Steve dives into a more detailed financial update, let me highlight a number of recent positive developments here at DexCom since our last call only 2 months ago. First, in terms of our sales performance, the quarter came in consistent with our expectations with revenue growing 22% over the first quarter in 2016. Our CGM-first message continues to resonate. Again, in Q1 of this year, new multiple daily injections or MDI patients drove our growth and represented the majority of our new U.S. patient additions estimated at just above 2/3 of our new patients for the quarter. Second, as we discussed in our last call, we received a nonadjunctive indication from the Food and Drug Administration near the end of 2016, making DexCom G5 Mobile the only CGM system approved for therapeutic decision-making. Shortly after FDA decision, Medicare issued a positive ruling for therapeutic CGM. And then late in Q1, we received additional coverage details from the regional MACs confirming that all people with diabetes on intensive insulin therapy will be covered under this ruling. This includes people with type 1 and type 2 diabetes. We have always believed that all intensively managed patients should have access to CGM regardless of age, and we hope to leverage the Medicare coverage criteria to our commercial relationships. So far, patient interest has been outstanding. We currently have over 10,000 prospective new Medicare patient opportunities in our pipeline, and this is before we have even started promoting Medicare availability. We commend CMS on this decision. And while we are still early in establishing the framework to serve these patients in a streamlined manner, we are excited to begin rolling this out to seniors who, we believe, will benefit tremendously from this technology. I will provide more on the timing later.

And finally, we are beginning to see good initial uptick in Germany following our positive reimbursement decision there last year. Although we are still early in the adoption curve, Germany helped fuel 37% OUS growth in Q1.

With that, I will now turn the call over to Steve for a review of our financials, after which I will expand on these accomplishments and provide a general business update. Steve?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [5]

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Thanks, Kevin. DexCom reported revenue of $142 million for the first quarter of 2017 compared to $116 million for the same quarter in 2016, a $26 million or 22% increase. Sequentially, revenue for Q1 was down approximately 17%. This reflects the seasonality we have experienced in the past several years as our U.S. patients faced resetting insurance deductibles at the beginning of the calendar year. In addition, because of the January CMS ruling, we are prohibited by law from balance billing our existing cash pay Medicare-eligible patients, which we estimate accounted for approximately $2 million to $3 million of loss sales during the quarter. As Kevin mentioned, there is a lot of excitement around the CMS ruling, and our sales channel is experiencing a significant amount of noise in the field, which has not yet translated into revenue.

During Q1, we also saw a good uptick in our international business. This led to a slightly lower global sensor ASP due to a greater mix of distributor revenue outside of the U.S.

Finally, we saw a new weaker -- weaker new patient additions from our pump partners, which Kevin will touch on later. Our first quarter gross profit was $94 million, generating a gross margin of 66% compared to a gross profit of $75 million and a gross margin of 65% for the same quarter in the prior year. Our gross margin came in slightly below our anticipated range for the quarter due to a few factors. Obviously, gross margin was impacted by seasonally lower first quarter sales and slightly lower sensor ASPs. Our hardware sales mix continues to shift towards our G5 mobile transmitter, which has a shorter useful life and a lower ASP. And our warranty expense rate has stabilized, but continues to run above historical levels, exceeding 3% in Q1.

Some final thoughts on our revenues and our gross profit. Our mix between durable and consumable products was within our normal historical range in Q1 at approximately 30% durable and 70% consumable. The ASP for our hardware has remained stable, and average sensor pricing came in slightly below $70, again, due to geographic and distribution channel mix. Finally, our international business showed continued year-over-year growth, generating $26 million in revenue during the quarter, up 37% from last year and 24% sequentially. This represents 18% of our total revenue. Research and development expense totaled $48 million for Q1 of 2017 compared to $32 million in Q1 of 2016 and up approximately 10% sequentially. Our key R&D investments continued to make good progress. These include the G6 pivotal study and related submissions with the FDA as well as our advanced product pipeline, investments in our Verily partnership and a build-out of our data platform.

Selling, general and administrative expense totaled $86 million in Q1 of 2017 compared to $62 million during the same quarter in 2016, with the increase primarily due to year-over-year increases in headcount in our field sales and customer support organizations, including support for the initial phase of the Medicare launch as well as a ramp in our patient-focused marketing expenses, higher IT costs in our OUS expansion. Our GAAP net loss was $42 million in the first quarter of 2017, which included $35 million in noncash expenses consisting primarily of noncash share-based compensation expense across all functional areas of our business. Consistent with our prior comments, the sequential increase in our first quarter operating expenses included approximately $9 million in annual share-vesting payroll tax expenses and onetime charges associated with retirements, severance and restructuring. However, total operating expenses came in slightly below our recent commentary, primarily due to the timing associated with new hires as well as our direct-to-consumer marketing campaign. Our GAAP loss per share for the quarter was $0.49. Absent noncash charges, non-GAAP cash-based net loss was $7 million for the quarter. We ended the first quarter with $181 million in cash and marketable securities on our balance sheet versus $124 million at the end of 2016. During the quarter, we drew $75 million from our credit facilities to support our cash needs, primarily to fund expenditures associated with the build-out of our manufacturing facility in Mesa, Arizona.

With respect to 2017 guidance, we continue to expect global revenue of $710 million to $740 million, reflecting growth of approximately 25% to 30%. We remain encouraged by our early progress with Medicare and are beginning to work through the practical implementation of the CMS ruling in the field. We are very confident that Medicare will be an important component of our future business, and Kevin will provide more on our outlook in a moment. For the full year, we now anticipate gross margin to be at the low end of our guidance range of 67% to 70%, due to continued ongoing warranty expenses as we transition to our new receiver. And we continue to anticipate OpEx will increase 20% to 25% versus 2016 on a GAAP basis.

With that, I'll turn the call back to Kevin for a business update.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [6]

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Thank you, Steve. Life at DexCom continues to be very exciting. The company achieved multiple historical milestones in the past several months, and now it's time for us to execute on them. Following our nonadjunctive claim late last year and the CMS ruling in Q1, our pipeline is at an all-time high. We are proud that the DexCom G5 Mobile is the first and currently the only CGM system to be classified as therapeutic CGM. We continue to believe these accomplishments are a direct result of the strength of our CGM platform, both in clinical trials and in the real world.

In the U.S., our recently expanded sales force is ramping up and will be critical in supporting our preliminary launch into the Medicare market later this year. Our worldwide new patient additions met our internal projections. As I mentioned earlier, the estimated mix of our new MDI patients in the U.S. is now consistent with the underlying type 1 market. However, we have experienced softness in the growth of our new pump patient additions. As you are most likely aware, our 2 commercial pump partners have encountered difficulties in recent quarters driven by a variety of factors. However, we see several highly competitive DexCom-enabled insulin delivery systems, both on the near- and long-term horizons that will provide attractive options for the diabetes community.

Outside the U.S., our year-over-year growth accelerated from fourth quarter levels buoyed by the broader reimbursement in Germany, efforts on our 2 other direct markets, the U.K. and Canada, and increased volumes throughout the European distribution channel.

Turning to Medicare. Nothing in this process has gone according to the standard plan. A CMS administrator's ruling is incredibly rare. And the timing of that ruling was completely unanticipated by us. Medicare certainly got this right for patients as this ruling should ultimately accelerate access to the eligible population. However, the joint article recently issued by the DME MAC is something that is typically issued simultaneously with or after a coverage decision has been published. So while the joint article provided guidance enabling patients to access this technology, the formal absence of a coverage decision makes it very challenging to process claims in an efficient manner and not to take significant regulatory and financial risk by shipping to these patients. Hence, the confusion and the delays. At this point, we are pulling every lever we have at our disposal and are speaking to Medicare regularly. It is also important to note that the change of administration and the stricter stance on new regulation can cause challenges. We hope to resolve this as soon as possible. Longer term, Medicare represents one of DexCom's biggest opportunities in the intensive market. We estimate that Medicare age type 1 population represents 20% of the overall type 1 market or as many as 300,000 patients in the U.S. We also estimate that type 2 Medicare age patients on intensive insulin therapy represent approximately 1/3 of the intensive type 2 population or approximately 500,000 patients in the U.S. Again, we have over 10,000 Medicare eligible patients in our pipeline, and we really haven't done any promotions yet. In the past year, we have certainly made dramatic progress on the reimbursement and access front. To put things in perspective, with positive coverage decisions from both Medicare and Germany's GBA, we estimate that we now have an incremental of 1.3 million covered lives to target with our technology. This roughly doubles the number of covered lives we had entering 2016. Globally, our goal remains to continue to drive CGM towards the standard of care for diabetes management, and we maintain our goal of achieving or exceeding an installed base of approximately 270,000 patients worldwide by the end of 2017.

Now I'll provide you with an update on our pipeline -- our product pipeline. With respect to our product pipeline, we continue to have regular interactions with the FDA. We have received approval for our new more reliable touchscreen receiver, and we will begin transitioning new patients later this year. Our discussions on the submissions surrounding our new insertion system and corresponding transmitter are ongoing. As we mentioned on our last call, we are evaluating the implications of this filing on our commercial time lines. Considering the magnitude of launching a new applicator, coupled with our G5 platform, making -- G6 platform, making very good progress. We will assess the timing and a potential launch of the new insertion with that of G6 as we move through the year. On the app front, we hope to launch our Android platform in the U.S. by midyear. The majority of our G6 pivotal trial has concluded, and our goal remains to file the G6 PMA by the end of Q3 2017, which would allow us to launch this product in 2018, assuming a positive review by the FDA. We have very high expectations for G6 based on its impressive early data. Assuming this performance continues, we expect patients would quickly appreciate what G6 means for standards and CGM performance even with a reduction in the number of daily calibrations. In addition, G6 represents the basis of our future no-calibration technology.

Turning to our Verily partnership, our collaboration continues to march towards a continuous real-time low-cost, no-calibration disposable sensor system, allowing us to target the nonintensive type 2 market. In addition to the progress we are making in product development, we are beginning to explore a variety of commercial channels to support our nonintensive strategy. As we have said in the past, the business models we consider in the nonintensive market will likely differ from what we have pursued in our intensive business to date. These include a shift to value-based programs and working in collaboration with payers, providers and employers to develop diabetes management solutions that leverage CGM and our data platform to facilitate both therapeutic and behavioral change. Considering the importance and cost associated with the broader type 2 patient population and health care management today, these efforts are driving significant interest in solutions for this important category. The noise in the type 2 diabetes market is only getting louder. New drugs, new programs, all with different outcomes. It seems like we have a new answer every week. It is our belief that none of these offer the diabetes community as much value as CGM. More specifically, there is a tremendous void in the information provided to these patients to manage their condition. The system's answer today is to take a pill, eat less and exercise more. Patients have heard this for years and yet those ineffective treatments cost the system a fortune. The opportunity lies with an approach that cannot only provide better outcomes, but alleviate expenses. For the first time, accurately viable and intuitive CGM data will provide payers, providers and patients with real-time feedback about timing and efficacy of medications and how eating, sleeping and exercise can impact their diabetes. One of our early learnings is the CGM accuracy matters in the nonintensive market every bit as much as it matters in our intensive market. Many of these patients are truly interacting with their diabetes for the first time. And they must have confidence in the data and information they receive. Our early pilot studies in the nonintensive type 2 space have demonstrated this with reductions in average glucose as well as improvements in A1c, time and range and glycemic variability over a relatively short period of time. Once patients begin using CGM, they quickly understand the repercussions of their decisions around both medication and behavior. These benefits will ultimately drive significant cost reductions in the care of these patients. From a product development perspective, for these initiatives, we believe our first Verily device should be commercialized by the end of 2018 and anticipate that the second-generation device will be available in the 2020, '21 time frame.

Turning to our partnerships. We are making continued progress in our integrations of both G5 and G6 with advanced insulin delivery systems, including pumps, smart pens and other interconnected diabetes management platforms. We will highlight more specific progress as these integrated systems approach clinical trials and commercial launch.

To sum things up, DexCom continues to raise the bar in the CGM category. In the near term, we remain focused on driving awareness around therapeutic CGM and our recent positive reimbursement developments, both with Medicare and in Germany. In parallel, we continue to develop our nonintensive strategy and are excited by the early signs of significant potential, both in terms of product development and revolutionary new business models. Execution on our strategic pipeline will position us to maintain our position as a leader in CGM. The DexCom team continues to perform in a very high level. I want to take a moment to thank our employees for their continued efforts. With all of the major milestones the company has achieved in the first past few years, we now have the ability in the mission to bring this life-changing technology to a much greater number of patients. I'd now like to open the call up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have our first question. Our first question comes from Mike Weinstein of JP Morgan.

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Michael N. Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research [2]

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Let me just start with the U.S. sales performance. So it sounds like the inability to deal with some of your cash-pay customers cost $2 million to $3 million. If I -- even if I adjust for that, it would seem the U.S. business was down 21% sequentially. The last 2 years, U.S. business was down 15% sequentially. So can you give us some additional commentary on just the U.S. revenue performance and then from there, I'd like to follow up with the commentary you made about that backlog of 10,000 Medicare patients. Can you just explain what that backlog is and how you're coming up with that number?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [3]

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Well, I'll start with the backlog because that's very concrete. Once the coverage decision was announced, we certainly have criteria when the patient phones in or goes to our website for creating what we believe is a patient opportunity or patient lead. And these are patients who have met criteria who shown enough interest and have enough of the criteria within our system to be qualified as patient leads. So again, there are more than 10,000 Medicare patients in our system outside of the traditional patients that we have as well coming in through the field or coming in through our website and through the digital market space. So these are again patients who have reached out to us and expressed interest and have enough information to qualify as someone who is truly interested in CGM. With respect to the U.S. business and our growth year-over-year, I think one thing that's very important to remember is we were in the middle of the G5 Mobile launch last year. We launched it late in the first quarter, could not meet everybody's need -- in the fourth quarter -- didn't meet all the needs in the fourth quarter and allowed our carryover into the first. So it is a tough U.S. comparison quarter-over-quarter. With respect to our patient ads, again pretty much like we had discussed before Mike, the majority of our growth came from MDI patients, and we see the MDI patient base growing very quickly. Where we were down a bit, where we've been in previous years on the new patient side, was on insulin pumpers, and we have fewer of those than we've had in the past. With respect to reorders and patient behaviors, the other thing Steve talked about and I can elaborate a bit on as well, it's back to seasonality in the first quarter and possibly changing nature in our patient base. We had good reorders. Our patients called in and that wasn't a problem, but the bigger issue is deductibles and co-pays and particularly as we get into the MDI markets, our insulin pump patients spend a lot more money on insulin supply -- insulin pump supplies and their pumps, meaning deductibles faster than this new market in this group of patients that we're seeing. So we know that there is some financial pressure on these people. We have not seen anything that would indicate increased attrition. We have not seen anything that would increase -- that they would indicate decreased utilization on the sensor. It's -- first quarter is a tough seasonal one, and those are really pretty much everything around the revenue numbers in the U.S.

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Michael N. Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research [4]

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Okay. So you -- just to cover a few things. So you reiterated your projections for the year on new patient starts and where your installed base would end up, which was -- is just going back to the fourth quarter fall was basically your patient adds are going to be -- are going to exceed your revenue growth in 2017. Is that your pipeline is at an all-time high? And you're reiterating your sales guidance for the year. So 2 questions. One, can you give us some sense on the second quarter, how you're -- what's your visibility is today? And how you're thinking about the second quarter versus the balance of the year since, obviously, there is some disconnect between how The Street is modeling you guys and how you are thinking about it? And then, second, can you just talk about how your expectations may have shifted to the positive on Germany and that may be offsetting a little bit of incremental U.S. weakness with your pump partners?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [5]

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Well, Germany has been very successful for us. We have -- while we've grown quite a bit in Germany, it's still only about 20% of our total international revenue. So it's not as big as it can be. We have contracts in place with less than 20% of the payers. We're sitting in front of 2 of the largest ones with contracts that should be executed shortly. That would give us up to 50% of contracted reimbursement with the payers we have been contracted with. We can process those claims and get paid, but it's very much one-off and requires a lot of documentation. So Germany will provide us some significant growth opportunities going forward. With respect to our estimates for the year in our pump patients, there are a number of factors that we look out as we weigh this. Again, we have our Medicare situation. We have a robust pipeline of potential new patients to serve without promoting it. We -- once we got this, we're excited. We think we can add a number of new patients there. We think on the patient number front, that would offset some softness on the pump side and possibly more than offset any softness on the pump side where the Medicare model is a little bit different is the revenue we derive from a new patient when we add them. And if I can give you an illustration, you all know if we go back in time or if you look at a new patient, the initial transmitters and a receiver and 3 sensors, the hardware is between $800 to $900 and 3 boxes of sensors just for the sake of being simple. Let's say, they're $300 a piece or $75. So you've got $900 and you've got somewhere between $1,500 and $2,000 to start up a new patient. On the Medicare side, as you've all read the CMS rulings, we're not going to get that big of an upfront payment. We will be getting -- us or our distributors will be getting rental payments on the receiver over a 13-month period and the average payment per month on the disposable component would be somewhere between $250 and $300. So a new patient in that first quarter gives -- will bring in somewhere between $750 to $900. So even if we grow the patient base significantly past the 270,000, if a number of them are Medicare patients, it won't have the immediate pop that we've experienced in our commercial business in the past. As we look it out -- as we look at the opportunities and the number of patients who continue to request CGM, the number of new non-Medicare patients in our pipeline, we're comfortable with our guidance for the year, in spite of all the other diabetes news that is out there, and we plan on achieving those goals. And second quarter typically, for us, has been up over first. We certainly expect that it will be much better than the first quarter, and we'll see how it goes from there.

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Michael N. Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research [6]

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Yes. I mean, like one of the other...

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [7]

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Just a quick addition on U.S. about [QGs] specifically and those outside models. I mean, we certainly don't control those outside models, but what we said in our Q4 call, if you recall, as we expected to do somewhere between 18% and 20% of our annual revenues in the first quarter, and I think where we landed was right square in the middle of that. We've also typically historically said we expect to do 40% to 45% of our annual revenue in the first half of the year. And so, I think, we would be comfortable sticking with that as a historical guide.

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Michael N. Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group within Equity Research [8]

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Understood. And then last one (inaudible). I just want your comment on some kind of what you think the feedback has been so far in 670G in terms of how that scattering with the early clinicians and patients?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [9]

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Well, they've put on 500 people and my guess is they probably picked those 500 people specifically. So we've heard some relatively good feedback. We've also heard mixed reviews with respect to the complexity of the system. And going out of auto mode and everything, I don't think the book can be written on 670G till this is commercialized to a broad number of patients. I would tell you on the pump front, we do see as is evidenced by, I think, what we heard on Tandem's call that some doctors are waiting to see before they put a patient on a pump to see how 670G goes, and this will be more applicable to a patient. But in all reality, pumps again are 4-year warranty cycle. We believe that we can do very well with the pump patients that we have now. And as I said earlier, on our new patient adds on the pump side, we are slow. And that was really the most negative thing that we saw in the first quarter or so. We'll just keep going from there. But there is a lot of MDI patients who really can use CGM, and we will focus on those guys and other pump partners' patients as well.

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Operator [10]

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We have our next question from Jayson Bedford of Raymond James.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [11]

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Just a couple of quick ones. Kevin, I appreciate the explanation around Medicare, but what really needs to happen from here for Medicare patients to access the technology?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [12]

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The most important thing that can happen next is a coverage decision. And what a coverage decision does is it provides an explanation around the benefit criteria that have already been established. For example, in the documents that have been issued already, it says the patient needs to be taking 4 finger sticks a day, but we don't have any guidance as how to document that. What the local coverage decision will provide is documentation requirements to document 4 finger sticks a day, this is what you have to do. Same thing with the other criteria type 1 diabetes and the other things that are on that list. Also, with the local coverage decision, Jayson, while under the current pronouncements of Medicare, you can bill on a one-by-one basis on claims. We processed a few Medicare claims and our distributor has and they've all been pretty much denied and waiting a coverage decision. So we really need this coverage decision and then we can really open this up and get this process running smoothly. That is the next obstacle. And then again, I want to be very clear, CMS has been very progressive and helping us try and get this out. The things that they've done, the last guidance they gave towards the end of the first quarter. That was very much a positive step. We see it as a positive step by us to outline the criteria to specifically identify type 1 and type 2 diabetes patients using intensive therapy and that did keep the ball rolling. We need to get this local coverage decision, and we are going for local coverage decisions as soon as possible and then we can really get this thing going. That's the big holdup right now more than anything else.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [13]

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And Kevin, are we going to see a series of local coverage decisions? Or is it one national that can be overlaid on the local?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [14]

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There is -- again it's more consolidated than that. It may be more than 1, but it probably would be 2 up to a maximum of 4. So a little bit (inaudible).

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [15]

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Okay. And when do you anticipate this to be put in place? Is midyear still a fair estimate?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [16]

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There was a CMS webcast actually that happened earlier today, and they said it's -- basically said it's in process. And they wouldn't give specific timing, but it seem like it would be sooner rather than later. So we are hopeful before the summer.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [17]

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Certainly, before the end of this quarter is what we're hoping for.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [18]

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Okay. And last one on this topic. Is -- when the local coverage decision is in place, is that when you kick in a more aggressive marketing effort?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [19]

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That is correct. Last thing we want to do is go add another 10,000 patients to the 10,000 patients we are not currently shipping and have them all frustrated. So yes, we will aggressively go after them as soon as we get that local coverage decision. We are more teed up. We're ready to go. This isn't something that will require a bunch of time. We'll get after it very quickly.

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Operator [20]

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And we have our next question from Doug Schenkel of Cowen & Company.

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [21]

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This is Ryan on for Doug. So you've talked historically about international ASPs being about 20% lower than the U.S. on average. Is this still the case in direct markets or should we assume it's closer to the U.S. indirect markets? And what are your expectations for sensor ASPs over the remainder of 2017?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [22]

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Yes, so what we've said is the pricing in Germany is more reflective of our pricing -- our direct pricing in the U.S. But remember, Germany doesn't represent -- it represents an okay chunk, but it doesn't represent a huge chunk of our OUS business yet. So the vast majority of our OUS business is still through third-party distribution, which is at a lower ASP. As we look to go directly in other markets, I think you'll see some pricing improvement versus through distributions. But I'll tell you, giving example, in one of our reimbursed market, we actually elected to lower the price slightly to drive sale, to drive volume, and it's had a wonderful response, particularly against some of the competition that is priced lower. So we're still evaluating how we proceed OUS, but yes -- I mean, what you've seen today is certainly Germany being the only big direct market is still more reflective of our U.S. pricing.

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [23]

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Okay. So should we expect the -- where ASPs were this quarter or around that? We should expect it to be towards the lower end of your historical range for the remainder of 2017?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [24]

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Yes, this is Kevin. I think we get back up into the 70 range, probably not towards 75 as the U.S. volumes become a larger percentage of our business. And the U.S. international mix in Q1 of last year was also similar to this. In fact, the international business doesn't really suffer the seasonality that we suffer in the U.S. and many times Q1 has been our biggest quarter in the year internationally. Now we certainly wouldn't want that to be the way this year. But as U.S. business goes up and becomes a bigger percentage of the business, again you will see prices naturally move up because of again just distribution channel shift and geographic shift.

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [25]

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Okay. That's helpful. Moving back to Medicare. You said on the Q4 call that you believe within Medicare penetration of the type 1 patients could exceed the broader market rate over the next few years. What do you believe will happen within the intensively managed type 2 population?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [26]

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Specifically, to Medicare or more broadly speaking?

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [27]

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Specifically to Medicare, but both would be helpful.

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [28]

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Yes, I mean, I will tell you, it's still a bit of an unknown as Kevin said in his prepared remarks. We hope to leverage the coverage criteria, the coverage language from Medicare into the commercial side of the business. I think it's a little bit of an unknown because our core commercial business is not -- it's not dominated by intensively managed type 2s due to a lack of coverage. So it will probably -- I'd tell you taking a little bit of wait-and-see approach, but the number of patients are much, much larger than the type 1. So I think it could be extremely additive over the next several years.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [29]

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And with respect to the type 1 market, again these are prevalent patient profile. These are patients many of whom who suffer from hypoglycemia unawareness, and this is a wonderful tool to help them and help give their families peace of mind. So we see a tremendous opportunity here. And if we didn't see a tremendous opportunity here, I can tell you it's emphasized because it would appear to me that most of the Medicare cash patients who we didn't ship, all send the e-mails regarding, in fact, that they don't have their product and they want it soon. So this is the group that has been very committed to the technology and done extremely well. So I think we have a wonderful opportunity here. The key for us will be executing, streamlining the reimbursement and shipment process as we have to bundle this with the strips and meters upfront and making sure the patients are properly trained and qualified, and we've staffed up for that. We've added more people on our tech support group and on our patient care team and in our processing team in anticipation of this. So we've done some things much better than we did a year ago. We put good plans in place to anticipate this, and we're just really excited to get started, but getting started is the keyword, we really need to go.

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Operator [30]

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We have our next question from Jeff Johnson of Robert Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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So let me ask, I guess, one other Medicare question. So I'm looking at the Noridian coverage decision from late March. The wording is pretty clear in there that you'll only get coverage if you are using the DexCom receiver, the display data. And in fact, I think in that document, the word "only" is capitalized and then it goes on to say that if a beneficiary uses a smartphone as the display device, the supply allowance will be noncovered by Medicare. So I guess my question is Liberty recently decided they're no longer going to process G5 orders, at least -- I'm not sure if that's temporary or not, but is there any connection between that and the display wording? Is there any risk that the payers take if it's found out that the patients are using their phone? Do patients take any risk? Do you guys have to change the share functionality on Medicare -- for Medicare patients. It just seems like a big issue tied to this word "only" and I'm just trying to figure out if there is anything there to be thinking about?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [32]

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Excuse me. This is Kevin. I'll take that. What is lost on many of this is we're about a year ahead of where we thought we'd be with respect to this Medicare stuff. And in order to get DME approval, we have to have a durable component of the system that would last a specific period of time that we would cover. And working with Medicare, again they worked very hard and they determined that durable component is the receiver. So we'll start with the rules that we have. As far as Liberty concluding, it still has absolutely nothing to do with their decision and with this and that is, by far and away, the least important gaining factor in doing this Liberty's decision and as we've looked at this and quite frankly spoke with other distribution channels, not knowing exactly what the coverage decision looks like and not knowing what you're going to have to have in your file to get paid when you have a Medicare license at risk and your business is very much Medicare-oriented is something of a risk that Liberty just wasn't ready to take at this point in time even though they could get paid on individual claims and go through the process and do a lot of work. So they stepped back and they're waiting -- and they want to wait for this local coverage decision as much as we do. Once this becomes clear, we will -- we'll determine how to best proceed. And I think it's important for everybody to understand, this hasn't been a onetime thing. This has been a process over several years, and while we may sit here today with that position on the receiver being the durable part and being kind of like the centerpiece and the most important component of the system, we have a number of options here. We can certainly work with CMS over time to see if we can move it to another category. We can also go back to what we did in the past with SHARE and have the receiver talk to the phone and we could -- certainly, we don't have that product in our portfolio right now, but since we were the first to make it way back when we know how to do that. So we have a number of options here. We just need to let this play out. We need to get this technology on patients. We need them to explain how it has changed their lives and how beneficial it is. And we need to be pleased with where we are and not get too crazy. I don't think that's over time going to be a factor.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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That's helpful. Can I ask one clarifying question, Kevin. Earlier you mentioned the supplies reimbursement monthly limit of $250 to $300. And just as I'm thinking about by Medicare model for you guys, I thought the number would come out at $238. Am I wrong on that and just wondering where your $250 to $300.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [34]

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The receiver rental is the payment for the first 13 months. That's why I had that and then -- again, what we end up getting will depend on the distribution channel and our terms with distributors, and we'll have more color on that once we start going in future quarters.

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Operator [35]

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And our next question comes from Kyle Rose with Canaccord.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [36]

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Yes, so just wanted to ask you more on the pump partnership side. Has the disruption in that side of the market changed? How you guys think about long-term opportunity of where our partnership should look, whether it be on pump partnerships versus smart pens versus connected Holters? Obviously, when you think about the type 2 opportunities, just trying to understand how you guys view some of the value of those longer-term partnerships?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [37]

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I'll take that one, Kyle. No, I don't think it changes our thinking on that at all. I think there is an extremely important segment of the market that we'll look to have to utilize the semi-automated or hybrid closed-loop systems, and we remain active with folks who you know with Insulet and some others -- and there's some others that you don't know. I think those are critically important to some subset of the market. We also think, as you mentioned smart pens, smart pen paired with a CGM, we think is an extraordinarily compelling product offering, particularly when you think about the power and computing power that we have on the phone and being able to really mimic using the algorithms that would be the similar algorithms that you have on the pump -- on the phone and actually really provide detailed dosing assistance and otherwise to the patients. But then if you really look out at the market, thinking about type 2s more broadly speaking, Kevin gave some color on our initial thoughts there, there is a much, much broader opportunity even in the noninsulin taking patient population in type 2s. And I think we're starting to see some really compelling preliminary data that will marry up with the appropriate products as we continue forward with our Verily relationship. So I don't think our product -- our partnership strategy has changed. In fact, I think our partners are becoming frankly more important, perhaps more diverse. We're not just going to focus on closed-loop or hybrid closed-loop systems. I think there is a broad spectrum of partnership product opportunities for us, but they're all going to be critically important over time.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [38]

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Great. I appreciate that. And then just a 2-part question and then I'll hop back in the queue. Just wanted to say -- just wanted to see, is it fair to think of the product cadence and I appreciate the color, but is the product cadence coming as G6? And then the Verily G1 and then the Verily G2. And I don't mean to imply that, that's not a very robust pipeline, but I'm just trying to understand, if we may see some incremental launches, whether that be different labeling, different types of use cases for those products along the way as we think about the '17 to '20 to '21 time period. And I just -- second question, is anything you guys want to highlight when we think about you're heading to ADA in June?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [39]

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Let me start with the product pipeline. On the product pipeline front, it's a real good question and a very good observation. We have been very successful over time. Once we get a technology platform established on the sensor side to turn that into enhanced performance and other different opportunities, and I think in today's hospital world and the expertise we're developing and the expertise, quite frankly, that's some of these important partners that Steve has talked about is, I think, you will see derivations of our core technologies. We tend to speak to our core technologies on these calls, but I can give you a simple example. We've certainly run feasibility studies on the Gen 6 sensor for 14 days, not only for purposes of the Verily first product that we're going to launch because there will be a G6 sensor, but also for possibly a 14-day version of G6, but all this is in feasibility phases. We are giving all these things thoughts and you will see iterations that will be different. I think the other place that we can iterate that will be very meaningful will be software. We believe once we have that accurate stable industry-standard sensor platform and algorithms that generate extremely accurate and well-performing numbers that we can then, in future worlds, come up with possibly different apps that might be approved for different labeling and might have different use cases for patients and back to what Steve talked about with our type 2 business models, our type 2 relationships. So now, there is a lot going on and there is a lot more going on here than just the -- when we talk about really the core basic things on these calls, there are many other projects and many other things we're considering along with those. And with respect to ADA, certainly, there will be talk about the second phase of the DIaMonD study, the type 2 DIaMonD data, and we have several technology papers. There will be posters. We have a couple of oral presentations. We don't have a new product coming this year. We would love to be able to knock on wood if we can launch Android at ADA that would be a wonderful event, but we're not there yet. So we'll -- it will certainly be a good show for us. It always is. And we'll have a great time here in San Diego.

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Operator [40]

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And our next question comes from Margaret Kaczor of William Blair.

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Margaret Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [41]

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So the first question for me in terms of the final pieces for Medicare, once they're in place, how should we think about the ramp of these patients? Are you continuing to see that pipeline of patients grow even now as we go couple of months beyond the initial announcement? And I guess, more specifically, over what time frame should we look at those 10,000 patients to come online?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [42]

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Well, certainly, we want to get the 10,000 patients up and going as quickly as possible. I think the Medicare ramp, once this final coverage decision is in place, can go relatively quickly. As we qualify these patients and make sure they meet all the criteria and understand what documentation that we have to have. The impact of the patients though, as I described earlier, is a little different than our regular in-patients just based on the reimbursement model and the fact that we get a monthly rental rather that the big upfront payment. So our relationship with distributors are going to be a little bit different. Where the Medicare revenue really becomes material and significant is when we get, like, a 30,000 or 40,000-patient base and we're billing them all that monthly charge, and so you've got a regular monthly revenue stream, combined with monthly shipments that we think could be highly predictable. So like I said, our new Medicare patient upfront is probably about half of what a commercial patient is in our upfront revenues but as that [bolus] goes out over time, those patients become extremely valuable to us. So it's going to be a little bit different model, but it will be highly -- we're very excited about everything. I think it will be very additive to our business.

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Margaret Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [43]

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And are those pipeline of patients still growing beyond the 10,000 kind of the rate over the period of time?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [44]

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Yes. Well, we are still getting people calling in and wanting to join the pipeline. We get several -- we get many opportunities per day. But when they hear we can't -- or we can't ship to them, it's been a little bit difficult. I would say that we really need to turn on the faucet once we get the coverage decision marketed. And then we'll have a very good idea as to how robust these patients who have inquired is and how many will convert and how they'll use it. We really need to get going.

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Margaret Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [45]

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Got it. And in terms of the second question, on the U.S. patient adds, is there anything that you guys can do in the near term to help maybe your existing pump partners improve those patient adds? And Steve, I don't know if you have the numbers or willing to share, but what percentage of your patient adds in the past have been through those pump partners last year versus what you guys saw this quarter?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [46]

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Well, it's not -- I wouldn't say it's just pump partners. I mean, what we've said is, historically, this is 2 to 3 years ago, when we were a typical quarter, we would add roughly 50% pumpers, which included Animas, Tandem, not just integrated -- DexCom-integrated systems, but pumpers, broadly speaking. So the Animas, Tandem, Insulet and even Medtronic, and so with a couple of pump partners that we're seeing not adding -- just not adding new patients, generally speaking, we've seen a slowdown. So the point though is while it did have an impact, we've shifted the mix pretty dramatically over the last 12 months or so. So now in a typical quarter, we're adding 2/3 of our new patients are actually MDI patients. So while it's had an impact, it's not crippling the business. We just drew attention to it because it was a factor.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [47]

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It's a factor, yes.

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Margaret Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [48]

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Got it. And then last one for me, maybe as we think about the G6 label, Kevin, what could DexCom offer for patients in exchange for that hard shutoff on the sensor? Whether it's 10 days, I think you mentioned 14 days that you're thinking about, what would make them excited about that prospect and effectively pay more per day per sensor than they do today?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [49]

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Well, the 10-day life per G6, the way G6 is configured, there is not a hard shutoff on G6. As we are filing it at this point in time and we will evaluate that hard shutoff feature going forward. We all read the blogs on our system and every time I get on the DexCom G5 user group, pretty much every night, somebody says "Hey, I just got my DexCom and I've worn my sensor for 2 weeks. How much longer is it going to last and what do I do to make it last longer?" And then you read -- the last couple of weeks, I read somebody said "Yes, I get 48 days for each of my sensors or 7 weeks per sensor and here's all the things that I do." So this is the feature we have built into our product. I mean, our product has been very reliable for more than 7 days. I think over time, the way our model works, particularly if you get out to 10 or 14 days, if we were to shut it off, it would be -- absolutely for quality purposes and to make sure that it's accurate, in particular, with our nonadjunctive claim. And the way we would look at that, Margaret, in all reality, while we're billing somewhere between $10 and $12 a day in the U.S. to the reimbursement entities. If we did shut the thing off hard, we would make sure we were fair with the patients because we always do and we would have a program to whereby patients -- we would hope patients will not be hurt economically. And that's something we will study and explore over time and give it lots of thought and consideration. So it will be a -- it will be an interesting evolution on our technology curve and we have a lot of things to think about and consider.

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Operator [50]

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And we have our next question. Our next question comes from Danielle Antalffy from Leerink Partners.

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Danielle Antalffy, Leerink Partners LLC, Research Division - Director, Medical Supplies and Devices [51]

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Just a question on the competitive landscape. I don't want to belabor this but Kevin, I'd want to hear your thoughts on another competitor expected to come to market at some point later this year, The Abbot Libre, and they've added a significant number of patients internationally. What I'm really looking for is maybe your view on how the U.S. market, the dynamics there are different than the international markets where you compete head-to-head with them and therefore, why the competitive landscape, when they do come to the U.S., might be different than what we see internationally?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [52]

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Well, one of the first things to note international us versus Libre is, when we've restarted our entire international team, consisted of 3 people. And so we really hadn't built much infrastructure over there and we didn't have any reimbursement and the decision for a patient was very simple: pay cash for Libre, which is much less expensive than a DexCom system. So adding cash patients with that little price point upfront led to some significant growth. As Steve alluded to earlier and I can validate again is we have received reimbursement in some of these European geographies, a reasonable number of our patients adds are Libre users who aren't getting what they want from Libre. In the U.S. markets, again, one of our biggest assets is our nonadjunctive claim that a patient can dose insulin off of the system. And we believe intensive -- people intensively manage their diabetes. That is going to be an important feature. And so we believe in the intensive market, we can do well. And the fact is, again, even in Europe, where we don't have any of the resources they've had, you just heard us talk about a 37% 1st quarter growth factor in Europe and I mean, U.S. markets for this quarter and our reimbursed markets we're doing very well. So in the U.S., I think there's a niche for this. I think there will be people who want it. I think in the intense world where we are now, we can maintain our share with our connectivity, our SHARE features, the Android app, the new technology we have coming and, really, more important than anything else, our accuracy and the performance of our system. This has been documented time and time and time again. Over time, as we look at that market, I assure you, as you look at the Verily products, we will have products to compete head-to-head with that in the not-too-distant future that we think will be extremely good.

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Danielle Antalffy, Leerink Partners LLC, Research Division - Director, Medical Supplies and Devices [53]

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Okay, that's helpful. And I guess, another issue for Libre might be what reimbursement looks like for that system. But one more question, Kevin, I have on the long-term outlook here from an OpEx perspective. I'm not asking for guidance, but just trying to think directionally. I know you've talked about how the look of the business will have to change when you do have a type 2 product. And I'm just curious about how the run rate for OpEx might change? Can you continue to -- can you drive leverage as you sort of shift the infrastructure and build the infrastructure for the type 2 market? Or should we think about, just directionally speaking, over the next few years as you get ready for this, sort of negative leverage or, at best, flat?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [54]

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I appreciate that. You're talking really more about the commercial and the SG&A aspect of those expenses. And we have -- it's become very clear to us that this will be a different type of business model for us. We can't have the one-on-one ordering that we have now on what patients through their DME benefits in the way that we do things. It's going to have to be different. And we are exploring new business models that can do that. As Steve talked about earlier, outcome-based -- excuse me, type programs that we can sell with employers, payers, communities and things of that nature. There's going to have to be leverage and it's going to have to be done differently than what we do today. And we think we can leverage that and be successful. And so we're taking as much time with the business model in this area as we are taking with the technology. And the development of business model is every bit as high tech and challenging and different as developing the technology as it's really been a wonderful effort so far. And you'll hear more probably more towards late this year or early next year as to what that's going to look like for us.

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Operator [55]

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And we have our next question. Our next question comes from David Lewis from Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [56]

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A couple of follow-ups and some clarification. Kevin, just on this topic and maybe Steve, actually, I think you answered this question. But on the 2/3 MDI mix, if that mix holds at 2/3 where it sort of has been in the next several quarters, you're still comfortable with your guidance, I'm assuming, because that's where it's been in the last several quarters. You seem to have copped up a little bit. But is 2/3 MDI throughout the remainder of the year an issue or something you're comfortable with?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [57]

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No, that's actually been a goal, right? I mean, historically, we were even -- with the endocrinology community people always -- this is the old days, but people used to characterize CGM as just an adjunct to a pump. So we set out a number of years ago with our CGM-first campaign to show the world that CGM is the most important tool in diabetes management. So if you're on MDI, you can effectively manage your diabetes without going to a pump with MDI and CGM. So now I think it's actually -- that's a huge positive for us.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [58]

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Okay. So I totally understand, Steve. I guess what I'm getting at is if that number would go to 80% in the back half of the year, do you have enough MDI momentum to offset the pump degradation?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [59]

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Sure. There's lots more patients on MDI. Now if you remember, pumps are only about 30% penetrated in the U.S. and less than 10% penetrated outside the U.S. So there's tons more patients in the MDI group.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [60]

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Okay. And then Kevin, just -- or for Steve, guidance for this year, I mean, no one's really specifically asking, but how should we think about the impact Medicare is having on guidance? So we still assume a very limited impact in your expectations for Medicare? Was there any channel load at all here in the second -- first quarter into your DME partners to speak of?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [61]

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No, there's no channel load for us. We monitor our distributors very carefully and no, there's no channel load there. With respect to the impact of Medicare, again -- and even the impact of new patients and patient growth and that's a very good question. In all reality, as you're looking at a $700-plus million business, the number of new patients you can add on your quarter dwarfs what new patients can contribute 3 years ago to a quarter. So the new patients are very important and Medicare will have an impact. But I don't think you can move the needle like 10% or 20% certainly over the back half of the year. It can move at a lower amount of that depending upon how many patients that we add. So we will give you more guidance and color on that as we add them and we probably have to be very clear with Medicare patient numbers on margins and breaking some of this out. So everybody understands the story. What really moves the needle is in the periods going forward as you get a large established base with recurring revenues and we continue to shift to that business and it is going to evolve more over time than the upfront payments we get from new patients now.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [62]

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Okay. And then Kevin, just -- we get this question a lot from shareholders in the last couple of weeks and months. In light of this year with Medicare, Libre, 670G, is it likely we get a guidance update earlier in the year this year based on those parameters or do those parameters actually make it a lot less likely you provide an update for the year into your more traditional period?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [63]

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No, I mean, we evaluate our guidance on a quarterly basis and at this point, we're not comfortable because we're not shipping to Medicare. We're not comfortable -- we do think Medicare is a huge opportunity, and we'll evaluate it at the end of Q2, which will -- that call's probably going to happen in a month after the end of the quarter. Just where we seat today, we don't feel comfortable (inaudible)

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Operator [64]

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And our next question comes from Tao Levy of Wedbush.

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Tao Levy, Wedbush Securities Inc., Research Division - MD, Equity Research [65]

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Maybe some clarification questions. In terms of the percent of patients who are on G5 versus G4, is that number that you guys can provide?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [66]

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No, we've not broken it out. But remember, the disposable sensor is the same. So with respect to 70% of our revenue, it doesn't matter whether they're on G4 or G5. The only difference it makes to us financially as we noted in our prepared remarks is that the COGS on the G5 transmitter are a little higher.

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Tao Levy, Wedbush Securities Inc., Research Division - MD, Equity Research [67]

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Right. And so that's -- I mean, that's a -- has a decent size impact on some of your hardware sales? If you separate the two, I mean, hardware sales growth was reasonable this quarter, up over 30%, and then kind of where you fell a little bit short, at least versus my model, was on the sensor side, and what you had said on the call was you get more international so that lowered the ASP a bit. And so my question is that $2 million to $3 million related to Medicare is -- was that all sensor-related? Or is any of that hardware? And also, what happens to that in the second quarter?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [68]

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Those are -- I mean, it's much more sensor-related. These would be existing patients, so not new patients. I suppose there could be, in that mix, some anticipated transmitters. The transmitter died during the quarter but that would be predominantly sensor revenue.

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Tao Levy, Wedbush Securities Inc., Research Division - MD, Equity Research [69]

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Got you. And then -- and what happens in the second quarter with that $2 million to $3 million? Can you start charging for?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [70]

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So we haven't been able to ship for -- these are ex-cash pay patients. And now that we have Medicare coverage, we cannot ship to them and charge them cash. So once they -- once we have coverage -- again, so back to once we have the formal coverage in place, we can absolutely continue to service these patients. There won't be a makeup per se. It's revenue that they would have -- we'll start charging -- we'll start charging Medicare per sensors and shipping sensors to them, but there won't be a catch out.

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Tao Levy, Wedbush Securities Inc., Research Division - MD, Equity Research [71]

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Got you. And then just lastly, from a sort of like a strategic perspective, I think -- the question around you, "Will you guys ever buy a pump company?" had come up in the past. I think the response was, "No not really," but if it did potentially have an impact on our sensor business, not having a competitive artificial pancreas or similar device, then you guys might consider it. Is this kind of what we're talking about here where your pump partners aren't as quick to launch artificial pancreas technology?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [72]

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Yes, I mean, I can cut you short. No, we're not looking to buy a pump company. I think we continue to evaluate our partnership relationships. You could see us become a little more involved with one or more of the partners if some of them seem to fall off, but at this point in time, we're going to continue with our partnership strategy, again, both on the pump side and on interconnected pens and other software platforms. So not interested in buying pump.

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Operator [73]

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And our next question comes from Joanne Wuensch of BMO Capital Markets.

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Joanne Karen Wuensch, BMO Capital Markets Equity Research - MD and Research Analyst [74]

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Out of the sales force hires, is there a way to qualify or quantify the people that you have coming on board? And how are they spending their time largely? And then the second question, which is somewhat related, you talked about 10,000 Medicare patients coming in before you really do an outreach program towards them, can you discuss what that outreach program might look like and the timing of when that might happen?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [75]

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Well, the outreach program will start as soon as we get a coverage decision in earnest. It will be much more noisy. It will be a combination of digital platforms. We'll also -- we have some TV ads that we'll run and then other media programs, very similar to what we do with our DTC campaigns today. We have very focused web, all that type of stuff going into plan to help these patients. And so we're going to do that one announcement that will come. Sorry, what was your other question?

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Joanne Karen Wuensch, BMO Capital Markets Equity Research - MD and Research Analyst [76]

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Your new sales force hires..

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [77]

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Sales reps, okay. So the new sales adds came on board late last year and early this year. The sales adds in the U.S. were determined literally by dividing current territories and reassigning people within those territories. I would tell you like any sales force reorganization, there are some bumps and some speed bumps along the way. We are extremely happy with the quality of the people that we brought on board and we had absolutely no shortage of people wanting these jobs who are very, very qualified. But it does take a while to get everybody up and running. And we did experience that in the first quarter as well in the U.S. I mean, [Dr. Jones], some said he just lost (inaudible) and a new one is coming in and relationships have to be redeveloped and redeployed. We believe our team is up and running and doing well and it does take a little while. I mean, we expanded 20% to 25% on the U.S. side. And so there's a lot of new people. They have all been trained. They have all been in for training. We've had our international sales meeting and then they should be ready to go and then certainly very productive in the second quarter. The way we analyze all our salespeople in the U.S. and our key criteria is new patient adds. And we evaluate everybody based on their new patient targets and are very thoughtful and deliberate as we set those up and get that done. And so we watch everybody.

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Operator [78]

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And we have our next question. Our next question comes from Steven Lichtman of Oppenheimer.

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Steven M. Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [79]

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So obviously, a nice uptake in Germany and that continues to build. Where are we in terms of CGM reimbursement in additional countries in Europe? I know you talked about France and U.K. in the past.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [80]

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Why don't you go ahead, Steve?

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Steven R. Pacelli, DexCom, Inc. - EVP of Strategy & Corporate Development [81]

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Yes, I mean, we're still working with the French authorities. I don't want to be more specific other than we're hopeful within the next 6 to 12 months, we hope to see some reimbursement in France. Similarly, in the U.K., we've submitted the appropriate paperwork and are having discussions with the National Health Service there. We're starting to see reimbursement but in a more limited fashion in some of the other countries in Europe, where they're looking to provide set fixed amount of money for reimbursement. We're trying to figure out how we would play in some of those markets. Australia is starting to reimburse. So we're seeing it's happening certainly as quickly as we would've hoped.

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Steven M. Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [82]

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Okay, great. And then beyond the dosing claim, you also had positive data, obviously, come through over the past few quarters through DIaMonD. How do you think you can leverage the DIaMonD data sets with clinicians and with patients, particularly as they get published?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [83]

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Well, I don't think that one's -- certainly, having a published paper to take into clinicians, particularly as I go back to the example Steve gave and when I first started with DexCom, going out in the field. Frequently, when I would go into physicians' office, the first thing they would say to me, "I'm not giving a patient CGM unless they're on a pump." They have to be on a pump first. And what the DIaMonD study clearly shows is that is not the case. Then you can drive significant benefit being an MDI patient and wearing DexCom CGM. And I would tell you as we have clinicians -- as we meet with clinicians and conduct symposiums and educational programs across the country, that attitude has changed. The CGM-first message is taking hold and that DIaMonD paper is really the first thing we've ever had to document those outcomes. We think you can also be helpful for us with payers over time as we look for lower-cost solutions in managing patients with type 1 diabetes and in terms of insulin-using type 2 patients and we will use it for that as we try and expand our markets and our coverage and go deeper. So it's a very good start and the other data would be very helpful as well.

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Operator [84]

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And our next question comes from Chris Cooley of Stephens.

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [85]

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Just two for me. One, would you be willing to characterize the Medicare pipeline in terms of which channel they're primarily served in? Are they coming in primarily through the endo channel or are these patients that are being cared for by GP? Just trying to think a little bit about how frequently they visit their practitioner and then converting them over time, once the coverage decision comes into place. And then just as a quick follow-up from a model perspective, when the additional 2 payers come online, in Germany and Europe, over 50% of the covered lives there, should we think about incremental pressure to the global ASP on the sensor side or is that already kind of factored into your prior comments?

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [86]

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As Steve said earlier, in Germany, our sensor reimbursement in Germany is very similar to what we get here in the U.S. So again, if these payers come on in Germany, chances are it would have a positive impact if Germany becomes a greater percentage of our international business. As I said earlier, it's probably around 20% of the total OUS business right now. So we'll just have to see how that goes. With respect to referrals and positions of our Medicare patients, we're getting leads from 2 sources, certainly online, and online referrals of patients coming through our website and enrolling, and those patients can have general practitioners and endocrinologists. With respect to referrals from the field, those are primarily coming from endocrinologists, which is where our field team spend most their time. And if you go into an endocrinologist's office, at least when I go in, as much as I want to talk about our pipeline, all the stuff that's coming in the future, the first question I get every time is, "When are you going to be able to take care of my Medicare patients?" So I think there is good pent-up demand amongst endocrinologists to help that senior population.

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Operator [87]

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I am showing no further questions at this time.

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Kevin R. Sayer, DexCom, Inc. - CEO, President and Director [88]

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All right. I'm go to wrap it up. I want to thank everybody for their participation on our call today and your continued support of DexCom. In preparation for today's call, we noted that my first earnings call with DexCom was exactly 6 years ago today. And we proudly reported $13.1 million in product revenue for the quarter, not 1 week's revenue for us going forward from now on. It's been a very fast and extremely rewarding 6 years driven by a tremendous amount of hard work and commitment from our team here. Think about the short list of industry first: CGM performance that finally met patient expectations, the first FDA-approved apps to allow patients to share data, the first system ever to communicate directly to a phone, the first device ever to be labeled to make therapeutic insulin dosing decisions, and finally, the first product to Medicare, at least in a few weeks or a few months, we hope. While this list is great and we're very proud of all that we've done, everybody here at DexCom would tell you that if you look out over the next 6 years, that list is going to be much longer and much more meaningful as we drive the message of CGM as a standard of care for glucose measurement across the board.

I had an opportunity this past weekend to speak with an individual, whose family has been greatly affected by diabetes, in the recent JDRF gala here in San Diego. This person commented to me that while he is very generous and is supporting diabetes research, it's DexCom that saves his children every night and he told me to be very mindful of that as we go forward in what we do. We'll never forget that. As we launch our new product platforms, incorporate Verily's high technology and truly merge high tech and med tech, build out our new factory, communicate and connect to more and more devices and expand into new markets over the next several years, our commitment to patients will never change. We truly want to enable people to take control of their diabetes. Thank you.

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Operator [89]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.