德康醫療 (DXCM) 2016 Q3 法說會逐字稿

Welcome to the DexCom third-quarter 2016 earnings release conference call. My name is Adrienne and I will be your operator for today's call.

(Operator Instructions)

Please note: this conference is being recorded.

I will now turn the call over to Kevin Sayer, President and CEO. Kevin Sayer, you may begin.

Thank you very much and thanks, everyone, for listening to our third quarter conference call today. We'll start off by turning the line over to Steve Pacelli for our traditional Safe Harbor statement.

Thanks, Kevin.

Some of the statements 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 hereof 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. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release, which is available on our website.

Kevin.

Thank you, Steve. Joining me today are Jess Roper, our Chief Financial Officer; and Steve Pacelli, our Executive Vice President of Strategy and Corporate Development. Sticking with our usual format, Steve will review our third-quarter financial results and I will follow with our customary operations update and offer some concluding thoughts before opening the line for questions.

But before I turn the call over to Steve, I want to take a few minutes to discuss recent developments in the US competitive landscape. Approximately one month ago Medtronic announced it had received FDA approval of the 670G Hybrid Closed Loop System. Since that time there has been significant press surrounding this product, which has created considerable confusion in the marketplace. For example, we recently attended a diabetes charity event where it was declared from the podium that type I diabetes has now been cured because of the FDA approved artificial pancreas. Clearly this is not the case. Patients and caregivers are showing signs of skepticism and frustration due to the over-hype of the promise of this technology.

Our review of the currently available data suggests although this product may be an incremental step in automated insulin delivery, it appears to be an extremely complex system and its real-world performance remains to be seen. Earlier that same day, Abbott announced FDA approval of the Freestyle Libre Professional System. This system is not a direct competitor to our core commercial product portfolio in the US, as the data generated by this center is blinded to the patient and only made available to the clinician retrospectively.

Additionally, the first independent studies regarding Libre's performance as a consumer device are beginning to be published. One comparatively rated DexCom G5 where DexCom CGM outperformed on nearly every metric including improved time and range and reduced time in hypoglycemia. Just last week, at the ISPAD meeting in Spain a pediatric study was published showing that Libre accuracy is inconsistent and not reflective of previously published data. Put simply, this form of technology does not achieve the same result in diabetes management as CGM. And alerts and alarms and real-time communication are very critical in generating real clinical outcomes.

While we are always vigilant of these well resourced competitors, and we expect the noise around these offerings to only increase, we will continue to focus on the things that we do well. The superior performance and feature set of our current and future products, including industry-standard accuracy, reliable real-time alerts and alarms, and connectivity across multiple platforms, leave us well-positioned to remain the leader in CGM. I will now turn the call over to Steve.

Thanks, Kevin. DexCom reported revenue of $149 million for the third quarter of 2016 compared to $105 million for the same quarter in 2015, a $43 million or 41% increase. Sequentially, revenue for Q3 was up approximately 8% from the prior quarter.

Our third-quarter gross profit was $101 million, generating a gross margin of 68% compared to a gross profit of $75 million and a gross margin 71% for the same quarter in the prior year. As we mentioned during our Q2 earnings call, our warranty costs remain higher than historical levels due primarily to the receiver recall. This has impacted gross margin by one to two points during Q3. However, as expected, warranty costs, as a percentage of sales, began to decline in Q3 and should normalize before the end of the year.

Some final thoughts on our revenues and gross profits. Our mix between durable and consumable products was within our normal historical range in Q3 at approximately 30% durable and 70% consumable. The AFP for our hardware has remained stable and sensor pricing remains within an ASP range of $70 to $75 per sensor. Finally, our international business showed continued year-over-year growth, generating $18 million in revenue during the quarter, up 29% from last year. Although international sales were relatively flat sequentially, OUS revenues are up over 40% year-to-date.

Research and development expense totaled $44 million for Q3 of 2016, compared to $65 million in Q3 of 2015 with the decrease due primarily to the $36.5 million non-cash milestone payment to Verily in connection with our collaboration offset by increases consistent with those we have discussed throughout the year. Specific to our near-term pipeline, during the quarter we incurred significant expense associated with our G6 pivotal study, our continued efforts with the FDA to obtain a non-adjunctive claim for our system and several other recent FDA submissions. We also incurred significant expense related to our advance product pipeline, particularly expenses associated with our Verily partnership, future generation sensor technologies and the building out of our data platforms. Selling, general, and administrative expense totaled $76 million in Q3 of 2016 compared to $52 million during the same quarter in 2015 with the increase due primarily to year-over-year increases in headcount in our customer support organizations, as well as a ramp in our patient focused marketing expenses, higher IT costs, and investments in our OUS expansion efforts.

Our net loss for the third quarter of 2016 totaled $19 million which included $34 million in non-cash expenses centered primarily in non-cash share-based compensation expense across all functional areas of our business. Our net loss was wider than Street estimates and even our own internal expectations due to a number of factors including, one, building out customer ops and tech support infrastructure to address the customer service issues we experienced during the first part of the year. We believe that these groups are now staffed appropriately to support our anticipated growth and new product launches through 2017. Two, increased direct to consumer marketing in Q3 which we expect to further increase in Q4 as our metrics suggest strong conversion rates with our early programs. And finally, we added new senior talent during the first part of the year which led to incremental compensation expense and some severance expense during the quarter.

We also remind investors that our operating expenses this quarter included increased spend on the four strategic investments that we outlined at the beginning of the year. Mainly our Verily relationship, building out our data analytics capabilities, international expansion, and finally our new manufacturing facility in Arizona. We're now trending to the $40 million of incremental expense we outlined earlier this year. Absent non-cash charges, non-GAAP cash based net income was $15 million for Q3. Our GAAP loss per share for the quarter was $0.22. We ended the third quarter with $127 million in cash and marketable securities. And with respect to 2016 revenue guidance, we currently believe that we will fall within the mid- to upper-end of our range of $550 million to $575 million in revenue for the year. However, we don't expect to exceed the top end at this time. With that, I will turn the call back to Kevin for a business update.

Thank you, Steve. As many of you know, during the past few years, we have consistently increased our annual revenue guidance on the third-quarter call. We're obviously pleased with our continued growth during Q3 and adoption of DexCom CGM remains robust. More importantly, the majority of our new patient additions are now MDI patients, a long standing goal of our company. But there are some variables we're currently experiencing that we haven't seen in prior years. First, our hardware sales model has been significantly affected by the issues we've encountered with our receiver and the related product recall. Numerous patients have returned their receivers for new ones free of charge.

Historically, these would have been revenue generating replacement receivers, particularly in the fourth quarter, as our patients' out-of-pocket expenses are much lower than at any other time of the year. I would like to note, however, that we have completed all of the compliance procedures related to this recall and have filed the appropriate documentation with the FDA to close out this action.

Next, our international business grew 29% in Q3, a bit slower than the past several quarters, and our sequential increase from Q2 is relatively flat. In countries where CGM is not reimbursed, Libre has gained traction with its low cost approach. As we've consulted with healthcare providers and patients in these markets, we've found that these are cost-based decisions, not performance-based decisions. And virtually anyone we speak to would agree that our system offers so much more. This is exemplified by the recent reimbursement decision in Germany to not cover products like Libre. We remain optimistic about our long term international growth outlook particularly in the EU where we have made early progress on the reimbursement front in other geographies in addition to Germany.

Our biggest growth opportunity internationally remains reimbursement for CGM. We knew that going into 2016 and that's why we made the decision to establish our international headquarters and to begin to ramp-up our internal sales and support staff. Germany represents a prime example of this strategy. We evaluated the opportunity and determined the best way to attack it was to bring our distributor team into DexCom. We expect to make additional international investment to obtain reimbursement and accelerate growth in reimbursed markets in future years.

Finally, as I mentioned in my opening remarks, there is a lot of confusion in the US marketplace today. The media blitz surrounding what is being called the new artificial pancreas has been deafening. Based on what they have been told, many patients currently perceive that they will no longer need to manage their diabetes if they purchase this product. Therefore, many patients are willing to delay purchase decision until the system becomes commercially available or they're being directed to purchase the current Medtronic offering with the promise of being first in line for the 670G.

In the short term we intend to focus on the following: continue to reinforce our CGM first message, emphasize data from multiple recent clinical studies, demonstrating outstanding real-world outcomes with standalone CGM and focus on the connectivity and ease-of-use of our current and future systems. Over the long-term, we're developing CGM systems which are much more accurate and reliable than today's products and greatly reduce the daily burden of diabetes management. These systems will be cost-effective solutions for the management of type I and intensively treated type II patients globally. Our insulin delivery partners will have access to in this exquisite technology and we believe we will have very competitive product offerings in automated delivery market in the not-too-distant future.

Now, I will move on to a pipeline update. We never believed that we would be alone in this marketplace. Accordingly we have strategically positioned our product pipeline to maintain our technological leadership position in CGM. Specifically, we continue to work with the FDA to finalize the parameters of a non-adjunctive claim for our G5 mobile system. For example, we are working through the additional training and education that will be required for a non-adjunctive sensor system.

We continue to work through the final size and scope of a post-market study. Finally, as we have stated previously, the FDA is working to establish standards for a non-adjunctive CGM, not just sensor accuracy standards but manufacturing and performance standards as well. We have submitted and will continue so submit data to support such standards but nothing has been finalized at this point. As a result, timing of this approval is more likely an early 2017 event. Importantly at this time we do not anticipate that these ongoing deliberations will impact our goal of obtaining Medicare coverage in 2018. We are actively engaged in discussions with both FDA and CMS regarding the non-adjunctive system. Let me emphasize this, this is a really big deal. When we go out into the field, Medicare coverage is the most common topic and the most urgent need presented by the caregivers we visit.

Turning to other pipeline developments. We continue to make progress on several enhancements to our G5 mobile platform. We recently received FDA approval for a new version of the IOS G5 mobile app and a new transmitter framework configuration which provides us with key features like mute override, improved Bluetooth connectivity and several other features to enhance the patient experience. We're pleased to report we have filed a PMA supplement seeking approval of our new insertion system and smaller transmitter. We've also filed PMA supplement seeking approval of a next generation receiver which incorporates a Kellar Touch Screen display. Finally, we have filed a PMA supplement for our G5 mobile app for Android. And depending on the timing of FDA review, we expect the US launch of our Android platform to occur in late 2016 or early 2017.

We already launched Android in several key markets internationally earlier this quarter. We continue to work on several other enhanced versions of our G5 mobile app to provide additional features and functionality including the incorporation of insulin data. Turning to future sensor technology, G6 is as important an advance in our technology as was the shift from 7 Plus to G4 Platinum in 2012. Gen6 is a complete change in our sensor platform. New algorithm, new sensor, many new features. Initially, it will provide the basis for reducing calibrations and we believe it will be the foundation of our no calibration technology both with our first Verily products and our Gen7 system. I am pleased to report that we have commenced our pivotal trial and to date 40% to 50% of patients have completed the study. The Gen6 pivotal is the largest pivotal study that we've ever executed, with pediatric and adult patients included in one combined study of approximately 300 subjects. We could not be more excited about the prospects for Gen6, in large part to due to extremely promising data sets captured during a number of pre-pivotal studies. Early Gen6 data will be presented next week at the Diabetes Technology Meeting in Bethesda. All we can tell you now is we are not going backwards with respect to accuracy and reduction in and/or elimination of calibrations.

We are working with several of our automated insulin delivery partners to incorporate Gen6 into their research and clinical studies to gather more valuable data on these systems. Gen6 will more than likely now be a 2018 launch and we will provide more color as we get further into the study and the filing. Turn to our partnership with Verily, our collaboration to develop simple low-cost disposable sensor systems is one of the most aggressive innovative development opportunities we have ever engaged in. Our initial joint product offering with Verily will be a no calibration CGM platform based on the Gen6 technology. We believe the products we develop in our Verily partnership will not only expand CGM use in type I, but will drive entry into the non-insulin using type II market. As we continue to do research into this type II market, it has become more and more evident that the approach to the treatment of type II diabetes has been historically very hit or miss. For example, roughly 40% to 50% of patients remain poorly controlled despite a proliferation of new drug classes over recent years. We believe the information our system provides to a type II patient exceeds anything they can learn from the tools that they use today.

CGM paired with knowledge based decision support delivers healthcare providers a window into glucose variability and enables patients to visually connect the cause and effect that diet, physical activity, and medication choices have on glucose, therefore driving sustainable behavioral changes. Put simply, CGM data advances the potential for treatment optimization and ultimately better clinical outcomes and lower long-term costs. We believe the first product developed in collaboration with Verily should be commercialized in the second half 2018 and we expect that the smaller bandage-like sensor could be available as early as 2020.

The first feasibility studies of the bandage-like sensor is taking place this quarter. With respect to our insulin delivery partners, our G4 integrated pump offerings remain popular among patients. And all our partners are making progress on integrating more advancements in delivery systems that leverage our G5 and G6 technologies with pumps, smart pens, and other connected diabetes management platforms. Early studies on several of these platforms look promising and we anxiously await the outcomes.

In conclusion, we have long held that the largest market opportunity in insulin using patients for our product is in the MDI segment, representing more than 70% of patients in the US and more than 90% outside the US. With all the noise in the current marketplace, it appears people have lost sight of how compelling the data from our DIaMonD study actually is. In patients using CGM we saw a full 1% reduction in A1C, which is unheard of in almost any other diabetes study.

Patients on DexCom also experienced decreased time in hypoglycemia and improved timing range, all of these outcomes achieved with a minimal amount of training and without a complicated and expensive insulin delivery system. The CGM first message will continue to resonate. We also remain extremely bullish on our future market opportunity to change the management of type II diabetes with our CGM platforms. The information we're gathering from patients is fascinating and confirms what we have long believed. To quote a type II patient who's also the father of one of our scientists, who has type II diabetes and has been using our product, diabetes has been a series of losing battles for 20 years. CGM has given me my first win.

I would now like to open the call for questions and answers.

Thank you. We will now begin question and answer session.

(Operator Instructions)

Mike Weinstein, JPMorgan.

Thank you. Good afternoon, guys. Kevin, the first question is, it sounds like the approval of 670G and all the discussion around it has basically taken up all of the noise in the room and made things a little bit more difficult for the rest of the diabetes players. I don't know if you saw it but Tandem reported relatively soft results and guided down for the year. So it sounds like that is occupying all of the discussion right now in the space. Two questions. One, can you maybe just characterize the tone of business pre-and post that? Obviously, it is reflected in your guidance commentary for the fourth quarter. But any other color there would be great. And two, how you change that dynamic? How do you make it so that you're not spending the next six months trying to get people's attention when Medtronic seems to have dominated the discussion over the last month?

Mike, not only getting their attention but talking about a product that is not commercially available yet, that patients can't see, and the perception being created that it truly is an artificial pancreas. Where we are taking this discussion, Mike, is back to the fact that CGM is the most important tool in intensively managing diabetes and the outcomes we've achieved in the DIaMonD study. There are several other studies coming out in the not-too-distant future that are similar to that, real-world studies, are great outcomes.

Our problem -- the doctors have been very supportive, they are very much taking a wait-and-see attitude. We've done very well with clinics and getting our message across to them. It is just this confusion or cloud that is hanging above us all. We will focus on CGM first. Quite honestly, in the fourth quarter in particular, the investment in CGM if somebody has met their deductible is not tremendously large. We will offer programs to encourage new patients to sign up. You'll see those come out over the Internet over the next couple weeks. To see if we can get -- certainly get more patients on. I would tell you from a color perspective our reorder patterns still remain very strong.

We are not seeing reorders fall out of the queue. We're not seeing new patients we get signed up fall out of the queue saying I want to go the other way, it is just conveying the overall noise. We went through, not as much noise with 530G but we did go through noise with 530G as well. The difference being that product's been out in Europe and we knew exactly what we were going after. There had been studies comparing our sensor to theirs and other things. We could adopt a technical and tactical approach. This time there isn't one because, again, the product is not out. We will continue to plug. We will continue to offer promotions. Our DTC campaign has been very effective as far as generating new leads. But it's -- that's just where we are today.

Ben Andrew, William Blair.

Good afternoon. Thanks for taking the questions. Kevin, you talked a little bit about international been flat sequentially, can you attribute some of that or what amount to the move to direct operations separate of maybe an impact from Libre? And then second, how should we think about the impact of you guys going direct and getting reimbursement and when that will begin to impact revenues at least in Germany?

There was no impact in Q3 with respect to reimbursement in Germany and if anything, what we did is we've significantly increased our operating expenses by adding the operating expenses of our distributor to our own expense line. We are seeing now, as reimbursement is starting to sporadically come in for some of the payers in Germany, that our opportunities of new patients have gone up quite significantly. I think there will be a bit of a bump in Q4 for 2016 for Germany. But it really is more of a 2017 event than it is late 2016. Probably more Q2 and beyond, again, as we have to get reimbursement and insurance contracts ironed out. We have the staff to go do that and we're calling on the people we need to meet with and talk to now. Our direct opportunity in the UK, as we said earlier we have gone direct in the UK. UK was very small for us. It's still not very big but the fact is our business has gone up at a nice rate since we hired a great team over there.

Again, we've hired people who can go drive reimbursement and there's a percentage of our patients who are getting covered in local geographies there. So I think, German reimbursement is going to help significantly. UK growing reimbursement might help a tad bit but it's not going to be a huge driving factor. As we look at other countries, we certainly have had meetings and discussions in France. We see reimbursement continuing to be talked about in Italy. Australia is now looking at reimbursement for CGM as well. We've got programs going on in Canada also. So there's a lot of opportunities and once we get reimbursement we think we can grow nicely in those markets. But with respect to cash payers, I will get back to what I said earlier, our product is very expensive and there's a reason it is, it's really good. It provides a lot. It is a large cash commitment for somebody. And when offered a much lower cash price upfront, most of them elected to try that. Over time, when we get reimbursement we can certainly work through that, because of the features that our product set offers.

So as we think about the transition while we wait for the other products to show up in the market, if they actually do with most likely 670G and then whatever label the Libre consumer might get next year, do we think about different growth rates before and after that happens? Is there a transition where people are holding back a bit and I come through with subpar revenue growth but after that gets out there and you can message you got the G5X that you would expect to see patient adds accelerate perhaps in the second half of 2017, is that a fair way to think of it?

I will let Steve start. I am going to look at Steve and let him start then I will add my two cents.

Obviously, Ben, we will give formal guidance for next year in January. It's something we are still evaluating. I would tell you we are starting to see new patient adds pick up again. I think it's too early to tell. I wouldn't even want to speculate on Abbott. The challenge we have with Medtronic, as Kevin mentioned, we went through this exact thing with 530G. It was supposed to put us out of business, but we had the benefit of having an actual product and independent investigators had the benefit of having an actual product to test it. We have scoured their safety statement. It appears that patients are being recommended to take at least four fingers sticks a day to keep the thing running. They also have to take finger sticks every time it drops out of automatic mode to keep it into automatic mode.

The alert -- the false alert rates seem pretty high, in fact potentially even worse than the 530G. And as we know in the 530G context, that's the one thing patients complain about most in the field is the false alarms they receive from that system. So we are fighting a ghost for the next 6 to 9 months and we won't really know what we're up against until we actually have a physical product to o test. I'm not sure how to speculate on the impact.

I think we need to see what the fourth quarter brings and we need to see what our -- we also have a non-injunctive claim on the horizon and I believe that could be a very big deal for marketing and positioning DexCom against these other products before they are out there because when there is a sensor that is labeled, you can dose insulin off of this thing. I think that will be very compelling for physicians, caregivers and patients and present a very good story for us. And you've mentioned G5X. We have G5X coming which is the smaller transmitter and much easier insertion system, much more practical and easier experience for our patients. So we have a number of positives that we are not quite sure of the timing on that go into this entire discussion as well. I think you are going to have to -- we will be a little more concrete in January.

Last question for me, is it then fair to assume hardware as a percent of revenues drops below 30 thus because of the warranty stuff you mentioned and perhaps the patient starts and replacement hardware for maybe the next one to three quarters? Thanks.

You know, Ben, what we said when we started the G5 transmitters is it was two for one. We expected our gross transmitter hardware dollars to go up and our gross margin percentage go down because we were supplying two transmitters for the price of one, and that has happened. What has affected us again is the lack of receiver revenues, but there has been an increase in transmitter revenues. We think ultimately the percentage will go down and we will be more sensor driven than transmitters.

We are selling a lot of transmitters.

Yes, we are selling a lot of transmitters. I don't have percentages to give you to where that goes yet. We will provide more color in January.

Thank you.

Jayson Bedford, Raymond James & Associates, Inc.

Good afternoon. Can you hear me okay?

Yes.

Okay. You kind of alluded to it, but have you seen any change in the attrition rate with the launch of G5?

No.

No. We have not. We think our patient retention metrics are still very good. I would tell you the thing that may have changed, and we are studying this, a little bit, and I cannot give you complete color because we study retention all the time. As we enter a broader market of patients, our early adopters were pretty intense on CGM. I need CGM or I am going to die basically was often the statement that we'd hear from patients.

As we're entering a group of patients who are saying, I will give this a try, we see their use patterns may be different than our long-time use it every day all the time patients. We also see that just given the reimbursement world, the continued use of our sensor for more than seven days remains prolific. And so that is something we factor in to our revenue models and revenue analysis as well. I don't see a huge increase and we don't see a huge decrease. We think it's remained relatively consistent.

You mentioned some of the marketing initiatives you have, but just given some of the stiffer headwinds, any thoughts on adding to your sales team going forward?

We are going through our 2016 planning efforts right now. More than likely, we will expand the team. We will announce how much and to what extent in early 2016 -- 2017. I'm sorry, early 2017.

Lastly, for me. On Germany, can you give clarity on the level of reimbursement or how ultimately price will shake out? Are the economics comparable to the US for DexCom?

Without giving you specifics, the preliminary numbers that I have seen look quite favorable even with respect to or in comparison to what we see here in the US. And that -- I would tell you I spoke to John Lister, he heads up our European operations, yesterday and he informed me we are currently in discussions with approximately 40% of the covered lives, if you want to look at it that way, in Germany and the pricing looks quite favorable.

Thanks. I will let someone else jump in.

Kyle Rose, Canaccord Genuity.

Great. Thank you very much. Can you hear me all right?

Yes.

Yes, we can.

I just wanted to touch on the G5 and the potential dosing claim. Any color or -- you can add with your conversation with the FDA as far as potential either changes from a product perspective that they may be looking for, whether it may be a required number of calibrations a day or a sensor shutoff or something along those lines?

Yes, nothing in particular. What the FDA is really focused on right now is what sort of standards do they want to set? What bar is going to be the bar for a dosing type sensor? Not just MARD, but we focused in on percent 20/20 and outliers, and things like that. The FDA is focused, we mentioned in the prepared remarks, the FDA is focused on manufacturing standards, manufacturing variability, things like that. There is a whole bunch going into this and very thoughtful, frankly, on the part of the FDA. It's just taking a little bit longer is all. We are not going to -- I don't expect that they'd come back and ask us to modify the product in any way.

I'd just add that's one of the reasons for the post-market study. After the post-market study if we see anything then we would go back and discuss with them but for today there's nothing significant.

Okay. I appreciate the color there. Lastly, on the quarter, any comments, directionally on new patient additions and what that type of mix was there? I believe last quarter you talked about 60% of patients came from MDI? Any sort of color you can give us on, on this quarter? Once again, more of our patient adds came from MDI than did from the pump world. So we continue to make inroads there. With respect to numbers, just to get to $149 million in revenues we reported, the new patient number had to be significant. It certainly was within our target. Quite candidly, year-to-date, based on our internal targets, we are spot on at the end of Q3. New patient growth remains very robust for us.

Great. Thank you very much for taking the questions.

Doug Schenkel, Cowen and Company.

Hi, this is Ron Bucker on for Doug. Thanks for taking my questions. Starting with sensor utilization. You mentioned that reorder rates haven't changed but then you also noted that the use patterns of the product may have changed given the broader patient base you now have. Can you clarify these comments and is average sensor utilization in Q3 into the first nine months of the year, maybe closer to the lower end of your historical range?

I think sensor usage for the first nine months of the year is relatively consistent with what we've had before. What I was trying to do in making my comments was indicate that, again, patients continue to use [them long], particularly those where reimbursement is tough for them and they are not covered as well as others. And, again, some of the new patients. I don't think there has been a significant change in sensor utilization. As the whole population gets bigger, the portion or the raw numbers of people who use their sensors longer is going to go up and so it becomes more visible to us as we look at it. The same with the use patterns.

We go through exercises -- I will get into a lot of the detail, but we go through exercises we pick samples of the new patients in the patient base and try and follow them all the way through and look at their purchasing patterns, look at their use histories and everything. And every time we do it we learn something different and something new. Those were really the two things that were pointed out from the last group and the last population that we studied, that we still see increased sensor use and maybe use patterns for some of these patients are not what they were before. That's okay. They are still patients. They still derive great benefit from it.

Okay. Thank you, that is helpful. You talked about the impact Libre had internationally. Can talk more about the features of your first-generation Verily product and how it stacks up versus Libre for type II patients or maybe type I patients in the near term who might desire a less comprehensive solution? Thank you.

Certainly the first product -- let me couch this first by saying, we don't believe the first product that we launched in partnership with Verily is the end all product. We've said that on multiple occasions. Bu it will be --

It is a learning experience for us.

It will definitely be a smaller form factor than the Libre platform. In many ways similar attributes, no calibration, and up to 14 days. I think the performance characteristics, and you guys will be pleased when you see the data at DTM next week, it incorporates the core Gen6 sensor technology. So you will see some preliminary data on that next week and you'll understand the levels of performance that we will be able to achieve with that product, so I think that will be a real positive for us. In many respects, it's a smaller, better performing version of the Libre.

And I would add one of the things that will dictate the software around that product and the features set is going to be our non-adjunctive label. As we head into a particularly intensively insulin managed markets, we are not going to give up our non-adjunctive label for anything. Once we get it, we are going to stay there. We believe our technology is more than robust enough, again, as Steve said, and as you will see next week, to maintain that label with reduced and with no calibrations over time.

I should add too, key differentiating factors, of course that it does have Bluetooth technology and it does have real-time alerts and alarms as part of the system.

Yes.

That's an important point not to overlook.

David Lewis, Morgan Stanley.

This is actually Jon Demchick in for David, thanks for taking my questions. I wanted to go back to the top line in guidance. You mentioned the number of times you see the sustainable growth rate of this business; 35% to 40% I think is what you've said historically. The guidance range, as we look into the fourth quarter I guess, implies just shy of that, even at the top end. Should we think of the fourth quarter more as fully baked in for these competitive pressures? And from that base we can start to recover back to more of a normalized rate? Or do you think there could potentially get larger impacts, sequentially, for a couple of quarters as the launches continue to competitively?

The first part of the question, we don't have a crystal ball to tell you this confusion -- there was initially substantial confusion in the marketplace. We've now started the see some press to the contrary where they are trying to clear up the mistaken notion this is an -- actually an artificial pancreas coming. We don't have a perfect crystal ball to tell you what this is going to like going forward. We are being conservative, obviously, in our guidance.

I want to, though, take a step back. We stated 35% to 40% sustainable growth something like or five years ago. As I looked four or five years out -- four or five years ago looking forward, we've successfully sustained and exceeded that level of growth. At some point, we have said, even on recent calls, the law of large numbers is such that on a percentage basis growth is not going to continue to exceed 40% to 50% like it has in the past. You guys are trying to read a whole lot more into this, I think, than (inaudible).

We need some time. The flip-side of that, and I will cover it a little more in my close, penetration in the type I market for CGM is still not above 20%. There is plenty of runway there. We are not penetrated in someone using type IIs, at all, reimbursement will come there. It will be a combination of when we can get our new technologies and products out and feature sets that can expand to broader populations combined with just market penetration in the current markets where we sit. We'll just see over time.

Understood. Very helpful. Just a follow-up on gross margins, you mentioned last quarter they would jump back up to the upper 60s, they certainly did. It sounds like there is still elevated levels of warranty expense. So normalized for that, is that -- is it fair to say we get back in towards the 70% levels?

I think that's fair. You know our warranty expense was about 3.5% of revenue versus our historical averages of about 2%. So we have some opportunity there. The margins came up this quarter, kind of in combination of lower warranty costs as a percentage of revenues. We also had better yields, particularly on our Gen5 mobile transmitter and then, of course, we had higher sales volume.

Understood. Thank you.

Joanne Wuensch, IMO Capital Markets.

Good afternoon and thank you so much

for taking my questions. I really have two. We focus mostly on German reimbursement, can you give me a timeline of when we might get additional reimbursement? My second question has to do with non-adjunctive claim, is there anything qualitatively that you can provide regarding the conversation that you are having with the FDA?

On the non-adjunctive claim, we are really not going to provide any more details than we have. We need to work through the requirements and standards and really have a clear position before we explain everything to everybody. Again, I will echo Steve's comments, the discussions have been very good and very focused and very regular. They have been paying significant attention to the process and we hope to get through it soon.

With respect to the other geographies, we really don't have timelines. One of the things we're learning as we go to other geographies, a lot of these places are not national decisions, they are very local and it's state by state or region by region. We certainly have very good reimbursement in Sweden right now through the tender process. We have the German reimbursement decision that just came. There's reimbursement in Switzerland, Austria, and there's are some other regions, like I said, in the UK where we're get a little bit of reimbursement and a little bit is beginning to come forth in Italy but there's not been any national decisions. We'll just continue to work on region by region and we'll give you more color as time goes on

Okay. Thank you very much.

Tao Levy, Wedbush Securities.

Hi. Can you hear me?

Sure.

Perfect. Great. Just a couple quick questions. Am I right in estimating that there's maybe about a $3 million impact from receivers on the revenue line in the quarter? Is that ballpark?

We're not going to quantify it.

Okay. In terms of CMS, it doesn't sound like these are linear discussions where you are waiting for FDA approval of the non-adjunctive and then you'll go to CMS, it sounds like there is positive dialogue going on around ahead of that. Is that a fair --?

That is a fair statement. In fact, it's communications together, CMS and FDA and our regulatory folks. So yes, there are certainly discussions ongoing. Obviously, we will still need the non- adjunctive labeling before we can really become active with CMS. I would say this is highly visible not just with FDA but within CMS as well. I do think our belief is that CMS is going to ask us to go directly for a national coverage decision as opposed to trying to go regionally like we had discussed previously. But still, from what we're hearing from our consultants and our internal folks, they don't think even if the non-adjunctive claim pushes into the early part of 2017, that will impact our path to Medicare by sometime in 2018.

Okay. Got you. And lastly, in terms of data that's going to come out next week, what specifically is it? Are these patients from pivotal trial? Or is this another study that you have going?

With all of our sensors, we run several pre-pivotal studies, the data that will be presented next week is from a relatively large pre-pivotal study using our [intensive] platform. That will be what is presented. It's not the pivotal data because we would not open it up until it's done, until we submit it.

That's what I figured, I just wasn't sure. Thank you.

Anthony Petrone, Jefferies and Company.

Thanks and good afternoon. Maybe a little bit on CGM pricing broadly. You know you have 670G out there and then Libra and there's the potential for some other CGM clearances in 2017, if I'm not mistaken. How do you see pricing shaking out with all the increase technologies on the marketplace at this point? And then I have one follow-up.

You know we have remained relatively consistent on the price front for quite some time. I think future prices will be accepted -- will be determined by the outcomes one can generate with the technologies. Another big factor on pricing is going to be the length and wear of the sensors. As we talked about, our Gen6 sensor is a 10-day product versus a 7-day product, which give us an opportunity to either increase price or increase value to the patient and payer and we'll probably end up with a combination of both with the Gen6 sensor. We prepare internally scenarios for every alternative.

We prepare for higher prices. We prepare for lower prices. We prepare for everything you can imagine. We have modeled several scenarios, we will adapt to where the market takes us. Being the leader, we want to take the market, obviously, to the right place. But these technologies have to be affordable to patients. They have to provide outcomes that are worth more than the cost of the CGM system and that's how we look at pricing in the future.

That is helpful. And maybe a follow-up on 670G. When you look at the dynamics between pumpers and MDI, it seems to me that the initial low hanging fruit would be pumpers, but how much of a broad push are you expecting from 670G? Do you think it's going to be broad-based in those two categories and therefore potentially more competition in the MDI segment of the marketplace? Thanks.

You know, I think that's the big question, right?

When Terry and Kevin -- I am speaking for Kevin; he's sitting here. But when Terry and Kevin sold MiniMed 15 years ago, pump penetration was at about 20% in the US. Today it's about 30%. 15 years later, four commercial pump companies have been able to drive an additional 17 points of penetration. I mean, I personally don't believe that 670 is going to move the needle from 30% penetration to 40% or 50% penetration in any meaningful period of time. I think, particularly outside the US, MDI is going to remain the vast majority of patients' method for insulin delivery. And even in the US, I think patients -- as we continue to improve our technology, improve the form factor and shrink the form factor on the technology, add patients with the additional tools, additional decision support tools, with respect to their insulin on board, et cetera, I think that the product offering and from a pricing perspective the product offering of CGM and an intelligent insulin pen, for example, will be very compelling both from an outcomes perspective and from a cost perspective.

That is helpful. Thank you.

Well said.

Rebecca Wang, Leerink Partners.

Can you hear me okay?

We can.

This is Rebecca on behalf of Danielle, have you seen any impact on your patient adds from the time and the data that was released at the ADA this year?

You know the DIaMonD study has not been officially published in a journal yet, so we remain relatively low-key about that data at this point in time. We know it's under review right now. We are going to be a little more aggressive with marketing as we think it is getting closer to publication. So we will really unleash a DIaMonD blitz over the month of November here and hopefully that will add -- help increase patient adds. Not a lot so far because we really haven't pushed it.

Yes. Can you provide more color on the timing of the rest of the DIaMonD data to be released? This year or?

There are a couple of other study arms. There's a type II patient study arm. There's also an arm of the study where some of the patients continue to use CGM for a longer period of time, another group of patients continue to use CGM, they go to an insulin pump in addition to CGM. I know the studies are winding down. I don't have timelines for you. They will be greatly affected by publication timelines as well. But the study is -- it will be wrapped up, the actual patient analysis will be wrapped up, by the end of the year. So the data will come after that.

Thank you.

Jeff Johnson, Robert Baird.

Thank you and good afternoon, guys. Two quick questions, one on G6 it seems like the pivotal is moving very quickly there and FDA also seems to be moving fairly quickly on some of their approvals recently, just wondering how solid you feel on that 2018 commercial launch time? What are the options to maybe pull that forward or see that move up a little bit from a potential launch standing?

You know we have a sequence of launches next year, particularly with the new applicator and transmitter with the Gen5 system, that we need to get those manufacturing processes up and mature really quickly. That is really important to us. That is a bigger endeavor than anything we've undertaken for a long time. So it's probably better timed that G6 come out little after that because we fully intend to use the new transmitter and new applicator configuration and we would be much happier if we didn't have to start from scratch.

If we could pull it in that would be wonderful if we were to pull it in but there is a lot of boxes to check. With respect to FDA timing and speeding things up, while I would agree they appear amenable to that, we have been discussing non-adjunctive claim for a very long time. And it's not through. So when you get into complex issues, it can become real tough. I think they will be very cooperative with Gen6. I think we can push it through quickly provided the data set is reflective of what you guys will see next week. I think it's a tremendous advance in sensor technology that we can get through. We have to remain diligent and keep going but there's a lot to get ready before it comes.

Understood. That's helpful. Steve, just want to go back and clarify something you said on Germany. It sounds like the reimbursement rates are coming in, you said pretty solid especially even relative to US rates. Just wondering, that's the sell in price or the price you're going to recognize for sensors and transmitters, and receivers, and things like that is on par? I don't put words in your mouth but relatively good relative to US?

Yes. You can put words into my mouth. That's exactly right. None of this is finalized, we still don't expect to see an impact until really next year. But I would tell you so far so good.

Okay, and do you have any idea the copay that patients are going to be -- are going to have on that system then in Germany, how that maybe stacks up, relative to self-pay for a Libre, or something like that?

I don't but we can certainly -- maybe for the next call we'll have a little more detail here because we will have some contracts signed by that point.

We will have a little more detail.

Yes. Understood. Thanks, guys.

Mike Weinstein, JPMorgan.

I think she probably put me back in from earlier, but let me ask you, relative to Europe since Germany was just discussed, do you have any greater visibility on the other countries coming through? And as you are aware, our checks on Germany have been pretty positive over the last several weeks, in terms of not only how reimbursement shaping up, but potential demand. Do you think that Germany could be bigger in 2017 than maybe you are assuming or the street's assuming?

Yes, it certainly could be. Particularly as we mentioned, we're in discussions, I'd characterize discussions, with about 40% of the covered lives. As we continue to accelerate that, if we can truly contract with and grow something like 15-ish critical payers to get the vast majority of covered lives, Germany could be a much bigger contributor next year. Just giving an example in the UK we're actually seeing reimbursement. Most of our patients are seeing reimbursement these days, but it's a one off basis and they're having to apply individually. It's not something that is scalable. We really do need to reengage with NICE and push that issue to make it more formalized.

France the same thing. We are in discussions; there's not been any formal action taken in France. The signs are looking positive so that could be a contributor, potentially, as early as next year as well. So yes, I think you're thinking about it right, Mike, that Europe as a collective, if we knock off a couple more of these big countries it could be a big push for us next year.

You know, obviously, there's something to learn from what's going on with Libre, right? Libre has taken off in Europe. There's this demand for diabetes technology in Europe that has not been satisfied. And so, when you think about the fact that there has been now a couple hundred thousand patients that potentially are on Libre or have tried Libre, better put, at this point, how do you tap into that once you get reimbursement in a country like Germany? What's the launch strategy look like? Because I have to think that with the Libre experience and the enthusiasm that product has seen, that how you think about going to market has to be different than maybe you were thinking a year or two ago.

I think, Mike, we are very much evaluating product configurations. I'll give you one example. We have seen, [market] for the system without use of the receiver in Europe, now. If a patient wants to use the system, unlike in the US where we get a new patient we're required to sell them a receiver, we don't have to do that anymore. So we've put ourselves in a position where we can somewhat reduce the upfront costs for patients to get I to start. And as far as enthusiasm, we are enthusiastic. In fact, our German team is going through budget processes and their requests for sales hits is remarkable. They, obviously, are very optimistic about their ability to go sell, and poor Jess has to be the bad guy down at the end of the table, but we'll --- we're going to add significant feet on the street in Germany to go after that. I think one of the other lessons learned is people do want information.

And if their copay and out-of-pocket and their reimbursement covers this, by offering connectivity and the things that we offer from a feature set versus this product, we think they are going to really lead to fast growth. We will configure future products as we look at it. We are going to offer a no calibration sensor, over time. We are just going to offer one that's going to be accurate enough to meet our standards and to meet the non-adjunctive claim standards we believe will be set up by the FDA as well. There is a lot to learn here, and we will aggressively go after it.

Understood. Thank you, guys.

(Operator Instructions)

We have no further questions at this time.

I will close with a couple concluding remarks. We want to thank everybody for being on our call today And everybody for their questions, they're very insightful. We continue to address what we believe is one of the most meaningful opportunities in all of healthcare. The treatment of diabetes, type I and type II, is one of the leading cost drivers in healthcare all over the world. We are going to continue to focus on what we do best, developing, manufacturing, distributing the world's leading CGM technology.

Our future platforms, sensor platforms, our new algorithms, Verily' s technology, advanced data analytics, we're going to be able to change the conversation of diabetes management over the next several years. Our growth opportunity, even in times like we have described today, is still huge. The type I market is very underpenetrated. There's a completely unpenetrated type II intensively managed insulin market. The global opportunities we've discussed with Germany, the UK, the other places we are seeing reimbursement come up, are huge, even in light of the increased competition that is coming. It's a great time to be here at DexCom. We will continue to deliver great products and great performance for our investors. Thank you.

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