德康醫療 (DXCM) 2018 Q3 法說會逐字稿

Welcome to the DexCom Third Quarter 2018 Earnings Release Conference Call.

My name is Adrian, and I will be your operator for today's call.

(Operator Instructions) Please note this conference is being recorded.

I'll now turn the call over to Matt Dolan.

Matt Dolan, you may begin.

Thank you, operator, and welcome to the DexCom's Third Quarter 2018 Earnings Call.

Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will provide a summary of the quarter; followed by a financial review and outlook from Quentin Blackford, our Executive Vice President and CFO; and then a strategic update from Steve Pacelli, our Executive Vice President of Strategy and Corporate Development.

Following our prepared remarks, we will open up the call for your questions.

(Operator Instructions)

Before we dive in, I'm also pleased to announce that DexCom will be hosting an investor meeting next month on Tuesday, December 4 in Orange County, California, where we will discuss our business and long-term outlook in more detail.

The event will be available by webcast.

Attendance in person is by invitation-only and space is limited.

So please make sure to reach out to us directly with any questions.

We look forward to seeing a number of you there and diving deeper into the opportunities we see ahead of us.

With that, let's review our Safe Harbor statement.

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 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 non-GAAP and cash-based results and our rate of growth in our revenues.

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.

Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures.

Now I will turn it over to Kevin.

Thank you for joining us.

I'm excited to report that DexCom has maintained a strong momentum that we have seen all year with third quarter sales up 45% over the same period last year on a constant currency basis.

Both the U.S. and OUS businesses were solid, driven by a continued increase and awareness around the value and convenience of real-time CGM.

The G6 launch has been well received, helping to drive strong new patient additions.

To give you some perspective, our U.S. commercial new patient pipeline has more than doubled as compared to this time last year, and our Medicare business continues to build nicely.

Our OUS business grew faster this quarter than in any period over the last 5 years.

Remember, of course, that the franchise was much smaller 5 years ago.

Our investments in the international infrastructure are clearly paying off as all of our key markets showed growth in the quarter.

As noted from our numbers, demand continues to outpace expectations.

We have been moving aggressively to build up incremental capacity and are making meaningful investments to ramp production and service capabilities.

From a comps perspective, DexCom remains committed to demonstrating leverage.

Revenue growth exceeded the increase in operating expenses by more than 2x for both the third quarter and our year-to-date results.

Quentin will provide you with more detail around our financial performance and outlook in a moment.

The G6 system is already available in 14 countries and we will continue to roll it out globally in 2019.

As part of our plans, we recently announced that CMS has approved G6 and we intend to bring this great technology to our Medicare eligible customers in early 2019.

All in all, we put up a fantastic quarter.

Considering the significant level of demand for DexCom's CGM and the benefits of the new product cycle, we have again increased our revenue outlook.

2018 has exceeded our expectations in every way.

In G6, we have the technology to build on our industry-leading sensor performance and truly enhances the patient experience more than anything we have ever done.

But most importantly, we are only 5 months into the launch and see significant potential in this platform over the next several years.

With that, I will now turn the call over to Quentin for a review of our financials.

Thank you, Kevin.

Today we reported worldwide revenue of $266.7 million for the third quarter of 2018 compared to $184.6 million for the same quarter in 2017, reflecting growth of 44% on a reported basis or 45% excluding the impact of currency, and representing the fourth quarter in a row of accelerating growth.

Notably, our key indicators including growth in sensor volumes, international revenue and our global patient installed base all drove our third quarter growth rate in a sequential quarterly increase in revenue of 10%.

Notwithstanding a terrific result for the quarter and consistent with previous commentary around our guidance, we began to realize reduced revenue per patient for a few reasons: International continues to become a larger part of our business; Medicare continues to become a bigger part of the U.S. franchise; and we have had success in moving some of our commercial payer contracts into the pharmacy channel.

Adjusting for those headwinds, our U.S. revenues would have grown approximately 40% in the quarter versus the 34% reported.

International sales were up 93% over Q3 2017 on a reported basis or 95%, excluding the impact of foreign currency and grew 22% quarter-over-quarter.

International hit another high watermark as it represented 24% of worldwide sales in the quarter with all major markets nearly doubling from the prior year.

Our third quarter gross profit was $168.6 million, resulting in a gross margin of 63.2% for the quarter and in line with our expectations.

As anticipated on our last call, the teams have been working hard to eliminate the inefficiencies of ramping production in starting new production lines, which allowed us to exit the quarter with production deals back in line with historic levels and positioning us well to see an improving gross margin in the fourth quarter.

Operating expenses were $154.7 million for Q3 2018 compared to $127.5 million for Q3 2017.

This reflects an increase of 21% year-over-year and compares favorably to our revenue growth of 44%.

For the first 9 months of the year, we have realized top line growth of 39%, while operating expenses have grown at less than half of that rate at 18%.

This comes even as we continue to invest in key strategic initiatives that positions DexCom well for the future.

Adjusted EBITDA, which excludes the impact of share-based compensation, foreign currency losses and $35 million of investment income, was $48.8 million or 18% of revenue for the third quarter, an improvement of 250 basis points year-over-year and 700 basis point sequentially.

Our GAAP net income was $46.6 million or $0.52 per share.

Adjusting to exclude the $35 million of investment income and $3 million of noncash interest expense related to our convertible notes, non-GAAP net income was $15.1 million or $0.17 per share.

Our balance sheet remains strong having ended the quarter with $669 million in cash and equivalents and full availability of our $200 million revolving line of credit.

Turning to guidance.

We are increasing our annual revenue forecast by $50 million to $975 million reflecting a reported growth of 36%, essentially 2x our original growth outlook at the beginning of the year.

As we planned at the beginning of the year and realized in the third quarter, we expect the impact of lower revenues per patient to continue into the fourth quarter.

In line with our previous comments, we anticipate gross margin to rebound in the fourth quarter to approximately 65%, resulting in a gross margin of 64% for the full year.

Despite the $50 million increase in our annual top line expectation, we are not revising our overall operating expense outlook and continue to expect GAAP operating expenses will increase by approximately 18% for the full year.

This includes both our core operating expenses as well as investments being made for new market opportunities.

As I reflect on my first full year as CFO, I could not possibly be more excited about top line growth prospects, ever-increasing opportunities for innovation that will continue to set us apart and importantly, our commitment to becoming more efficient in how we conduct our business.

Notably, the teams are demonstrating a strong desire to manage spend appropriately, allowing us to make investments where necessary and deliver an improving profitability profile at the same time, setting up for an exciting future.

With that, I will now turn the call over to Steve for a strategic update.

Thank you, Quentin.

The launch of G6 remains DexCom's primary strategic priority for the remainder of 2018 and into 2019.

Beyond G6, we are thrilled to welcome TypeZero Technologies to the DexCom family, following our acquisition of the company in August.

The team and the company's technology align well with our strategy.

Specifically, the inControl closed-loop algorithm provides DexCom with a medical clinical component in an automated delivery system.

We look forward to first bringing it to market with our [San Diego neighbors and then] (inaudible).

In addition, TypeZero will advance our decision to support the road map, which includes both our core intensive business and other non-intensive programs.

The TypeZero acquisition was catalyzed, in part, by the FDA's iCGM classification for G6, which we believe will help bring a greater number of insulin delivery solutions integrated with DexCom's CGM platform to market over the next couple of years.

The shift towards CGM integrated systems is advancing quickly, including both automated insulin delivery and smart pens, and we are confident in the competitive position that we have developed through our collaborative strategy.

In addition to Tandem, we are encouraged that Insulet and Lilly continue to progress well for product offerings that will simplify diabetes management.

And at DAST last month, Novo Nordisk announced that they have added DexCom as a partner in its connected pen offerings.

Our vision for DexCom role in insulin delivery is crystal (inaudible).

Whether patients just prefer that their insulin is delivered by pump or pen, we are ensuring that their integrated systems can be driven by DexCom sensor technology, and that their data can be presented and assessed in one complete picture.

Beyond our core insulin business, we continue to explore new market opportunities that will expand DexCom's long-term growth profile.

For example, many of these other recent 510(k) clearances we've received for devices supporting our development efforts outside of our intensive business.

The first clearance relates to a software application based on our core G6 sensor and algorithm and had certain features that are tailored to people with diabetes in the nonintensive population.

And the second is a fully disposable glucose recording device indicated for all people, 2 years and older, not exclusively to people with diabetes.

We believe this product is the first set in making CGM a valuable diagnostic tool across all of health care.

This is a great example of the advantage of our Class 2 designation as we can rapidly iterate the 510(k) route while meeting the stringent performance criteria managed by special controls.

And although we are still early, we believe the G6 system is truly a platform technology and you will see us continue to invest in these initiatives over the next few years.

As you can see, we have made significant progress with our pipeline, building on the capability of our G6 platform.

We will begin using disposable G6 CGMs in various pilot activities in 2019 and beyond.

Additionally, with respect to our product collaboration with Verily, we continue to consider options to utilize the first-generation system.

But we have shifted significant resources to the second generation device, which is on track for a late 2020 or early 2021 commercial release.

With that, I will pass it back to Kevin.

Thank you, Steve.

We are very pleased with DexCom's performance through the first 9 months of 2018 and continue to push the team to ramp up G6 production to meet demand.

As you can tell, we've exceeded growth expectations as CGM accelerates, and patients realize the clear benefits of DexCom's capabilities.

With respect to our outlook, our new growth guidance is twice what we anticipated at the beginning of the year.

And we're still only scratching the surface of the opportunity for CGM and remain confident in our ability to grow over time.

With a number of market dynamics still in play, we will remain thoughtful in how we establish our forward expectations.

To the DexCom team, what a year so far, and let's finish strong.

The company's leadership is incredibly grateful for everyone's hard work this year throughout the world, including our new friends at TypeZero in Charlottesville, Virginia.

To wrap up, 2018 is proving to be a wonderful year thus far for DexCom and we remain in the early stages of the launch of G6 and the growth of real-time CGM.

We look forward to seeing many of you next month in our industry day.

We would now like to open up the call for Q&A.

Matt?

Thank you, Kevin.

(Operator Instructions) Operator, please provide the complete Q&A instructions.

(Operator Instructions) And the first question comes from JP McKim from Piper Jaffray.

I actually wanted to start first talking about the approval that you have out there.

A, I didn't know you were working on your own disposable, and so if you could elaborate on that?

And then maybe two, you had a lot of conversation with payers lately in terms of changing the business model and are they open to covering this noninvasive (sic) [nonintensive] patient population at this time or are they waiting for future clinical data?

This is Steve.

I'll take the first part and I'll let Kevin handle the insurance reimbursement portion.

So yes, I mean, we've always maintained that G6 is a platform technology, right?

So what you saw in the [510(k)] is nothing more than really an extension of the core G6 platform.

But quite frankly, we expect to ride this platform for a number of years just seeing it follows that the transition from kind of G4, G5 to G6 just didn't happen overnight.

So while we're still big believers in that second generation Verily disposable, we thought it best to leverage something particularly in the IT scale world where we consider it very rapidly off of our existing platform.

We thought it was in our best interest to start learning and advancing our strategies outside of our core intensive insulin [formulas].

So with respect to churn, I mean, we've got a number of pilots in the works.

You guys know about the [pen] pilot.

Kevin, I'll let you...

With respect to the non-intensive world, we do believe that payers will eventually cover that.

It depends upon the form of the program and how the CGM is going to be used.

I think one of the 510(k)s that you saw approved where we have a device that could be used across all segments of the health care world, not just patients with diabetes is a good step in that as a diagnostic product as well.

We do believe we will get payment for that but that's going to take years to develop.

I mean, we're several years into getting CGM reimbursement in the Type 1 and intensive space for now and that's going to take a while also, but we're optimistic.

We're very confident it will happen.

That's helpful.

And then maybe can you just give like broader base, I know you're -- like where are you at in terms of your covered lives in terms of unique channels like the pharmacy versus subscription?

Like are you 30% of your volumes go that way?

The rest all goes to DME?

Like how long could this revenue per patient kind of be a little bit of a headwind?

And are you getting more active in the volumes to offset that?

This is Quentin here.

Good question.

We're north of 40% of our lives -- covered lives are through the pharmacy channel now.

I would say that G6 is in the majority of all of those.

So we made great progress in bringing G6 into that channel, if you will, and there is a lot of benefit that comes with it.

Obviously, ease of access for the patients, which we believe over time can improve utilization trends and they'll become easier for the physicians who subscribe as well, which we think has implications on volume and then just generally trying to expand the coverage universe as we move into that channel also.

So our view is, we're starting to realize some of the revenue per patient headwinds that we started to communicate at the beginning of the year.

Obviously, we're navigating that quite well with the 44% growth in the quarter.

We believe we can continue to do that as volume remains very strong.

So highly confident in our ability to navigate through it, but we're going to see it in the fourth quarter.

You'll probably see a bit of it in Q1 and Q2 of next year, then we start to anniversary out what we just saw in Q3 and will have seen in Q4.

So that's what we think about it.

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

I have a few questions.

The first one has to do with the way that you provided guidance and that you're growing at 2x your initial growth rate.

While I'm thrilled about that, don't get me wrong, where do you think it's different today than when you first set it up?

This is Quentin.

Obviously, we talked about price or channel mix headwinds being roughly 5 to 10 points in that initial guidance at the beginning of the year.

And I think what you're seeing play out -- or did play out over the course of the year, those headwinds didn't start to hit in Q1 or Q2.

They've really started here in the third quarter and fourth quarter.

So those pricing channel mix headwinds weren't as significant as we originally thought.

That accounts for a portion of it, but the vast majority, far and away, there's just no way around it, is truly a volume increase in the overall business.

And I think that comes back to the point we've talked about historically, which is where the value of CGMs becoming more and more prevalent.

People are understanding it to a much greater degree and that's what really has driven the upside over the course of the year to the majority of the extent.

And my follow-up question has to do with Verily.

Can you walk us through what are the steps to bring this to market?

And if I read between the lines in your comments, you may not bring Type 1 to the market or did I read that wrong?

This is Kevin.

We continue to explore options with the first-generation product.

We've always indicated that, that was never going to be a huge revenue producer for us.

In all candor, we're all hands on deck with the G6 launch right now.

So we're exploring options with product 1. Product 2 is a completely new platform, very similar to G6.

We're not going to go to all the details regarding it.

But suffice it to say with new electronics, new insertion system, new sensors, pretty much everything.

There are going to be a lot of steps, there will be a large clinical study and there are things we're working on.

That project is going very well right now and then we are on schedule with our internal plans, but it's going to be a big move-the-earth effort similar to what we've had to do with G6.

And the next question comes from Robbie Marcus from JPMorgan.

This is actually Christian on for Robbie.

Wanted to start first on the OUS business, I think that was probably the biggest upward surprise in the quarter, almost double the business year-over-year on a constant currency basis.

What countries are you seeing being really strong growth internationally right now?

And what are the opportunities for expansion that you still have ahead of you with G6 going into 2019?

So when you look at the international business, it was really strength across the entire board.

All of our major markets for the most part were double where they were at from the year before.

So it wasn't any one particular market that outdrove or outpaced growth.

This is the others that, that really drove the overall result.

It was very widespread and really across all regions for that matter.

So I'm very happy with what we're seeing play out in that international space.

A lot of opportunity continues in front of us yet.

We've gotten approval into the Japan market, same with the Korean market.

Those become significant opportunities for growth into the future.

We're not yet selling into those.

So those become exciting opportunities.

And there are several EU countries that remain opportunities for us as well.

So I think, we're still in the very early stages of where that international business can grow.

Obviously, having tremendous success and it is really is widespread at this point.

And then maybe turning to the U.S. Given your results and the very positive results from competitors in U.S. in the CGM space, obviously utilization has ticked up pretty significantly.

Do you have an updated estimate of where type 1 CGM utilization stands in the U.S. and where you see that going, going forward?

I think you are asking for penetration in type 1, not utilization.

When we talk about utilization it's really utilization of vendors on a per patient basis.

It's hard to [copy] because they're not great numbers from specific numbers out of Avid or Medtronic but we estimated the category somewhere in the 25% to 30% range in type 1. So very little penetration even in the tentative type 2 and we're just getting our feet wet in nonintensive type 2 beyond that.

So probably our best estimate.

And the next question comes from Jeff Johnson from Baird.

Quentin, maybe I want to follow up first on your 40% or greater than 40% of covered lives through pharmacy at this point.

We often have this pollyannaish view that once you go to pharmacy, a doc will just have to write a script and the patient will walk out the door and go down to CVS or Walgreens and get that filled.

Is that truly that 40% of U.S. commercial covered lives right now could really get CGMs that easily?

Are there other hurdles there?

And if there are other hurdles even in pharmacy, just kind of how do you expect that to play out over the next couple of years?

Does it continue to get easier and easier for these patients?

I think that's the right way to think about it.

Certainly it's much easier.

Every payer has a little bit of a nuance of what they require, but the way you described it there is very much in line with how we see it moving over time and that is the ease of access that comes through the pharmacy channel and that's why we think incremental volume or even utilization trends can change for patients, which drives incremental volume over time and that becomes the attractive nature of it.

And obviously, with that then comes the opportunity to reduce the back office overhead cost of administering a pharmacy claim versus a DNE claim.

So you described it accurately.

That's the excitement we have around that channel and that's why we think long term it is a better channel for the company to be pursuing.

That's helpful.

And then Kevin or Steve, maybe just would love -- we're all out there trying to talk to docs and understand the competitive environment and things like that.

But as you're out there talking to your prescribers and maybe some competitive docs who are using other products, just what are you hearing out in the field with -- between Libre -- probably more Libre than the [panic] sensor at this point, but just is it truly all the market expansion?

Is there some overlap where you guys are competing aggressively head-to-head for a Libre versus a G6 patient?

Just any update there would be helpful.

Yes, I'll take that one.

As I've said about the 1% is very clear and these are 2 very different products.

We are a continuous glucose monitor, which provides a continuous data feed with alerts and alarms and with a level of accuracy and standards we have to adhere to with iCGM that Libre doesn't.

The providers understand that.

They understand what a patient is going to get.

They understand all the features that we have.

We recently, for example, reviewed some Net Promoter Scores today coming from independent source, and our G6 Net Promoter Scores were off the chart.

And I would tell you just anecdotally, the feedback we're getting on G6 is unlike anything we've ever done.

I made the statement on the earnings call that this is a patient experience unlike anything we've ever done before and it's absolutely true.

The features we put in that system make it very, very desirable.

At the end of the day, we've talked about the things we need to drive more awareness and more access to get this available and get it on to more people, and we continue to do that.

And so -- but we've had great response so far in our markets and we think we can take G6 to a number of places.

And our next question comes from Jayson Bedford from Raymond James.

Just a couple.

In terms of the reduction in revenue per patient, it's a bit of a -- I don't remember you calling that out, at least quantifying it in the past.

Do you see any headwind in the second quarter?

Or is all this tied to the G6 launch?

Yes.

I think the way to think about it is -- let's separate price from mix for just a second.

When we look at price at a same store, same product or same channel, very consistent view of it, we're actually seeing very good trends in the business.

Price is holding in flat if not even slightly up in some of the business, particularly on the sensor side.

So price itself is holding in just fine.

Where you're seeing the pressure of lower revenue per patient is really from a mix perspective.

That's the combination of international being larger as a portion of the overall business.

That's Medicare growing faster than the overall business.

But what we really saw in Q3 that became unique relative to other quarters was our approach to really push into the pharmacy channel and lead with G6.

So where we were willing to concede some price for the G6 system in lieu of broader access or moving out of DME into pharmacy over time because we believe that, ultimately, incremental volumes are going to result from that.

And as the volume increase will more than offset the price that we're willing to give up.

So that was really a Q3 phenomenon that started to pick up.

We hadn't seen it in the prior quarters.

And to our guidance, we expect it to be there in Q4.

So that's why we're talking about trying to describe -- it really is more of a mix issue versus pure price.

Price has hung in there pretty well.

Okay.

That's helpful.

And then just as a bit of a follow-up.

Receiver growth accelerated quite a bit in the quarter.

Was that a pretty clean number?

Or was there a bit of a catch-up from any type of deferred revenue?

No, no catch-up.

I mean, just to be clear, on the deferred revenue or any catch-up, there was roughly $3 million in the quarter.

You guys recall back in Q2, we talked about the G6 promotion program that we had.

We did see $3 million come through in the quarter, but what really drove the receiver growth relative to the back end was outpaced compared to the other categories is really twofold.

One, new patient additions are up significantly, and that pipeline is more than double what it was the prior year.

So you're seeing the new patient realization come through that number.

It shows up very clearly.

And then you also have folks upgrading from the G5 to the G6 program, which, again, very encouraging for us as we think into the future as they're going to stay on that G6 system, possibly translates into other product revenue for us.

And our next question comes from Travis Steed from Bank of America.

I wanted to follow up on the new patient funnel.

You mentioned the pipeline of new patients more than doubled.

Can you maybe comment on how long it takes to convert these patients into new users and then if you can take your predictive metrics, are there any changes that would suggest that the recent momentum won't continue into 2019?

Let's stick to 2018 for today.

With respect to converting these patients, we do have metrics and a lot of that varies depending upon the payer mix within that pipeline.

Some of the payers require much more extensive documentation than others.

Others require very little and we really don't disclose that number.

We have had a bit of a delay in our patient pipeline in all candor due to product availability on our side and so that has been a little slower in some cases.

But by and large, referrals are coming in at a faster rate than they ever have for us, both from the payer community and from our direct-to-consumer advertising campaigns.

People very much enjoy G6 and word is getting out there.

We're hopeful that it's very strong in '19, but we'll wait for early '19 to give you more feedback on that.

Okay, that's fair.

And in terms of the 6-point headwind in the U.S., I don't know, Quentin, if you would be willing to split that out between the impact of Medicare versus the pharmacy channel.

And also, the 40% of your business that is in pharmacy now, if you could give us a sense for maybe where that was at the beginning of the year.

Just give us a sense of how quickly the business has been shifting.

And also, as you're making headwinds in the pharmacy channel, can you maybe comment on margins, both gross and operating margin in that segment of the business?

That's about 6 questions in there.

Look, I'll tackle a few of those.

In terms of the revenue per patient headwind in the quarter, when we normalize that U.S. growth rate to say that -- reported with that 34%, excluding the revenue per patient headwind, we would have been up around 40%.

That was really all the pharmacy channel headwind for the most part, and nearly all of it was driven by that.

So that was the big aspect to that.

In terms of the coverage, we've seen the coverage increase.

We said north of 40%.

So obviously, coming into the year, we were south of there.

We're seeing good progress.

I think what is becoming apparent to us is that there are certainly some payers who are not going to move into the pharmacy channel.

They prefer to be a DME benefit and that's how they're going to continue to adjudicate us.

So we know that we're not going to see that go to 100% over time, but we do expect it will continue to do uptick and improve beyond the 40% that we see today.

I think that addressed most of the questions you had in there.

And our next question comes from Doug Schenkel from Cowen.

This is Ryan on for Doug.

Exciting to see the pharmacy progress you've made.

Can you talk a bit more about access changes with G6, particularly for intensively managed type 2 patients in the U.S.?

Medicare coverage has been in place now for a bit, but have you seen any progress for intensively managed type 2 patients among private payers?

Yes.

This is Kevin.

I'll take that.

We have seen some increase in type 2 intensive insulin patient coverage.

It is up.

It's certainly not all of them yet, but we have used this opportunity to get to more of those patients.

So that has increased.

That's great.

And then you mentioned the Novo announcement regarding connected insulin pens in your prepared remarks, but no time lines were provided regarding business decisions and support solutions [directing] those Bluetooth-enabled pens driven by DexCom CGM.

Is this something that could be launched in 2019, whether with Novo or other partners?

Or will it take a bit longer?

Yes, and we certainly hope to start running.

In fact, we're running some smaller pilot studies today.

But you may see some commercial activity in 2019.

Certainly by 2020, we expect to start to roll these out on a broader commercial basis.

And our next question comes from Danielle Antalffy from Leerink Partners.

Really strong quarter.

Just wanted to ask Quentin about -- I appreciate you're not going to provide color on 2019 specifically, but given all the moving parts here, if you think about volumes versus price, what do you think is a sustainable growth rate going forward kind of longer term?

And I know you're going to get into this more at the analyst meeting in December, but curious what you can comment now and how to think about all the puts and takes to the numbers?

Sure.

Look, I think, we've talked a little bit, Danielle, already about the fact that we're not going to get out and provide '19 guidance just yet, but I've given you a little bit of color already around some of the revenue per patient headwinds.

And clearly, we saw it starting Q3.

We expect that to accelerate a bit into Q4.

And as a result, we would think that it's going to play out in Q1 and Q2 of next year and we start to anniversary it in Q3 and Q4.

So we think it's very navigable and we feel very good about our ability to see volumes continue to be very strong and offset those pricing pressures.

And we know where the Street's at relative to the '19 models at this point in time, sitting around the $1.125 billion.

I'm not uncomfortable with that.

We feel good about that number, but we'll give more clarity and more specific updated guidance in the future when we're ready to talk about that in line with where we have historically done that.

But we feel good about where they're at, at this point in time.

Okay, that's helpful.

And then just one quick follow-up as we look at the December 4 analyst meeting, which I'm very excited about, by the way.

What can we expect to see there?

So you mentioned long-term growth outlook, a little bit more color there.

What about from the pipeline?

I assume that's going to come into color a little bit more clearly.

And then, also, anything on type 2 and the partnership with UNH there that we could expect to see at the Analyst Meeting?

We're putting that agenda together right now.

Suffice it to say, you'll probably hear a little bit on all those fronts.

We're just getting our ducks lined up in a row, get everything ready for presentation.

Certainly, you'll hear the product pipeline.

You'll certainly hear our launch review of our business.

That remains very bullish and then some of the other things moving forward.

(technical difficulty)

And your next question comes from the line of Steven Lichtman with Oppenheimer.

Just as a first question, if you can hear me, on the pharmacy channel shift, are you already at a point where you can start leveling off incremental investment in back-office functions given the smoother nature of that process?

Or is that something we should potentially look for in the future?

Yes.

This is Kevin.

I'll take that.

We are trying to optimize our back-office support right now.

And again, while we have many, many covered lives, not 40% of everything goes through that channel right now.

There's still some mix between DME and pharmacy in some of those payers.

This business is not any less confusing than it was 6 months ago.

We just feel like we're making really good progress on our major strategic initiatives here.

Over time, that back-office can come down, but there are several elements to our back-office support as well.

There is not only back-office sales support for reorders, there's new customers, there's new patients, there's training, there's tech support.

There's a number of areas.

And we're looking to streamline all of those operations, make them more efficient.

But we're also looking to make sure we take care of our patients and make sure they have a good experience with us.

So we have to balance them.

Over time, obviously, we would like to be more efficient, but we'll just play it out.

There's nothing in our numbers that would reflect any of that at this point in time.

Got it.

And then just a quick one on the pipeline.

Is the 14-day label something we could potentially see over the next year?

What's your latest thoughts on bringing that or going after that extension?

Yes.

This is Kevin.

I'll take that one, too.

Extended wear certainly is something we are looking at.

We're evaluating the performance of our current G6 system against the iCGM standards that we remain adherent to.

We're very happy to play in the 510(k) world.

We have to make sure we create a patient experience on the extended wear that is really superb for them.

One of our biggest issues, it doesn't take a lot to [raise], is our adhesive.

We have new adhesion in the pipeline that will be coming out in the not-too-distant future.

We wouldn't, for example, go to an extended wear until we have the new adhesion into our manufacturing processes to get better "stick 'em" on the product.

And so we're evaluating that.

It certainly is something we will do.

It's just a question of when and what modifications we have to make in the system to go there.

And your next question comes from David Lewis from Morgan Stanley.

Quentin, maybe just one for you and a related follow-up.

I know we're not going to talk about '19, but just taking the fourth quarter guidance, obviously, it implies an implied slowdown and that's sort of been your tactic sort of all year.

You wanted to maintain that flexibility.

But there's 2 months left in the year (technical difficulty) how much you don't understand, pricing is stable, you understand the Medicare headwind, so the only dynamic in the fourth quarter seems to be greater progression to the pharmacy channel.

So that 6-point separation, Quentin, 34% to 40%, are you expecting that to widen in the fourth quarter?

And if it does widen in the fourth quarter, does it widen still into the first and second quarter?

Or do you see that 6-point separation as pretty stable?

Yes.

So let me -- I'll just walk you through kind of how we think about that fourth quarter and the revised estimate to our guidance.

So obviously, our guidance implies roughly 25% growth in the fourth quarter coming off of what is 44% in the third quarter.

I think, one, you've got to keep in mind that fourth quarter has witnessed its toughest comp of the entire year and the comp alone is going to account for roughly 5 points of growth headwinds in terms of year-over-year growth.

And then we believe there's probably 10 points of price headwinds or revenue per patient headwinds coming from that pharmacy channel.

So the 2 -- those 2 items together give you roughly 15 basis points of headwinds that if you took the 25% in our guidance, normalize it back so that you're up around 40% and getting pretty comparable to where we were at in the third quarter and even in the second quarter.

I think the one other thing to point out is OUS, obviously, was a tremendous growth quarter for us in the third quarter, up 93%.

Very bullish on what's going on there, but also not willing to call 93% growth a trend just yet.

That business has grown somewhere around 75% in the first 9 months of the year.

We think we'll replicate something like that in the fourth quarter.

But I think, you take those moving pieces that I just gave you right there and the guidance in the fourth quarter starts to make a lot of sense for you.

That's super, super helpful, Quentin.

Actually, very clear, more than I was hoping for.

And just a related question on profitability.

So this pharmacy benefit channel has always been talked about as a significant profit driver for the business.

So as I think about the third quarter, you made money.

Some of that was lower spending with United.

But is this the inflection quarter, Quentin, with 40% pharmacy channel penetration where you build from here heading into 2019 given the success you've had in that channel?

We're going to talk a lot more about profitability and the path forward at the Analyst Day.

I think what we're seeing right now in the business is a couple of things.

One, the organization is doing a tremendous job of instilling the discipline around controls of spending and then ultimately where we invest for the greatest opportunity to drive growth into the future, but those opportunities are significant.

There's all kinds of alternative market opportunities, new markets that we're not in today.

And we think our technology has a tremendous opportunity to really differentiate and make a significant difference for patients.

And we're going to continue to pursue those.

So I think, on a go-forward basis, it's all about growth for us.

At the same time, it's creating the opportunity internally to make sure that the spend is going into those opportunities that give us the greatest opportunity to drive significant growth.

And that's how we're thinking about profitability right now is we'll [drop it,] move, the investment opportunities are there but we want to fine-tune our operations to make sure we're investing in what is the greatest chance of success in the future.

And your next question is from Brandon Vazquez.

I wanted to kind of go back and focus on international markets.

It's been obviously a really strong point for DexCom in the past several quarters.

And specifically, what kind of investment have you made in the channel in the last 12 to 18 months?

And can you just give us an update on how big your direct presence is in the international markets and maybe which of those regions you might want to look to invest more going forward?

I will take the first one...

Well, I'll take the second one.

Yes, if you look at, Germany, for example, a market that we made an acquisition of a distributor a little over a year ago, we continue to invest in building out that infrastructure and really position us for success well into the future.

We're seeing great benefit as a result of that and the growth there has been phenomenal.

If you look at the U.K., which is a direct markets, seeing the same thing.

So I would say we're very happy with those investments.

We know the long-term opportunity of being direct in those large markets outweighs the -- not the indirect.

So excited about what we're seeing there.

Steve, maybe...

We would look to be opportunistic where we see reimbursement coming into play.

So for example, our path into Korea was actually much more rapid than we expected.

And together with that, actually came some initial reimbursement.

So then Japan, same thing.

We entered into Japan, a professional market where there is reimbursement for a professional-type product.

But we also entered into a cycle where we think over the next maybe 18 to 24 months, we would be in a position to have reimbursement for consumers use for CGM, which should line up nicely with when we expect to have a G6 launch into that market.

So certainly, all that being opportunistic before we go direct with these markets.

Great.

And as a follow-up, can I -- going to the G6, can you just talk about maybe how G6 upgrades are tracking within your legacy G5 installed base?

And maybe if you don't want to break out what percentage of your installed base is on G6?

So maybe -- when do you expect the majority of your G5 patients to be upgraded to G6?

This is Kevin.

I'll take that.

I can tell you that we have more G6 users than we have G5 and G6 sensors accounted for a larger percentage of our sensor volumes than G5 did in this quarter.

But there are still quite a few G5 patients out there, as transmitters have to expire as the Medicare patients use the system.

So it will be certainly a period of time before G5 is insignificant with our business.

We still have commitments in some foreign markets and with some other patients to whereby we'll support it for a while, but the change is happening very rapidly.

And your next question comes from Rajbir Denhoy from Jefferies.

Anthony for Raj.

Maybe a question back on the pharmacy channel, just in terms of co-pay assistance.

It sounds like Avid has taken a page out of the pharma book and has a co-pay assistance program in there with Libre.

I'm just wondering where DexCom stands with co-pay assistance?

And if it does have one in place, does it essentially walk down the co-pay to 0?

We've had programs like that over time, Raj (sic) [Anthony].

And it's not unusual to have that.

So we have done some things like that in the past.

That isn't how we've been running it, but that has been a portion of our business before.

Okay.

And then maybe at this point, can you maybe speak to the price difference that's out there in the market today, which is the numerous offerings out there?

The new data point on this call, at least one of them was the nonintensive initiative.

I know it's early days there, but can you maybe help us think about how to think of sort of the size of that opportunity and maybe timing when that actually becomes a part of the business?

Yes.

I mean, nonintensive revenue is, right now, a stretched material at this point.

I think 2019 is probably still going to be a year of learning in terms of more frequent pilot studies and really continues to be an investment year on the nonintensive side with the hope of coming out of 2019.

We have a little more defined what our -- where our go-to-market strategy is.

I'm not going to actually comment on what we think and what we're thinking because we don't need to give competitors our playbook here.

But it's really probably 2020 and beyond where you start seeing the nonintensive piece of the business become a little more and more material.

I don't remember what the other part of the question was.

(inaudible) I'm not going to get into discussing the price differences at this point.

We're still in the early stages of deciding how we approach those markets.

Your next question comes from Ravi Misra from Berenberg Capital.

Just want to throw out -- you guided $975 million.

And Quentin, I think, you talked a little bit about channel and price mix headwinds that hit later on in the year, much later than you'd expected.

How do you factor those headwinds into the fourth quarter guide -- implied guide?

And then second, just on the kind of the European outperformance, you have a complementary technology with Tandem launching into Europe right now.

Can you kind of show us any detail on what kind of attachment rates you're seeing there with their pump kind of installed?

And how does that compare to attachment rates in the U.S.?

Yes.

On the first part of that question, Ravi, we talked about roughly 10 points of headwinds in that fourth quarter.

So you can do the math on that number, but that's really what's contemplated in our guidance there.

It would be a bit of acceleration off of Q3, not because we view revenue per patient really moving any further down, but more because it's a full quarter that we'd have an inflation now in the fourth quarter whereas the third quarter was just a partial quarter.

In terms of the second question, I'll let Kevin answer...

This is Kevin.

I'll take that, on the Tandem side.

Certainly, Tandem is selling pumps in Europe.

And pumps integrated with G6 is going to help us across all markets, but it isn't going to drive any of our revenues through the roof in the near term.

And I mean, for example, to the extent Tandem picks up an Animas upgrade, it's highly probable that, that Animas patient is already using DexCom sensors.

And that's why they're using Animas pump over in Europe.

So we'll get to keep them and they will continue to have great experience with our system, but we won't be picking up revenues there.

We think over time as both they and we grow, those integrated systems will be very additive to our revenue base and that's why we continue to be very supportive there and work with those 2 partners because they're both doing well for us.

But as far as the big pickup for us in Q4, we don't see one.

We want them to keep going.

And your next question comes from Isaac Ro from Goldman Sachs.

Maybe, Quentin, a couple of questions for you on the margin side.

A lot of moving parts this year with all the growth as well as the investment.

Just trying to think through where you guys are on the gross margin side as it relates to supply, both for G5 and G6.

I know last quarter, you guys were in a hurry to catch up with G5, and now you're bringing on G6.

I just wanted to get a sense of, from a supply standpoint, where you are actually in the quarter and basically what's assumed for the rest of this calendar year?

Yes.

So while we assume 64% gross margin for the full year, which when you drop in your models, is going to imply 65% or so in Q4, which is a 200 basis point improvement from what we've been running for the last few quarters, down in Q2 and Q3.

I think we've made tremendous progress.

The teams have done a great job to get our production yields back in line as we exit Q3 with where we had been historically.

If you recall back in the second quarter, we talked about our yields being down just from the incremental impact of trying to keep up with the higher demand than what we had assumed originally.

We're bringing new lines up to meet that demand.

We were ramping up in Mesa, Arizona.

So those naturally created some inefficiencies, but the team did a good job of getting that back under control.

And we exited the third quarter kind of in line from a yield perspective with where we wanted to be and feel good about the ability to deliver 65%, a nice improvement in the fourth quarter.

I think the reality continues to exist though that the overall awareness of CGM continues to grow and the volume surpassed our expectations.

It's hard to keep up with that.

The teams have done all they can to continue to keep up with it, but we're bringing more new incremental lines on faster than what we have ever anticipated.

And so just continue to navigate through that, create some challenges for the team, but they've done a good job thus far.

And like I said, in the fourth quarter, we'll be right back in the mid-60s.

And I think that's the right way to think about it into the future, but it is not without some challenges.

Got it.

And then just a follow-up on the Analyst Meeting next month.

Just kind of curious, what we should reasonably expect for the agenda, and specifically, whether or not that'll be the right forum to talk a little bit about 2019 guidance, either for sales, margins or otherwise?

Yes, like, I think it was someone else asked that question.

We're still working on the agenda for the Analyst Meeting.

I think we're going to -- certainly Quentin is going to go in depth with a little longer outlook on the financials.

You're going to meet a couple of other people from the senior management team.

I doubt we'll give any more color on 2019 guidance.

We typically do that in the first part of January at a conference.

That's probably what we'll do again.

So we'll let you know when we get closer to Analyst Day.

And this concludes our question-and-answer session.

I'm going to turn the call back over for final remarks.

Thank you very much, and thanks everyone for participating in our call today and for all your questions.

As you can see from our continuing performance, DexCom is at an amazing place.

To put things in proper perspective, revenue this quarter exceeded all of 2014, which is not that long ago.

As we look to the future, the things we've done have driven our success today are the things that will drive our success going forward: Our commitment to patients, our incredible employees and our world-leading technologies.

Our future efforts we discussed on our call today focus on enhancing the patient experience, building infrastructure, [nuance-driven] decision support, leading-edge technology partnerships integration with insulin delivery systems, even simplification and distribution channels.

Accurate, timely glucose information will drive everything in the future diabetes ecosystem.

And the DexCom patient experience is only going to get better and more important going forward.

We know that we pushed out teams to the limit this year.

Launching G6 significantly earlier than we had initially planned has created manufacturing and operational and customer support challenges.

We did the right thing.

People needed access to this amazing technology as soon as we can get it.

And on top of our accelerated launch, our volume growth has significantly exceeded our actual revenue growth over the course of year as well.

We appreciate everybody's efforts this year.

Thank you, again.

And finally, on the technology front, G6 is just the beginning.

You heard about our recent 510(k) approvals, our investment to enhance the future experience, our many strategic relationships.

We have all the technology features necessary to take the CGM everywhere it needs to go, across all of health care.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

And you may now disconnect.