德康醫療 (DXCM) 2006 Q4 法說會逐字稿

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  • Operator

  • Good day, and welcome to the DexCom fourth quarter results conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following today's presentation, we will conduct a question- and-answer session. Instructions will be given at that time for you to queue up for your questions.

  • And now, at this time, I would like to turn the conference over to the Chief Executive Officer, Andy Rasdal. Please go ahead.

  • Andy Rasdal - CEO

  • Good afternoon. Thanks for joining us on our fourth quarter earnings call. To start, I'll just briefly cover the agenda. I would like to start out, as we typically do, with a financial review update on a variety of issues related to our commercialization, talk about reimbursement to our product pipeline, and a few various topics at the end and open up for questions.

  • So at this time, I would like to turn it over to Steve Kemper, our Chief Financial Officer.

  • Steve Kemper - CFO

  • Thanks, Andy, and good afternoon, everyone. First I'd like to remind everyone that we will be making forward-looking statements, so please refer to our 10-K, which we just filed, as well as all our other SEC disclosures for a full discussion of the risks.

  • DexCom today reported a net loss of $11.1 million for the fourth quarter of 2006 and a loss of $46.6 million for the full fiscal year of 2006 compared to a net loss of $12.1 million and $30.9 million respectively for the fourth quarter and full years ending December 2005. We also reported today a net loss per share of $0.39 per share for the fourth quarter of 2006 compared to a loss of $0.48 per share for the fourth quarter of 2005. For the full year ending December 2006, we recorded a net loss per share of $1.71 compared to a loss of $1.63 per share for fiscal 2005.

  • Today, we reported revenue of $835,000 for the fourth quarter of 2006 and $2.2 million for the fiscal year, full fiscal year after launching our STS in late March of 2006. As we disclosed at Investor Conference in January, we added approximately 840 new customers during the fourth quarter in spite of being constrained by product supply for much of the quarter. So, in spite of relatively stable new customer acquisition during the fourth quarter, we're still able to grow center revenues 23% sequentially while ending 2006 on backorder.

  • Gross margin loss of $2.6 million for the fourth quarter of 2006 compared sequentially to a gross margin loss of $2.5 million for the third quarter of 2006. For the full year, our loss at the gross margin line was a $8.8 million. There is no meaningful comparison to 2005 as these costs were included in research and development while we were still in the development stage.

  • As mentioned previously, the majority of our cost of goods sold are fixed in nature and will begin to be absorbed into inventory at a higher rate as we grow our sales and production. Adding to the higher volume based absorption going forward will be efficiency improvements in our production areas and Andy will discuss those more fully during his review.

  • Research and development expense, including stock based compensation decreased $7 million to $3.9 million for the fourth quarter of 2006 compared to $10.9 million for the fourth quarter of 2005. Excluding the $6.9 million in manufacturing costs that were included in R&D in the fourth quarter of 2005, research and development costs actually declined $160,000 from the fourth quarter of 2005 to the fourth quarter of 2006.

  • Likewise, a $3.9 million in R&D spending for the fourth quarter of 2006 also declined sequentially by approximately $700,000 compared to the $4.6 million of spending in the third quarter of 2006. The sequential decline was primarily due to the reversal of the 2006 bonus accrual in the fourth quarter, as no bonus was paid during 2006 for performance. As noted previously, we are endeavoring to hold our R&D energy and expenses flat while continuing to invest in new product development and our sales efforts and we are pleased at the progress we have made to date in those controls.

  • Selling, general, and administrative expense including stock based compensation increased $3.6 million to $5.3 million for the fourth quarter of 2006 compared to $1.7 million for the fourth quarter of 2005. The increase is primarily due to $3 million in higher sales and marketing costs and $666,000 in higher general and administrative expenses as we continue to launch our STS system in the United States.

  • Driving the higher spending was $2.6 million in higher compensation cost, primarily in the sales area, $329,000 for increased promotions and advertising, and $317,000 in higher auditing and Sarbanes-Oxley compliance expenses. For the full 2006 fiscal year, our SG&A spending reached $21.1 million or an increase of $15.4 million compared to our spending of $5.7 million during 2005. The majority of the increase was related to the institution of our sales force and our marketing capabilities, although public company expenses also increased related to Sarbanes-Oxley compliance and the fact that 2006 had four full quarters of public company expenses compared to just three quarters of being public in 2005.

  • Our net interest income and expense increased $147,000 to $684,000 for the fourth quarter of 2006 compared to $537,000 for the fourth quarter of 2005. For the full year, interest income increased $1.1 million to $2.7 million for fiscal 2006 compared to $1.7 million for 2005. The increase here was due to higher investable balances as well as moderately higher interest rates.

  • We ended the year with a strong balance sheet. As of December 31, we had working capital of $52 million, which includes $54.5 million in cash and cash equivalents and our marketable securities. During 2006, we accessed $3 million on our bankline to cover $3.4 million in equipment and leasehold improvements expenses and we will start repaying that loan on a 30-month amortized basis starting in April.

  • Net cash used in operating activities increased $21 million to $43.6 million for fiscal 2006 compared to $22.6 million for fiscal 2005. The increase in cash used in operations was primarily due to the increase in our net loss as well as lower accounts payable and accrued liabilities and $1.4 million in our initial inventories. Net cash provided by financing activities increased $473,000 to $51.2 million for the 12 months ended December 31, 2006 compared to approximately $51 million for the same period in 2005. The increase was primarily due to approximately $1 million in proceeds from exercise of stock options and the proceeds from our 2006 follow-on offering and our bankline draws in 2006 approximating $50 million were about the same as our 2005 IPO proceeds.

  • With that, I'll just turn it back now to Andy Rasdal, our CEO, for his comments.

  • Andy Rasdal - CEO

  • Thanks, Steve. I'd like to provide a little color to the quarter that we're currently in since our last update at Investor Conference in early January. To begin, we'll talk about some of the key commercialization issues.

  • First, with manufacturing. We've made a continued and a substantial progress in our manufacturing operations to both improve quality and produce higher levels of product availability as well as reducing unit costs including increasing yields and decreasing variability in our manufacturing operations. Overall sensor yields have improved over 75% from December to February, and product supply today is not currently limiting our sales efforts.

  • Beyond just the yield performance, we've continued to make progress in automating key manufacturing processes to increase throughput, further reduce costs and improve future scalability. We have received approval from the FDA for two manufacturing changes to automate two of our key three processes and expect to file on a third one shortly. These three key processes relate to preparing the initial sensor wire, applying the membrane system and final performance testing.

  • We aim to implement these improvements carefully over the next few months. When successfully implemented, we believe these changes will create very substantial improvements in throughput volume, require fewer people, and further reduce our manufacturing unit costs.

  • Product performance and quality as measured by complaint rate data from the field continues to be improved since the fourth quarter, while at the same time, manufacturing volumes have increased and we are pleased with that, obviously, improvement and product performance as we have scaled further. Qualitative reports from our field personnel additionally about product performance are also very encouraging at this time.

  • During the month of January, the FDA conducted their post- PMA approval audit of our facilities operations in quality systems. Additionally, they also inspected aspects of our new larger manufacturing facilities for future expansion. The inspection was a standard post-approval audit as well as for our new facilities and not for cause or in response to any issues. The audit, though, was quite thorough and intensive with the two inspectors spending nearly eight days at our facilities. Based on the results and findings of the audit, we believe that we are in compliance with requirements for medical device manufacture and we are told at the close of that meeting there would be no action indicated.

  • We did receive some minor observations during the inspections as we did with our first one back prior to our PMA approval. Although we have no requirement to formally respond to any of these observations, we believe as is best practice, we will voluntarily close out all of these observations and provide formal written documentation to the FDA shortly on those observations.

  • Today, just today, we also received approval from the FDA for our expanded component manufacturing in our new larger facility, which is important for expanded capacity going forward into the future.

  • On the demand and revenue side of things, our manufacturing improvements and increased volumes enabled us to fill the existing backorder during January. We've now been out of backorder for several weeks in a row and have sensor inventory on the shelf today. As a result, approximately mid-January, begin to provide product for our field force to begin again driving new customer adoptions.

  • Thus far in Q1, new customer additions and revenue rates are roughly the same as Q4 2006, but after not being able to readily fulfill customer order and sales rep demand in the third and fourth quarter of 2006 due to supply limitations, and the sensor performance issues we reported customers experienced during those quarters, we believe there's some lag in restarting the channel for new patients and some time is needed to re-establish credibility with prescribing centers.

  • We're focusing our efforts on creating positive experience [with] those centers that can make them strong advocates for continuous glucose monitoring DexCom so that they will felt comfortable endorsing and supplying to increasing numbers of new patients. Further, we hear some reports now that some customers may be waiting for second generation seven-day product. Although too early in dynamic to provide any firm estimates, if new patient rates don't accelerate as a result of our improvement efforts, we would expect Q1 revenue to be comparable to Q3, Q4 of 2006.

  • Last week, we had the entire field force together in San Diego for the week primarily related to product training. I was generally impressed by their high level of enthusiasm, commitment, and persistence in [empiring] this continuous glucose monitoring category. All of us, and myself included had a fair amount of interaction with them and it was encouraging and I think invigorating because in them I saw the true belief and passion that CGM represents, a major step forward in diabetes management and they are the people in contact with physicians and patients every day. They are almost evangelical about driving this technology for the patient and health-care professionals. So I remain optimistic about the potential impact this motivated and capable group in the field will now make that they have -- now that they have adequate product supply and if and when improved, the second generation seven-day STS.

  • On the reimbursement front, we submitted an application for a [hixpix] code in January with strong supporting evidence. Medtronic also supported a [hixpix] application again as well. We would expect a preliminary decision on the [hixpix] application sometime towards the end of Q1 or beginning of Q2 with a final determination late fall.

  • We are aware that the JDR reimbursement trial, the randomized clinical trial there has begun enrollment and we are providing product for that enrollment at this time. We continue to receive unsolicited ports from new patients and physicians, a favorable coverage decision, and our dedicated reimbursement organization is working to most appropriately build upon these experiences to create wider spread reimbursement and clarity going forward.

  • On our seven-day second generation product, we are currently engaged in more active dialogue with the FDA on that product. Just recently, the FDA has requested and we have provided additional reformatted tables of data we had previously submitted. We view these interactions as positive and moving forward towards an FDA decision regarding approvability of our seven-day CGM system and although we can't predict the ultimate decision or timing for a decision by the FDA, it would seem that we're still on track for a decision in Q2 of 2007.

  • As we sit back and look and evaluate the status of the category, it becomes more clear every day that DexCom is a pioneer in the CGM category and changing the standard of care takes time and leadership commitment. Our daily experiences continue to reinforce the patients and health- care professionals and make a commitment to using this product for a period of time, irrespective of first generation performance issues, obtaining the best levels of glucose control ever. We continue to get reports about best ever improvements in A1-C levels from patients and physicians who have been using the product for several months at a time and in spending time with our field force last week, that just becomes reiterated.

  • And so we continue to believe that we have something which is both important and meaningful. We believe as much as ever that CGM will increasingly play an important role in the future of diabetes and will be a growing and profitable business.

  • On the in-hospital opportunity and application of this technology, we spoke a little bit at a conference in early January and I would like to cover some of that same material, but also provide a little bit further clarity and update. We continue to believe that the in-hospital application of continuous glucose monitoring is a very important and large opportunity. Published data continues to provide compelling evidence that the intensive glucose control and insulin therapy in post-surgery intensive care significantly reduces mortality and morbidity, and so this isn't dealing with complications occurring tens of years later, but with acute and immediate clinical consequences of people post-surgery.

  • Intensive glucose control and insulin therapy regimes are starting to be addressed and evaluated by accreditation bodies for these hospitals. From a citing standpoint, there are an estimated 100,000 critical care beds in the U.S. and we believe approximately 25% of U.S. hospitals have begun implementing intensive glucose control and insulin therapy, often involving 12 to 24 fingersticks per day per patient.

  • It is estimated that about 25% of patients admitted to the hospital have diabetes. There are approximately 450,000 cardiovascular surgeries per year and it's estimated approximately 30% of these patients have diabetes. For those hospitals already practicing intensive glucose control, CGM could significantly reduce the workload and the cost while improving the quality of care. Published studies have estimated the cost of these bedside fingerstick tests at $3 to $5 per test.

  • So, as we said, we focused on developing a product addressing this critical care opportunity. The product is IV-based with simple insertion and used consistent with the practices and techniques in the critical care areas. Design is simple and requires minimal hardware capital investment. The product, much like our current ambulatory system, provides current glucose value, trended glucose data and, of course, high and low alerts.

  • In bench and animal testing, as we previously said, the product has been highly accurate and stable. In early January, we said we hoped to conduct initial human use of the product in the first quarter of 2007. We have now completed our first human studies using the device with very satisfying results. In the latest small initial study, the system was more accurate and reliable than a traditional blood glucose meter when both were compared to YSI laboratory reference standard.

  • We're pleased with the speed and the progress of the project and intending to enroll additional patients in a series of feasibility trial to rapidly evolve the technology into a commercial product platform for the continuous monitoring of glucose in the critical care areas of the hospital.

  • Although it's still too early to accurately predict a commercialization timeline, we're working to find the best clinical and regulatory path for the product and we certainly hope to have more to say, both on our clinical results as well as the timing and the path at our next quarterly call.

  • We are determined to ensure that DexCom has the staying power to drive development of the continuous glucose monitoring market and to meaningfully participate as it matures into a larger business. We desire to ensure that the time and resources are available as to implement a well proven strategy we believe to drive a new treatment category.

  • First, we intend to continue developing next generation products with a performance that appeals to larger segments of the target population, gets away with the first generation issues that are always present and drives towards easier, more convenient, more reliable, more usable, and more cost-effective products.

  • Second, we intend to create the experience and continue to publish evidence for health-care professionals to widely accept and adopt continuous glucose monitoring as a primary means for diabetes management; and third, to drive increase to clear reimbursement in this market.

  • Going forward, we plan to provide the required cash resources from one or more of the following -- a loan or in combination. We have the potential to make business adjustments to place spending more in line with revenue performance as we obtain that information; additional financing and business partnerships. And although we cannot comment on the specifics of any potential business adjustment to reduce spending if revenue does not accelerate, we have previously demonstrated our ability to appropriately focus resources on activities that enhance value for all of our key constituencies.

  • We believe our in-hospital continuous glucose monitoring product is an outstanding opportunity for partnership. We're pleased with the progress of the project and would expect to more aggressively explore a partnership with appropriate companies to most effectively address this important market in the future. Further, in the first year of commercializing the STS now, we've learned a great deal about the potential for CGM to be integrated with other diabetes management products to improve the convenience and effectiveness of diabetes managements. We would expect to more aggressively pursue such partnerships that will provide for mutual beneficial integration.

  • So I think just in conclusion, finally, again, as we continue to gain experience here, we believe as much as ever that the continuous glucose monitoring will play an increasingly important role in the future of diabetes as real meaning and impact to people with diabetes and will be a growing and profitable business.

  • And so with that, we could open up to a few questions.

  • Operator

  • (OPERATOR INSTRUCTIONS). Thom Gunderson, Piper Jaffray.

  • Thom Gunderson - Analyst

  • Three questions really, Andy. Number one is after three quarters now of watching patient usage and looking at reorder rates, are you getting a better sense of how that's trending? Did it stabilize, are people using sensors longer, shorter, et cetera?

  • Andy Rasdal - CEO

  • I think, first, the only data I think we can probably cite right now is Steve's fourth quarter data that sensors grew more rapidly than new patients. And I think that's encouraging. The trouble is it's still hard to use data to determine that, when we're really just, although we're pleased with the manufacturing, been out of backorder for several weeks, the fact that we filled so much of that backorder in January and people play the normal thing of placing orders because they know we're in backorder to try to get more product sooner, and then we deliver late, we set up interference as a normal reorder cycle. But right now, it's just hard to get any clarity internally on what those usage rate, let alone provide any accurate guidance externally.

  • Thom Gunderson - Analyst

  • And then, second, Andy, you mentioned that you had the whole sales force in last week. You remind us what those - - how many people showed up for that? How many of them were actually sales responsible for revenue in their territories? And how many of them have been there more than six months?

  • Andy Rasdal - CEO

  • Well, they all showed up and I'm pleased to say that based on my observation, they showed up and they were all awake and paying attention. And as we said previously, we have just over 40 people with territory responsibility comprised of both education specialists and sales reps. All of them, despite some delineation roles have clear revenue in new customer acquisition targets and performance criteria. That's been stable now for some time and I think again, I'm very impressed with the level of morale and nearly all of those have been, and I can't quote the exact number, but nearly all of those have been here for more than six months now.

  • Thom Gunderson - Analyst

  • And then last question is on reimbursement, you talked about [hixpix], you talked about JDRF. Can you give us any granularity, any color on individual private pairs that are beginning to see the light or where you're making more progress?

  • Andy Rasdal - CEO

  • Well, I think we -- I'm so used to hearing what people don't like and what's wrong, of course, but the anecdotal reports that we just continue to get in relate to successes in individual patients and physicians obtaining reimbursements. Again, today, they make a decision generally to purchase it and then seek reimbursement after. In some cases, when initial reimbursement is denied, subsequent appeal with a letter from the physician seems to work. I don't -- as we released previously, just about every national name at least a local level has made a one- off decision to do that. We're in the process of trying to capture, harness that, [and] figure which pieces are localized and then have the ability to try to begin to drive local policy, but we don't have anything material or concrete that we could point to as to whether there's been a firm decision or a denial of a decision related to a policy.

  • Operator

  • Sara Michelmore, Cowen and Company.

  • Sara Michelmore - Analyst

  • Andy, as you're heading into this kind of Q2 decision or response, I should say from the FDA on the 70 sensor, I'm just wondering in terms of your communications with them, if you feel like they are holding the products to a higher standard than you saw the first time around? I asked that just in response to some of the feedback we've had from Abbott and through their experience and it may just be company specific, but if you could comment on that.

  • And secondarily, with regard to the facility inspection, I'm wondering if that was actually prompted by the review of the seven-day sensor, if that was an entirely separate issue.

  • Andy Rasdal - CEO

  • Let me deal with the last one first. To our knowledge, and we were told this was just a standard required post-PMA approval inspection. Additionally, because we had filed for expansion of our manufacturing to some new facilities, we asked them to do that during the same visit, and whereas it could have been somehow initiated, propagated, related to seven-day, I can't make any comment as to whether that was true or not. We certainly weren't informed of that piece.

  • Relative to the communications with the FDA or what we can divine from that, I think that the best way to categorize the review is consistent with the review of the original PMA. Whether it's being held to a higher standard or not, the good news is if you've seen the published data, this is a very strong data set in and of its own and certainly compared to our first generation product. The data that we've demonstrated is very, very strong. And so, though, like I said, we can't predict what the ultimate decision or timing is, based upon the kind of interactions and responses we have right now. We believe that we are moving forward towards a decision on the expected timeline of sometime in early Q2.

  • Sara Michelmore - Analyst

  • And then in terms of the manufacturing challenges that you've had, it seems like there's been a kind of a host of things that you've been up against; everything from yield to supply issue to need to automate to variability. If you could, sort of in rank order, talk about what's been the most difficult to overcome and just give us a sense of where you are on some of the most notable issues.

  • Andy Rasdal - CEO

  • I don't know that any of them are particularly more difficult than the other. I think we've always characterized these as first generation, first product initial scaling, early commercialization types of issues. We did get through the regulatory process fairly rapidly and the evolution of moving from a commercial company to a -- from a technology company to a commercial company occurred pretty rapidly in what I think is certainly a difficult and challenging product category for a number of people to do it, and so really it's been time. It's been tracking and diagnosing issues and failures and then, finding real causes; benchmarking the status and then implementing standard good old manufacturing engineering for process [improvement] that drives it (indiscernible). But there's nothing, any one thing that's major. These are just -- I think the things that we would expect and I think based on where we are today, and the fact that products supply is no longer limiting our efforts here today, and that product performance is measured by the best data we can get, appears where we would like it to be, and we've been able to make progress and have two of three key processes receive approval for automation is very encouraging going forward from a manufacturing -- and from a scale standpoint, not that there aren't bumps and that isn't hard, but there's no one specific thing that is necessarily a big issue -- (multiple speakers)

  • Sara Michelmore - Analyst

  • Now in terms of -- you did have out of the box failures and I'm just wondering in terms of your ability to sort of pick up bad product at sort of the end of the manufacturing procedure. Have you been able to put any systems or QAQCs, things in place there to help you kind of catch the quality of the product before it heads out the door?

  • Andy Rasdal - CEO

  • Sure. Well, we have had a lot of that before and I think maybe early in January provided a little bit more concrete update. As we got more data about that out of the box failure that we had attributed to simply being a sensor issue and without spending too much time, it really ended up being a mathematical parameter issue that either allows or doesn't allow the sensor to initialize. And the sensors that went in and were able to look at that it quote failed or it didn't initialize, were able to get data back from a number of patients, actually track glucose literally perfectly. And so it's just an old failsafe from a first generation product back in 2004, and so it more related to the software parameters, but is that related to being a PMA supplement to change such an algorithm? And the most immediate response was actually to tighten up the release criteria within final inspection to ensure the sensors could meet that.

  • And although that certainly caused some supply issues initially, it also forced the discipline to very rapidly tighten the distribution or the standard deviation of that product such that we could hit a tighter window. And so although the resolution of that related to how we did manufacturing, the fundamental issue was created by not unusually a first generation product design that relates back to 2004, and that parameter has already been changed and expanded in the seven-day product that's awaiting an FDA decision.

  • Sara Michelmore - Analyst

  • And that was my last follow-up on the seven-day. Are there incremental improvements going into that product even [versus] the improvements you've been able to make to date on just a plain old manufacturing process that's going to allow you maybe get over some of these scale challenges you've seen. Inherent in the product itself.

  • Andy Rasdal - CEO

  • Everything that we learned up and through even the first few months of commercialization was reflected in the PMA that we filed in Q2 of 2006 for the seven-day. And certainly as we spend this time in the hurry up and wait period, we continue to learn and we always look for opportunity to amend as appropriately, but many of the changes relate to manufacturing are 30 day manufacturing changes anyway, and you don't always pursue an appropriate path with the FDA. But often, once a PMA or a PMA supplement is improved, the 30 day path makes the most sense rather than delay the introduction of the new product that we think is important for patients.

  • Operator

  • Brian Wong, First Albany Capital.

  • Brian Wong - Analyst

  • Just a couple of quick questions. First of all, you mentioned that you're out of your backlog, you've got products in inventory. I'm just trying to get a sense of if demand picks up, whether you're going to be able to meet that demand with the product you have in inventory.

  • Andy Rasdal - CEO

  • Well, I suppose in any dramatic non-linear change has the potential to impact supply, but we do have one, an inventory cushion, that will allow us to -- an inventory cushion more than ever that would allow us to absorb such a thing and I believe based upon the kind of yields and throughput improvements we've made, that would allow us to rather rapidly sort of respond if that -- a change was then sustained in a linear fashion.

  • So I'll never say never because I spend a lot of time scaling new products over a number of years, but I think we are in the best position ever. We have an inventory cushion. We have very robust processes and I think the ability to respond rapidly.

  • Brian Wong - Analyst

  • Then you mentioned yield percentages are around 75%.

  • Andy Rasdal - CEO

  • We said they had improved 75%.

  • Brian Wong - Analyst

  • Oh, improved 75%.

  • Andy Rasdal - CEO

  • From where we ended December to where we are currently in this quarter.

  • Brian Wong - Analyst

  • What are the yield percentages that you are seeing?

  • Andy Rasdal - CEO

  • We've never commented on those.

  • Brian Wong - Analyst

  • Do you think there's additional room for improvement in the yields? Or is that pretty much at a steady state now where you are?

  • Andy Rasdal - CEO

  • Well, I think even a 99% yield, there's -- although it becomes asymptotic, there is certainly improvement in yields and often driving towards improvement in yields also drives a higher degree of reliability and performance in the product as you scale, so [you're going to] say certainly there is improvement in yields, but what we focus on are the fundamental improvements that drive yields and enhance (technical difficulty) increase substantially.

  • Brian Wong - Analyst

  • And then, you mentioned that you've got two out of your three processes automated. Are there any other areas or processes that you see going forward that could be automated that would improve significantly?

  • Andy Rasdal - CEO

  • Well, I think the three big ones are clearly, for lack of a better description, kind of the bottlenecks on the line, the ones that require the most intensive people interaction in management. A number of the processes already were automated. In some cases, this is just further automation, but I think right now, these three we think have substantial opportunity to improve throughput and reduce the number of people required and allow us to scale very reliably. And so I think we'll focus on the two that have been approved by the FDA and making sure we implement those in a manner which doesn't jeopardize product quality and get the third one approved and implement that afterwards.

  • Brian Wong - Analyst

  • And then two more questions, if I may. In terms of your in-hospital products, I know you said you're looking to determine what that pathway would be, but would you be able to tell us whether that might be a 510-K or a PMA pathway?

  • Andy Rasdal - CEO

  • We don't know the answer. I think it would be either a supplement to our current PMA or a 510 K, although I can definitively rule it out, I think [we] would be surprised if it required a whole new PMA, given that we are leveraging basically the same technology, the same clinical utility and so forth. So I think PMA supplement or 510 K would be where we would be leaning today.

  • Brian Wong - Analyst

  • And the last question is for Steve. Could you give us a sense of what the stock options expensing cost was for the quarter?

  • Steve Kemper - CFO

  • Yes, it's been running about $1.5 million to $1.6 million per quarter.

  • Operator

  • Mimi Pham, HSBC.

  • Mimi Pham - Analyst

  • You mentioned before that you focused on the top 45 or 50 centers. Are you still focused on just these? And ultimately, how many top centers do you plan to support?

  • Andy Rasdal - CEO

  • Well, we had I think said earlier in January that even without product and one of the activities for people if you don't have product driving your customers is certainly do the selling via education and training at the centers. We don't have the personalities in the field that want to sit around and play golf. These are hard charging, well motivated folks, and so we have always sort of trickled well beyond the 40 or 50 because of just the need to serve patients that have real needs, although the strategic focus has been and continues to be on the top 40 to 50, especially why we operate in an environment that we have today, but we've expanded [two] more, and I think the goal is ultimately with 40 plus people in the field, we can support substantially more than the 40 to 50 and we just want to make sure that we've got things well sold, the people truly see the value of it and are prescribing and training on their own before we just expand to get additional one-off patients.

  • Mimi Pham - Analyst

  • And then on the seven-day sensor, you mentioned some people are waiting for the seven-day sensor. Are you hearing this from patients directly or is this is more from the endocrinologist?

  • Andy Rasdal - CEO

  • I would say it's really from all data sources. We hear it from the educators, the endocrinologist, and patients. All, I would say.

  • Mimi Pham - Analyst

  • Can you just clarify when do you start actually ramping up your seven-day sensor manufacturing? As soon as you -- will it be ready then as soon as you get approval you can fully supply to customers?

  • Andy Rasdal - CEO

  • Well, certainly the intent as we demonstrated the three day is to supply and begin launching what we think is a meaningful second generation product as shortly after approval as we can get. We did that I think with the three day. Certainly that's the goal with the seven-day and a lot of that's determined by the FDA. As the product will share the same manufacturing lines, fundamental processes, equipment and operators, as we get approval, we can begin to make sensors fairly rapidly by just switching lines over almost instantaneously, and so that would be the goal is to certainly -- as we get further in discussions and have some clarity about when and if approval may come is begin to take a little bit, begin to put a little bit on the shelf, but I think our manufacturing and the continuity of the product is such that we can respond pretty rapidly once we do get approval.

  • Mimi Pham - Analyst

  • Last question. How will you modify or change your sales and marketing approach once Abbott and Medtronic launch their systems?

  • Andy Rasdal - CEO

  • Well, I think we'll wait until those systems launch. Certainly, we certainly welcome more help into the marketplace about driving the message of continuous glucose monitoring and making these technologies more widely available to the people and the caregivers who can benefit from them.

  • Operator

  • Steve Ogilvie, ThinkEquity.

  • Steve Ogilvie - Analyst

  • A question on the cost of goods sold, could you maybe explain when, what the revenue run rate needs to be to have positive gross margins and how that changes with the seven- day?

  • Andy Rasdal - CEO

  • We've not giving any kind of guidance related to that specifically, and it's fairly dynamic even at this. Relative to the seven-day, as we said, we would expect to set prices higher for the value we bring on a per day basis for the seven-days, not linear in line with the three day product but somewhere between those two. And we -- of course, it's an evolving marketplace and we've not set product yet, but given that the product is very similar and utilizes the same manufacturing machines and processes, any increase in price should be additional contribution margin and accelerate the path towards breakeven.

  • Steve Ogilvie - Analyst

  • And then maybe ask from a different direction, just trying to understand how much of the cogs in the last couple of quarters is due to the improving -- or lowering your yields and improving the quality control. Is a bit of that going to fall off assuming that the seven-day doesn't have any issues?

  • Steve Kemper - CFO

  • Well, as we mentioned that we worked on all those problems and challenges throughout the third and fourth quarter and as Andy mentioned, we saw a good yield improvement toward the end of December and into January, so as I mentioned in my comments, we expect to see better absorption going forward. Obviously, as you're building more product that is earned into inventory, that's going to be positive toward your cost of goods sold line.

  • Andy Rasdal - CEO

  • I think the other thing, Steve, certainly we've made substantial yield improvements and I think that reflects of course in lower-cost, but I think that the next phase of that, as I said, is further automation that falls in line with Steve, that drives greater volume through an existing facility or line with less labor. And I think we've been very methodical about that, having done it, it's easy to say automate, but if you are making marginal product and you automate, you just make more marginal product. And our (indiscernible) to ensure that we are making good product and that we're doing it on purpose and then to phase in volume increases or automation to do that. And so if we start to cap off of getting cost improvements out of the yields, then we'd expect to see some improvements based upon automation and further process development.

  • Steve Ogilvie - Analyst

  • And then is there any technical reason for a diabetic to wait for the seven-day? And are you going to aggressively market against that or are you just going to kind of wait and bide your time until the seven-day comes, because it's not pushing the three day when the seven-day is coming?

  • Andy Rasdal - CEO

  • Well, there's no clinical or technical reason, but I know a whole lot of people who never buy a new car in its first model year, and clearly, I think not unexpectedly, we see that and as word spreads that timelines are getting closer; that's kind of a natural response and I would suffice it to say that we've got a very experienced, creative and motivated field force that I believe will deal with that objection real-time. Nonetheless, we do hear it.

  • Steve Ogilvie - Analyst

  • But if someone bought a three day today, they're not out of luck when the seven-day comes. They can switchover easy enough?

  • Andy Rasdal - CEO

  • Yes, but they'll have to be on the seven-day system to gain all of the benefits from the seven-day system. We will, of course, work with good customers to make sure those upgrades are done effectively, but yes.

  • Operator

  • Alex Arrow, Lazard Capital Markets.

  • Alex Arrow - Analyst

  • Andy, on the guidance that you gave for the current quarter revenues coming in, I believe but it was similar to the way the third quarter and the fourth quarter has been when there was a supply constraint. Can you help us understand if the supply constraint has been largely or completely eliminated as of January 15? And the sales reps that have the last couple of quarters to do the educating of the docs and patients, why is it that the guidance is for a similar level of revenue as third quarter, fourth quarter?

  • Andy Rasdal - CEO

  • Well, I think we, what we've seen, I don't know if it's guidance, but it's the best that we can give at this point is the run rates are similar in all aspects and I think, as I said, I think if I listen to the sales reps and I spent a lot of time with it, that certainly after we weren't able to fulfill customer orders and sales rep demand in Q3 and 4, as well as some of the center performance issues, that patients are going -- or physicians are going to put a handful of patients on those, see how they do, make sure that they work and patients are happy with them and that they can be appropriately supported before they expand, and that takes more than just one or two weeks. And so I think it's realistic to expect that after you do that, that there's some time to sort of restart the channel. Clearly we're trying to re-create the experiences, but as we said, unless those rates accelerate and I'm optimistic that the product availability and the product performance and the capabilities of our field force has a good chance to impact that. Based upon where the run rates are today, I can't tell you that they are up.

  • Alex Arrow - Analyst

  • On Abbott, I know they've been saying that they're about to launch for quite some time now. Are you hearing from the field that (indiscernible) are beginning to get frustrated or they feel more or less the same about the navigator as they did before? Any color you can give us on the Abbott situation?

  • Andy Rasdal - CEO

  • I don't really think it's our place to provide any sort of just general feedback from the field that is substantial to rumor. I think to best comment that would be Abbott. Certainly in a new category, several good competitors, all out to help patients and driving the category are welcome and important in moving this thing forward. But we don't hear anything outside of the commentary that they've had on their calls and where they've guiding specifically related to the Navigator product.

  • Alex Arrow - Analyst

  • And on the [hixpix] code, the processes you described is that Medtronic and DexCom have both applied, did Abbott then become part of the process as well? Can you help us understand what impact Abbott might have on the [hixpix]?

  • Andy Rasdal - CEO

  • Well, probably Abbott would be the best commentary on that. Certainly my understanding is that you have to have FDA approval to actually file an application and that would leave us and Medtronic, but in the same way that we didn't have that in 2000 -- at the end of 2005 and we essentially became party with Medtronic's [hixpix] application through the open hearings, through some of the Congressional hearings and through [IMCAC] and some of those other things, as Abbott brings their product forward, I would imagine with their history, they would play an important, meaningful role in that process as well.

  • Andy Rasdal - CEO

  • All right. Great. Thank you very much. That ends our call.

  • Operator

  • And again we'd like to thank everyone for your participation in today's conference call and wish everyone a good day.