德康醫療 (DXCM) 2007 Q2 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to today's DexCom's second quarter results conference all. Today's call is being recorded. (OPERATOR INSTRUCTIONS) I would now like to introduce your speakers for today. First we have Mr. Jeff Roper interim Chief Financial Officer, Mr. Steve Pacelli, Senior Vice President of Corporate Affairs, and Mr. Terry Gregg, Chief Executive Officer. At this time, I will turn the conference over to Mr. Steve Pacelli for opening remarks. Please go ahead, sir.

  • Steve Pacelli - SVP, Corporate Affairs

  • Thank you. I would just like to begin with a brief safe harbor statement. Statements we will make on this call may constitute forward-looking statements. These statements reflect management's expectations about future events, operating plans and performance and speak only as to the date hereof. These forward-looking statements involve a number of risks and uncertainties. Factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements are detailed under the risk factors and elsewhere in our annual report on Form 10 K, our quarterly report on 10 Q and other reports as filed in the FCC. We undertake no obligation to update publicly or revise forward-looking statements for any reason. I would now like to turn the call over to our President and Chief Executive Officer, Terry Gregg.

  • Terry Gregg - President & CEO

  • Thanks, Steve. I would like to set forth our agenda today. We are going to start off with a financial review of the second quarter with Jess Roper followed by a strategic review of the Company. I'd like to lead that off with really a a vision for the future. We will give you a bit of an update on the Seven launch. We will touch on reimbursement, go over our in hospital continuous glucose monitor, provide you with some additional information on the third generation sensor technology that we are developing, and summarize with some conclusions and then move into the Q&A. Jess?

  • Jess Roper - Interim CFO

  • Thank you, Terry. DexCom Inc., the day before reported a net loss $11.3 million for the second quarter of 2007, or $0.40 per share, compared to a net loss of $11.2 million or $0.41 per share in the second quarter of 2006. We reported revenues of $863,000 for the second quarter of 2007, up 80% compared to revenue of $479,000 for the second quarter of 2006. We added 702 new customers during the second quarter and that number includes 77 seven day systems, After receiving approval of our Seven system, on May 31st we saw a delay in customers wanting to purchase our 3 day systems for a three week period until we launched our Seven system ADA. Customers preferred to wait for the Seven system. We decided not to aggressively address this customer hesitation prior to ADA as we strongly preferred to wait and start new customers on our Seven systems so they can realize its improved performance and features . We did announce an upgrade for our Link Q2 both for our existing three day customers and for those new three day customers who did not want to wait for the Seven launch to get started on the CGM . For $150, existing customers can upgrade to the Seven system. Any customer who purchased a three day system in June was offered a bundled upgrade. For those 167 customers with a bundled upgrade, we deferred $150 of revenue for each customer to allow their upgrade in Q3. This deferred revenue is approximately $25,000, and should be recognized in Q3 as we complete those upgrades.

  • We continued to have good supplies of Seven inventories and continue to improve our manufacturing operations to allow more efficient scaling and to support the two product platforms as well as we upgrade programs. Hence, our revenues for the quarter were up over 280% compared to the second quarter of 2006. Our gross margin loss of $2 million for the second quarter of 2007 increased $431,000 compared to a loss of $1.6 million during the second quarter of 2006. However the second quarter of 2006 loss was lowered by $1.1 million due to a credit. In that period the materials purchased and expensed for 2005, were still developed by the [stage] organization. Without the impact of the 2006 credit, the gross margin will have improved over $500,000 in 2007 to 2006. The improvement was due to our higher revenues as well as lower direct labor spending. We're very pleased to see the continued improvement in our manufacturing capabilities and yields which translated into better gross margin performance.

  • Research and development decreased $1.3 million to $4.0 million for the second quarter of 2007 compared to $5.4 million for the second quarter of 2006. Changes in R&D expense included $500,000 in lowered clinical and regulatory costs, and $1 million in lower development expenses, partially offset by higher quality assurance costs. The major elements of the decline in Research &Development costs include $467,000 in clinical trial expenses , $262,000 in lower tooling and fixturing costs and $163,000 in lower facilities costs. Our clinical trial expenses were higher in the second quarter of 2006 as we were in completing a civil trial for a seven day sensor submitted on behalf of the FDA. Although the clinical costs were lower this quarter we expect those costs to return to previous levels as we move to new products and indications through the regulatory cycle. The tooling and fixturing costs were relatively high in the 2006 quarter as we were completing the scaling up of a three-day product launch. Those expenses have moderated as our manufacturing operations mature. R&D expense was flat sequentially with Q1 2007.

  • SG&A expenses increased $537,000 to $5.5 million for the second quarter of 2007 compared to $4.9 million for the second quarter of 2006. The increase was primarily due to $419,000 in higher general &administrative expenses and $118,000 higher sales and marketing expense. Major elements in the increased expense include $853,000 in higher compensation expense, and $154,000 in higher consulting costs primarily due to $400,000 in separation payments to our former CEO which was partially by $129,000 in lowered legal expense. Stock based compensation costs declined $50,000 to $862,000 in the second quarter of 2007 compared to $912,000 for the same quarter in 2006. The $269,000 in one-time expense related to the CEO separation cost for extended option vesting extended exercise period was more than offset by the decline in value in vesting grants overall. Operating loss of $11.5 million improved $364,000 compared to our operating loss of $11.9 million for the second quarter of 2006. This slightly higher gross margin loss was more than offset by $795,000 in lowered operating expenses. Net interest income interest expense decreased $532,000 to $204,000 for the second quarter of 2007 compared to $736,000 for the second quarter of 2006. The decrease was due to a $914 000 increase in interest expense primarily related to our $60 million of convertible loan, partially offset by $382,000 higher interest income.

  • We ended the quarter with a strong balance sheet. As of June 30, 2007, we had $84.2 million cash equivalents and working capital of $80.1 million. We continue to focus on controlling our expense and cash burn continue to be pleased with our progress during the second quarter. Net cash used in operating activities decreased $9.2 million to $15.8 million in six months ending June 30th, 2007, compared to $25.0 million net cash for the same period in 2006. The decrease in cash usage operations is primarily due to $3.2 million less cash to invest in inventories, $3.7 million less cash used to pay down payable and accrue liabilities compared to the same period in 2006. During the quarter we invested $391,000 in capital equipment and facilities to support our business. As a result of non-cash expenses including $1.6 million of stock based compensation, $645,000 in depreciation and liability changes, our cash usage from operations of $8.3 million in the quarter was much less than the reported net loss of $11.3 million. We continue to build our business in a cash efficient manner. I will now, turn it back over to the CEO, Terry Gregg.

  • Terry Gregg - President & CEO

  • Thanks, Jess. Although I have only been at DexCom for approximately five weeks I have been involved in the diabetes space for more than a decade. During that time I have had the opportunity to participate in and lead the adoption of novel technologies that significantly improve the clinical outcomes of patients with diabetes. I am fortune to once again be given that leadership role in the further development and adoption of a new technology that is able to address a very large diabetes population. The clinical consequences of diabetes hinge on the inability to maintain normal glucose levels. Insulin is a tool but not a cure. Other injectables and oral agents may help to reduce the extreme excursions in glucose levels but the real key to reducing the unforeseen clinical events of diabetes is understanding the glycemic profile of patients. This can only be accomplished by continuous glucose measurements, and if glucose is the culprit then knowing the total glucose exposure, a patient experiences each day is extremely an important in controlling these excursions.

  • With our leadership role in the category, we will continue to invest in activities, to grow the category by increasing acceptance of CGM as the best standard of care for diabetes management. While our second generation continuous glucose monitoring system, the Seven, is approved for adults, we are actively engaged in an effort to secure a pediatric indication and we are currently conducting feasibility trials within that population. As we said previously, we believe that there are performance differences between pediatric and adult patients and we intend to commercialize a product optimized for the pediatric population. I believe that many of the improvements I will outline in our discussion on our third generation product will be applicable to a product optimized for this key target population.

  • Diabetes is a global disease and I believe DexCom should be participating in key international markets particularly the European Union countries. We have begun pursuing a CEO (inaudible) for the Seven and expect to provide an update regarding timing on our next quarterly call. Additionally, we have been asked by several European diabetes thought leaders to begin discussions about introducing the Seven in Europe in 2008. To that end we will be attending European Association's for the Study of Diabetes annual meeting in Amsterdam later this year to begin that effort.

  • I have been asked recently about pending partnerships, particularly with the pump company. We're very receptive to having discussions with potential partners and believe an open architecture whereby our sensor system is adaptable to multiple pump models representing the best interests of the patients and DexCom. Since the pump represents a relatively small percentage of the insulin using population, we believe it would be foolish to align the Company with a single pump manufacturer. I recognize patients utilizing continuous insulin infusion systems are traditionally considered early adopters of technology. However, any patient on a pump today can in fact use the DexCom CGM system to aid them in managing their diabetes.

  • The discussion surrounding integrated and automated pump sensor systems, creating what is currently termed an artificial pancreas, is extremely premature. As you well know, diabetes is a multifactorial disease that requires more sophistication than pumps, sensors and algorithms to effectively mimic the metabolic and physiological reactions for rising or falling glucose levels. There are numerous internal and external factors that hardware and software simply cannot duplicate. As we previously announced, on May 31st, we received approval from the FDA to begin commercially marketing our second generation continuous monitoring system, the DexCom Seven. The Seven is the first continuous glucose monitor to be approved up to seven days of continued use of a single sensor. It is indicated for use by adults over 18 with type I and type II diabetes at home or in health care facilities as a complement to a standard home glucose monitoring device. The indication statement clearly states that the Seven aids in the detection of episodes of hyperglycemia and hypoglycemia facilitating acute and long-term therapeutic adjustments which may minimize these excursions. We're very pleased with the continued emphasis on the therapeutic aim and labeling of the device. We believe the Seven is a better performing second generation product with both true performance benefits and more ease of use and convenience. As we ramp up the launch of the Seven the next several months, we anticipate it will create more positive initial experiences for patients and health care professionals which we believe is critical to building this emerging category.

  • As we move into the third quarter our focus will be on the 40 to 50 largest diabetes centers in the U.S. We are now, providing initial launch inventory for these accounts. We will continue to move methodically through the rollout process with the Seven and to make use of all rampup lessons we learned with the FTS three day launch. We believe the improvements we have made in our manufacturing operations with the three day are transferable to the Seven. Our initial focus will be on new patients although we hope to rapidly move to upgrading those loyal current users with the desire to move up to the Seven.

  • Patients who purchased the Seven received a new version of our PC software. Our new software has more extensive analytical and statistical tools to allow patients and their doctors to more fully fully analyze and interpret glucose data to guide them through the most appropriate use of CGM to improve glucose control. Additionally during the second quarter we filed a PMA supplement with the FDA to add additional functionality to the Seven to enable patients to calibrate the system using any brand of blood glucose meter. We expect the Seven will generate new excitement and interest in the CGM category. The Seven provides us a chance to meaningfully revisit the benefit of continuous glucose monitoring with both patients and health care professionals who might have been resistant to any first generation product, who might have been an unfavorable initial experience with CGM, or who might have wondered if DexCom would only be one product company. With the Seven we continue to provide leadership to the category in bringing a second-generation product forward.

  • Product performance and quality as measured by complaint rate data continues to be positive while at the same time manufacturing volumes have increased as we ramp up the launch of the Seven. Qualitative reports from our field personnel about product performance are also encouraging and we expect this to continue as we roll out the Seven. One of our single source suppliers of materials used in our membrane system has recently experienced difficulties in providing us with the materials which consistently meet our specifications. We're working closely with the supplier to resolve these issues. Additionally, we are taking steps to bring on a second source supplier of these materials.

  • We continue to receive unsolicited reports from patients and physicians of favorable coverage decisions and our own reimbursement organization is working to most appropriately build upon these experiences to create wider reimbursement especially with private payers. We continue to believe the private payers are a very important constituency in diabetes. Novel technology introductions and adoptions is always a reimbursement challenge. We are fortunate to have certain standards established for glucose level goals as outlined by the DCCT and ADA standards of care. The payer community is well versed in the health/economic benefits of better glycemic control in the diabetes population. Our goal is to establish the role of CGM in assisting patients to better manage their glucose excursions, both hypoglycemia and hyperglycemia.

  • At the present time more at risk patients of the logical recipients of coverage. However, it is clear there are a number of patients who simply cannot achieve acceptable glucose levels without the continuous glucose management system. The reimbursement process takes time, patience and perseverance. The JDRS-sponsored randomized reimbursement trial is continuing to enroll. The design of the trial is very comprehensive and should provide a wide and thorough array of data the payers will find useful for coverage decisions. Our own outcome study which demonstrated statistically significant improvement in (inaudible) C levels in 140 patients using the DexCom CGM system was peer reviewed/published in the June issue of Diabetes Technology and Therapeutics. When combined with our two previous publications demonstrating improved outcomes, this outcome data should allow us to more aggressively approach payers. We are making progress but I cannot predict when broad coverage will be generally available.

  • We continue to believe that the in-hospital application of CGM is a very important and large market opportunity especially in a critical care arena. Published data continues to provide compelling evidence that intensive glucose control and insulin therapy and post surgery intensive care units significantly reduces mortality and morbidity. Intensive glucose control and insulin regimen therapies are continuing to be addressed and evaluated by accreditation bodies. Without specifically trying to quantify the market at this time, there are an estimated 100,000 critical beds in the U.S., and 25% of U.S. hospitals have implemented in intensive glucose control and insulin therapy often involving 12 to 24 bedside finger stick tests per day. There are also estimates that 25% of patients admitted to the hospital have diabetes. There are approximately 450,000 cardiovascular surgeries per year and approximately 30% of these patients have diabetes.

  • For those hospitals practicing intensive glucose control, CGM could significantly reduce the workload and costs while improving the quality of care. Studies have estimated the costs of these bedside finger stick tests at $3 to $5 per test. We continue to conduct human feasibility trials with our in-hospital system and are continuing to refine the product. We're very pleased with the speed and progress of the project and we are working to rapidly evolve the technology into a commercial product platform. In early July we had a productive meeting with the FDA to determine the most appropriate regulatory pathway for product approval. Although it is still too early to predict commercialization timeline, we are working to define the best clinical and regulatory path for the product.

  • Moving to our generation III products, we believe the continual introduction of next-generation products with improved performance are key to the development and the growth of the CGM category. We are currently in the final development stages for our third generation short-term continuous glucose monitoring system and we expect to complete a pivotal trial for this next generation product early in the fourth quarter and file a PMA supplement with the FDA shortly thereafter. We have incorporated many improvements into the device to enhance usability and configurability including a 75% reduction in implanted sensor sides. This is especially important considering DexCom already has the smallest sensor available in the marketplace. It will further reduce the needle size down to a 28 gauge from the current 26 gauge.

  • We will add the addition of trend barrels to complement our trend graph, more customization including unique tones for high/low glucose levels, vibrate only capabilities, alert/snooze. We will add event entry capabilities such as insulin intake, meals and exercise and that will also include the addition of a 12 and/or 24 hour screen. We anticipate that our next generation system will make the device even more user-friendly and intuitive to allow patients to be trained more efficiently and begin using the system more rapidly and with less follow-up on support from DexCom or the prescribing sites required.

  • In summary, as we launch the Seven we believe as much as ever that CGM will increasingly play an important role in the diabetes management and will be a growing and profitable business in the future. DexCom has emerged as a clinical technology and market leader in CGM. We are determined to ensure DexCom has the presence and staying power to help drive development in the CGM market and to meaningfully participate as it evolves. We remain committed to our three-pronged strategy.

  • First, continued developing next-generation products for the performance that appeals to larger segments of the target population including potential partnership that provide for the integration of diabetes management technologies. Second, create the data, experiences and the evidence for health care professionals to widely accept t and adopt CGM as the primary means for diabetes management. We believe the approval and launch of the DexCom Seven demonstrates our ability to stay focused and rapidly introduce products with new product improvement and product enhancement. We expect to continue moving our third generation short-term continuous monitoring product and our in hospital products rapidly towards commercialization. Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS) We're going to take our first question from Tom Gunderson of Piper Jaffray.

  • Tom Gunderson - Analyst

  • All right. Good afternoon. Just a couple to clarify, with 702 new customers in the quarter if I heard correctly, but revenues were flat and I believe that was due to --if you could just say it one more time in a different way -- a three week hiatus where people were waiting to maybe go to the seven day and were holding back on the three day reorders? Is that right?

  • Terry Gregg - President & CEO

  • Tom, this is Terry.That is right. We saw that there was some holdout from the three day moving. If you remember we really introduced it at the ADA in Chicago in mid June. So there were people were waiting until after the initial launch.

  • Tom Gunderson - Analyst

  • And as far as any back order or turnaround time issues Terry, now, with this seven day or the three day?

  • Terry Gregg - President & CEO

  • No. We are not in any back order situation.

  • Tom Gunderson - Analyst

  • And you said you wanted to go to the top 40 to 50 diabetes center with the seven day. Where are you with those on the three day right now?

  • Terry Gregg - President & CEO

  • I think the original approach was to get the information out with regards to the benefit of CGM to a large population. I think at this point we have -- I would say we have refocused the sales force to go back in and identify those key thought leaders at very large practices, and certainly we are participating with the three day in some of those centers, as well. But I think we have been scattered at times and we are definitively focused and have identified those centers and have been calling on them for the last four to five weeks.

  • Tom Gunderson - Analyst

  • Okay, and the last question and I will let others ask is you talked about the importance of a pediatric indication. I know the JDRS study is using the seven day. Is your studies now going forward to gather data for the FDA for pediatric indications on the seven day or on the third generation or anything else?

  • Terry Gregg - President & CEO

  • At the present time we are engaged in the pediatric population with the seventh day. That said, as you look at the benefits of a third generation, we believe that given some of the challenges of that pediatric population, with rapid glucose changes due to a variety of hormonal changes and other challenges that they experience, we can better accommodate that with the third generation.

  • Tom Gunderson - Analyst

  • Okay. Thanks Terry.

  • Operator

  • We're going to take our next question from Mimi Pham of HSBC.

  • Mimi Pham - Analyst

  • Hi. Good evening. Could you remind us of your current central manufacturing capacity and do you have goals in terms of improving that for exiting '07 and into '08?

  • Terry Gregg - President & CEO

  • Mimi, this is Terry. We haven't disclosed that previously and I would not want to do that at this time.

  • Mimi Pham - Analyst

  • Given the delay in the Abbott navigator device, are you sensing the doctors and patients that they are waiting for that to come out before ordering the seventh day? Is that impacting orders for our people -- That is not really coming into play?

  • Terry Gregg - President & CEO

  • I can't really comment on what patients are doing relative to a competitor. I can only comment that the results we are experiencing from the field and listening to patients on their call-in and their letters and testimonials that they are very satisfied with the Seven. And I wouldn't want to comment any more than that.

  • Mimi Pham - Analyst

  • Thanks and the last question, do you have a sense of the attrition rate for the patients on the three day STS?

  • Terry Gregg - President & CEO

  • We are still trying to capture that information in order to provide us with feedback to go back and understand if there is particular reasons for the attrition but it is not something that I can dial in at this point. I have asked to capture that information but right now, that is not available to us.

  • Mimi Pham - Analyst

  • Thank you.

  • Operator

  • We'll take our next question from Bill Plovanic of Canaccord Adams.

  • Bill Plovanic - Analyst

  • Great. Thank you, can you hear me okay?

  • Terry Gregg - President & CEO

  • Yes, Bill.

  • Bill Plovanic - Analyst

  • Fantastic. Just a couple of questions here. In terms of the pediatrics product, is the gen three the pediatric product or are they two separate products?

  • Terry Gregg - President & CEO

  • Well, clearly the Seven which has been in clinical trials with the pediatric population is a product and the third generation is yet another product. So, I think we are talking about two different products. As I indicated in my comments I believe that the next generation, what we call the third generation product has attributes associated with that will more readily adopted itself and optimize to the pediatric population.

  • Bill Plovanic - Analyst

  • Okay, so they both address the pediatric population?

  • Terry Gregg - President & CEO

  • That is correct.

  • Bill Plovanic - Analyst

  • Okay. Thanks for the clarification. You mentioned 75% decrease in sensor size for gen three, is that in the transmitter that you're talking about?

  • Terry Gregg - President & CEO

  • No. We are talking about the sensor.

  • Bill Plovanic - Analyst

  • The actual sensor?

  • Terry Gregg - President & CEO

  • Correct.

  • Bill Plovanic - Analyst

  • Okay. And then in terms of the calibration, I take it will be a manual calibration as you go forward? That's the DMAS that you filed?

  • Terry Gregg - President & CEO

  • That is correct. Yes.

  • Bill Plovanic - Analyst

  • Okay. Lastly, you mentioned that probably the target population at least in the near term in terms of gaining reimbursement is going after that high-risk population for hypo and hyperglycemic. If you had to nail it down in terms of the type Is using and the type IIs that are effectively type Is at this point, what percentage of those populations would you think were at risk or the target that you're speaking of?

  • Terry Gregg - President & CEO

  • Well, I mean, from my now 13, 14 years of experience in diabetes, I would say 100%. I mean, these patients have hyperglycemic excursions on a daily basis. That has been demonstrated by a number of studies. Does that translate into extreme at risk patients, I don't think we entirely know the answer to that yet. That was part of my earlier comment in regards to the total glycemic excursion and the total glycemic exposure.

  • Until we get a better understanding of what that means to patients without diabetes who don't suffer the long-term clinical consequences, it is an evolving knowledge base that we don't have a good handle on. Clearly, those who have demonstrated, ER visits is a good example, it is fairly easy to know that they are at a higher risk because of their clinical consequences on an acute basis. We know that on the hyper side, the long-term challenges to the cardiovascular system alone, as a result -- excessive glucose exposure can be devastating. I am not trying to evade the question, I just don't think anybody has the statistics we're looking for right now.

  • Bill Plovanic - Analyst

  • Okay and then last question. At this point in time, I don't know if you have this data or not but what percentage of your customers are on insulin pumps?

  • Terry Gregg - President & CEO

  • We don't have that data.

  • Bill Plovanic - Analyst

  • All right. Great. Thanks, Terry. I appreciate it.

  • Terry Gregg - President & CEO

  • You bet.

  • Operator

  • We'll go to our next question -- Ben Andrew of William Blair.

  • Unidentified Participant - Analyst

  • Hi. It's actually Matt, in for Ben. There are a couple of quick questions. In terms of conversion from the three to the seven, do you have any sense of the people who have done that so far or how many are expecting to do that over the next couple of months?

  • Terry Gregg - President & CEO

  • We have got a list of patients who have already converted, which we haven't disclosed publicly, and we also have a list of patients that are waiting to receive their upgrade, and again we haven't disclosed that information to the public at this particular point in time.

  • Unidentified Participant - Analyst

  • Okay. Any sense or attempt to quantify the lost sales in the quarter from the delay in ordering?

  • Terry Gregg - President & CEO

  • We haven't quantified that in dollar terms. But again, we think think we experienced about three week delay or hesitation by the customers.

  • Unidentified Participant - Analyst

  • All right. So we can do the math on that. Last question, sales, any acceleration in turnovers? That has pretty much been tracking as it has been over the last few months.

  • Terry Gregg - President & CEO

  • I haven't -- I have been here five weeks, I haven't seen any sales force change or turn over in that time frame. I think we are pretty stable. I am very comfortable with the current size of the sales force.

  • Unidentified Participant - Analyst

  • No major plans to increase that in the quarter?

  • Terry Gregg - President & CEO

  • No. We are still taking a look at it but our challenge, this is one of the discussions we have had with a number of potential partners about them adding significant sales bodies to carry our product. The problem we're looking at is an to sales force sizing issue, it is getting right to the key thought leaders, getting them to embrace the technology as a primary tool, not a secondary or tertiary tool. That is why we refocused the sales force into these 40 to 50 key clinics at least north of 3,000 type I patients per site in order to get deeper into those particular arenas. I think we're well staffed from that standpoint to simply carry our product isn't somebody else's bag, doesn't make a lot of sense to me right now.

  • Unidentified Participant - Analyst

  • Okay. Great. Thank you.

  • Operator

  • We go next to Steve Ogilvie at ThinkEquity.

  • Steve Ogilvie - Analyst

  • On the sales force, Terry, how many people do you think you need to adequately cover those 40 to 50 key accounts?

  • Terry Gregg - President & CEO

  • We are sized at around 45 and I am comfortable with that number, with four regional directors, geographically distributed. On top of that we have five insurance reimbursement specialists. I think that is the right size for the Company right now, and to address adequately the key centers we are approaching, and that we are in.

  • Steve Ogilvie - Analyst

  • As you said, with the uncertainty of a reimbursement and growth, how do you view the future kind of philosophically, quick revenue ramp? Are you ready to hire a lot more or if it comes for several years, is it something where you send the not or is it 40 to to to 45 people?

  • Terry Gregg - President & CEO

  • That is a big question on your part -- several years, I --- this is trench warfare right now. All of the companies in that space are going to experience the same thing. We did 12 years ago, 10 years ago, when pumps were just being introduced on a more global basis, reimbursement is going to come. It is not a matter of if it is going to come, it is a matter of when it is going to come and we are continuing to see better coverage every month. Again, without broad based coverage, I don't know when that is going to happen.

  • If you look at when the JADR of trial are supposedly going to conclude at the end of next year, and so that will be available sometime in the 2009 time frame. When asked about the timing of reimbursement, I have to be vague. I don't know exactly when we're going to get broad-based coverage. I certainly think even today we are getting somewhat off coverage, we see that growing on a monthly basis. But until the time that there is a wide coverage decision by some of the larger third-party payer systems, we're going to keep staff about where we are at in the sales force.

  • Steve Ogilvie - Analyst

  • Okay and then last thing, can you just maybe speak to the commercialization of the hospital products, how do you want to push that? Do you think you will leverage your current sales force or is that going to be someone else?

  • Terry Gregg - President & CEO

  • We need to go into partnership clearly with that. We have got a superior technology that is wonderful. We don't understand the hospital market. I know what it takes to build a sales force, I have done it on a couple different occasions, and that is a marketplace that we need to partner up with somebody.

  • Operator

  • We will go next to Brian Wong, First Albany Capital.

  • Brian Wong - Analyst

  • Thanks. Good afternoon. Hi. I was wondering if you could talk about the manufacturing process? I believe in the past you said that there were about three areas that you could automate the manufacturing process. One of them was up and running. Are the other two areas now automated or--

  • Terry Gregg - President & CEO

  • Brian, I am not sure I ever said that. And again, I am looking to the two guys who have been here longer than me for clarification.

  • Steve Pacelli - SVP, Corporate Affairs

  • Yes, Brian. This is Steve. I am not sure we have ever characterize this being three processes that we could automate. I am not sure I follow what you are referring to.

  • Brian Wong - Analyst

  • Okay. I was in my notes from previous -- All right. And in terms of the next generation, I guess the third generation, product, I don't know if I missed this, but did you say the calibration time was going to be different at all from what you have now?

  • Terry Gregg - President & CEO

  • We haven't commented on that. And I am not ready to comment on it on this call.

  • Brian Wong - Analyst

  • Then lastly, in terms of your disposables versus the durables sales, would you be able to say whether or not the majority of the revenues came from disposables this quarter or are you still kind of half and half or what?

  • Terry Gregg - President & CEO

  • We don't break that out yet. Maybe at some future date, we will, but not for this call, I really don't expect to comment on that when we get into the '08 time frame and I get better optics going forward.

  • Brian Wong - Analyst

  • Got you. All right. That's it for me. Thanks.

  • Operator

  • We'll take our next question from Caroline Corner at Montgomery Company.

  • Caroline Corner - Analyst

  • Hi. Thanks for taking my call. So, I just wanted to follow-up a little bit, you said you had some favorable coverage decisions, no broad coverage yet, and that's to be expected at this point. But can you comment on prescription pays vs. purchase pays? I know there has been some commentary around those metrics, I was wondering if you could let us know if prescriptions are still really outpacing purchases? Just if you could comment on that?

  • Steve Pacelli - SVP, Corporate Affairs

  • Caroline, this is Steve. Let me answer that one. What we disclosed previously is that we received anecdotal evidence from some of the key thought leaders we speak to on a regular basis, they were prescribing the product and those prescriptions were not necessarily translating into orders. Again, we don't have anything we could quantify or disclose at this point. This is just basically reports we are receiving from the field. I haven't seen anything new come in since the last update we were given on that.

  • Caroline Corner - Analyst

  • Okay great. That is helpful. The other thing I wanted to ask about with regards to the calibration methods. You said you had a PMA supplement was under review, that means we could use any of the finger stick devices, the blood sugar, but calibration. Could you give us a sense of the timeline when you would be approved? Or other devices?

  • Steve Pacelli - SVP, Corporate Affairs

  • Yes. What we said, typically a PMA supplement can take statutorily 180 days, but if the FDA interjects questions, the process can typically take -- We would say between six months plus or minus two. This is not a complicated PMA supplement but I can't guarantee that it will clear, it is within the purview of the FDA at this point. Six to eight months, we could be ready to launch something.

  • Caroline Corner - Analyst

  • Final question, with regard to the hospital product, you mentioned partnering -- You said previously that you would be looking for a partner in this area, could you give us more clarity as to when you would get a partner on board? Would it be in the development stage or would it be after you have proof of concept? Where are you thinking of joining with another company in order to get this product out on the market?

  • Terry Gregg - President & CEO

  • We really haven't discussed that in great detail at the Board level so I will give you my personal opinion as the new CEO and the Board may turn around and smack me for this. My belief system is that we need to take this product well beyond the feasibility and to the pivotal, all the way through a potential PMA filing or whatever the ultimate regulatory pathway is. Obviously during the course of that process to engage in discussions about a distribution partner, but I don't have any intention whatsoever of selling this asset until we have fully recognized and realized the tremendous value this particular product line brings to the Company. So, much later than where we are at today.

  • Caroline Corner - Analyst

  • Thanks so much for taking my call and good luck (inaudible).

  • Terry Gregg - President & CEO

  • Thanks.

  • Operator

  • We go next to [Alec Barrow, Levart Capital Markets].

  • Alec Barrow - Analyst

  • Thanks. Good afternoon. Did you give the exact number of days of the 90 in the June quarter that the seven-day (inaudible) was available? I know when it was approved, but when was it actually available to be bought by customers?

  • Terry Gregg - President & CEO

  • I'm sorry. You were fading out. Can you repeat the question, please?

  • Alec Barrow - Analyst

  • I apologize. The questions was, of the 90 days in the quarter, how many the seven-day [essential] was available to be purchased by customers?

  • Terry Gregg - President & CEO

  • No. We did not. We mentioned the approval date previously of the Seven and there was a hesitation of about three weeks.

  • Steve Pacelli - SVP, Corporate Affairs

  • The approval date was May 31st. The ADA was the third week in June. Realistically, in terms of actual days, two to three weeks in the month of June the we had the product technically available.

  • Alec Barrow - Analyst

  • Okay. the hesitation, I thought you were describing customers hesitating because they were not available because they were waiting or did you mean was it between when you got the approval and when you made available? Is that what you mean by hesitation?

  • Terry Gregg - President & CEO

  • Correct. Correct.

  • Alec Barrow - Analyst

  • Okay. Was that because you had to ramp up supplies or because you had a specific reason for holding off when it was available?

  • Terry Gregg - President & CEO

  • Well, I think we wanted to be sure we had an adequate supply and rollout. Remember, we certainly learned, hopefully from the rampup when we launched the SEF three days, we needed to make sure all systems were in place internally to launch the product.

  • Alec Barrow - Analyst

  • My next question is are the product performance issues that came out with a three day sensor in the past, can you say whether the seven day has been free of those? Are there any kind of product performance issues you can comment on?

  • Terry Gregg - President & CEO

  • I get a weekly complaint data grabbing system from all of the possible complaints and I can tell you they are deminimus in terms compared to the challenges that the three day it -- We're just not getting any of the sensor complaints that we had with the early stage of three day.

  • Alec Barrow - Analyst

  • Okay, my next question is about margins and price points. Is there anything you can give us far as -- as we plot out how the seven day is going to affect your profitability versus what the three day is going to do? Can you give us any direction?

  • Steve Pacelli - SVP, Corporate Affairs

  • Not at this point. We're not giving any forward-looking statements with regards to our financial performance at this time.

  • Alec Barrow - Analyst

  • Okay. Even just, how about that there is a higher margin on the seven day than the three day?

  • Steve Pacelli - SVP, Corporate Affairs

  • We're not commenting on that and I would prefer at this point not to speculate or comment. Obviously, in any situation, you have got a bill of materials versus cogs and they are directly affected by quantity. Until we understand our manufacturing process or increase optimization, that number is gong to change literally on a weekly and monthly basis. Right now, we are ramping up from the manufacturing standpoint. Any number I gave you today wouldn't hold within 30 days.

  • Alec Barrow - Analyst

  • Okay. That is totally understandable. My last question is about the receivers, can you clarify it, is the receiver compatible with the three day sensor or do you need an enhanced receiver to use the seven day?

  • Steve Pacelli - SVP, Corporate Affairs

  • Actually, he receiver, we are currently upgrading the receiver. The receiver requires a software upgrade. What we do need to replace with the patients is the transmitter. There is a new [asik] in the transmitter, so we are doing that on a very calculated basis at this point.

  • Alec Barrow - Analyst

  • Okay. So it is an upgrade? So, patients send in their old receivers, you give them the upgrade and then you send it back to them? Should we be thinking about that when we model it for like a refurbishing program? The trade up of software upgrade?

  • Steve Pacelli - SVP, Corporate Affairs

  • Yes, I think that is fair. That is how we have (inaudible) the ramp is supposed to occur. We are supplying new patients and working to upgrade those patients that are on the three day that wish to upgrade.

  • Alec Barrow - Analyst

  • Okay, and a similar way that you have indicated the top 50 accounts, can you give us a number of how many have been upgraded so far?

  • Steve Pacelli - SVP, Corporate Affairs

  • We haven't broken that down.

  • Alec Barrow - Analyst

  • All right. Thanks very much.

  • Operator

  • We'll take our final question from Sara Michelmore at Cowen and Company.

  • Sara Michelmore - Analyst

  • Hey. Good afternoon. Terry, if I could just ask you to clarify something you said about your source of membrane materials, has that been a key source of variability in the product you look to improve or has it just the membrane you have been receiving hasn't met the specs and hasn't been going into a product?

  • Terry Gregg - President & CEO

  • No. It hasn't been in another product. I mean, we constantly receive materials. We noticed there has been some variability in the materials we have received. So that has required our attention to reduce that variability with the supplier but there is no issue from that standpoint. Obviously my background in operations, I hate single source. I always liked dual -- at least dual source. And so we saw this beginning to show up and having to take in more lots to screen, it became obvious we needed to help the vendor understand what our needs were particularly on a longer-term basis and in the process get a backup supplier ready because this would require regulatory filing. Outside of that I wouldn't read anything into it.

  • Sara Michelmore - Analyst

  • Okay and you mentioned you were heading into a scaling period for the Seven. Obviously when the three day was launched last year the company ran into problems with the scale up. A lot of changes and improvements were made to the manufacturing process at that point. How confident do you feel that the Company is going to be able to pull off a problem-free scale-up process here with the seven day? Is everything in shipshape in terms of the operational piece of it?

  • Terry Gregg - President & CEO

  • Yes, absolutely. I am looking at yields that come out of the manufacturing environment, and am very happy with the current yield. We are not experiencing any challenges in the seven day. Again, I think we learned from the three day what went right and what went wrong. We corrected what went wrong. No issue to speak of at this point. I think some of our future looking challenges, I would like to see some optimization obviously, from a manufacturing standpoint. We are doing things that I think we can be more efficient at and reduce our CODs but that is the course of the commercialization process the we're not having any difficulty at this point, Sara.

  • Sara Michelmore - Analyst

  • Okay. That is great. In terms of calling on the top 30 to 40 partners, I was surprised. Am I correct to interpret that you are at the ground floor with the majority of these accounts just in terms of educating them not only on DexCom, but on the benefit in continuous glucose sensors?

  • Terry Gregg - President & CEO

  • I would not say we are at the ground flow. We're beyond that. I mean, you attending the ADA you saw that the two key presentations on Saturday and Sunday morning at 8:00, were all centered on CGM. So, certainly there was a groundswell of information. Where we are is in those key centers, moving this technology from a secondary thought process in the minds of the prescribers, including the educators as well as the prescribing physicians, to more of a primary. Typically, if you think of a sales call our sales people go in, make a call, see the physician and the educators and then walk out. If there are one or two patients that come to mind, that maybe utilization for CGM, they will get put on it. But I want it to be a primary tool when a physician sees a patient or looked at the patient's finger stick records and believes there are elevated HGMC, or their glycemic excursions may be unexplained or just that they are having difficulty maintaining glycemic control, it is primary thought. We are going -- traditionally, you go deep within the organization and also through that process, let them understand how they can utilize this information. Remember: a highly compliant patient may do four to six finger stick measurements a day. We are giving them 288 measurements every 24 hours. That is to help them understand how best to utilize that information.

  • What I do find interesting, as you well know, there is a very large diabetes population within the healthcare sector in terms of endocrinologists and diabetes educators who have migrated to that health profession. They are some of our best customers. And they can't live without our product. So obviously they have crossed over that information, to utilize the product effectively and they have become product of champions. But we need that beyond the experts down into the rank-and-file. That is really the goal now , to get it to be more of a primary thought process.

  • Sara Michelmore - Analyst

  • If I think about the old model, one of the things you did at that company was scale up support for the customer base in terms of securing reimbursement for the products and also creating training organizations, nurse training organizations to to support the account, can you compare and contrast where you are in the market development and and if you think something larger reimbursement strategy for the Company or training support of force is something we should think about you undertaking over the next three to five years?

  • Terry Gregg - President & CEO

  • A couple issues there. Obviously when you have pumps carrying 300 units of a potential lethal drug there was a lot of training issues you had to be particularly cognizant of, and so we spent a lot of the resources to build those up. I don't think sensor technology is as difficult nor as dangerous, quite frankly, as it was in the old pump world. I don't think we need those kind of resources. Certainly, from an education standpoint developing product algorithms in terms of management modules to support physician understanding, patient understanding and payer understanding, these algorithms are things that we currently are engaged in developing. Those types of things, we're going to support, but in terms of the old style, huge customer service insurance reimbursement format don't think we need to develop that from that perspective for CGM.

  • Sara Michelmore - Analyst

  • That is helpful, Terry. Thank you so much.

  • Terry Gregg - President & CEO

  • You bet.

  • Operator

  • I turn things back over to Mr. Gregg for additional closing comments.

  • Terry Gregg - President & CEO

  • I want to thank everybody for joining us today. OBviously, you see there are a lot of exciting things going on at DexCom as we move Seven forward to the domestic market and into the international market next year. We are well suited to begin to expand the rollout of the product into a larger adoption mentality and also on the horizon, hospital sensor product under development that truly can address a very large unmet medical need in the hospital sector. Thanks for joining us today.

  • Operator

  • Thank you. Once again, everyone, that does include today's teleconference, we appreciate your participation today. You may disconnect at this time.