德康醫療 (DXCM) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to today's DexCom Second Quarter Year 2008 Earnings Conference Call. Please be aware that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Terry Gregg. Please go ahead, sir.

Thank you, operator, and thanks for joining us today for the second quarter update. Joining me today is Steve Pacelli, our Senior Vice President Corporate Affairs; Jess Roper, Vice President, Chief Financial Officer.

Let's start off with Steve on a safe-harbor review.

Thanks, Terry.

Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's expectations about future events, operating plans, and performance, and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under Risk Factors and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reasons.

Terry?

Thanks, Steve.

On the agenda today, our customary order -- financial review by Jess. Then I'll go into the update for commercial and reimbursement and hospital partnership, insulin-pump partnership, development and regulatory update. Close it out with summary and conclusions and then we'll have a Q&A.

Jess?

Great. Thank you, Terry.

DexCom reported product revenues of $1.9 million for the second quarter of 2008, compared to $863,000 for the same quarter in 2007, an increase of 125%.

Sequentially, product revenue increased by 6% from the first quarter of 2008. During Q2, we sold approximately 1,050 Seven System starter kits.

As of Q2 2008, we have upgraded approximately 1,600 first-generation three-day customers to our second-generation Seven product.

Sequentially, sensor revenues were up 15% from Q1.

Total revenue for the second quarter of 2008 was $2 million and included a small amount of development grant revenue associated with our joint development agreement Animas Corporation entered into during Q1.

Cost of sales for the second quarter of 2008 totaled $3.4 million, compared to $2.9 million for the same quarter in 2007. The increase was primarily due to higher sales volume and approximately $250,000 in development cost of sales.

The increase in product cost of sales relating to additional product sales was offset by lower direct labor costs and increased manufacturing absorption.

Our gross margin loss for the second quarter of 2008 was $1.4 million, compared to a loss of $2.0 million in 2007.

Research and development expense increased by about $800,000 and totaled $4.8 million for the second quarter of 2008, compared to $4 million in the same quarter of 2007. Major elements of R&D expense included increased facilities costs, clinical trial costs and consulting fees. Sequentially, R&D costs remained flat from Q1.

Selling, general and administrative expense totaled $7.2 million in Q2 of 2008, compared to $5.5 million in 2007. The increase was primarily due to increased sales and marketing costs. Major components of increased SG&A expense included approximately $550,000 in higher share-based compensation, $233,000 in increased trade show costs and $231,000 in additional sales commissions. Sequentially, SG&A expense increased by about $826,000 from Q1, due primarily to additional marketing and trade show-related costs.

Net interest expense totaled $619,000 for the quarter, compared to net interest income of $204,000 for the same quarter in 2007. The increase in net interest expense was primarily due to lower average balances of our cash and marketable securities, combined with lower yields earned on those balances.

Our net loss increased to $14.1 million for the second quarter of 2008, compared to $11.3 million during the same quarter in 2007. The net loss for the quarter included $2.8 million in non-cash expenses, centered primarily in share-based compensation.

During the quarter, we invested about $400,000 in capital equipment and facilities to support our business.

We ended the quarter with $43 million in cash, marketable securities, and restricted cash, and had working capital of $34 million.

Cash and security balances decreased by $13.3 million during the quarter. The increased consumption of cash during the quarter, as compared to prior quarters, was primarily due to increased sales activity and marketing costs, additional inventory and payment towards annual insurance premiums.

In anticipation of moving all of our manufacturing operations to our new facility and to meet forecasted sales, we increased our inventory levels to about $2.8 million. This represented an increase of about $1 million from the prior quarter. We do not expect any significant increase in inventory in the near future.

I would like to now turn it back to our President and CEO, Terry Gregg.

Thanks, Jess.

The second quarter of 2008 represented yet another quarter of sustained sequential growth for DexCom. As we look to the second half of 2008, we continue to see momentum building on the reimbursement front, and, more than ever, we believe broad-based reimbursement for CGM will be a key driver of increased sales going forward.

We were extremely pleased to announce last week that we have entered into a contract with Blue Cross of California. This contract will enable us to process claims on behalf of qualified patients throughout much of the Anthem Blue Cross network, not just those patients residing in California.

We were also pleased to learn in early July that Aetna has adopted a positive coverage decision for continuous glucose monitoring, and we are in the final stages of contract negotiation with Aetna.

While the coverage policies adopted to date are limited in scope, we believe these policies are an important first step to achieving broad-based coverage for CGM as a category, and while we're extremely excited about the progress we've made on the reimbursement front to ensure the long-term success of our business, we believe these initial coverage policies may actually present a short-term sales challenge.

To date, our CGM business has largely been a cash-pay model, with patients purchasing the Seven System and disposable sensors with their credit card, and any reimbursement received by these patients was largely on a one-off basis. Now we're faced with a situation where reimbursement is accelerating, and patients and physicians who are aware of this are becoming much more reluctant to initiate a cash purchase, knowing that reimbursement may be just around the corner. This is not atypical in medical device situations, where reimbursement is becoming more prevalent but is not universal yet. As more third-party payers issue coverage decisions, and DexCom enters into contracts with these payers, we expect this challenge will resolve itself.

In addition, we continue to caution that, even as payers adopt coverage policies and we enter into contracts, it will take time for patients and their physicians to learn about these coverage decisions, demonstrate medical necessity, and ultimately receive reimbursement for their CGM products.

Nonetheless, the recent decision by Aetna reinforces our belief that other large payers will be forced to adopt coverage policies for continuous glucose monitoring or risk losing patients to competing insurance plans.

As we work to define our commercial strategy for the balance of 2008 and look out to 2009, we are pleased to announce the appointment of two new members of the executive team who will be joining us in September, both whom have worked for me previously.

Claudia Graham will join us as Vice President of Marketing, responsible for all aspects of DexCom's marketing effort. Claudia has extensive experience in the diabetes space. I initially hired Claudia in 1999 from Parke-Davis to lead our marketing effort as insulin pumps were gaining traction in adoption and reimbursement. She remained with Medtronic MiniMed post-acquisition and expanded her role to Vice President Global Therapy Access.

On the international front, Peter Gerhardsson will join us as Vice President of International Business Development, where he will be responsible for the expansion of our business outside of the United States. Peter has spent 23 years in a number of global leadership positions with NovoNordisk. While I was at MiniMed, Peter ran our business in Scandinavia for five years before returning to Novo post-acquisition about three years ago.

These two individuals are seasoned professionals with a significant presence in diabetes on a global basis. I feel very fortunate they are rejoining me to help lead DexCom as we expand our business across the globe.

We also announced today the departure of Rod Kellogg, our Vice President of Sales, and note that on an interim basis, I will assume responsibility for the DexCom sales organization, and I expect to work closely with Claudia as we refine our messaging going forward.

Our mission for the balance of 2008 is simple. We must continue to educate physicians and diabetes educators on the need to reduce glycemic variability in patients with the utilization of CGM. As I have stated previously, we are closely evaluating the size of our sales force and, as reimbursement expands, we will strategically address our sales coverage and adjust accordingly. We must refine our messaging further to educate patients on the benefits of continuous glucose monitoring. Shortly, we will be introducing a new patient-centric web portal and patient tutorial to assist patients in better understanding the value of CGM.

We must also continue to educate the private payer community on the role of CGM in assisting patients to better manage their glucose excursions, and we must work to obtain additional coverage decisions for CGM and enter into contracts with payers to reimburse our products.

We continue to see reimbursement as one of the key challenges to achieving widespread adoption of CGM. Although we are extremely pleased that several significant national payers have taken the lead in adopting positive coverage decisions, we reiterate that it will take time for this and other positive coverage decisions to filter down to patients and physicians and translate into sales, and it will take time for DexCom to secure contracts with these payers as coverage decisions are released.

I want to move on to the discussion on the in-hospital continuous glucose monitoring system. We continue to be extremely pleased with the rapid development of our in-hospital continuous glucose monitoring system. We recently completed yet another in-clinic human feasibility trial in which we were again able to demonstrate prospective accuracy that exceeded the ISO standard for therapeutic use.

We continue to make significant advances in our membrane technologies that will allow us to block most common sources of drug-related interference in the critical care setting, including acetaminophen. We're on track to complete our development efforts for a first-generation product and commence a pivotal trial before the end of 2008. We believe this would enable us to commercialize our first product in the critical care setting by the end of 2009.

We remain committed to commercializing our in-hospital product through an established partner with experience in the critical care marketing.

In our last earnings call, I stated that we expected to complete technical and business due diligence and finalize negotiations with a chosen partner within a 90-day period. My primary motivation for this self-imposed deadline was to force potential partners, many of whom are very large organizations accustomed to operating at glacial speeds, to move more rapidly if they were serious about a deal with DexCom. My statement has had the desired effect. We're now in late-stage negotiations and expect to be in a position to announce a deal by the end of this quarter or early next quarter.

Moving on to our insulin-pump partnership update, we continue to make significant and substantial progress on the joint development of integrated insulin-pump CGM systems with both Animas Corporation and Insulet. Our continued goal is to complete all development, clinical and regulatory efforts with Animas and be positioned to launch our first product during the summer of 2009, but as you are well aware, the timing of the regulatory process is uncertain. We would expect the combined product with Insulet to follow later in 2009.

In the interim, we continue to work on an informal basis with each of our insulin-pump partners to promote our respective products within our target markets.

We are also pleased to report that we have filed a PMA Supplement for a third-generation continuous glucose monitoring system with the Food and Drug Administration. Data from our approval support trial demonstrated significant improvements in system on time and improved accuracy, as compared to our current product. In addition, our third-generation system will include trend arrows to complement our trend graph, and entry capabilities, such as insulin intake, meals, exercise, as well as configurable alarms.

Keeping in line with generational iterations, we continue to make progress on our fourth-generation product. We expect this design to incorporate an enhanced membrane system for even greater accuracy and be suited for large volume production.

Additionally, our fifth-generation sensor is now being tested in humans in connection with our in-hospital product.

Finally, we continue to pursue a CE mark for the Seven. We are currently in the midst of our ISO audit and hope to be granted a CE Mark before the end of the year. This would enable us to begin conducting clinical trials in Europe later this year or very early next year.

In summary, I've now been on the job for 13 months, and as I look back over that period of time, I've seen a tremendous transformation in the attitudes of the key opinion leaders on the benefits of CGM. At the 2007 American Diabetes Association meeting, CGM was described from the podium as "interesting technology, probably for the most intensively-managed patients, with reimbursement at least two to three years away."

Fast-forward to today, and those same thought-leaders are now saying CGM will be the standard of care in the next two to three years for a broad segment of the diabetes population. They now understand that the value of reducing glycemic variability in patients on a daily basis is rapidly replacing the utilization of A1c as a measure of glucose control.

And reimbursement is here and is rapidly gaining traction. We continue to create positive experiences for patients and health care professionals. Almost daily, I hear reports of patients achieving their best-ever glucose control without increasing their exposure to hypoglycemia.

With our leadership role in CGM, we must stay the course in building the category so that we will ultimately gain acceptance of CGM as the best standard of care for diabetes management.

Thank you. We'll now take questions.

Thank you. (OPERATOR INSTRUCTIONS.) And first, we'll go to Tom Gunderson with Piper Jaffray.

Hi. Good afternoon. Just a couple of quick checks here on what you said. You said inventory -- you didn't expect inventory to go up from here, but since you, I think, raised inventory to accommodate the move and give you a little safety stock, is it fair to assume that it might decrease in the second half, Terry?

Well, that's the goal. We'd like to be in -- ultimately, Tom, to adjust in time kind of manufacturing environment. We're not there yet. Some of the other items that we had to go forward on are some of our longer-lead items, which we increased in terms of that inventory because we are not, at this point, given our run rate, able to take complete advantage of some of our longer-lead items. We had to buy those in advance bulk in order to get some price considerations, but also, we'll keep those and they translate into inventory. I don't expect, at this point, to have to rebuy some of those in the next quarter. We will adjust our inventory levels accordingly, but at this point, it was -- as we transition from one facility and bring everything in-house, I didn't want to run the risk of carrying -- of the jeopardy of going into a back quarter. So I would say we're not going to build it. We'd like to kind of bring it down a bit. But we're going to keep a watchful eye on it.

Got it. Thanks for that. And then clarification on the sales and marketing management. You're going to be interim head of sales. Will that fall under Claudia's job description or do you still need a head of US sales?

It does not fall under Claudia's description. What we -- I have three regional sales directors in the field now. Two of them have been with me in my former life as head of MiniMed. I want to truly understand what their needs are in order to be more successful. I think we've done an outstanding job of driving the push from the key opinion leaders, as evidenced by my summary comments. I think now it's part of why I want Claudia on board, in particular, and staffing up a bit more on the marketing side -- is to move that messaging to -- now what we need is the patient [pull] and she's excellent at delivering that message. She'd done it for me and for Medtronic MiniMed. I think from that standpoint, we'll continue to look at potential candidates, but I'm not in any rush to go out and hire somebody. I know this business quite well. These guys have -- two out of three have reported to me previously. And so I want to get a better feel with being in the street for a while before we make a decision to go in a different direction.

Okay. And then last question will be a broader one and it ties into sort of the economy and the paying out of pocket. You mentioned sort of this switch to reimbursement and less of a willingness by some to pay out of pocket when they know reimbursement might be coming soon. I understand that. Have you gotten anything from the field that tells you that because the economy is tough out there -- because this can be considered sort of a medical consumer product in some ways -- that they're either using the sensor longer -- pushing the limits -- or using it only part of the month kind of thing? Any change simply because of the cost of it, or is it just pretty much steady as she goes from previous trends?

No. I think, obviously, the economy is playing and having a bearing on some of this. Certainly, I will tell you that today, our sensors are the most reliable that they've ever been in the history of this company. That's both -- obviously, excellent news from the standpoint that our technology is the best that's on the market. The other side of that is they're using them longer. When we look at -- it's not uncommon now. We used to say seven to ten days. I'm saying probably the average is north of that. So we're not getting that reorder. We do -- and a large portion of the population, when we look at reorders -- we know they're using them 24/7 from that standpoint. Others are using them more episodically. We do have a decent business with physicians that have acquired the hardware -- the durable -- and they'll put patients on to test -- allow the patients to utilize the product for a couple of weeks. So we've got a number of different categories. But since it is, as you've described it, a bit elective, we do see a bit of that. We're asking patients, once they've acquired the durable piece, to spend -- in the case if they don't have reimbursement -- upwards of $2,000, and I think that they're looking at the economy and their durable spending, just like anybody else -- I think as we move more towards the reimbursement model, their resistance to that diminishes accordingly. But there are a significant group of people who, regardless of the economy, believe they've got to utilize the product 24/7, and that's -- that value proposition is something that, in terms of messaging, Tom, that there's a reason that they do that, and they have found great benefit that justifies their utilization. Obviously, we've got to message that more appropriately to the rest of the diabetes population.

Got it. Thank you.

And moving on, from Cowen, we'll go to Sara Michelmore.

Yes. Thank you. Terry, you talked a little bit about sales and marketing staffing. Can you talk about, too, the organization that focuses on some of these reimbursement issues, whether it'd be folks involved in contracting or educating payers? Can you just describe the evolution there in terms of the staffing?

Sure. Let's look at it from the first part and that's the external group that reports to Steve Pacelli. They're still out in the field. They're staffed by three individuals who are all professionals in the managed care arena, and they continue to call on the third-party payer system. They're the ones that really get to the point of the contract, and then, of course, obviously, Steve's group internally -- the legal group we have here -- negotiate the terms of the contract. On the reimbursement side, that's one -- if you look at the increase in expenses on the sales side, we really flow that through, and we have had to increase the staffing on that, quite frankly -- on the reimbursement side. As we move to more contracting, we're going to have to continue to be sure that we have adequate staffing. We move that whole distribution cycle from -- as an example, from one of our DME suppliers. Once we have a contract in place, then these patients still have to undergo prior authorization, but that is done by us. So that means that paperwork comes in to us. The group inside has to process that paperwork back through the managed care provider, and once we then have prior authorization, we can ship product knowing that we'll get paid from the third-party payer in 45, 60-day kind of time frame. But that does require a back-office support system that we are building. None of that existed here. A year ago, none of it existed, so we are building that as part of the overall organizational structure as we move forward commercially.

Okay. And in terms of the coverage policies, I guess, it does seem that a lot of these first-pass coverage policies are for infrequent, or perhaps intermittent, use of the devices, and I'm just wondering -- what do you think it's going to take to take those policies to the next level in terms of broader coverage and continuous use of these devices were initially conceived to be used?

Well, I don't think they're intermittent, Sara. I would classify them -- they have specific policies for continuous use, and actually, if you were to talk about intermittent use, there's another whole diagnostic capability of these products that we could obviously explore with the physician population and, certainly, even in other diabetes-related -- gestational diabetes, as an example -- things that we have actually engaged in clinical trials on that I really haven't addressed during this call. But I -- is we look at the types of coverage -- it has comments like recurring hypoglycemia and things of that nature. I would say that, when we look at data points, our patients and every patient afflicted with diabetes have episodes of recurring hypoglycemia as established by the policies. So I think, although they -- those are the target because they're the most acute in terms of the implications -- you also notice that none of the coverage decisions have anything to do -- or any criteria related, at this point -- to A1c. So it's quite a broad policy. What we have to do is try to make the physicians understand. We've done well with the key opinion leaders. We now need to message down to that next tier or health care professional about the benefits of it. As far as the policy coverage, there's ample language to cover a very large portion of the diabetes population.

Okay. And you talked a little bit about international business. Could you just remind us what your latest thoughts are and how you plan to develop that business? I assume that you're not conceiving of doing a large direct build-out, but if you could just give us a thought of where you're heading with that organization --

Sure. I -- obviously, Peter has worked for me in the past. He ran our Scandinavian operations and is broad-based throughout Europe, Middle East and Africa -- was his domain for NovoNordisk. So what we intend to do -- right now, we're looking at it in two different ways. One, do something with a very large multinational company who already has the number of feet on the street, and those discussions are ongoing, and you can think of who they are in that world. Or secondly, we have been approached now -- I think the number is somewhere close to 100 different distributors throughout the world that have made inquiry about the opportunities to distribute our product in a wide domain. Obviously, we are in those discussions. There is a large meeting occurring next month in Rome -- The European Association for the Study of Diabetes. Peter and I and others are pretty much booked solid with a number of potential distributors, and also engaged with key physicians in each of those countries that already have some relationship with a distributor. They've made introductions. So we'll go about it one or the other way or a combination of both. But we are not going to hire a direct sales force.

Great. And it sounds like we could -- just some visibility on what you plan to do there by the end of the year (inaudible)?

We're going -- it hinges on our successful migration through this ISO certification, and when we say we're literally in the middle of it -- it started yesterday. It is intended to end tomorrow.

Okay.

So assuming we pass that, then we would apply for CE mark. We would get that, hopefully, in the fourth quarter and begin putting in the mechanisms in place to -- which allows us then the market approval to go into the EU. Obviously, it's a -- we're looking at only a handful of countries in the EU that we believe reimbursement is such that would necessitate or be worthwhile for us to enter in the first year. So we're talking -- typically, those would be the UK, obviously. Germany, France, the Netherlands, possibly some of the Scandinavian countries.

Great. Thank you, Terry.

And moving on, we'll go to Mimi Pham with JMP Securities.

Hi. Good afternoon. Regarding Abbott, are you seeing them in the top diabetes centers that you're in during the second quarter, and do you get a sense that they're helping you develop the US market and convert additional thought-leaders to CGM?

Mimi, they have not had much of a presence. They have no sales force. They're using Smith's to distribute the product and some of the traditional DME suppliers. But we have not seen as active an effort on their part. When I talk to physicians, it's very spotty as to their availability of product, and so I think they've done some target introduction, but hopefully, as they gear up --. It's always -- as I have always cautioned everyone, going from an R&D environment to a production environment is never linear, and I think that most companies stumble a little bit when they move from R&D to a production, so they want to limit their exposure. I think the other -- and I can't speak for Abbott, but (inaudible) to say that product was originally attempted to be filed with the FDA in -- back in 2003. They probably need some upgrade to their product in order to be more competitive with the two products that are currently on the market.

And then you talked about the current coverage decisions being somewhat limited in scope, but can you give us your estimate of what percent of the type 1 diabetics in the US -- you feel that they fit that -- the current coverage criteria?

Well, I would tell you that, based on the data that I have seen on a wide variety of clinical trials, north of 95%. And if you look at how many patients go below 70 on a daily basis -- probably most patients. How many go above 250? Most patients. So it's a wide [continuing]. The problem with A1c, as an example, as a surrogate marker -- patients will attempt to do their best efforts to get below 7 because that's what ADA has established as the goal, and then they get there and they're still running 40 to 400. So unfortunately, as they try to drive their A1c down to an acceptable level, they also increase the risk of hypoglycemia because the band just moves down, and so I would say that an overwhelming majority of patients would qualify under the conditions set forth by these "coverage decisions" by the national payers.

Okay. I'm sorry. I thought you thought it was limited, but it sounds like (inaudible).

I don't think it's limited at all. I think it's just the opposite. I'm very comfortable with the coverage decisions that have been issued. I think they're great. They're actually more expansive than I would have estimated and predicted earlier when I said I thought the first one --first coverage decision would come in Q4 '08, and I had said back even in January that I thought it would be very limited and, in fact, they're much more expansive than I thought.

And then the last question. The 3-day STS users that haven't yet upgraded to the Seven -- have you actually gone back to each of them to see if they're interested in the Seven? And then is there something where, as you get more national coverage, you have their contact information and you can go back directly to them and see if they're interested in buying the Seven?

We reached out to them to the extent that we provided some upgrade opportunities for them. I would say, at this point, if they haven't upgraded, we are -- they've either lost interest potentially, they've migrated to possibly Medtronic with a pump, or that they're now, at this point -- we always have the opportunity to go back to them. I think, given where we're at right now, we need to focus more on new patients than the remaining patients who are former STS-3 patients.

Okay. Thank you very much.

And moving on, we'll go to Bill Plovanic with Canaccord Adams.

Great. Thank you. Good evening.

Did you change your name, Bill?

It's close enough.

Okay.

Just in terms of coverage, you've gotten a lot of coverage thus far, much faster than expected. Are there any major payers or any surprises you could see in the back half of this year? I know that you've been saying that, I think, by the end of next year kind of everything will be in place, but where do you kind of think we'll be at the end of this year and maybe mid-next year -- just any milestones or other major payers coming?

Yes. We know we're undergoing tech assessment by a couple of the national payers. Assuming that gets through the process, I would expect at least one more this year. That is, within the last five months of the year. I could be surprised. Listen, I don't have the right crystal ball. I -- and earlier this year, I said first one in Q4. We've got two now, so --. I think everything is just happening a bit faster than we predicted because I think the -- number one, the number of claims being processed has increased dramatically at those payers. I think if those payers have also had to go to external review -- if they're spending money for those external reviews and they've lost a lot more of those reviews than they've ever won, that that's causing them to take a second thought. So I think you could probably see another one before the end of the year.

Okay. And then any thoughts on the JDRF data that it's either going to be coming out at the AADE this week or it'll be at the EASD in Rome. Just any thoughts you may have on that.

Yes. I'm pretty sure -- I'm sure the first time you're going to hear it from the podium is going to be EASD. I don't hear anything from JDRF at this point that there'll be any early announcements at AADE this week, and I -- they are very tight-lipped about the results. I've talked to some of the trial investigators and they're not even giving me a wink or a nod as to yea or nay, so --. We do know that, in terms of looking at time spent and target zone, that's -- they are very happy with that. That's a secondary endpoint, though, and we don't have any optics on the primary endpoint. [Other than that], it's an interesting development, though, because the more we talk about A1c, the less universally-accepted it is. In fact, we're going through now an issue with the scientists who don't want to use A1c at all. They want to now use glucose exposure and trying to come up with yet a new number. So I don't know how that's all going to tease out in terms of utilization of A1c anyhow. So I think it's more -- for us, it's a lot more important. And I think you're seeing the coverage decisions that are being made today by the reduction of time spent in hyper- and hypoglycemia and more time spent in utilization their target zone. (Inaudible.)

Okay. I'm sorry. And then last, just -- you talk about the gen-four being more manufacturable. Does that mean that you would expect gross margins on that product north of 75%, or is that how you get to a 75% gross margin at scale?

That is certainly how we get to robust gross margins. I don't want to put an absolute number on it because we're not there yet, but looking at what we have predicted, the folks we've got -- that we brought over, actually, from the bio-side organization now running our manufacturing environment --. Certainly, we have got to move to that type of manufacturing in order to achieve those kinds of gross margins. And this is the way we're going now. As I mentioned earlier, we have never seen such reliable product as we have right now, and the result -- why is that? That's because we're going through these manufacturing upgrades as we speak in anticipation. It never happens overnight. We always do it in -- sequentially, and that's what we're experiencing, so anytime we can get higher reliability, it directly translates back into our COGS and the whole process. So that's the goal.

And moving on, from Steve Ogilvie with ThinkPanmure.

Hi, guys. Just a couple questions. First, just kind of wondering if the JDRF data isn't as we hope -- as you hope -- what DexCom's response will be, if there's some sort of a contingency plan? And then the second question would be if you could talk about headcount and how that's changed in the 13 months since you've been in charge and, looking forward -- if you see any major dynamics just there?

Well, contingency with regards to JDRF -- no, I think that the --. If you look at the world of publication -- not only from us but from MiniMed, from Abbott -- there's overwhelming data to suggest the improvement in glucose control as a result from time spent improvement in target zone from hypoglycemia and hyperglycemia. I would be surprised if the outcome of the JDRF trial didn't reinforce that there are dozens of studies that have already demonstrated that. I think the real question on the JDRF trial that has been bantered about is will they reach the primary endpoint of a 0.5 reduction in A1c. And we have the history, so to speak, of the Star 1 trial from MiniMed in which, globally, they did not reach the primary endpoint, but I think if you really tease that data and look at patients that actually complied and used the product, it was significantly positive. If you look at the Star 2 trial, which was a precursor to their Star 3 trial, again demonstrating, with proper patient selection and representative use -- the Star 2 trial for MiniMed was also significantly positive, and we don't have the results from the Star 3 trial yet. So I don't know what the outcome will be looking at A1c, but even if they don't meet primary endpoint, I'm not sure that matters anymore. They didn't have -- when the JDRF trial was designed, we still thought A1c was the gold standard and it was something -- because we didn't have any other standard. With the advent of CGM, we now find that A1c is a terrible surrogate marker. So I'm not sure how valid it is. We are participating in a number of drug trials with our sensor that is still using A1c as a criteria, because that's what FDA utilizes for effectiveness, but these folks want sensor data to demonstrate reduction in glycemic variability because they believe that, regardless of what the outcome is on A1c, if they show reduction in glycemic variability, that's going to be more powerful than reduction in A1c because of its lack of consistency.

And if I could just follow up real quick. Do you think CMS will be able to look beyond A1c like you're speaking of?

Yes, I think so. We have to do that trial. That's an age-related population that we haven't. What is interesting and -- CMS issued a decision with respect to they won't pay for two hospitals for lack of good glucose control because they recognize that glucose control is important. And that's been a recent decision on their part, and we need to understand that better as what it relates to us, but it certainly is obvious from the -- on a global perspective that CMS understands that, number one, the value of the glucose control in that setting -- in the in-hospital setting, which is important, and what it means to encourage the hospital sectors to pay more close attention to that, which bodes well in terms of the efforts that we've got in the hospital sector.

I'm sorry. And then just quickly on headcount. Thanks.

Yes. We've -- the bulk of the headcount increase, quite frankly, is in temporary -- on the manufacturing side. So we're gauging that. We really haven't had a tremendous increase in terms of the total number of bodies. I think we've been selective where we had deficiencies, Steve. We've improved and upped, in some cases, but particularly in the engineering group, I would say we've added some bodies and also in terms of the quality group. As we have moved to ISO standards as an organization, we've had to implement better quality systems and that didn't exist before I got here, and so once we've got it to the point where we believe we can pass an ISO certification, we've got to have sustainability of those processes and validations. So that would be the primary area. The other area I expect to -- I want to add in the marketing area one or two more bodies than we have today, which, today, we have one. So I think that's from that staffing standpoint. But we're pretty well set other than that. Again, I want to look at the sales force, that we get greater reimbursement coverage. Right now, we do not have a tremendous geographical coverage. We are expanding beyond the hundred key target clients, but that's not enough. We're leveraging the relationships with both Animas and Insulet, and they -- Animas has got 200 people in the field and Insulet 100. But that's in a pump world and we still think MDI is extremely important to us. So as we need, we'll try to leverage where we can, but if it justifies expansion -- not a huge number -- but we will begin -- we're looking at each of the territories and what they're doing and are they able to do more.

And our final question will come from (inaudible) with Sanders Morris Harris.

Hi, guys. It's [Raj]. Terry, just given that -- pardon me. I jumped a little late on the call, so if you have answered this, my apologies. But just given the macroeconomic environment, and if we are doing the math right, given the cash burn and the current securities available for sale on the balance sheet, can you just help us with what kind of exposure do you all have for those securities? And also, as a subset of that question, how do you look upon a potential cash, raise given this environment, two quarters down the line?

Well, I'm going to ask Jess to talk about the exposure on the securities which, I think -- we have always been ultraconservative from that standpoint, but -- and I can't comment, obviously, on any financing situations. We review that with the board on a -- literally a monthly basis. I would just say this. In the discussions that we have previously had with the hospital sector, that will -- and the discussions we're having now in terms of the -- I would say we are in very late-stage negotiations. There is an upfront payment for exclusivity in that, which will impact us in a positive way from a cash infusion. Secondarily, the conditions -- there are R&D-related payments that, when you look at the expenses that, in the second quarter -- and even in the first quarter -- we're spending more on the R&D side, quite frankly, in the hospital sector as we push to get that product into a position in order to negotiate a definitive contract. I -- so -- in both of those, I think there's some mitigation of that and I'm looking to Jess. Anything else on the cash securities? They're very safe. We don't do anything in a risky -- on our -- the securities that we use (inaudible).

Yes. That's right. Just to clarify. We have a very short-term portfolio, and our philosophy is to preserve our cash and capital, not to try to maximize our yields on those. We haven't had any downgrades in securities, and we don't hold any auction-rate securities or have any exposure on that side.

Okay. Fair enough. And Terry, on the JDRF trial, given that there are multiple CGM systems used -- Freestyle, DexCom, the Medtronic system -- how do you look upon the data as an aggregate when you use different systems with different specificities, sensitivities? And let's say you get a certain aggregate data set. Is there a subset analysis plan specifically related to the DexCom data? Because the overall might -- may or may not give you a positive picture, and then everyone is going to be slicing and dicing the data and looking separately. So how would you -- what's the thought process in terms of looking at data specifically for DexCom, or is that even planned at all?

Well, it's -- let me put it this way. We have asked for that data to be segregated out at the time when they have concluded with it so that we can do exactly as you're suggesting. We don't own that trial. All we did was provide product, as did MiniMed and Abbott, so we don't have the authority under the contractual relationship with JDRF to demand that. Again, we have asked, I think, in an air of cooperation, hopefully that they will grant us that request, as I'm sure MiniMed and Abbott would like as well, because there are -- as you've stated, there's a big delta between the different technologies, and obviously, if there were some reason the other two systems weren't performing as well as ours, we would want to be able to stand on our own. Obviously, we're at 7 days and the others are at less frequent. One of the things that we're doing -- one of the attributes that we have that we've agreed with JDRF -- we have the ability to look at on-time -- the time the patients actually look at their receiver screen, and the other companies don't have that ability. So as hopefully a quid pro quo type of -- we will give that information to JDRF through our download software. So I'm hoping that we'll be able to analyze that appropriately. But no guarantees.

And finally, how would you quantify -- or maybe you have already mentioned this. How would you quantify your relationship with Insulet and Animas, specifically related to this quarter and what you see in the next two quarters?

Well, I -- in both of them, I only have high regard, and my comments on both companies are tremendous. I know, in particular, the good folks at Animas we meet with weekly, either in person or telephonically. The teams are highly-integrated in driving this product forward. They've got a lot more resources to bear on this than the Insulet folks, but again, we're actively engaged with Insulet as well. They had, obviously -- as they moved to utilize the OmniPod for a fertility drug with Ferring Labs, they were concentrated in that particular endeavor and filed a separate 510(k) for that, so I think there was a little bit of resource allocation. But we are actively talking to them as well. We talked to JDRF in combination with both of those entities about an artificial pancreas program that Insulet is interested in, as well as Animas, and both of them use our sensor as part of that effort, so --. Both -- in both relationships, a high degree of compliments.

And that does conclude our question-and-answer session. Mr. Gregg, I'll turn the call back to you for any additional or closing comments.

Sure. Thank you, operator. And thanks for joining us today. I just want to point out, as we look at where we've been, where we're going -- we've really had an opportunity, I think, to change the way in which folks treat diabetes today. We've done -- and the industry has done a good job, from the key opinion leaders, and now we need to take that to the next level of prescribers beyond just the endocrinology world. Internal medicine treats a large portion of this diabetes population, and that's obviously a target goal. We talked about the additions that we've added. We need to improve our marketing, messaging, and I've brought Claudia. To do that globally, we need to move into a more aggressive way, and Peter will help us in that domain, as well as others. But I really focus on what we have accomplished, based on the expenditures that we have done in the last year since I've been on board. We're third-generation filed with the FDA with clinical trial. We already have the best technology out there. I think, more importantly, as I look at the hospital sensor and our effort there, we have accomplished so much. When I came on board, it was an R&D project, and here we are planning a pivotal trial. We've been in over 100 patients now, and we've really done that on quite a limited budget. If you look at it from a global standpoint, we're really two companies. We've leveraged our technology from both the ambulatory world as well at the (inaudible) and accomplished more than other companies with far -- far greater resources that that's why we're deep in these negotiations, particularly on the hospital side.

So I'm quite proud of where we're at. I'm quite proud of the accomplishments that we have made in this 13 months that I've been on board.

So thanks for your support and look forward to the future. Thank you, operator.

Okay. And thank you. That will conclude today's conference. We'd like to thank you all for your participation.