德康醫療 (DXCM) 2008 Q3 法說會逐字稿

Good day, everyone. 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.

Thank you and welcome, today, to our third quarter investor conference call. Joining me today are Jess Roper, our Chief Financial Officer; and Steve Pacelli, our Senior Vice President for Corporate Affairs. I will ask Steve to lead it off by addressing the Safe Harbor requirements?

Thanks, Terry. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's expectations about future's 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 reason. Terry.

Thanks, Steve. As always, we'll go through the financial review with Jess, we'll talk about the Edwards collaboration that we announced shortly before the start of this meeting, a commercial and reimbursement update, give a brief insight into our insulin pump partnership, a clinical and regulatory update followed by summary and conclusions and then we'll open it up for Q&A. Jess?

Thank you, Terry. DexCom reported product revenues of $1.9 million for the third quarter of 2008 compared to $1.2 million for the same quarter in 2007. An increase of 53%. Sequentially product revenues remained flat compared to the second quarter of 2008. During Q3, we sold approximately 770 SEVEN system starter kits. Sequentially, censor revenues were down 5% from Q2 and starter kit revenues were up 5% from Q2.

Total revenue for the third quarter of 2008 was $1.9 million and included a small amount of development grant revenues associated with our joint development agreement with Animas Corporation, entered into during Q1. Cost of sales for the third quarter of 2008 totaled $3.8 million, compared to $3.1million for the same quarter in 2007. The increase was primarily due to higher sales volume and approximately $260,000 in developed cost of sales. The increase in product cost of sales relating to additional product sales was offset primarily by increased manufacturing absorption. Our gross margin loss for the third quarter of 2008 was $1.9 million, which remained flat as compared to the same quarter in 2007. Research and development expense increased by $1.7 million and totaled $5.4 million for the third quarter of 2008, compared to $3.7 million for the same quarter of 2007. Major elements of increased R&D expense included additional external development costs, facilities costs, and supply costs.

Sequentially, R&D costs increased by about $600,000, from Q2 due primarily to additional external development costs and lab supplies. As we continue with our in hospital efforts. Selling general and administrative expense totaled $6.7 million in Q3 of 2008 compared to $5.9 million in 2007. The increase was primarily due to increased general and administrative costs. Major components of increased SG&A expense included approximately $500,000 higher salaries, $200,000 in increased facilities costs, offset by $350,000 in lower sales commissions. Sequentially, SG&A expense decreased by about $600,000 from Q2 primarily due to lower commissions and share based compensation. Net interest expense totaled $700,000 for the quarter compared to net interest income of approximately $120,000 for the same quarter of 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 $14.7 million for the third quarter of 2008, compared to $11.4 million during the same quarter in 2007. The net loss for the quarter included $2.7 million in noncash expenses centered primarily in share-based compensation. During the quarter, we invested about $610,000 in capital equipment and facilities to support our business. We ended the quarter with $30 million in cash, marketable securities and restricted cash and had working capital of $22 million. Cash, marketable securities and restricted cash decreased by $13 million during the quarter. Cash consumption during the quarter included our twice per year $1.5 million interest payment associated with our convertible debt. I would like to now turn it back to our President and CEO, Terry Gregg.

Thanks, Jess. This afternoon we announced-- (audio difficulties).

We have temporarily lost our host location. We would like to ask participants to remain connected as they rejoin. Again, we have lost our home location. Hold please.

Operator, can you hear us. Thank you. Not sure where I cut you off, so let me just go back to the last area. We have previously discussed the growing clinical evidence that the close monitoring of glucose levels in critically ill patients, both with and without diabetes can positively impact the patient care and outcomes from a morbidity and mortality standpoint. We know that existing intermittent monitoring methods are not practical for hospitals to employ on a widespread basis. We believe that together with Edwards we will develop technology to allow clinicians to better maintain tight glycemic control of patients in an operating room or intensive care unit setting.

We believe this collaboration will combine our continuous glucose sensing technology with Edwards leadership in the monitoring of critical ill patients and knowledge of the critical care environment. Under the terms of the agreement, Edwards will pay DexCom up to $36.5 million over the next three years in the form of licensing and development fees and regulatory milestones. Payments will include an initial upfront licensing and collaboration fee of $13 million. Additional research and development dollars of up to an additional $2.5 million paid during 2009 and the first half of 2010. Milestone payments of up to an additional $13 million, based on the achievement of certain regulatory approvals between 2009 and 2011. In addition, DexCom will receive either a profit sharing payment of 10%, or royalty of up to 6% of commercial sales.

Edwards will be responsible for global sales and marketing, which is expected to begin in 2010, and DexCom will be responsible for initial manufacturing. Why Edwards Life Sciences? Edwards has been a world leader in critical care monitoring for more than 30 years, dating back to the development of the Swann Gansz line of hemodynamic monitoring devices for measuring heart pressure and output during surgical procedures and in ? postsurgical intensive care settings.

Over of the years, Edwards has introduced a broad portfolio of critical care products, including advanced Venus access products, antimicrobial catheters, disposable pressure transducers, and a blood management protection system. In choosing Edwards as our partner for our in hospital continuous glucose monitoring systems, we evaluated a number of factors. During the development phase, we believe Edwards will bring a strong, technical team focused on continuous glucose monitoring in the critical care setting. We believe Edwards has a deep understanding and working relationship with clinicians in this setting on a worldwide basis. We also believe Edwards will bring a strong manufacturing team to help DexCom scale up and refine our manufacturing processes. As we move to commercialization, we believe Edwards' dedicated global salesforce and critical care is the best avenue to drive rapid market adoption of the in-house glucose sensing business.

Over the past several months of due diligence, it became increasingly clear to me and our team that the technical teams operate extremely well together and we expect this effort to jump start a new level of cooperation now that our formal agreement is in place.

As just reported, the third quarter of 2008 was flat in terms of our revenue and our new patient ads were down slightly from previous several quarters. This was not a surprise to us, and it is consistent with comments we made during our second quarter call, regarding the shift in our business from a cash pay basis to a broad reimbursement model. During Q3, we continued to see tremendous progress on the reimbursement front with the adoption of a number of new coverage policies for CGM and the establishment of contracts to cover our products, including key contracts with Blue Cross of California, and Aetna. We estimate that today in the United States there are over 100 million lives covered under CGM policies and expect that number to grow as we enter 2009. Yet these coverage policies and contracts have actually resulted in a short-term sales challenge.

First, we are faced with a situation where patients and physicians are increasingly aware of our reimbursement progress and are now much more reluctant to initiate a cash purchase. As we have mentioned this is not atypical in medical device situations where reimbursement is becoming more prevalent but is not yet universal. Second, and more importantly, in spite of these positive coverage decisions, plans have made it administratively challenging for patients and their physicians to demonstrate medical necessity and ultimately receive reimbursement for CGM products.

On average we are now required to collect five to six new documents per patient, and submit them as a package to the payer as part of the approval process. Required documentation can be as simple as an insurance card and an assignment of benefits form. But it can also include the previous two to four months of the patient's blood glucose logs, a letter of medical necessity prepared by the fiscal as opposed to a DexCom form letter and a copy of the physician's handwritten notes regarding a specific patient. And all of this must be done under the format of HIPAA compliance. Again this is not atypical in medical device situations where reimbursement is still developing.

In spite of these new requirements the rate of new patients entering the system continues to increase. We believe patient demand for the SEVEN is real and is growing. Over the past several weeks we have seen the number of successful authorizations for insurance reimbursement increase. We believe that as the insurance companies gain experience in processing CGM claims they will gain a better understanding of what information is appropriate and necessary to make a coverage determination and ultimately we expect these administrative challenges to resolve themselves over the next several quarters.

Nevertheless, in order to ensure DexCom has the staying power to overcome these short-term challenges, we have taken steps, effective immediately, to reduce our cash burn by approximately 15 to 20%, with the goal of reducing cash used in operations on a quarterly basis to approximately 11 million to $12 million of the second half of 2009. We are taking important steps today to improve our cash efficiency, optimize our internal return on investment and ultimately ensure we have the resources to compete as the CGM market more fully develops.

Give you a quick update on our insulin pump partnership with Animas Corporation. We continue to make substantial progress on the joint development of an integrated insulin pump CGM system with Animas Corporation. 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 regulatory process is uncertain.

We were extremely excited to see the study data presented by the Juvenile Diabetes Research Foundation at the 44th annual meeting of the European Association for the Study of Diabetes in Rome in September. For the first time, a truly independent study demonstrated that CGM is an effective tool to improve glucose control without increasing hypoglycemia, a common concern for patients employing intensive management. The 322 person, six month multi-center randomized trial included both pediatric and adult patients who used either insulin pumps or multiple daily injections to manage their diabetes.

Highlights from the data presented at EASD include the adult population meeting the primarily end point and achieving an A-1-C drop of 0.53%. The adult and pediatric population meeting their secondary end points with patients either reaching an A-1 C less than 7%, achieving an A-1-C reduction of greater than 10% from baseline or achieving an overall, absolute 0.5% reduction in A-1-C. Most importantly this improvement in control was observed without an increase in hypoglycemia, which is a common concern in intensively managed patients trying to achieve and improve glucose control.

Finally, while there was no significance observed in patients age 15 to 25 due to low compliance, patients of all ages wearing sensors for six days or greater per week had an average A-1-C reduction of greater than 0.5%. As the only Company of an FDA approved 7-day censor, we believe we are uniquely positioned to help patients achieve better glucose control. We applaud JDRF for their continued support of outcome studies in the area of CGM technology and are extremely encouraged by the results.

In summary, CGM is here to stay. The data is clear. The independent study data presented by JDRF at the AESD meeting simply confirms the data presented in each of our peer reviewed published studies showing significant improvement in glucose control and outcomes. CGM is the first glucose monitoring technology to demonstrate both a reduction in hyper and hypoglycemia enabling more aggressive management of diabetes.

The key thought leaders around the world in diabetes are saying CGM will be the standard of care in the next two to three years for a broad segment of the diabetes population. Today, we are renewing our commitment to the CGM category to patients and clinicians in both the hospital and in the ambulatory space and to growing an important and valuable business franchise. With our leadership role in CGM we must stay the course in building the category so that we will ultimately gain acceptance of our CGM products as the best standard of care for glucose management. Thank you. I'll now entertain questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Bill Plovanic with Canaccord Adams.

I'm going to ask two questions, then I'll jump back into queue. My two questions are this. Number one, relative to the reimbursement you mentioned 100 million plus lives covered today. What is your thoughts on timing of getting north of 120 million, 130 million covered lives? Are you close? Is this going to be end of '09, relative to reimbursement? And the second question is, on your cash burn you mentioned, I didn't quite get if but you are reducing your cash burn by 15 to 20% in the second half of '09? Exactly what are you reducing it to? How are you doing that? It sounds like you are trying to stretch the money to last through to the end of '09. Those are my questions, thanks.

Okay, Bill. Let me answer those in the order you asked. On the first one with regard to reimbursement I will preface it by saying it's always hard to look in a crystal ball and determine when a coverage decision will actually be issued. That said, if you remember in January of this year, I stood up at the JPMorgan conference and went out on a limb saying I we would have one national payer by the end of 2008 and we've got four of the national payers, waiting only on United. I can't speak for United, addressing this in the next 60 days. But we continue to make good progress, not only on coverage decisions, but in initiating contracts once the coverage decision has been published. So, I think it's continuing to grow. And I think ultimately, we will have not only all the national payers but most of the secondary and tertiary payers that oftentimes follow the national payers's lead.

With regards to cash burn, I think I'll take it from a top down look at it. As we went out, and looked at where we were spending our money, obviously we have historically been a very focused R&D Company that has commercial products. So we made a decision, having gone through a lot of diligence with the good folks at Edwards, to really focus on what was important. What's going to drive near term revenue for us. And although some of the R&D projects are exquisite and we clearly have the best technology out there, our product class now well beyond 7 days, and clearly has the top hypoglycemia awareness capability and detection, let alone the smallest footprint. But beyond that, there were other areas in which we decided to either postpone the development from the R&D standpoint or in some cases if necessary eliminate it all together.

The reason that I had to focus on saying less than $12 million, somewhere in the 10 million to $12 million per quarter by the second half, we have certain commitments that we have already made to our partners, and in filings we have already committed to the Food and Drug Administration. And we need to fulfill those. Those should be forthcoming in the first and second quarter of 2009, and then obviously we will commercialize those in some way but reduce some of that expenditure. The other side of it is, today, we reduced our head count effective this morning by some 10% in a number of different areas within the Company to again try to increase our runway.

Okay. That's all I had. Thanks so much.

Next we'll take a question from Ben Andrew with William Blair.

Good afternoon, Terry and Steve and Jess. Maybe talk a little bit about the Edwards transaction, and kind of how we should expect the cash to flow here. Is this the milestones? Or can you just identify those any more precisely for us? Or is that confidential in terms of the timing? And is the R&D likely to be spread evenly over the 18 months that you identified?

I'm going to ask Steve to address this because he was the primary negotiator on our side of the equation.

The way it breaks down it is effectively an up front payment for exclusivity then there are some R&D offset dollars that will basically flow on an amortized basis over a monthly basis throughout 2009 and into 2010. And there is no specific performance metric tied to those in the sense of those are not, I wouldn't call them milestone basis as long as the development is pushing forward, we are conning to make progress that money will just come in on a monthly basis. Then the milestone payments are tied specifically to regulatory approvals and without being specific there is some money specifically tied to a CE Mark approval and an FDA approval which would be some time in '09 would be the goal. Some money tied to a second generation product, the goal would be to get those approved in the '010 time frame.

That second generation would be integrated to Edwards system?

I haven't really seen any specifics on that yet.

Okay. Fine. Then, if you think about kind of the dollars of spending here for you, does that largely offset your expense for the in hospital product? Or are you still going to be absorbing a fair bit that have yourself?

It completely absorbs the expense on the R&D side. Plus there's obviously the exclusivity portion, it covers -- we've got some responsibilities on the clinical and regulatory side. There is money in this, in these payments to offset those expenses as well.

Okay. And next will be R&D offsets we'll see R&D come down, is that right? Or it will be in the revenue side?

We haven't discussed that previously. But it's likely that the display will be similar to what we did with Animas and it will have development grant revenues offset by development cost of sales.

Okay.

And we'll finalize that of course in Q4.

Sure, then Terry the cuts that you made in headcount, can you describe sort of where they were? And are there any particular projects or initiatives that might have generated revenue in the next couple of years that are impacted by that?

No the back answer, Ben, is there was nothing in those developmental progress or programs that would result in any revenue over the next couple of years. And that's why we either elected to postpone them or elected to eliminate them all together. I think one of the challenges of developing discipline as a Company, there are a lot of unique technologies that we were pursuing that were very interesting. I'm not sure that, given the value proposition, they were worth the expenditure of dollars. So the cuts obviously came a lot related to a reduction of those projects. There were some other just general, I think tightening of the belt type reductions. Also as we looked at our business, I would say that as also when you look at the SG&A, that we had increased, some of the back office situation that we are now challenged with, with regard to the reimbursement, we have had to address that. In many cases just with brute force. But other than that, it's just been a general, like I said, belt tightening on our part.

Okay. If I can, one last question, talking about the pairs. How complicated is it to go through this logistical process with an individual patient and is it something that becomes routine very quickly for a payer? Or are there 250 local insurance payers that you have got to go through this process with every single one of them a couple of times before they routinize it. So is this national or is this really a local battle that required the brute force you talked about?

No it's national, unfortunately. I really wish it were local. But as we have looked at this, we have unfortunately been forced into the old pump model. Because that's what the payer system was kind of forcing us into. And so we have resisted as much as possible. We do need to streamline this. Brute force is only on a temporary basis. I would just say that we don't lack patience in the process.

We have, our salesforce has done an outstanding job of driving business in through the doors. We've not been able to adequately process those to get them reimbursed and patients in this economy have dramatically shifted from a cash pay to a reimbursement. If they think they've got any chance of getting reimbursement, they will postpone their decision. Used to be just swipe the credit card. Now we are asking patients in that scenario that they are looking at I would say $200 a month and in over a year period when they are also trying to put food on the table or gas in their tank, it's just been a real struggle because of the economy. Well, that has shifted over to the reimbursement. And this is just the collection itself. And then having to transmit that information over secure faxes for HIPAA compliance and if one document is not in that package or one T is not crossed appropriately, the letter of medical necessity or certificate of medical need does not meet a standard, and again you used the number 250, I'll say it's at least that, if not more, then we've got to collect that information and resubmit it. It is a paperwork log jam that we are working through as quickly as possible. But certainly and I give a lot of credit to our salesforce, we have more patients than we can possibly handle right now. That's been part of the problem.

Has the co-pay become a problem for any patients that you have heard about that might restrict uptake in this environment?

None whatsoever. The co-pay has been a blessing. I think we have had great coverage from that standpoint. I think it's just getting to that documentation and getting that prior authorization through the system has been the biggest barrier at this point.

Thank you.

Our next question from Tom Gunderson with Piper Jaffray.

Hi, guys. Actually it's Amy Sullivan in for Tom today. First of all congratulations on the Edwards transaction.

Thanks, Amy.

Couple of quick housekeeping things. At the beginning of the call you mentioned censor revenues down, was that 5% or 7%? I missed that.

That was 5%, Amy.

Okay. Then did you give a dollar amount as far as the total milestone payments with Edwards?

On the hospital side?

Correct.

Yes. Up to $13 million.

Okay. And then you talk about the being on track as far as the time line with the Animas combination there. Does that mean that you are looking to submit still here before year end?

We, I think we are going through that process right now with Animas and in fact, I'll be chatting with them to get an update this week, to be sure. But as far as we can tell at this point, all systems are go. We have a human use requirement. We've engaged, that's on track at this point and active. So unless there is something that we are not aware of, by either Company at this point, again I always want to hesitate, because this is a brand new product. But as far as we can tell, we are on track.

Okay. Then just two final ones. If you can give us an update as far as where things are at, with your work on getting CE Mark. Then I'm also curious as far as how your conversations with payers may have changed with all the new data that was released in Rome in September.

Well, CE Mark we have gone through our ISO audit, we have been informed by our notified body that they are recommending both certificate for ISO compliance and certification and simultaneously, CE Mark authorization. And so I would expect, I think we have given Q4 as our date previously. And we are holding to that date as we speak. The other question you had Amy? I'm sorry.

Just with regards to the data that was presented in Rome?

On the payer, yes. It's just been part of this compendium of data information that we have continued to submit as things get published. We add to our packet of information. I think it's -- the goal now is for them to digest it, them being the payer system. And our goal is to demonstrate to them that if you look at the entry criteria for this population, they were actually relatively well controlled, they had an average A-1-C upon entry of 7.6% and clearly demonstrating a reduction of 0.5 in that. Plus if you look at secondary end points being met even more dramatically if they used the products six days or more. That information is going back to all the payers. Right now, as you well know, most of the coverage decisions are relatively limited to something about hypoglycemia, recurring hypoglycemia, hypoglycemia unawareness. We don't think those coverage decisions should be as restrictive. This data certainly clearly demonstrates that I think, along with the JDRF and a campaign, public relations campaign going back to all of the payer systems to expand those indications for use. That's where we're at, at this point.

Okay. Thank you.

Next we hear from Mimi Pham with JMP Securities.

Hi. Good evening. In terms of the Edwards product, would you be receiving any minimum payments or royalties if for some reason commercialization is delayed beyond 2010?

Without getting into specifics, maybe the royalty and profit sharing is based solely on the commercial launch. So the answer in that respect would be no. The, again we have divided this up. There is an up front element. There is a kind of an R&D offset payment, probably not using the right term from an accounting perspective. But they are funding on a monthly basis as I discussed to account for R&D expenditures and there are milestone payments based on regulatory approvals. There, if for some reason the approval was delayed, those payments would not be payable until we received the approval. So if that answers your question, then yes. If there's a delayed approval, there is some portion of the milestone payment that would be at risk for a delay or reduction, depending on the nature of the delay.

Okay. And then in terms of either 10% of the profit share or 10% of royalty, is that of the price of just the stand alone system? Like if it is integrated into some other system or product how does that work out?

It's based on the disposable censor component of the system.

Just the disposable component?

Yes.

Then you mentioned just being responsible for the initial manufacturing. Is that something where you would potentially convert the manufacturing to Edwards? All of it?

I'd tell you it's our present intent to continue to manufacture sensors. Edwards has some rights under the contract to take over manufacturing at a future date which is where it would shift from a profit sharing world to a royalty world if and when that shift for manufacturing occurred but I would tell you it is our present intention and I believe Edwards as well would prefer to have us manufacturing the disposables.

Then a couple questions on the (inaudible) side. Can you give us an idea just generally of customer retention? In terms of the patients on the SEVEN?

Yes. We have never publicly disclosed that data and we are not inclined to for competitive reasons, more than anything, MiMi.

Okay. Okay. Thank you very much.

Thanks.

We'll take our next question from Sara Michelmore, Cowen & Co.

Terry, I'm interested in getting your thoughts on the JDRF data that was presented back in September, in terms of the compliance factor in that data set there were some age groupings that did better than others, which was attributed to some differences in compliance. Just wondering what your thoughts are there, in terms of the impact of the device in certain age groups, particularly juveniles. And what, if anything, does that mean in terms of device design going forward?

Well, certainly when you looked at the what I'll call the adolescent group, I think Bill Tamberlin from Yale summed it up perfectly by saying why teenagers didn't have diabetes and they were noncompliant as well. I think that's part of the, this image issue that teenagers go through. They want a much greater degree of privacy, and that is part of the psychological challenge. I don't think it's a product design issue, if you look at the pediatric group, obviously a lot of parents are insisting on that. The design is more than adequate. Again, I wouldn't say that there's any requirement for a design change.

Patients basically from our perspective, we make it very convenient. If you look at the utilization of six days or greater to have the highest degree of results, all the other competitors have to change it at least once if not twice during that time frame. We don't. So we, in fact, a little interesting anecdote is, we have previously said that once reimbursement was in place, we felt that that would reduce the reliance on patients using the product beyond 7 days. And I think now looking at some of the data we look at, that may be wrong and has nothing to do with the cost, it has really to do with the convenience of not having to exchange it out at any time frame. We know they routinely use it more than 10 days and I think, given the economy, they are probably stretching it even more than that. And we certainly routinely here have used beyond two weeks a single censor.

But the data, I think was just so powerful. There was a lot of speculation relative to the design of the trial, reflecting back on the STAR ONE trial that probably failed because of lack of adequate compliance, not because of technology. From that standpoint or even protocol design if you really kind of carve out some of the noncompliance issues even in the STAR ONE trial, it is highly statistically effective. But from our standpoint, I'm very comfortable with the way that the trial was run and the fact that, again, remember, a 7.6 starting A-1-C s a lot harder to get down to a 0.53% reduction than if they were starting at 8.5. So I think the data itself was overwhelmingly positive.

Okay. And you started to answer my second question which was related to censor frequency. And if you had to sort of pick an average, I understand there are people that do use it for extended use. What is your best guess in terms of the length of time that folks are using the censors? Are people using the censor intermittently in your view? Are they actually using it continuously? Thanks.

That's a good question. I think that patients are using it longer than ever before. And we routinely hear of it more than ten days. If they can get it out to two weeks, they will. I think you have, where we begin to see stretch use is obviously just analyzing from a cash pay group versus a reimbursement group, they may be using it a bit longer. But I don't see, it's hard to tell if it's intermittent use. If somebody is using two a month, is that one a week intermittent use? Or is that 100%, 14 days at a time? We don't have the optics on that standpoint. But in terms of average utilization, we haven't seen a change in that, in the last two to three months.

Okay. And any change in terms of dealing with the physicians and their receptiveness to the product? We talked a little bit about patients and insurers. Any changes going on, on the physician side in terms of acceptance and the technology interest in kind of going through the hassle of dealing with the paperwork, et cetera?

We have seen a dramatic uptick in physicians wanting to use it. I think once you got your key opinion leaders moving from only the most intensively managed patients to publicly stating all patients with diabetes should be using this, it's a standard of care in the next two to three years, that migrates down into the decile list of insulin prescribers and we are beginning to get more and more requests for information, more and more requests for training and education at the physician level. There is no, there is absolutely no lack of patient, I really wish and I'm not going to disclose the number, because the folks here won't let me. But I will just suggest to you that our funnel is full. Our salesforce has done an outstanding job. We have failed them from internal processing. The insurance companies have failed them from internal processing. But not the physicians prescribing or the patients wanting. We do not lack for demand. It's the ability to process this in a timely fashion that is our number one priority.

Okay what loosens up the log jam, Terry? What time frame can we hope that things get cleared up a little bit here?

Well, what loosens up the log jam is just processing, more and more processing. Just brute forcing those files to go and be received by a claims adjuster. And I think it's going to resolve itself over the next several quarters as I mentioned earlier. It's just, it's not, if it's going to happen, it's when it's going to happen. Again, I can't tell you more distinctly than several quarters. We have, over the past, probably six weeks, saw dramatic improvement in terms of processing. Some of that is us by throwing more resources at it, some of that is the system opening up a bit as insurance companies get a bit more comfortable with the whole process.

Great, thank you.

(OPERATOR INSTRUCTIONS) Next we hear from [Shawn Pitts], with Stephens, Inc.

Terry, just as you draw on your experiences, managing through a similar reimbursement cycle on the pump side is there anything unique you are seeing in terms of the administrative difficulties that you all are having to process through on the CGM side?

Not more difficult, actually less difficult. I see everything faster, Shawn. And I think the real reason, back in the old pump war days, utilization relative to pumps was not directly, at the time before reimbursement was not as closely connected to the benefits of A-1-C improvement. Today nobody disputes that. That was really, I think once pumps got reimbursed, it was based on that you had a tool in which you could lower A-1-C. There is nobody that doubts that improved A-1-C is better. I think now we are entering into a new paradigm where A-1-C is a surrogate marker but it's probably not the best surrogate marker because if you look at multiple patients with similar A-1-Cs or glycemic variability, profiles are much much different one will be 80 to 150 and another will be 40 to 400. The value of that photoglycemic exposure is now coming into play but that is still at the scientific level and a key thought leader level of what to do about that but clearly reducing A-1-C.

So everything, again I remind everyone that in January we went out on a limb to say we thought one national payer would issue a coverage decision and quite frankly, we would be from a financial standpoint as a Company, probably if the economy hadn't taken a downturn, we would probably be in better shape in terms of a revenue number because we would still be more skewed towards cash pay. This caught us all by surprise. I never thought when I stood up in January that we would have all these coverage decisions and contracts in place and then be forced into a decision of data accumulation, manipulation and submission that we are bogged down with today.

Terry, as we look for way points in terms of adoption curve on CGM there is nothing that you are seeing right now that would make you think that that curve would be any lower or less of a slope than what you saw on the pump side of the world?

No. No. Far, it's actually going to be steeper. I think if you look out even next year with sensor integrated pump with Animas that's going to drive adoption as well, because that's, that's the lowest of the low hanging fruit, in terms of that intensively managed population. Plus right now, I have said historically, about 50/50 pump versus MDI use. My guess is, today it's probably 60% pump use in our population, 40% MDI So clearly, I don't see any, anything other than a steeper adoption curve as we go forward and more information is even presented from that standpoint.

Great. One last question. Just as we look at your customer mix, could you give us a ballpark guess on kind of what your self pay mix looks versus those receiving reimbursement from insurance?

Sure. Yes. I can tell you that the latest, I just got this from the sales guys. And a bit ago we were 50/50. We are now probably 65/35 reimbursement versus cash and moving rapidly to more reimbursement less cash.

Okay. Great. Thanks for your time, guys.

Next we'll take a follow-up question from Bill Plovanic with Canaccord Adams.

Great. Thanks. Just a couple of housekeeping questions. On the first up front payment, the $13 million you are receiving from Edwards, is that going to be amortized quarterly? And if so, how much per quarter?

No, Bill. We'll get that within 10 days. We signed the agreement today. It is due within 10 days of signing.

No but I mean, how -- how long is the agreement for it?

Oh, you are asking how Jess is going to--?

How we're going to account for it, Bill?

Yes.

I think it is similar to what we did with Animas. It is likely the up front fee of the $13 million will be over a period of time that both parties have the rights to update the spec on the product. So we are looking at a two to three-year time period and then we have the development dollars, which we will be, we'll receive in and we'll amortize those on a regular straight line, and then we have the final payments, the milestones that we'll account for at the time of receipt.

Okay. So on the up front payment probably three years is a fair assumption to make? Is what you are saying?

Two to three years, correct.

Okay. And then on the the head count reduction, were there any sales and marketing folks cut with that?

No.

So you are still reminded of how many reps you are carrying and where that is today? 25, right?

Yes, we've got 47 in the field between sales reps and clinical education specialists. Constantly, I think that's a sized appropriately at this point. With where we're at on the reimbursement as, and we watch it. We are overlaying where we are getting better reimbursement over the sales territories. Obviously we don't have the best geographic coverage that I would like. Part of that we need to continue to leverage our partners, in terms of both Animas and potentially other partners in that same skew, but at this point, I don't look to change to size the salesforce any differently.

On the marketing side, one of the things that we do need to do, and we are, part of our development is to, and we really haven't had, until Claudia Graham came on board last month, or September now, we didn't really have much of a marketing department to speak of. I think that that's, we just couldn't find the right people. I won't say how long I chased her. But suffice it to say that she was on my radar screen. In any event we need to improve in that particular area with regards to branding and messaging.

Okay. Then Jess, the restricted cash on the balance sheet, it went up significantly that is close to $5 million. What, exactly, is that for? And why is that restricted?

It did. It went up from about $914,000 at year end to over $5 million. What you see now, and that is for the, to secure the equipment lines that we have. We have two equipment lines from one single lender. And as that is repaid, approximately, a little under $200,000 per month, or a little under $600,000 per quarter falls off that restricted cash balance.

Okay so it's just coming off of it. Then as we look obviously the capital markets are challenging these days and congratulations on the deal with Edwards. It gives you some more cash in the bank. I mean, just looking at what you started with, and what you have added and what your current burn is, you have probably somewhere at the current burn, even when you start dropping it down a little three to four quarters of cash. What's the strategy at this point to when you get to the end of '09 and into 2010 to bolster the balance sheet?

That's a great question. Obviously we are in constant communication with our Board of Directors on that Bill. And at this point I would have to defer any discussion. The Board has asked us not to comment on that.

All right. Thanks, Terry. I appreciate it.

You bet.

We have a follow-up question from Ben Andrew with William Blair.

A couple quick things. Terry, maybe talk about the back office staff you have got in terms of if you can, number of people. How well sized is that for patient growth over the next year? And a related question I guess maybe even answer first would be given the backdrop, should we expect patient adds to grow sequentially for a few quarters? Or is it going to take that long before you think it actually starts to get back up to 1000 plus patients per quarter?

Yes. I mean, you are right. I should, I'll answer the second part of the question. First. Certainly over what we did in the third quarter we did 777. I will tell that you we had a far greater number in queue than that number that we processed. I can't describe how many more, but it was significant. I would hope to be able to get, if the last six weeks are any indication of a, at least a bit of a break in the log jam, then I would hope sequentially, Ben, that we are able to do better. But right now, it's too early to really go out on too much of a limb to say that absolutely. I still think it's a couple, two to three quarters away until we completely get it down and get it processed.

We are not, again we are not lacking. One of my biggest concerns we are working through the backlog now. But we are still getting patients in each and every day. So they are adding to the backlog. Unfortunately we are still not at a point that we are processing them as fast as I would like us to. Some of it is our system. Some of it -- a lot of it is at the third party payer level. Remember we also have to use DME suppliers in cases where we don't have a contract with the particular payer yet, and they do. They are an in network system. So add to that the complexity of taking all of this information that we normally would submit to a payer and actually submitting it to yet a third party, for them then to process with the payer. So, it's pretty complicated right now.

As far -- I don't want to really go into the staffing. Just logistically, I think we are adequately staffed in that particular arena right now. It's a matter of streamlining. We have to become more efficient. And -- than we are today. It is more efficient not only on our side, but also on the receiving end from the payer standpoint that they understand what these packages and they can turn around. Remember who gets these packages, it's a claims adjuster who is looking at a formulary document and saying yea or nay. If they get rejected for any reason whatsoever we go to appeal. Right now it's at the early stages. We are having to work through a very complicated issue right now. Again, given my history, and having gone through this previously in the pump world, it's solvable, it's frustrating, our salesforce is frustrated because they are doing everything we asked them to do. But we are just continuing to force it through the system, if necessary, we do send salesforces into clinics to collect paper, rather than selling. They are not happy with that. But that's what we have to do to clear the log jam periodically we will send them in.

Okay. Thank you.

There are no questions in the queue. I will turn the conference over to our host for any closing or additional remarks.

Again, thank you for joining us today. Obviously a very exciting time for DexCom. We believe that the partnership with Edwards allows us to take our technology into another particular area of glycemic control that is in reality far greater than our ambulatory world because of the conditions called stress hyperglycemia, in which relatively stable patients have an inability to control their glucose levels and have to be instituted on intensive insulin therapy in order to stabilize them and the resulting outcomes in morbidity and mortality provide us with a unique opportunity. We believe we have the best system. Edwards certainly has looked at all the players in this space and chose us. Because they too believe we have the best system. On the ambulatory side we are making great strides and progress. It's not without its frustrations as we go through this. But the adoption is where we predicted it would be. Maybe even a little north of that. But it's the back office, devils in the details that we are dealing with at this particular point in time. There is a great future ahead of DexCom and thanks again for listening to us and supporting us.

And that does conclude our conference call. Thank you for joining us today.