德康醫療 (DXCM) 2009 Q1 法說會逐字稿

Good day, and welcome to today's DexCom first quarter year 2009 earnings conference call. Today's call is being recorded, and after opening remarks and introductions, I'd like to turn the conference over to your host, Mr. Terry Gregg.

Please go ahead.

Thank you, operator, and welcome to DexCom's first quarter investor conference call. Joining me today on the call are Steve Pacelli, Chief Administrative Officer, and Jess Roper, Chief Financial Officer.

The agenda will follow our normal format, with a financial review by Jess, I will provide a commercial update on our core business, a brief update on our partnerships, and we will conclude our prepared remarks and open it up to your questions. Steve will kick off with the safe-harbor statement.

Steve?

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 reason.

Terry?

Thanks, Steve.

Jess, I'll turn it over to you now.

Thank you, Terry.

Following a strong fourth quarter, DexCom continued with sequential growth during the first quarter of 2009, generating product revenue of approximately $2.7 million, compared to $1.8 million for the same quarter 2008, an increase of over 46%. Sequentially, product revenue for Q1 increased over 8% from the prior quarter.

During Q1 we sold just over 1,200 systems, slightly more than we shipped during the fourth quarter of 2008. In addition, we deferred approximately $40,000 of product revenue from the sale of SEVEN systems during Q1 as we may deliver SEVEN PLUS system upgrades to certain customers who purchased the SEVEN system during the quarter. We expect to deliver these upgrades during the next couple of months and will recognize revenue when the upgrades have been delivered.

Sequentially, sensor revenues were up 5% from the prior quarter. Total revenue for the first quarter of 2009 was $5.2 million, compared to $1.9 million for the same quarter in 2008, and included $2.5 million in development grant revenue from our development and collaboration agreements.

We recently amended our agreements with Edwards Life Sciences to provide that Edwards be responsible for leading and funding certain clinical study activities previously required to be performed by DexCom. As a result of this amendment, DexCom will receive $1.5 million in lower development funding from Edwards. However, the net effect is estimated to be cost neutral because DexCom no longer has the obligation to fund these clinical trial activities.

As a result of this amendment, during Q1 we recognized $2.5 million, rather than the $2.8 million, in development grant revenues as previously guided.

Going forward beginning in Q2, we expect to recognize $2.64 million per quarter in total development grant revenue on a straight-line basis for both of our development and collaborative agreements through the end of 2010, rather than the $2.8 million that we previously guided. This quarterly estimate excludes any milestone-based payments that we may also earn. Changing the estimates could impact amounts recognized in future periods.

Cost of sales, including both product and nonproduct, total $5.5 million for the quarter. Product cost of sales total $3.5 million for Q1, compared to $3.1 million for the same quarter of 2008, and our product gross margin loss was $850,000 in 2009, compared to $1.3 million for the same quarter of 2008. We have experienced improvement in our negative margin primarily due to increased sales volumes in 2009.

Development cost of sales totaled $1.95 million for the first quarter of 2009, compared to $130,000 in 2008. The increase in development cost of sales was primarily due to costs related to our development of a hospital-based continuous glucose monitoring system pursuant to our agreement with Edwards entered into during Q4 of 2008.

Research and development expense decreased by approximately $1.6 million and totaled $3.2 million for the first quarter of 2009, compared to $4.8 million in 2008. It is important to note that R&D costs associated with our development and collaboration agreements with Animas and Edwards are included within development cost of sales.

Selling, general and administrative expense totaled $7.9 million in Q1 of 2009, compared to $6.4 million in 2008. The increase was primarily due to additional marketing, selling, and customer service-related costs. Major components of increased SG&A expense included approximately $410,000 higher salaries and $240,000 higher marketing consulting costs.

Sequentially, SG&A expense increased by approximately $550,000 from Q4 of 2008, primarily due to additional customer service, billing, and selling-related costs.

In 2008 the Financial Accounting Standards Board issued new guidance, commonly referred to as FSP No. APB 14-1. This new guidance requires the issuer of certain convertible debt instruments to separately account for the fair value of the liability equity proponents of the instrument. The debt would be recognized at the present value of its cash flows discounted using the company's nonconvertible debt borrowing rate. The equity component would be recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability.

APB 14-1 also requires the accretion or expense of the debt discount over the expected life of the debt to interest expense. The transition guides requires retrospective application to all financial periods presented.

On January 1st of 2009, we adopted the provisions of APB 14-1, which resulted in a reduction to the historical carrying value of the convertible debt on our balance sheet of $26.6 million, a reduction to the carrying value of the debt issuance cost of $1.2 million and a corresponding increase to paid-in-capital as of the issuance debt.

The adoption of APB 14-1 also resulted in an increase in accumulated deficit of $6.2 million and a corresponding net decrease to the carrying value of the debt discount and issuance cost as of January 1, 2009. We recorded $1.1 million and $947,000 of noncash interest expense relating to the amortization of the debt discount for Q1 of 2009 and 2008 respectively.

The company also recorded $713,000 of interest expense relating to the contractual coupon payments for each of these quarters ended in March 2009 and 2008.

The impact of the adoption of APB 14-1 to loss per share was an additional loss of $0.02 and $0.03 per share for the quarters ended March 31, 2009, and 2008 respectively.

Going forward, we expect to record $1.2 million to $2.0 million of noncash interest expense relating to the amortization of the debt discount on a quarterly basis through March of 2012.

Our net loss decrease to $13.1 million for the first quarter of 2009, compared to $13.8 million during the same quarter in 2008. Our net loss for Q1 of 2009 included $3.7 million in net noncash expenses centered primarily in share-based compensation and the expense of our convertible debt discount related to the adoption of APB 14-1, as described above.

We ended the quarter with $61 million in cash and marketable securities, which excludes $3.7 million in restricted cash, and we had working capital of $51 million.

As we mentioned previously on our fourth quarter call held in March, we completed a follow-on public offering in February 2009, selling an aggregate of approximately 16 million shares of our common stock for net proceeds of approximately $45.6 million after deducting underwriting discounts, commissions, and offering expenses.

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

Thanks, Jess.

Well, obviously, we were extremely pleased with our financial performance in the first quarter of 2009. Product revenue, new patient adds, and sensor sales were all up sequentially from Q4 2008.

I'm frequently asked how is this economy impacting your business? So I'd like to take a minute to reflect on the state of the economy, its impact on the diabetes business and, specifically, our business.

My years as President of MiniMed taught me that sales of durable medical equipment in the diabetes space are seasonal and are often soft in the first quarter because patients are faced with increased out-of-pocket costs as insurance deductibles are reset and because flexible spending accounts are largely unfunded. And while health care is traditionally one of the last areas in which consumers cut back on spending, there has been a slowdown in the market for certain diabetes supplies, as witnessed recently by reported lower sales in the worldwide market for SMBG products.

Yet, in spite of the global economic crisis, unmet insurance deductibles, and underfunded flexible spending accounts, we delivered another quarter of sequential growth, we exceeded analyst consensus for product revenue, and, more importantly, we see a positive sales trend continuing in to the second quarter.

The launch of the SEVEN PLUS has been especially well received by patients and health-care providers. We believe the SEVEN PLUS is proving to be a better-performing product with noticeable performance benefits and greater ease of use for our patients. We believe the SEVEN PLUS is the only CGM system that meets the key criteria demanded by physicians, educators, and patients: convenience, performance, and simplicity.

Qualitative feedback from our field force, clinicians, and patients reinforces that product performance of the SEVEN PLUS is more reliable and consistent than ever. Product complaint rates, especially rated to -- related to sensor performance are at historically low levels, and the operational improvements we've made are resulting in substantially improved manufacturing yields and throughput.

Since launching the SEVEN PLUS towards the end of the first quarter, our focus has been on new patients, although we hope to rapidly move to upgrading those loyal users of the SEVEN who desire to move up to the SEVEN PLUS. To that end, we are pleased to announce that just yesterday we received FDA approval to begin commercializing an upgrade kit for the SEVEN PLUS, and we expect to begin that process later this month.

As we look to the balance of 2009, we enter what I would term a blocking-and-tackling mode of building our business. We will continue to improve our back-office systems and processing capabilities to meet expected increases in patient demand. We've made tremendous changes in terms of how our back office operates. However, we're still functioning largely on a manual basis in terms of our interaction with a payer system. We will work to move to a more automated system and expect to make progress on that front in the coming quarters.

We will continue to push for progress on the reimbursement front, both in terms of the adoption of new coverage policies for CGM and the establishment of contracts with payers to cover our products.

In summary, I remain convinced more than ever that patient demand for CGM is real and is rapidly growing, and I'm extremely pleased with our progress and momentum in the field as we work to establish continuous glucose monitoring as the standard of care for diabetes management.

We continue to make great progress in our collaboration with Edwards Life Sciences relating to the development and commercialization of a hospital-based continuous glucose monitoring system. Results of the recent NICE-SUGAR Study highlighted the continuing need to further define appropriate target glycemic levels in critically ill patients. In assessing this study, key opinion leaders continued to express the need for accurate and continuous glucose monitoring in the critical care setting.

Unfortunately, today there is no methodology other than utilizing traditional finger-stick measurements for monitoring glucose levels and controlling both hyper- and hypoglycemia in the hospital. Provided our development efforts in clinical studies over the next several quarters continue to demonstrate successful performance, we plan to support Edwards in seeking regulatory approval and launching our first-generation product in Europe before year end.

We continue our development work on the integrated insulin pump CGM systems with our pump partners Animas Corporation and Insulet Corporation. As you might expect, coordinating the development of novel technology among multiple engineering teams can be challenging. In a slight reset of expectations, our goal is to complete all development, clinical, and regulatory efforts on these joint development projects to enable us to launch first-generation products during 2010. As you are well aware, the timing of the regulatory process is uncertain, and it is ultimately up to each of our partners to decide appropriate timing of market launch.

To summarize, first, I am very pleased with the performance of the team at DexCom, who have functioned well under the pressures and challenges of launching the SEVEN PLUS, bringing a third-generation product in just the third year following our first product introduction.

With our leadership role in CGM, we will continue to invest in activities to grow the category and grow our product revenues by increasing the acceptance and adoption of CGM as the best standard of care for diabetes management.

At the core of this effort will be our focus on the patient. Daily, I aim to reinforce a patient-centric culture across the company, for I have long believed that, if you take care of the patient, everything else will take care of itself.

Yet, as we invest in the business, we will be ever mindful of our balance sheet. We ended the quarter with approximately $65 million in cash, marketable securities, and restricted cash, and still expect to receive up to an additional $20 million in development and milestone payments from Edwards, assuming achievement of the regulatory milestones, and an additional $5 million from Animas on receipt of a CE mark for the first OUS commercial product. If we execute on our revenue plan and we continue to spend wisely, we believe this cash will be sufficient to take us to profitability.

In the end, we are determined to ensure DexCom has the presence and staying power to drive adoption and be a meaningful participant in CGM as it evolves over time.

Thank you.

Now open it up for question and answers.

Thank you. (Operator instructions.) And our first question will come from Mimi Pham with JMP Securities.

Hi. Good afternoon.

Hi, Mimi.

Just to clarify on a timeline for the integrated pump products 2010, is J&J still expected first versus the integration with Insulet, and would you characterize as first half '10 for J&J and second half of 2010 for Insulet?

Mimi, that's a good question, and, unfortunately, we have been asked by our partners that -- because they really will drive the commercial introduction of these products, to defer to them, and so, in the course of that, I think that's what we need to do on this call.

And, Mimi, just to clarify as well, part of the reason they've been reluctant to allow us to give more specific guidance, quite frankly, is that there's a real fear on their part that patients -- if we try to zero in on specific guidance as to a market launch, that patients -- it will negatively impact their sales of their existing products. So they're not allowing us to give any more specific guidance than what we're giving you.

But it sounds like the timeline still maybe took a -- is pushed back a quarter just talking about your integration timelines -- the time -- it's still pushed back -- it's at least pushed back about a quarter?

Yes, I mean, Mimi, without getting into specifics, I would just say that, when these companies -- and particularly with regards to a global view of diabetes -- they have to coordinate launches not just in the US but on a global basis. And so I think, from that standpoint, it's really not as much from the developmental side or technical teams as it is as they strategize for their global, worldwide launch of products. So I would just leave it at that.

Okay. And in terms of the impact on the economy, last quarter you had 12 patient -- 1,200 patient adds and your disposable sales were 25% this quarter. You had a little bit higher than 1,200, but you had the 5% increase sequentially in disposable rev. Do you think that there's any impact on the economy in terms of higher attrition, or anything related to that affecting your disposables revenue?

Well, I think that there's a couple things working there, and the first one is the fact that -- what we believe the impact is from the economy is that patients are using the product for a longer period of time. When we -- historically, we've said we know they use it 7 to 10 days. If we look at reorder practices, we know that they're extending that out as long as they possible can, and it's not uncommon now to see patients probably using it closer to 14 days.

Okay.

Not -- it's something that we are looking at internally. We've long said that there is a mechanism to shut that sensor off, but we have chosen up to this point not to do that vis-à-vis software. Obviously, looking forward to future generations of our sensor products, we're going to have to take a much closer look at how we handle that whole shutoff process.

But it doesn't seem like -- it sounds like you're not seeing higher attrition, you're just seeing people use the sensors longer?

It is difficult to say. I would generally make a comment that, no, we don't see a higher attrition rate. We're seeing, as we move more to reimbursement, certainly the -- if you look at the average number of boxes of sensors sold per order, that is increasing due to the reimbursement. So as we move to a higher reimbursement, we're allowed to ship more boxes. So coming out of the first quarter, as an example -- or coming out of the fourth quarter '08, as we had a particularly strong December, if we were able to ship more than one or two boxes, obviously, and they're extending the use of that, we're going to see a little dampening, as we've expressed, in this -- the first quarter. But, again, that should turn itself around as they go to reorder under these insurance contracts.

Thank you. And then last question, for your SEVEN PLUS, is there a pricing premium for the starter kit, and did you talk about the price for the upgrades?

We do have --

Yes, I mean, Mimi, yes, there is a pricing increase. Again, there's a current cash promotion. I believe that price is $799 for the durable system. But keep in mind, as we've moved to a reimbursed environment, pricing, I would tell you, is kind of all over the map. What we've disclosed previously is that our ASP has certainly migrated north from the -- what we were seeing the $600 range to closer to a $700 ASP from a reimbursed perspective. But it's kind of hard to say, yes -- so, yes, we do have an increased price on the SEVEN PLUS, but I would tell you that that doesn't really have a direct link to pricing that we receive from our insurance contracts. Does that make sense?

Yes. Yes, it makes sense. And then -- that makes sense.

Yes, and then we will launch an upgrade, and the price for the upgrade for users of the SEVEN who are still under warranty -- so they have to be within their one-year warranty period -- would be able to upgrade for $199.

Okay. Thank you so much.

And our next question will come from Ben Andrew with William Blair.

Good afternoon, guys.

Hey, Ben.

Just a few questions. What all is included in the SEVEN PLUS upgrade kit? Is it just the new durable, or is there new software or anything else that the patient needs, and is there any kind of constraints on availability of those?

Yes, no availability constraints but the -- it actually includes a new transmitter, and it'll include software that the patient will actually upgrade the firmware. So they don't actually have to swap out the receiver. We replace the firmware within the existing SEVEN receiver, but they do require -- the system does require a new transmitter.

Okay. And, Terry, as you think about reimbursement -- and maybe Steve as well -- what chunk of your patients have a material copay? How -- what chunk are HMO's -- maybe they do only have a $10 copay -- versus (inaudible) in PPO and maybe higher so -- to try to understand better the constraints on patients' willingness to pay the copay on both the sensor as well as the upgrade?

Yes, no, Ben, we have not stratified that information. I'm sure it's within the bowels of our system if we could stratify it but I'd -- I'll remind you of my earlier comment with regards to we're still basically a manual-processing unit brute-forcing some of this stuff until we finish our software upgrades in that particular area and be able to extract that information.

Okay. So then maybe following on that, as you try to go to automatic with these accounts and the payers, what does that really take? Does it take a contract with each local payer, or is it software? I mean, how difficult and time-consuming is that going be, you said, quarters?

Well, it's certainly going to be time-consuming from a standpoint that, while we're converting this over we're -- our ERP system is an Oracle-based ERP system so we've got to integrate with ERP system at the same time to sign up contracts and allow that electronic communication to them. Obviously, all of that requires B&B confirmation. So there's a lot of handholding that goes on. In the meantime, we still need to process patients on an ongoing basis. So it is a major undertaking. We have completed the first of probably four steps to that that is live as of this month, and so we've got an additional three, what I call, modules that need to be activated. That's going to take most of the rest of the year to do that.

Okay. And then shifting gears, Terry, why the change in the Edwards contract? Was it just logistics or some other reason?

No, Ben, quite honestly, the -- so the only change is that Edwards has agreed to take on the responsibility for a portion of the clinical trials, and, quite frankly, it goes to the heart of why we did this deal with Edwards in the first place, which is we're not experts in the critical-care setting. And it became clear through the beginnings of the -- of developing the protocols, etc., for the pivotal trial that Edwards would be in a much better position to interact with folks that they're used to interacting with in terms of getting patients enrolled and consented to the clinical trials, working with the critical-care centers, as opposed to the types of sites that we use for our ambulatory product. So it -- over the course of this development, it just became clear that it would be much better served if Edwards took the responsibility of this trial. And all we did is just basically took away the estimated amount we would spend that they were going to fund for us to conduct the trial, deducted that from what they would be paying us, so they're going to have -- they'll fund it and run it themselves.

And we've been -- it's been a great relationship. They actually have people here in San Diego on our campus shoulder to shoulder. We have trained them as we move in to the first protocol. So they are completely capable of running the trials in the ICU and in the clinical setting. They've got a lot more horsepower in order to do that in terms of their staff than we do. We were spread pretty thin going in to this. So I think it's -- for us it -- we had offered that up as part of the original contract, and they have taken us up on our offer. So we're thrilled with it.

Great. And then last question, Steve -- or I guess maybe a question for Jess really -- if you look at gross margin, it was a bit -- quite a bit better on the product side than I expected, which is great to see. How do you anticipate that margin progressing through the year? Are you -- do you think you can make significant progress as a percent to revenues over the course of the year?

Well, we don't really give too much guidance, but I think, if you look back historically quarter to quarter in 2008 and then Q1 of 2009 on the product cost of sales, we really haven't had much of an uptick, and most of -- a lot of our costs are really kind of factory overhead costs, and we've been able to, just through sales volume, get a lower cost per unit. We're kind of chewing the overhead costs. So we hope that product cost of sales don't go up that high. Again, we said we had excess capacity issues in the past.

And, as Terry mentioned, Ben, in his statements, we are working on some process improvements, manufacturing improvements that are providing us with just better yields, less scrap, just kind of all the things that you would expect to do as we mature as a business to help drive those costs down.

Okay. So that can stay relatively stable. Maybe there's some quarterly fluctuations there.

Yes, I think that's right. I mean, we would expect it to improve on a quarterly basis, certainly, without giving specific guidance as to when we would -- I think the guidance we've given previously is that we would expect in a quarter of a $5 million product revenue quarter that we would be gross margin positive.

Okay. Okay. Great. Thank you.

We'll move on to Thom Gunderson with Piper Jaffray.

Hi. Let me just do some quick cleanup. Jess, could you repeat what you said on deferrals? I didn't catch the number.

On the deferred revenue piece?

Right.

Yes, we deferred approximately $40,000 in deferred revenue related to the upgrade to the SEVEN PLUS system and --

Got it. Got it.

-- we expect those upgrades in the next couple of months.

Thanks. And then is it fair to assume -- you said 1,200 systems were sold. Is that fair to assume that that's all new customers?

Yes, I mean, at this point, it would be all new customers. I'd have to go back, Thom, and specifically look at that, but that's not part of an upgrade program.

Okay. And then, realizing that there is all sorts of inputs in to how you launch a product and certainly how you launch a product when you're working with a partner -- some of them larger, some of them smaller -- can you comment, Terry, just a little bit on your own internal timelines. Have your internal timelines changed on Animas or Edwards or Insulet faster or slower in the last three to six months?

No, not really. I think one of the challenges in any of these, and I would say -- let's take Edwards as an example because we're teaching them through this process, and they're here on campus, they're within our R&D environment, and that one has gone, I think, quite swimmingly well, and, in fact, we're right on schedule for everything -- both parties -- so we're pretty happy about that.

If you look at the other two in the (inaudible), it's integrating our product into their platform, and so it's a different animal from that standpoint, Thom, and we have -- we rely on their engineering staff to a great degree because, ultimately, no matter what we do -- remember, we embed our software into their hardware and so it's -- in many cases you have a different landscape that you're trying to work through and relying on their engineering staff to bear a good portion of the burden as we work through these issues. So it's a little bit different.

But, no, I think these things at -- as we've expressed them, once they get outside of our complete control, we don't always have the visibility, I think, that we would necessarily have if they were completely in our control.

Okay. But just to try and put words in your mouth -- never successful, but I'll try -- is -- you knew that, having DexCom on board for other companies -- the software into hardware -- you knew that challenge from the get-go, and you put timelines together, and you've been working diligently towards that. Those timelines haven't changed.

Yes, I would say in the global sense, no, they haven't really changed. I think some factors have come in to play that we didn't necessarily anticipate. When you look at the global business of launching a product, I think, our thought process -- because at the time we entered into these -- was simply, look, we're going to get stuff going in the US. We didn't -- as a stand-alone, we did not at that time have a product that we planned to introduce OUS. Now we subsequently this year signed an extension of our contract with Animas for OUS, and they want to launch that. They now have, I think, more thoughtfulness going forward as to what it looks like for them in a global launch with their distribution system. So there's just more factors at play. They have to seek more counsel from a strategy-wise in terms of commercial introduction. It's not just US. And in the J&J world, obviously, that requires a lot more discussion at senior levels.

And then last question is you covered the economy and the economy and diabetes and the economy and DexCom well. I guess I would just ask you, from your standpoint, when you do that well swimming upstream in a tough economy, did you feel the current running against you? Were there anecdotes out there? Were there current customers that were -- that you heard about that were struggling, or was it just full speed ahead because you're so early on the adoption curve that you didn't feel it?

It's the latter. I mean, we have felt no real headwinds to speak of. If anything, it's been tailwinds. The demand -- I mean, our pipeline, as I look today down in the sales operations, the back office, we are full, processing as rapidly as we can possibly process. We've got efficiency experts on staff right now and consultants -- as part of what Jess was talking about -- to look at how we process more, rather than less. So -- and my comment about going in April -- April was the first month after a strong quarter, again, I always get nervous, but there was no letdown from day one. So I don't see it yet.

What I do see -- and, again, it gets back to this issue with regards we do, anecdotally, hear more and more patients talking about the extension of use of the product beyond its recommended use, and the SEVEN PLUS with the new algorithm -- more data capture -- has only exacerbated their capacity to do that. And so we have to think about that going forward to next generation.

I mean, Thom, our long-term goal -- and I think anybody in the category -- is to clearly get to a point where we are sophisticated enough, accurate enough to have insulin dosing off of ISF glucose. We believe that at some point we can get there, and we believe we'll be the first to get there. That may be the time that we do different things in order to really -- and from an FDA standpoint, we want that labeled indication -- we may have to have more restriction on terms of how the sensor can be used and for how long. But until we actually get to a point where we want to make out an application to FDA, I think we're not going to change that. But that's kind of the behavior, if anything, from the patient standpoint.

And the ease in which they can restart it. I mean, just go to YouTube, and you can have a full display of how to do that. It's very convenient for the patient. Where, if I made any mistake in terms of understanding the patient dynamic, I really thought that, once reimbursement was here, there would be less motivation on the part of the patients to stretch the use out beyond seven, eight, nine days, and I calculated wrong. Patient -- I did not take into consideration the ease of use, the simplicity of use, or the convenience the patients like that they simply just restart it because they then don't have to go through the entire application and startup process. So that's just the area where, I think, if we possibly had it to do over again, we may have done something differently. I can't say that for sure because at novel adoption there is quite a marketing cache to know that we are the most durable, certainly the most accurate in hypoglycemia detection, the most convenient, the simplest to use. I mean, all of those things, given the commercial mass of our competitors, are really great things to have in trying to compete in that environment.

Okay. Thanks, Terry.

And our next question will come from Bill Plovanic with Canaccord Adams.

Good afternoon. This is actually Anoop for Bill.

A lot of the questions have been asked. Couple of follow-ups. In terms of UNH, is there any update in the pricing contracts with UNH?

I'll let Steve answer.

Yes, no, we're still -- Anoop, we're still working on that. Just to give you a sense of where we are, United is a little bit different compared to some of the other payers in the sense that United has adopted a policy of preferring to actually cause us to work through a distributor. And the reason they do that is because United has -- they believe, I think, have greater purchasing power working through a single entity where they can purchase not just CGM supplies from us but purchase strips, insulin, etc. So the -- this is going to take a little longer than, I think, we initially expected because we've got to basically prove to United that they would be much better off economically working directly with DexCom.

Now, that said, it's important to remember we do have access to the United network via one of our DME -- actually multiple DME suppliers. So the fact and the absence that we don't have a direct contract really is nothing more than a potential to improve some margin on the United -- the sales to United patients. But we do have access to that network so it's not like -- excuse me -- that we're precluded from transacting with those patients on a reimburse basis.

And then it's safe to say that UNH was beneficial in the quarter and is likely to continue to be --

Absolutely.

Okay. And then could you just explain one more time the pricing premium on the SEVEN PLUS? I just missed some of the explanation on that.

Sure. Let me try to be more clear. So let's talk about the upgrade first. So we'll offer to users of the SEVEN who are still within their one-year warranty period, they will have the right to purchase an upgrade to the SEVEN PLUS for $199, and that upgrade will include a firmware upgrade to their existing receive, and it will include a new transmitter. Okay? So that's the upgrade kit.

Now, for new SEVEN PLUS kits, we're currently running a cash -- for nonreimbursed patients a cash promotional price of $799 for the SEVEN PLUS system. Okay?

We will also establish -- we have not disclosed -- we do have a new, what I'll call, a list price, which we have not disclosed yet. But what I tried to make clear -- and I'll try it again in case it wasn't clear -- is that that list price doesn't really have a direct impact on our ASP because, remember, we have -- now have negotiated contracts with -- either through a DME supplier or on a direct basis with virtually all of the insurance payers that we do business with. And the pricing, I would say, it's all over the map. I mean, it's -- we have indicated that our ASP's -- historical ASP's have gone up. So that tells you that the pricing, certainly across the payers, is better than we were seeing on our historical cash basis.

But to be able to tell you exactly what our pricing is on the SEVEN PLUS is sort of a tough thing. I think, as we get clarity down the road on our ASP's -- we've been pretty good about kind of giving you a good sense of what our ASP is on both the durables and the sensors, and so what we're saying today is that our ASP has moved up closer to $700, as opposed to $600, where it was historically on a cash basis, and that our sensor ASP is moving north of $60. We haven't been more specific than that at this point.

Does that clarify it at all?

Yes, it does. Thank you. And that's it. Thank you.

(Operator instructions.) And next we'll hear from Shawn Fitz with Stephens, Inc.

Good afternoon. Terry, this probably dovetails a little bit with some of your commentary as it relates to demand and the economy. Are you currently experiencing constraints on your ability to add new patients as a result of some of your back-office capacity issues?

The answer -- easy answer is no. We certainly are strained from that standpoint, but if you remember back a couple quarters, we really got caught flat-footed, Shawn, in that third quarter of '08 when we had a lot more in queue than we were able to process. We are keeping up at this point, but we are having to manually force that through. So that means there's overtime, there's other ways in which we're addressing this. It is a challenge. I do not want to minimize the challenge.

Luckily for us that a couple of the major payers have in many ways adjusted their requirements, and so as a result of that, we need less documentation, which means more expeditious processing of the claims. So that has lessened some of the load, and they're some of the major players from that standpoint.

But we need to continue to streamline, and that's why, if you look at what the field -- I asked the field force to do something, they have performed extraordinarily well, and I think our -- if you look at what our ratio is, we're still -- we have a lot of MDI patients so this has been an opportunity. We have to remind people that the world of diabetes is only roughly approaching 30% pump penetration but still north of 50% MDI, and so we have gone out and -- we still have a good ratio of MDI patients versus our pump patients.

But that said, they continue to amaze me in their ability to fill the channel. And, in fact, some of our -- if you look at our -- the S portion of our SG&A -- and I'm happy to report we were overbudget in terms of the commissions. I'm happy to pay commissions when guys overachieve -- and the gals. So they're doing their part. Our obligation -- we are their customer in the back office, and we're able to keep up.

Okay. Okay. Great, Terry. And then you spoke a little bit about the improvements you all have been able to gain on the yield side of manufacturing. Terry, could you maybe quantify how much room there still is to improve yields, or are you guys kind of fully meeting your objectives on a yield standpoint?

Well, I would say from a standpoint of where we're at on yields, we're pretty happy with where we have improved and -- from the last couple of quarters and the guys -- I think no one will ever be entirely happy from a standpoint. We have -- based on what we had projected where we would be at at the end of the first quarter on the yield category, we have overachieved on that, and that results in some of the improvements that Jess reported on. We need to continue to do that.

I think the -- well, the bigger issue, the bigger opportunity -- as I've said before, we have plenty of capacity here given 2009. Obviously, some of the things that we've got planned for manufacturing improvements are not just the yields. It's really as it relates to the ability to process much greater quantities. And I've talked about that historically in terms of our gen-four product, which is moving along quite nicely in the R&D environment and moving now in to some areas of the production facility.

Great. And then maybe a little bit of a housekeeping question. As we look at your new patients that you added in the quarter and then your mix of existing customers on the sensor side, what's the mix in each of those two segments versus insurance -- insurance versus self-paid?

Yes, right now we're still running around 75% insurance, and that's edging up a little bit. It slowed down in terms of its acceleration. Obviously, if you look at where we were even three, four months ago, we've gone north more towards more reimbursement and -- but there are still some patients that are cash-pay patients, both on the STK -- obviously, there's more insurance on the new patients as it relates to the introduction to STK. We still have some patients on the sensor reorder that are cash pay. What we're trying to do is move them for their benefit. We -- when they reorder, we certainly identify as a cash-pay patient, and they may -- since we have additional insurance coverage contracts and decisions that we will get new assignment of benefits and do a benefits investigation on their behalf, and they may or may not at that point be qualified for reimbursement. But I continue to see that move in that reimbursement direction.

Okay. Okay. Great. Terry, last question, as you think about the ADA conference in June, would you care to kind of talk about what we might expect from DexCom specifically and then maybe more broadly in terms of what we might see as it relates to clinical data?

Well, I've got Steve glaring at me right now not to talk off track here so I'll say, certainly, we've got new booth graphics. We've got some things that I think you'll be happy with. I think in the -- and actually I was going to put it in my closing comments, which I always write so the attorneys don't get to see them until I actually say them, but I'll go ahead and give them a little heartache right now.

No, I think there's -- you'll -- last year, if you remember, ADA was all about the ACCORD trial and trying to unravel the mystery of that trial. So CGM really didn't get its place, and, in fact, there was only really one session. Two other sessions were canceled and replaced by discussions on the ACCORD trial. This year we are certainly in the front of all of that. There are a number of sessions that are going to be talking about CGM. There's, obviously, additional analysis from the JDRF trial. We've seen some of that at different meetings leading up to this. I don't think you'll see the full JDRF one-year trial results, which also have a quality-of-life and an economic analysis. I suspect that's going to be probably later in the year, maybe EASD in the September-October time frame. But there's going to be a lot more positive information about the utilization of CGM as a tool to better manage patients' diabetes.

And I think you're going to begin to really hear a lot more, Shawn, about the role of glycemic variability in all of diabetes. And what that means -- historically, we've treated the symptoms, but we've never really understand what the other problems are associated with glycemic variability. In fact, it was, in many ways, first recognized in the ICU by [Bree] Vandenberg and Tony [Funari] and people like that because they were looking at it from a -- both diabetes and nondiabetes population. And so now you'll see a lot more that we've got to do something other than A1c because that's really a pretty poor surrogate market.

So the new thing is how do we come up with something that makes sense on glycemic variability and methodologies in order to really -- our mantra -- stay between the lines? How do you reduce those outliers? And so CGM will get a lot of play in that environment and how best to use that -- it really true is a behavior modification tool -- and how best to use that, and it's not just about measuring glucose. It's all about behavior, as well as insulin dosing. So you'll see a lot of programs and presentations, both oral, abstracts, presentations at the booth by companies talking about where they think CGM will be in the future.

Okay. Terry, congratulations on the progress. We'll see you guys in June.

Thanks.

And we'll take a follow-up question from Bill Plovanic.

Hi, Terry. You mentioned the gen-four product. Could you just give us an update on the timeline for the gen-four product?

I can't give you any update on the timeline. I will just tell you that, as I've stated before, we always believe in iterations, and so one of the benefits as we move down this pathway, all of them are linked to each other. So gen-three is linked to gen-four is linked to gen-five, and gen-five is a hospital sensor. So from that standpoint, as we get more and more information, as we're in human trials on the hospital sensor with that membrane, we're able to translate that backwards into the gen-four. Don't want to give any timelines because we keep discovering new wonderful things about it each time we go out in the field.

Okay. Well, thank you for taking the questions, and we'll see you on Tuesday at our Diabetes and Obesity Conference.

You got it, Bill.

(Operator instructions.) We'll take a follow-up from Thom Gunderson.

Hey, Terry, could you -- maybe you commented on this and I missed it, but I think you shipped $700,000 out of your distributors in Europe during the quarter. Does that compare to virtually nothing in Q4 or $100,000 -- $200,000 and what -- is that mostly stocking orders? I mean, this is what you have to do when you're starting up with distributors is start to go to the rest of the world and get them good inventory. But where would you say we are with that whole process?

Hey, Thom, this is Steve. I'm impressed you already got that far into the 10-Q considering we just filed -- no.

We didn't actually mention that on the call, but you're right. No, we don't think of our use of distributors as -- primarily as stocking distributors. In fact, we're doing it on a very limited basis. Our distributors were really -- as we've talked about before -- our DME supplier/distributor strategy, if you will, in the US is absolutely one of access to reimbursement channels that we don't otherwise have access to via -- in the case of United being the big one. But there will be a whole host, and these suppliers will be a portion of our business going forward because there are economies that we can gain from their access to much smaller, more regional payers that -- we'll never be able to contract with everyone and do business with everyone. So in many instances we'll do business with the DME suppliers a means to access smaller regional payers. Jess, is looking for the number.

Yes, but let me jus weigh in. I mean, our standard even with our distributors are drop-shipped. We really try to avoid what we call a stocking-inventory distributor at all cost, just because we need to maintain control where the product is going. So in most of our situations -- there will be those one-offs. Obviously, shipping to Europe, drop-shipping is not going to be possible from that standpoint, and we have one situation here in the US, but it does not represent a huge portion of our existing business from that standpoint.

But as Steve said, I mean, going forward we -- we'll have to deal with that, but that -- the reason we really don't want to do too much of that is, quite frankly, the regulatory requirements for us and the diligence on our end of it to ensure the adequate control of that product when it's outside of our shipping department and our warehouse just increases our cost component to maintain that good regulatory control.

Great. Thanks for the clarification.

And we'll take a follow-up from Mimi Pham.

Hi. Just a few follow-ups. Did you give us the breakout of percent MDI and percent pumpers?

No, we have not. Historically, Mimi, what we said was 60/40. That's based on a annual survey that we do -- 60% pumpers, 40% MDI. We'll do that survey again in the fourth quarter.

Okay.

That is not something that we collect when we capture the information in terms of their insurance benefits but that's -- and other than that, there's real -- no methodology to collect it.

The only other thing I can tell you is that in all of our clinical trials that we do, we don't specify what route of insulin administration is required, and so I would say in that we're about 50/50 in terms of MDI versus pump in our clinical trials. So it's somewhere in that mix between 40/60 and 50/50.

Okay. And are you currently in any discussions to integrate your device with any other pump manufacturers?

I couldn't comment on that.

Okay. And then last, do you anticipate once second half of the year, when you get through this bottleneck in processing the reimbursements, do you envision any other bottlenecks to get through your pipeline of patients?

Let me, if I may, make a clarifying statement. I don't consider it a bottleneck right now. I do consider it an opportunity to become more efficient. Bottleneck is what we did have in Q3 '08. That's not what we're experiencing today. We just have high demand and, therefore, high processing efforts being done. But we have streamlined that system. The goal is to make it even more efficient by moving from manual to electronic. So I expect that, as each module comes online, that we will continue to get much more efficient than we are today.

The goal is to ultimately either cap or reduce the headcount in the requirements for processing higher numbers of patients with fewer bodies or on a per-submission basis. But that's -- we've got that planned out quite eloquently so we have -- I think, from a standpoint of understanding what the sizing requirements are, we've done a very good job of understanding that.

Okay. Thank you for the clarification.

Okay.

And there are no further questions at this time.

Mr. Gregg, I'll turn things back to you for any additional or closing remarks.

Operator, thank you.

And for those of you still on the call, on behalf of DexCom, appreciate you tuning in, and we will update you on second quarter as we get through it. I welcome all of you to join us at ADA. I think you'll find that meeting to be very informative on the progress of CGM as a category. Thank you.

Again, thank you for participation -- for your participation. That does conclude today's conference.