德康醫療 (DXCM) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the DexCom's Third Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Terry Gregg. Mr. Gregg, you may begin.

Thank you, Operator. Good afternoon and welcome to DexCom's third quarter investor conference call. Joining me today on the call are Steve Pacelli, Chief Administrative Officer, and Jess Roper, Chief Financial Officer. I will ask Steve to read our Safe Harbor Statement.

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 here of. 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 10K, our quarterly reports on Form 10Q, 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. The agenda for the call today is as follows; Jess will provide you with a financial review of the third quarter and I'll follow-up with commentary on our commercial business, the Edwards collaboration, a brief update on our insulin pump partnerships, and a look at our future. We will close the session with the question and answer period. Jess?

Thank you, Terry. Following positive momentum from the first and second quarters, DexCom continued the trend and generated product revenues of $4.6 million during the third quarter of 2009 compared to $1.9 million for the same quarter in 2008, an increase of 146%. Sequentially, product revenue for Q3 increased over 12% from the prior quarter.

During Q3, we sold approximately 2,125 systems representing an increase of 10% over the prior quarter. Sequentially, revenues were up 17%. During the quarter, we generated a positive product gross margin. Total revenue for the third quarter of 2009 was $7.3 million compared to $1.9 million for the same quarter in 2008 and included $2.6 million in development grant revenue from our development and collaboration agreements. Cost of sales, including both product and non product total $6.4 million for the quarter. Product costs of sales totaled $4.6 million for Q3 compared to $3.6 million for the same quarter in 2008. With increased sales volumes and product revenues, we were able to achieve a positive product gross margin of $31,000 in Q3 compared to a product gross margin loss of $1.7 million for the same quarter in 2008.

Development cost of sales total $1.8 million for the third quarter of 2009 compared to $263,000 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, originally entered into during Q4 of 2008. Sequentially, development cost of sales declined by $1.4 million from the prior quarter.

Research and development expense decreased by approximately $1.9 million and totaled $3.5 million for the third quarter of 2009 compared to $5.4 million in 2008. Sequentially, R&D costs remain flat from the prior quarter. As a reminder, 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 total $8.9 million in Q3 of 2009 compared to $6.7 million in 2008. The increase was primarily due to additional marketing, customer service, insurance reimbursement, and sales cost. Major components of increased SG&A expense included approximately $736,000 in higher salary and payroll related costs, $410,000 of higher commissions and $306,000 higher share based compensation costs. Sequentially, SG&A expense was flat as compared to the prior quarter.

Our net loss decreased to $13.5 million for the third quarter of 2009 compared to $15.6 million during the same quarter of 2008. Sequentially, our net loss decreased $1.8 million as compared to the prior quarter. Our net loss for Q3 of 2009 included $4.2 million in non cash expenses centered primarily in share based compensation and the expense of our convertible debt discount. The loss per share for the quarter was $0.29. We ended the quarter with $40 million in cash, restricted cash, and marketable securities and we had working capital of $26 million.

Finally, you will note that we filed a form 8K today, furnishing updated financial information on our previously filed form 10K for the year ended December 31, 2008. This filing was required to reflect certain required accounting adjustments and reclassifications, resulting for our adoption of 8PB14-1 as it relates to our previously issued convertible debt.

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

Thanks, Jess. We were extremely pleased with our performance in the third quarter of 2009 as we delivered yet another quarter of sequential growth. We exceeded analyst consensus estimates for starter kit sales, product revenue, and net loss, and more importantly we achieve a positive product gross margin for the first time in the Company's history. We achieved these results in the midst of the continued slowdown in the market for traditional glucose monitoring products as witness by recently reported lower sales in the worldwide market for SMBG products.

On our second quarter call I cautioned that the third quarter is often a seasonally slow quarter and yet total product revenue grew approximately 12% sequentially from Q2 2009 to Q3 2009 and, as Jess mentioned, was up 146% compared to the third quarter of 2008. We sold approximately 2,125 starter kits for the SEVEN PLUS in the third quarter, amounting to a 10% increase in starter kit sales compared to Q2 2009 and up 178% compared to the third quarter of 2008. We posted an increase of approximately 17% in sensor revenues quarter to quarter.

As we look to the balance of 2009, we will continue our blocking and tackling mode of building our business. We will continue to improve and begin to automate our back office systems and processing capabilities. We will continue to focus on the customer experience, recognizing that superior customer service is critical to our long-term success. And we will continue to push for progress on the reimbursement front. Particularly in terms of the adoption of more liberalized coverage policies for CGM which will not only ease the burden on our back office but will make the technology available to more patients.

We will introduce our technology outside the United States. We announced in early October that we received CE mark approval for the SEVEN PLUS. The CE mark enables us to commercialize the system in the European Union and the countries in Asia and Latin America that recognize the CE Mark. We have commenced a limited launch of the SEVEN PLUS through an established network of distributors in Europe and expect to expand our sales efforts in up to ten countries in the EU and Israel during the fourth quarter.

As we head into 2010, we'll begin to expand our sales and marketing efforts from a focus on the diabetes educator to a direct, targeted focus on the patient. Looking back, you'll recall we termed 2008 the year of the endocrinologist during which we spent the bulk of our sales and marketing efforts educating clinicians on the benefits of CGM as the best standard of care for glucose management and raising the awareness of DexCom among key opinion leaders to increase clinical adoption.

2009 was the year of the educator with a focus on providing the educator community with the tools, training, and support necessary to help patients utilize CGM to change their behavior and accomplish their diabetes self management goals. The result of our efforts were clearly evidenced by the enthusiasm for continuous glucose monitoring we saw the American Association of Diabetes Educators annual meeting in September and particularly as reflected in Close Concerns' annual AADE survey.

In this year's survey, CDs estimated that in 2009 37% of their Type 1 patients are using CGM compared to only 7% in 2008; however, educators that said if CGM were widely available and reimbursed for the device and the healthcare provider time, they would put an average of 91% of their Type 1 patients and 58% of their Type 2 patients on CGM. This is markedly higher than in previous years. Last year, for example, educators said they would use CGM in 69% of Type 1s and 35% of Type 2s if reimbursed and at AADE 2007, educators indicated that they would use CGM in only 33% of the Type 1 patients under similar conditions with no mention of Type 2 utilization. This data clearly shows a trend of growing acceptance of CGM among CDEs.

2010 will be the year of the patient. We will shift to a more of a direct to patient marketing strategy. Diabetes patients today are more informed than ever and franchised by wider access to health information. Patients are not shy about making demands of their healthcare providers regarding the patients they use. Obviously DexCom can ill afford the high powered media ad that has served the pharmaceutical industry so well but we will turn to the internet as the great equalizer.

I caution that we are not talking about direct consumer advertising which is about mass marketing. Our direct to patient initiatives are about building relationships that we believe will earn a significant return on investment over time and our goal is to get to the point next year where patients are calling out our product by brand name when they visit their doctor.

Finally, we believe there my be opportunity in 2010 to expand our reach through co-marketing or co-promotion relationships with other device and-or pharmaceutical companies focused on the diabetes space recognizing, of course, the significance of maintaining ownership of the patient relationship.

Moving to our collaboration with Edwards Lifesciences, we were extremely pleased to announce earlier this week the receipt of CE mark approval for our first generation hospital based glucose monitoring system developed in collaboration with Edwards Lifesciences. I could not be more pleased with the progress we've made to bring our continuous glucose sensing technology to critical ill patients in the hospital environment.

This product has been a personal quest of mine for over 12 years and to be part of the group responsible for this first in class life saving device is truly rewarding. I have been genuinely impressed by the high level of enthusiasm, commitment, and persistence the members of both the DexCom and Edwards teams in pioneering this important category. As we've stated previously, Edwards will be responsible for the global sales and marketing of the system which is expected to begin on a limited market development basis in a few European clinical sites before the end of the year.

A brief note on our insulin pump partnerships, we continue to make steady progress on the development of integrated insulin pump CGM systems with our pump partners Animas Corporation and Insulet Corporation and we remain committed to completing all development, clinical, and regulatory efforts on these joint development projects to enable us to launch first generation projects with Animas and Insulet next year.

Looking to the future, my marching orders to the organization are simple. Continue to remain laser focused on our near-term mission critical priorities, namely continued commercial growth of our approved ambulatory continuous glucose monitoring systems in the US and abroad, continued development and commercialization of our in-hospital platform in collaboration with Edwards Lifesciences and continued development of our integrated insulin pump CGM systems with our pump partners. We believe by focusing on this core business strategy we will drive the Company to profitability in the shortest period of time.

I point to Q3 as an example. We grew product revenues while our operating expenses remained flat quarter to quarter and our net loss declined by over $2 million. Nonetheless with our leadership role in CGM, I believe we should continue to invest in activities to grow the category and increase the acceptance and adoption of CGM as the best standard of care across all aspects of diabetes management. These are the activities that will maximize shareholder value over the long run.

In addition to executing our primary strategies in the Type 1 market, I believe we have opportunities to extend our CGM leadership position in other areas, particularly continuous development of next generation interstitial sensor technologies for application in both the ambulatory and in-hospital settings such as the step down and telemetry wards. Expanded application of our core technology including utilization of CGM as a management tool in Type 2 patients on insulin and utilization of CGM as a diagnostic tool for drug titration in Type 2 patients. Utilization of CGM in prediabetes screening. Utilization of CGM in pregnancy including gestational diabetes and application of CGM into the obesity market.

Over the next several years, we expect to explore these and other growth opportunities, some on our own and other through licensing or partnership arrangements. To that end, today we filed a shelf registration statement with the Securities and Exchange Commission. Let me start by saying we have no immediate plans to raise capital. Together with our cash on hand at quarter end and the additional proceeds with expect to receive from Edwards and Animas through 2010, we believe we have the financial means to reach breakeven if we continue to grow product revenues as planned. That said, we believe it is prudent to provide the Company with maximum flexibility as we look to the future. We believe this is simply good corporate stewardship. Additionally, while we don't believe our convertible debt represents an overhang on the stock today, given recent unsolicited interest from a number of our note holders, we believe opportunities may arise to reduce our debt load in the near-term.

To wrap up, we've had a very exciting year thus far. We've executed precisely as we said we would. We continued to deliver sequential quarterly growth both in terms of product revenue and starter kit sales. We continued to meet our operating milestone and we continued to exceed analyst expectations on a quarterly basis. I discussed earlier in the call survey data from the Close Concerns' annual AADE survey evidencing the growing acceptance of CGM among diabetes educators. What I failed to mention were two additional data points from the same survey which were particularly exciting for DexCom.

Close Concerns asked respondents two questions; which of the diabetes companies are the most innovative and which have the biggest impact on the patients that use their products. In both cases respondents ranked DexCom number one. We have accomplished what many other larger and better resourced companies have failed to do and I could not be more proud of the DexCom team.

Thank you. We'll turn it over for question and answer.

(Operator Instructions) Our first question comes from Amy Sullivan from Piper Jaffrey. Please, go ahead.

Hi, guys.

Hi, Amy.

So, Terry, you were recently at EASD and they approved the CE mark on the in-hospital system. Curious if you can give us some sense of the enthusiasm you received from docs while you were there as far as how they're respond to the availability of the product?

I think I heard two questions, one with regards to we were at EASD which we had received CE mark for the SEVEN PLUS system and then this week we received CE mark for the -- in conjunction with Edwards for the in-hospital system. Amy, if I may ask for clarification, which product line are you referring to?

Looking for more color on -- I imagine you were talking with a lot of docs on both products, but especially with regards to the in-hospital product, what sort of -- how you expect the response to be from docs based on those conversations to the new availability of that product?

To be honest with you, the conversations at EASD were not centered around the in-hospital system at all. As you well know, even in the European sector, that is a product that is traditionally more used by intensives and less used by actual endocrinologists. So, the EASD is focused on the rank and file endocrinologists. So, we spent the bulk of the time there talking about the SEVEN PLUS. There wasn't really any flavor to speak of at EASD on the in-hospital system.

Okay. Then as far as -- what are your current thoughts as far as when we might be looking for gen two of that system for more of a full launch of product.

I'm going to ask Steve to comment on that, Amy.

I think the expectation -- I would actually refer you to some of the guidance provided by Edwards in their recent earnings call, but we've completed a -- we basically have a two stage clinical effort for the gen one. We've completed the first generation -- the first stage of that clinical effort which enabled us to seek European approval and obtain that CE mark. We're currently undergoing the second stage and that will enable us to seek FDA approval some time early next year is what we'll guide. Then I think development efforts are already underway for that second generation system. The goal would be to have the second generation system into the market before the end of next year.

Okay. And then lastly, as far as international markets in the new CE mark with that product, can you give us more color as far as your strategy there?

Are you talking about the SEVEN PLUS? (inaudible)

I'm sorry. He answered you and he's looking at me. Yes. We have -- we spent the last year as you know that whole effort is headed up by Peter [Geheardson] who's got close to 30 years of experience in the European sector in diabetes. So, what we did was the focus was on securing appropriate relationships with distributors in the diabetes space. All of those are signed up and we're beginning with shipped product and we're beginning a launch in those countries. Many of them do not have formal reimbursement. So, part of the effort over the next 12 months is to introduce the product to the endocrinology centers and at the same time start meeting with the reimbursement folks in conjunction with our distributors. That's part of their responsibility as well and begin to seek reimbursement. There are countries, such as Sweden, as an example, that actually do provide reimbursement to some of the CGM products. So, that's really the goal for the next probably 15 months.

Thank you.

Our next question comes from Ben Andrew from William Blair. Please, go ahead.

Good afternoon. Can you hear me, Terry?

Yes. You're coming through clear.

Great. Thank you. Maybe just ask Steve to talk a little bit about progress on the reimbursement front? Obviously with the nice sequential uptick in patient starts in the quarter, productivity must be improving. But maybe just walk through what changed this quarter and what additional levers you've got to pull in the next couple quarters to keep that going?

Sure. As you're aware, outside of Medicare, we have extremely broad coverage at this point, Ben. I would tell you it's broad but as you know, it's in many cases still very restrictive. That said, we're becoming much, much better in our back office. We did not speak too much in Terry's prepared remarks about the back office because frankly there's not that much to report other than every day is better than the previous day. We continue to get more efficient, we continue to process claims better, we continue the speed at which not only are we able to -- through the entire system, at which we're able to do what we call a benefits investigation where we qualify the patient for insurance coverage all the way through to the end until the claim is filed and we ultimately receive payment.

Every day it's blocking and tackling. We're getting just that much better. One thing we did mention in the prepared remarks is that we will look to start automating some of the processes by the end of this year and really early into next year which I think will add some additional efficiency. But quite frankly, at this point, it's really just a matter of we're becoming better and better at what we do. The insurance companies are helping because they're becoming better and better at actually managing continuous glucose monitoring claims. That's been helpful. I think the next thing you'll see, it's really probably a 2010 exercise, is really starting to go back to some of these larger payers who have still today restrictive coverage policies and start to try to influence less restrictive polices.

We said before it's pretty early. We're really only into the first 12 months of kind of broad based coverage, so it's a little bit early for us to go back and try to put pressure on the payers with the more restrictive coverage policies at risk of them potentially changing their mind and adopting a non coverage or a negative coverage policy would be the worst thing for us. So, we kind of walk on eggshells there. But I can see as we move out into 2010 and certainly 2011, it will be time for us and certainly we'll lean on some of our advocacy groups to help us in influencing these payers to adopt more liberal coverage policies. That will certainly help the efficiency.

Terry, you mentioned two other kind of intriguing things about '10. One would be sort of DTC approach to patients who -- what sort of patient -- would that be leveraging patient advocacy groups, purely a DexCom initiative? And then in a similar vein you talked about the potential co promote or co market with a variety of different players. Maybe just talk a little bit more about that and how far that can take you?

Sure. With regards to the communication, obviously there are a number of advocacy groups that directly communicate to patients and patient's families with diabetes and certainly we need to up our internet activity with and co promotion with those types of advocacy groups. Certainly our relationship with JDRF, ADA, we're expanding our relationship with them with under the guise now with Larry Hausner being the new CEO. David Kendall, who I have a long relationship with as the new Chief Medical Officer. So, we're looking at ways in which we can do more things with ADA on a broader basis. So, that, really aggressive the first part.

The second part is interesting because we've been approached by a number of both device and pharma companies who now are beginning to recognize what they believe to be the next great space in diabetes. As they look at their portfolio pipelines of what they've got coming down the pathway, that CGM is going to be ever important because all of their products, which we've stated multiple times previously, are all about the reduction of glycemic variability. No matter what you do, the billions of dollars that are spent today on a wide variety of drugs and those for the future are all about trying to get patients in better control. So, I think they're now recognizing, although traditionally, as you well know, probably as well or better than I do that device and drug companies don't necessarily do well together. A few have done well, but most jettisoned their device divisions long ago.

But there are these partnership potentials about co promotion and potential extending beyond that. And we're in early stage discussion as to how that would look but it certainly would leverage the size when they have commas in their sales force size and we still have basically 50 sales people in the field. So, we're excited about the opportunity and obviously if and when it comes about, we would announce it on a more formal basis.

Great. Thank you.

Our next question comes from Bill Plovanic from Canaccord Adams. Please, go ahead.

Thank you. Good evening. Couple more questions for you here. First of all, how much have you stated for the Edwards milestone tied to the CE mark and when would you expect to receive that?

It's $1 million and we should receive that kind of any time at this point.

It turns out the US FDA approval for that first gen Edwards product, is that -- that carries like a $12.5 million milestone?

$2.5 million, Bill.

$2.5 million. Okay.

For the gen one. Remember, it was a total of about $13 million to $13.5 million in total milestones between two generations and approval between both US, OUS, including a Japanese approval for the gen two system.

Okay. Then you said 2010 for the US approval of the gen one?

Yes.

Roughly when in 2010? Mid year? Early? What does it look like at this point?

I would expect first half for gen one and latter half of 2010 for gen two is my expectation.

Is the 510K already been submitted for the gen on in the US?

It is not. That's what I commented on in response to Amy's question with respect to the two prongs or two layers of clinical trials we're completing. We've completed the first stage of the clinical trial. The second stage is still ongoing. That's the clinical trial that we need to complete before we can file for FDA. We expect to file that if not by the end of this year, early, early next year. And then you go through the 510K waiting period which is anywhere between 90 to 180 days.

Got you. And then just more clarity on your pump CGM combo products. Your handling the PMAS filing on the Insulet one and its Animas controlling theirs? Is that how that works?

No. We would be -- both filing will be PMA Supplement filings by DexCom.

And then when would you expect to file those PMASs?

As you probably listened to the Insulet conference call, Insulet's committed to filing a PMA Supplement with a partner by the end of this year. I think we're supporting them in that effort. I think we would hedge just slightly and say we're going to try very hard to get in by the end of the year and I think we're on track. But if it slips it could be very early in the first part of next year that we would file that one. And Animas will probably come sometime in the first half of next year is the best I could guide you.

Okay. Have you completed the studies for both of those products or at least the Insulet product?

The answer is no but the studies, we've met recently with the FDA on this issue and the studies are not as complex as you might think because really all we're doing is taking two approved products and combining them and really just eliminating the display functionality of our receiver and incorporating it into the handheld. I'm speaking in the case of Insulet now. And so the trial, this is not an extensive, not a huge N in terms of numbers of patients. It's a trial that can be conducted in a matter of a week or two. So, those will be conducted, with Insulet should be conducted certainly before the end of this year and Animas, again, will be first half of next year.

Okay. And then for the gen three upgrades, I don't know if you talked about the SEVEN PLUS, if Jess gave any color on that. Do you have any color on how many upgrades there were in the quarter?

Yes. Since the launch we've had a little over 600 since March of 2009. So, we had very few in Q3. Most of those were in Q2.

Okay. Did the new disposables work with -- you don't have to upgrade to continue to use the disposable, correct?

No. We're still supporting and selling sensors for the SEVEN system. That's right.

And then to talk about -- I just have two questions here. I promise. You mentioned that the back office continues to improve. Has the backlog been completely wiped out from a bottleneck standpoint? And as they're coming in they're being serviced and working forward here?

I would classify it, Bill, as we're keeping our head above water but the water's not going down. I think we're getting better but at the same time, as Steve mentioned, every day is better than the day before but at the same time, we're getting more patients into the system. I think the real beauty is everybody's getting greater experience on our side, on the payer side, that we're able to process patients more efficiently, also utilization of DME suppliers where appropriate. They're getting better in terms of from the time they get an order to the time they can process it.

So, this whole thing is shifting. It's speeding up a bit. We still have, in my opinion, we still have a ways to go. I am happy, Steve mentioned, for the first time, and even in my remarks, we look at the beginning of automation of some of these that today and heretofore, we've been manually processing. You see even in Jess's comments some of the increase and our expenses have been directly related to having to build up some of that back office staff. Obviously as I look at 2010, we need to leverage that so that you don't see that continued ramp and the bulk of that increase has been on the reimbursement side, either in customer service, not so much tech services, a little bit there. But just the reimbursement and processing. So I think it is scalable and we're looking at the first signs of scalability as we look to 2010, what our expectations are there.

Okay. I promise, one last question. That is with the direct to patients focus that you're going to have in 2010, does that impact your operating costs in any way? I think you said you're going to utilize the internet. I'm trying to get at, going forward, should we see flat operating expenses roughly as you build new patients on top?

There's obviously going to be some expenses. But you're not going to see any huge ramp up in those types of expenses because of the utilization. But when you begin to partner there are developmental costs associated with building those types of internet connectivity and those programs. Obviously we use consultants. We don't do much of that work in house. But I would not see some dramatic increase in that expenditure.

Great. Thank you very much.

(Operator Instructions) Our next question comes from Shawn Fitz from Stephens. Please, go ahead.

Hey, guys. Good afternoon and thanks for taking my question.

Hi, Shawn.

I guess first off, it looks like you all made some solid progress on the gross margin side of things and maybe you were ahead of the plan? I think my recollection is you guys talked about $5 million or so on product revenue to be at a positive gross margin. So, I guess what I'm trying to understand is maybe describing some of the things that are going on there that are driving the improvements in gross margin and then maybe describe how much additional room there is to improve that with the current generation and maybe where it can go with the next generation?

Yes. You kind of almost led me into that one. It's better ASPs had some impact on both the durables and actually the sensor ASP has remained basically flat but a little bit better ASP on the durables. That's largely a function of our cash business going away. We're largely a reimbursed, certainly with respect to individual patients as opposed to some of the clinics who buy equipment from us and sensors from us. We are largely reimbursed. Those prices tend to be better than our historical cash prices. And then just some efficiencies that we've realized, yield efficiencies, et cetera, that we've realized in our manufacturing operations. I would tell you that you've got the next question is what else can we expect on the gen three or the SEVEN PLUS? I think we're probably, in terms of yield efficiencies and things that we can do to control that here other than obviously additional absorption in terms of adding volume, there's not a whole lot else we can do and really we look to that next generation, that fourth generation sensor to really drive some additional cost out of the sensor itself. Again, that's probably an end of next year, early 2011 launch for that next generation sensor.

Thanks, Steve. And then, as we think about the volume driver in that equation, is there a certain volume level that once you guys get to that you see a really nice step up in terms of the efficiencies of the plant of is it going to be a pretty linear process as we go forward on the production side?

It's pretty linear, actually. I think the guidance that we've given really, we haven't guided you along that path, but I would say it's fairly linear until you get to that million sensors a year number, a little North of million sensors a year. And you start to see the kind of gross margins that you'd like to see in a disposable medical device. That 65% ish range.

Thanks, Steve. And then, Terry, just as we think -- I know you guys don't formally disclose the days usage per sensor. We try to make a guess on that front. Is there any reason to think that as you guys get more patients with insurance coverage and so forth that that number doesn't come down mostly over time? Or should we just assume on a go forward basis that it stays pretty stable?

I would say just whatever your modeling is probably pretty stable. One of the things we've discovered, we certainly thought originally that patients would be more motivated to change out at seven day intervals if they didn't have that out of pocket expense component. And in reality what we've found even in those that pay absolutely nothing out of pocket, they get 100% reimbursement, they're using the product beyond the labeled indication.

The real reason -- two reasons. One, I think most importantly it's not unusual for the product beyond seven days to be at its best if you look at some of the data that has been published and presented by physicians and key opinion leaders that out at day ten we're still going very strong. And their patients' attitude is if it's going strong, why do I want to change it regardless of what the economic situation is? I think secondly to that is just the mechanical procedure of removing gone and inserting another, as simple as we have made it and we're extremely simple, but that fact is again of all the other things they have to do, this is not one of the things that if they don't have to, they're inclined to do so. I would use the same numbers going forward.

Okay. So, Terry, just as we think about kind of the strategic possibility you have there, I guess you all could have the sensor basically go dead at seven days? You already have a life that is well beyond the competition. Or is there an opportunity for you guys to basically take that 12, 13, 15 days of usage possibly and use that in the marketplace to drive incremental volumes because some of the limitations you just described?

We certainly debate that internally all the time. Obviously sequential generations of sensors in our belief system, all are going to get better. And I would assume that our competition is working on those types of improvements in their sensors as well. There was a published study by Dr. Gard that demonstrated ten day use. Certainly a number of physicians have pressed on trying to get that labeled indication. Right now our attitude is the product is performing at the highest level of this category.

The next generation, we have even greater hopes. Steve mentioned the discussion with regards to the cost factors associated with that sensor. I would tell you although the numbers are not large in terms of the human testing, but we've been in a number of humans, the performance of the sensor is remarkable and certainly better than what we're seeing with the SEVEN PLUS if that's possible. Everybody's excited about that as well. And so is that -- can we get a longer sensor and get it through the regulatory process? I don't know the answer to that. I know we can get a longer behaving sensor more accurate than everybody that has sensors out today including us, but whether or not the agency will allow a 14 day sensor or a 10 day sensor or whatever utilization is remains to be seen. Right now I don't want to give the indication to our patient population that they should be doing anything or expecting anything differently than what we're doing today.

Great. Last question, Terry. Just if we step back and kind of broadly think about the accuracy of all kind of the glucose measuring mechanisms that are in the marketplace, I guess we're hearing that the ISO standard could be progressing to maybe a 15-15 type of goal from 20-20. Could you talk about the opportunities or threats that presents for your business? And then maybe talk about on the MARD front, where you guys are now, maybe where you could go with future generation devices and at what point -- where would MARD have to go for your guys to actually be able to dose -- use that measurement as a dosing point?

There's actually three questions in there that I'll have answer for. The first one with regards to the ISO requirements going to 15-15, if we look at the hospital sensor as an example, we're already far beyond that in terms of accuracy versus YSI. It has no bearing and in fact if anything it's more of a yahoo because we are so much better than the current commercial sensors that are used in the hospital setting in that comparison.

If you remember, we were 95% within ISO standards and 100% in zone A even using the Clarke Error Grid. So, that's one issue. Now expanding to the ambulatory sensor, it really doesn't have much impact. I think if you really look at the testing mechanism done by most of the SMBG companies -- Johnson & Johnson, Roche, Abbott, Beyer, if you look at their data, they're probably all on the bench top meet 15-15. I think what happens is in the hands of the user and we've certainly seen that, that you start stacking variables on top and that becomes more of a user situation than it does actually the technology itself. So, I don't even think that has a huge amount of bearing on what we're doing.

The third, in your question with regards to MARD as it relates to insulin dosing, I think, Shawn, all you have to do is demonstrate that -- I say all you have to do. Easily said. Harder done. But all you have to do is demonstrate sufficient improvement and lack of problems associated with dosing off of ISF. We know today and I don't know what the percentage of our patients, we routinely are told that by physicians, by patients themselves, that once they've gotten to a degree of being comfortable with ISF glucose from a CGM product that they will at times dose off of that. That's not our recommendation. Our recommendation is always to do a confirmatory finger stick measurement before you make an insulin dose adjustment. But that said, the reality is something different. I'm sure the FDA is well aware of that and that may be some of the impetus to get more refinement. I would also say that in that vein, look, you're getting a measurement every five minutes or an output from a measurement that goes on continuously versus episodic measurement from even if it is required to be more accurate, we're giving a lot more information to the patient to make better decisions. I think we have to do definitive clinical trials that generate empirical data to demonstrate that we do no harm. I think the agency has made it pretty clear to companies.

Where can we go? We certainly believe that this technology can get to single digit MARD on a routine basis. We obviously see that with the hospital sensor. We have future generations that we have talked about previously that incorporate the best aspects of the hospital sensor with the best aspects of our ambulatory sensor so you can logical derive out of that that we believe or have demonstrated in at least an N of one that we are down in that level that we believe the agency would approve. Getting it from an R&D project to a commercial enterprise with the type of manufacturing, nothing in the manufacturing environment is ever linear, unfortunately. So, something that you do in an R&D lab does not automatically translate to the manufacture ability on a grander scale. I think everybody, all the companies in this space, have experienced those challenges and certainly I did when I was at that other Company and we saw Abbott have that problem earlier and DexCom from STS-3 to STS-7 had their challenges as well. It remains to be seen. We're certainly working on it and I've got to assume that Actronic and Abbott and others that are known or unknown in this space are all working to that same degree.

Okay, Terry. Great. Thanks, you guys, for the time.

You bet.

We have no further questions at this time. Mr. Gregg, do you have any final remarks?

I do, Operator. Again, thanks for joining us on today's call. Obviously we're excited about the first three quarters of the year. We're even more excited about the fourth quarter as word gets out. We continue to see the utilization of CGM grow not only in the traditional endocrinology diabetology space, but for the first time we're actually experiencing early support in primary care as the benefits of CGM are reaching a much broader audience. DexCom will continue to drive the concept of convenience, performance, and simplicity in its current and future product platforms. I have touched on some of the areas we believe CGM can positively impact. Our philosophy is very simple. Malglycemia or the inability to maintain a person's glucose levels within an acceptable range often results in complications. The risks associated with exposure to malglycemia effect more than those with Type 1 diabetes and we are committed to driving awareness of our CGM technology as both a behavior modification tool as well as a leading continuous glucose monitoring system. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all disconnect.