德康醫療 (DXCM) 2009 Q4 法說會逐字稿

Welcome to the 2009 fourth quarter and year end earnings release conference call.

I will be your operator for today's conference.

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, President and Chief Executive Officer.

Mr.

Gregg, you may begin.

Thank you, operator, and thanks to all of you joining us today for our fourth quarter and full year 2009 conference call.

Steve Pacelli, our Chief Administrative Officer, Jess Roper, our Chief Financial Officer, are also joining us today.

Steve will kick off the call with our 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 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.

The agenda today will include a financial review of the quarter by Jess, and I'm going to provide a commercial review of the fourth quarter, a bit of a 2010 outlook, an update on our insulin pump partnership, as well as our Edwards collaboration and then we'll finish up with a few brief remarks as I look to the future.

Jess?

Thank you, Terry.

DexCom finished the year strong, generating $6.6 million in product revenue for the fourth quarter of 2009 compared to $2.5 million for the same quarter in 2008, an increase of 169%.

Sequentially, product revenue for Q4 increased 44% from the prior quarter.

During Q4, we shipped approximately 2845 systems, representing an increase of approximately 34% over the prior quarter.

Sequentially, since the revenues were up 50%, and for the quarter, we generated a positive product gross margin of over $1.1 million, representing the first meaningful contribution from our ambulatory product line.

Year-over-year, product revenue was up 122% and totaled $18 million for 2009 compared to $8.1 million in 2008.

Total revenue for the fourth quarter of 2009 was $10.5 million compared to $7.3 million in Q3, and included $3.8 million in development grant and other revenue from our development and collaboration agreements.

Included within the $3.8 million was $0.9 million in milestone revenue, earned following receipt of a CE mark for our gen-1 hospital-based system developed in collaboration with Edwards.

As well as approximately $275,000 of non-product revenue related to services performed in support of certain third party clinical trial activities.

Total cost of sales including both product and non-product remain flat and totaled $6.4 million for the quarter.

Product cost of sales totaled $5.5 million for Q4 compared to $4.6 million sequentially for Q3.

With increased sales volumes, we were able to achieve a positive product gross margin of over $1.1 million in Q4 compared to $31,000 in Q3 of 2009.

Development cost of sales totaled $0.9 million for the fourth quarter of 2009 compared to $1.8 million the prior quarter.

The decrease in expenditures quarter to quarter was primarily due to curtailed development efforts, with our hospital-based glucose monitoring system.

Research and development expense totaled $4.2 million for the quarter compared to $3.5 million for the prior quarter of 2009.

R&D costs increased sequentially, as we incurred more clinical trial costs and higher salaries.

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 totaled $9.4 million in Q4 of 2009 compared to $8.9 million in the prior quarter.

The increase sequentially from the prior quarter was primarily due to additional legal, finance, and corporate costs.

Major components have increased SG&A expense included approximately $353,000 in higher salaries and payroll-related costs, $196,000 higher legal costs, and $120,000 higher consulting costs.

Our net loss decreased to $11.5 million for the fourth quarter of 2009 compared to $13.5 million during Q3 2009.

Our net loss for Q4 included $4 million in non-cash expenses, centered primarily on share base compensation and expense of our convertible debt discount.

The loss per share for the quarter was $0.25.

Net loss for the full year 2009 was $53.5 million, or $1.21 per share, which was down $5.3 million from the prior year and included $16.4 million in non-cash expenses.

We ended the year with $30 million cash, restricted cash, and marketable securities, and have working capital of $18 million.

In January of 2010, we completed a public offering, selling 4,025,000 shares of common stock for net proceeds of approximately $33 million.

And most recently during the past several weeks, we have retired $20.25 million of our $60 million of outstanding convertible debt, by issuing 2.7 million common shares to certain debt holders, who elected to convert early.

These early conversions will save the Company almost $1 million in cash interest payments on an annualized basis.

For the next two years, beginning March 20, 2010, we will have the right to issue 20-day call notices and settle all, or portions, of our remaining outstanding convertible debt.

Assuming our shares are trading comfortably, above $7.80, we plan to move forward in a systematic fashion to settle the remaining $39.75 million in convertible debt in our efforts to prudently manage cash expenditures.

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 fourth quarter of 2009, as we delivered yet another quarter of sequential growth, we again exceeded analyst consensus estimates for starter kit sales, product revenue and net loss, and we achieved a positive gross product margin of 17%.

As many of you know, the fourth quarter is traditionally a seasonally strong quarter in the durable medical equipment business.

Annual insurance deductibles are often met, so patients can typically obtain the product for little or no out-of-pocket expense.

And patients who participate in employer-sponsored flexible spending program must utilize any excess funds they have saved prior to year end.

This often spurs year end purchases of durable medical equipment, as well as disposable supplies.

Our fourth quarter was no exception.

Total product revenue grew approximately 44% sequentially from Q3 2009 to Q4 2009, and was up 169% compared to the fourth quarter of 2008.

We sold approximately 2845 starter kits for the Seven Plus in the fourth quarter, amounting to a 34% increase in starter kit sales compared to the third quarter 2009, and up 137% compared to the fourth quarter of 2008, and we posted an increase of approximately 50% in sensor revenues quarter to quarter.

Obviously our strong Q4 performance begs the question, will we be able to sustain our growth into 2010?

The short answer is yes.

We doubled product revenues in 2009 and we expect similar growth in 2010.

That said, the first quarter is traditionally a seasonally slow quarter in the durable medical equipment business, primarily because annual insurance deductibles have reset.

Reflecting back on my days at MiniMed, I am reminded that the first quarter was often down relative to the fourth quarter.

Where we sit today, we're tracking towards a flat to moderate sequential increase in Q1.

Fortunately, I do not believe we are lacking in demand, as evidenced by our current pipeline.

We simply saw in January and the first part of February a short-term slowdown in patients' willingness to complete their purchases until such time as their deductibles are appropriately reduced.

Again, this parallels my experience at MiniMed precisely.

As we look to the balance of 2010, we expect another exciting year for DexCom.

Our mission this year is simple and straightforward.

Our top priority remains blocking and tackling, to build our core ambulatory business, recognizing that growth of our installed base through the continued commercialization of our stand-alone continuous glucose monitoring systems remains paramount to our long-term success.

We have stated that 2010 will be the year of the patient and we are working diligently to expand our direct-to-patient initiatives, particularly with respect to the MDI patient, to reach that critical point this year where patients are demanding CGM and calling out our products by name when they visit their doctor.

We will continue to push for progress on the reimbursement front in terms of the adoption of more liberalized coverage policies for CGM, which will not only ease the burden of our back office, but will make the technology available to more patients, and we will continue to introduce our technology outside the United States, acknowledging that 2010 will be less about international revenue growth and more about gaining mine share among key opinion leaders and working to establish reimbursement for our products in our target countries.

Our second priority is to complete development of our fourth generation short-term sensor and we expect to commence a pivotal trial for this product and file a PMA supplement with the FDA in the next several months.

In addition to improved manufacturability, our goal with gen-4 is to bring to market a next generation sensor, which will offer an unmatched level of performance and ease of use for our patients.

Next, we will complete the development of our first generation integrated insulin pump CGM systems with our pump partners, Animas, and Insulet.

We long stated that we are agnostic as to the method by which patients deliver their insulin, since we believe that information provided by CGM enables patients to make better diabetes management decisions.

However, we remain committed to providing patients who elect to utilize an Animas or Insulet system with access to our Best in Class CGM technology.

My counterpart at Insulet mentioned on their Q4 call a few weeks ago that we would file a PMA supplement for our combined system within a couple of months.

And I am confident that we remain on track to meet that goal.

With respect to Animas, as you know, we've agreed to make certain modifications to our transmitter, in order to comply with regulatory requirements outside the US.

This development cycle has taken slightly longer than expected.

However, we remain committed to filing a PMA supplement with Animas later this year as well.

Finally, we will continue development of our second generation blood-based glucose monitoring system for the critical care environment in collaboration with our partners, Edwards Lifesciences.

As you know, our first generation system received a CE mark in October and Edwards has commercialized that system on a limited market development basis in several markets in the EU.

At a recent Advanced Technology and Treatments For Diabetes meeting in Basel, Dr.

Nigel Scawn, Clinical Director of Critical Care at Liverpool Heart and Chest Hospital presented data from his initial 10 patients on the first generation product, which is branded GlucoClear.

The results demonstrated the accuracy of the GlucoClear sensor and in one instance, the system identified an extreme hyperglycemic event in a non-diabetic patient that would have gone undetected in the absence of our system.

The data also detailed the significant glycemic variability experienced by patients undergoing surgical procedures, prompting Dr.

Scawn to comment, this was totally unexpected, but now that we have the data, we must develop programs to treat these patients more effectively.

While we don't anticipate that the first generation GlucoClear system will be a significant revenue driver for either company, we expect to apply the tremendous feedback we are receiving from the field on the gen-1 GlucoClear, such as that of Dr.

Scawn to produce a truly robust commercial system in generation 2.

We believe by focusing on the core business strategy outlined above, we will drive the Company to profitability in the shortest period of time.

As Jess mentioned in late January, we completed a follow-on public offering of our common stock, raising net proceeds of approximately $33 million.

We believe we have appropriately addressed any remaining balance sheet concerns, and together with our cash on hand at year end, and the additional proceeds, we expect to receive from Edwards and Animas, we believe we have sufficient resources to take us to profitability.

As we look to the future, we are becoming increasingly excited about the Type II market opportunity.

There is a growing body of data supporting the role of CGM and Type II patients, particularly those who take Prandial insulin injections.

Interim data from a clinical trial conducted out of the Walter Reed Medical Center involving 100 Type II patients on insulin was displayed in a poster session at the Diabetes Technology meeting in San Francisco in November.

At just 24 weeks, the CGM group achieved an A1C reduction of 1.4%, a significant reduction in blood pressure, and a greater improvement in weight loss when compared to the control group.

We believe the use of CGM in this patient population provides a solution for certain inadequacies attributed to SMBG.

CGM has the ability to detect post Prandial glucose excursions, nocturnal hypoglycemia and hyperglycemia, and provides an actual picture of the glucose curve over time as a patient's glucose levels react to meals and snacks, exercise, and stress.

We believe CGM is the ideal tool to enable Type II patients on insulin to understand the juggling act required to control their diabetes.

We are also extremely excited about the progress we have made on the development of a fifth generation sensor platform, which applies aspects of our blood-based hospital sensor into a subcutaneous sensor.

I refer to this future generation as a platform because we believe there may be application of this technology, not only as a future ambulatory sensor, but also as a subcutaneous sensor for use in the hospital outside of critical care.

As a reminder, our collaboration with Edwards Lifesciences provides Edwards with exclusive rights to blood blowing sensors for application in the critical care market, and we are free to develop and commercialize subcutaneous sensing technology in other areas of the hospital.

Finally, I would like to end our prepared remarks with a brief mention of ongoing activity by the Food and Drug Administration with respect to diabetes devices.

There has been significant media attention paid to the FDA's very public evaluation of the potential risks associated with insulin pumps and the perceived need for improved accuracy of single point blood glucose monitors.

Interestingly, in late December, we received an invitation to meet with the agency.

And in late January, we had a very productive meeting to discuss, among other things, efforts we are undertaking to improve the consistency and accuracy of our CGM devices, scientific and technical challenges we have faced, market pressures and resource allocations driving our CGM programs, and our thoughts on how we might accelerate significant and clinically relevant improvements in our CGM technology.

We believe the agency appreciates the impact that new and better CGM devices would have on diabetes management, including in support of the FDA's Artificial Pancreas Initiative.

Today, there is greater awareness of the CGM category, both domestically and internationally.

The number of presentations on the benefits of CGM and ambulatory and hospital settings are more numerous at each successive scientific meeting.

The role of CGM and several Artificial Pancreas projects around the globe is critical.

I'm pleased to report that DexCom is a key participant in these important trials.

2010 is a very important year, as we continue to put the building blocks in place at the same time as CGM is moving closer to becoming the standard of care.

Thank you, and now we will entertain questions.

(Operator Instructions) The first question comes from Tom Gunderson from Piper Jaffray.

Please go ahead.

Hi, good afternoon.

The -- Terry, you've talked the last couple quarters and you've mentioned in your prepared remarks about the insurance companies, and trying to get not only wider coverage, but take away some of the restrictions.

Have there been any wins in, in reducing some of the more restrictive policies from the big guys in the last two to three months?

No, Tom.

We're still working at it.

We've actually most recently created a new position within our organization that will be more focused on driving that message.

Obviously as more data gets accumulated, presented through peer review journals and from the podium, we're taking that information and supplying it to those third party payers.

But within the last three or four months, there's been no liberalization or change.

Okay, thanks.

And then on the Insulet DexCom enabled pump, that time line seems to move out and I'm wondering, is there a -- are there any technical issues that you see at this point?

Is it paperwork?

Is it the general slowness that we're seeing across the board on FDA?

Could you give us a little color on that?

Certainly it's no slowness on the part of the FDA because we have yet to file the PMA supplement.

I don't believe it's slipping all that much.

It may be slightly slipped from what we had said previously.

I just think that taking two products and combining them from, one, a 510-K product, which has a certain set of standards, and combining it with a PMA product, which has, as you know, a higher threshold because of the way in which the agency reviews those two different distinct classes of products.

It's just marrying everything up consistently to get it in, and in complete.

I think we're right on time.

Was there anything on Friday that made you more positive or negative on how that process would go?

I think more positive.

You know, we were led to believe, I think, by some pundits that this was going to be a scenario in which there was a bashing of the pump companies over a variety of different parts.

And in reality, there was not.

I mean if you read all the messages from the meeting and people that were at the meeting, it was an endorsement of pumps.

The real critical component came about through the education of the patient to a higher degree.

But we don't view that information or that meeting by the agency is anything other than positive.

Okay, and then last question, in the year of the patient, you've mentioned previously that you might be doing co-marketing with some pharma partners.

Can you give us an update on how that's going?

We really can't give you an update on that because those discussions are very highly sensitive at this point.

I can only refer you to public comments made by pharma companies as to their interest in moving forward in a more expansive way within the diabetes community and certainly as CGM and other medical devices used in the diabetes space, we're certainly party to those conversations.

Would you be disappointed if you didn't have some sort of co-marketing six months from now?

I wouldn't be disappointed at all.

Quite frankly, as you look at what we're doing as a Company, we are extremely busy at this point.

I think any type of relationship that would be north of what we have in our three current partnerships is challenging for the organization without in terms -- without spending a lot more money to build the infrastructure to accommodate that.

That is a lesson that has been painfully learned here and I think we want to go about this in a very methodical, detailed way.

Got it.

Thanks for your time.

The next question comes from Ben Andrew from William Blair.

Please go ahead.

Good afternoon, guys.

Hey, Ben.

Just maybe following up on the direct-to-patient advertising.

In terms of your thought process on spending levels this year for that, is that materially different than last year, or can you do that pretty efficiently?

No, I think -- this is Steve, Ben -- I think we'll increase the spend -- Claudia will increase the spend in marketing, but it -- I wouldn't call it a material amount.

You're not going to see it go like 2 X or anything like that.

Okay.

Terry, you've talked a lot about the opportunity with MDI's.

That's obviously part of that spending, but how do you get that message out more effectively to clinicians in a way that materially changes uptake in that segment this year?

Well, certainly web-enabled programs that we are initiating both from a healthcare professional, participation both at the physician level, as well as the diabetes educator level to make them more aware.

I think the print media that we've produced for our sales force to go in to the current call patterns and really look at moving deeper into each of the accounts that we currently call on.

Also, with our partners, at least identifying those higher insulin prescribing physicians that today we may not be calling on, but again, moving into them.

Because it's all -- even from the pump side, Ben, I mean these MDI patients from the pump world are all opportunities for them to -- and we believe first put on CGM.

And if they make that decision, that life-style decision to move to pumps, then we've already identified a lot of the challenges that they are going to, that they as patients would have to undergo to understand how to utilize pump therapy more efficiently.

So I think it's in concert with our partners, although we want to remain keenly focused on MDI, because that's a much larger segment of the insulin-using market, both domestically and far greater on an international basis where the pump utilization is about a third at best of what it is in the US.

Is it fair to think of, you know, potential pharmaceutical partner as a key contributor to going after that broader patient population and even the Type IIs?

Well, certainly.

As you look at the growth of the diabetes market, clearly folks that are already calling on that market who are competing and want to have more tools for their sales people to utilize, we, we are one of those tools.

But again, referring to the earlier question, we're going to go about this very diligently.

I think one of the challenges of having multiple partnerships is that you treat them well and understand what their needs are and that you both set expectations appropriately and then meet those expectations.

Okay, and then last quick question, Terry.

The initial commercial experience with the GlucoClear may be characterized as some of the experiences beyond the one you've already expressed in the preamble about kind of how people are doing with the product, how they are using it, and what maybe, if any limitations or changes in clinical experience in terms of the accuracy, whatever, that you've observed.

Well, I think the most overwhelming comment and has been universal, according to the folks that we've talked to in, with Edwards, has been they never truly understood glycemic variability.

They understood that, in those cases where they needed to use intensive insulin protocols, that where they were failing and seeing some of the challenges, and we don't need to belabor all the studies that have demonstrated the challenges associated with lack of adequate monitoring of blood glucose with -- in conjunction with intensive insulin use.

That's been I think the biggest shock to them, that they in many ways have not considered insulin, or I mean glucose levels as a vital sign.

And now they are having to go back and really incorporate in their own hospital setting, and ICU setting, that glucose is a vital sign, just the same as blood pressure, EKG, pulse oximetry, and I think that's kind of the epiphany, if you will use the term to describe that, has been their greatest realization.

And the impact it has on not just the glucose level of the patient, but now they are beginning to look at different things in terms of sepsis or other infection, things that may indirectly or directly be associated with uncontrolled glucose levels.

Okay, great.

Thank you.

(Operator instructions) The next question comes from Mimi Pham from Soleil Securities.

Please go ahead.

Hi, good evening.

Hi, Mimi.

The bump up in the new patient ads from third quarter to fourth quarter, was that all due to an increase in the number of patient referrals?

Or was it also due in part to a higher referral conversion rate with improving back office support?

Yes, I think, Mimi, I think the back offices we talked about before is really a, it's a continual work in progress, if you will.

And so absolutely there was, you know, better throughput in Q4 than Q3, for example.

But I would say it's a combination of three factors.

You know, the increase in throughput in the back office.

I would say seasonality of the fourth quarter, as Terry discussed in his prepared remarks in terms of deductibles and copays being met and excess cash and flex spending accounts is another contributing factor, and just increases in demand.

We saw throughout the course of '09, we certainly saw significant increases in demand coming into the organization, both from our field force and I think one of the interesting things is we're starting to see scripps come in from folks who we don't call on.

And I would expect some of that to continue into this year, especially as we ramp our MDI, and our direct-to-patient marketing, as patients are going in to their doctors and demanding the product.

I except to see more scrip coming in from folks who we don't have direct touch points with.

So I think that would be, you know, in total, kind of a combination of those three things would result in the uptick we saw in the fourth quarter.

Okay, and then anecdotally, do you lose potential new CGM patients to Medtronics?

And if so, is it because of the integration with their pump?

No, I think actually the reverse is more common.

We're gaining a lot of Medtronic patients.

If you look at some of the higher prescribers of Medtronic pumps, they will prescribe a Medtronic pump and a DexCom CGM for a whole host of reasons, certainly reliability, accuracy, user friendliness.

It's -- we are best in class.

I mean it is clear -- I don't think there's any dispute other than probably Northridge might dispute that, but, you know.

So, no, we don't lose -- and in fact, the only time in certain very high prescribers, pump prescribers, that they recommend other than a DexCom CGM is when the patient absolutely refuses to carry an extra receiver.

And we understand that.

And then regarding the international, did you break out your international contributions in the fourth quarter?

We didn't.

And, you know, I would tell you it's an immaterial amount of contribution from international in Q4.

And as we mentioned in the prepared remarks, don't expect it to be a huge contributor in 2010 as well.

The core of our business in 2010 will be growth of our base in the US, with our stand-alone system.

Great, and then last question, your product margin was 17% in fourth quarter versus 1% in third quarter.

Is there -- how should we look at that ramp through 2010?

Do you have a goal for exiting 2010?

Not that we've given guidance on.

We don't intend to give -- other than the kind of limited guidance Terry gave at the beginning of the call, I don't think we're going to give any additional guidance in terms of financial guidance.

Okay, thank you.

(Operator Instructions) This concludes the question-and-answer session for today.

Please go ahead with any additional comments.

Thank you.

Well, 2009 was a pivotal year for DexCom and CGM as a category.

As I look back over the last four years, we introduced the STS Three-Day Sensor in 2006, the Seven Sensor in 2007, the Seven Plus in early 2009, a first in class Intravenous Sensor with Edwards in late 2009.

This year our goal is to introduce our fourth generation sensor.

Four generations of ambulatory sensors in four years, and the first IV glucose sensor for the critical care market.

We are and we will continue to be the glucose sensor technology leader.

DexCom is at the right place at the right time, as we see this technology embraced by a much larger scientific, clinical, and consumer community.

Thank you.

Thank you for participating in the 2009 fourth quarter and year end earnings release conference call.

This concludes the conference for today.

You may all disconnect at this time.