德康醫療 (DXCM) 2011 Q1 法說會逐字稿

Welcome to the DexCom First Quarter Earnings Release Conference Call. My name is Christine and 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 Terry Gregg, Chief Executive Officer. Mr. Gregg, you may begin.

Thank you, Christine, and thank you for joining us for the first quarter 2011 investor call. I'm going to ask Steve Pacelli, our Chief Operating Officer, to remind us all about our forward-looking statements. 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 10K, our quarterly reports on form 10Q, and our other reports as filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Terry?

Thanks, Steve. And joining me today in addition to Steve are Jess Roper, Chief Financial Officer, and Kevin Sayer, a DexCom Board Member. Jess will provide you with the first quarter financial results and then I will take you through a brief corporate update followed by the operational review. This in turn will be followed by a question and answer period. Jess?

Thank you, Terry. DexCom generated $13.1 million in product revenue for the first quarter of 2011 compared to $6.8 million for the same quarter in 2010, an increase of 94%. During Q1 we shipped over 4,000 systems representing a 56% increase compared to the same quarter in 2010. Sequentially, product revenue for Q1 of 2011 decreased by 3% from the prior quarter. Following a very strong fourth quarter, we experienced seasonality in Q1 similar to Q1 of last year and as is typical in the durable medical equipment business.

Total revenue for the first quarter of 2011 was $14.2 million compared to $9.5 million during the same quarter in 2010. Sequentially, quarter to quarter, total revenue was down 9%, primarily due to a $1 million development milestone earned and recognized during Q4 as part of our collaboration with Animas. Our product gross margin totaled $4.8 million or 36% for Q1 compared to $1.6 million or 24% in the same quarter of the prior year. Sequentially, our product margin declined $1.1 million. As discussed on our last conference call, we saw a small incremental improvement in our product margin during Q4 as we increased both hardware inventory levels in anticipation of Flextronics relocating their production line to China and sensor inventory levels to account for a shutdown of our internal sensor manufacturing lines for approximately 1.5 weeks during January 2011 in order to perform upgrades and maintenance.

We also noted that we anticipated a softening of our product margin in Q1 2011 as we expected to manufacture fewer units and also expected to manage down our inventory levels. During Q1, inventory declined by $1.7 million from the prior quarter. On a monthly basis, our product margin increased from 30% in January 2011 to 40% in March 2011. Barring unforeseen events, we expect our product margin to improve with increased product revenue beginning in Q2. Research and development expense totaled $6.3 million for Q1 compared to $4.7 million in Q1 of 2010. The increase in R&D cost was attributed to additional efforts associated with our next-generation ambulatory products. Sequentially, R&D expense decreased 9% which was primarily due to lower consulting costs.

Selling, general, and administrative expense totaled $10.7 million in Q1 2011 compared to $9.8 million during the same quarter in 2010. The increase was primarily due to additional selling, customer service, and information technology costs to support revenue growth. Sequentially, SG&A expense increased 7% with the increase primarily due to additional salary and share-based compensation costs as we added additional sales headcount.

Our net loss for the quarter totaled $11.9 million and included $3.5 million in non-cash expenses centered primarily in share-based compensation. And the loss per share for the quarter was $0.19. We ended the quarter with $39 million in cash, restricted cash, and marketable securities and had working capital of $43 million.

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

Thanks, Jess. Before I go through the operational review, I would like to update the investment community with exciting news regarding two new additions to our Board of Directors and a new member of our senior management team. It is no secret that we have a tremendous amount of work in front of us as we drive CGM and in particular DexCom's industry-leading technology in both the ambulatory and hospital settings to be recognized as the standard of care. Given DexCom's momentum and the projected growth of our category, we feel the time is right to enhance our Board with individuals that bring unique and diversified expertise to an already dynamic Board of Directors and to bolster our senior management ranks with an individual who has a proven track record in the industry.

Chip Doordan has spent the last 40 years in the hospital sector and is currently the Chief Executive Officer of Anne Arundel Health System in Annapolis, Maryland. Anne Arundel Health System is comprised of a 324 inpatient facility, a 40 bed inpatient substance abuse treatment center, the Edwards Outpatient Surgery Center, the AAMC, the DeCesaris Cancer Institute, and Anne Arundel Diagnostic Center, as well as three satellite facilities. All of this is staffed by more than 3,200 employees with an annual operating budget in excess of $500 million.

As you are well aware, we believe the hospital setting is extremely important for the expansion of the role of continuous glucose monitoring for all patients, not just in the ICU environment but also for patients in the non-critical care areas of the hospital. Our partnership with Edwards Lifesciences provides us with access to the ICU with a sophisticated blood dwelling sensor. We are in feasibility testing with a new subcutaneous glucose sensor specifically designed to address the unmet needs of the step down ward and other areas of the hospital outside of the ICU. I am excited to welcome Chip with his extensive experience in managing and expanding Anne Arundel's hospital operations. This perspective will be an important part of our Board of Directors and the exciting future of DexCom.

Also joining our Board is Barbara E. Kahn, the Patty and Jay H. Baker Professor, Professor of Marketing, and the Director of the Jay H. Baker Retailing Center at The Wharton School University of Pennsylvania. Barbara is an internationally recognized scholar on variety seeking, brand loyalty, and patient decision making whose research provides marketing managers with a better understanding of the consumer choice process. As mobile healthcare technologies converge with consumer devices and patients become more empowered and responsible for their own health, the role of patient choice becomes ever more important. And Barbara will be instrumental in advising DexCom as we bring advanced healthcare solutions to the marketplace.

Finally, it is with great enthusiasm that I announce the appointment of Kevin Sayer to the position of President of DexCom effective June 1. As many of you remember, Kevin and I worked together from 1994 to 2002 as part of the team that grew MiniMed from $40 million in revenue to almost $400 million in revenue and resulted in the acquisition by Medtronic for $3.4 billion. I have relied on Kevin's counsel as a Board member here at DexCom the past couple of years as well as personal friend for more than 15 years. Kevin's position certainly enhances our bench strength and increases our bandwidth as CGM continues its adoption as a significant tool in diabetes care. Rest assured, I am in now way relinquishing my day to day operational control nor decision making. I am building the team that will allow DexCom to achieve product revenue of more than $67.5 million this year and continued strong growth in coming years. As I remind our staff, we anticipate continued growth within the CGM category and we must scale our operations and expand our capabilities to keep pace with the opportunities before us.

Today, we remain keenly focused on the type one market. Just two weeks ago, at the American Association of Clinical Endocrinologists' meeting here in San Diego, a key opinion leader in diabetology made reference publically about a late-breaking abstract to be presented at the American Diabetes Association annual meeting in June regarding a study in the type two population comparing CGM to traditional fingerstick measurements that will be in his words -- a game-changer for CGM. Just today, data from the first 12 weeks of this 52 week prospective randomized clinical study were peer review published in the Journal of Diabetes Science and Technology, demonstrating that the use of DexCom's CGM system significantly improved glycemic control in patients with type two diabetes not taking prandial insulin. We have long believed that CGM is more than continuous glucose monitoring and in fact is a strong behavior medication tool across the spectrum of diabetes tool.

I might add that this investigator initiated prospective randomized study utilize the DexCom SEVEN PLUS system exclusively. Expanding that thought, of the 12 to 15 artificial pancreas projects currently underway around the world, DexCom sensors are used in approximately two-thirds of the investigations. Of course while data supporting the value proposition for CGM in type two patients is exciting, as we've said previously, we will not devote significant resources to target that market until the reimbursement landscape for that important population matures.

This is my 17th year in diabetes. I've never been more excited about the technologies that are being developed for patients. I consider my role in the industry as an elder statesman, philanthropist, and advantaged technologist that brings forth truly innovative products to the diabetes marketplace. In order to expand awareness of the benefits of CGM on a global basis, I need to focus my efforts more externally, particularly in the sales and marketing arenas. Adding Kevin to the team will certainly facilitate those efforts. Our business is multifaceted with the SEVEN PLUS performing as the best available CGM on the market and our next-generation sensor technology currently approved in the EU and under review by the FDA. Our partnerships with Animas and Insulet will bring forth sensor-integrated insulin pumps this year and next and our partnership with Edwards Lifesciences will introduce the next-generation critical care sensor technology to the marketplace next year as well.

Turning to the commercial update, as we guided during our Q4 call in March, we posted a relatively flat first quarter sequentially in terms of product revenue. As I reminded investors during that call, the first quarter is traditionally a seasonally slow quarter in the durable medical equipment business as annual insurance deductibles reset. And this year in particular patients are reporting sharp increases in their deductible amounts as employers ask their employees to share the burden of increased healthcare costs. Like the first quarter of 2010, we saw in January and much of February this year a short-term slowdown in patients' willingness to complete their purchases until such time as their deductibles were appropriately reduced. Nonetheless the deductible burden easing, our pipeline is full, and we remain committed to our guidance of estimated full year 2011 product revenue ranging from $67.5 million to $72.5 million.

Shifting to an update on clinical regulatory affairs, we have continued to maintain an open dialog with the agency on a pre-IDE basis and expect to reach agreement with the FDA on a study design to enable us to file a formal IDE and commence the required trial for gen four within approximately 60 to 90 days. We believe this timing will keep us on track to complete the trial and file an amendment to our fourth-generation TMA supplement during late summer provided however that should FDA's review of our IDE submission take longer than accepted, our submission timeframe would be adjusted accordingly. Regarding our combination products, we have had productive discussions with the FDA concerning the nature of the human factor study and associated technical information required by the FDA to support approval of the Animas VIBE system. Our application for CE Mark approval of the VIBE remains under review by the Animas notified body. We continue to expect that Animas will launch the combination product in Europe before the end of this quarter.

Concerning the integrated system with insulin, we are in the early stages of our development of an integrated system that combines our fourth-generation sensor with Insulet's next-generation Arrow system and we continue to anticipate that an FDA submission could occur sometime in the first half of 2012. Finally, we continue to work diligently towards the development of our second-generation hospital-based CGM system and plan to launch that system in Europe next year.

Needless to say, the regulatory environment remains difficult for all of us in the medical device industry. Yet, as we work collaboratively with the FDA to finalize the protocol for our upcoming clinical trial, we believe we will establish a new benchmark for the category, creating in effect a barrier to entry, not only for new entrants but for existing competitors in our market.

So, in conclusion, as we progress through the second quarter of 2011, the adoption of CGM continues to grow nicely as more and more patients and healthcare professional discover the benefits of continuous glucose monitoring. Although we continue to focus on the type one population, one cannot help but to take a peek at the future and envision the role of CGM in type two patients and even outside of diabetes care. Our plate is full with the SEVEN PLUS growing in the marketplace, our fourth-generation sensor technology winding its way through the FDA and the fifth generation in human feasibility studies in the step down work. Add to that the pending introduction in the EU of the J&J Animas VIBE, a sensor integrated continuous insulin infusion pump system, our progress with Edwards Lifesciences as the gen two glycolic product continues its development with an intended EU launch next year and our collaboration with Insulet to create the first tubeless insulin pump CGM combination product. Also expect it to be commercialized in 2012 along with the US introduction of the VIBE.

From a leadership perspective, we have taken steps to build our bench strength both at the Board level as well as management level with Kevin Sayer joining us as President. Kevin and I have seen this movie before and our entire management team is excited that the opportunity to participate in making a newer and what we believe can be a much broader version. I'm excited to see the pieces being put in place that will allow DexCom to continue to grow and expand our mission.

Personally, this is the perfect situation for me to lead this organization to profitability and beyond from both a revenue and technology perspective. I know that continuous glucose monitoring is one of the most impactful tools to allow people with diabetes to lead a more normal life. I am committed to seeing the technology established as the standard of care in glucose monitoring. At the same time I am privy to early results of a number of the artificial pancreas closed-loop projects we are participating in around the globe and I have never been more excited about the work that these fabulous researchers are conducting to further this technology and bring it to the market in a timely fashion. I want to be part of that accomplishment and have it as part of my legacy to diabetes.

Thank you. Christine, we'll entertain questions now.

Thank you. (Operator Instructions) The first question comes from Ben Andrew from William Blair and Company. Please, go ahead.

Good afternoon, Terry, can you hear me?

Hi, Ben.

How are you? Kevin, welcome aboard. Good to work with you again. It's been awhile. I think you'll be a good addition to the team. Glad you were able to join the Company full-time.

I'm glad to be here.

So, maybe one quick question for you, Kevin, while we've got you. You've been on the Board now for some time. You've seen the Company develop. Maybe in your own words, why is now a particularly good time for you to join? What do you think your initial objectives will be as President?

As Terry said, we've seen this movie before. But in this case I'm thinking the sequel is going to be better. Coming up, there's a lot of things I can look at. Terry and my skills compliment each other very well as I've been involved in a number of -- a lot of things -- I think as we went towards rapid growth, profitability, and also from just a systems end and work perspective, there's a lot of things I can contribute there, particularly being here in the building and working with these people. With respect to the Company, it's just seeing the timing seemed perfect for me. I left my last employment as mentioned in the press release in December and this is the best opportunity I'm going to see. So, I'm happy to be here.

Great. Okay. And Terry, maybe turning to the quarter for a moment, talk about the change in deductibles that you're hearing about from customers and how the magnitude of that might've been different than last year's seasonality, seeing the flattish result was consistent largely with your guidance, maybe a touch worse. But maybe the other factors this year in terms of economic sensitivity or other patient drivers that led to a slightly weaker performance.

It really was the extension from last year -- if you remember in January was very down. We had to pretty much go through half of February before we saw the uptick begin and then we came roaring back with March. I think we've seen the extension of that through the full month of February. We came roaring back again in March. We're happy to see that. And without giving guidance on a month by month basis, the pipeline was full, Ben. I think that's really as we look at things, the question you ask yourself when you see the flatness in January-February timeframe, is there a falloff of demand? The answer is absolutely not. Our pipeline has been full. We had orders ready to ship well beyond what the revenue number was. We just had to wait for patients to finally give us the go ahead because we have to collect the copay from that standpoint and relative to the deductible and just it's the economic -- I don't see at this point any lingering any more than we saw as we moved into the second quarter of 2010. So, again, as reaffirming our full year guidance, we're confident that we will meet that guidance number.

Okay. Maybe one other question for me and I'll jump off. As you ramped up your efforts in the field this year, partially in response to regulatory delays on some of the combination products and maybe losing a little bit of the opportunity to have partners helping co promote, are you done doing that or are you in the selling process? And how should we think about the SG&A line, maybe a question for Jess, over the course of the year? Thanks.

Let me first talk about the number of new sales people that we've put in. We've completed that increase in the number of sales people. So, we're done from that standpoint as far as we can see this year. I have to always say we look at that continuously. If there are particular unmet needs, if we get a payer as an example in a particular area that we are not serving adequately, we may adjust that accordingly. But the other side of that too and one of the questions you should be asking me -- how fast do those new sales reps measure up and get fully functional? We're still in that learning period. They've just -- many of them have gone through sales training in the formal sense of our sales training program within the last 60 days and so they're not fully -- in my opinion they're not fully functional. It usually takes anywhere from three to four maybe even five months. We have not recognized the increase there.

Okay. Great. Thank you.

The next question comes from Bill Plovanic from Canaccord Genuity. Please, go ahead. Mr. Plovanic, please, go ahead. Your line is open.

Sorry about that. It was on mute. Can you hear me?

Yes, Bill.

So, just as I look at this, the first question is just for Kevin is in some of your commentary that, Terry, you'll be focused on sales and marketing and external and basically, Kevin, you'll be focused on internal? Is that the way I should think about this going forward?

Yes. That is how you should think about it, Bill.

Okay. And then kind of on the back of that we saw gross margins drop and we talked about kind of the shutdown in January for the PDA and for also the disposable -- it's ramped back up to 40% as we exit Q1. What should we expect in Q2? Is it going to be a 40% to 43% number? Is it going to move up faster than that? How should we think about that?

I think if you look at Jess's comments that we should continue to see growth, we have never given forward-looking guidance on that, Bill. Now would not be the time to start that. But again we said as we ramp this is a very volume sensitive business, particularly on the disposable side. We today, we're not fully absorbed in our manufacturing operations. We expect that to continue to grow appropriately.

What type of absorption -- what kind of gross margin can you get to on your current generation of product? And what revenue level do you kind of max out in your current gen, on the gen three.

We don't really max out from that standpoint. We have said -- and I think Steve's addressed it. I'll ask him to address it again, but just from a manufacturing capacity standpoint, this footprint with the gen three technology and a single ship, we can do a million sensors. At this point in time we believe -- and I think Steve -- I'll let actually Steve answer the margin question on a million sensors.

Yes. So, Bill, somewhere between a million to 1.5 million sensors in the current configuration in the current footprint, we're north of 65% on the disposables. We'll probably be running 50% ish on the hardware. Yes. The hardware volumes are certainly not going to exceed that -- near that million unit number. And then we moved to gen four, again, same footprint due to the manufacturing changes. The scaling, some of the configurations that we manufacture in gen four, we move that 65% to north of 75% in that same kind of 1.5 million-ish sensor volume on the --

Got you. Shifting gears once again, the study that you highlighted, that was talked about at the ACE meeting -- I guess we'll get to see this come out regarding the type two data, is this -- is that enough, that study, to drive the reimbursement? Or do you need multiple studies? What's your kind of thoughts at this time?

I don't know to be honest with you. It's a 100 patient study. It's got a full year of analysis. It's randomized, independent, prospective. Certainly from an analytical standpoint and statistical standpoint it will more than stand on its own from that perspective. I just cannot tell you if it's going to be enough. I reflect back on the CGM trial that was sponsored by GDRF. It certainly had more patients in it -- over 300 patients. The analysis at six months was positive.

But even before that, you remember back it was finally released in September of 2008, we were getting positive coverage decisions before that. And so I don't know how the payer community will look at this. We haven't seen the final results. If you just look at the six month results, they're pretty compelling in reduction of A1c and some other components with regards to weight and blood pressure. I don't know if that's going to be sustainable at one year. Obviously when Dr. [Bodie] was making the comment from the podium about the game-changer, he may have had access to information that we don't. Therefore, I'm encouraged by his comments but I don't have the actual data, nor have I seen it. So, we just have to wait and see have the payer community reacts to that.

Okay. Then on the product update, this is the last question. You talked about the CE being under review, launch late Q2. That's coming shortly. And the US for the J&J product. I don't know if you talked about when you expect to submit on that one. I know Insulet you said you expect to submit in the first half of '12.

Yes, Bill. There's no real update from the March call. What we said in March was that we expect to submit it in some period of time following the gen four. It'll -- theoretically we could submit it at the same time or the next day, quite frankly. But the FDA has asked us, without giving us definitive guidance on number of days or weeks, they've asked us to delay slightly from the time we file the gen four standalone to the time we file the Anima PMA supplement because remember it contains the gen four sensor, the Animas system is a gen four system. So, they want some period of time to review the gen four filing before they have another gen four filing sitting on top of them. We're guessing somewhere 90 to 100 days or so after our gen four filing which again we're holding consistent to our kind of late summer filing for that, the gen four standalone.

Okay. Perfect. Thank you. I'll jump back into queue.

The next question comes from Mimi Pham from Weeden and Company. Please, go ahead.

Hi. Good afternoon. Just your quick comment about the 90 to 100 days for filing of the J&J integrated device, you don't need any additional data then? Or you don't do trials -- ?

It will require what we call a human factors trial, Mimi. It should not require -- there was some discussion at certain points during the FDA's evaluation of establishing this class 2B category where it was looking like pump companies were going to have to run trials pumping insulin in patients or clinical trial subjects. It doesn't appear that that will be the requirement going forward. But we will have to do a small human factors trial which is a much less significant trial of course than we're running on the gen four stand alone.

Which assuming you can get done and completed and compiled to the update within that 90 to 100 day?

It can be done in parallel. It can be done at the same -- there's nothing -- that kind of window of waiting is something we're doing at the request of the FDA. We will be prepared to file as soon as they will permit it.

And then regarding the pilot type two study, when the data comes out, do you have to wait for the data to be published before you approach the payers? Or do you think it will be published at the same time as the ADA late breaker?

I think it'll be published at the same time as the ADA late breaker. Typically those things, if you remember back to last year and the STAR 3 trial being a late breaking abstract and then published in the New England Journal of Medicine the same day that it was presented, I don't know the publication intent of the investigator. Certainly we hope that a prestigious journal such as the New England Journal of Medicine would consider this for publication. We think it's interesting enough and groundbreaking enough that it should warrant that type of publication, but I'm not the editor and chief of that prestigious magazine yet.

I guess based on the last time you went through this on the type one side, can you just talk about your strategy for reimbursement? How many payer you will approach and how soon after this data is presented or published by the ADA could you see any type of decision for type two?

We have not formulated that strategy. Obviously if you look at a couple of payers that have any type of type two diabetes reimbursement although today the criteria for coverage is quite restrictive. I would make the assumption that those would be the first two payers we would want to approach and begin to explore and have that discussion. I think it's very early at this point to have any kind of stated strategy for that. We haven't seen the data yet, so I think we'd first have to see the data before we develop the strategy.

Got it. And then last quarter you talked about potential partnerships to promote CGM without -- separate from your direct sales force. Can you provide an update on that?

The only thing I can tell you is we said by midyear we would have some kind of announcement.

Midyear? Okay.

I would say at this point we are -- to use the term, deep in the weeds, in discussion. I can't elaborate more than that. I think there's multiple different opportunities and we're deep in discussion with those opportunities.

Would it be fair to characterize it maybe we could see something on that front in ADA also?

I wouldn't want to speculate. The devil's always in the details in these deals. From us, negotiating and them negotiating and then at the final minute you get the attorneys involved. That can sometimes -- depending on the size of their organization, take longer than it would take for us to finalize an agreement. I don't want to speak to that or predict when that might be announced.

Okay. Thank you very much.

The next question comes from Amy Sullivan from Piper Jaffray. Please, go ahead.

Hi, guys.

Hi, Amy.

You guys gave us a lot of details there on all the different projects and stuff. So, I apologize if I missed this, but where are things at from a US perspective with the Edwards hospital product on the regulatory front?

Where in -- I would classify this as a state of limbo from the standpoint of what the FDA is looking for. They have -- and it's not related to the product itself. If we characterize their concern, they being the agency, their first issue is they do not like the standards when it comes to glucose monitoring. The ISO standard. And so they have to come up with something that is acceptable. Obviously the institute of medicine will weight in. International standards organization will weight in. They've asked for advice from ACE. They've asked for advice from ADA, from IDE, and everybody that can weigh in, it's more related to establishing what would be an acceptable point to point accuracy standard. Until that data is established, we can't actually do a follow-on clinical trial because we don't have an end point to shoot for in terms of accuracy.

That said, they are very open and have asked us to again collaborative way to sit down with them and discuss what other attributes of the product that we could bring forth. Their big concern is direct dosing off of the value and as you know and even all the way back to November of last year when Dr. [Gutierrez] got up and commented that point of care meters are not indicated for therapy adjustment, particularly in the hospital sector and yet they are used by most facilities, most hospital facilities. I think this is a much larger issue than just continuous glucose monitoring in the ICU. I think there are some basic standards that have to be established. But that said, I think the agency embraces the role of CGM and the reduction of potential morbidity and mortality in that sector and want to find a solution that they can live with and that's the level of dialog that we're engaged with them along with Edwards' regulatory personnel.

Okay. That's helpful. And then secondly with the SEVEN PLUS system out there now for, what? Almost two years? I'm curious what you guys are seeing as far as trends or patterns on the actual durable components of the system? How long are patients using the system and has there been any sort of pushback or anything from payers as they go to reorder a new system?

There's certainly been no pushback from payers whatsoever from that standpoint and as far as the durability of the disposable, I think that's what you're referring to in terms of use patterns. We continued to see the number of patients using it more frequently grow as they realized that the utilization on a continuous basis provides them with much greater benefit than using it periodically. So, that has, as we've said each quarter, that continues to grow. The only other thing I would add is we would continue to grab share from the standpoint as more patients become dissatisfied with competitive products, we certainly capture what I consider to be more than our fair share of that competitive landscape and we're happy to do that.

Are you seeing patients that have been using the system now for over a year? Is it around that year timeframe that they're getting a new transmitter?

The transmitter -- we carry a one year product warranty on both the transmitter and the receiver. But as you know the transmitter would be the gating item because the transmitter has a fully contained battery. But the transmitter will typically last somewhere between 12 to 18 months and so we're not seeing any issues with our ability to process -- it's kind of across the board. It's either a new transmitter or potentially a whole new kit for the patient processing through their insurance.

Okay. That's it for me. Thanks.

The next question comes from Raj Denhoy from Jefferies and Company. Please, go ahead.

Hi. Good afternoon.

Hi, Raj.

I wonder if I could ask about the timing of the IDE for the next-generation sensor here in the US. If I look back on the fourth quarter, I think you mentioned it was going to be 60 to 90 days to submit then and that was early March. If I'm not mistaken I think you're still saying 60 to 90 days. I'm curious if there's been a slip there or any discussion with the FDA that's taking a little longer?

What we said in March, we said we would be in a position -- we would file the IDE and be in a position 60 to 90 days thereafter to launch the clinical trial. And so, no, at this point we're not slipping. The one caveat we added and what we're hearing sort of anecdotally in the industry is that IDE they're typically a 30 day filing. Statutorily the FDA will respond to you in 30 days. But we're hearing that the IDEs are not going through as rapidly as that and that sometimes the FDA is coming back with comments and things that could result in multiple iterations of the IDE. I will tell you that we've spent a considerable amount of time working with the agency on a pre-IDE basis which is -- that's what we've been doing for the last couple months. To really nail down precisely what the FDA would like to see in our clinical trial that we're going to conduct. So, we're hopeful that we get the IDE through in a timely fashion. But that's the only caveat that we added to our comments today. We didn't slip the timing at all, just added the caveat that if the IDE doesn't go through in a timely fashion that could push the trial.

Okay. Very helpful. The comments on the Edwards trial and your relationship with them, I'm curious what effect it has on the grant revenues. I think you'd mentioned before that you'd give an update at some point but as you guys continue to work what that's going to look like. Have you updated when we could start to see some of those?

The milestones outside of the gen one FDA which is the one that we need to renegotiate and Edwards is quite open and interested to renegotiate that as we identify gen two and even a subsequent generation beyond the gen two so the other milestones remain the same and that's gen two approval, OUS gen two approval, US, and the Japanese approval at some point in time. So, those do get extended out into 2012 and probably the Japanese approval in 2013 even potentially longer than that depending on the Japanese regulatory process.

But that's the only what I would say as delay in terms of receiving those milestone payments. We're currently highly engaged with them. They just, as you may know, there was a period of time in which their leadership of the glucose monitoring, they recruited a new individual from a very successful Edwards individual to now head up that program. He came in from Israel around the first of the year and I can say that energetically how we are engaged on the technical front, I have never seen the teams works as closely as they are today. So, I think it's moving quite nicely. But again we do have to renegotiate that contract.

Just so I'm clear, there was no kind of nearer-term milestones that are maybe getting pushed out. These were all based upon approvals and kind of later milestones?

Yes. The milestones are the ones that we had published previously.

Fair enough, just a couple other ones as well, pending approval of the combined J&J product in Europe, what are your expectations for that product early on, particularly given some of the reimbursement challenges for CGM in international markets? Are you expecting much in the near-term from that product?

No. I would not put much in terms of revenue as it relates to DexCom. That's a market introduction. I think it allows the Animas as well as DexCom, but it allows a competitive -- a highly competitive product to be introduced. No. Medtronic diabetes has had their way with a technology of the combination of their two systems. I think this allows DexCom a hunting license not only on the new two pump therapy patients but as well to go after some of that install base of Medtronic's. But it is a limited, what I would consider to be a limited interruption, therefore limited revenue potential for DexCom.

Okay. And sorry, just one last one. You know I appreciate the comments as well on kind of the changing reimbursement landscape, the insurance landscape for patients. That's changing some of the adoption, the rate of adoption of the technology. But have you seen any change in the time the patients are wearing sensors, if the deductibles are increasing or even the copays are increasing, are patients stretching out the time they're keeping sensors on?

No. They always do that. I mean that's just kind of the -- if you want to have an ah-ha moment as a Company, when we move to reimbursement originally we were certainly under the impression that once reimbursement was in place, patients would be less motivated to, quote, extend the life of the sensor beyond its labeled indication. That said, even patients that have zero deductible, they are 100% covered, oftentimes extend the use of it well beyond its indicated label indication and part of it is convenience, they don't have to change out the sensor but I think even more importantly is the fact that when they get to a certain point and it's still running strong, from that perspective they just say -- why would I want to change it at this point? I trust it. And I'm going to wear it until it actually begins to fail. Of course that's going to vary with each individual patient. But we're -- if anything we see patients using sensors and exchanging them more frequently in terms of the exchange where historically I think we also believe that a patient would wear it and take more holidays from wearing it. I think you see less of that today and that may stop one session and initiate the next session pretty quickly.

So, in a sense despite the economic challenges that may be emerging because of the insurance landscape changing, you're not seeing any change in the way patients are using the technology?

No. Once they're onboard and if you really look at it from the economic proposition, if they've met their deductible and patients with diabetes meet that fairly quickly in the first quarter of the year with all their diabetes supplies, not just sensors, there's less of an impact from an economic standpoint. The real impact on the insurance change and the increase in deductible is in starter kits. Not really on the sensor side of the business.

Okay. Fair enough. Thank you.

The next question comes from Richard Lau from Wedbush. Please, go ahead.

Hey, guys. Thanks for taking my question. A lot of them have been answered already. Can you maybe give us an update on the gen five development and maybe sort of performance you're seeing in the step down order or anything like that?

We're awfully excited about it is the easiest way to describe the results. It's not a huge number of patients. But it's more than a handful and we're able to subject those patients to a variety of the normal occurring drugs and stress factors that a patient undergoes in a step down ward. So, they're post-surgical. They've moved into still a monitored situation. They're still receiving analgesics and other concomitant medication and yet we're seeing an excellent single digit MARD type of results from a broad range of -- and these are in both patients with diabetes as well as non-diabetes patients. So, we're very encouraged as is the facilities that we're doing the work in. So, very excited about it.

That's great. That's all for me. Thanks, guys.

The next question comes from Jonathan Block from SunTrust. Please, go ahead.

Thanks. Good afternoon. Most have been answered. But maybe just two or three quick ones. The first, and I apologize if I missed this -- Jess, did you give the sensor revenue numbers in terms of a percentage basis, what that was up either year over year or Q over Q?

We did not on this call.

Is that a change you're going to make going forward?

To be honest with you we haven't really given that a lot of thought.

Okay. Alright. Just to shift, do R&D, a little bit lower than what we were looking for the R&D expense? I think you mentioned annualizing about $20 million for the year. Has that changed? Or is this going to be a little bit more backend weighted as you finalize some of these projects?

That holds true in terms of what we expect out of Q4 run rate of about $7 million a quarter. It was a little bit lower this quarter. It does fluctuate. It can fluctuate dramatically just depending on the number of trials we're running, the timing of those trials. In this quarter in particular, we had lower consulting dollars. I would expect something similar to what we announced previously which is about $7 million per quarter.

Got it. Last two, Terry, maybe for you. The first one, just a clarification -- I remember you mentioned on some of the trials that will be published that DexCom was the exclusive. I'm sorry, were you guys the exclusive in the upcoming type two trial or was it a different one?

No. That's the one we were exclusive on. That was, by the way, just to frame the landscape, in an investigator initiated trial, they buy the product. This was not something that DexCom sponsored in any way. This particular principle investigator made the decision to conduct this trial and we were -- quite frankly we were not even apprised of his intent to do this until well after the trial was started. It is independent and randomized. But we were the exclusive CGM device used in that trial.

Okay. Great. And last one, anything on the competitive landscape, Terry? I know probably the other CGM guys are a ways away but maybe you can comment on what you're hearing from Medtronic and their light sensor OUS?

Yes. Really I haven't heard much. Unfortunately in the European sector they are not obligated to publish data. We really don't know what the performance of that sensor is. If you look in the FDA requirements, we have to fulfill a certain format where you -- it has to be prospective. You have to demonstrate the range between 40 and 400 and they've got nomenclature that we have to follow so it's pretty easy to compare a Medtronic sensor to an Abbott sensor to a DexCom sensor. In this scenario we can't find anything in any of the published data other than what they've presented in an R&D format which is always somewhat questionable as together it was prospective or retrospective data and how they analyzed the data. So, until we either actually get it in our hands and do our own testing or we see a head to head competitive study done by an investigator or they get approval in the US, we're -- it's always subject to interpretation of how they've analyzed their data.

Understood. Thanks, guys. Very helpful.

The last question comes from Vivian Wohl from Kaufman Funds. Please, go ahead.

Hi, guys. So, since I'm last I'm not going to ask you to go through all 80 -- let me turn off my cell phone that's ringing. I won't ask you to go through all 80 plus studies that are listed on ClinicalTrials.gov for continuous glucose monitoring. But I am curious in Europe what the reimbursement environment looks like there for continuous glucose sensing? Do you have any color on the major markets in Europe that you'll be addressing?

The only color I could ascribe to it would be grey from a standpoint of there are some local funds that do in fact reimburse for CGM. They're limited. So, from that standpoint I would characterize the CGM reimbursement landscape in Europe as probably what we were in 2007 and 2008. There's some reimbursement but it's limited. I think that's going to continue. I will say there's a lot of studies ongoing with the express intent to create portfolios in which to submit dossiers for reimbursement. We have some pending as well but I think at this point it's still a ways away.

And Medtronic hasn't really paved the way there yet?

No. Medtronic I think has seen the light and certainly are spending more of their effort on the area of glucose sensing because they recognize like I think all of your recognize that at some point as the VIBE comes into the marketplace, it's going to take market share as the both OUS and particularly in the US market and as well as the Insulet product here in the US next year. So, they've got to in order to kind of sustain their share or certainly revenue, they're going to have to make up the capitalization of their systems with -- I would assume with sensor revenue.

So, they're going to have to get through that regulatory process much like all -- from the other competitive landscape, we monitor everything that we can to get all the scientific research meetings. We don't see anything that is alarming to us. Bayer demonstrated their sensor technology in London. The iSense technology. I think we all came away from that thinking they were further along in the development of that and they were the ones that quite frankly really I had been more worried about and now I'm less worried about.

I don't see any disruptive technology out there that's anytime soon and I think with the FDA having the kinds of requirements and what we see as an opportunity to increase the standard with some of our technology that it's going to become even more difficult as a barrier to entry for existing competitors or even more importantly I think for anybody that wants to come up the ranks. The other comment I make is it's going to be really expensive. Three years ago, two years ago, PMA product was probably $150 million to get to commercialization, you can pretty much double that these days. So, I think that these privately financed companies are going to have to find deep pockets to support them through that -- the length and cost of a PMA process.

Thanks very much.

That was the last question for today. Please go ahead with any final remarks.

Thank you. I just want to say DexCom is truly a remarkable Company blessed with talented people and we continue to add to that strength. As I look at our portfolio of products in the R&D pipeline, I'm proud to say that we own a leadership position in the CGM technology and that leadership position continues to grow. We are well positioned to address unmet needs on the most important fronts in both glucose monitoring and insulin delivery. Thank you.

Thank you for participating in the DexCom first quarter earnings release conference call. This concludes the conference for today. You may all disconnect at this time.