德康醫療 (DXCM) 2011 Q3 法說會逐字稿

Welcome to the DexCom Third Quarter Earnings 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 today's conference is being recorded.

I will now turn the call over to Terry Gregg, DexCom's Chief Executive Officer. You may begin.

Thank you, operator, and thank you for joining us for the third quarter 2011 earnings call. I will ask Steve Pacelli to review our Safe Harbor Statement to kick it off.

Thanks, Terry. Some of the statements that we will make in today's call may constitute forward-looking statements. These reflect management's expectation about future events, operating plans and performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties.

A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under the section, Risk Factors, and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other reports as filed with the SEC.

We undertake no obligation to update publically or revise these forward-looking statements for any reason. Terry?

Thanks, Steve. Joining me today are Kevin Sayer, our President, Steve of course, our Chief Operating Officer, and Jess Roper, our Chief Financial Officer. Consistent with our second quarter earnings call, Kevin will provide you with our third quarter financial results and a brief operational update and I will conclude with a more macro update and some thoughts on our strategy for the balance of the year. This will be followed by a question and answer period.

Before I turn the call over to Kevin, I would like to update investors on a very exciting relationship that we just announced this afternoon. We've entered into a definitive research and development agreement with Roche Diabetes Care relating to the development of an integrated diabetes management system. Our goal is integrate our next generation Smart CGM technology into an advanced Accu-Chek insulin infusion system that will provide patients with the option of utilizing a single handheld to control either a traditional durable insulin pump or a disposable patch pump and it will also include integrated blood glucose meter and bolus calculation capabilities.

Under the terms of the agreement, Roche will pay DexCom technology license fee of $3 million. Roche will offset our development, clinical and regulatory expenses and upon commercialization of the combined system Roche will pay DexCom $100.00 for each CGM enabled handheld sold.

From a timing perspective we expect to complete the development, clinical and regulatory work and file a PMA supplement with the FDA before the end of 2013. Separately during the third quarter we entered into an exclusive distribution agreement under which Roche Diabetes Care will promote our SEVEN PLUS system for real time professional use in the United States.

This agreement allows Roche Diabetes Care to sell the DexCom SEVEN PLUS system directly to healthcare providers who will use it with their patients to promote a better understanding of individual glucose patterns and trends. This information will support healthcare providers to make better informed individualized therapy adjustments, which can lead to optimized diabetes management.

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

I would now like to turn the call over to Kevin Sayer.

Thanks, Terry. I'll start with the financial update. DexCom generated $16.7 million in product revenue for the third quarter of 2011 compared to $10.8 million for the same quarter in 2010, a 55% increase. Recognizing this is slightly short of analyst expectations of approximately $18 million in product revenue, we note that our international business continues to under perform our expectations. And in the third quarter domestic starter kit and sensor sales volumes were not as strong as we'd hoped, as many potential patients are reluctant to use their discretionary spending dollars on a product that is still not viewed as a must have by their healthcare providers.

During the third quarter we shipped approximately 5,200 systems representing a 33% increase compared to the same quarter in 2010.

Sequentially, product revenue for the third quarter of 2011 increased 10% from the prior quarter, as both starter kit and sensor revenues were up approximately 10%. Total revenue for the third quarter of 2011 was $18.3 million compared to $11.7 million during the same quarter in 2010.

Our product gross profit totaled $7.4 million generating a gross margin of 45% for Q3 of 2011 compared to gross profit of $3.8 million and a gross margin of 35% for the same quarter in the prior year.

Sequentially our product gross profit increased $0.6 million, or $600,000 on increased sales of $1.5 million over the prior quarter, while our gross margin remained flat. Our product gross margin was approximately two to three percentage points lower than expected due to several lost manufacturing days as a result of the September 8th power outage that affected Southern California and Arizona, which caused under absorption of our fixed overhead costs and required us to scrap certain work-in-process inventory. We are currently implementing systems, processes and procedures to mitigate losses of this nature in the future.

Research and development expense totaled $8.2 million for the third quarter of 2011 compared to $6.2 million in the third quarter of 2010, primarily a result of additional expenses related to our future generation ambulatory products. Sequentially, research and development expense increased 17%, which was primarily due to higher development, clinical and regulatory costs relating to our future ambulatory products.

Selling, general and administrative expense totaled $13.2 million in the third quarter of 2011 compared to $10.4 million during the same quarter in 2010. The increase, which included $0.7 million, or $700,000 in additional share-based compensation, was primarily due to additional selling, marketing and information technology costs necessary to support revenue growth. Sequentially, selling, general and administrative expense increased 8% with the increase primarily due to seasonal marketing and trade show costs.

Our net loss for the third quarter of 2011 totaled $13.3 million and included $5.0 million in non-cash expenses centered primarily in share-based compensation; and the loss per share for the quarter was $0.20, slightly higher than analyst consensus estimates of $0.16 due primarily to the following.

First of all, we had reduced gross profit related to lower than expected product revenue and the cost of goods issue related to the power outage, which accounted for approximately $0.02. Greater R&D expenses accounted for another penny and finally greater SG&A costs accounted for another penny.

We ended the quarter with $98 million in cash, restricted cash and marketable securities, and had working capital of $100 million.

Finally, a brief comment on our Q4 outlook. While we are pleased with our Q4, 2011 performance through the month of October both in terms of starter kit and sensor sales, we have elected at this time to revise our guidance for estimated fiscal 2011 product revenue to a range of $62.5 million to $67.5 million. Terry will add some color on our Q3 performance and our expectations for Q4 during his prepared remarks.

Shifting to an update on our fourth generation sensor system, as most of you know Gen 4 in its original embodiment was designed with a focus on increased scalability and improved manufacturability and less on approved sensor performance.

During the Q and A session of our last earnings call, Terry mentioned that it was unclear whether Gen 4 would be classified as a PMA supplement or a new PMA by the FDA. His comment was predicated on the fact that to date we have filed 43 supplements to our original PMA for the STS Three-day System coupled with the fact that the FDA will often require a new PMA if a design change is so significant that a new generation of the device will be developed.

Remember Gen 4 embodies a new receiver form factor, a new transmission frequency in the transmitter, certain sensor material changes and a number of manufacturing process changes. We've had continued dialogue with the FDA regarding the nature of the Gen 4 filing and we were recently informed by the FDA that based on the information we have provided our Gen 4 submission will be classified as a new PMA.

In anticipation of this, as we started down the path of our Gen 4 pivotal trial, we decided to pause to evaluate the current state of our technology to ensure we were testing and ultimately seeking approval of the best possible system configurations. Based upon this evaluation, it became obvious to us that we should include a few key modifications to the Gen 4 system that we developed during the course of our advanced technology development activities over the past year, modifications we believe will give us substantially improved accuracy and reliability over the full seven-day sensor session. We believe these improvements will further entrench DexCom as the gold standard in terms of sensor performance in the CGM category.

From a timing perspective we expect to conclude the pivotal trial with our improved GEN IV configuration, prepare the appropriate submission and file the GEN IV PMA in the first part of 2012. We also intend to submit our improved Gen 4 configuration with our notified body to obtain CE Mark Approvals and expect to launch a Gen 4 standalone system outside the United States during the summer of 2012.

Turning to our development partnerships, Animas continues to commercialize the Vibe system in Europe and it is expected that the Vibe will be available in up to five markets by the end of the year. With regards to the filing of a PMA supplement for U.S. approval of the Vibe, we continue to anticipate filing with the FDA approximately 100 days after we file our Gen 4 PMA.

Similarly, we believe the FDA will allow us to file a PMA supplement for U.S. approval of the insulin integrated, system subject of course to completion of development and clinical and regulatory work on that product.

Finally, the development of our second generation in hospital glucose monitoring system conducted in collaboration with Edwards Lifesciences continues to move forward. As Edwards announced on their Q3 earnings call, recent design enhancements to our GEN II System now require a more extensive regulatory review in Europe and consistent with Edwards' guidance we now anticipate obtaining CE Mark and beginning a U.S. IDE study in the second half of 2012.

I would now like to turn the call back over to Terry.

Thanks, Kevin. I would first like to add some additional color to our Gen 4 regulatory path. As Kevin mentioned, we have filed 43 supplements to our original PMA for the SGS three-day sensor dating back to early 2006. Obviously we had achieved a great deal of success iterating product improvements through the PMA supplement process. We certainly tried to continue that trend with the Gen 4.

The fact of the matter is that Gen 4 System embodies new hardware, new sensor materials and new manufacturing processes, all subject to the PMA. We know that FDA very thoughtfully considered our request to treat Gen 4 as a supplement but we always anticipated that some day we would need to file a new PMA to accommodate the substantial number of changes we have made to the system over the years.

And I remind investors that, while the volume of information required to be submitted by us for a full PMA filing is more extensive than for a PMA supplement, the statutory review cycle for a PMA, as a PMA supplement, is identical at 180 days. So, while the burden on our regulatory department is greater, we are cautiously optimistic that a full PMA will not materially add to the review time frame for Gen 4. And, as evidenced by the Gen 4 data presented in a poster session at ADA back in June, upon approval we expect to be in a position to commercialize the Gen 4 system with much greater accuracy, durability and on-time performance and with less physiological interference than any other system on the market.

Shifting to some thoughts on our commercial activities, uncertainty regarding the global economy continues weigh heavily on everyone's mind and I believe pressure on discretionary spending coupled with increasing overall healthcare expense has impacted both starter kit and recurring sensor sales.

For example, I read in a recent Wall Street Article sighting a poll conducted by the Kaiser Family Foundation and the Health Research and Education Trust that health insurance premiums paid by employers continues to rise sharply with the average annual cost of family coverage passing the $15,000 mark for the first time.

More concerning was the fact that this increase premiums came despite a continued trend toward high deductable plans, which require workers to bear significant out-of-pocket costs and that 31% of employees are enrolled with a plan with a general annual deductible of at least $1,000 for a single person. Yet in spite of that we sold 5,200 starter kits in the quarter, which is a record number for us, and we remain confident of sequential growth in starter kits during this fourth quarter.

As Kevin mentioned, growth in our international markets continues to be slow. We are still faced with a general lack of reimbursement for CGM outside the United States and it is becoming more clear that obtaining reimbursement will require us to conduct clinical trials in the various countries. We expect to look to markets, such as China, India and the Middle East as expansion opportunities and cash pay markets. I just returned from a 10-day tour of diabetes clinics across India and I believe there is substantial interest in CGM, although I think it will take time to develop this market as well.

When Kevin joined us as President in June I committed to focusing my efforts more externally, particularly in the sales and marketing arenas. So what have I learned since then? Well I've learned that now more than ever there is a critical need for our technology. I've learned that while reimbursement is substantially better than it was even just a year ago, it's not perfect and many patients are still required to battle their insurance companies to obtain coverage.

I've learned that while we do a good job with our patients, on our healthcare providers we need better tools, so improved physician and patient training will be a focus for us going forward. And I've been reminded on the need for us to go deeper into our target accounts. We need more scripts out of our core group of endocrinologists.

Finally, some thoughts on the future of our technology, at the Eleventh Annual Diabetes Technology Meeting held in San Francisco last week the most notable subject matter discussed was the development of an artificial pancreas. And over the course of several days we heard presentations from some of the diabetes industries' most highly regarded researchers, including Doctors [Roman Horvaca], Howard Zisser, Boris Kovatchev and [Lou Teinamen].

We were pleased to learn that FDA has approved Medtronics IDE to conduct an in home clinical study of the VO Insulin Pump with a low glucose suspend system. And of course we were pleased to see that we continue to be the sensor of choice in the vast majority of artificial pancreas projects ongoing around the globe.

We were also presented with data from a host of would be competitors to DexCom, including a non-invasive CGM and an implantable CGM and I remind our investors the need to focus on four key things when looking at competitive technology.

The first consideration is technical performance. Does their technology perform through the full range of requirements, those requirements being 40 to 400 milligrams per deciliter and do they show required data points at each of the three major zones required by the FDA below 80 milligrams per deciliter or hypoglycemia, the mid-range of 81 to 150 milligrams per deciliter and greater than 150 milligrams per deciliter to at least to 250 milligrams per deciliter, or the hyperglycemic range? This traditionally is only accomplished by moving patients up and down with insulin and high sugar content drinks during the course of a very controlled clinical trial. These early stage companies have not presented any data to support performance of this nature.

Second are the human factors consideration. With one potential competitor you have to wear an elastic bandage around your torso to hold the heavy bulky device in place. Take a moment and think about the patient experience in the summer as a problematic example of why this is not doable. They also have movement artifact issues according to their own people, as presented at the Diabetes Technology Meeting.

In the case of another you have to denude the skin with a micro-abrasion device everyday or every couple of days. They say they can get to 48 hours. We've only seen data at 12 hours. Even in the case of Medtronics Enlite sensor to achieve increased durability and accuracy, the patient has to increase the frequency of calibration measurements to three to four a day in order to compensate for the increased drip of the sensor signal.

The third and possibly the most important part is a PMA process itself. It has become clear that certain sell side analysts are not well informed in the PMA requirements and their report is of CGM were a 510K filing rather than a PMA. The degree of difficulty is tremendously different. Just setting up an approvable quality system is very costly. Every component part and the manufacture of that component part has to be certified and audited by the Company and the FDA. Every part has to undergo extensive testing, validation and verification before they can be used on the manufacturing line.

The entire manufacturing facility has to be audited by the FDA and approved before a PMA will even be considered. You have to have engineering change order process that is validated. You have to have a CAPA system, a Corrective Action and Preventative Action system in place and validated with extensive amounts of data demonstrating its effectiveness. We're talking about millions of dollars if investment to set up and maintain and in fact, we estimate that DexCom spends between dl10 million and dl15 million per year just to maintain our quality system as required by the Food and Drug Administration.

And finally, it gets back to the data. These would be competitors, excluding Medtronic of course, are trying to compare their limited data sets to our SEVEN PLUS data and then make claims. We have learned over the years that trials with a small number of subjects, meaning fewer than 20, can provide inconclusive or misleading results. And in many cases, these companies provide retrospective data and try to compare it to our prospective data simply not an apples to apples comparison.

We have Gen 4 approved in the EU and we know that the MARD improves versus our SEVEN PLUS by two to three points over the full range of 40 to 400 and particularly in the less than 80 milligrams per deciliter range, hypoglycemia. This is prospective accuracy. We have Gen 6 human feasibility data showing a single digit MARD with less frequency of calibration and greater durability. Again, this is prospective accuracy.

Even Gen 4 shows no degradation of sensor performance beyond seven days but we will have to conduct yet another clinical trial to achieve that plane. It is my belief that these early stage companies will not catch up to the advancement of our technology. Never mind the challenges of scaling manufacturing to build millions of sensors per year.

With that, I'll get off my soap box and open it up to question and answers.

(Operator Instructions). Tom Gunderson, Piper Jaffray.

Can you -- Terry, maybe you can talk a little bit about the Roche deal. There is just a couple parts I missed. Number one is has your sales force in the U.S. been spending any time calling on the professional, the doctors, in what Roche is going to be taking over?

No we have not. In fact, we have specifically instructed our sales force not to go down that pathway, Tom, and the reason was that building the ambulatory category was extremely important to us and getting that mindshare and taking the sensor outside of the realm of only integrated with a pump was the key component to driving to the MDI market, which is much larger than the pump market in the U.S. So, as a result of that, no the easy answer is no.

So this is a new opportunity. As you know, the SEVEN PLUS has two capabilities, both blinded an unblinded depending upon how the physician wants to use it. We obviously even with the professional use recommend in its unblinded state because there's more valuable information from that and it is real time with all the alarm systems that are available to keep patients safe, even during diagnostic use.

And the distribution for the combined Roche product will be U.S. only?

Well, I mean if you think about going back to the original agreement with Animas, that agreement ends in the end of 2013 and, as we mentioned in the call, the intent is to file this with -- this combined system with Roche, in either the durable or the patch pump towards the second part of 2013 so rolling into 2014 with this approval we would expect this to be a global distribution.

Got it. Thanks for the clarification and then on the Q4 guidance, Kevin or Terry, can you give us a little bit more color? I understand sort of the seasonality that we see in the summer. Others have had a slow time but is there -- what are you seeing? You said sensors and kits look good in October. What are you seeing that gives you some pause that you want to bring in Q4 a little bit?

Well this is Kevin. Our initial guidance range was $67.5 million to $72.5 million and the fact is we could not see getting to $72.5 million as we looked at it and even getting to $67.5 million is a very substantial quarter for us and so we brought it down a little bit and thought that would be a more conservative, more prudent approach at this point in time, Tom. Now again, as we said earlier, our October numbers to date are good and we're doing well but we just felt it more prudent to bring things down a little bit right now.

Yes, Tom, I would add to this if we had had the upper end of each of the Q1, Q2 and Q3 number, then the Q4 number would be in total year number would be a lot more achievable. We, again, just eyeballing one-third of the quarter with the end of October we were very pleased with what we saw. That said, the makeup to get up to that $67.5 million to $72.5 million is challenging even if we didn't have the economic headwinds but we do expect substantial increase over the Q3 number.

Okay last question and I'll get back in queue, the Vibe in Europe if memory serves well that has Gen 4. Is that -- I think you may have said something about that but could you repeat it or clarify?

Yes that's correct, Tom, that the Vibe does incorporate the Gen 4 sensor. So what we said is that we would expect to launch the Gen 4 as a standalone system in the middle of obtaining CE Mark in the early to middle part of '12 and launch it as a standalone Gen 4. Today the Gen 4 is not commercially available as a standalone in Europe.

Right but I was just trying to figure out -- I don't know what the PMA product is called, Gen 4 point one or something but this Gen 4 continues on until there's another one available?

Yes it will ultimately -- that is correct. The Vibe version of Gen 4 will continue on. Ultimately they will marry up and be the same sensor when we launch the standalone.

Got it. Thank you.

Ben Andrew, William Blair & Company.

Maybe a little bit of commentary on the gross margin impact in the quarter and what happened on the manufacturing side? I know there was a power outage. How much product did you have to scrap and what will it take for you to get to a point where you can kind of avoid that in the future, if possible?

Well, let's go through a couple steps. We said it impacted our margins two or three, between two and three points. We had to scrap quite a bit of production, certainly for that day and a little bit that was queued up for the next day and then the factory was shut down literally for several days while we revalidated all the equipment and all the manufacturing lines because we had lost our power. What we're doing to mitigate is a couple of things. One of the first things that we have in process right now is setting up a distribution center on the East Coast so we can have our finished goods inventory spread bet3ween the two. There was a lot of chaos around here as we moved our finished good inventories into air conditioned, controlled spaces. At that time we don't want to have to do -- go through that effort again.

The second thin we have to do, Ben, is develop some more emergency power sources. While we actually had a very good position with the local power company to get some portable generators in here and we have one big generator system now, we're going to need more and so we are looking at the best configuration to ensure that this doesn't happen again. So those are the things that we're doing.

Is that a -- I mean, more than $3 million sort of expenditure that we would notice in the CapEx, Kevin?

No it's not a few. It probably wouldn't exceed $1 million. It would be less than one.

And then, Terry, in terms of the R&D budget as you go into 2012, with the increase in the PMA or the change to the full PMA, is there anything related to -- or anything material related to that or is the clinical trial going to change do you think? You know, are you still comfortable that you're on the right path there because it doesn't sound like the timing on Gen 4 changed a whole lot?

No it didn't. I think when we look at the clinical trial the criteria that we received for the approval of the IDE remains the same and we'll initiate the clinical trial yet this year is the goal and then complete it, analyze it and submit it to the Agency as Steve or as I mentioned or Kevin mentioned in the first part of 2012. So I don't expect any additional data requirements than we already know about.

This is from that standpoint, Ben, it's more taking the information of all of the changes that we made. And I'll just point out so, as we mentioned about Advanced Technology, we have Gen 5 in humans. We've got Gen 6 in humans and over the last year, and these projects were in place long ago, the difference is they have matured so the results of that what we decided that when -- back when we filed the original Gen 4 we filed it as a PMA supplement.

And during the course of discussion with the Agency, we continued to believe that it would be a supplement so but we continued also at the same time for the Gen 5 and Gen 6 developmental all the way going in to humans. But we did not want to interrupt and if there was any chance from our standpoint of maintaining a Gen 4 PMA supplement, that was a pathway that we wanted to do and then we would iterate with the improvements in Gen 5 and Gen 6.

As we -- but at the same time, being prudent, we initiated a contingency plan to say look if we go down this pathway and they turn us into a PMA are we ready to look at some of these improvements that we've developed in Gen 5 and Gen 6 and convert those over into the Gen 4. It may delay us a month or two but the difference of the output in terms of the clinical experience by the patient as an example would more than offset the slight delay that we would have. And so that came to be in the last couple weeks basically.

Can you describe in maybe a little more detail some of the components you're adding if that's not proprietary at this point?

It is proprietary and I really don't want to go down that pathway. Obviously this is being recorded and people have access to this. I would just say that our long-term goal has always been to get two factory calibration and increased durability beyond the seven days and everything we did with Gen 5 and Gen 6 was with that mindset. That said, Gen 4 is still being looked at as seven days without any new claims with regards to reduced calibration in this original filing. That is not to say we will not explore other claims with Gen 4. It will require additional clinical trials but we now believe that this platform is sufficient in the technology to allow us to pursue those other claims.

That would be subsequent clinical data after you did the filing or the approval.

That is correct. We don't want to do anything that would cause the Agency at this point to delay the review. Obviously they have seen the data to date from a standpoint of the original Gen 4 pivotal trial that we filed and we mentioned as a poster session at ADA so they have seen the improvement and what we have already filed with them.

And those were, as I mentioned, two to three improvement points in MARD over the full range of 40 to 400, better hypoglycemia detection, more robustness, less interference from biological interaction, so there's a lot that the Agency has already seen. What we're doing with the additional is really getting a platform that will allow us to expand and, as we do expand, to keep it since we're filing as a PMA, we believe that subsequent filings off of this PMA will then once again restart from PMA supplement filing as we go forward.

Okay and two real brief questions if I might, just to finish up; first, if you think about the revenue impact from Roche, this is just to the professional market. It's more of a seeding effort isn't it in terms of driving patient demand and interest in getting clinicians to buy in as opposed to a material revenue generator?

And then second, are you sort of stuck with this economic sensitivity or are there things you can do in the marketplace whether it's price or marketing or whatever to try to accelerate demand over the next call it 18 months? Thanks.

Well, I think it is part of the awareness so my field visits to date have been enlightening from a standpoint that, as Kevin mentioned in his comments, we haven't moved it to a must have yet and we're geared to do that. I think the greater exposure with the Roche carrying the product they've got a lot more sales reps and feet on the street than we do. We'll get a greater exposure to the product as CGM as a category and we need to be able to develop that because remember we're at this point in the United States we're the only company with a standalone product and so that -- everything that Medtronic does is to sell pumps and they do a very good job at it. But they really don't look at the category of the MDI patient and so this will allow us to expand that awareness and grow.

I think there are other activities related to that that will assist us in growing that adoption. We're still, regardless of the economic headwinds, we're still pushing and growing and let's be sure we keep this in perspective that, as a Company, regardless of where we end up with the final year number, that growth will be significantly greater than the dl40 million that we did last year so we're still going to be on that 60 kind of percent growth range and I think that in this market from an economic standpoint there aren't many companies that can make that claim.

So am I satisfied? Absolutely not and I think it's frustrating that when I call on these accounts that they still take the position of oh I don't think about it for my MDA patients or that it's -- not it's too expensive and I think those are barriers that we still have to overcome. And what is the end game there? I mean, it's a value proposition. You've got to demonstrate that the value is worth the effort and I am not sure that we have done that adequately out in the field so that's part of that effort and certainly having more people promoting the product can only be a good thing.

Well, is it another dl5 million in clinical work to demonstrate that or marketing dollars that could move the needle or that's just not useful at this point?

Well, I think any -- it's more marketing dollars than R&D dollars because if you look at the sensor today, I mean the SEVEN PLUS is exquisite. It's the most accurate sensor longest durability on the market. I would say and these guys are going to jump on me but from a standpoint if Medtronic was truly serious about an artificial pancreas project and I think they are, they would be better served by using our sensor in their technology than their sensor, even the Enlite. We know that. They know that and investigators have told them that so I don't think that from a technology standpoint we need to do more R&D from a sensor performance standpoint.

I do think from the marketing standpoint we do and I will tell you that November is National Diabetes Month and so we are initiating a major public awareness campaign. Starting next week you'll see fliers on it talking about the incidence of hypoglycemia on a national campaign level and we'll have people out, including myself, engaged with beyond the professional population to talk about this awareness of I'm sick and tired of getting letters and interviewing patients that or loved ones of patients who have succumbed to hypoglycemia and it's ridiculous when technology is available today. So that is an awareness campaign that we are spending some dollars on starting this month.

Bill Plovanic, Canaccord.

So just clarity, so the new Gen 4, as we call it, you star the trial by year-end; you complete it some time in the first half. You submit some time in the first half and we expect approval by the end of 2012, early 2013; is that timing correct?

Yes.

Okay and then I missed the first couple minutes of the call. I didn't understand the Roche deal and kind of the drivers behind it and kind of who owns what and how long that exclusivity lasts for, if you could just bear with me and maybe explain that, that would be helpful for me. Thank you.

Yes, Bill, this is Steve. So there are two components. The first component is the research and development portion of the deal, which is really very similar to the agreements we have with Animas and Insulet so what we're doing is we're actually incorporating our next generation so not Gen 4. It would actually be our Gen 5.

What we've talked about [weekly] about our smart technology utilizing the Gen 5 system to communicate with a Roche handheld device that will be capable. It will be a future Roche handheld device. They're classifying it as a diabetes manager and so this handheld device will handheld device will contain an SMBG, a finger stick reader. It will contain some bolus calculators. It will be able to control either their durable pump or a future patch pump that they've talked about publicly. So that's kind one element of the deal.

And that's exclusive?

It is not exclusive no so the -- I'll get to the -- so that is a non-exclusive deal and it's initially targeted only at the U.S. because, as Terry mentioned, we have an exclusive arrangement with Animas that currently goes through the end of 2013 outside of the U.S.

So it's a non-exclusive deal and we have not entered into a commercial relationship with Roche. The agreement today contemplates that we would enter into a commercial arrangement down the road but one aspect of the commercial deal that has been finalized is that for every handheld, CGM enabled handheld that Roche sells, we will get $100 royalty. Does that make sense?

Okay yes.

So then switching to the other deal, another separate agreement was this distribution agreement that allows Roche, it is an exclusive distribution in the U.S. only to sell the SEVEN PLUS system to healthcare providers to use with patients in their clinic so they don't have the right to sell it. It's not a full-blown distribution deal where they would actually be selling SEVEN PLUS product to patients. You follow? So it's only to healthcare providers.

Basically for the professional market only.

For the professional call it diagnostic market, call it -- yes it's for that sort of diagnostic use of CGM.

And was there any up front or ongoing fee associated with that or how's the dollars--?

Not in that one. There was in the pump deal and what we've always said, and I take this opportunity to sort of characterize it as such, we've always said that kind of going forward with our Gen 5 technology, any future technologies, that we were going to establish a framework that was really a template that all future partners will have to live by and this is basically what we've done with Roche.

So we've established a framework for Roche, for any would be durable or patch pump companies who come along to incorporate our technology in the future you're going to need to pay us an up front license fee, which is a $3 million up front license fee. You'll have to reimburse us for our development, clinical and regulatory expenses and you'll have to pay us a royalty on every device that you sell of $100 and so that's going to be the sort of the standard. So if there are other companies who wish to come and incorporate our technology we would entertain the ability to do so on an open architecture basis but those are going to be the terms under which all future companies have to play by.

Okay that's helpful. Thank you for that. And then on -- just on Q4 on the starter, given the guidance you gave -- I'm sorry I don't have a model in front of me. I'm on the road but I was wondering what are you looking at in terms of starter kits? What are your assumptions in Q4 low end, high end?

You know, we've never given guidance down to that detail, Bill. Certainly it will be more than what we achieved in the third quarter and I guess we'll leave it at that but there's a base line of 5,200 this quarter. We certainly would hope to do better than that.

Okay and then I actually think that was all my questions. Thank you very much.

Raj Denhoy, Jefferies & Co.

Hi this is Amy in for Raj today. So I guess just kind of starting off looking at with new patient adds this quarter it seems like we're at least not to read into it trying with two quarters in a row but we're coming in at in the low 30 rate for a year-on-year growth. Is this how we need to -- is this kind of where we start thinking about where we're tracking from a growth rate moving forward? Is that a good way to be thinking about this given the economy?

I wouldn't necessarily think about it like that. This is a cyclical business, fourth quarter always being the strongest, first quarter always being the weakest so I don't think you can level load it across the year and say that last quarter we were X and therefore it's representative of the successive quarter.

I guess I am kind of looking year-on-year because typically it does tick up quite a bit in Q4 so I guess you're trying to look at it in get our numbers to jive with the new guidance that it perhaps we are kind of hitting a new level of growth right now that's a little bit lower than what we'd been running at for some time.

Yes. No I think that's a fair statement.

Okay and then just I guess just to confirm to make sure I have my time lines down for I guess Gen 4, since it does sound like I guess things will slip a bit, I think we are hoping for some time mid 2012 hopefully having a chance to get through FDA so start clinical trial then in Q1, is that correct? Can you just kind of walk me through? I just want to make sure I have it.

No actually what I said was we would initiate the clinical trial yet this year. We would finish it and file in the early part of 2012. I didn't define early by quarter but the goal obviously is to get it in as soon as possible in early 2012 and then our expectation is that -- and again, statutorily it's 180 day review. I don't want to try to crystal ball it to say that it's going to be 180 days, although at the same time certainly the engagement with the Agency has been active and frequent so I know that we certainly don't expect an extended review.

Okay that makes sense and then just a tag onto the questions with Roche so that was helpful kind of clarification of targeting just the healthcare provider market so I guess this is really looking more for this is building the market versus looking for incremental distribution to -- so is this?

Yes I think that's right. I think it's both but I think you're absolutely right that gaining more -- using the Roche field force, which as Terry mentioned was substantially larger than ours obviously, using a substantially larger field organization to help gain better understanding of the value of the technology with the healthcare provider community, which ultimately should lead to additional ambulatory kit sales but the goal of this partnership specifically is to drive awareness, drive utilization among the healthcare provider community.

Okay so any kits, any sales so that are driven by Roche I guess would then they would still flow through your internal sales force from a starter kit revenue?

That's correct.

Okay so it wouldn't be selling to Roche at any level.

That is correct.

Okay great, thank you very much.

John Putnam, Capstone Investments.

Two questions really. One, can you kind of go through the math of recognition of either the licensing agreement or the development costs for Roche? And will this all hit in one quarter or is it spread out?

Actually, Jess, you want take care of this one for us?

Sure. You know, we're in the very early stages. We have had conversations with our independent external accountants trying to figure out what the revenue recognition on this will be but you can look at it really in a couple different buckets. You've got what Steve was talking about the up front $3 million payments and they're broken out in different ways.

And then we also have $1 million plus in development dollars and then we also have the $100 royalty per unit sold. It's likely that we would combine the development dollars and some portion of the dl3 million and spread that over the development period and recognize it ratably and then on any milestone payments we'd recognize that as received or as earned I should say, and then on the dl100 per unit royalty we would recognize that as units are sold. And that's very similar to our Edwards arrangements, for example.

Okay so development grant revenue in the fourth quarter will be greater than in the third quarter I am assuming?

Just I wouldn't say that. As we've guided previously we are recognizing approximately dl600,000 per quarter through mid 2012 and we have received some additional development dollars from Edwards, the last couple of quarters and those additional amounts are not -- I mean they fluctuate and we haven't given any real guidance on that but relative to Roche there would be some incremental development dollars that we would expect in the quarter. Just it's too early to give the dollar amount at this point.

Okay and then my other question is how do the changes in the PMA affect your development with Insulet for a combined product?

It doesn't other than that we have that kind of 100-day waiting period so assuming Insulet is-- as you know, the Vibe is already commercial so the Vibe is basically sitting waiting to file with the FDA. It will be 100 days after our filing. We're still in the development process with Insulet assuming the development clinical and regulatory work is completed any time after that 100 day window, we believe we would be able to file that one as well.

Okay great. Thanks very much.

Jonathan Block, SunTrust Robinson Humphrey.

Terry, maybe just a quick question for you, in your commentary you had some interesting chatter about what you were seeing in international markets and maybe if you can just elaborate a bit there, what are you seeing? I think you alluded to the need for more robust clinical data in order for reimbursement. Is that broad based? Is that specific to certain markets but not others? Any color would be great.

Sure. As you look through the market, be it individual countries within the European Union, I think their local reimbursement folks have asked for local clinical trials to be done to demonstrate the efficacy of the product and we also have to include financial analyses as part of those trials. The same thing when I was in India last week it was very clear to me in talking to the largest hospitals and clinics there that that's going to be the expectation to get going down the regulatory process and reimbursement process. So these are observational studies. They're not the type of studies that we normally engage in in terms of a PMA process but they do want to see it in citizens of that particular country. We've heard that Sweden, France, Germany, throughout the EU so we're talking about relatively small studies being conducted by key opinion leaders within those countries and then filing that dossier with the local authorities.

Okay and like you said, these are small studies. It's not nearly as robust as the PMA adventure here in the U.S. but is it still fair to think of these studies being initiated in early '12 and a reimbursement landscape that takes effect when? Sometime early '13, late '12? Is there a time table that you can assign to that?

I would assign some time in 2013. I wouldn't even try to get to a specificity of a quarter within that. The trials are relatively because the number of patients are relatively small, the trials are relatively short so you're looking at it versus SMBG as a criteria you don't have to have the traditional laboratory measurement using YSI or some other laboratory glucose meter. Collect the data, analyze it and then submit, I think the small wrinkle to it is the financial analysis. Now, we have interestingly enough we do have several studies that we have done, particularly analyzed and presented by an investigator in Sweden so we're well along the pathway of how to do that but it would require additional trials that we haven't done yet. And we would initiate those sometime in 2012 with the expectation of filing those dossiers in 2012.

Okay great and then maybe just a quick one on SG&A, where you guys exited the September quarter on an absolute basis from SG&A should we think of that as a pretty good number and any incremental would sort of show up more in the agreement with Roche or are you going to still need some additional bill to go directly to the patients since Roche is just more on the healthcare and professional side?

The Roche agreement shouldn't affect our SG&A cost at all. As we look going forward, our SG&A we built a pretty large increase to the sales force, both internal and external into those model, into those numbers and into Q3. If there's an increase in Q4 it will be volume related to the fact that we're doing a lot more business and then we'll look at expenses after that for next year.

Okay maybe last one or two quick ones, I know you don't give exact detail but, Steve, maybe just overall utilization, attrition, ASPs, on the handheld, not a whole lot of movement, maybe the continual build a little bit on the ASP side on the handheld?

Yes. No the ASPs have remained basically the same, a little north of 800 on the kits and mid 60s on a sensor basis, still nothing new on the attrition side so I'm not disclosing any specifics at that point.

Fair enough and last one and then I'll just jump back in queue, Jess, on the milestones from Edwards, I mean the development grant revenue came in ahead of where we were. Is anything -- is that from Edwards? Has there been a renegotiated contract there? Any update?

No there has not been a renegotiated contract. Those are development dollars that Edwards has agreed to pay us on a one off basis for Q1, two and three.

Perfect. Thanks, guys.

Richard Lau, Wedbush Morgan.

Most of my questions have been answered but is there any color you can give us in terms of patient feedback on the Vibe product out in Europe so far?

Very limited from that standpoint that we know. I mean they've basically presented it from a market introduction standpoint, they being Animas. All we're getting is positive feedback but nothing more than almost anecdotal at this point as they look to expand. As Kevin mentioned through the remainder of the year, a total of five countries but it really hasn't been a what we would consider to be a full commercial launch at this point.

Okay thank you.

Ben Haynor, Feltl & Company.

Just curious with Abbott discontinuing the U.S. sales of the freestyle navigator CGM sensors, do you expect to see a benefit from that and do you have any anticipation around what the magnitude might be there?

No we don't expect to see much of a benefit. Certainly we were contacted by Abbott at the time that they were discontinuing to alert us to the fact that they would in those cases send patients our way but it's just -- I mean, at the end we estimated there were about 300 patients still on the Navigator system in the U.S. so it did not have a material impact on us.

Okay and then I know you've talked quite a bit about moving CGM up the list in terms of diabetes treatment options. Have you seen any movement as far as notable payer coverage decisions to make it more broadly available, reduce paperwork involved, etcetera?

I think the last one we commented on we've seen some movement. Actually Steve would have the details on that.

Yes so earlier this year we haven't seen anything in since our last earnings call is what I should answer specifically but we did earlier this year see the Anthem organization liberalize it's coverage policy basically remove most of the documentation requirements. We saw some movement on the Aetna policy as well, more specifically there to documentation for under the age of 25 or removing documentation requirements for patients under the age of 25.

Anecdotally we continue to hear positives from the field that it's becoming easier but, as Terry mentioned in the prepared remarks, it's not perfect yet and that was one of the things. I think one of them are eye opening things I think that we heard back, as Terry has been out in the field a bit more, that we sit here at the headquarters and listen only to the positive stories that come in from the field in term so positive momentum on the reimbursement front. And I think Terry eyes -- I shouldn't speak for you but your eyes have been opened a little bit as to it isn't maybe as perfect as we thought. We've still got some work to do.

I think if you look and it goes unfortunately state by state, you go up to Washington state as an example and we spent a lot of time up in the Seattle area most recently and it's very much a challenge up there. As those states try to figure out ways and the carriers and the states, they are still demanding and the demand then comes upon the physician population to provide the documentation. They're being pressured from an economic standpoint of their own practices. So it's a domino effect and we keep -- again it gets back to my earlier comment then from a value proposition one of the things that we have to continue to push is this value that it is worth the effort doctor for you to write the letter of medical necessity for us to fight for that patient because this is the benefit to make it from this nice to have to a must have.

And really one of the avenues and that has been most effective recently is identifying those patients that have succumbed to hypoglycemia in their practice and I hate to ask them but I'm not hesitant to say how many patients have you lost in the last year to hypoglycemia and how many of those patients would have been saved or survived their event as a result of having CGM? And that's where it's got to be is there's some degree of shock value that is unfortunately working but if that's what it takes to get that awareness and that's what we're willing to do.

Okay sure and then just this one quick one, what was D&A, depreciation and amortization during the quarter?

We had share based compensation of 3.7 million and depreciation of about $1 million.

Great. Thanks for taking my questions, guys.

The last question is a follow-up from Bill Plovanic from Canaccord.

I wanted to jump back on. I know you haven't addressed this but as models come down for 2011 I think there's going to be people looking at 2012 and I was just wondering if there's any kind of way you'd like to bracket 2012 at this point in time for us as we start thinking about that?

No, again, as is our plan right now we'll finish the year probably and have a discussion in January as to what our expectation is on a top line basis, as we have done over the past couple of years but outside of that, I do expect that Q1 is going to be challenging. We saw Q1 this year be a lot more challenging than Q1 in 2010 and I have no reason that Q1 2012 is not going to be more challenging than 2011. But again, I -- it's just we've got to continue to push the value proposition of CGM as a standard of care.

That was the last question for today. Please go ahead with any additional comments.

Thank you. When I joined DexCom from the Board to become CEO in 2007 nobody said it was going to be easy but over the last four years we have built a technology leading Company and just last month, as an example, we were recognized by Deloitte in their fast 500 companies as number 57 out of 500 fastest growing technology telecommunications, life sciences and clean technologies with a five-year growth rate of over 2000pc.

DexCom is driving CGM to be the standard of care in diabetes. We are addressing the insulin using market regardless of the method of delivery of the drug. We're addressing now in clinical work non insulin but other diabetes drugs either taken by injection or by oral. Again, from a standpoint of CGM as a tool in which to demonstrate reduction of glycemic variability which continues to be extremely important in both our pharma work as well as the day-to-day living of patients.

In spite of the economic headwinds, we continue to grow. It is not without its challenges but the difference we make in people's lives make every effort worth it. Too often today life and death is what happens between finger sticks. Thank you.

Thank you for participating in today's conference. This concludes the conference for today. You may all disconnect at this time.