德康醫療 (DXCM) 2011 Q4 法說會逐字稿

Welcome to the DexCom 2011 year-end 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, today's conference is being recorded. I will now turn the call over to Terry Gregg, Chief Executive Officer. You may begin.

Thank you, Operator. Thanks for joining us today for our conference call. Let me first ask Steve Pacelli to review Safe Harbor statement.

Thanks, Terry. Some of the statements that we will make in today's call may constitute forward-looking statements. These statement reflect management's expectations about future events, operating plans, and performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under 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 filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Terry?

Thanks, Steve. Joining me today are Kevin Sayer, our President; Steve Pacelli who you just heard from, our Chief Operating Officer; and Jess Roper, our Chief Financial Officer.

Before we review our fourth quarter and full-year 2011 financial results and provide our customary operations update, I'd like to spend a few minutes discussing a very exciting transactions we announced just today. This afternoon we announced that we have entered into a definitive agreement to acquire SweetSpot Diabetes Care Inc. in an all-stock transaction with initial consideration of approximately $4.5 million and performance milestone-based earn-out consideration of up to another $4 million. SweetSpot is a healthcare focused information technology company with an advanced platform for uploading and processing data from diabetes devices. The SweetSpot system specializes in turning raw output from patient devices into powerful information for healthcare providers, patients, and researchers. SweetSpot and DexCom share the mission of transforming diabetes care through the better use of data.

We each offer advanced technologies to help patients control their diabetes and we each believe that diabetes care must and will evolve with the help of connected monitoring devices and the more sophisticated use of data, to providers, patients, (audio difficulties) and payers. Today, the SweetSpot platform is comprised of (audio difficulties) cleared SweetSpot diabetes data management service, a secure end-to-end solution for diabetes data management automating the retrieval of data from numerous patient devices, managing, processing, and storing data in the cloud and integrating into electronic medical records and other clinical systems for information delivery. The platform is vendor neutral, and today data from most common blood glucose meters can be retrieved during a step-by-step session at a physical kiosk in clinic or through a web-based application.

As currently configured, once patient data is retrieved, the service generates a plain English report and pushes it back to the clinic either to a local printer or directly into the clinic's electronic health record system. Patients can also receive reports via a secure link. Reports contain visualizations of daily and weekly glucose levels, statistical summaries, and provide measures of glucose variability and testing frequency. The platform also has the capability to compare a patient's data with their cohort and can be customized by the clinic to best support physicians and their patients.

As we work with SweetSpot to build out this platform, our intention is to use the platform to move and manage CGM data in the cloud and we expect to add insulin data and other information considered necessary to better manage diabetes. We will also add more data management tools specifically designed for the patient and additional reporting capabilities for wireless devices such as the iPad.

While we believe we are firmly entrenched as the world's leading glucose sensor technology, from a competitive perspective our two missing pieces remain insulin pump integration in the US and a universal data management system. Our acquisition of SweetSpot combined with our insulin pump partnerships will fill these voids.

Looking at future DexCom product offerings, our ultimate objective is to move a patient's CGM data directly and seamlessly from the patient's phone or CGM receiver to our cloud-based platform. Not only will this cloud-based data provide patients and providers with much more useful information, it will greatly enhance DexCom's ability to monitor our product performance and measure patient utilization patterns. Data-driven health care services are evolving rapidly. In addition to building out our data management platform, SweetSpot will continue to pursue its pre-acquisition business strategy marketing the data management service directly to clinics and other customers, including leading academic research centers and integrated delivery networks such as the VA Medical System.

SweetSpot will operate largely independently from DexCom in these activities, and its employees and facilities will remain headquartered in Portland, Oregon. Patient-based applications, however, will be provided to our patients directly through DexCom. It is no secret that our healthcare system is witnessing a rapid expansion in the number of tools and services to support the gathering of health-related data creating an unparalleled opportunity to inevitably and forever change the face of how healthcare is delivered.

I have often stated that the majority of patients with diabetes are treated by internal medicine and primary care, not endocrinology. We expect this trend to continue and as the burden to manage a growing diabetes population falls increasingly on primary care and even on patients themselves, we need informative tools that are convenient and effective. We believe the future of healthcare is one in which the patient is presented not just raw data but with simple, easy to use, timely and actionable reports that not only interpret the data but also provide motivational recommendations for positive health behavior change.

We also believe that most of the tools and services available today are not taking full advantage of the vast amount of patient data that is being processed. This is where DexCom together with SweetSpot will work to pioneer an integrated, interconnected data management solution. We expect the acquisition will close within the next several weeks. I would now like to turn the call over to Kevin Sayer.

Thank you, Terry. I'll start with the financial update. DexCom finished the year strong generating $20.9 million in product revenue for the fourth quarter of 2011 compared to $13.6 million for the same quarter in 2010, a 54% increase. Sequentially, product revenue for Q4 of 2011 increased 26% from the prior quarter. Year-over-year product revenue was up approximately 64% totaling $65.9 million for 2011 compared to $40.2 million in 2010. Total revenue for the fourth quarter was $22.4 million compared to $15.6 million during the same quarter in 2010.

Our product gross profit totaled $10.2 million generating a gross margin of 49% for Q4 2011 compared to gross profit of $5.9 million and a gross margin of 44% for the same quarter in the prior year. Sequentially, our product gross profit increased $2.8 million on increased sales of $4.3 million over the prior quarter, and our gross margin increased 4 margin points over Q3. Year-over-year, product gross profit increased $15.2 million on increased sales of $25.7 million. Gross profit more than doubled from last year and our gross margin increased 9.4 margin points over 2010.

Research and development expense totaled $9.2 million for Q4 of 2011 compared to $6.9 million in Q4 of 2010 primarily a result of additional expenditures related to our future generation ambulatory products, primarily our Gen4 product. Sequentially, R&D expense increased 12% which was primarily due to higher development, clinical and regulatory costs again relating to our future ambulatory products and primarily the Gen4 product.

We expect to continue to incur significant R&D expenses as we complete our Gen4 trial in Q1 and complete our PMA filing. Right after our Gen4 filing we will commence a pediatric trial to enhance our labeling for children and these comps will hit during the Q2/Q3 timeframe. We will then shift our efforts to our Gen5 platform to enable communication with a smartphone and the Roche (inaudible) and insulin pump products. After Q2 we expect things to stabilize a bit, but on an overall basis, it will be a year of much activity and we expect R&D expenses for 2012 will increase some compared to fiscal 2011.

Selling, general and administrative expense totaled $13.7 million in Q4 of 2011 compared to $10 million during the same quarter in 2010. This increase, which included $900,000 in additional share-based compensation, was primarily due to additional selling, information technology costs and customer support costs to support revenue growth. We note, however, the year-over-year SG&A grew only 23% while product revenues grew 64%. We are beginning to see some leverage in our SG&A infrastructure. Sequentially, SG&A expense increased 4% with the increase primarily due to additional selling costs, information technology, and customer support costs to support our increased volumes.

For full year 2012, we expect cash-based SG&A expenses to increase by less than 20% compared to the full year 2011 as we continue to expand our marketing and product awareness campaigns, our IT infrastructure, and support our revenue growth. Our net loss for the fourth quarter of 2011 totaled $12.3 million and included $5 million in non-cash expenses that are primarily in share-based compensation. The loss per share for the quarter was $0.18. We ended the quarter with $83 million in cash, restricted cash and marketable securities and had working capital of $90 million.

Our users for cash during the fourth quarter can be characterized in three areas. First, our Q4 CapEx was over $3.5 million as we are working rapidly to complete our clean room expansion and acquire the equipment necessary to ramp up manufacturing to support increased volumes for current and future generations of our technology. Second, we had a negative working capital swing of $4.4 million during Q4 but $3.5 million of this coming from receivables and the remainder coming from increases in inventory during the quarter. Finally, our cash operating loss was just over $7.3 million for the fourth quarter of 2011.

As we discussed on numerous occasions, the fourth quarter is typically the strongest of the year for companies in the durable medical equipment business as annual deductibles have generally been met, meaning patients can obtain the product for little or no out-of-pocket expense. Our flexible spending account deadlines loom so if patients who participate in these employer-sponsored programs must utilize any excess funds they've saved prior to year end.

We attribute our strong performance during the fourth quarter both to typical Q4 seasonality as well as our stepped up efforts to increase awareness and demand for our CGM products. Just as a point of reference, our Q4 product revenues exceeded our total revenues of 2009 by 16%. Obviously, our strong Q4 performance begs the question, what will our growth be in 2012? As a reminder, the JPMorgan healthcare conference in January, we issued guidance of estimated full-year 2012 product revenue ranging from $85 million to $92 million and we remain comfortable with that guidance. While we do not plan to provide quarterly guidance going forward, I remind investors that the first quarter is traditionally a seasonally slow quarter in the durable medical equipment business, as annual insurance deductibles reset, and flexible spending accounts are largely unfunded.

I also remind investors that in years past, approximately 40% to 45% of our product revenues have been generated in the first half of the year and 55% to 60% have been generated in the second half. We do not view 2012 any differently. Last year Q1 accounted for approximately 20% of our annual revenue and we would expect similar performance in the first quarter this year.

I will now provide you with the Gen4 update. Shifting to an update on our fourth quarter generation sensor system, I'm pleased to report that we have successfully completed the pivotal trial for our fourth generation system and we are actively engaged in our data analysis. We expect to file a PMA with the FDA by the end of this quarter or early in the second quarter. I'm also pleased to report that we submitted our improved Gen4 configuration with our notified body to obtain CE Mark approval and expect to launch a Gen4 standalone system outside the United States during the summer of 2012.

Finally, a partnership update. Turning to our development partnerships in January, we announced that we entered into a development and commercialization agreement with Tandem Diabetes Care. Much like our agreement with Roche, under the terms of the Tandem agreement, Tandem will pay DexCom a technology license fee of $3 million. Tandem will offset our development, clinical, and regulatory expenses and upon commercialization of the combined system, Tandem will pay DexCom $100 for each CGM enabled hand-held sold.

To further our patient centric model, we have adopted an open architecture strategy in order to provide our patients the ability to choose a pump system that best fits their needs. We believe the financial framework established under the Roche agreement and married in our Tandem partnership is appropriate for both existing and potential future Com partners who wish to integrate our advanced CGM technologies into their product offerings. Animas continues to commercialize the Vibe system in Europe and is expected to increase the number of available markets over the course of the year. With regards to the filing of a PMA supplement for US approval of the Vibe, we continue to anticipate filing with the FDA approximately 100 days after we file our Gen4 PMA.

Finally, the development of our second generation in-hospital glucose monitoring system conducted in collaboration with Edwards Life Sciences continues to move forward. As Edwards mentioned in their Q4 earnings call, the commercial launch of Gen2 in Europe is expected before year end as we collectively work on several additional enhancements to that product. I would now like to turn the call back over to Terry for some concluding remarks.

Thanks, Kevin. Earlier this month the fifth annual ATDD meeting was held in Spain. Just under 2,000 registrants from around the globe attended the important technology meeting. Prior to the official start of the meeting, there was a full day review of the current status of the artificial pancreas project currently being conducted around the world and sponsored by a number of entities, including JDRF, the Helmsley Trust, the EU, and even the French government. DexCom was clearly the sensor of choice in the overwhelming majority of programs regardless of sponsorship. In fact, a few sites not using DexCom sensors approached the Company requesting access to our technology to be included in their ongoing efforts, quite a tribute to our sensor technology.

Also during the meeting, we presented accuracy data on our Gen4 technology and results from our clinical trial and support of our CE Mark filing achieving a mean absolute relative difference of 12.3% when compared to finger sticks. This is real-time prospective accuracy. We believe this is the most accurate prospective data that has been presented on CGM to date. In addition, we discussed our Gen5 product platform that provides for open connectivity to a variety of devices including smart phones, tablets, and PCs.

Finally, we presented recent human clinical data from an ongoing trial of the DexCom Edwards intravenous sensor in the critical care arena achieving an [MARD] of approximately 5%. That is therapeutic accuracy.

My final take-away from the meeting was the presentation sponsored by the Type 1 diabetes exchange. The exchange is a data repository hosted at the Jaeb Center in Florida through a generous grant from the Helmsley Trust. Sixty-seven clinical centers around the US participate in providing information from their diabetes patients to the exchange. To date, there are more than 20,000 patients from these centers that have responded to questions regarding their diabetes. Focusing on the more than 1100 respondents that have utilized CGM, approximately 80% were pumpers and 20% used injection therapy. Of that group, 43% of the patients reported using DexCom CGM which is remarkable when you consider that our installed base is about 60% pump and 40% MDI. The authors also concluded that there was no difference in A1c when comparing injections in CGM versus pump and CGM. With that, I will open up the call to Q&A.

Thank you. (Operator Instructions) The first question comes from Tom Gunderson from Piper Jaffray. Please go ahead.

Hi, good afternoon, guys. So, let's start with the new news on SweetSpot. You did a good job of giving us a summary of the concept and technology. Can you give us a little bit better sense of financial impact other than the acquisition cost? Maybe just a quick summary of what the business equation was and will be for SweetSpot and, secondly, is this going to have any impact on OpEx in 2012?

Yes, Tom. This is Steve. Let's start with kind of the OpEx and the expense and revenue side of the business. Today, revenue is very, very small. Particularly, we don't expect material revenue contribution in 2012 nor do we expect material additions to the OpEx line from this Business.

It's a very small business. If a handful of employees, highly skilled technical employees and some very early sales resources. We are going to expect to add a few bodies over the course of the year to help with the technical build out and probably build a few more bodies into that sales organization, but nothing that won't be material to the overall Business in terms of an expense.

In terms of the business model, we talked a little bit about it in Terry's prepared remarks, but we are kind of looking at this from an almost as an acquisition of two distinct companies in one. So, the first side of the Business that we focus most of our prepared remarks on had to do with building out the infrastructure that SweetSpot already has in place. So the 510(k) cleared product that SweetSpot has today can aggregate basically any brand of commercial glucose meter up to their cloud base system and then report that meter data back down to the clinic and the patients can also see that reporting.

It provides them with really slick output in terms of very crisp, clean reports and very clear, plain English messaging on kind of trends and key patterns and things to look for in analyzing the finger stick data. Obviously, that analysis and the analytics behind it will become much more robust when you start uploading the equivalent of 288 finger sticks a day versus what the patient is probably taking four to six to eight finger sticks today.

We would also look as we build out that platform, so from a technical perspective we will build out the platform to include not just finger-stick data, but the next step would be to incorporate obviously our CGM data and then we would look to incorporate insulin pump data, as well, from the various insulin pump partners.

So, from a clinic perspective, the clinical of kind of a single platform to aggregate basically all patient devices into a single cloud-based platform and then have access to that data again initially directly into a printer in the clinic or directly into the EMR environment. Over time the clinician and even the patient will have access to it from a mobile device like an iPad or potentially even a smart phone.

So, that's kind of one aspect of the Business, but then we have the other side of the Business which is the revenue-generating opportunity. To be honest, the prospects of that business are somewhat unknown. It's a very, very new Business. The concept of selling data services be it into a clinic, I think there are opportunities to work with payers in aggregating some of this data and providing that data to the payer community. We have a relationship, or SweetSpot has a relationship today with the VA. It in early stage and only in a single site at this point, but it is comprised of uploading data and actually remotely monitoring patients.

So, we see some pretty interesting opportunities. Don't really want to comment much further on that because I think that Business is really an evolving Business but I think it is really a separate and distinct part of the Company that we are buying that I think we are pretty excited about. Three questions? That kind of covers them?

Yes, just one quick follow-up on that. It also on the website mentions R&D -- or research, sorry, applications. Would you see incorporating your clinical trial data, both your direct and the ones that you are doing with other companies into the system in the near term?

Good catch, Tom. Yes.

Yes, that's part of the platform as well for sure.

Okay. That's it for me. Thanks, guys.

The next question comes from Ben Andrew from William Blair. Please go ahead. Ben Andrew from William Blair, please go ahead with your question.

Can you hear me?

Yes, we can.

Okay. Great. Just a couple follow-ups to Tom and then something else. Did you look at other businesses in the space, and what was the build versus buy timeframe? It's a small acquisition, but maybe describe what you saw as you looked around the industry. Are these guys one-of-a-kind or have other people been trying to do this?

No, we said the appropriate diligence of what was available and these were not necessarily one of a kind. They were certainly the most advanced and comprehensive that we saw their current distribution format and their relationships. We talked about the VA. There are several others that we haven't talked about that they have existing relationships with, very broad-based important relationships that we either today have our own relationships with or certainly will allow us to enter into additional relationships as we look across a broad swath of what they can do.

I think that the real key here, and we need to reiterate it, so the one thing that we have been missing I think from a standpoint of our ability, we create software. It's in a disc that you put in your computer, it's PC-based and it's not web-enabled. One of the criticisms of DexCom by the physician community has been the inability to pull that information down from a web.

For us to build it on our own, which we went back to our own internal IT group, the infrastructure that would be required and the time was enormous, much greater than what we are paying for and having it already integrated. So, in many ways we took the advantage of this sophisticated system to buy it now and to build on it with our own IT infrastructure to incorporate it. So, that was the decision making.

Okay. That's helpful. Thank you. And then, probably not any time soon or in the current scale, but is this a true platform where it could be used outside of diabetes, or just haven't gone there at all they have been so focused?

It is a true platform. As we look at data management, if you were to ask me what I thought the future would look like in three or four years from now, I will tell you that patients will wear multiple body-worn sensors in which they are registering glucose, as well as blood pressure, even today heart rate monitors are common using app plus technology, as an example through Garmin or Nike endeavors. All of this is really the future of healthcare and so, yes, this is a platform that can incorporate other vital sign measurements and also, in the convergence of that information, to either the patient themselves or to a caregiver.

Okay. And then maybe switching gears a little bit. Talk about patient ads, if you are giving that number out in the quarter, and talk to us about any trends you are seeing with retention and kind of utilization. I know the numbers were solid in the quarter, but did you see a change in sensors per patient or the length of time that each patient is using a sensor?

Ben, this is Kevin. I will take that. We kind of scaled back on this with respect to patient ads and kit sales for a couple reasons. First of all, we've been giving our competitor a very clear map of everything that we do. Second of all, as we disclose kit sales, we have all interpreted that as a new patient ad.

As we look at the future, when Roche purchases a kit and puts it in a professional officer, is that a kit, is a Animas pump placed in Europe a kit? And then another transmitter another kit? Things are getting blurry. So, we kind of backed off on that disclosure.

I will give you a mix. Our sensor and hardware revenue is still about 30% hardware and 70% sensors. As we look at utilization, we do know, and Terry can tell you firsthand from his field experiences, that patients are wearing our products for a very long time. We would love it to be shorter, but they use it for a long time.

We have seen, we believe, in our more current patients, in particular, increased utilization and stickiness as they use the product. So our sensor sales were very strong last quarter and we are feeling very good about what we see right now, so I'd say that's our trend there.

Okay. Thank you.

The next question comes from Bill Plovanic from Canaccord. Please go ahead.

Great. Thanks. Can you hear me okay?

Yes, Bill.

Fantastic. Just a couple of questions here. One on AFPs in the quarter, If you could give us any trending data there, and kind of where we sit on the sensors and the kits. And then just in terms of one of Ben's questions, just any incremental change in attrition rate up or down in patients utilizing the product?

We have never disclosed an attrition rate. What we are seeing is what we think is some pretty strong utilization right now. The mix between sensors and hardware remains 30/70 with respect to pricing. Since so many of our sales now, Bill, are through managed care contracts, pricing is pretty well set. So, we don't see a lot of pricing moving quarter-to-quarter right now. So, things have been relatively consistent with what we have had in the past.

And then just as we try to kind of fine tune our models, any update on the total number of patients that are currently utilizing your technology at the end of 2011?

I think we made the statement that we thought collectively the penetration in the Type 1 category in the US exited the year at around 6%. How you factor that in to a model, and you saw where we just most recently in 1100-plus patients represented a 43%. If you look at Kelly Close's dQ analysis, it has it said about a 54% share. So, somewhere in that range. That's about as far as we can go.

Okay. And last question. You gave us pretty good clarity on what R&D settings and SG&A will be going forward. As we look at this, do you have a target in 2013, 2014, 2015 when you think you can get to be a cash flow positive or operating positive Business?

Are you kidding me? I like my job. It's going to have to be quicker than '14 and '15, Bill. We are looking, particularly as we get to the very last part of 2012, to start flipping toward cash flow positive and certainly during 2013. We are confident.

Great. Thanks. I appreciate that. That's all I had.

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

Hi. This is Amy in for Raj today. Just a question back on the SweetSpot. I noticed previously they had a direct subscription model for patients. Is that still an active business model or is that shifted solely just direct to clinics?

Today the 510(k)-approved product is only for clinician use, although the patients do have the ability to access the data once they've uploaded it to the clinic. In the future though, we would certainly expect to provide the platform to patients, as well as clinicians.

Okay. Great. Just kind of switching gears perhaps to the international market, I think wrapping up 3Q you all noticed that was a little bit of a tougher market, and this quarter Medtronic cited that as a very strong performer for them and noting CGM adoption. Could you all talk a little bit about your view of the International market?

Yes, I'm happy to. I have spent over the last three months I probably spent three or four weeks in the International market between Europe, Asia, India. I think there is great opportunity. We did finish out the fourth quarter in the International sector very strong. I was quite happy.

Compared to my comments about the three previous quarters, Q1 through Q3 we were underperforming but came roaring back in Q4, and I would say as we look out even now, the prospects in the International market although still as a percent of our revenue will be single digit, maybe approaching double digit. But, again, with robust opportunity, we certainly applaud the good folks at Medtronic for paving the way, spending the money to build those markets and our goal is to come in and trump them with superior technology.

Great, thanks. And then just regarding Roche marketing to the professional physician group. Has that started in earnest and could you talk about any experiences thus far?

Actually, we were really engaged in the training exercise late last year. It's really not kicking off until just this month with the Roche national sales meeting, so we don't really have much of an update at this point. Probably update you in the next couple quarters as we start to see some traction.

Great. Thanks so much.

You next question comes from Sarah Michelmore from Brean Murray. Please go ahead.

Yes. Thanks for taking my question. I guess I will hit you with some pipeline questions. First, just on this Gen4 trail. Is there a venue where we may do the data from this latest trial? And then on the Gen5 I'm assume you're thinking right now this would be a supplemental PMA type of route. I'm just wondering in terms of the smart phone piece of the submission, how much clarity do you have in terms of what the FDA may or may not require? Thanks.

This is Terry. I will take both questions. The first one with regards to the first display or presentation of material clinical results we're gearing towards ADA, that's the first part of June in Philadelphia. We believe that multiple investigators will want to present. Obviously, we are trying to get the analysis done, file the PMA which would allow them to meet the timing requirements for late-breaking abstracts under the FDA -- or the ADA guidelines.

Secondly, with regards to the Gen5, we are in active discussions and face-to-face meetings with the agency on the Gen5 technology. Don't have any definitive answers. The learning curve of FDA and this convergence of healthcare information, mobile applications reported to a variety of devices is at its all-time high. We actually had Dr. Shurin, head of CDRH, in our offices in January talking about this specific area. I think we will gain greater clarity as to their comfort level as to what we can and cannot do with a truly mobile device.

They remain, their primary concern, which is well-known, has been to ensure that the protocol of receipt from transmission of sensor signal from a transmitter is always primary, no matter what you do, regardless of the upgrade to your software or adding apps to your phone. We can make that primary, but there are some limitations along that process for them to understand that no matter what an individual can do on their phone that that sensor signal cannot be corrupted in any way. So, it's a matter of demonstrating all the testing that we are doing and others are doing, as well.

Okay. That's helpful, Terry. And then just in terms of the Gen4 sensor, can we just stay on your thoughts in terms of the cost position of that product. I suspect, but don't know, that that's part and parcel with having that product out there with a lower cost position that's going to enable you to deliver cash flow break even or cash flow positive results in the near term? Thanks.

Sara, we've consistently said we can pick up significant margin points when we go to our new manufacturing process. As we look at it internally, certainly a 70-plus margin on sensors once we get there should be achievable based upon the volumes that we would expect to sell. The flip side of that argument is, for a year we are going to be manufacturing SEVEN PLUS sensors and we are going to integrate Gen4 sensors. We will have some blended manufacturing between the two. But on a pure standalone basis with volumes where we think they are going to be, we should see a good margin improvement on the Gen4 sensor.

Okay. Thanks so much.

The next question comes from John Putnam from Capstone Investments. Please go ahead.

Just to pursue that a little bit, Terry, do you think that the gross margin will improve sequentially on a quarterly basis through 2012 then?

This is Kevin. Again, based on volumes and timings of product launches it should, but I will go back to cautioning it. In the quarter where we flip and we have to manufacture both and support both, there will be a lot of start up cost involved. But by and large our model would indicate our margins improve every quarter as we increase our volumes.

Okay. Thanks. You didn't mention your relationship with Insulet. Can you give us an update on that?

Not much to update other than Insulet has been focused on the AROS system, and driving that through the FDA approval process. Obviously, we've had our hands full with some things on the Gen4 with the SweetSpot deal. I expect now that both of us can come up for water, as soon as Insulet sees their product approval, we are kind of standing by ready to let them go forward with the Gen4.

Okay, great. Thanks.

The next question comes from Caroline Corner from McNicoll Lewis. Please go ahead.

Hi, guys. Thanks for taking my call. Most of my questions have been answered. Just a couple of quick ones. With regard to the former Abbott patients, since that product has been off the market now since last August, could you let us know how your sales efforts to those patients have been going, and how successful you've been able to capture them you think as compares to Medtronic's efforts to that.

Yes. By the time that Abbott actually exited the market there were less than 300 patients that were still on navigator sensor, so we did not, quote, go after them specifically as I had mentioned previously. Abbott did give us a heads up that they were going to exit the business and that they would be referring their patients over to us versus referring them over to Medtronic. We don't have any records specifically of how many of those patients elected to use the DexCom sensor technology.

Okay, thanks. And then my other question is just about the grant revenue line. It looks like it's been fairly strong lately. As we look forward, is there any component of that that is recurring that we should model in, or is it going to be just on a quarter-by-quarter basis as they come in?

There are three elements in the grant revenue line. The first one is when we receive these up-front payments for development contract. We amortize those over what we think is the lifecycle development agreement. Those are relatively straightforward. Those get amortized in. When we get a milestone payment based upon achieving some performance milestone we take that revenue and immediately, similar to what we did with the Animas revenue in Q2 of this year when we received CE mark on that combined system.

And then the last system, on many of our partnership agreements, we have a component whereby we can build for development revenue in a current quarter as we incur costs on their behalf. And those are recognized quarterly and are relatively inconsistent, depending upon the project that we are working on. So, we will amortize the rest of the deferred revenue that we have on our balance sheet over the course of the agreements as we have set them up, and if other things happen, it rolls in.

Okay. Thanks very much.

Your next question comes from Ben Haynor from Feltl and Company. Please go ahead.

Good afternoon. Thanks for taking my questions. Have you guys continued to see positive momentum on the reimbursement front? And then are there any specific coverage policy review dates coming up that you might have your eye on?

Yes, I guess the short answer is, it gets better every day. What I mean by that is we continue to see plans that may have been historically restrictive in terms of the documentation required to enable a patient to obtain coverage is lessening or being eliminated in its entirety.

With respect to specific coverage policy dates, there's nothing that comes to mind. By and large, I would tell you north of 95%, maybe 97% of our patients received reimbursement for the product at this point. The one kind of hole, if I were to identify a hole, would be the Medicare side of the Business which we have been pretty transparent with the market on, and our plans there in the sense that we need to conduct a clinical trial specific to the Medicare population.

But, as Terry mentioned or Kevin mentioned in the prepared remarks, in order of priority certainly we view a pediatric trial for the Gen4, for example, as much more important in the near term to our Business than running a trial in the Medicare population. So, it's something that we will do at some point in time.

We will probably look to have some help from either an industry organization or potentially even Medtronic to try to do something together for a trial like that. Other than that, I think reimbursement, we are not out of the woods in terms of eliminating all restrictions with all payers. I think it continues to get better.

Okay, great. And then on SweetSpot, do you guys believe that if you get patients using that system or service that that could potentially increase the number of sensors that that given patient may use over time?

Sure, I mean, that's only a small part of the strategy. Yes, as patients have a better visualization of their data and there will be components to the SweetSpot system that will roll out over time providing not just data and analytics but providing motivational support to the patient, really encouraging the patient to maintain better glycemic control, things like that. Sure, we do expect that to lead to better sensor, better and more frequent sensor utilization.

Okay. That's all I had. Thank you.

Your next question comes from Richard Lau from Wedbush Securities. Please go ahead.

Hi, guys. My question is about the Type 2 population, what your current thinking is of that market opportunity? I know you guys have said recently that you think that that patient group is kind of ready for CGM now, so just wanted an update there.

This is Terry. I think it's clearly ready. We had the Robert Vigersky paper on diabetes care. He's doing some follow-up work in a Type 2 population that was demonstrated sustainability of effect over time even with periodic use. We believe, and we've got at least two payers that have, in one case it's still a letter of medical necessity and they will approve.

We are processing some of our patients on Type 2 through insurance and getting that reimbursed, although it's very small. I would classify those as one off. But the opportunity is, in my opinion, enormous and particularly not only restricted to the US.

And, in fact, if you look at some emerging countries where you've got a Type 2 patient with a BMI of 22 and an increase in cardiovascular impact on that patient, they are very concerned about their glycemic control, because they look at that and the healthcare systems are beginning to look at that, as well. Are there preventative ways in which to reduce that glycemic variability and a reduction of the potential longer-term complications associated with Type 2?

So, I think the market is robust. It won't be in 2012. We will continue to make inroads. Some of these studies that are being done today, some will be published later this year. You should see some at ADA, some at EASD, but I don't see anything transformational until no sooner than 2013, or possibly even later.

Okay. So, is it safe to say you guys probably won't be putting significant marketing dollars behind until 2015?

No, not at this point. We do have some investigator-initiated trials and we tend to support with product or in kind, but not that we are going out conducting $400,000 trials in the Type 2 population.

Okay. And then one more question with regards to your Tandem Diabetes agreement. Could you give us a sense of timing for potential launch with Integrated System there? What the development pathway is?

Nothing specific. We are just literally kicking off that program now. Between the development efforts on our side and the development efforts required by Tandem, I'd hesitate to give you any specifics at this point.

Okay. Alright. Thanks, guys.

Your next question comes from Jonathan Block from SunTrust. Please go ahead.

Hi, guys. This is Chris in for John. Thank you for taking the questions. First of all, I just wanted to just make sure that I got the timeline correct for -- I know you mentioned the PMA coming at the end of this quarter, potentially early second quarter. The 100 days after, have you guys in your conversations with agency had anything incremental that you think you could still get an approval for Gen4 standalone by year end?

Does that slip to a first quarter '13 event or are you confident that if that happens on a standalone basis by year end '12 and, secondly, just as a follow up to Amy's on the International. I know previously we had talked about trials for reimbursement concerns International? Any update that we could have there would be great. Thanks a lot.

Sure. On the Gen4 approval would be too early to speculate as to what that review timeframe is. The agency, as you all know, has historically taken longer than the statutory requirements to review things. You counter that versus what we think will be data that they will be reviewing. So, I don't know. I really would not want to forecast any timing of it.

Obviously, from a launch standpoint, the further out we get into the year, 2012, the less motivated we would be to actually launch a product in the last two months of the year as an example, so we would most likely hold that launch until early 2013. With regards to the International sector, I just got back from Spain, had multiple meetings with investigators. We will do some small trials for reimbursement.

There already exist a number of data analyses with regards to the benefit versus economic outlay that have been filed in dossiers. Some of these countries are already reviewing them from that standpoint. Others, even though it's the European community, they are not as harmonized as one would hope for, so we will run small 20-patient trials with a key opinion later in order to generate that type of data. That will actually happen in 2012.

Great. Thank you.

The next question comes from Greg Chodaczek from First Analysis. Please go ahead.

Just a couple quick questions. With regards to Edwards, what is the story with the milestone payments? I think there was about $12 million remaining. Has that been renegotiated? Just a little color on that. And, also, is there any type of milestone payment when you file a PMA with Animas? Thanks.

I can take both of those, Greg. So, with Edwards, with discussions with Edwards but nothing definitive yet, so that's sort of kind of a stay tuned and we'll update you as soon as we have something more definitive. Animas, if you recall, the $5 million payment from Animas was based on the CE mark approval. That was due to the exclusive nature of the Animas pump outside of the US. So, in the US they are not exclusive. There's no additional payment there.

So, looking at the royalty payments this coming year it's a lot -- there's not a lot of one-timers coming but a lot of amortization coming?

That's accurate.

Okay. Great. Thanks, guys.

The next question comes from Greg Simpson from Wunderlich Securities. Please go ahead.

Okay. Thanks. Good afternoon, guys, and congratulations. A lot of good news here. Most of my questions have obviously been answered but, Terry, if I could maybe throw something a little more anecdotal at you. Could you maybe characterize your relationship with the FDA at this point? Seems like it has improved dramatically and what I'm specifically trying to get at, obviously the process for the Gen4 has been kind of excruciating. It seems you guys are going to come pretty rapid fire with the five and the six. So, can you maybe just throw some comments at us with respect to the relationship with the FDA today?

Yes, I would say the relationship with the FDA is at the highest level of collaborative state that it has been in the past few years. I think to give the FDA all the credit that they richly deserve, they have listened. We have been very open and transparent with Gen4, Gen5, Gen6.

Other face-to-face meetings they have been highly receptive to receiving us and making time for us in D.C. to have those face-to-face meetings. As I mentioned, Dr. Shurin was here and we spent a good hour and a half reviewing today's projects, artificial pancreas, future projects with them. I think there is a real desire for them to try in their best way to accelerate the review process in an efficient, effective way.

I will also say though that they have a responsibility that was enabled by the device amendments way back when that they need to protect the citizens of the United States from adulterated abusive products. They take that charter very seriously.

So, I do think that this world of regulatory science deserved improvement and that's what Dr. Hamburg and Dr. Shurin and the people that we deal with have done. Frustrating for us as well, but in the end I think that the public is better served by having better products and it forces all of us in industry to actually go the extra mile to produce better, more robust products to better serve our patients.

So, I'm happy with the FDA at this point in time. I think, again, they work in a very collaborative way if you make the effort, but you've really got to go out and make the effort on behalf of industry. So, the rhetoric that you keep hearing I think is, in many ways they can also be an easy excuse. I think some companies choose to use them in that way. DexCom does not. We view them as a partner in trying to get better products into our patients' hands as soon as possible.

Okay. Thanks very much and congratulations.

Thanks.

At this time there are no additional questions. Please go ahead with any final remarks.

Thank you, Operator. Well, 2011 was an important year for DexCom as we expanded our presence in the diabetes and CGM marketplace. We have long believed that CGM will be the standard of care in glucose monitoring. Although it is not today, we continue to make progress towards that goal and the diabetes community, both patients and healthcare providers, share our vision.

Clearly, it is now apparent that CGM is more than just a continuous glucose monitoring device. As we saw with Dr. Robert Vigersky's diabetes care article on CGM and the Type 2 population, it's also a behavior modification tool. This year we will explore it's application in pre diabetes as a financial impact of unprecedented growth of diabetes on a global basis, unfortunately continues unabated.

DexCom is addressing these challenges and opportunities through strategic partnerships and relationships. We are extremely excited about 2012 as we expand our global reach and CGM takes its rightful place in the entire spectrum of diabetes. Thank you.

Thank you for participating in the DexCom 2011-year end earnings release conference call. This concludes the conference for today. You may all disconnect at this time.