德康醫療 (DXCM) 2012 Q2 法說會逐字稿

Welcome to the second quarter earnings release call. My name is Monica, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Terry Gregg. Mr. Gregg, you may begin.

Thank you, operator, and thanks to all of you joining us on the call today. As is our usual and customary process, I'm going to ask Steve Pacelli to read our Safe Harbor statement.

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

Thank you, Steve. Joining me today are Kevin Sayer, our President; Jess Roper, our Chief Financial Officer; and Steve in his new role as our Executive Vice President of Strategy and Corporate Development. As our Company grows, our needs naturally will evolve. And as we expand our footprint globally, Steve will be responsible for the business development and strategies that are required to commercialize our platform internationally. His new title reflects that focus.

Additionally, as you all know, we use partnerships to expand the awareness and benefits of CGM as a critical tool in the management of diabetes and glycemic variability. Today we have four insulin pump partnerships in various stages of development and a critical care program with Edwards Lifesciences. Managing these relationships is a very demanding endeavor. And I have also asked Steve to focus his efforts in this area by leading our participation on the steering committees that govern these partnerships. Steve will continue to lead our investor relations as well as our legal and intellectual property groups.

Before we review our second quarter 2012 financial results and provide our customary operations update, I would like to spend a few minutes updating investors on the status of our Gen 4 submission. As we disclosed during our Q1 earnings conference call in May, we filed a PMA with the Food and Drug Administration at the end of the first quarter seeking approval of our Gen 4 system.

Within a matter of days, FDA launched a interactive review of our submission, which has continued for the past several months. Additionally, in mid-July, the FDA visited our manufacturing facility to conduct the Gen 4 PMA audit in addition to our biannual quality system inspection technique review. And I'm pleased to report that we could be colluded the audit with no findings or formal observations. We believe we remain on track for an approval of Gen 4 before the year end, and of course I am hopeful we will obtain approval sooner. I would now like to turn the call over to Kevin Sayer.

Thank you, Terry. I'll start with the financial update. DexCom generated $21.5 million in product revenue for the second quarter of 2012, compared to $15.2 million for the same quarter in 2011, a $6.3 million or 42% increase. Our split between consumable and durable revenues was between 70% to 75% consumable and between 25% to 30% on the durable side.

AFPs for sensors remain consistent, and AFPs for our hardware remains consistent on a gross basis. However, over the first half of the year we offered a $200 rebate to all of our customers purchasing new hardware. The effect of this rebate, based upon actual redemption activity, was an offset of approximately $200,000 to sales for Q2.

Our international business continued to perform well in Q2, and we're pleased to report that we initiated the first, albeit limited, phase of our Gen 4 launch in Europe, and we will finance to introduce Gen 4 in other European countries over the coming months. On the domestic distributor front, our split between direct and distributor business remained consistent with the prior quarter.

And as a reminder, all of our international business is through third party distribution. Let me remind you once again that only two domestic distributors stock our starter kids, and all other participation -- participate in our drop-ship program. With respect to sensors, the distributors carry less than one month's inventory, more like two to three weeks. On the international side, our distributor credit terms are very tight and often require significant upfront payments for products. Given those terms, international distribution channel levels are also very low.

Sequentially product revenue for Q2 of 2012 increased 16% from the prior quarter. Total revenue for the second quarter of 2012 was $23.5 million, compared to $21.4 million during the same quarter in 2011. I would again remind invests that in Q2 2011 we received a $4 million milestone payment from Animas based on CE mark approval of the Vibe. Our product gross product totaled $10.6 million, generating a gross margin of 49% for Q2 2012, compared to gross profit of $6.8 million and a gross margin of 45% for the same quarter in the prior year.

Sequentially our product gross profit increased $1.6 million on increased sales of $2.9 million over the prior quarter, and our gross margin remained relatively flat versus Q1. Our flat margin was slightly lower than anticipated and was due primarily to a greater than anticipated write-offs to components and materials relating to the discontinuation of our SEVEN PLUS hardware line internationally. Absent these charges and the ASP effects of our rebate, our gross margin would have been approximately 51%.

Research and development expense totaled $10.5 million for Q2 of 2012, compared to $7.0 million in Q2 of 2011, the increased primary the result of development costs associated with our Sweet Spot platform and continued investment in our next generation products. Sequentially, R&D expense increased approximately 8%, again primarily due to higher development costs relating to our Sweet Spot platform, including $300,000 of cash expenses and $800,000 of non-cash charges related to the Sweet Spot acquisition.

For the balance 2012 we will focus our quarterly R&D expenses on completing preparation for our Gen 4 launch, our Gen 4 pediatric trial, continuing to very many our platform, obtain and extend the durability claim for Gen 4, continuing to expand our Sweet Spot platform and furthering our Gen 5 efforts.

Selling, general, administrative expense totaled as $15.4 million in Q2 2012, compared to $12.2 million during the same quarter in 2011. The increased was due to two factors. An increase in non-cash charges of approximately $800,000, primarily centered in share-based compensation, and additional expansions related to increased selling and marketing costs to support revenue growth. Sequentially SG&A expense remained relatively flat.

Our net loss for the second quarter of 2012 totaled $14.7 and includes $7.1 million in non-cash expenses, centered primarily in share-based compensation. And the loss for the quarter was $0.21 per share. We ended the quarter with $62 million in cash, restricted cash and marketable securities, and had work capital of $67 million. We evaluate our balance sheet on an ongoing basis and we continue to believe we are adequately capitalized to support our business operations.

Finally, we remain committed to our guidance of estimated full year 2012 product revenue ranging from $85 million to $92 million. One final financial update. Based on advice from our outside tax advisors, we do not expect the medical device tax to have an impact on our business based on draft IRS guidance. We believe that virtually all if not all of our products are exempt from the tax based upon the retail device carve-outs, which defines a retail device as one that is regularly available for purchase and use by individual consumers who are not medical professionals, and designed such that it was not primarily intended for use in a medical institution or office by a medical professional.

Now I'll provide an update on the product pipeline. As Terry discussed at the outset of the call, we couldn't be more pleased with the progress we are seeing out of FDA on our Gen 4 submission. We're also pleased to note that in June we received CE market approval for Gen 4 and have commenced commercialization of the system in several countries in Europe.

We have I initiated our pediatric trial for Gen 4, and although the final protocol agreed to with FDA is more comprehensive than we initially expected in terms of total number of patients and number of in-clinic days, we're still targeting completion of the pediatric trial before yea rend. We were also working hard on a new algorithm for Gen 4, which we believe will not only further enhance performance, but will enable an extended durability claim as we look to conduct a clinical trial to seek such a claim during the first half of next year.

We continue to explore the potential of reducing the need for sensor calibration without materially affecting the performance Gen 4, and we are evaluating the clinical and regulatory strategy related thereto. As we stated previously, our long-term goal as a continuous glucose sensing company is to eliminate altogether the need for patients to take fingersticks, and we believe we are making significant progress towards realizing that goal.

Finally, we are making good progress in our cloud-based information management efforts with Sweet Spot. Sweet Spot's current 510k clearance allows for the upload and analysis of data derived from any FDA-cleared blood glucose meter, and we had our first face-to-face meeting with the FDA in July to define the regulatory [path] to include CGM and insulin pump data as part of our cloud-based platform.

Finally, I will provide an update on our partnerships. Shifting to our integration partnerships, Animas continues to commercialize the Vibe system in Europe, and our understanding is the system is being well received by patients and physicians. With regard to the filing of a PMA supplement for US approval of the Vibe, our timing is largely dependent on the speed with which FDA processes are Gen 4 filing, but we hop to be am a position to file before year end.

Although somewhat earlier in the development cycle, we continue to see nice progress on both the Roche and Tandem integration products. Finally on the Edwards front, work on the second generation in-hospital glucose monitoring system is near complete, and as Edwards mentioned in their recent earnings call, they expect to obtain a CE mark for the second generation GlucoClear system before the end of 2012. I would now like to turn the call over to Terry for some concluding remarks.

Thanks, Kevin. The second quarter is always an exciting time for DexCom, for in June of each year we head to the annual scientific sessions meeting of the American Diabetes Association. This year's meeting in Philadelphia was no exception. We kicked off the meeting on Friday evening with an overview of our Gen 4 pivotal trail data presented by our Medical Director, Dr. David [Price] as part of an oral presentation on factors to be considered when evaluating a study reporting CGM data.

Dr. Price educated the audience on how to care, C-A-R-E about CGM data by outlining key questions to be asked of investigators, including "C," calibration. What was the frequency of calibration? Was it prospective or retrospective? Was it performed by trial subjects or by clinical staff? And what was the reference used? Blood glucose meters, laboratory instrument?

"A" for analytical techniques. Was the sample size adequate to draw conclusions? Was the data presented as mean relative difference, mean absolute relative difference, or median absolute relative difference? And was Clark air grid A zone distinguished from Clark air grid A and B zones? "R" for range. Was the range of glucose values appropriate, and was the rate of change of glucose values reflected? And finally, "E," for excluded data, or outlier values, outlier sensors or other data excluded.

[You have] to ask yourself why is Dr. Price's message so important? Well, imagine the GPS system in your car or even your speedometer showing you your position or speed 15 to 25 minutes ago. What value is that to you? You need current information in order to take action. And CGM systems must display critical, accurate and real-time information to the patient or, in the case of hospital-based products, to the healthcare professional, to be an effective tool.

Shortly after Dr. Price's presentation, we saw for the first time a presentation by independent researchers comparing our Gen 4 sensor, currently being reviewed by the FDA, to the Enlite sensor technology to in a direct head-to-head comparison. As expected, the Gen 4 demonstrated superior accuracy to the Enlite sensor and as a result of this data presentation, DexCom was besieged by the various artificial pancreases investigators from across the globe requesting the Gen 4 technology for their ongoing studies.

Of course, as an investigational device, we turned to FDA to seek their collaboration on behalf of researchers and patients involved in these AP studies, and we're pleased to note that FDA has swiftly responded to allow inclusion of Gen 4 in these studies and the switch by investigators to be made expeditiously and efficiently.

The importance of prospective, real-time, unblinded CGM as an effective tool in managing diabetes continues to gain momentum. At the recent keystone conference, Dr. Robert Ratner, the Chief Scientific Officer of the American Diabetes Association, went so far as to conclude that blinded, retrospective CGM has no place in diabetes. His view was supported from the podium by key opinion leaders such as Dr. Irl Hirsch an Dr. Jay Skyler.

And a recent publication in Diabetes Technology and Therapeutics reported the lack of any glycemic improvement in both type 1 and type 2 patients in a study evaluating retrospective blinded CGM in 102 type 1 and type 2 patients over the course of ten months. Finally, I am pleased to note that two recent independent surveys conclude that DexCom is the market leader in the category and continues to gain share sequentially.

We remain keenly focused on the patient. Designing, developing, and delivering advanced technology products that are considered first in class yet are simple and convenient for patients to use. Our market share gains and Company growth are a testament to that philosophy and execution. Diabetes is challenging. Our goal is to be part of the solution, not part of the problem. With that I will open up the call to Q&A.

(Operator Instructions). Our first question comes from Ben Andrew of William Blair. Please go ahead.

Hi, guys, this is Todd in for Ben today. Thanks for take be the call. My first question is on the international side. Could you guys give some color on how much European operations are contributing to the business right now and where you see that going in the next year or so?

This is Kevin. Right now we've said it's approaching 10% in our comments, and so it's getting up to that level. We see it continuing to grow. But again, it still remains as fraction of what we're doing as a total basis right now. We see it picking up steam over time.

Okay. And then how -- maybe some comments on how the, like, reimbursement environment is going over in Europe? Have you seen any changes to that within the past year or six months?

It's still pretty tough. There's not a lot of approval for stand-alone CGM. What has happened over there -- and Terry spent a lot more time with these international doctors than I have -- the product is working so well that it's gaining acceptance and physicians are buying it and using it. Do you want to add to that?

I think for the first time we are a beginning to see a more US-type of payment out-of-pocket by individuals. In the way in which the product gets distributed from our distributor generally to a clinic, it goes within the clinic budget, and physicians prescribe is it to the patients. But we're beginning to see the first signs of, again, the traction, particularly Gen 4 as a technology adoption. Patients are now willing to pay out of pocket, and there are a number of programs where there's some limited reimbursement, and certainly we've got dossiers on file as we go through that interactive process with those different funds.

Okay. Thanks. Very helpful. Just one last question. Could you guys comment on any trends that you saw as far as attrition rates and utilization rates in the first half of the year?

It is our standard practice not to comment on attrition rates, and we continue to subscribe to that. It is difficult for us to actually nail that down, as we've said on multiple calls, only from a standpoint that off-label use does occur and it is hard for us to narrow down exactly how long a patient is using the product. We read the blogs like everybody else, and we see it anywhere from it's reported seven days, which we would prefer, all the way of to 30 days. So it's very difficult.

Okay. Thanks for take be the questions.

Our next question comes from Thom Gunderson of Piper Jaffray. Please go ahead.

Hi, good afternoon. Maybe the same question asked a different way, but maybe we can get a bit more color, Terry, on consumer behavior. You and your team are talking to your customers a lot. The back office people are talking to them. Have you noticed anything either since Q1, or maybe in 2012, that shows any change one way or the other in behavior on CGM holidays or reorder rates or anything in that category?

No, Thom, we really haven't. I mean, it has been status quo. We're dialing down into a customer relations effort to gain more information, and again it becomes very difficult to narrow that down in terms of the "reorder patterns," and it depends on the pair for that particular patient, if they're willing to allow patients to order one box or two boxes or three boxes. Each additional box gets tougher for us to try to analyze how soon patients would use a product or in fact, as you described, if they're taking a holiday/

We see certainly -- as we look at the kind of external analyses that are available to us -- and again we have to always be mindful that these responders are typically the most aggressive in the way in which they treat their diabetes -- we see no pattern change in them -- in one session, however long that may be, and they immediately start another session. And many of them will comment that I can live without my pump, I can't live without my sensor. So from that standpoint, no, we haven't seen any real change.

And then is there -- last time we talked, I think you thought you were going to pay the medical device tax. Now you're not. Is there anything that changed other than a draft IRS document and an accountant that wrote his name on it?

This is Steve. Actually, I don't think we were specific that we were going to have to pay for it. I think our comments were very reserved previously because we were waiting for our outside advisors to get their report done. I don't think this is a change. Obviously it's a pleasant outcome for us, but I don't think it's a change of position.

Okay. And then last question, also international, but, Terry, you've been travelling outside of Europe. Is there any advances that we should start to be paying attention to in the BRIC countries?

Well, certainly -- unfortunately diabetes is a global epidemic, and its fastest rate of growth is outside US, outside of Europe and certainly looking at the BRIC countries. We are, I would classify, deep in discussions with a number of distributors. Everything we do outside the US will be through a distributor network as to what is our best solution, who has the biggest footprint in the space, and also the regulatory acumen to get us through the various regulatory agencies that we -- we're going through.

I would say the first on our list and the closest we are to launch would be India sometime yet this year. Then you look at China and Japan would be 2013 from that standpoint. And there are obviously some countries in South America that look like they have enough economic wherewithal to begin that process as well.

Thank you.

We have Bill Plovanic of Canaccord on line. Please go ahead.

Thanks, good evening. Can you hear me okay?

Absolutely.

Great, guys. Any commentary on the Roche SEVEN PLUS, how they're doing with that?

I can take that. You know what, Bill, we started up in the first quarter and the program is going. It has not had a material impact to our revenues yet. Relationships are starting to be made out in the field with our reps and the Roche reps. It's too early to tell or make a call on the program.

Is there any commentary or color you could give -- I mean, in terms of the sequential cadence of the patients over the past few quarters?

Sequential cadence. Do you mean patient growth?

Yes.

No, we've kind of dialed down on disclosures as far as numbers between kits and hardware and stuff. No, but suffice it to say we are comfortable with where we are.

Any update on the Gen 4 manufacturing? Where are you, how many lines, how much can you make? How is that coming along?

Bill, we started off the year, we were going to start with one manufacturing line again that way, and we made decision in the first quarter that we needed to build another one. And part of the CapEx that you see is the equipment related to another Gen 4 manufacturing line. The other one is up, the other one is near completion of being up, and we're fine-tuning some of these processes, so we'll have the volumes we need to launch this I thing in a very big way. And so we're quite well -- we can certainly support what we're selling in Europe and what way need with our clinical studies. We have a not turned on the switch to produce thousands of sensors a day yet, and nor would it be prudent to do so until we see approvals right around the corner.

Do you still feel confident with the gross margins getting into the 70%, 75% as we get the full manufacturing going?

Absolutely. And that's going to be a function of volumes as well, but the we they will the cost profile of the Gen 4 sensor will be much better than SEVEN PLUS over time.

Okay. That's all I had. Thanks.

Our next question, comes from Chris Cooley from Stephens. Please go ahead.

Thank you. Good evening. I appreciate you taking the questions. Could you maybe just explain or give us some update in the pediatric trials, both in terms of its -- the indications and how you're managing that process while still waiting for the Gen 4 approval? I mean obviously when that trial wraps. I'm just curious how you're managing those processes dually. And then I have a quick follow-up. Thanks.

Well, we had been encouraged by the Food and Drug Administration to initiate the clinical trials in pediatrics as soon as possible following our submission. We did. It was, as Kevin mentioned in his comments, getting down to the degree of specificity that the agency wanted to see in a protocol. There's a lot of back and forth. Particularly as we go down in age group to very young patients, there's a sensitivity obviously from the investigators as to what they're willing to do. We need samples, but certainly can't be looking at [Venus] samples as an example out of a very young population.

Of course, agency asked us to look at that younger population knowing that, quite frankly -- which we had advised them -- that the product has been used in literally month-old patients. Off-label, but again that's the discretion the attending physician, how he or she chooses to use a product for the benefit of their patients. So it was an iterative process, and now once we got the protocol signed off on by the agency, we already had several pediatric sites that we had chosen, went through the IRB process with them, and we -- as Kevin again mentioned, we've started enrolling patients in the first of those clinical trial sites.

Super. I apologize if I missed the prepared marks. Kevin, I think when you walked through the developmental partnership agreements, you touched on Animas, Roche, Tandem and Edwards. I missed Insulet, if it was am there. Could you give us an update on that?

We don't have any development work going on with Insulet right now. We know they're very focused on their next generation product, and I think when they work that out, I think we'll resume discussions. So that's where that is.

Okay. Thank you so much for your time.

Our next question comes from the Danielle Antalffy of Leerink Swann.

Good afternoon, guys. Thanks so much for take be the question. Just focusing on gross margins again and the impact of the transition to Gen 4. You had some impact internationally, pretty meaningful impact on the gross margin front. I just wanted to get a sense of could you remind us how long you expect the transition to take once you do get approval, and what we should expect on the gross margin side in the first few quarters post launch?

Well, there's a lot of transitioning going on as we launch, because we will still be manufacturing SEVEN PLUS sensors for at least a 12-month period to support the patients that have hardware that's in warranty. Production of the SEVEN PLUS sensors will go down over that period of time. Nevertheless, we'll have to support two manufacturing lines. On top of that, we'll be transferring to -- transitioning to the Gen 4 hardware platform, and so we'll have that start-up as well.

So I think you've got a few quarters of margins that will go up as our volumes go up and as we get more efficient with Gen 4 manufacturing, offset by costs related to the transition in having to run two lines. And we're running two lines today. We're running a very limited scale line on Gen 4, because we are manufacturing for our clinical studies and for Europe right now, while the remainder of manufacturing is on SEVEN PLUS.

The impact in this quarter related primarily hardware. We cannot sell under the EU guidelines the old SEVEN PLUS hardware anymore. The communication protocol was no longer valid, so we had some left and we worked it down to a relatively small number given the size of our Company. We wrote that off and took that charge. And so we'll see, goes over the next year. A lot of it depends on timing, Danielle. How much of the SEVEN PLUS we work down, and how quickly we launch Gen 4.

Okay. That's great. Thank you so much for that. And then lastly, just on the competitive front, we saw a very small data set from a competitor. This was of course an in-hospital product, but the accuracy looked pretty good. So I just wanted to get your guy's perspective on the competitive front going forward. Thanks.

Yes, this is Terry. We look at the competitive front really from the product offered by Medtronic and their Enlite sensor. We did head-to-head by Dr. Russell and Dr. Damiano out of Mass General, and we were obviously pleased at ADA with the outcome of that showing us to be far superior. I think your are referring to the in-hospital -- they also -- situation -- they presented at ADA, and I think it gave us a glimpse into how really truly early stage they are.

They finally came forth with acknowledging that on that particular presentation and technology, they had to do confirmatory calibrations every four hours. And that there were also suffering from an extensive time lag, which -- 15 to 25 minutes of time lag, which meant they to go back retrospectively to do some shifting from a standpoint of it was not really what we would consider to be real-time analysis. So it's retrospective. So again, until they can move that forward to a level that makes sense and patients and healthcare professionals will see real-time, I really wouldn't put them in that kind of competitive landscape that others that [have forth] like Medtronic.

Okay. Great, thanks so much.

(Operator Instructions). Our next question comes from Raj Denhoy of Jefferies. Please go ahead.

This is Amy in for Raj today. Thanks so much for taking my question. I just wanted to talk a little bit about R&D. I believe you had indicated that there could be a bit of a -- to expect a step down in the second half of the year. And I'm wondering with pediatric trials being a little bit larger and longer than you had anticipated and you have a lot going on, will we still see a little bit of a step-down, or should we think about this quarter's run rate moving forward?

Certainly that would be the upper end of moving forward this quarter. We would like to manage it down a bit, but you right, the pediatrics trial is going to cost more and take more time than we thought. We also acquired a company in the first quarter in adds to R&D line, particularly for non-cash expenses. So we'll see how we are in three months.

Okay, great, thanks. And just one other question regarding the type 2 space. And I know the reimbursement there is still in the very early stages, but what have you all seen in the way of demand? Have you -- are you all seeing any more increase or a shift in that type 2 patient population in demanding CGM is it.

Yes, we really have. It's been interesting in that the demand has come from the professional group in terms of healthcare professionals, where the demand originally in the type 1 group was really from the patient level, and we pushed that through to the professional and here we are being very successful in the type 1 market. The type 2, when the healthcare professionals that treat type 2 diabetes recognize the benefit, they're really the ones that are pushing it.

So we've got what we consider to be kind of the landmark study that Dr. [Podgurski] conducted. We're supporting an another trial of that nature. That was a single center trial, although independent randomized prospective. You still need multi-centers in order to gain traction with the payer community, and so we've elected to go out and basically repeat that study at a different site. So we do see an increase in the desire in pushing for those patients. That said, I would agree with you that the reimbursement landscape is still challenging for those patients.

Great. Thank you very much.

Our next question comes from the John Putnam of Capstone Investments. Please go ahead.

Very nice quarter, gentlemen. My question was about competition, and I think you've covered it. Thank you.

Our next question, comes from Ben Haynor of Feltl and Company.

Good afternoon, gentlemen. Thanks for take be the questions. On the mindset of I can live without my pump and -- but not without my CGM that we've seen, are you seeing increased awareness from doctors -- or maybe even peers -- that are saying that CGM might be a better first step than the pump when it comes to managing diabetes?

Certainly from the physician population. Not yet from the payer population.

Sure. And then on the rebates, what kind of redemption rate did you see there? And do you expect some coming through quarter as well, and does that program continue?

The program is not in effect right now. And we're into the going to disclose our redemption rate.

Okay. Thank you very much.

Next question comes from Greg Simpson of Wunderlich Securities. Please go ahead.

Thank you. Congratulations, guys, on a very strong quarter, and Steve, congratulations on the new job and I'm sure the big raise that went along with it. Terry, first of all, a question for you about critical care. It seems like you guys are extremely well positioned over the next few years, maybe as well positioned as anyone. You talked about the interstitial product a little bit on the last call. Could you maybe elaborate either on that product or just the overall strategy going forward?

Sure. We view that market opportunity as ones that very robust -- one that is. We know an even the SEVEN PLUS technology is being used in -- I'll call it -- not quite the critical care, although certainly physicians will use it in the ICU as part of an investigation, not anything we're sponsoring, but we do see reports of it. I think as you move downstream in the hospital sector into the step-down ward -- progressive, telemetry, whatever you want to call it -- into the general ward, a robust interstitial sensory would be extremely attractive.

And that information comes to us really from the hospital sector as they look at things. They're being challenged in terms of cost of care. And so they also have a challenge with regards to recidivism. As you well know, any CMS patient that gets re-admitted any time in the first 30 days for lack of adequate treatment, and anything that relates to why they were there in the first time, the hospital is on the hook for the treatment of that patient. And so I think all of the hospital sectors are beginning to take a much closer look at the economics of ensuring that patients released are in good health

And certainly we know that there are several million patients with diabetes that get admitted every year, and this would not necessarily only be restricted to those patients with diabetes, but anybody again having type of glycemic or malglycemia from that standpoint. We are -- as you all know, we're designated a Gen 6 technology, that we have human feasibility data. Small numbers. But it is built as a very robust, very highly single digit MRAD accuracy and drug interference blocking. And we're continuing to work on that project.

Okay, great, thank you. And then just a question -- or maybe you can engage in a little commentary on the FDA inspection. I view that as obviously a very big deal. And obviously there's two ways that can happen. One it either happens early in the process and then you seem to answer questions endlessly, or it seems to be kind of a last step in the process. Given how quickly it process has been going on, it would appear that maybe the FDA is kind of viewing that as one of the last steps. Is that fair, or can you maybe discuss the flow back and forth between the FDA and follow-up questions, things like that?

I would say that that's a fair assessment. Obviously we're biased in wanting to believe that that's what the FDA is thinking. We can't speak for the FDA. I would say that in several decades of experience, this is the fastest review that either our senior regulatory person who's been in the business about the same time I have, now going on over 40 years. We both agree that this whole developmental review has been the most interactive that we've either one of us has experienced.

I do believe that the FDA is -- given their resources, are doing everything possible to expedite the review and, hopefully in the not too distant future, the approval. They've seen the data. And I would say in one of their comments to us at ADA, when you had all of these investigators come rushing that wanted to replace either SEVEN PLUS or even alternative sensors in their AP programs, FDA commented, we are very comfortable with the Gen 4 clinical data. But remember this review is not just the clinical data. There was also a manufacturing change as part of this, so it is 17,000 pages of review that they have to go through.

But I do think that given the comments by the auditor when she came in and when she left were -- we were favorably disposed that this was toward the end of the cycle as part of the review. I think given the gage of interaction even today from a standpoint of discussions with agency post that that audit again it's encouraging. There's nothing that seems to be -- that they're delaying in any way whatsoever. In fact, quite the contrary.

Thank you very much. Again, I appreciate the openness.

(Operator Instructions). Our the next question comes from Steven Lichtman of Oppenheimer and Company. Please go ahead.

Thank you. Hi, guys. Just a couple questions. First on all on the sales force. In think last call you said that it's likely to stay steady here in the remainder of 2012. I just want to see if there's any change in those plans. And then just secondly on the manufacturing line comment, I just wanted to make sure. Can you begin a US launch in earnest with just one line-up, or do you need that second line-up? Thanks.

This is Kevin. The second line will be up very soon, so we'll begin our launch with both of them. Fortunately we don't have to shift the entire patient base over day one, but we'll be ready to support our launch upon approval.

The second piece, with respect to the sales force, our sales force has remained the same size as it was last quarter. There's been no additional head count added. There has been maybe some shifting from one position to another, but no additional bodies. They have achieved this growth with the same-sized group that they had last quarter and at the end of last year. We don't anticipate making it any bigger as we sit here today.

Okay, great. Thanks, guys.

We have no further questions in the queue. I will now turn the conference call over to Terry Gregg for any closing remarks.

Well, thank you. I continue to be extremely impressed by our performance. And you should as well. The advances we are making in the technology of continuous glucose sensing are truly extraordinary, and our long-term vision of replacing fingerstick measurements gets closer every day. In the meantime, we're a executing on our business plan of growing the business and achieving profitability in a timely fashion. We have several tailwinds pushing us forward, and I'm thrilled to be part of a company that transforming the way diabetes is being treated. No one disputes that CGM should be the standard of care, and we're on the cusp of seeing that vision realized. Thank you.

Thank you for participating the in the second quarter earnings release conference call. This concludes today's conference. You may now disconnect.