德康醫療 (DXCM) 2012 Q3 法說會逐字稿

Welcome to the third quarter earnings release call. My name is Christine and I will 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. You may begin.

Thank you, operator, and thanks for joining us today on our third quarter earnings call for 2012. I'm going to ask Steve Pacelli to initiate our call with a Safe Harbor statement. Steve.

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

These forward-looking statements involve a number of risks and uncertainties. A list of 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 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 publically 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, of course, Steve Pacelli, our Executive Vice President of Strategy and Corporate Development.

Our agenda for today's call is fairly typical. I will provide a brief update on our G4 PLATINUM approval and launch activities. Kevin will review our third quarter 2012 financial results and provide our customary operations update and then I will offer some concluding thoughts.

So, as most of you are aware, on October 5th, 2012 we received approval from the Food and Drug Administration to begin commercially marketing the DexCom G4 PLATINUM continuous glucose monitoring system, our fourth generation CGM system. We received approval for a full PMA in just under 180 days, a credit to the outstanding work of our clinical and regulatory teams and a testament to the collaborative working relationship we have established with FDA over the past several years.

We believe G4 PLATINUM sets a new standard for performance. It is the most accurate and reliable continuous glucose sensor ever commercialized and we believe this sensor system will create an extraordinary patient experience and will drive category adoption of CGM.

As we mentioned during our G4 PLATINUM approval conference call, we began building both hardware and sensor inventories in the third quarter in anticipation of approval. We began taking orders for G4 PLATINUM immediately. I am pleased to report that we completed our initial G4 PLATINUM shipments to patients in the US late last week and have commenced full scale order fulfillment this week.

Our initial focus has been processing orders for new patients, although we expect to begin to upgrade existing SEVEN PLUS users who desire to move to the G4 PLATINUM starting this month. We are working to complete all of our upgrades by the end of 2012.

The US launch of G4 PLATINUM has generated a higher level of excitement at DexCom than any of our previous commercial launches. As I stated on our call in early October, patient, partner and physician response at the Berlin meeting of the ASD in early October was exceptional. Growth in our international markets truly reflects this excitement.

As one would expect, our pipeline of new patient opportunities is at the highest level in the history of the Company. The number of daily calls into our customer service organization is up over 50% when compared to pre-launch; and while it is too early to determine whether this call volume will be sustained, we're certainly keeping busy processing orders for G4 PLATINUM. In fact, call volume has been so high that our team has had little time to actually process all of the orders.

Contrast that excitement with the operational challenges of launching a product in the same month that we received approval. For example, we could not even begin to print user guides until we received final approval from FDA and yet we immediately announced approval knowing full well that all new SEVEN PLUS kit sales would come to a complete halt while we assembled final G4 PLATINUM kits.

Fortunately our pre-launch planning activities ensured that we will have sufficient inventories to meet patient demand during the quarter, a task made particularly challenging now that we offer multiple color receivers and need to forecast the appropriate build of colors.

Aside from patient and clinical and clinician excitement, the G4 PLATINUM approval has created much stronger interest than we have ever experienced with potential clinical trial partners.

While we have been providing blinded product for clinical trial use for the past several years, we now believe that the clinical segment represents a meaningful business opportunity. For example, a number of pharmaceutical companies have recently suggested to us that CGM is an important tool to demonstrate the effectiveness of future diabetes compounds. However, they've expressed a strong dissatisfaction with competitive CGM used in prior trials to the point that they had ceased using CGM in their studies.

We believe our G4 PLATINUM system combined with our sweet-spot cloud-based data management capabilities and QUALCOMM communications platform will operate very robust solution to these potential partners and we will be gearing up for this opportunity next year.

It is important to keep in mind that this is the first new product launched by DexCom in over three years, so our field sales force is extremely excited about demonstrating the product to healthcare providers and I am pleased to hear from numerous physicians and educators that they have been eagerly anticipating the G4 PLATINUM in their practices.

Above all I would like to acknowledge the hard work of the people at DexCom who have made this launch possible.

Finally, our revenue guidance for 2012 has been $85 million to $92 million for the year and while we don't have a crystal ball for the balance of Q4, in light of what we've seen so far with patient interest in the G4 PLATINUM System, we expect our full-year product revenue to land at about the midpoint of our range.

With that, I would like to turn the call over to Kevin Sayer.

Thanks, Terry. I'll start with the financial update. DexCom generated $21.1 million in product revenue for the third quarter of 2012 compared to $16.7 million for the same quarter in 201l, a $4.4 million or 27% increase.

During our G4 PLATINUM approval conference call in early October we stated that we expected product revenue for Q3, 2012 to be approximately $22.2 million prior to any adjustments related to our G4 PLATINUM launch and subject to completion of our closing processes. After internal analyses and review by our independent auditors, it was determined that we should reserve an additional $1.2 million for sales returns related to our 30-day money back guarantee on DexCom hardware.

As we discussed during the G4 PLATINUM approval call, DexCom has always maintained a 30-day full refund policy on our hardware. As part of our G4 PLATINUM launch, we elected to extend this offer for patients who purchased SEVEN PLUS hardware from September 1st to our G4 PLATINUM announcement date of October 5th.

While historically very few patients have returned products under the terms of our 30-day money back guarantee, we expect a significant number of patients to take advantage of the offer to exchange for G4 PLATINUM. This $1.2 million reserve resulted in a dollar for dollar reduction in product revenue for the quarter.

Our product revenue growth for Q3, 2012 over Q3, 2011 would have been 34% without this increase in the returns reserve. It is also important to note that we plan to recognize most of this reserve as product revenue during the fourth quarter of 2012 as we ship G4 PLATINUM hardware to these patients.

Sequentially product revenue for Q3, 2012 decreased 2% from the prior quarter. However, excluding these additional sales returns reserves, product revenue would have increased 3% sequentially. As we stated in our G4 PLATINUM approval call, we believe that many purchase decisions during Q3 were deferred as patients and healthcare providers anticipated the G4 PLATINUM approval and introduction.

Total revenue for the third quarter of 2012 was $23.1million compared to $18.3 million during the same quarter in 2011.

Our product gross profit totaled $7.7 million generating a gross margin of 36% for Q3, 2012 compared to a gross profit of $7.4 million and a gross margin of 45% for the same quarter in the prior year.

As we discussed during the G4 PLATINUM approval call, we have recorded a number of one-time charges that have negatively affected our gross profit and gross margin for the quarter. Specifically, we recognize approximately $500,000 in cost of goods sold from SEVEN PLUS hardware we shipped in September although we recognized no revenue related to those shipments due to the increased sales returns reserve discussed previously.

We also wrote off approximately $2.5 million in excess and obsolete inventory related both to the SEVEN PLUS and the SEVEN PLUS upgradable product we discussed during the G4 PLATINUM call that we no longer expect to sell. And we shortened the useful life of and recorded additional depreciation expense of approximately $600,000 related to certain fixed assets used for SEVEN PLUS manufacturing and testing.

Absent these one-time charges, our product gross profit would have been $11.9 million generating a product gross margin of approximately 54%.

Sequentially our product gross profit decreased $2.9 million on decreased sales of $400,000 over the prior quarter and our gross margin decreased 13 margin points. However, excluding the charges we discussed our product gross profit would have increased $1.3 million and our corresponding gross margin would have increased approximately five margin points over the prior quarter.

Some final thoughts on our revenue and gross profits during Q3; our split between consumable and durable revenues was again between 70% and 75% consumables and between 20% to 30% durables and the ASP for sensors remained constant, while the ASP for our durables was affected slightly by our rebate program for SEVEN PLUS, which was offered only during the month of September.

Our international business continued to perform well in Q3 accounting for just under 10% of our product revenue in the quarter.

On the domestic distributor front our revenue split between direct and distributor business remained consistent with the prior quarter.

And with respect to Q4, we expect sales and gross margins to be affected by a number of additional factors related to our G4 PLATINUM launch including the impact of reversing our sales return reserve, the impact of our $399 in-warranty upgrade programs and our manufacturing scale-up activities.

Research and Development expense totaled $10.6 million for Q3 of 2012 compared to $8.2 million in Q3 of 2011, the increase primarily resulting from cost associated with our sweet-spot platform, expenses related to our G4 PLATINUM pediatric trial, G4 PLATINUM scale-up costs and continued investment in our next generation products.

Sequentially R&D expense remained relatively flat.

Selling, general administrative expense totaled $15.5 million in Q3 of 2012 compared to $13.2 million during the same quarter in 2011. The increase primarily related to sales, marketing and information technology costs to support revenue growth. $600,000 of this year-over-year increase is centered in non-cash share based compensation.

Sequentially, SG&A expense remain relatively flat.

Our net loss for the third quarter of 2012 totaled $17.3 million and included $6.9 million in non-cash expenses centered in share based compensation, depreciation and amortization, as well as $4.2 million in non-cash charges and reserve discussed previously.

Absent all of these non-cash charges, our net loss for the quarter, for the third quarter of 2012, would have been $6.1 million. Our loss per share for the quarter was $0.25 and again absent our one-time charges our loss per share for the quarter would have been $0.19.

We ended the quarter with $53.4 million in cash and marketable securities and had working capital of $55.2 million.

One additional note regarding the balance sheet, today we entered into a loan and security agreement with Silicon Valley Bank at Oxford Finance that provides a $15 million revolving line of credit and up to a $20 million term loan to be used for general corporate purposes. The revolving line of credit is an interest only financing that bears interest -- that bears an interest rate equal to the prime rate plus 0.5% and requires repayment of principal at the maturity date in November of 2015.

Under the term loan arrangement, $7 million will be advanced on the funding date and up to $13 million in additional funds will be available upon our request from June 1st, 2013 to September 30th, 2013. The term loan bears a fixed interest rate equal to the three-year treasury rate at the time of the advance plus 6.94% and requires payment of interest only for the first year and amortized payments of principle and interest thereafter through the maturity date in November 2016.

There are no conversion features or warrants associated with this facility. Now I'll turn to the business update.

Regarding our product pipeline, I am pleased to report that we had completed our pediatric clinical trial and we expect to file a PMA supplement in the US and update our CE mark in the EU to obtain an expanded indication for G4 PLATINUM before year end.

We are especially excited about the prospects of a pediatric indication. That is not only significant -- as it not only significantly expands the number of endocrinologists we call on in the US, we expect to be able to recommend our technology to patients as young as two years old, which would be a first for CGM.

On the international front, we have recently received approval on Australia and we expect approval in Canada and India within the next six months. We're actively exploring opportunities in China and Japan and other Asian geographies.

We continue development of the GEN5 system working on an improved applicator combined with a mobile phone interface.

We continue to have discussions with the FDA on this front and we believe that DexCom is in a very strong position to become the first Class III medical device to communicate directly to a mobile platform. We have already seen several early phase mobile-based systems in many of the artificial pancreas programs that display our data on a mobile computing platform and remain very encouraged on this front.

Shifting to our integration partnerships, Animas continues to commercialize the Animas Vibe system in Europe and it was made abundantly clear to us by the European physician community at AASD in Berlin last month that system is being very well received by patients and physicians in the EU. With regards to filing for US approval of the Animas Vibe, the work required to modify the system to accommodate G4 PLATINUM in the US is taking slightly longer than expected, but we believe we will complete all development and system testing and be in a position to file early next year.

We are pleased to note that our newest partner, Tandem Diabetes Care, recorded their first commercial shipments during Q3. We're actively working with Tandem to accelerate our development efforts and are nearing completion of feasibility assessment of incorporating G4 PLATINUM into the Tandem System. We are optimistic that feasibility will be successful and hope to be in a position to define our path forward with G4 PLATINUM before the end of the year.

Finally, on the Edward's front, work on the second generation in hospital glucose monitoring system is near complete and, as Edwards mentioned in the recent earnings call, they expect to obtain a CE mark for the second generation glucose clear system before the end of 2012.

I would now like to turn the call back to Terry for some concluding remarks.

Thanks, Kevin. We created the G4 PLATINUM CGM system with the customer in mind through a series of customer surveys and regular CRM outreach and dialogue. One could consider approach akin to crowd sourcing from people with diabetes with a focus on the consumer experience influencing our design. It is certainly a sleek, slim design for discretion and portability to meet an active lifestyle.

We incorporated customized tones and melodies for alerts of glucose levels and increased the wireless transmission distance by some 4x to improve data capture, particularly around the house. But we are glucose sensor technologists and the best in the world. We improved the over accuracy by approximately 20% and by 30% in the hypoglycemia range.

Hypo detection, sensor precision and sensor longevity were all improved resulting in exceptional sensor stability and accuracy over time so that from start to finish sensor-to-sensor our customers can expect extremely consistent performance.

Initial customer reactions to wearing the product has been or exceeded our expectations. The blogs are filled with positive comments regarding the accuracy, durability, convenience and user friendliness of the G4 PLATINUM.

We are now replacing the SEVEN PLUS systems with G4 PLATINUM in the artificial pancreas trials so you should expect to see those results as early as next week at the Diabetes Technology Meeting in Bethesda.

I said it before the launch and I'm more convinced than ever that the G4 PLATINUM is transformational in the utilization, understanding and uptake of CGM as a critical component of diabetes care. We are truly answering the promise of CGM.

Thank you and, operator, we'll turn it over for question and answer.

Thank you. We will now begin the question and answer session. (Operator Instructions). And our first question is from Ben Andrew of William Blair.

Terry, I think I missed the number on the upgrade number in timing that you gave early on. Could you repeat that and kind of talk through how quickly you think you can get everybody upgraded that perhaps wants to in the first phase?

Yes the upgrade, we didn't give you an actual upgrade number but our -- we are starting to identity that now and begin to ship out. Our goal then is to complete that by the end of this year, so by the end of December.

And do you have a sense of what percentage of patients are likely to do that? I know that's what you're trying to figure out but that would be awfully aggressive to get seven plus mostly shut down by the end of the year wouldn't it?

Well, no, no this is upgrades so you've got to look at those. The upgrade program is for those patients who are in warranty and we provide them an upgrade for $399. Then the next group are patients that are out of warranty and they would be responsible for the whole initial new starter kit. So we've just looked at this so the number is not as big as you think it is from that standpoint.

We certainly have a number of immediate requests of those patients wanting to upgrade for $399 in particular. We're addressing first the brand new patients and that was my number of increase in calls in of over 50% versus our pre-launch number of patient calls coming in but, again, our goal is to address obviously both of those segments but first the new patients followed by the upgrade patients.

Okay do you have any better sense of what chunk of existing patients are going to want to switch to this? I know your goal is ultimately to get people over there but is the timing -- do you have a timing in mind, a time frame in mind when you want to get people off of SEVEN PLUS one way or the other?

Yes our time frame would be as soon as possible so we could shut down the SEVEN PLUS line. I don't have the optics. I remind the audience we've been now shipping for less than two weeks. Our phones are ringing off the hook and there's a lot of moving parts right now. Obviously we'll try to give clarity as soon as we can but right now we don't have the kind of optics that I think you're looking for.

Okay and then, Terry, any -- you gave some good commentary on the pediatric indication and maybe that was commented on but did you update the timing there or is that still on track for kind of mid 2013?

Well, it -- our belief is it's on track for that mid 2013. The commitment that we made to the organization and actually the team made to FDA in a face-to-face meeting recently was that we would file that with the agency before the end of the year. Like any PMA supplement statutorily, they have 180 days to review and complete. We're hopeful that based on the fact that this is a supplement to data that they're really looking at the clinical aspects of it, obviously not the degree of numbers of the more than 9,000 matched pair points that we had with the adult trial and we're not doing the rigor of having to do intravenous blood sampling of these patients, that they should be able to look at that in straight order. And I know that they are very interested in expediting this. They were very happy when we told them that the trial was complete.

Okay and then finally, Kevin, any new learnings relatively to manufacturing as you start ramping more aggressively with the new product or things are on track there? Thanks.

Every day there are new learnings towards manufacturing but yields are getting better on a weekly basis on our central lines. We turned everything on full blast. Literally we talked about during the call full scale as we were getting approval so we learn a bit every day but things are going well.

I guess one of the more learning -- interesting learning experience, Terry talked about the mix of colors, figuring out how many people wanted to buy our receiver that's called Tickled Pink has been a learning experience for us. We've had pretty good demand on the color front so it's been good, Ben, no major surprises.

Great thank you.

Thomas Gunderson, Piper Jaffray.

I'm still getting my notes down on Tickled Pink; hang on a second. The same kind of question Ben asked on Animas, you said slight delay and early 2013. Do you think there's still a reasonable possibility or probability that you could have this by -- finished by ADA?

Yes, Thom, this is Steve again. You know, with that 180-day time frame I think the answer is possibility probably not probability I would say. If we get this filed very early in the first quarter of next year, I think there's still an outside chance. I think it's definitely what we've committed to previously was second half of next year was a stretch of both trying to get to ADA and I think that's still our plan. We just, you know, as without re-hashing all the old details, as we move from the old what was Gen4 to the G4 PLATINUM, we had to do some systems' upgrading on their side and we just have to get through the final systems validation, verification testing and literally have just been get the paperwork done.

Got it and then on Tandem I think the original agreement was for Gen5 to go along with Tandem and you were talking about Gen4. Where -- do you think they'll -- is that something that we should plan on or is that still in the negotiations stage?

It's actually from a business perspective there is no real negotiation. We've already agreed with Tandem that if we collectively can prove that it's feasible -- what I mean by that is you'll remember the Gen5 architecture is much simpler to integrate with potential partners because all of the intelligence resides in the transmitter so with Gen4 the partner is required to actually put some additional hardware into their handheld or in this case the durable pump. Word is that the final stages of feasibility testing to make sure, for example, that the transmitter can communicate appropriately from, you know, send and receive the RF signal for -- as the best example.

We're very, very close to kind of final sign off from both engineering teams that the G4 PLATINUM system will work inside the Tandem pump. We've actually built prototype, actual prototype pumps, and we're testing them today so I think the answer is it's a high likelihood. I don't want to tell you for sure but it's a high likelihood that Tandem will move to the Gen4, really because they're looking to accelerate their entrée into CGM.

Thanks. One more partner question and then a quick customer service question and that would be on the partner side, Steve, any update on Insulet and combining Gen4 with their next generation?

Yes not really an update, there's nothing, at this point nothing going on there.

Okay and then, Terry, the customer service question, when you say 50% increase from pre-launch post-launch, can you give me a sense of that because you also said that maybe people were waiting for Gen4 so I am maybe customer service calls were lesser in advance of this. What kind of calls were you getting relative to what you're set up for and the second part of that question would be do you need to temporarily boost labor there to handle the calls?

Well, my comment of 50% was greater than an average of what we were experiencing. There was, although we believe that there was a decision by physicians and patients -- not that there was a belief, we actually were told that by both constituents that they were waiting. We certainly, if you just look at the growth of the business, we have continued to build that customer base in anticipation all along.

So we didn't see any dramatic fall off from that customer call pattern and we continue as part of that call pattern to -- on customer service to fulfill the sensor orders as well. And that, you know, the more starter kits we put in the market, the more sensors that we also put into the market. So I would say that this 50% increase was truly a dramatic increase. That's the first part. The second part.

The second part, I don't -- and I've tried to caution the audience by saying we're not sure if that's going to be sustainable or not. We've not seen any big drop off but, again, we're really three weeks into this and so we don't know. We just don't have the optics on what November is going to look like as an example and then of course we, again, we go into December, which is always our largest month regardless and that's kind of a DME experience for all parties in that world.

Your third question regarding do we need to staff up, we're monitoring that. We do have the ability to do some shifting and if you look at kind of the way we train people, we like to have expansive training in the customer service so patients, for the patient level we can shift resources as necessary, even involving tech services. One of the beauties of the seven plus is that we've seen the number of calls to tech services go down over the year and we certainly expect that to further decrease in tech services because Gen4 is a better product and so we can shift some of those resources if necessary. So I think we certainly don't want to add to it unnecessarily in terms of the cost component. But we literally monitor the number of ops coming in every single day and make adjustments for the next day.

Thank you.

Bill Plovanic, Canaccord.

Just a couple of questions; one, you gave an update on Edwards. I think you talked about did you say the Gen2 is near completion and CE before year-end '12? Is that -- were you referring to the US as well when you say the Gen2 is complete?

No that's -- well, the product is complete. The time line for approval is just for CE mark approval before the year end.

And any update on the US for Edwards?

We don't have an estimate for the US time line at this point. Quite frankly we're still somewhat waiting on the FDA to weigh in as to what the acceptable approval criteria would be in terms of performance for the system and that's something, that's going to be a 2013 discussions with the Agency is my guess.

Okay and then just as you kind of move through these one-time charges, I don't think you quantified any for Q4. I was wondering if you could do that and then will all of this have been washed through as we complete 2012?

Bill, we don't see any one-time charges coming in Q4. We believe we dealt with everything now and that was our plan and so we believe it will all wash through and, as Terry said earlier, it's our goal to get all those upgrades in the system on the in warranty program and also those in the 30 days that we exchange to try and get all that out of the system in the fourth quarter as well so we can get any effect on margins washed out with that here in Q4 and move forward with a clean slate.

Given that we're moving over to the new product, what -- I mean, can you provide any color on what you think Q4 gross margins will be?

Yes, as I said in my remarks, there's a whole bunch of things affecting them and as you walk through it, we've got $399 in warranty upgrade program for hardware. Obviously the margins on that, it's not going to be real good so that will affect it negatively. Conversely, we have a whole bunch of manufacturing volume going on that will affect it positively and we know Gen4 sensors cost less to build than seven plus sensors so to the extent we can shift over that, we'll have a positive impact. We've got a whole bunch of factors going every which direction, Bill, so I wouldn't give any more color than saying just it's going to be an interesting quarter.

Okay so looking -- okay and then on--

Mostly good, I'll say that; I'll say mostly good and even the in-warranty upgrade program to the extent we sell $399 hardware, we're still selling sensors to those people at very positive margins, so we look for a good quarter, Bill, not for a bad one.

Okay and then on the 10-day trial and labeling, where are you on that?

I think we're still in planning stages from what that should look like and, as I've said previously and I am sure Kevin and Steve have said previously at a variety of meetings so here's the landscape. As you remember, Gen4 PLATINUM is actually taking the membrane from Gen5 and moving it backwards. That's why it was a brand new PMA. So, as we -- but we didn't stop all of the work on Gen5 from the hardware so in the Gen5 there's two new components.

Basically one is a new applicator and one is putting the brains from the receiver into the transmitter so I think as you look at 10 days, they're going to marry up from a standpoint it's probably going to be a Gen5 moving forward with a 10-day trial. And part of it is these trials are not inexpensive so if you look at the Gen4 pivotal trial, it's probably $2.5 million and you add another pediatric portion to that and I don't know what that final number--

It's certainly over a $1 million.

Okay so you're looking at $3.5 million. We want to do that once, not twice so I think from that standpoint and the fact that in this Gen4 PLATINUM approval there was no requirement at this point from the Agency to cause patients to actually remove the transmitter for a restart and so they will use that as they so desire. We obviously would like them to use it at the labeled indication of seven days but we do have it in our 2013 planning schedule.

Okay so just in sum know that the whole concept of a longer label is going to be more focused on the Gen5 than the Gen4.

Yes.

Yes.

Okay and then last question and I'm jumping off is you have the $15 million revolver, the $20 million term loan; I think the commentary was on the term loan you gave us the interest rate, no warrants. Was there any warrants on the revolver?

No warrants, no dilution, Bill.

No. no dilution on anything.

Okay so this definitely fills the coffers up and that's all I had. Thank you very much.

John Putnam, Capstone Investments.

Terry, can you talk about the economics of those clients that are not under warranty going from seven plus to Gen4? What will it cost them to convert?

Well, basically they're going to -- my expectation is number one, they would use up their seven plus sensors so there's no new cost factor from that standpoint so what they're going to be looking at is an upgrade to the disposable -- I mean to the hardware durable, both the starter kit and the transmitter. As we've mentioned before, our average selling price is a little north of $800 so if they are within their whatever their plan is, and the majority of our patients have an 80/20 plan so from an out of pocket standpoint they're probably looking at under $200 out of pocket for the starter kit and then the standard of what they're paying relative to the sensors. There was no increase in the cost of sensors.

Okay so you don't believe that you'll have to incentivize them to convert.

No I -- we're not expecting that to be a scenario. We -- in fact, even on the -- you know, those that were in warranty we long debated whether or not we should provide an upgrade but, again, part of our motivation and I think Kevin alluded to it, was the fact that we need to get patients into the Gen4 format sooner rather than later because if you just think about the growth of Gen4, we're making more margin on the sensors and that means that we're going to make less margin on the seven plus sensors as we go forward and so at some point we need to get everybody converted over.

Right thanks very much.

(Operator Instructions). Ben Haynor, Feltl & Company.

Thanks for taking my questions. First off, how -- what percentage of the people who were eligible for the 30-day return policy have taken advantage of it now?

We're not going to disclose that. Some have filed. We haven't shipped anything to those patients yet but what we did, Ben, is we came up with an estimate of how many we thought would based upon what we've experienced in the past and that's the reserve that we've recorded so nobody has got a thing yet. We have had quite a few people request it but not all of them and certainly not close to what we provided for in our reserves yet.

Okay that's understandable and then kind of a big picture question, you guys mentioned that the blog post that we picked on our surveys as well, increasing discussion on CGM, particularly your Gen4, where do you believe that US penetration is at currently and then I am wondering where you think or how close we are to that tipping point where you really see the adoption accelerate?

Yes I, you know, I still think we're in that 6% to 7% penetration as a category. I do believe now that well reach that whatever that magical point is. I've always said it's around 8% or 9% within the next 12 months. Based on -- in fact, I've been pleasantly surprised more than I thought I would be with the Gen4. We knew from a technological standpoint that it was an advance sensor, accuracy, things of that nature.

What I think we didn't or we underestimated, didn't anticipate the -- some of the features and benefits that would be highly desirable by patients and that may, in fact, drive it to a greater degree and faster. Based on some of the comments that we're getting back from our field sales people of their ability to get into accounts and drive some of the interest at accounts that were somewhat resistant for -- you know, it's cumbersome and things of that nature that the slimness and things of that nature of the receiver, as an example, or extended connectivity are really attributes that are more desirable at the consumer level than we anticipated.

Okay great that's helpful and then just one more and I'll jump off; what's the most popular color?

Oh it's still black.

It's still black, (inaudible) and right now I think we're running 50/25/25.

Okay great. Thank you very much.

Thank you. We have no further questions at this time. I will now turn the call back over to Terry Gregg.

Thank you and I'd like to close with a couple of real life experiences with the G4 PLATINUM just over the last couple of weeks that have come into us and this is from both the healthcare sector as well as from patients. As an example, we've had one resistant physician whose only objection to our CGM was lack of integration with the pump and that's not uncommon. But upon seeing the receiver and accuracy of the G4 stated integration doesn't matter anymore and gave our sales rep a list of 10 patients to initiate contact with regarding CGM. So we look at that and we say imagine the day when we are able to transmit directly to a smartphone with our next generation.

We truly open the opportunities. And we've also heard from both patients and physicians that G4 will enable them to use CGM first before moving to pumps if they move to pumps at all. And this has been our philosophy and our marketing message so it is nice to see that kind of traction.

And finally from a parent with a family member playing a soccer game, the highlight of the game was his ability to hold his son's monitor the entire game and keep track of his glucose due to the extended range of connectivity. He added, "There is a helplessness of watching your kid play an innocent game worrying if he got his insulin correct." And these are the things that I was just talking with Dan about that these are some of the intangibles that are really tangible in terms of driving market awareness and adoption. So this is the power of the G4 PLATINUM and these experiences validate what we're trying to achieve and particularly over the next three years, as you see this innovation move into a consumer world of how we view the glucose monitoring world.

So with that, I'll close and say thank you very much for your participation today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.