德康醫療 (DXCM) 2012 Q4 法說會逐字稿

Welcome to the DexCom Fourth Quarter and Full Year 2012 Earnings Conference Call. (Operator instructions). I would now like to turn the call over to Terry Gregg. You may begin.

Thank you operator, and thanks for joining us today for our Q4 and Full Year 2012 Conference Call. I'm going to ask Steve Pacelli to go through the safe harbor statement. Steve?

Sure, 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 publicly or revise these forward-looking statements for any reason. Additionally, we will discuss certain financial information that has not been prepared in accordance with GAAP with respect to our cash operating loss. This non-GAAP information is provided to enhance your overall understanding of our current financial performance.

The presentation of this additional information should not be considered an isolation or as a substitute for results or superior results prepared in accordance with GAAP. Terry?

Thanks, Steve. Joining me today are Kevin Sayer, our President and Chief Operating Officer, Jess Roper, our Chief Financial Officer, and you've just heard from 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 launch activities. Kevin will review our detailed fourth quarter 2012 financial results and provide our customary operations update, and then I will offer some concluding thoughts.

As we discussed during our third quarter 2012 earnings call, on October 5, 2012, we received approval from the Food and Drug Administration to begin commercially marketing our fourth generation CGM system, the DexCom G4 PLATINUM Continuous Glucose Monitoring system.

The US launch of G4 PLATINUM has generated a higher level of excitement among patients, partners and physicians, than any of our previous commercial launches. We began taking orders for G4 PLATINUM immediately upon approval and we completed our initial G4 PLATINUM shipments to patients before the end of October 2012. While our initial focus was on processing orders for new patients, we also successfully upgraded a fair number of existing SEVEN PLUS users to the G4 PLATINUM in Q4.

Also during Q4, approximately 60% to 65% of PLATINUM starter kits shipped went to new patients, while the balance went to existing SEVEN PLUS patients including patients who took advantage of our $399 in-warranty upgrade promotion, patients who purchased the SEVEN PLUS in September 2012 who were entitled to a free upgrade, and SEVEN PLUS patients who were out of warranty and were processed through normal reimbursement channels.

To add some color to the new patients, I note that we had a 50% increase in kits shipped to new patients in Q4 2012, versus Q4 2011, and we sold more kits to new patients in the US alone in Q4 2012 than the total number of kits we sold in Q4 2011.

The commercial introduction of G4 PLATINUM continues to exceed our expectations. Our pipeline of new patient opportunities remains robust. Call volumes into customer service remain strong, and in spite of typical first-quarter seasonality, first quarter sales through late February have been solid.

More than ever, we believe G4 PLATINUM sets a new standard for sensor performance. It is the most accurate and reliable continuous glucose sensor ever commercialized, and we believe this system will accelerate category adoption of CGM.

Now, before I turn the call over to Kevin Sayer, I'm pleased to share that we have yet again delivered on a significant operational milestone at DexCom. Just this week, we received approval of an expanded indication for our CE mark to include pediatric patients and expect to update our product labeling and begin marketing to pediatric patients in Europe before the end of Q1.

Additionally, as promised, we have filed a PMA supplement with the Food and Drug Administration seeking a pediatric indication for the G4 PLATINUM here in the US.

I would like to acknowledge the hard work of the people at DexCom, particularly our outstanding clinical and regulatory teams who have taken us one step closer to enabling DexCom to care for all people with diabetes. And with that, I would like to turn the call over to Kevin Sayer.

Thank you, Terry. I'll start with the financial updates. DexCom generated $31.7 million in product revenue for the fourth quarter of 2012, compared to $20.9 million for the same quarter in 2011, a $10.8 million or 52% increase. We note the product revenue for Q4 includes a $1.2 million reversal of a sales returns reserve we recorded in Q3 relating to our 30-day money back guarantee on DexCom hardware, or the so-called September patients.

Sequentially, product revenue for Q4 of 2012 increased 50% from the prior quarter. As we stated in the G4 PLATINUM approval call we held in October 2012, we believe that many purchase decisions during Q3 were deferred as patients and healthcare providers anticipated the G4 PLATINUM introduction. While we believe this may have led to additional demand in Q4, as Terry mentioned in his remarks, we continue to see strong demand for G4 PLATINUM in the first quarter of 2013.

Total revenue for the fourth quarter of 2012 was $33.3 million, compared to $22.4 million during the same quarter in 2011. Our product gross profit totaled $17.2 million, generating a product gross margin of 54% for Q4 2012 compared to a product gross profit of $10.2 million and a product gross margin of 49% for the same quarter in the prior year.

Please note the product gross margin in Q4 2012 was affected by a number of factors related to our G4 PLATINUM launch, including the impact of our $399 in-warranty upgrade program, manufacturing scale-up activities for G4 PLATINUM, extremely high manufacturing and sales volumes, early-stage production yields, and the continued support of our SEVEN PLUS sensor manufacturing operations.

Some final thoughts on our product revenues and our gross profits during Q4. Our split between consumable and durable revenues was slightly more heavily weighted to durables in Q4 due to the G4 PLATINUM launch, with approximately 32% of our product revenues generated by sales of G4 PLATINUM hardware and approximately 68% generated by sales of both SEVEN PLUS and G4 PLATINUM sensors. [AFP] for sensors remained constant while the [ASP] for our hardware was negatively affected by our $399 in-warranty upgrade program.

Our international business continued to perform well in Q4, accounting for between 5% and 10% of our product revenues. However, the US launch of G4 PLATINUM somewhat overshadowed our consistent OUS growth.

Research and Development expense totaled $8.7 million for Q4 of 2012, compared to $9.2 million in Q4 2011, and the decrease primarily resulting from lower clinical trial costs and lower G4 development expenses. Sequentially we are pleased to report that R&D expense was down 18% as a result of similar factors -- lower clinical trial costs, reduced Gen 4 development expenses, and reduced outside consulting services.

As we move into 2013, we expect that R&D expense for the full year would be relatively flat versus 2012. Much will depend upon our timelines and opportunities with the FDA. With the pediatric PMA supplement on file, our R&D focus this year will be on the Animas and Tandem PMA filings and subsequent product approvals, mobile and cloud-based data platforms, continued system performance improvements, all of the elements of our Gen 5 CGM system and early-stage research on the Gen 6 sensor.

Selling, General and Administrative expense totaled $17.2 million in Q4 2012, compared to $13.7 million during the same quarter of 2011. The increase primarily related to sales, marketing and information technology costs to support revenue growth.

A little more detail on the increase, of the $3.5 million increase in SG&A, $500,000 of it centered in non-cash, share-based compensation. The remaining increase was related to G4 PLATINUM launch costs. Increased variable sales costs related to our 50%-plus revenue growth, both sequentially and over 2011, and marketing information technology costs to support this revenue growth.

As we look at Fiscal 2013, we do anticipate an increase in SG&A expense of up to 20% to support our growth. While G&A will increase moderately, we intend to invest in the sales and marketing side of our business. Earlier this month, we commenced a reorganization of our US field team. We have increased the number of US sales territories from 48 to 68, and we've consolidated what was previously a tiered model with multiple sales reps and field-based clinical support staff sharing larger territories, into a flat structure with a single sales rep solely responsible for a much smaller territory.

Our clinical support team will no longer be field-based, but instead will be redeployed on phone lines and on computers as part of our DexCom Care Initiative, proactively reaching out to patients on predefined schedules to improve patient experience while also working to increase sensory utilization and patient retention.

As we have discussed on numerous occasions, most of our patients are trained using DexCom support resources including our online tools, in combination with support from their healthcare professionals and our technical support center. So, with smaller territories, we believe our sales reps will have the bandwidth to handle local training issues where necessary.

Upon completion of this reorganization, we will have expanded head count in our sales organization including non-field-based clinical support, by approximately 15%. We expect this reorganization to be completed by early Q2 2013.

Our net loss for the fourth quarter 2012 totaled $8.5 million, including $6.3 million in non-cash expenses centered in share-based compensation, depreciation and amortization. Absent these non-cash charges, our net loss for Q4 2012 would have been $2.2 million.

Compare this cash operating loss of $2.2 million to a cash operating loss of $9.8 million in the prior quarter and a cash operating loss of $7.2 million in Q4 2011. It's easy to understand our belief that we can in fact move our current business model to profitability with increased volumes. Our loss per share for the quarter was $0.12. With respect to our balance sheet, we ended the quarter with $48.7 million in cash and marketable securities, down $4.7 million from Q3. As we stated during our last call, we had significant working capital needs during Q4. As our receivables increased over $7 million from Q3, we had capital expenditures of another $1.4 million and we paid down our approximately $2 million in accruals in conjunction with year-end.

Finally, as we disclosed on Form 8-K during our prepared remarks at the JPMorgan conference in January, our product revenue guidance for 2013 is $120 million to $130 million.

Now for a business update, turning to our product pipeline, as Terry stated earlier, we filed a PMA supplement with the Food and Drug Administration seeking a pediatric indication for the G4 PLATINUM, and we have received CE Mark approval for pediatric patients and expect to be in marketing to pediatric patients in Europe before the end of Q1.

We remain extremely excited about the prospect of a pediatric indication, as it not only significantly expands the number of endocrinologists we can 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.

Our future generation products are very much geared towards this market segment. On the international front, we expect approval in Canada and India shortly, and we continue to explore opportunities in China, Japan and other Asian geographies. We continue with development of the Gen 5 system working on an improved applicator, combined with a mobile phone interface. We continue to have discussions with the FDA on this front and believe that DexCom is in a very strong position to become the first Class III Medical Device to communicate directly to a mobile platform.

Shifting to our integration partners, Animas continues to commercialize the Animas Vibe System in Europe, and in its recent earnings call Johnson & Johnson disclosed that in markets where Animas Vibe is commercial in Europe, they have seen 35% to 50% average sales growth compared to markets where the product has not let launched.

With regards to filing for US approval of the Animas Vibe, all development work and systems testing is complete and we are working diligently with Animas to finalize their PMA application to be submitted before the end of this quarter.

We are pleased to note that we reached an agreement with our newest partner, Tandem Diabetes Care, to accelerate our development efforts, and we will be incorporating the G4 PLATINUM into the Tandem system. We expect development to continue through 2013 and hope to be in a position to assist Tandem in filing a PMA with the Food and Drug Administration before the end of the year.

Regarding our relationship with Insulet, as many of you are aware, Insulet announced during its presentation at the recent JPMorgan conference in San Francisco that it was seeking to partner with a to-be-named glucose sensor company in an effort to physically integrate a continuous sensor directly into the disposable pod, in addition to displaying CGM data on the insulin handheld device.

A couple of things have changed since we entered into our original agreement with Insulet. First, we have made significant progress in moving our CGM display directly to a phone. Both companies believe the display of CGM data on a patient's smartphone significantly reduces the market impact of displaying data on the pod handheld. This is different from a durable pump like Animas or Tandem products, where the device remains continuously tethered to the patient.

Second, the physical integration that Insulet intends to pursue would present several problems for DexCom. An integration of this nature would require the transfer of much of our sensor intellectual property and know-how to Insulet so these combination devices could be manufactured. We would then have to determine how to share patients and the resulting revenues in the combination products. And finally, and perhaps most important, DexCom is working to develop a sensor that will last 10 to 14 days, so integrating our technology into three-to-four-day disposable doesn't make economic sense for us as it will cost us the same to manufacture a three-day sensor as a ten-day sensor.

While we've not formally terminated our contract, the integration path chosen by Insulet effectively ends our relationship and we wish them well.

Turning to our development partnership with Roche, as we've discussed previously, Roche has spent the past several months evaluating the feasibility of incorporating G4 PLATINUM into their next-generation handheld diabetes management system. Roche recently concluded that the incremental expense associated with doing so could not be justified from a time-to-market perspective, particularly in light of our Gen 5 timelines.

Like Insulet, Roche also understands that as DexCom's hardware platform shifts directly to direct display on a smartphone, the value of integrating Gen 5 into a future Roche handheld device is much less meaningful as patients who will opt for CGM display on the phone.

For these reasons, together with the fact that Roche and all other SMBG companies are looking at a very challenging diabetes marketplace with respect to pricing pressure and decreasing reimbursement, as a result of competitive bidding, Roche has made the decision not to move forward with Gen 5 integration at this time and will instead focus resources on their core business.

Our overall relationship with Roche remains very strong, as Roche is a very strong distribution partner in many of our international geographies, and we continue to explore future distribution collaborations with them.

Finally, on the Edwards front, we are very pleased to announce our second generation GlucoClear system has received CE Mark. While we don't expect significant sales this year, we expect 2013 to be a pivotal year as Edwards completes additional accuracy studies in Europe and obtains greater clarity on the pathway towards US approval. We remain enthusiastic about the significant breakout opportunity represented by this technology and look forward to supporting Edwards as they bring our best-in-class sensor technology to the critical care setting.

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

Thanks, Kevin. I'd like to start by highlighting our Q4 financial performance. Product revenue clearly exceeded our expectations in the quarter, but I am equally pleased by our operating performance.

As you know, our Board set a stretch goal for us to reach cash operating break-even during Q4 of 2012. We got within $2.2 million of that goal, in spite of a number of unanticipated expenses during 2012, such as costs related to our SweetSpot acquisition, costs related to advancing our mobile platform, and costs associated with an earlier-than-expected G4 PLATINUM product launch, none of which were contemplated in our original budget.

Needless to say, I am excited by the long-term profitability profile we believe we can achieve here at DexCom.

Now, in terms of our messaging for 2013, this is the year we put CGM first. We have long said that to effectively treat diabetes, you must know where you are going before you can figure out how to get there. We believe CGM is the first tool that should be used in any treatment approach.

For newly-diagnosed patients, how does the doctor decide appropriate insulin dosage without understanding the patient's glucose profile? For all insulin-taking patients, the method of insulin delivery is not nearly as important as knowing when to dose and how much insulin to take. And for all people with diabetes, clinical data support the potential benefit of CGM for titration of insulin, oral medications, lifestyle changes such as changes to diet or exercise routine.

We believe CGM will become the first line of therapy for all insulin-taking patients, and one day for all diabetes patients.

Turning to our pipeline, we are obviously very excited about the prospects of bringing G4 PLATINUM to the pediatric community. Today, pediatric patients represent only about 10% to 15% of our install base, and with an estimated 300,000 to 400,000 people with Type 1 Diabetes in the US alone who are under the age of 18, we think this is an extremely important growth opportunity for the Company.

In fact, as we studied the pediatric opportunity and the unique challenges faced by parents managing a child with Type 1 Diabetes, a new product concept was born. The DexCom Share System. So, the DexCom Share System will be a docking station for the G4 PLATINUM receiver, enabling the wireless transmission of glucose information such as the patient's trend graph and alert notifications from the G4 PLATINUM to designated recipients, allowing the recipient to view the patient's data on a smartphone.

For example, a parent can receive glucose information during the night time, while the child sleeps in another room. During the school day, while the parent is at work, or even for non-pediatric applications such as for a spouse while at work or when traveling. So, when I'm asked, what is DexCom Share, my response is straight forward. Share is not waking up at 3.00 am to take your finger stick from your child. The freedom to finally allow your child to sleep over at his or her friend's house, not worrying when your spouse is away on a business trip.

The idea is simple. Connecting DexCom users to the people who care about them. We expect to file the DexCom Share System with the FDA in the third quarter of this year.

Now, I'd like to conclude with some market commentary regarding the G4 PLATINUM. While the general feedback from patients and healthcare providers has been nothing short of remarkable, we have seen three recurring points of praise. First, its accuracy. The sensor is 20% more accurate from [400] to 400 milligrams of detection, 30% more accurate in the 70 milligrams and below area of hypoglycemia detection. Second, it's range of connectivity. The SEVEN PLUS had somewhere between five and eight feet of connectivity. While the G4 PLATINUM is labeled for 20 feet, we're hearing it's closer to 50 feet, especially in line of sight.

So, if you think about a patient's mobility at home, the patient might be able to leave it on a nightstand, go down to the kitchen, come back up, and not lose any data packets. Third, is its size. Do you know it's about one-third the size of the old receiver, so the patient can slip it into a pocket, or put it into a purse.

As I look back on my diabetes career, nearly 20 years ago I began my quest to develop a continuous glucose monitoring system, to meet the needs and expectations of all people with diabetes. Now four generations later, I truly believe we have delivered a product in the G4 PLATINUM with broad appeal and broad application that will continue to accelerate the growth of CGM as a category and DexCom as the market-leading [participate].

We will replace finger sticks. Not if, just when. Thank you, and we'll open it up for questions.

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

Good afternoon, gentlemen.

Hey, Ben.

Hey, Ben.

So Terry, two topics for me if you could, please. Talk a little bit more about the patient dynamics as you've gone through the launch, and how it's changing. You gave some statistics relative to the percent that were shipped on the new version and what-not, but can you give us a sense what the install base is, or any other metrics that we can use to kind of project forward from here?

You know, we've never given direct install base. You guys all kind of make up your models, and quite frankly you're pretty good at that, so I don't think we'll help you out in that. That's what you get paid for, I think. I will say this -- the most interesting dynamic as you're preparing new models is the fact that we're seeing greater utilization of sensors in the G4 than we did with the SEVEN PLUS. And so, what does that mean? Are they using it more frequently? Possibly. Certainly I think there is a trust level with the accuracy of the technology, which is encouraging patients not to take as many holidays, possibly. But, we haven't, have all the metrics yet to analyze it as completely as we would like. But, that is one interesting thing that we're seeing post the launch and certainly moving into this first quarter.

Okay, and is that, is it different in the newer patients than the patients who had been on Gen3 in that dynamic, or it's still too early to say?

It's still too early to say. We haven't dialed down the metrics to that level yet, Ben.

Okay, and then you talked about some changes in the field organization, and maybe give us a bit more detail there and what that will do through the P&L relative to kind of bringing more people on to, it appears like a commission basis, and hopefully driving more sales directly.

Yes, I'm going to have Kevin talk about that.

Sure. You know Ben, as we look at our structure we just felt we needed more coverage, and we looked at, we had the field clinical sales team and as we look at how easy our product is to use, the fact that as I said earlier most of our patients train with our support materials, or online. We felt we could best deploy our resources in the field with feet on the street, so in essence we'll, as I said, we'll have 68 territories. We're also adding to the in-house team. We gave them a goal as to how much more they could spend. As I said, we won't spend more than 20% total on SG&A, but that will flow through the P&L. A little bit in the first quarter, more in the second and then you'll have the full throttle certainly for the entire third and fourth quarter, the variable expenses will go up obviously as they did this quarter, when we have a very successful quarter and sell a lot of product.

Yes, I would only add to that, there's about somewhere between 800 and 1,000 pediatric endocrinologists that today we don't call on, and so part of this structure change and expansion was to give our sales reps the bandwidth to go call on that endocrinology group. The good news is that they tend to be centered in areas geographically that we can address it with the smaller territory without having to really expand more sales reps than moving from the 48 to the 68 territories.

Okay, and then just briefly, extending on that point, when you—when you get the pediatric indication in the US and then bring on the Vibe, how should we think about the timing of those rollouts? Are those things that can step function quickly, or would they take some time to have an impact on patient adds? Thank you.

Well Ben, we just launched a new product 20 days after it got approved, so when we get Pedes approval we'll roll it out pretty fast. When it comes to how it'll affect our numbers, we gave a range of $120 million to $130 million in revenue, and literally that range is, is kind of variable based upon Pedes approval. If we got no Pedes approval, that $120 [million] dollar number would be our target, or $125 million or something lower, and then Pedes takes us up into the higher end of that range.

But new patients will jump on board pretty quickly with the Pedes approval. That will not be something we wait for. With Animas Vibe, that'll be a -- we think patients will find it pretty quickly. We know Animas will have very aggressive upgrade programs to get their patients to upgrade to stay on the Animas Vibe system. Some of those patients already use DexCom sensors, so we really haven't modeled a lot of that out and we don't have any of it in our 2013 numbers.

So, we'll give you more guidance on that, as the year goes on.

Thank you.

Our next question comes from Bill Plovanic from Canaccord, please go ahead.

Great, thanks, good evening. Can you hear me okay, gentlemen?

We can, Bill.

Great. A couple of questions, first on gross margins. As you ramp up the manufacturing of this product, remind us, at this point what type of margins do you think you can hit on the disposables at scale and when is that at-scale time frame?

Well, we've long maintained we can hit between 65% and 75% margins on these G4 disposables. That scale-up should really start to occur about the end of this year. The factors that will affect that, Bill, will be continuing to do our Gen 4 -- I mean excuse me, our SEVEN PLUS manufacturing line next door, so we still have to weigh those two things against each other. You know, I talked a bit about startup yields in my comments earlier for the fourth quarter. I can tell you the first quarter, our team is doing a spectacular job of getting yields much better than what we've targeted so kudos to those guys.

So, we think this process is much more robust than anything we've had for SEVEN PLUS, so that is something that will be a positive factor as well, so you know, we believe as we start hitting the end of this year we'll be getting close on our disposable margin targets. We certainly should be at the lower end of the 65% to 75% range anyway.

Okay, and you're still comfortable with that range to the higher end over time, now that you have a little experience?

I'm more comfortable today than I've ever been, absolutely. I think Terry and Steve are, I say everybody else is, too. We're doing a very good job.

Okay, and then, congratulations. Then on R&D I think the one thing I didn't hear you talk about was the 10-day, and I was wondering if we could get some color on that?

You know what, our focus for next year will not be on the 10-day. Our filings for next year will be the things we talked about.

This year.

I mean this year. I keep saying next year, because we're reporting on 2012. But our focus in 2013 will be on those items we reported, the Gen 5 sensor, getting these partnership products filed and out the door, a little work on our Gen 6 sensor, in addition to the Gen 5. Ten day is something that we kind of do off the main path. We'll work on our algorithms and our software and decide when we're going to drop that in, and Bill, we have not made a decision on that front yet.

Okay, and then since I'm on the R&D the last question, just it seems like with the guidance that you're providing at this roughly flat 2013 versus 2012, and even on the SG&A guidance of up 20% year-over-year, it seems like is you put together your 2013 budgets, you're extremely focused on driving this to cash flow break even or profitability. Is that a fair kind of statement?

Hey, I would say that would be my new name. (laughter)

That's a fair assessment.

That is a very fair assessment, Bill, and everybody is -- we're very focused on that.

Great, that's all I have. I'll jump back in. Thanks.

Our next question comes from Thom Gunderson from Piper Jaffray, please go ahead.

Hi, good afternoon. So, a couple things on regulatory. The supplement that you filed for pediatric, can you narrow that down a little bit for timing so we can model that in?

Well, statutorily you know, it's a 180-day filing and that's -- we've got to stand by that not having a crystal ball. Obviously, you know, we're taking bets as we did with G4, as to when that will get approval, and of course Terry is always the most optimistic one, which means I'll probably lose another dinner bet, but that's okay. No, I think we should look at that 180-day and not know anything else. The only kind of factor that you might want to think about is the fact that they've already seen the adult data, so we're really just comparing the pediatric data to the adult data and submitting that.

I know that they are anxious, and we're anxious to receive the file because their belief there, their being the FDA, belief is, that every child should be on a CGM device as part of the diabetes therapy model.

And what's the start time for that, Terry, for the 180 days?

Sometime in the first quarter.

Yes, we --

Okay.

As I said, we have filed the PMA application this quarter. It's already in, so the clock has started.

The clock has started.

So I would say, sometime in the second, obviously the second half of the year.

Okay. And then, Kevin, when you were describing Animas, I got a little confused. Is that a supplement as well, and is it a supplement submitted by DexCom, or is it a new PMA submitted by J&J?

I'll let Steve take care of that one.

Yes, Thom, this has been a moving target, but now we have, we have some clarity out of the FDA and frankly it was extremely positive. So, you'll recall probably a year or so ago, we had this concept we were going to try to file a supplement on top of the PMA. We were guided during the Gen 4 review, the Gen 4 PLATINUM review, that we should wait until Gen 4 PLATINUM was approved before we filed the Animas Vibe.

What the FDA determined is that it would be a full PMA, but what they also determined is that Animas can file the Vibe system and actually rather than include all of the detailed information regarding G4 PLATINUM, they can actually just reference our PMA submission. So, it's really just a PMA filing that will be conducted by Animas referencing the G4 PLATINUM. Why that's a benefit to both of us, as you'll recall is, as the Vibe moves, Vibe moves the Animas pump platform from a 510(k) product to a PMA product, which means Animas becomes subject to, as we are on a daily basis, subject to all the change control procedures and requirements, and basically they become a PMA company that'd have to file every change they make with respect to their manufacturing operation and things like that.

By allowing Animas to file a PMA separate and distinct from ours and be able to reference ours, that enables them to control the regulatory process on their front with respect to ongoing manufacturing operations, with respect to the pump, so we don't have to be in the middle of that.

So, this is all kind of you know, new information to us within the last three to six months, but it's actually very positive from an operations perspective.

Got it, thanks for that. And then on Roche, I understand what you said in the prepared remarks but I didn't hear any reference to the in-office CGM that you have a partnership with. Is that still ongoing, or is that dissolving?

It is, you know, I wouldn't read too much into the Roche announcement. I mean, Roche is a very strong partner for us, internationally. Roche has some direct distribution rights in some countries, and they work, frankly work with our distributors and our distribution network in other countries. They've been a very strong partner and will continue to be.

We've said before, on the SEVEN PLUS Professional Use system that Roche has carried in the bag has been less than successful. You know, that's -- we've been saying that for several quarters now, and I think that program is still ongoing, but look. As we look to wind down the SEVEN PLUS, naturally that program would look to wind down sometime this year, you know.

One of the other items on our R&D radar screen would be moving the Gen 4 PLATINUM to a professional use model, but it currently today is not labeled for multiple patient use, so that's something that we're looking at obtaining a labeled indication for. Not sure whether Roche would be the partner there or not, but we would evaluate that at the time we got an approval.

And then Kevin, I think you mentioned this in reference to a question from Bill, but does the $120 million to $130 million product revenue guidance that you gave out a month ago, it clearly assumes a pediatric approval moving different times through the year. Does it assume Vibe approved this year, or would that be upside?

It assumes no Vibe approval this year, there is no Animas numbers baked into that, and the pediatric impact is really something again Tom, that would push us to the upper end of the range or even outside the upper end of the range. Our numbers are built pretty solidly from the ground up.

Got it. That's it for me guys, thanks.

Thanks.

Thanks.

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

Thank you, good evening, and congratulations on a great quarter. Was there, are there -- I should say, are there going to be charges that we should think about or any one-time items in the P&L associated with the change both with Insulet, and as well with Roche, in terms of the co-development agreements there that we should think of in addition to just you know, the timing out of those development efforts? I have one quick follow-up.

No, there won't be any one-time charges with respect to that.

There will be some changes with the development grant revenue.

Yes.

So, if you look at Edwards, we have effectively completed that development arrangement and recognize revenue through December. We won't have any going forward. Other than in Q1, of development grant revenue of about $1 million, going forward we expect development grant revenue of about $100,000 a quarter through 2014 as we stand here today.

Okay, super, and then just lastly when I think about product revenue guidance for the year, should we think about a normal split between consumables and hardware that we've seen historically? I'm just looking at what you put up in the fourth quarter and what seems to be intimated regarding the new patient starts here in the 1Q, and just trying to think about that a little bit while I think about both top line growth and margin. Just any additional color you could provide there would be great, thanks so much.

Sure, Chris. You know, we've stated in the past that our split is typically 25% to 30% on the durable, and the rest on the disposable side. We did 32% this quarter as we launched a new product, but in all reality if we didn't have the upgrade of the $399 upgrade program and also the $1.2 million that we recognized from the September patients, the ratios would have been in that, would've been within that range of 25% to 30%. So, we think things will remain relatively consistent on that front, 25% to 30% durables and the rest of it for the consumable products.

Sounds great, that's all I have, thanks.

Thanks, Chris.

Our next question comes from Danielle Antalffy from Leerink Swann, please go ahead.

Thanks, good afternoon guys, and congrats on a great quarter. I know you guys don't give quarterly guidance, but just trying to get a sense of first quarter is usually a down quarter sequentially, given deductibles resetting, etc., but was hoping you could give us some, some you know -- you have a lot of momentum it seems going into the first quarter. How do we think about the launch continuing to progress versus the trend of resetting deductibles, and how that might offset? If you could give any context around that, that would be really helpful.

Well certainly, I'll weigh in, then I'm going to ask Kevin to follow on, as I'll give you the 35,000 kind of foot level and he can get you to more specificity. Certainly, we are challenged with as you've already identified, the seasonality with deductibles and flexible spending accounts. That's not going to change. You know, we did it, $18 million in Q1 of 2012, so I -- you know, that was down, we had done $21 million in Q4, so we did $32 million in Q4. We're going to be down from that standpoint, and I can't -- I don't want to start -- if I gave you the what we think we're going to do this quarter, then every single quarter going forward we're going to have to do the same thing and we don't want to get into that.

But, I would say that it is on the one end, the same type of softness that we see. The little bit of change that you know, I heard my comment saying we had a solid through the end of February, is just the Gen 4 I think in terms of word-of-mouth, by patient-to-patient communication which we've seen really I think more dramatically in the last three months than we have ever with the SEVEN PLUS, that there is that interest level. Kevin mentioned that the opportunities in the pipeline are as full as we've ever seen them in the history of the Company. I think -- now that doesn't mean that they absolutely translate into a new starter kit sale, but certainly the interest level is there, but again we haven't, as we look at the landscape of deductibles, they've gone up a bit, but it's still single digits this year as far as we can tell from that standpoint, so I think there are some of those headwinds.

But we're doing okay, and Kevin, you want to get to more granularity?

No, Terry, you covered a number of the points, and one of the things different going into this quarter, let's just go back to Q4 revenues for a minute, because there are some things that won't reappear. We had the $1.2 million we carried over from Q3, but you can't extrapolate what Q1 is going to be like from that. We also had some pent-up demand, that I really can't quantify in Q3 of patients who did not buy, who waited to buy in Q4, but that makes things a little bit different, and we had the $399 upgrade program.

So, we have a group of patients who are non-repeatable. That being said, as we've come out of most years I can tell you we have sold to most every patient we could ever find, or most quarters, and we came out of Q4 this year, that was not the case. We still had a very robust pipeline going into the year, and we're still getting a lot of phone calls. We are getting very favorable reaction not only from our patient customers, our distribution partners, our dealers, are ordering regularly and basically can't keep the thing on the shelf, [go through] stock.

So, while all the issues exist, with deductibles and copays and all these other things, it just appears that patients are a little more excited about this new product and might be able to deal with those issues and make an investment in their care earlier than they have in the past. So, you combine all the positives with all the things that are floating, and we're very excited about the quarter. But there's a bit of uncertainty, still.

Got it, that's helpful. And then if I look at your product revenue guidance for 2013, the $120 million to $130 million, beyond Animas Vibe coming online this year, earlier pediatric indication, what are the other variables that could get you towards the higher end of that range? For example, you mentioned more frequent use of, or more sensors being used. Is that something that could continue, and if it does, is that something that gets you to the higher end, or is that more something that gets you within the middle? Any color on that? Thanks.

You know, I -- Steve, Terry, anybody jump in if you think I'm too far out there. I think our utilization would move us up a bit into the range, probably doesn't get us to the very end, but I think it's very helpful. I think the other thing that you know, that is, if we can shave a point off the retention rate, or I mean, add a point to the retention rate, a point off the attrition rate, that's certainly very helpful. We know the Gen 4 does that, so far, from what we've seen. People really like this thing and appear to be using it very regularly.

Earlier pediatric approval helps more than anything else we could do right now, and we can't predict that, and certainly we don't have any Vibe numbers in what we've got. But those are really the levers we could pull. We're going to have more coverage with more sales reps and more territories, so we'll be calling on people we haven't called on in the past, or going more deeply into practices where we've had to be relatively shallow before.

So, we might be able to go deeper and get, again get more from there, but bottom line is we've got a 40% target on our backs, that we put on our backs already. We're going to have to execute pretty well just to do that.

Right, okay, all right, thanks so much.

The only other thing I would comment on is this peer-to-peer, which we're beginning to see early stages of that communication, which is then driving some sales, at outside of our normal call patterns, which we hope is kind of the vision of the future and what we've long predicted as a trajectory increase attribute of having more patient demand than physician prescribing. So, we'll see if that continues to play out in a robust way.

Perfect, thank you so much.

You bet.

Our next question comes from Mimi Pham from ABR-HealthCo, please go ahead.

Hi, good afternoon. Can you clarify what percent of those 1,000 pediatric endocrinologists you would be able to access with your reorganized, reorganized sales force later this year?

That'd be 100%.

100% okay, and then regarding your guidance for 120 to 130 CGM sales, can you talk about how did you anticipate any hit from your growth due to the Medtronic NextGen CGM launch in the summer, if they get approval this summer, of Enlite? Have you taken that into guidance?

Well, I would say from a standpoint look, we address two different markets. They're really addressing the pump market, and that is something that as you know just based on their latest quarter announcement was declining, as a pump sale. They really never had a standalone product that was a competitive product, and I think even looking at the clinical results of Enlite versus G4, I would say most of the academic and clinical community have been disappointed in the performance of the Enlite.

We've seen data, even in head-to-head competition by independent researchers, and it looks like it's approaching the same kind of accuracy as the SEVEN PLUS had achieved, but in terms of comparing that and contrast that to the current data we're getting from G4, in that contrast we're 70% more accurate overall between 40 and 400 milligrams of detection. We're really getting down below, close to that 10 MARD range, so I think that that's -- you know, from the user standpoint, accuracy really counts and they're really trying to sell it as part of an integrated system.

I think our pump partners will have to address that, both Animas and Tandem, and I would say this, and it gets back to -- so they've had the system approved in Europe for some time now and yet on the -- Kevin's comments, based on what they, what J&J presented in their first quarter call was, that they're -- in places where they've launched the Vibe, they're growing it anywhere from 35% to 50%. Their informal comments to us are that they're not very impressed with the Veo system. They don't find it as a competitive threat, and they're not seemingly having any problem replacing Medtronic pumps in that space.

So, you know, is that going to translate the same in the US remains to be seen.

Okay, but we should assume if they happen to do announce approval mid-summer, that necessarily doesn't change your guidance or expectations (multiple speakers)?

Oh, it doesn't change our guidance at all. I look at it, you know, again, I want to differentiate who we are versus the pump world. The pump world is a $2 billion market. Glucose monitoring is somewhere between $10 billion and $12 billion. We are in the glucose monitoring market. Our program this year for 2013 is CGM First, and what that means is, because if you look at the US pump market, maybe 28% penetrated. That means there's 60%-plus that are still using injections. We need to move the dynamic that when a patient walks in regardless of their insulin delivery mechanism, that the physician says, I need to know more about your glucose first, because that's really the goal.

I mean, if you look at the pharmaceutical companies and all of the billions of dollars that they're spending on drugs, it's all about trying to figure out how to reduce glycemic variability. My god, we do that every day, and so I think we have got to get that point across to the prescribing population to say how important it truly is, about glucose. And that's really where we're focused, so I don't view the pending approval, that's if they can get approval, sometime later this year as being a competitive threat to us whatsoever.

That's helpful, and in terms of the international, the 5% to 10% of sales, is the majority of that associated with Vibe, or are you getting a ramp in the standalone Gen 4 sales?

Yes, we're getting good traction with the standalone, quite happily so, because that's a tough reimbursement market. And so, for the first time, as part of that contribution, we're routinely seeing patients willing to pay out of pocket which is something that is very unusual in a socialized medicine situation where they get all of their supplies for diabetes either from the clinic or certainly reimbursed by the government, but these, the value proposition is such that many of these patients are electing to pay out of pocket in order to maintain the product on an ongoing basis.

Thanks, and then just last question regarding the Share System, you know, we've heard about there being a strong demand for something like that for a while, from parents. Is this a PMA supplement, or is it an easier FDA pass?

No, it's going to be a PMA supplement.

Okay, thank you so much.

Our next question comes from Steven Lichtman from Oppenheimer, please go ahead.

Thank you. Hi guys, just a couple of pipeline clarifications. In terms of Vibe in the United States, with the change in the structure of the filing, and it sounds like a -- I don't know if it was a full PMA, or a PMA supplement. If it is a full PMA, does that change your timing potential by end-of-year?

No, because I mean, it's still, again -- statutorily it's 180 days. Look at our performance on the G4 PLATINUM, 177 days. If you look at the Vibe, the combination of the Vibe System, is effectively the G4 PLATINUM with their Base 20-20 pump with some modifications. So, you could argue that it's basically to approve products just talking to each other. So I don't think there's anything that gives us reason to believe that it's going to be an extended review cycle, even though it's classified as a full PMA.

Okay, all right, thank you, and then on -- as you do move to Gen 5 and recognizing you're already on 4.5, but as you move to 5, do you need to re-file with Animas and Tandem, or how will that work when that gets through?

Yes, I mean, they will ultimately, again they reference our PMA but they would need to file a subsequent filing with each sensor iteration that we achieve, that is right. So, there will always be a generation for some period of time, would be a generation behind us while their filing is pending.

Okay. You haven't indicated, if I'm wrong, about Gen 5 filing potential right, in terms of timing?

We didn't give any timelines today, no.

Okay. All right, thanks, guys.

Thanks, Steve.

Our next question comes from Bill Plovanic from Cannacord, please go ahead.

Great, a couple of follow-up questions, here. Do you expect any upgrades in Q1 or Q2, or has that program been exhausted at this point?

The $399 program, the in-warranty upgrade, is done. We ended that on January 31. Upgrades of patients out of warranty will occur all year long, and so there will be some, and it's always been part of our core business and will continue to be part of it. There are a lot of patients who would look at you know, they're sitting there in the fourth quarter looking at their insurance dollars, and say okay, I can pay $399 now or I can wait until the first quarter and my copay is going to be $275, I'm going to wait until the first quarter and go with the $275.

We gave the patients the option if they wanted to speed it up and they wanted to get on a Gen 4 system, we gave them the opportunity. A lot of them chose not to take it, they'll upgrade throughout the course of the year and take advantage of their copays or their deductibles and the other things.

So, we will have upgrades all year, but our goal, our goal is very clear. We want everybody on Gen 4 by the end of this, before the end of this year.

Okay, but so we will see some more of those in Q1 because it ended January 31?

Yes, but they'll -- yes, but not many. Not much.

Okay. And then the development revenues were pretty big in this quarter. Was that Edwards, or was that, what was the extra amount that you received in Q4 and then the extra that you're picking up in Q1?

Jess, you want to take care of that?

Yes, that's right, so we did receive additional funding from Edwards in Q4 just like we have in the prior quarters, outside of the development grant agreement. We expect that as we've stated before to really go away. In Q1 if we do have any we don't expect at this point to be overly significant, and I think you might have heard our comment before, but in Q1 as we sit here today, we expect about $1 million, $1.1 million, in development grant revenue, and then going forward through 2014 expect about $100,000 a quarter.

Okay, and then, on the accounts receivable, you did address it in your opening comments but a little more clarity on -- it was a pretty big jump sequentially and year-over-year, and I'm just curious if you could explain that a little.

Sure. We sold a lot of stuff in December. When we, you have a quarter that big, you know, as big as our $32 million quarter compared to $20 million last year, $21 million in Q3, we up -- the sales number $9 million and as is with particularly every quarter I've been at, at a diabetes company, December's the biggest month of the year. So, when you just look at straight timing, our receivables grew just based on a business activity and there was no other reason.

Most of those receivables are directly with payers, and we're billing and collecting that. First quarter should be a very good collection quarter, and Bill, we'd expect that to go down as we get into the first quarter and then manage it the same way throughout the other quarters of the year.

So, there's nothing unusual there. It's just a lot of late in the year volume that we just, you just can't get paid on before the year's over.

Okay, understood, and then historically I think your mix has been 70% non-pumpers, 30% pumpers. Is that mix changing now with G4, and -- or do you expect that to change outside of you know, obviously your partners as we look forward?

Bill, that number's really been 60, and then it's all based, 60% pumpers, 40% MDI patients. Obviously, as the pumpers come on, we would expect some of that shift to happen, but I'm cautious because we've been pretty steady-stayed on that ratio for some time and as Kevin mentioned in one of his comments, with regards to once the Vibe is launched. If you look at the dynamics about, of that 60%, some 40%-plus are already on Animas, about 30% are on Medtronic, the rest on Insulet, we've got some on Roche and even some on the old Deltec pump.

So, we've already got a pretty significant share of the Animas population, but going forward having them promoting the product, yeah, we would like to see an uptick there, as well. I [don't] know that the ratios are going to change all that much.

And as we think of the Animas opportunity, how many pumpers do you think they have, or what -- yeah, how big is the pump market in your opinion, and what percent share do you think they have? Same question asked a different way.

Yes, well, I think in the US the pump market is probably somewhere around I don't know, 400,000 total. My guess is, yeah, again, I don't want to speak for Animas -- I've always said, gee, it looks to me like they've got about 18% to 20% share of that market.

The market, the challenge with the market is, it's not growing. It's actually, if anything, having a bit of a decline so if you're not growing, it's hard to predict where the share is shifting. We certainly know that you listen to Animas, if you listen to Insulet, they seem to be adding pumpers, so that means that they -- if the organic growth isn't growing, that means they've got to be cannibalizing from Medtronic.

If you listen to Tandem, their first, I don't know, three or four months they told us that about 50% of their patients that they put to the T-slim were Medtronic patients, 25% were brand new patients new to pump therapy, the remaining 25% came from cannibalization of Animas and Insulet, Roche and Smith. So, I think that's kind of the landscape that we look at it going forward.

Okay, and then, as you think of the pediatric label, so you've submitted for that, would -- if you have approval on that, do you have to wait for that to submit the Animas, or would that approval for a Pede automatically roll on to the Animas? I'm just trying to figure this out from a timing standpoint. Are they going to have to basically hold up and wait until you get that Pede so that they can have the Pede label? Because I would assume that's important for them in the US.

Now you're right, remember, with the Animas Vibe, that the clinical trial requirement if you will, is more what we call a human factors trial, basically button-pushing. Animas will have to do a supplemental human factors trial with pediatric patients, and then file that and they will have to wait until we receive a -- our approval, so they can reference our approve. Again, it's all about referencing an approved product. So there will be, yeah, there will be a gap.

There'll be a gap.

Now, that doesn't mean that holds up the initial Vibe. They will go forward with the initial Vibe filing, you know, as soon as possible now. They won't wait until we get a Pedes indication, they'll have to supplement their PMA submission with a Pedes submission at some point down the road.

Okay. Okay. And then just in my last question, that's why I waited, jump back in and wait until the end, but if I look at the Animas deal, the way it is now from a reimbursement standpoint, it's great that you have daily reimbursement, they have their reimbursement set up, but if you think about them selling the pumps and you now have some international experience, but in the US, are you going to -- are they going to get the reimbursement approval for the CGM, and -- or are you going to do it, and then how do you get the product to the patient? Has that all been worked out, at this point?

I would tell you it's a to-be-determined, Bill. There's a contract in place, but we're exploring you know, different ways that we might make it more seamless for the patient.

So, what I would tell you is, table that question until probably the next conference call and we'll have some more clarity there.

Okay great, thanks.

From the reimbursement standpoint, you know, the HCPCS codes are established, so, there is a mechanism if we got approval tomorrow, say, as an example, and even this wasn't worked out, it's really from a patient convenience standpoint, not from a reimbursement standpoint.

Right. All right, well again congratulations on a great quarter, and thanks for taking my questions.

Thanks, Bill.

Thanks, Bill.

Thank you, at this time we have no further questions.

So, I'd like to wrap it up. Needless to say I'm very proud of our accomplishments. There are very few companies with that successful a track record as DexCom. So, I look back over my career here. In 2007 we had revenue of less than $5 million. In 2012, that revenue had grown to $93 million, and here we are forecasting revenue of $120 million to $130 million this year, and we believe that we can sustain that 35%-plus kind of growth over the next several years.

We are the technology leader in the CGM space, and we continue actually to extend our lead over the competition. Patients are walking in to their physician's offices today and asking for the G4 PLATINUM. We are moving the category from a nice-to-have to a must-have. The DexCom team and I are extremely excited about 2013, and certainly beyond, as well. Thank you.

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