德康醫療 (DXCM) 2013 Q1 法說會逐字稿

Welcome to the DexCom 2013 first-quarter earnings conference call. My name is John, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note, the conference is being recorded. I will now turn the call over to Mr. Terry Gregg. Mr. Gregg, you may begin.

Thank you, Operator, and thanks for joining us for this first-quarter 2013 conference call. I am going to ask Steve Pacelli to read our 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 provided]. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under the section Risk Factors and elsewhere in our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason.

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 in isolation or as a substitute for results, or superior to results, prepared in accordance with GAAP.

Terry?

Thank you, Steve. Joining me today are Kevin Sayer, our President and Chief Operating Officer; Jess Roper, our Chief Financial Officer; and Steve Pacelli, who you just heard from, our Executive Vice President of Strategy and Corporate Development.

As we just held our Q4 2012 earnings call in late February, today's call will be largely a financial update, with Kevin reviewing our first-quarter 2013 financial results, providing a brief operations update, I will then follow with some concluding thoughts. Kevin?

Thank you, Terry. I will start with the financial update.

DexCom generated $27.8 million in product revenue for the first quarter of 2013, compared to $18.6 million for the same quarter in 2012, a $9.2 million, or 49%, increase. Sequentially, product revenue for Q1 of 2013 decreased 12% from the prior quarter, which is consistent with the 11% decrease we experienced from Q4 of 2011 to Q1 of 2012. The seasonality is not unexpected, as annual insurance deductibles reset and flexible spending accounts are largely unfunded in Q1, requiring patients to spend more out-of-pocket dollars to obtain our products.

Total revenue for the first quarter of 2013 was $29.6 million, compared to $20.1 million during the same quarter in 2012. Our product gross profit totaled $15.4 million, generating a product gross margin of 55% for Q1 2013, compared to product gross profit of $9 million and a product gross margin of 49% for the same quarter in the prior year. As a reminder, product gross margin continues to be affected by a number of factors related to our G4 PLATINUM launch, including the impact of our $399 in-warranty upgrade program, which expired at the end of January; continued manufacturing scale-up activities for G4 PLATINUM; and the continued support of our SEVEN PLUS sensor manufacturing operations.

Some final thoughts on our product revenues and our gross profits during Q1. Our split between consumable and durable revenues was, again, slightly more heavily weighted to durables in Q1, due primarily to existing patients upgrading to the G4 PLATINUM, with approximately 30% of our product revenue generated by sales of G4 PLATINUM hardware, and approximately 70% generated by sales of both, SEVEN PLUS and G4 PLATINUM sensors. ASP for sensors has increased slightly to a range of approximately $65 to $70 per sensor, and the ASP for our hardware continued at approximately $800 to $850 per starter kit.

Our international business performance remained consistent in Q1, and continues to represent between 5% and 10% of product revenue, but remained somewhat overshadowed by our strong domestic growth. Research and development expense totaled $9.3 million for Q1 of 2013, which was flat compared to $9.4 million in Q1 of 2012. Sequentially, R&D expense was up 7%, as a result of increased spending on the development of our mobile platforms. We continue to expect that R&D expense for the full year will be relatively flat versus 2012. However, we will always consider adjusting our R&D spend to take advantage of near-term opportunities such as -- advanced integrated pump-CGM systems, mobile- and cloud-based data platforms, system performance improvements, all of the elements of our Gen5 system, and continued research on our G6 sensor platform.

Selling, general and administrative expense totaled $18.1 million in Q1 of 2013, compared to $15.4 million during the same quarter in 2012. The increase primarily related to sales, administrative, and IT costs to support revenue growth. Of the $2.7 million increase, $400,000 of it is centered in non-cash share-based compensation. The remaining increase was primarily related to investments on the sales and marketing side of the business; in particular, the reorganization of our US field team and expanded headcount in our sales organization.

Our net loss for the first quarter of 2013 totaled $11.1 million and included $7.2 million in non-cash expenses centered in share-based compensation, depreciation, and amortization. Absent these non-cash charges, our operating loss for Q1 2013 would have been $3.7 million. Compare this cash operating loss of $3.7 million to a cash operating loss of $9.7 million in Q1 2012. We are pleased with our progress in driving the Company to profitability. Let me say it another way -- of the $9.2 million increase in sales from Q1 2012 to Q1 2013, $6 million dropped to the bottom line on a cash basis. Needless to say, we are excited about the long-term profitability profile we believe we can achieve here at DexCom. The business model is maturing as we planned. Our net loss per share for the quarter was $0.16. With respect to our balance sheet, we ended the first quarter with $45.3 million in cash and marketable securities (sic - see press release "$46.3 million"), down only $3.4 million from the end of 2012. Finally, we will reiterate our product revenue guidance for 2013 of $120 million to $130 million.

Now, I will give you a business update. Turning to our business, we continue to be extremely pleased with the commercial launch of the G4 PLATINUM system. With its significantly improved accuracy, convenience and reliability, we believe that the G4 PLATINUM fulfills the potential of CGM as the first and most essential tool in the treatment of diabetes. Patient testimonials and blog postings regarding the performance of the system have been nothing short of remarkable. With G4 PLATINUM, we believe we have finally achieved the promise of CGM.

As we mentioned during our earnings call in late February, during the first quarter, we filed a PMA supplement with the Food and Drug Administration, seeking a pediatric indication for the G4 PLATINUM. We have also received CE Mark approval for pediatric patients and have begun marketing to pediatric patients in Europe. With respect to our US pediatric submission, similar to our previous filings, we continue to have a regular, open dialogue with FDA. We remain excited about the prospects of a pediatric indication, as it not only significantly expands the number of endocrinologists we can call on in the United States, we expect to be able to recommend our technology to patients as young as two years old, which will be a first for CGM. Many of our future-generation products, particularly our mobile- and cloud-based products, will be very applicable to this market segment. In particular, we continue to make considerable progress on the DexCom Share system, a remote monitoring system developed to address the unique challenges faced by caregivers in assisting people with Type 1 diabetes.

As a reminder, the DexCom Share system is a docking station for the G4 PLATINUM receiver, enabling wireless transmission and 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 could receive their child's glucose information during the nighttime while they sleep in another room, or during the school day while the parent is at work. It will also have non-pediatric applications, such as for a spouse while at work or when traveling. We expect to file the DexCom Share system with the FDA in the third quarter this year.

On the International front, we are pleased to report that we have received approval from Health Canada to begin marketing the G4 system in Canada. Our initial approval is for adults only; however, we expect to file a supplement seeking pediatric approval later this quarter. Our distributor in Canada expects to commence a limited launch at the beginning of Q3, with a full launch commencing before the end of Q3.

We also continue to explore opportunities in China, Japan, and other Asian geographies during the first quarter, and we had a number of productive meetings with potential business partners in both China and Japan. We are currently evaluating potential partners and better educating ourselves on the most prudent regulatory path into these countries. By the end of the year, we expect to be commercial in up to 30 countries worldwide, compared to approximately 20 at the end of 2012.

We continue development on the Gen5 system, working on an approved applicator, combined with a mobile phone interface. The FDA has been very cooperative with us regarding our efforts to develop a mobile CGM platform. The path is becoming more clear with each and every step we take. For example, the share product in this data platform represents a very well thought out and deliberate approach for our first connected product offering.

Shifting to our integration partnerships, we are pleased to report that Animas has filed the PMA with the FDA, seeking approval of the Animas Vibe system in the US. Animas continues to commercialize the Animas Vibe system in Europe and has reported strong success where the product has launched. We continue to work diligently with Tandem Diabetes Care to incorporate the G4 PLATINUM into a next-generation version of Tandem's t-slim, and we expect to be in a position to assist Tandem in filing a PMA with the Food and Drug Administration before the end of this year.

Finally, on the Edwards front, to quote Edwards CEO, Michael Mussallem -- we remain enthusiastic about the significant opportunity represented by our GlucoClear system, end quote. As we mentioned during our Q4 earnings call, we don't expect significant sales for GlucoClear this year. However, Edwards management expects 2013 to be a pivotal year, as Edwards completes additional studies in Europe and gains greater clarity on the path towards US approval. We remain enthusiastic about the significant 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 over to Terry for some concluding remarks. Terry?

Thanks, Kevin.

As I reflect upon the six months after our launch of the G4 PLATINUM, we have learned a number of important things. Accuracy is everything. The data demonstrates that the sensor is 20% more accurate in the 40-to-400 range, and 30% more accurate below 70 milligrams per deciliter, which is especially important to the detect hypoglycemia. While we believe accuracy is essential, we have also learned that the overall patient experience is what truly matters. We believe that our best-in-class accuracy and reliability empowers people to take control of their diabetes.

G4 PLATINUM has set a new standard by which all future sensor technologies will be measured. In fact, just a few weeks ago, at a National Institutes of Health sponsored meeting on the development of an artificial pancreas, investigators from Boston University and Mass General Hospital reported the results of a 24-patient comparative study between Medtronic's Enlite Sensor, the Abbott Navigator Sensor, and the DexCom G4 PLATINUM.

The researchers reported an MARD, or mean aptitude relative difference, of 17.9% for the Enlite, a 12.5% MARD for the Navigator, and a 10.8% MARD for the G4 PLATINUM -- a 10.8% MARD for G4. The researchers are currently completing a small outpatient study of an artificial pancreas system using the G4 PLATINUM and have received IDE approval for a larger follow-up study to be conducted at two New England diabetes camps this summer. But, we are certainly not stopping here. Prior to the G4 PLATINUM launch, we went several years without a new product introduction. That will not happen again. As Kevin highlighted, just this year we have filed for pediatric indication, we supported Animas in filing the Animas Vibe system, we have committed to filing the DexCom Share system in Q3, and assisting Tandem in filing a sensor-pump combination system before year end.

I am also pleased to report that we have completed development of a next-generation algorithm for the G4 PLATINUM to further improve our sensor performance and, we expect to file a PMA supplement for the new algorithm late this year or early next. So, we have the potential for up to five new product introductions in the next 12 to 18 months. All of these introductions are incremental steps towards our ultimate goal of replacing finger sticks.

We entered 2013 with our principal message to the diabetes community of CGM first, targeted to both patients and professionals. Simply stated, CGM should be the first tool you use when treating diabetes. CGM is the best tool to determine a patient's glycemic variability and the best tool to understand the action of insulin and other anti-diabetes agents in improving glucose control, independent of how these agents are delivered. Our field team has been very effective in delivering that message. And while largely anecdotal, we believe a number of physicians are beginning to embrace the G4 PLATINUM as a front-line tool, in large part because of its convenience and simplicity, in addition to its exquisite accuracy.

Our second goal this year is to improve our outreach about the benefits of the G4 PLATINUM. A recent survey of approximately 300 patients indicated that for about 70% of the SEVEN PLUS respondents, their physician was the most influential driver in choosing CGM, where only 50% of the G4 PLATINUM respondents cited their physician as the driving factor. This supports our belief that we are experiencing an increase in patient-to-patient communication as a key factor in the uptick of CGM adoption.

Finally, a brief comment on Type 2 patients and CGM use. When I mentioned glycemic variability earlier, I was not restricting my comments to only Type 1 patients. Excessive glycemic variability occurs in both Type 1 and Type 2 patients. And lately, excessive glycemic variability is getting a lot of negative recognition in the literature, with reduction of glycemic variability cited as potentially more impactful than reduction of A1c to improve diabetes management.

Several studies have linked excessive glycemic variability to adverse health outcomes, including diminished cognitive function, retinopathy, and increased cardiovascular disease. While we know that chronic elevated glucose levels contribute to the adverse clinical outcomes associated with diabetes, including both micro- and macro-vascular conditions, but acute daily glycemic variability is now being identified as causing oxidative stress, believed to be the underlying cause of these long-term complications.

And, we are seeing an increase in the number of private payers covering insulin-using Type 2 patients. In just the last year, 12 payers of approximately 20-million covered lives have admitted their policies to provide coverage for Type 2 patients, and this is in addition to both CIGNA and Anthem, who have had policy in place. CGM is the only tool to determine the level of glycemic variability in order to take corrective action to improve glucose control. We believe our future is very bright.

Thank you, and we will now open it up for questions.

(Operator Instructions)

Thom Gunderson, Piper Jaffray.

Just a quick clarification on the last part, Terry. I think you said 20-million covered lives for the 12 payers in T2 -- that's in addition to whatever covered lives you have for CIGNA or Aetna, or including?

That is in addition to -- that is just in the last 12 months, Thom.

Got it.

So, you're seeing that improved, obviously, we knew that CIGNA, Anthem had established coverage, but this is new. This is primarily the responsibility of our managed care group, they have done an outstanding job of improving that policy coverage.

I know these are difficult, if not impossible, to count, but do you want to venture a guess as to what percentage of your sales is going to Type 2?

It would, at this point still, in my opinion, be de minimus.

Okay. Then maybe, one of you could talk about how the change in the sales field force is going? The reorg and the expanded headcount -- like clinical associates being shifted over to territory people? Give us a little more color on that if you could?

Yes, Tom, this is Kevin. I will take that.

We have -- with the exception of just a couple slots, we have filled the entire organization -- the additional 20 territories that we had outlined. Our sales reps, who have converted over, are all doing extremely well. The talent available to us, with our business and our product, has been outstanding. We have added some absolutely fabulous people who have hit the ground running. Most all of our territories are performing the way we expected them to. We are off to the races.

With respect to the clinical aspect, our patient care team is what we had put together, in essence, to replace those clinical specialists in the field. We have expanded that from 4 to 12 people who work the phones continually and have a very structured program, with respect to contacting our new patients, and sometimes taking educational calls from those who have been patients for a longer period of time, versus our normal tech services group, which responds to product issues. And I can tel you, that group is fully staffed and doing very well, also. And, everything is clicking the way we wanted it to.

Got it. And then, my last question and I'll let some others. ADA is a ways off in June, and yet we won't have one of these calls until after that. Are there any highlights or things we should look for at ADA that would be interesting to DexCom investors?

It is an interesting question, Thom, and I would just say that I think the influence of the artificial pancreas group, certainly, will be on the podium talking about their experiences. As you know, in that environment, everything is kind of geared toward the artificial pancreas arena from the scientific community. So that, for us, will probably be the highlight, especially given that we are in 22 out of approximately 25 artificial pancreas programs around the world. So, that would be the highlight for us. Outside of that, I am not aware of anything, in particular, that you should be looking for.

Got it. Thank you, guys.

Ben Andrew, William Blair.

A few questions for me, please. First, Terry, talk a little bit about peds roll-out, and I think we are at 15% to 20% of your installed base in ASPs. What should that be, say, in one year from now?

30%.

Okay, and what does it take to get there? Is it just getting in front of the endos and they already know the product, they just need detail? Is it -- take staffing? What sort of movements on the part of DexCom will that require?

First of all, to get an approval.

And second, beyond that, just get in front of them. Luckily, that it is a rare situation in which there is a solo practitioner with a pediatric endocrinology practice. They're generally grouped with young adults and adults, or in, at least, close proximity. So, that won't require adding new bodies to our group, beyond what we have done in the reorg, so we are not going to be looking at substantial windshield time by the sales group. It is just the ability to go call on them, on a routine basis, and talk about the benefits of the G4 PLATINUM. Many of them know it already; but like anything, the more shots on goal, the more pucks go in, kind of attitude. So, this will be the first time that we have been able to call on that sector.

Okay. Terry, any information content yet, in the six months since the launch, about utilization trends or patient retention from G4, other than anecdotal commentary?

No, not really. I think we need at least one quarter or two to truly understand. We have stated earlier, and it has been truly anecdotal, the feeling it looks like they are using it -- they being patients -- using the product more frequently, and I cannot attribute directly, as that. More patients using it without taking a holiday -- we certainly -- reading the blog's is the best metric that we have right now. There is great utilization from that standpoint, greater confidence in the product, but beyond that, it is hard to come up with the qualitative or quantitative metrics on that, Ben.

Okay. Then finally, can you talk a little bit about the next-generation algorithm for the G4? What does that bring you, in order of magnitude, improvement of MARD, or other features? Thank you.

Yes, I can tell you that, overall, it is going to improve the MARD by about 2 points, from the 40-to-400 and day one through day seven. That's important because if you look at what the folks at Boston University and Mass General, they are at 10.8%.We certainly think we can get -- and what we published with the FDA was 13% MARD, so if we could get down into that overall range of around 11%, we would be sub-10% at some point during the week, because as you know, DexCom sensors get better over time. So, day four is better than day one and day seven is usually as good as day four, if not better. So, we are excited about that opportunity to improve the outcome of that.

Thank you.

Bill Plovanic, Canaccord.

Congratulations on a solid quarter. I would like to lever off Ben's question, there. As you look at G4, you have talked about new product launches, we talked about ped, when would we expect this new algorithm to come? I think I missed that in the prepared remarks.

We hope to file it, certainly, like fourth quarter or early 2014, and it would come sometime after that. And then, as Terry said earlier, that is really an accuracy enhancement for us. So, we don't have any real launch plans to share with you on that, but that will come out and be approved sometime next year.

Is that what the study -- the 24-patient study that you referenced, Terry, is that what they used?

No, they're just using G4 PLATINUM. Originally, we developed part of this algorithm as part of an AP project. And then, like everything we do, we expanded that. If it is good enough for that project and we get comfortable with it, it is certainly something we want to incorporate for everybody. So, that is how it kind of evolved over time, and we got excited.

Okay. And then, you have gone through the G4 upgrade. How many customers are left to upgrade, and did you have a lot of the $399s this quarter?

We had a good number -- it wasn't unexpectedly high or low. It was a piece of it. It had a little bit of a negative impact on margins, but not a whole lot. What we have seen, Bill, is quite a few have upgraded. What we have also seen is a lot of them are waiting until they're out of warranty because they want insurance to cover that purchase of the new system. While the $399 upgrade is appealing to a number of people, a lot of people who manage their diabetes dollars very closely, and they are waiting until where they can get the upgrade.

What we have also noticed with those customers on the SEVEN PLUS side is they are bleeding through every sensor they have in their closet and everything they have on their shelf, and their reorder numbers are actually lower than what we have experienced, historically, because they don't want up grade with any SEVEN PLUS sensor sitting on the shelf. So, what we are seeing is a rapid conversion in our sales numbers to Gen4 sensors, probably faster than we have converted on the hardware side, as people are using up the stock that they have.

Okay. And then, I have got a ton of questions, but I'll ask one more and let it slide. As you look at gross margins, do you still think the peak on the disposal is 70%, 75% by the end of this year? And then, where are the controller receiver, transmitter receiver margins today? And, where do you think those can go? That's my questions, thanks.

We are never going to have fabulous electronics type margins on the transmitter and receiver. We don't build enough of them at this point in time. When we have had a lot of discussions with some of the cell phone manufacturers, and one of them told us they design a SKU, they build 55 million of them, and they shut down the line, they never build it again. We cannot quite do that and get those kinds of efficiencies. We are very convinced that we can get our Gen4 sensor margins up in the 70% to 75% range, and we can even go better than that as volumes permit us, over time. And, the hardware margins will be what they are. They are less than those. They will never get to 75%.

Should we, as we think about them, always kind of float around maybe a 50% range?

Yes, that's fair.

Thank you.

Jayson Bedford, Raymond James.

Any way you could talk about growth in shipments to new patients in the quarter?

The new patient pattern is consistent with what we had during most of Q4. We do have upgrades -- we've always had upgrades, and they have always been a reasonable part of our sales. But, we have a lot of new patients coming on as well, we really don't have any numbers to share today. It's been very strong.

Right. And then, in terms of the sales force reorg, there, have the reps either been able to go deeper into existing counts, or are you finding the reps being able to open up new accounts? I guess, it is a way of asking the install base --?

Yes, I'll take it first, and then Terry's been out in the field, also. What I have seen in the times I've had is our guys are going a lot deeper into a lot of accounts where they have been before because of the performance and the accepts of this product by the patients that a lot of our long-time physicians are seeing, is they prescribe Gen4, the reaction they're getting is -- oh my gosh, this thing is wonderful, and they are prescribing a lot more. We are getting broader coverage as well. My observation, again anecdotally, I don't have numbers sitting here, is we are going a lot deeper with our existing physician base.

Terry, you want to --?

Certainly, each year we target a particular message. As I indicated in my prepared remarks, CGM first is the message of 2013, and with [outreach] patient-to-patient communication. But within the CGM first, we are beginning to see traction. I mentioned it was anecdotal as we get information back from the field force. But certainly, they are spending much more time in each office than they historically have because the physicians are willing to give them more patients. Historically, it has always been much of a, unfortunately, a pump-centric type of environment in which they have had to operate, and we are moving the needle on that. We have not moved it dramatically, but we are moving the needle, so as a result of that, they are spending more time.

And as Kevin said, that means that they're going deeper into each of those accounts. And again, in many of these accounts, there are multiple endocrinologists. It would be sufficient to say that not every single endocrinologist's in a particular group practice would necessarily be prescribing any technology, for that matter, let alone CGM, so they are broadening, even within a group practice of endocrinology, to call on more physicians. And of course, then, in relationships with our partners, often times, they call on a, in some cases high-insulin prescribing physicians who are not endocrinologists -- you could certainly think that there were diabetologists, but we are beginning to see scripts come from those as well. That's a little hard to make a judgment, how much is coming in from patient-to-patient, or how much is coming in from a referral from either a Tandem, or a Animas, or even, Roche partner.

That's helpful. Just last one for me, and I will jump back in queue. Just to clarify, the comment on utilization -- is it fair to assume that it's stable? It's not going down or up, at least, on the G4, it's largely stable from what you have seen?

At the very least, it is stable.

Okay, thank you.

Mimi Pham, ABR-HealthCo.

Just, I guess, a different way of asking the prior question. Last quarter, you said 60% to 65% of your starter-kit sales were to new patients. For this quarter, was it the same or higher?

You know what, I don't have that number with me -- patterns are pretty consistent. So, I would say, it is probably close to the same, but we don't have that number sitting here.

And then, for reimbursement for Type 2 CGM, with Type 1s, you obviously had the help from the JDRF. Is there a society, or the AD, or any kind of other independent group that could help drive CGM reimbursement for Type 2s that your managed care group could get help from?

We look to the ADA, from that standpoint, because remember ADA is not only Type 1, in terms of their care, commitment, and cure mentality. In fact, they are, as a professional organization, all about the inclusive of both Type 1 and Type 2, where JDRF historically has been more towards the Type 1. And, a lot of that has come from that organization.

You have to understand -- here is an interesting dynamic, and I have stated this number before, but I will state it again. Every day in the United States, 10,000 Americans turn age 65. So, you can say -- well, 65 is the new 55, and what does that mean? Well, it means that we have got a lot more patients that are living longer, and therefore, developing Type 2 diabetes. As a result of that, that is something that ADA recognizes and has to embrace. It used to be that if you got to age 65 and you had Type 2 diabetes, or even Type 1, you're lucky. And then, you certainly would have all of the challenges. I don't think that is the situation, whatsoever, anymore. So, it is something that they recognize that there has got to be intervention, so they are helping drive that.

I think, if you, now, look at some of the things I talked about glycemic variability, the amount of information that is being published in the literature about the role of excessive hyperglycemia, in particular, that is impacting and creating some of these economic costs that the payer system is looking to ways in which to reduce that. They have made all of the connect-the-dots assessments from that standpoint. So, I don't think we need a particular driver. I think, more than anything, we need more peer-review, independent-type studies, and those are ongoing, and they will be published over time, and we will be able to track them.

If we see Vibe approved in September or October time-frame, would there be any reason they would delay that roll-out until next year? I just want to clarify if, with the filing now in, if a fourth-quarter approval could mean a fourth-quarter launch for Vibe?

It could, Mimi, but again, this is a decision that needs to be made by Animas. And, just like we have commented in the past, where we would potentially choose not to launch a product in the fourth quarter with a fourth-quarter approval, the fourth quarter for Animas, or for any of pump companies, just like DexCom, is the biggest quarter. So, I would guess if that approval came late third quarter or very early fourth quarter, they would probably launch it. But, to be honest, if it comes in the middle or latter half of the fourth quarter, my guess is they would not want to pull their people out of the field and not want to disrupt their selling efforts in Q4, and would probably defer to Q1 to launch it.

Suraj Kalia, Northland Securities.

Congrats on a nice quarter. Terry, let me just ask some macro-level questions. A lot of company-specific have been asked, hopefully, you can shed some light here. Where do you all see your current CGM share in the US?

I don't have an answer. Part of the problem here is we don't publish our numbers. The other company does not publish their numbers. If we look at independent surveys, if you look at dQ&A, as an example, from Close Concerns, has us almost 65% share in the US. I don't believe that for a second. I think, as the responders to the particular survey, yes we -- they're what we call, super users, and yes, we probably have that kind of share, but that is not the broader group. I think there is another bank that has published data based on a survey, and again, puts us a little over 50% share.

Again, I really don't -- it is a tough question. Our people see that, and I always caution them, put your filters on because surveys are, like anything else, it depends upon the body of the responders. But, it is somewhere in that neck of the woods.

This is Kevin. It is certainly between 40% and 60%. That's about as close as we can get it.

Terry, the last one, I guess. I know this might be a little unfair question, but any thoughts on Medtronic's PreciSense -- you know the dual-sensing CGM that they were developing? Are you all hearing about it in the marketplace? Is it dead? Is a moribund? Is it still -- do you all see it on the competitive landscape? Any thoughts would be great.

I don't really know a lot about it. I certainly don't think it's dead. I think that they presented some data about their long-term intent with it to use that as part of a redundancy for an artificial pancreas. I don't know where it is at developmentally. Outside of that, they were at the NIH meeting as well, and so, we'll see -- but, don't know where they are at with that.

Fair enough. Thanks for taking my questions, guys.

Bill Plovanic, Canaccord.

A couple of follow ups here. One was on Thom's question earlier. Just on the distribution -- you have added 20. Where do you stand now in terms of your rep? And then, where do you plan to be by year end?

We are done adding for the year. When we had the first-quarter call, we said we were going to go from 48 to 68 territories, and 68 is where we are going to stop, through the end of the year, barring some incredible growth spurt. But, that is our plan we sit here right now. That's where we are today, and that's where we'll stand.

Okay. Then, as you have been scaling up the manufacturing on the G4, are you able to make it? Are you running into any problems? Just, in general, how is that going?

Bill, it is going fabulously. Our manufacturing team has just done an incredible job with this launch. You heard Terry laughing. My favorite email to send him every week is my yield report. These guys are doing a great job with sensor yields. It's been super.

Perfect. And then, on the 10-day label was something that got bantered about a while ago, I was just wondering if that is something that could still be out there with a 10-day label or shut off? Or, what do you think about that these days?

It is still out there, and I can tell you in many of the studies that we do, particularly the ones we do internally, we are running them all now, 10 or 14 days, even if we just take the data and cut it off at 7. We're running them longer so we can get a sense of how the sensor will perform, from a physiology perspective within our patients, and when that cutoff point would be. I think, over time, and as we have discussed this as a team, with respect to shut off, the way we would plan on doing that would be -- have the algorithm shut the sensor off, based on the signal from the electrode on the sensor. When we can see that it is not up to standard, we would have it shut off that way versus having a fixed shut off at a point in time. That's what we think is the best ultimate long-term solution, and we will look at that, probably not as part -- certainly, not as part of the current Gen4 system, and not in the next algorithm that we'll file. We will take a look at it after that.

So, maybe in G5, is what you are saying?

G5 or G6, we'll see.

That floats to the next question. Timeline on the G5?

The FDA has been working with us very diligently to define how we get a mobile platform and identifying all the risks and all the things we have to do to mitigate those risks, and this is very much an ongoing process. We have heard from the agency, at a number of fronts, that they're very comfortable with the device making a jump straight to a phone, without something in between or without a medical device, [rather] with all the mitigating factors. So, we are working with them to better understand it.

Bill, that is the beauty of the Share system, we are going to have a practice run that is not going to be lights out and all of our patients turning it on at exactly the same time, but we will have the server structure built, we will learn how to receive the data, we'll learn how to display the data back on the phone. The receiver is still the primary medical device, so with respect to their approval path, that is something that the FDA can comprehend and that we have made them comfortable with. So, we're excited for our first foray there, and we will see how it goes. With respect to the applicator and the other elements of Gen5, we have made the decision, we are going to keep manufacturing the same sensor when we go to the Gen5 platform. We do not need to change the sensor at all. And, with respect to the other hardware elements, we will pick the right time when we cut all those into manufacturing. While we don't have a timeline, as Terry said, we have got about five enhancements and different indications to launch over the next 12 to 18 months. That will keep us very busy. Gen5 will come after that.

Definitely. Actually, one of my questions was to help me understand the benefit of the Share platform. So really, it's almost the baby step for your Gen5, in terms of getting to the mobile platform, eventually. Is that how we should think about it?

Absolutely. From an operations and an internal perspective, yes. I can tell you, from a customer perspective, it is much more than that. I was discussing it with a physician this morning, and the physician's reaction was a huge wow. Kids are going to be able to take this to school and plug it in the back of the classroom, for example, and data can go to the parent all day long, and they can watch them. It can also go to the school nurse. This will be a big wow for our patients.

For the traveling spouse who is on the road all the time who has Type 1 diabetes, the other spouse can watch the data at home and make sure nothing happens. The sense of comfort there is something that is going to be a big deal. And in our minds, as I walk around here and say all the time -- that is going to sell more sensors.

Yes, I don't know if I would want my wife to see my glucose levels when I traveled.

You can take the receiver out of the cradle, Bill (laughter).

And then, lastly, does J&J's issues with the OneTouch Ultra have any impact on the SAP device? Because, if they -- I think they had a recall. I'm not exactly sure, but I think they have had challenges on the OneTouch, and if they've got something going on in the FDA, can they get a PMA approved?

It's different divisions. The Verio is at the LifeScan division. Animas is actually a separate operating company. So they have -- they operate somewhat together as a diabetes franchise, but they are two distinct companies. So, the warning letter on Verio went to LifeScan, not to Animas.

Okay, so the government, the FDA, doesn't look at J&J as one big company, they break them up into their operating companies?

No, it is operating company -- at the operating company level.

Okay, thank you very much.

Danielle Antalffy, Leerink Swann.

I was hoping you could -- so Kevin, you mentioned the split between hardware and sensor. I was wondering if you could give us any color on the split within the sensor revenue of SEVEN PLUS versus Gen4?

No, other than the Gen4 was substantially more.

Okay, that's helpful. And then, my second question is, if you speak to your competitor, Medtronic, they claim to be making progress with FDA on the Enlite sensor. I was just hoping to get a sense from you of what you're hearing in the marketplace in anticipation of the Enlite sensor, with the low-glucose suspend device. Because, the way they talk about it, they actually say they think it is negatively impacting your diabetes business now because patients are waiting for the device to be approved. So, if you have any sense of -- at least, what you are seeing in the marketplace on that front? Because, that would imply, obviously, that there's a whole list of patients waiting to go on this device. Just wondering if you had any comment there?

Well I look at what is going on in Europe where the device is available, and certainly, Animas and Johnson & Johnson have made public comments that they're growing 30% to 50% in markets in Europe, where the Vibe has launched in direct head-to-head competition with the Veo System. So, they don't seem to be too worried about it. I think here in the US, when we talk to the folks, both J&J, and certainly, at Tandem, they seem to be cannibalizing the installed base. I'm not sure patients, quote, are waiting to go to this other system.

The challenge is -- and here's part of our, and I will call it a conundrum for a lack of a better term. So last year, our Medical Director, David Price, got up and spoke and talked about all the ways you can manipulate data from a glucose-sensor standpoint and that we never do that, we always only do prospective analysis. Medtronic got up at that same meeting and said that the Enlite was about 13% MARD. We've tested the heck out of it. We couldn't get it to perform that way, and then Dr. Russell and [Dr. Damiano] presented results, and said they could not get it to perform that way, either. It was closer to 18% than 13%.Then, fast forward to ATTD, earlier this year, Medtronic gets up and says, the Enlite is, on a prospective basis, closer to 18%, which is consistent with where our experience with it is, and actually, out in the field experience.

Now, I think from an FDA standpoint, you've got an product that's pending before the FDA. They have seen our data, which is part of our strategy; and now, they're looking at something that can have an MARD for a sensor in order to shut off insulin delivery of somewhere close to 18%. It is a conundrum. It is a conundrum for the agency to say -- what are we going to do here? Now, most recently, you are hearing from Medtronic talk about Enlite 2, and other things predictive, so I don't know. I don't think the market reaction or that there is this huge pent-up demand. I know they are suffering, but I don't think it is related to waiting for the Veo System.

Right. Okay, thank you so much. That's helpful.

Robert Marcus, Leerink Swann.

Thank you, my question has been answered.

Greg Simpson, Wunderlich Securities.

Let me add my congratulations on a great quarter. Terry, you kind of answered it in response to Bill's question -- I had two questions. My first one, you kind of answered. But, I was wondering with the new algorithm for the G4 -- how does that affect your pacing on the pipeline and the progression to the G5? I know they are different animals, but does it affect your thinking? In other words, do you do more on the G5, and maybe come out with a G5.5? Kind of like you did on G4 because of the FDA process?

This is Kevin. I will take that. One of the things we have been, we believe, successful in is segmenting some of the improvements in our product and not linking everything together. One of the issues we had with Gen4 and launching it, as you just said, it became Gen4.5 because we took the membranes from the Gen5 system and moved them back when it took so long to file. We are going to do our improvements in smaller increments, and file them, and not necessarily interlink them. So, we will file the algorithm, and it certainly will run the Gen4, and may in fact be the algorithm we launch Gen5 with. Don't have the answer to that, yet. But, we can file the algorithm, and then we can launch it any time when we are ready. And, that's we look at it, and that's how we are going to treat this. And all of these things, we are trying not to link them all together, we want to do them in the order that best meets our business needs.

So, it isn't tied with that. There could be a Gen5.5 algorithm; but in all reality, that will depend upon the timing of a Gen6 sensor. And, if a Gen6 sensor comes, that algorithm would be completely different anyway. So, we don't want to do things that aren't going to lead to increased profitability. And this algorithm, we believe, will lead to increased profitability; because it again, makes the system more accurate and more reliable for our customers, so --

Okay. A pipeline embarrassment of riches, that's a nice problem to have.

Kevin, let me -- again, you mentioned profitability, so I feel compelled to ask this question because we've seen a growing number of companies raising money. This question has been asked of you on past conference calls. Do you feel, and you're making, obviously from a non-cash standpoint, very good progress towards profitability? Can you just talk about that in general? And, how you feel comfortable with the balance sheet, and where you feel like you sit, right now?

It's funny, if somebody were to ask me my favorite number that I ever cited in all these numbers, it would be 6 -- that would be the $6 million that dropped to the bottom line, $9.2 million in increased sales. Our operating income cash loss was only $3.7 million this quarter, compared to a number closer to $10 million one year ago. And, our working capital progressed exactly the way wanted it to.

We have debt capacity of close to $30 million that we could take down later this year if we needed cash. And, we have made a commitment, internally to ourselves, to our management team and to our investors, that we are not going to go raise more equity money. We are going to turn this thing where needs to be, and with growth like this, we believe we can do it. So, that is our plan, today.

Awesome. All right, thanks very much.

We have no further questions at this time.

Okay, I would like to wrap it up. I've got a few 35,000-foot level kind of comments.

In March of this year, the American Diabetes Association released new data, which estimates the total cost of diagnosed diabetes in the United States has risen to $245 billion per year in 2012, from $174 billion per year in 2007. It was a 41% increase over just a five-year period. Today, nearly 26 million adults and children are living with the disease in the United States, and an additional 79 million are estimated to have pre-diabetes. Direct medical costs totaled $176 billion last year for hospital and emergency care, office visits and medications. Indirect medical costs, including absenteeism, reduced productivity, unemployment caused by diabetes, related disability, and lost productivity due to early mortality totaled $69 billion last year.

We have gone from 12.1 million people diagnosed with diabetes in the US in 2002, to 17.5 million in 2007, to nearly 26 million people with diabetes in the United States in 2012. The high cost of complications has increased the economic burden over $70 billion annually in just the last five years. And yet, we know that CGM can improve outcomes, and delay, or perhaps even prevent, the onset of many of these complications. So, there is absolutely no wonder why I am so excited about the current and the future prospects of DexCom. Thank you.

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