德康醫療 (DXCM) 2013 Q3 法說會逐字稿

Welcome to the DexCom third quarter 2013 earnings release conference call. My name is Adrian, and I'll be you operator for today's call.

(Operator Instructions)

Please note, this conference is being recorded. I'll now turn the call over to Terry Gregg, CEO. Terry Gregg, you may begin.

Thank you, and welcome to our third quarter 2013 earnings call. We'll kick it off with Steve Pacellli, and reading 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 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 report as 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?

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

I assume by now most of you have seen our earning press release. Our financial results speak for themselves. During the third quarter, we achieved record sales, record margins, and we were cash flow positive.

Before I turn the call over to Kevin to review our financial results in greater detail and provide a brief operations update, I would like to update the investment community with some exciting news regarding a new addition to our Board of Directors. It is no secret that we have a tremendous amount of work in front of us, as our system evolves into display on a smartphone, paired with robust data management tools.

To that end, we are pleased to announce the addition of Steve Altman, Vice Chairman of Qualcomm, and long-time diabetes advocate to our Board. Steve brings unique and diversified expertise to an already dynamic Board of Directors. Steve has served on Qualcomm's Executive Committee for nearly 15 years, providing direction and guidance on key initiatives across all areas of the business, as well as on overall Qualcomm vision and strategy.

He joined Qualcomm in 1989, and his leadership roles have included General Counsel, President of Qualcomm Technology Licensing, President of Qualcomm, and most recently as Vice Chairman of Qualcomm. Throughout his 24-year tenure, Steve's contributions helped enable the successful growth, evolution, and expansion of Qualcomm into a world-leading mobile technology innovator, and we are pleased to welcome him to the Board.

I would now like to turn the call over to Kevin.

Thank you, Terry. I'll start with the financial update.

DexCom generated $42.5 million in product revenue for the third quarter of 2013 compared to $21.1 million for the same quarter in 2012, a $21.4 million or 101% increase. We remind investors that in the third quarter of 2012, we reserved $1.2 million for sales returns relating to our 30-day money-back guarantee on SEVEN PLUS hardware in anticipation of the G4 PLATINUM launch. Absent that increase in returns reserve, our year-over-year product revenue growth would have been 91%.

We also remind investors that we believe third-quarter 2012 product revenues were somewhat suppressed, because purchase decisions during Q3 2012 were deferred, as patients and health care providers anticipated the G4 PLATINUM introduction.

Sequentially, product revenue for Q3 of 2013 increased 20% from the prior quarter. And we note that if you back out the impact of approximately $1.3 million in higher than expected Q2 2013 revenue, attribute it to Animas royalties, and GlucoClear sensor sales, our sequential improvement in product revenue would have been 24%. Total revenue for the third quarter of 2013 was $42.9 million, compared to $23.1 million during the same quarter in 2012.

Our product gross profit totaled $27.7 million, generating a product gross margin of 65% for the third quarter, compared to product gross profit of $7.7 million and a product gross margin of 36% for the same quarter in the prior year. As a reminder, our product gross margin was artificially low in Q3 2012, based on a number of one-time charges and reserves we took in connection with our transition from the SEVEN PLUS to the G4 Platinum.

Sequentially, product gross margin for Q3 of 2013 increased 4 margin points from the prior quarter, primarily the result of increased sensor volumes combined with continued improved operational performance.

Some final thoughts on our products revenues and our gross products during Q3. During Q3, we added more new patients and sold more sensors than in any prior quarter. Consumable and durable revenues both increased significantly from Q2 2013; although, sensor sales grew at a much faster rate than durable sales.

We continue to see increased patient retention, combined with increased sensor utilization with the G4 PLATINUM system compared to the SEVEN PLUS, resulting in a very favorable impact upon gross margins and gross profits for the quarter. With respect to the split between consumable and durable revenues, our mix has naturally shifted more towards consumable products, and is now closer to 25% durable and 75% consumable. ASP for sensors has stayed consistent, at approximately $70 per sensor, and the ASP for our hardware continued at approximately $850 per starter kit.

Our international business performance continued to exceed our expectations in Q3, as well, as it was up approximately 100% year-over-year and continues to represent close to 10% of product revenue.

Research and development expense totaled $11.8 million for Q3 of 2013, compared to $10.3 million in Q3 of 2012, with the increase due primarily to additional payroll-related cost and expenses related to work on our near-term product pipeline. Sequentially, R&D expense was up 6%, with the increase due primarily to non-cash charges related to our SweetSpot acquisition and share-based compensation.

Selling, general, and administrative expense totaled $21.6 million in Q3 of 2013, compared to $15.4 million during the same quarter in 2012. The increase was primarily related to selling and information technology expenses necessary to support growth. The increase also included $900,000 of additional non-cash, share-based compensation.

Our net loss for the third quarter of 2013 totaled $6 million, and included $9.5 million in non-cash expenses centered in share-based compensation, depreciation, and amortization. Absent these non-cash charges, our net income would have been $3.5 million for Q3 2013. Compare this to an adjusted cash base net loss of $9.7 million for the same quarter last year.

We would also like to point out that year-to-date, our cash operating loss is $1.5 million, compared to a cash operating loss of $27 million for the first three quarters of last year. Another way to look at our year-to-date performance, our product revenues have increased by $44.6 million or 73%, resulting in a gross profit increase of $37.6 million, that's more than double. The gross margin percentage on these additional revenue is actually in excess of 80%.

Even with our robust investment in sales expansion and our continued investment in our R&D pipeline, more than $25 million of these gross profits have fallen to our bottom line and into the bank. Our loss per share for the quarter was $0.08.

With respect to our balance sheet, we ended the third quarter with $47.6 million in cash and marketable securities, an increase of $1.2 million from the end of Q2 2013; and we note that our cash and marketable securities balance at the end of Q3 is roughly where we started the year.

With our cash on hand at the end of Q3, our debt availability of $28 million, and most importantly, our operating performance improvement through three quarters of 2013, we remain very comfortable with our commitment not to raise additional equity funds in the near term.

I would like to close the discussion of our financial results with some thoughts on Q4. While we are not formally adjusting our full-year guidance at the this time, we're confident that we will exceed the top end of our current range of $140 million in product revenue. That being said, as we look to the balance of the year, there are a number of factors, some positive and some negative, that will impact Q4 revenue growth.

Obviously, you are all aware that in September, Medtronic received approval of its 530-G insulin pump with threshold suspend, and is currently commercializing the system. While it remains to be seen whether this product will have a meaningful clinical impact over time, we expect Medtronic to aggressively market this device over the next several quarters as the first artificial pancreas. More to come on that from Terry.

This could impact the rate at which we are able to add new patients to our installed base, as clinicians and patients take time to evaluate this product. It's also important to remember that we sold an extraordinary amount of hardware during Q4 2012 in connection with the launch of G4 PLATINUM. So for our year-over-year comparison in Q4 2013, we will be comparing against a quarter in which we launched our first new product in three years.

We exceeded in Q3 what most analysts expected us to do in Q4. However, I remind investors that we've never suggested that we would continue to grow at 65% year-over-year as we did in Q2, and certainly not the 100% that we experienced this quarter. So for Q4 2013, given the comparison to our first quarter, our G4 PLATINUM sales in Q4 2012, we expect our product revenue growth to begin to normalize at closer to 40% year-over-year as we've guided previously, and we do not expect to exceed 50% year-over-year growth in Q4 2013.

With respect to operating expenses in the fourth quarter, we expect to increase our spending in a couple of very important commercial areas. As many of you know, last year and early this year, we added approximately 20 sales territories to our US sales force. And before the end of this year, we plan to add an additional 20 territories, bringing our total US field set sales force to approximately 90 reps.

We're also commencing a number of clinical studies designed to demonstrate both the clinical and economical benefits of CGM as a front line therapy to support our position that CGM is the most important and cost-effective tool in the intensive management of insulin-dependent diabetes.

Finally, we note that our historical cash usage has always been high in Q4, as accounts receivable increased due to late Q4 sales and we pay out a number of accrued liabilities before year end. Adding to factors this year, inventories may increase in Q4 depending upon the timing of the approvals of our three pending FDA filings.

Now on to the business update. Turning to our regulatory activities, I'm very pleased to report that during Q3, we filed a PMA supplement with the FDA seeking an expanded indication for G4 PLATINUM for professional use. Professional CGM enables clinicians to gain better insight into their patient's glycemic profiles. Devices are owned by the health care professional, and can be used either in blinded mode for simple collection and retrospective review of glucose data by the clinician, or in unblinded mode which allows the patient to experience the full benefits of real-time CGM while still providing the doctor with an opportunity to review glucose data retrospectively with the patient.

Clinicians can use the insights gained from a professional CGM session to adjust therapy and to educate and motivate patients to modify their behavior after viewing the effects of specific foods, exercise, stress, and medications have on their glucose levels.

With respect to our pediatric indication, we continue to have regular open dialogue with the FDA concerning our US pediatric submission. Our discussions continue to center on appropriate labeling of the products, specifically for children, and we remain optimistic that we will receive approval prior to year end.

Finally, with respect to our share filing, we have received written feedback from the FDA, and we are currently preparing our responses to the questions posed to us. These questions required some simple clarification and a bit more testing of the system, and we expect that our responses will be submitted to the FDA within a couple of weeks.

Turning to our future CGM product offerings, we remain focused on replacing finger sticks as our primary long-term objective, and we continue to work on both Gen5 and Gen6 in an effort to achieve this goal. We continue to believe that simplicity, patient convenience, and expanded connectivity, paired with our superior sensor technology will enable us to maintain our leadership position in the CGM market.

Shifting to our integration partnerships, Animus continues to work with the FDA on its PMA submissions, seeking approval of the Animus5 system in the US. Animus is currently completing additional verification and validation testing, and additional human factors testing requested by the FDA, and it expects to have all additional testing done and responses submitted to the FDA by the end of January.

We continued to work diligently with Tandem Diabetes Care to incorporate the G4 PLATINUM into a next-generation version of Tandem's T-slim. Tandem's PMA application has not yet been filed with the FDA, and while the integrated system remains a top development and regulatory priority for them, as we're approaching year end, we do not anticipate Tandem will file this quarter.

Although Tandem management is currently highly engaged in their IPO process, we continue to work closely with the Tandem team to complete verification and validation testing, and submit a PMA application with the FDA as soon as possible.

I'd now like to turn the call over to Terry for some concluding remarks.

Thanks, Kevin.

The third quarter was a record breaking quarter for DexCom, as we continued to execute on all aspects of our business, be it commercial, clinical, regulatory, or with our R&D efforts. Further evidence that our business model is scalable, and is evolving in the way we've always said it would.

There's been a lot of buzz in the diabetes community of late with Medtronic's announcement in September of approval of the 530-G. I'd like to briefly share my thoughts on this approval and its impact on DexCom.

While a system that suspends insulin when a low glucose threshold is breached, it's considered a first step to achieve a closed-loop or bionic pancreas, I do not believe the 530-G adequately achieves that first step due to its poor sensor accuracy and reliability. In fact, in my opinion, the pursuit of an artificial pancreas has unfortunately been dealt a substantial blow with the introduction of this product. The diabetes community is already complaining that after seven years and hundreds of millions of dollars spent, is this the best industry could come up with? I share their frustration. Patients deserve better.

Sensor accuracy is what matters. In multiple independent studies, our G4 PLATINUM sensor is anywhere from 40% to 70% more accurate than the new Medtronic sensor. At this point, most investors are aware of the work done out of Boston University and presented at the ADA Scientific Session Meeting last Summer, where Dr. Steven Russell shared comparative data from patients simultaneously wearing the G4 PLATINUM and Medtronics Enlite, and reported an MARD of 10.8% for the G4 PLATINUM and 17.9% for the Enlite.

And just last week, at the Diabetes Technology Meeting in San Francisco, Dr. Gary [Stile] presented comparative sensor data as part of a study examining the use of CGM in critically ill infants, reporting an MARD for the Enlite of 17.8% and an extremely high 81% early failure rate. By comparison, Dr. Stile reported an MARD of only 11.7% for the G4 PLATINUM with no early failures. We expect additional studies with similar results will follow.

Medtronics cites several different accuracy metrics in their labeling. But unfortunately, it seems that no independent investigator can reproduce the Medtronic data, and we believe the sensor's poor performance will be obvious to patients who try the device.

Furthermore, while Medtronic's data raises a number of questions, we believe that to achieve any reasonable level of accuracy with this particular product, patients will need to take up to four finger sticks calibrations per day. We know from our own market research that reducing or eliminating calibrations is extremely important to patients.

We've also heard initial reports from patients that a considerable number of 530-G alerts are false, which is in line with one of the Enlite data tables where Medtronic discloses that more than 50% of the Enlite's alerts at 70-milligrams per deciliter within a 15-minute window are false. As we learned with several of our prior products, repeated, inaccurate, or false alarms undermines a patient's trust and faith in a CGM system, and are a key factor in patients electing to quit using CGM. ¶ We are very prepared with our messaging in the field, particularly around the benefits of CGM first. But we are also cognizant of the fact that the Medtronic marketing machine is out in full force. As a result, we do expect some impact to our new patient additions over the next several quarters, as clinicians and health care providers evaluate this new product.

Diabetes is a burden. It's a burden for the patient 24/7, 365. There are no holidays, there are no vacations. It is a life sentence. And it as challenging as it is for patients, loved ones, friends, and colleagues are all impacted by diabetes. Our mission remains steadfast. Replace finger sticks. And in the process, eliminate one of the most cumbersome and painful requirements of managing diabetes successfully.

For DexCom, the future is about simplicity, patient convenience, and connectivity. Our goal is to continually miniaturize the footprint on the body to make the patient experience as minimally invasive as possible. Our goal is to enable the patient to interact with their glucose data directly on a smartphone, which will not only add to the overall patient experience, but will enable parents to receive their glucose information during the nighttime, during the school day from the child while the parent is at work, or allow a spouse to monitor a loved one while at work or when traveling.

As I routinely tell our employees, stay the course. With their substantially larger field presence, we expect our competition will attempt to create confusion in the marketplace with regards to sensor performance. But we are committed to compete toe to toe in marketing the superiority of our system. In the end, by presenting performance data that is truthful and accurate, we will continue to win the hearts, minds, and loyalty of patients and health care providers.

Thank you, and we will open it up for Q&A.

(Operator Instructions)

Thom Gunderson from Piper Jaffray.

Hi, everybody. So, I'll be quick, Terry and crew, Kevin. Where do I want to go with this? Terry, on the Vibe and the PMA that J&J is doing, has there been any correlation -- any changes in how you think that product is going to be launched, given the reorg in the diabetes business at J&J?

Thom, I'm actually going to ask Steve -- since Steve heads up our steering committee relationship with Animas, and he would be better suited to answer that.

Look, the Vibe remains a critical priority. They still talk about the Vibe, not just at the diabetes franchise level, but we hear mention of the Vibe all the way up the corporate chain.

I think that the real challenge right now for the diabetes franchise is the diabetes franchise is being dragged down, frankly, by their finger stick business. So, there's a lot of moving parts in that organization.

But I think, first and foremost, the priority is get the Vibe out. We are working -- although it's largely being driven by J&J, we are working on a more advanced system.

Without disclosing too many details, there's been some limited data published, but it's certainly a more advanced product than the 530G. I can't give you any specific timelines on that product because it's really a J&J product, and they've asked us not to disclose those yet. J&J -- I think, frankly, that the launch of the 530G has reinvigorated particularly the Animas side of the diabetes franchise.

Thanks. And then, Kevin, you guys held back so long on adding reps, and all of a sudden you're on quite a ramp here. Can you help me understand or clarify -- of those 20 that you plan on adding before the end of the year -- 20 additional -- are those commission-generating sales guys' territories calling on unique customers?

That's exactly what they are, Thom. We've gone through a very detailed process of analyzing our demographics and where our current sales are coming from, where physicians and patients are located based on the insulin DSI reports and everything. And we've, again, divided the country back up and added 20 more reps. So, that's exactly what they are: more commission-based salespeople.

Got it. And then last, really quick question. You repeated that pediatric FDA clearance by the end of the year. Are you prepared for an early 2014 launch of pediatric?

Yes, we will be. Absolutely.

(multiple speakers) We're prepared for the day that we get the approval.

It only took us three weeks to launch Gen4 PLATINUM last time. We will get the thing out as absolutely quickly as possible.

Okay. Thanks, guys.

Bill Plovanic from Canaccord.

Great, thanks, good evening. Congratulations, gentlemen.

Thank you, Bill.

Wow. So, as we parse through the numbers here, it wasn't lost on me, and I just want to get clarification. If it's the 75/25 mix, your durable revenues' growth is accelerating, and your utilization went up significantly. Are my numbers that off, or is that what we're actually seeing?

I'm not looking at your numbers, but what we're seeing is our durable revenues went up, and our sensor revenues went up faster. So, utilization and retention are doing very well for us right now.

Are there any metrics you can share with us -- maybe -- even just sequentially? Is your utilization going -- improving X amount of sensors a quarter or a percentage, or is there -- just anything you can share to help quantify so we can understand? Because in my model, it looks like the utilization metrics are going up something like a 30% improvement on a quarter-on-quarter basis. And it seems a little high. But I'm just trying to get some clarification on drivers.

I'm not sure that you're that high, Bill. I think -- again, we have imperfect data. We share data with a lot of independent distributors. And while they give us tracings, we're still consolidating as best we can.

What we reviewed earlier this week -- we sat down and went through all the data that we could come up with. We see patients using more sensors.

One category that really struck me and Terry is there appeared to be a much higher number of patients, for example, who are purchasing enough sensors to wear a new sensor every seven days. And if patients are wearing a new sensor every seven days, then you can do the economics for that model. That's a very, very strong piece of evidence for us.

And as we have stratified our user base from those who use very few sensors to those who don't even -- who buy the first kit and then don't buy anything else -- what our goal all along was is to move everybody up the food chain to get everybody utilizing more sensors. And that's what's happening. Everybody is moving up a notch and purchasing more.

So, this product is being utilized very regularly by the patients who have it. And even our distributors have confirmed for us, because these guys -- they live to sell diabetes supplies. They are call centers: they track every call they make, every purchase made.

Our distributors have come back to us and told us that the retention rate on this product is fabulous. So, we're not just coming up with that with our own numbers. We're coming up that with our large distributors have verified that fact, as well.

Okay. And then, again, more in the weeds, but as I look at the past couple quarters, you've benefited from upgrades of patients. I think last quarter you mentioned maybe a third of the patients were upgrades. As you look at this quarter, is there any metric around that you're willing to share?

Yes, I can tell you upgrades are down. We added more new patients in this quarter than any quarter we've ever had. We've swapped out almost all of the SEVEN PLUS patient base at this point in time that is active.

So, upgrades, as a percentage, came down this quarter versus going up. This was a quarter of new-patient growth more than upgrades.

Okay. And then my last question, and I'll jump back into queue. You generated cash in the quarter. You lose money only because you have big D&A and stock comp.

As you think about the Business going forward, is the strategy to drive revenues and just keep it cash-flow neutral because revenues is what you're valued on at the end of the day? Or do you expect that you'd actually drive bigger positive cash flow in earnings? What is the focus of management at this point?

Bill, I'll take a crack at it. I'm sure Terry can add. We've been through this exercise before. And we want to grow that top line as fast as we can. That will require significant investment on both the commercial side of the Business and in our product pipeline.

That being said, we've been at this for a long time. It's time to make some money. So, we will manage our top-line growth and work to manage our bottom line, as well, and try and keep a balance. And ultimately, over the next few years, we'd expect our bottom line to grow faster than the top line.

But we will never ignore the reinvestment back into the Business. We need to garner as much market share as we possibly can over the next two- to three-year period, and get as many people on CGM as we can support within our system. So, it will be a balancing act, but we aren't going to ignore the bottom line. Once we get here, I don't think there's a lot of turning back.

No, you can't go back. And obviously, on the cash flow, we've made comments about the full-year 2014, and our Board has always maintained that that's the direction that we should go. And then look at GAAP positive in 2015 and beyond.

So, it is always going to be an incremental goal to continue to make this Business more profitable. But echoing Kevin's comments, not at the expense of having a robust R&D pipeline. Not at the expense of achieving our goal of replacing finger sticks, which -- I look on the horizon and see how close we think we are with some of the technology that we're currently developing, and it would be a shame. I think it would be -- it's our moral obligation to pursue this for people with diabetes.

Great. Thank you, and congratulations on an unbelievable quarter.

Thanks.

Ben Andrew from William Blair.

Not sure how to follow that praise or sequence, but I'll do my best, guys. Terry, if you think about the productivity in the sales force, did you add anybody in the third quarter in terms of staffing? Or was this just a significant improvement in productivity by the reps? And so, as you extrapolate forward with the 20 adds, can we -- again, that multiplier effect, in terms of that you're either getting patients on at this point with this new product?

Ben, it's a combination of things. So, number one, in answer to your question, no, we didn't hire the additions in the third quarter that shows this difference.

But I would like to contrast that by -- we hired better reps in terms of our attractiveness to the people that we hire. And the next 20 -- I'm sure we are not lacking opportunities to hire some of the best, particularly as you get some contraction in the diabetes world as a result of economic impact. We get to kind of pick the -- who we choose, and I think that's an influence.

What that translates into is that they are more active, more successful more quickly. So, you don't have that long traditional four- to six-month learning curve that new reps, particularly those that are coming from outside of the CGM business, tend to take in order to get them up to speed.

I think the second thing, and my field visits contrast that the same docs that I called on a year ago that I called back on today in ride-alongs -- just their attitude toward CGM first has driven -- so, in many cases, the product is selling itself. And the reps are certainly out promoting it. That's one of the reasons that Kevin and the team have made the decision to expand the sales force again, because we are not completely serving the entire diabetes population that we should. And now there's enough awareness about the G4 PLATINUM that now is the time to drive that message to a larger group of physicians and prescribers.

Okay. That's helpful, thank you, Terry.

And then, as you think about, Kevin, maybe the hardware components in the quarter. You obviously gave us some insights into the mix of new patients and upgrades. If you're pretty much done with SEVEN PLUS, where do you think the steady state, if there is one, will be in terms of hardware for new patients and equipment upgrades for existing patients after SEVEN PLUS? So, new transmitters, new handhelds, things like that?

And that's a very complex question with the G4 PLATINUM, and I can give you one variable. When we launched the G4 system, one of the things that we did is we warranteed the transmitter for six months, building in an estimated shelf life, and then selling it possibly to a distributor where there would be another month of shelf life, and then to a patient. So, we've given a six-month guarantee. The transmitters we shipped last October, by and large, are still working.

And so, we haven't been able to predict when the transmitter sales are going to come back in. We were thinking originally we'd get two transmitters a year. Our product works too well. Good for the patient, and a little tough for us to model. I think over time, Ben, on the hardware cycle, it probably won't be every year with the receiver maybe a SEVEN PLUS, because I think this hardware will become more reliable.

On the flip side of that, we've got a lot of hardware innovation coming, like the share system, that we will launch, again, as soon it's approved. That's more hardware sales. I don't know what that does to receiver and to transmitter revenues, but it could have a very positive impact.

And as we look out over time with another transmitter when we talk to a phone, or additional improvements that we have, our hardware cycle may become a little more traditional based on multiple product launches versus waiting three years for a new system. So, for now, our percentage -- we were 30% last quarter durable, creeping down closer towards 25% this quarter with huge sensor sale increases. We'll just kind of play it by ear.

Okay. So, the new-patient revenue -- it's over 50% of the handheld revenues, or is 75% within that?

We've never broke it out, but it's high. It's higher than it's been in other quarters.

Okay, great. And then the last question, and this is another one for Terry I guess. Why would somebody take off a good sensor at seven days? And you said you were surprised by that. Is it patient comfort or is it just a routine they get into? Thanks.

No, you know what I suspect it is -- I think it's new patients coming into the system that are different than the patients that originally were the earlier adopters and high-technology people. They actually read the label, the instructions, and use it according to the indicated use. I think they're just following the instructions appropriately. And they haven't gone to the -- because we do actually -- at the end of a session, we give them advanced notice that the session is ending.

It's this other group, earlier adopters, that figured out ways to trick the system to allow longer use. So, I think this is a population that is behaving appropriately according to indications for use.

Good. Thank you.

Kim Gailun from JPMorgan.

Thanks for taking the question. And congrats on the quarter. This is a nice one for me coming on board for my first quarter. So, nice work there.

I guess the first question is for Kevin. Just looking at your comments for your full-year outlook, and no formal change, but certainly exceeding the top end of the $140 million on production revenue. I think that you also said, in the fourth quarter, you'll look to normalize toward the 40% growth in product revenues, and not exceed 50%.

Are you essentially saying then, for the fourth quarter, just based on those growth rates, $44 million to $48 million? And then for the full year, on product revenues, that gives you $150 million to $153 million?

We created a frame that you can paint any way you would like, yes.

Okay, but those numbers -- I heard those numbers correctly?

Yes, you heard the 40% and not exceeding 50%. That's correct.

Okay. Fantastic. And how do you think that that plays out as we go into 2014? I know, broadly, you've said the 40% to 50% is the right number for 2014. How do you think about Medtronic's impact next year, as we move through the year?

It's a little early to tell, Kim, but we've been committed to 35% to 40% growth for next year for a long time here, and we knew this product was coming. So, it's not like we're completely caught unaware.

Driving our growth next year, obviously, a ped's indication is going to be very helpful. We believe our share system, combined with a ped's indication, gives parents an opportunity to monitor their children all night long, and even when they go to school when they take it with them.

It will also be, based on our market research, used very extensively with spouses and other loved ones. That will help drive revenue. And combine that with possibly a J&J launch -- we have a lot of things in our favor that are good, good growth drivers for next year. Bottom line: As we look to start next year with this patient base buying a lot more sensors, we've got a pretty good start.

Yes. Okay. And then, just a followup on the gross margin, which was obviously also very strong in the quarter. Was there anything one-time in there, or is that the level -- with the mix of business that you're seeing, is that the level we should expect to grow off of going forward?

There were no one-time events in there that had a material effect on margins. We have little one-time things every quarter.

We've often said our margin target for our sensors was in the 70% to 75% range. And as you guys do the math and figure out hardware versus sensor sales, it's not too hard to deduce that we've got there. So, again, we've achieved what we said we were going to do from a margin perspective, and we look to go forward from here.

Okay. Great. Thanks, guys.

Mimi Pham from ABR.

Good afternoon. I appreciate, Terry, your honest thoughts on Enlite. They talked about launching sometime in the end of October. Have you actually seen them in your account base yet?

Yes, we've actually got reports. And in fact, I have screen shots that have been sent to me from patients showing the highly inaccurate Enlite sensor, and a direct screen shot with our own meter and our sensor, and it's alarming. And I don't mean that as a tongue-in-cheek pun. But the reports of excessive alarms is remarkable.

Yes, we've seen them out there. And I think that's -- my comments are attributed to that type of information. The blogs are already populated with -- this thing isn't working the way that Medtronic is hyping it. And I think that's the disservice to the artificial pancreas consortium that tries to get this out and pursue this.

I think it's -- like I said, I think we've taken -- for those of us that are active in the AP world, and clearly we're in 17 projects around the world, I think this overhyping by Medtronic is gong to blow back in them, number one. And I think, number two, it's going to cause the AP projects and patient advocacy groups to take a second look at where we've come. We've spent all this money. The patient advocacy groups like JDRF and others -- I think there's a question in everybody's mind as to -- this is the best we can do? This is certainly dismal, in my opinion.

And for patients looking for pump CGM integration, how much can you say about the pending Vibe in the US now? I'm assuming -- (multiple speakers)

I'd have to look at the -- use the international experience as a proxy. So, the Veo system, which is the 530G and European launch, and it's been there for about three years now, has not grown particularly. The Vibe has taken share in every country that they are in.

I think the physicians recognize the lack of utility of that, quote, low glucose suspend over their low threshold. Here, that when you're only suspending for an average of 11 minutes and overnight, and you're -- that suspension represents probably less than a couple of units of insulin, that you're really not doing much.

So, I don't think they would necessarily harm a patient, but all it's going to do is just drive them crazy with alarms. They wake up, do a confirmatory finger stick, recognize that the Enlite sensor is wrong. And so, I think the more that happens, the more frustrated and the more alarm secession that patients engage in. And that's all going to come back to the blogs and to the health care providers.

Got it. And then -- (multiple speakers)

I think the Vibe well launch launch tier will take share.

And should we be updating our models for Vibe to reflect more of a mid-2014 launch next year?

As Steve -- I thought Steve had a great answer that this is driven by J&J. And although we're helping them every step of the way, it's really their filing. And until that actually goes in and they've responded appropriately, it would be inappropriate for us to comment on timing.

Got it. And then just last -- a comment about the sales productivity increasing. Have you reached the max sales productivity, or is there still a lot more upside?

There's a lot more upside. If you look at data that says where we're at, as a penetration in a category, we clearly -- most everybody thinks we've got more than 50% share in the US. And I don't know whether that's true or not true.

But as a category approaching 10% -- if you look at pumps, they're not quite at 30%. So, I would say hard target has to be north of pumps. So, we've got a lot of runway yet in front of us to achieve much greater goals.

Thank you.

Tao Levy from Wedbush.

Good afternoon. So, just to be clear then, so in the current quarter, in the third quarter, you really didn't have much in terms of incremental six-month transmitter type revenues?

Not much.

No.

We had some, but not a lot.

And do you think that -- that has to start hitting here in the fourth quarter, right?

It started picking up a little bit in September. And it's gone a little faster here in October and November. It still has the -- the floodgates haven't opened yet.

Got you. Okay. And have you closed down the old sensor manufacturing the SEVEN?

Yes, we have. We don't manufacture SEVEN PLUS sensors anymore. We've got a safety stock of inventory built, primarily to service our professional-use patients until the G4 PLATINUM professional-use system is approved, and occasional one-off shipments to our patients. We're in the middle of implementing some very aggressive upgrade programs for the remainder of the SEVEN PLUS patients to get them switched over. And those will be going out shortly. We'll push pretty hard over the next six weeks.

Thank you. So, in the Q3 gross-margin number, that still includes some of the old manufacturing? (multiple speakers)

Yes. It absolutely does.

Okay. So, then that gets better, from what we've seen?

Should.

Should. Right. And then just lastly, I didn't hear anything on GlucoClear, and if there's any updates there. Thanks.

I can go ahead. You know what? They're marketing it commercially on a limited basis in Europe. And they appear, as we hear comments in their calls and such, to be very bullish on the product. And we didn't have much on the revenue side there. So, it all appears to be going well.

And feedback -- clinical feedback -- that's all trending in the right direction?

Yes.

As far as we can tell. We have to -- Mike Mussallem certainly has that as a key growth driver in his comments. And I know they've committed a lot of resources to launch the product in the European sector in a very limited way. And their goal is, not only from the accuracy and that which is exquisite, we're down laboratory reference accuracy with the sensor technology.

But there's this other factor that they believe is important, and that is changing behavior in the ICU to allow it to be more functional by the nursing staff and the ICU staff. I think that's what they're trying to look at behavior modifications for the intents of us and the anesthesiologist and the staffing and how they use it in an effective way, because it is quite a change for the behavior in that environment.

Okay, great. Thank you very much.

Danielle Antalffy from Leerink Swann.

Thanks so much. Good afternoon, guys, and congrats on another great quarter. I just wanted to touch on the full-year guidance a little bit. Appreciating the numbers that you gave, but could you talk a little bit about -- in more detail, about the variables driving the fact that you're not raising guidance when the numbers you provided would imply a $10 million beat on the top line for the product revenue.

So, I guess, what's keeping you from just going out and raising the guidance? Is it just conservatism against the Medtronic launch? Now we're already six weeks in, I guess. So, could you give a little bit more color about your thinking there?

This isn't conservatism against the Medtronic launch. This is just a look at our Business and where we are and what we'd anticipate for the fourth quarter.

We typically, in the past, have never upgraded our year-end guidance in the fourth quarter, and we're going to stick with that policy. Because if we do upgrade it specifically, then we end up changing that year-end guidance. And we don't feel the need to do that.

We feel we've given you enough of a frame, and enough information to figure out where we think our numbers will be. And that's where we are.

And the other impact, and I'll just be very transparent that if we gave you the Q4, you're going to look for it in Q1 2014, and that's not what we want to do. We don't want to give quarterly guidance.

Okay. Got it. Thank you.

And then, as far as the Medtronic launch does go, a good number of your sensor wearers are Medtronic pump users. What are you seeing -- and I actually am not sure if you've disclosed that number, or if you could give us that number -- but what are you seeing of those patients? Are you still managing to hold on to those patients, or are you seeing some of those patients switch over to Medtronic? Because Medtronic sometimes automatically upgrades patients, I know. So, I'm not sure how that's playing out.

Well, I will tell you we haven't -- it's been too early in their launch to really have a good optics on what it's going to turn out to be. That's why, in Kevin's comments, two to three quarters -- you can't -- from a billing standpoint, there are some issues to the individual component parts, transmitters and so forth that our patients have already been reimbursed for. So, Medtronic can't bill for some of those things.

So, I think it's a very complicated scenario. And I would expect that, even in those that have upgraded and get to do their own comparative analysis between the G4 PLATINUM and the Enlite sensor -- I worry less about the attrition of those based on a few inputs that we've received. As I mentioned, I get screen shots from patients making their own comparison. And I think we'll see more and more of that. So, I'm not as concerned, I believe, as maybe some others are. (multiple speakers)

Okay. Thanks. Okay. Thanks so much.

Korosh Saba from Stephens Incorporated.

Hello, guys. Congrats on the triple-digit quarter. Really nice to see.

Just going back to the J&J and Tandem -- the integrated launches -- can you guys just speak around some color of how you guys see those two partners supporting the launch? Whether they'll be going after new patients versus converting their existing patient base, and just some color would be helpful. Thanks.

Yes, this is Steve. I can't speak with specifics for Tandem because we haven't, frankly -- I haven't talked to the Tandem business folks as to their specific launch plans. But absolutely with Animas and with the Vibe product, their expectation is to go straight after the Medtronic installed base. Look, it's no secret that the vast majority of pump patients in the US wear a Medtronic pump. They probably have 65%-plus market share.

So, every year, the number of pumps sold in the US -- there's probably -- I would venture to guess there's more pumps sold to existing patients than there are new patients to pump therapy. So, the lowest of the low-hanging fruit is a patient who has already chosen to wear a pump, but is just within -- just outside of their upgrade cycle. So, absolutely, that will be the Animas primary target. My guess is that Tandem will probably do the same.

We have heard, and this is publicly shared from Tandem, that they have done an excellent job in adding the patients they've added to date in converting Medtronic patients. So, I would assume that Tandem would probably take the same approach.

That's helpful. And then, just on pediatrics -- can you guys just provide some color around how you see that coming on board, and how quickly throughout next year you see that coming?

Well, again, we continue to have discussions with the FDA. The discussions center on labeling a product specifically for pediatric patients. And they are requiring specific pediatric patient labeling, and a specific pediatric patient product offering. We're discussing those features with the agency, and coming to where they want us to be.

As far how that comes on board, again, I'll go back to our past history. We announced G4 PLATINUM, I believe, on October 7 or 8 last year, and were shipping October 20. We expect the same from our team here, again.

And then, once it comes on board, we can directly market to the pediatric endocrinologists. And we believe over time that segment of our patient base will grow from the 8% to 10% that it is now to be more reflective of the general diabetes population in the 20% to 30% range. So, it's a wonderful growth opportunity for us. And with our -- the accuracy of our product with the connectivity and convenience and communication features we're about to offer, we think it's a wonderful area for us to go.

Great. And then just last one from me. In terms of the share product, have you guys given, or could you guys provide some color around how you expect to price that, whether it be a monthly, quarterly, or how you guys are looking at that?

To start with, we've got some pricing models built. I'd rather not disclose that now. I need to let my marketing team figure their way through it.

I can tell you our goal on this product is not to launch a product that people look at and go -- oh, I can't afford that. We want people to buy this and use it and buy more sensors. So, it will be very economically feasible for the patients.

It will add something to our bottom line. But ultimately, our goal here is to sell more sensors. And that's what we're shooting for.

Great, thanks. And congrats again.

Jayson Bedford from Raymond James.

Good afternoon. Thanks for squeezing me in; I'll be quick here. You mentioned increased retention as one of the factors in the growth here. Is there any way to quantify the improvement in retention? Meaning: Is it 5%, 10% higher than what you were seeing with the SEVEN PLUS?

We've never given a retention or attrition percentage in detail to anybody. It's a lot better; I'll just leave it at that. It's a very significant improvement over what we saw before.

Okay. Internationally, I think you've talked in the past about adding 10 new countries. I realize it's a small piece of the pie right now, but are you seeing any contribution from these new countries, or is the growth you're seeing from countries you're already selling into?

Most of the growth this year has been in our core countries. As the new countries come on board, they start a little slow. But we are making progress in adding those 10 new countries.

By the end of the year, we're confident we'll be approved in pretty much all 10 of the ones we look to add. And then, we'd expect those to account for a decent piece of our international revenues next year. So, we'll finish that up.

Every country is important, and every one of these adds is important to us. That's how we'll build that business over time. So, our team is doing exactly what we've asked of them.

Okay. And then just lastly on gross margin, I may have misheard it, but did you say that gross margin on the G4 PLATINUM sensor was 70% to 75% in the quarter?

I said that has always been our target. And then one can deduce, looking at 65% over our margins with the hardware and sensor mix, that we're there. We're within that target range.

Fair enough. Thank you.

Jan Wald from Benchmark.

Congratulations on the quarter. It was exceptional.

I just have a couple of quick questions. Most of the questions that I had were answered.

But one is -- just to make sure on the share submission, the questions you're getting are benign, right? There's nothing that's untoward or getting in the way of a smooth answer and response?

We don't see anything as major, but we also never see anything from the agency as benign either. So, we're giving them due diligence. They didn't ask us anything we can't answer. How's that?

That's a good answer. I guess another question I had is -- are there any updates on the clinical studies you have ongoing or planned? They seem to be important to your marketing strategy, and I was wondering where they are?

We're going to give more color on that next year, once these things get rolling. I think we're in a phase -- in the fourth quarter, we're running some pilot studies. We're doing a lot of trial design and consultation.

I think next year, as we go forward, you'll hear a lot more on these studies. But right now, it's a little early to tell you anything.

Okay. And just in terms of your sales force, you have 90 reps now. You added 20. How do we see the sales -- (multiple speakers)

Not yet. We will have -- when we get --

But when you add the 20, you'll have 90.

Correct.

Okay, sorry.

That's okay.

How do you see the sales force growing, let's say, over the next couple of years? Are you there and ready with the leverage, or a lot more territories and a lot more leverage opportunities even if you add?

Well, as pointed out earlier, these guys were pretty leveraged this quarter, as we didn't add any bodies that are up 24% when comparing to the quarter before. I think we're getting more leverage out of this group all the time, particularly as we continue, again, to sell more sensors.

But I also don't see us stopping our expansion either. There will be -- at some point in time, we'll get to the right mix, and more than likely be done. But the time is not now. It's certainly not next year. And we probably don't see it being through 2016. We think we can continue to grow.

And internationally, we use distributors everywhere. We've got a pretty small, effective international staff right now. There's investments to be made in that area, as well.

So, if we're thinking about the sales force additions over time, we should just consider that what you're doing now is what we should see over the next year to two years?

As we look at our spending, and it's a good question. We've spent a whole bunch of years before 2010 investing a whole bunch in trying to get product developed and product right. And what we're doing right now, to a large extent, even though we continue to spend on the product front, it's now time for the commercial side of our Business to catch up. Not only are you going to see continued investments in the sales force as we grow it, but in all candor, we've got to become a marketing company, too.

And so, we'll be not only investing in sales, but you asked about the clinical studies. We've never run a clinical study other than for product approvals. We've got to do things that support the value and, again, support our fundamental belief that CGM is the most important technology in diabetes. And it's the most important thing for anybody with insulin-dependent diabetes to manage their condition.

And so, some of those studies that we're going to do -- it's different than what we've done before. We're going to invest in things like that, in addition to salespeople. So, as you look at where we grow our dollar spending-wise, we will more than likely grow dollars as much, if not more, on the commercial side than we will the others over the next few years while we get to an equilibrium. And then we'll see where we are after that.

That goes back to a previous discussion, I think, where you were talking about growing the top line, but also recognizing now that you're going to have to return some earnings sooner than later, and probably by 2015. So, the spend rate -- I guess it's going to affect what you're going to be able to sell to the bottom line. How do you see that going in the next year to two years?

I see that just being a balancing act, and we've got some great people here to manage it. Terry and I have been through this a few times before, as have many of the people on this team. Any project we take on, we look at the payback, we look at the return, and we sometimes learn to say no. And we do.

All right. Well, thank you very much. Again, congratulations on the quarter.

You bet.

Raj Denhoy from Jefferies.

I was just curious about some of the trends you're seeing with the launch of the G4, things like higher sensor utilization, the lower attrition rates. And I'm curious how that compares back to the experience on the launch of the SEVEN PLUS? And in particular, is there a concern that some of those very robust trends may slow as patients get more experienced with the device or we move beyond the initial launch here?

I'll speak my piece. I think it's exactly the opposite. Sensor satisfaction and satisfaction with a product like this is determined very quickly. If patients find this product reliable and informative, and a tool to manage their lives -- if they're happy, they stay on.

And so, early usage is probably the more important indicator versus long term with something like CGM or pumps or anything like that. And so, in this case, the early history of the Gen4 launch, where it has performed much better than SEVEN PLUS did in the beginning with retention and sensor utilization and those trends, is truly a positive trend for us. ¶ I don't know, Terry, if you have anything to add?

I agree with Kevin. We're getting -- moving beyond the early adopters. So, it means we're also in CGM first with physicians and patients coming in naive to technology. And it's becoming a part of the fabric of their diabetes armamentarium, so they don't know any different.

And in that fact, if they've never been on a CGM, and the first one they go on in G4, they're extremely happy if they've been on SEVEN PLUS and have moved to G4, they're even happier because they have a benchmark for which to compare. If they've been on anybody else's sensor, then they're even happier to come to G4 because they have yet another wonderful experience.

And all of that goes to reduction of attrition and continued use on a more sensors-per-month basis that we're seeing. So, I don't see any headwinds associated with that, quite the contrary.

So, to just be clear, those trends you're seeing are being experienced in both the brand new patients, but in also the upgrade patients in terms of those metrics?

I don't think we have the detail available to answer that adequately, to say absolutely. And then the comments that we have from the metrics are, overall, we haven't dug down in to see which patients are using the sensors more frequently, naive patients are new to Gen4 versus SEVEN PLUS upgrades. We don't have that data.

Okay. Thank you.

Steven Lichtman from Oppenheimer.

It's Rosemary in for Steve. Can you hear me okay? Thanks for squeezing me in.

Just quickly on the tandem PMA filing -- can you elaborate on the type of validation testing that's being done, and generally how long you think this testing would take?

No, I can't give any more specifics other than -- we've talked previously about -- applicable to Tandem and to Animus is, remember: they're moving from a 510(k) environment to a PMA environment. And the level of systems testing required of a PMA company versus a 510(k) is substantially greater. So, there's just a lot of work to do. And I think both Animus previously, and then this time around Tandem, probably underestimated the magnitude of the work that has to be done in order to complete an adequate PMA to submit to the FDA.

So, I can't go into the specifics of the details of the testing. But let's just say they're very attuned to it. And we will help them in every way we can to get the filing done as soon as possible.

Okay. Fair enough. And Terry, can you talk a little more about the opportunity for G4 in professional use? How much more of an opportunity is G4 versus SEVEN PLUS in this professional-use market?

Well, I think there's a tremendous opportunity for G4 in professional use. Physicians enjoy the opportunity to put patients on the sensor.

We have the opportunity to do it either in a blinded or unblinded manner. We prefer unblinded. I think the majority of intelligent physicians today use the unblinded way as their preference, because that allows both the physician and the patient to experience the levels of glycemic variability and get a better understanding.

I always remind physicians who want to have such control, that they only see their patients, at best, four times a year. And so, the patient is left to be responsible for their own diabetes the 361 days a year that they don't see a physician. And so, it's better to have more information than less information with the help and education from the health care professional.

But having that technology available to them will enable them to get more patients started who may, in fact, be hesitant to go on CGM. And this allows them to cross the threshold and realize how valuable the information is, and migrate then to their own personal system.

All right. Thanks for the color.

I will now turn the call back over to Terry Gregg.

Thank you, and thanks for joining us. Obviously, this was, as I think one of you, maybe Bill Plovanic said -- wow. We agree, Bill -- wow.

So, we've done everything we've said we were going to do, and then some. This technology is the most exquisite, and the management team is the best that I have ever been associated with. And my last team was pretty good.

We know we're being chased by others who want to be the lead dog because if you're not the lead dog, the view never changes. While those who chase us shoot for G4 PLATINUM accuracy, for example, we've already set our sights and are deeply engaged in therapeutic accuracy, followed by reduced or factory-calibrated sensors. So, to the 350 million people with diabetes today, help is on the way, and it will have a DexCom label. Thank you.

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