德康醫療 (DXCM) 2013 Q4 法說會逐字稿

Welcome to the DexCom fourth-quarter and full-year 2013 earnings release conference call. My name is Joe and I will be your operator for today's call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Terry Gregg. Mr. Gregg, you may begin.

Thank you, operator, and thank you to everyone for joining DexCom for our fourth-quarter 2013 conference call. As usual, I will ask Steve Pacelli to provide you with our Safe Harbor statement.

Thank you, 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 performances and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under Risk Factors and elsewhere in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports filed with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason.

Additionally, we will discuss certain financial information that has not been prepared in accordance with GAAP with respect to our cash operating loss. This non-GAAP information is provided to enhance your overall understanding of our current financial performance. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Terry?

Thank you, Steve. Well 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.

Our agenda for today's call is fairly typical. I will provide some introductory thoughts. Kevin will review our detailed fourth-quarter 2013 financial results, and provide our customary operations update, and then I will offer some concluding thoughts.

At the JPMorgan Healthcare Conference in January, we announced Q4 and full-year 2013 product revenue of approximately $51 million and $157 million, respectively. What we did not disclose at JPMorgan, but I am pleased to announce today, is that for the second straight quarter, and for all FY2013, DexCom was cash flow positive.

Before I turn the call over to Kevin, I would like to update the investment community on my evolving role at DexCom. As you know, I joined DexCom in 2005 as an independent member of the Board, and came out of my then retirement in 2007 to become the President and CEO. As a management team, we have grown the business over the past several years, and enjoy an elite status in the med-tech space.

In 2011, we added Kevin Sayer as our President, and he assumed the title of Chief Operating Officer in 2012, to the expectation that he would mature into the role of Chief Executive Officer as my successor, and I would move to the position of Executive Chairman. As most of you are aware over the past several years, my role has become increasingly external. I have spent the vast majority of my time in the field, being with clinicians and other key stakeholders in diabetes.

During that time, Kevin has been largely responsible for the day-to-day operations of DexCom, and he has done a remarkable job, as witnessed by our growth and success. So on behalf of the Board of Directors, I am pleased to announce that effective January 1, 2015, Kevin will assume the title of President and Chief Executive Officer, and I will transition in to my role as Executive Chairman, remaining, of course, as an employee and active member of the Senior Management Team.

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

Thank you, Terry. I will start off with our financial update. DexCom generated $51.3 million in product revenue for the fourth quarter of 2013, compared to $31.7 million for the same quarter in 2012, a $19.6-million, or 62%, increase. We are especially pleased with our year-over-year financial performance. When you consider that we are comparing the fourth quarter of 2013 to a quarter in which we had very robust product sales in connection with our Q4 2012 launch of the G4 Platinum.

Sequentially, product revenue for Q4 of 2013 increased 21% from the prior quarter. Total revenue for the fourth quarter of 2013 was $51.7 million, compared to $33.3 million during the same quarter in 2012. Our product gross profit totaled $34.1 million, generating a product gross margin of 66% for the fourth quarter of 2013, compared to product gross profit of $17.2 million and a product gross margin of 54% for the same quarter in the prior year. Sequentially, product gross margin for Q4 of 2013 increased only slightly from the entire quarter.

Although we are now achieving our gross margin target of 70% to 75% on our sensor disposables and approximately 50% on our hardware, going forward, we will continue to seek improved gross margins through increased volumes, continued manufacturing improvements, the continued shift of the sales mix to more disposable revenue, along with our future product designs.

Some final thoughts on our product revenue and gross profits: during Q4, we added more new patients and sold more sensors than any other previous quarter. Consumable and durable revenues both increased significantly from Q3 2013. The improvements in patient retention and increased sensor utilization with the G4 Platinum system we spoke of during our last earnings call held steady during Q4.

Our mix between durable and consumer products is approximately 30% durable and 70% consumable, a mix we expect to remain fairly consistent going forward. ASPs for sensors has stayed consistent at approximately $70 per sensor, and the ASP for our hardware continued at approximately $850 per starter kit. Finally, our international business performance exceeded our expectations in 2013, as it was up approximately 80% year over year and represents approximately 8% of product revenue.

Research and development expense totaled $12.6 million for Q4 of 2013, compared to $8.6 million in Q4 of 2012, with the increase due primarily to additional payroll-related costs and expenses related to work on our near-term product pipeline. Sequentially, R&D expense was up 7%, with the increase primarily due to additional payroll costs and non-cash charges related to our SweetSpot acquisition and share-based compensation expense. As we move forward into 2014, we expect that R&D expense for the full year will be up between 10% to 20% versus 2013.

Some expenses, such as overhead and our share-based compensation expense, will increase as a cost of doing business. Additional increases will depend upon our development progress and regulatory timelines with respect to continued system performance improvements, development of our G5 and G6 systems, our mobile and cloud-based data platforms, and a variety of clinical trial opportunities we expect to explore during 2014.

Selling, general, and administrative expense totaled $23.8 million in Q4 of 2013, compared to $17.3 million during the same quarter in 2012. The increase was primarily related to increased headcount in our sales organization and increased variable compensation for the sales team related to our robust product sales during the quarter. The increase also included $1.1 million of additional non-cash share-based compensation.

As we look to fiscal 2014, we expect an increase in SG&A expense of approximately 20% to support our growth, driven primarily by increased share-based compensation expense, as well as investments in sales and marketing and our infrastructure necessary to support growth.

Our net loss for the fourth quarter of 2013 totaled $2.6 million and included $9.3 million in non-cash expenses, centered in share-based compensation, depreciation, and amortization. Absent these charges, our net income would have been $6.7 million for Q4 2013. Also, absent our non-cash charges, our net income for fiscal 2013 would have been $5.2 million. Compare this to an adjusted cash-based net loss of $2.2 million for the same quarter last year and an adjusted cash-based net loss of $29.2 million for the full year in 2012.

If I could summarize our operating performance, it's pretty simple. During 2013, our product revenues increased by $64 million. And our cash base, operating results increased by $34 million. It's an amazing accomplishment for our team.

Our loss per share for the quarter was $0.04. With respect to our balance sheet, we ended the fourth quarter with $54.6 million in cash and marketable securities and debt availability of $28 million.

I would like to close the discussion of our financial results with some thoughts on the first quarter of 2014. While we do not give specific quarterly guidance, as we've discussed on numerous occasions, the fourth quarter is typically the strongest of the year for those in the durable medical equipment business, as annual deductibles have generally been met and flexible spending account deadlines loom. So patients who participate in these employer-sponsored programs must utilize any excess funds they have saved prior to year end.

Just as a point of reference, our Q4-2013 product revenue exceeded our total product revenue for 2010 by over $10 million. Obviously our strong Q4 performance begs the question, what will our growth be in 2014? As a reminder, at the JPMorgan Healthcare Conference in January, we issued guidance of estimated full-year 2014 product revenue ranging from $205 million to $225 million, and we remain comfortable with that guidance.

While we do not provide specifically quarterly guidance, I remind investors that the first quarter is traditionally a seasonally slow quarter for our business, as annual insurance deductibles reset and flexible spending accounts are largely unfunded. As a result, our patients typically purchase as much product as they can during the fourth quarter, and 2014 was no exception.

We now have data to support that the average out-of-pocket expense for a patient during the first quarter of a given year is approximately 40% to 50% higher than the average out-of-pocket expense for a patient during the fourth quarter of the prior year. That out-of-pocket expense decreases gradually through each quarter over the course of the year.

I also remind investors that in past years, including 2013, approximately 40% to 45% of our product revenue was generated in the first half of the year, and 55% to 60% was generated in the second half. And we do not view 2014 any differently. Finally, last year Q1 accounted for approximately 20% of our annual revenue, and we would expect similar performance in the first quarter this year.

I will move on to our business update. I am pleased to share that we have achieved another significant operational milestone. Just two weeks ago, we received FDA approval of an expanded indication for our G4 Platinum to include patients as young as two years of age. We began taking orders for our pediatric product immediately upon approval, and we completed our initial shipments to patients within a matter of days.

I would like to acknowledge the hard work of the people at DexCom, especially our outstanding clinical, regulatory and operations teams, who have enabled DexCom to bring such an important technology to virtually all people with diabetes. We have several additional filings pending before the FDA, including a PMA supplement seeking approval of the DexCom share system and a PMA supplement seeking an expanded indication for G4 Platinum for professional use. We continue to have active dialogue with the agency regarding these important products.

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

Shifting to our integration partnerships, both Animas and Tandem continue to press forward with final development, testing, and regulatory matters with their respective sensor-augmented pump systems, and we continue to assist them in these endeavors when asked.

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

Thank you, Kevin. I would like to start by highlighting our 2013 financial performance. Product revenue clearly exceeded our expectations, both in Q4 and for the full year, but I am equally pleased by our operating performance. As you know, our Board set a stretch goal for us to reach cash operating breakeven for full-year 2013, and we achieved that goal. Needless to say, I'm excited by the long-term profitability profile we believe we can achieve here at DexCom.

Having just returned from the annual ATTD meeting in Europe, we remain convinced that sensor accuracy is what matters most. And while the competition tries to confuse the issue, in multiple independent studies, our G4 Platinum sensor is significantly more accurately than Medtronic's Enlite sensor.

At this point, most investors are aware of the work by Boston University where Doctor Steven Russell shared comparative data from patients simultaneously wearing the G4 Platinum and Medtronic's Enlite, with reported MARD of 10.8% from the G4 Platinum and 17.9% from the Enlite. And during our last earnings call, we discussed data presented by Harvard Children's Hospital examining the use of CGM in critically ill infants, and reporting an MARD for the Enlite of 17.8% and an MARD of 11.7% for the G4 Platinum.

Well, earlier this month at ATTD, data from the SPACE2 study was presented. SPACE2 is yet another independent, head-to-head study, and this time, the data showed an MARD range of 12.2% to 13.6% for the G4 Platinum and 16.6% to 19.9% for the Enlite. This data also showed particularly poor hypoglycemia performance for Enlite

Yet again, it seems that no independent investigator can reproduce the Medtronic data. And while we continue to see some distraction in the field, by and large, we have not seen much of an impact to our business as a result for the 530G launch.

As I close this conference call, I would like to add some additional color on my transition to Executive Chairman at the end of this year. One of my [three] personal goals was to help the Company achieve positive cash flow. As we presented today, we have achieved that for the full year in 2013. A year earlier than predicted.

I remain passionate about DexCom. My wife has often referred to DexCom as my mistress. As Executive Chairman, I will continue to provide DexCom with vision and strategy as we continue to lead the category with superior technology and outstanding execution.

Kevin and his leadership team must continue to focus on our core business. The growth opportunity for CGM in both the type 1 and the type 2 diabetes population is tremendous.

We had over 7,000 unique prescribers in 2013, and yet we called on only approximately 2,000 prescribers with our sales force. It is clear that patients are pulling the product through the channel, as we predicted. We need to expand our efforts to reach this growing population.

I will remain intimately involved with Kevin and his and his leadership team in driving our core business. But I also believe our technology is expandable for other markets. As an example, I mentioned above a study involving 900 critically ill infants with diabetes, utilizing our G4 Platinum CGM in the ICU at Harvard Children's Hospital. The results were remarkable and convinced us once again that glucose is a vital sign in this environment, along with the more traditional vital sign measurements.

We also know that there is tremendous benefit to non-insulin using type 2 patients utilizing CGM as a diagnostic behavior-modification tool. I am excited to explore these and other opportunities in greater depth.

Just last summer we used our G5 system to monitor 30 cyclists remotely from San Diego for over 13 days during a race from Brussels to Barcelona. I want to accelerate that capability on a global basis, and we are exploring opportunities with broadband carriers as part of that effort.

For the last several seasons of the reality show, The Biggest Loser our CGM technology has been utilized as a part of this weight-loss program. I believe CGM can play a very important role in the obesity market, particularly with behavior modifications. These are all areas I will focus on as Executive Chairman, and I will be actively involved in helping DexCom develop programs to address these markets as our products evolve along a well-planned developmental pipeline.

I've been called a dreamer at times, but many of my dreams have come true. Over the past 20 years, I have been involved in several companies that have grown to some $15 billion of market cap. It is rare when a CEO has the opportunity to hand pick his successor, work with him to build a world-class organization, and hand the reins over with complete confidence in his leadership skills and his vision for the Company.

I also remind the audience that I remain the largest individual shareholder of DexCom stock, so I have a significant incentive to remain engaged and to see that DexCom continues to be highly successful. I am not retiring; I am just graduating.

Thank you, and we will now turn it over to questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question here is from Mr. Ben Andrew from William Blair. Please go ahead, sir.

Good afternoon, guys. Thank you for taking the question. I wanted to ask a little bit on two topics, first is the peds ramp. Terry, do have some sense of what percentage of clinics are reflexively prescribing CGM on diagnosis at this point? We've got some high-profile examples, but is that becoming more commonplace?

Obviously from -- I will take the second question and turn the first question back over to Kevin. Obviously, when you look at the large number of prescribers that we don't call on, it is clear to us that there is an opportunity there to grow that market. And I think it is reflective of the tools that we need to develop from electronic conductivity, as well, to reach out and expand that capability.

With respect to the peds ramp, Ben, as we've said earlier, currently, our patient base is between 8% and 10% pediatric patients, and we expect it to grow to be about 30%. That ramp will take some time as we begin to call on these pediatric endocrinologists we haven't called on before. We'll build trust; we'll get a few patients on the system. We expect it to take off from there.

It will take a little bit of time. Our team is focused on calling on these clinics. They have made initial calls. As we look at our daily leads that come in, we are seeing a lot of pediatric patients. But it is not wildly disproportionate to our regular patients. It is growing, and it is growing gradually, and it's growing very nicely.

So Kevin, 30% of your users would be just a little bit -- it would be pretty close to the overall type 1 population. So is that --

It won't happen in a year.

It won't happen in a year; you're talking two, three, four years in your view?

Two to three.

Okay, and then as we think about, again, this notion of utilization and retention remaining steady, I think is what your comment in the commentary, was that related to the fourth quarter specifically? So it was flattish, and you didn't -- so you delivered the revenue, but without seeing an increase in utilization or retention versus Q3?

The trends are consistent over time, Ben. Our point is we are certainly a lot better than we were year ago. As far as the specific percentage increase, I can't give you one.

But it was --

Things where very good; if anything, patients bought more sensors in Q4 than they did in Q3. So if we were to look at that raw data from an individual point in time, it would look higher just cause of volumes, but I wouldn't skew that because of year-end purchases. We look at (inaudible) over time and things are very good; they're what we want them to be.

Okay great. And then the last question is, you mentioned the development progress with G5 and G6. Anything in particular on the timing with those or when we might see a regulatory submission or studies? Thank you.

We run early phase studies on all of our technologies before we go to publication, and we're running early phase studies on several different versions of these products in the pipeline now.

As far as timing, we need to get share approved first, and that is really our first foray into the Gen5 market; that will be our first cloud-based mobile application where you can share your data with others. I think once we get that approval, that will trigger a lot of efforts and a lot of thoughts on our part as to how we can accelerate things and how fast we can go.

Now those product lines are both in pretty heavy development right now.

Thank you.

Our next question comes from Mr. Bill Plovanic from Canaccord. Please go ahead.

Great, thank you. Good evening. A couple of questions, gentlemen. First, on -- can you separate out the specifics of G5, like what exactly will be the benefit to G5 over G4, and then the same for G6? And then I have one follow-up question.

G5 is going to be focused largely on connectivity, mobility, and convenience. And it will come out more than likely as a series of launches, rather than one big launch, with the end goal of G5 being a simplified application system at the end, combined with connectivity to a phone, in addition to being connected to your receiver and cloud-based data.

We will go there in the series of steps. That system will use the Gen4 sensor as currently configured, but with new algorithms that we've developed over the course of the past two years that will improve accuracy and reliability. With respect to the Gen6 system, that is our first step toward doing a couple-- three things: eliminating some of the calibrations, getting a replacement claim or a dosing claim so you can dose insulin, and then ultimately eliminating finger sticks altogether.

As far as accuracy, we will see how much better we can get. As you hear from Terry on the clinical data we've had on free capital and [Don Miyano] and Steven Russell's work, we're already down to 10, which is pretty close to where meters are anyway and lab instruments aren't a whole lot better than that. So we will continue to pick up accuracy points.

The other thing that we will note with Gen6 in the future is we will eliminate the interference. We will block the interference that we have some contraindications for, and this goes along with what Terry said: as we get to a Gen6 sensor, we can go to these other markets. We can go to the hospital, because that sensor will block the effect of all compounds that those patience are taking; we can also go to maybe a type 2 market, because you wouldn't need necessarily all the calibrations; and if we get advanced enough, as we talk about eliminating, then that becomes a very simple system for someone who had type 2 diabetes or type 2 diagnostics.

So as far as timing, we're going to keep that pretty much under wraps for now.

Okay. And then my second question, is to talk on disposable manufacturing. You are obviously printing a lot of disposables at this point, probably somewhere 0.5 million a quarter you probably sold, maybe a little more than that. The question is, what is current capacity per quarter, and what do you need to do to expand that? Thank you.

Bill, we're not even on two shifts yet, and our capacity is certainly above what you just quoted as our 0.5 million a quarter. The manufacturing processes have become much more robust and much more standard. We've got plenty of space. We can replicate any of these equipment lines quite quickly.

We grew 69% last year on an operating plan that was 40%, and we never missed a shipment. I don't think you will find a place more flexible and more robust than this one, so we're not concerned about that.

Excellent. Thank you.

Our next question comes from Kim Gailun from JPMorgan. Please go ahead.

Great, thank you and congratulations to both Kevin and Terry on today's announcements. So first question, I wanted to follow-up on the commentary around the attrition and the utilization. In my model, I've got attrition -- and I know you don't call it out, but I've got the attrition trending down pretty consistently since the launch of G4, and then the sensors per patient actually picking up modestly from third quarter to fourth quarter. So does that seem about right to you?

And as we think about 2014, understanding the comments you made on the first quarter and the seasonality, do you think that these two trends continue to improve? Or do you think you've reached a stable working point?

Kim, this is Steve. I'll take this one. On the first thing, on -- you had attrition trending down. I'm not sure that's actually the right way to look at it. I think what we saw is a pretty dramatic shift starting with the launch of the G4 Platinum in attrition to coming into a much more, what I would call, a normalized world.

And I think what we've talked about publicly before -- we're not -- without, again giving out specific numbers, what the gang here saw back in the mini-med days, something that we're just more comfortable with. Certainly attrition on the Seven Plus was much worse, potentially even than we expected as we converted the base over.

On the utilization side, the way you need to look at utilization is at a point -- and I think it was either Ben or Bill that asked the question, is utilization continuing to improve? There's going to be a point at which we know not all patients are going to use sensors all the time. We think most patients, a greater number of patients are using sensors virtually all of the time now, as opposed to Seven Plus where it was much more sporadic.

But at the end of the day, patients can still extend the life, so you are never going to see a point where patients are using -- where all patients or a vast majority are using four sensors a month. I think we used to quote 2 to 2.5 sensors a month on average, and that's probably bumped up, but I don't think we expect, going forward, I don't think we expect utilization, per se, to pick up dramatically.

What's important is we continue to add new patients to the base, and those patients continue to use sensors virtually all the time. In essence, the utilization continues to be very robust. Does that make sense?

Yes, that's helpful. So the implication is that yes, there's a little bit of room for improvement.

Yes, at some point, patients are going to continue to extend the life of the sensors, so (inaudible) we can improve utilization by (inaudible).

Anecdotally, we ask most every patient we meet, how long do you wear your sensors? And we very seldom hear, I swap it out every seven days.

So if they're wearing it 10 days, or 10 or so days, that's 3 sensors a month; 10 to 14 days is 2 sensors a month. It's somewhere in between there.

A follow-up, I don't know if you guys updated your expectations for the timing of Vibe in the US.

No we didn't. They're still working diligently. It's one of the things we've made the decision publicly not to speak on behalf of our partners anymore; so I would defer you to Animas and Tandem for specifics on timing, particularly Tandem, as they are a newly public company. We don't want to step on their toes, so I would defer you to the partner.

Okay. Thank you.

Our next question here comes from Danielle Antalffy from Leerink Partners. Please go ahead.

Thank you so much. Thank you guys for taking my question. Congratulations to you, Terry, on graduating and, Kevin, on your upcoming new role. That's great.

So I wanted to follow-up on Animas [side] and Tandem. I understand you can't talk about timing. But how do we think about progression through the year on? Maybe not in 2014, but in 2015 and beyond, how do we think about the impact to new patient adds from both of those products?

I think we've said when we gave our guidance at JPMorgan, we were pretty clear that we don't have any contribution from our pump partners domestically in our guidance for 2014.

Right.

There is some contribution, obviously, from Animas who's been commercial in Europe for several years now. I think we've said this on multiple conferences. I think the relative importance of our pump partners, sitting where we are in 2014 and going forward, is frankly it's just less than it used to be. Back in 2008, 2009 we were a much smaller organization with a much smaller sales force; today, we out-man Animas probably close to two to one in the field. Tandem is doing a great job growing their sales force; I think Tandem could certainly be more additive there.

But I think the way I would really look at the pump partnerships going forward is they're additive. I can't give you specifics on how additive in terms of specific numbers of patients. I think you would need to -- look at -- extrapolate what Tandem is going to give in terms of guidance and to the extent you can get information from Animas.

But I think we look at it additive; they are certainly not transformative to us. And I think particularly as we look to Gen5 and we move to the phone, we believe patients are going to more than likely prefer to use their iPhone as the means of display and interaction with their CGM data than pulling out their pump. We even have some data to suggest in Europe, patients who have been purchasing the Vibe had actually purchased a separate DexCom G4 Platinum receiver, because oftentimes, patients try to hide their pump, and it's easier to pull a G4 Platinum receiver out of their pocket.

So as we move to the phone, I think that's really, as Kevin mentioned in the prepared remarks, the convenience and connectivity of the phone is really where our future lies.

Great. My next question is, obviously, Medtronic is pursuing the low-glucose suspend role as the next step toward the artificial pancreas. Curious, so now that you guys are working on integrating with pump companies, what your view of is as it relates to the next step toward the artificial pancreas? Will you guys pursue a low-glucose, suspend-type technology, or what's next with the integrated system?

This is Terry. As we've stated before, we are, obviously, the premier sensor component. Of the overwhelming majority of artificial pancreas programs that are in place around the world, most of these are academic-based, and they use a wide variety of different insulin-delivery devices.

Certainly Tandem, Insulet is in that group; Roche is in that group; Animas is also in that group, and in many ways we are somewhat agnostic from that perspective. So any ultimate commercialization of a technology that, within this classification of artificial pancreas, will really be driven by the commercialization partner, not by DexCom.

We are happy to support those efforts. We are happy to lend our expertise, but the reality of what our mission statement is, and that's replace finger sticks. So we never lose sight of that each and every day. We look at the global market and the increase in total number of patients either having diabetes or over the next 10, 20 years, developing diabetes.

What we do really well is we develop advanced technology and sensor capability, and that's what we will continue to focus our energies on.

Thank you so much.

Our next question here comes from Mr. Jason Bedford from Raymond James. Please go ahead.

This is Mike Rich calling in for Jason. Can you hear me okay?

Absolutely.

Thank you for taking the questions. Since your gross margins where obviously the highlight of 2013, I think sometimes gets overlooked. I was wondering where you think that can exit 2014? And now that you think it can trend above that previous 75% range, do you have a longer-term goal?

Terry and I have made this statement before as we evolve into next generations of sensors, we think we can get closer to 80%. That will require some changes in the fundamental assembly process, and some molding, some tooling. So there's a lot that's got to go on there, and we're working on all those things.

One of the things that it's just a 80-base hit for us, the fact is, being in San Diego with our overhead rates, volume increases do a lot to help us on the sensor manufacturing side. So as we continue to grow at very healthy percentages, we pick up margin points there and we get more efficient.

So right now, we think as you look at 2014, we move to the higher end of our 70% to 75% range, and over time, we'd have targets to go from 75% to 80%, again, assuming all pricing remains the same. And we've got plans to do that. There's no question our guys are working on that and very cognizant of that on a daily basis.

Okay great. That's helpful. As a housekeeping item, Kevin, can you give us an idea what percent of your hardware revenue in the quarter went to new patients?

We gave the number at JPMorgan that we've sold 60,000 G4 kits since the launch of the product in 2012, and that's what we're -- and we gave, I think it was 10% of those were to patients who already had one Gen4 system. So that's where we are staying with that.

Obviously as we sell more transmitters and have more patients by a second transmitter because the first one runs out, those numbers even become more cloudy for us internally. So start with the 60,000 patient -- 60,000 G4 kit number we gave out in early January, and you can work back from there.

Okay. Thank you.

Our next question comes from Mimi Pham from ABR Health Co. Please go ahead.

Good afternoon and congratulations, Kevin and Terry. Regarding Medtronic's comments on their quarterly call about taking 4 points of sequential share in the pump and CGM market, can you address that? Is that -- because it doesn't sound like that's consistent with your commentary. Are they talking about perhaps in [centers] beyond your focus 2000?

Mimi, this is Terry. Thank you, it's always good to graduate. A couple of comments.

The first one is, it's always difficult when you hear somebody from Medtronic speak as to how they calculate anything. It always reminds me of Pinocchio, quite frankly, when I hear a Medtronic person speak.

So it's very difficult for me to, as to as I mentioned, three independent investigators have far different numbers than Medtronic [from a science]. So I don't know what they're talking about.

I read their transcript. It said, pump and CGM, 4 percentage points. We obviously didn't see it. We had a $51-million quarter; we saw more patients than we've ever seen before.

We're not feeling it, I mean we do channel checks to our customers. We still have a lot of Medtronic patients.

They may have tried it, because Medtronic forced them to buy the sensor components, so maybe there is some of that calculated into their numbers; we will see. I think they are recurring, obviously, a lot of those Medtronic patients who tried it are still our patients, because they actually want an accurate sensor. From that standpoint, time will tell. Time will tell.

That's helpful. Regarding also the -- going to the ATTD, did you see any data or hear any feedback on -- they talked about their next-gen Enlite enhanced CGM, any thoughts on that?

No. Quite frankly, we listened to whatever they had to say, and we saw nothing. They said they've launched in five or six countries; we haven't seen any from our international group, anybody commenting on it.

Looked at whatever data they presented; it didn't appear to be all that different than the Enlite 1. So not sure. Again, I think we've -- experience level will determine what is truth and what is fiction.

Got it. And then last, you talked more about your CGM first strategy at the ADA or ADE, can you talk about how is that having any impact at any certain centers that might be implementing that more?

I think obviously, by our numbers, it's been pretty successful. I think we have impacted, and in fact, you take some of the largest centers in the United States, in particular, where now it is a standard operating procedure to put a patient on CGM well in advance of pumps.

And let the patient ultimately decide on what method of insulin delivery that they want, that pumps are in fact, a secondary choice, lifestyle choice, not necessarily a need. That when you're talking about glycemic variability, you have to know about your glycemic variability in order to do something about it.

Pumps are a convenience, and so I think that is finally resonating. We have been at it now over a year since we started messaging, and again $157 million for the year. I think we're pretty successful versus a little under $100 million in 2013.

That's helpful. Thank you so much.

Our next question comes from Mr. Anthony Petrone with The Jefferies Group. Please go ahead.

Thank you, gentlemen, and congratulations again on the new appointments. A little bit on the headcount need for pediatrics, and on the approval there in the US, 800 to 1,000 pediatric endocrinologists. So wondering how should we be thinking about SG&A, specifically leverage, as you look in to 2014 based on the needs to expand the sales force there a bit?

Then a comment on utilization, specifically within the pediatric market, where is that today within that 8% of total sensor volumes today? And I'm assuming that would be extrapolated throughout the pediatric user base as that expands. And then one quick follow-up on potential Gen5 and Gen6 products.

With respect to the sales force expansion, we took care of that in Q4. We added literally 30% more field bodies than we had before, and that expansion was, for all intents, complete by mid-Jan, just a couple left to hire in early January and those have been hired. We're expanded as far as we're going to, at least today, for 2014.

And that expansion wasn't really pediatric driven, it was driven by all of our business territories, and all of our reps will sell pediatrics and regular patients. Our territories have been redone; our new reps are on the ground and doing very well. So the expansion has occurred.

With respect to utilization of pediatric patients, we don't have separate data broken out. Anecdotally I can speak, and Terry, if you have anything to add. In a very young pediatric patient, you have a parent that's driving therapy, so a parent is going to make the decision to have the child use the sensor all the time. As the pediatric patients get older, particularly in their teenage years, that utilization becomes a little bit different, as kids don't want to have everything connected to their bodies all the time.

Our utilization should be at least equal to, if not better than, it is for adults in the pediatric market, particularly as you look at the younger segment.

That's helpful. And the follow-ups on G5 and G6, and I know it's a little premature. You have the sensor ASP around $70 overall today on the G4. I'm curious as to thoughts on pricing G5, and then, G6 or beyond potentially, when we do move away completely from finger sticks, where you envision sensor pricing can go overall? Thank you.

Sensor prices are computed on a per-day reimbursement rate with our payers, and that $70 reflects an average of about $10 a day for a sensor wire. As we go out further over time, our best chance for price increase is probably extending the wear more days versus seven days, and getting a price increase that way.

On a per-day basis, possibly if we eliminated calibrations, we could get some of that. But ultimately, we are committed to the fact that this therapy is going to have to save money in our current healthcare environment if it's going to continue to grow and be successful.

So we are running our business, planning on driving our costs down, being as efficient as possible, and being able to deal with every pricing scenario that come our way. If we can replace finger sticks and have a sub-10 MARD with our sensor, it might be feasible that we go ask for more pricing, but we are not focused on that today. We need to get there first.

If I could add one in there about gross margin, it seems like you have pretty good volume coverage to reduce overhead in the factories. A little bit more detail on gross margins again, for maybe sensors specifically, and where potentially -- how do you get from the level today to where the vision is for potentially 80% gross margins on sensors, if it's not necessarily price-driven?

Again, we have never had our margin -- we have never as we've talked about margins going up, driven them up based on increase prices. It's already been on improvement in our processes.

The key word there is automation. A lot of the things that we do today, we still assemble applicators, and there's still a lot of manual processes in the things that we do. We have plans to automate a lot of those things over time that are largely dependent upon how quickly we go with our future product generations.

Another thing that will help margins over time, just margins as a percentage, when we go to the cell phone model of Gen5, the receiver won't be as intricate. We may lose a few dollars on the revenue side with respect to selling fewer receivers, but that will pick up more as we add more customers and sell more sensors to those customers. So you would see a mix shift in the sales to more disposable products.

But automation gets us there. On our future product designs, we don't design anything without it being cost-effective and more cost-effective than what it's replacing. So these guys have been innovating for a number of years. In fact, we joke about it; we've got everything stacked; We've got five years of innovation stacked right on top of each other, that we need to get out the door and get through the agency. These designs are all more cost-effective than what we do today.

Helpful. Thank you again.

Our next question here comes from Ken Wald from The Benchmark Company. Please go ahead.

Good afternoon and congratulations on the quarter and congratulations on promotions. I may be the last that says that to you. I have a couple questions; a lot of questions have already been asked.

It seems to me that the revenue versus OpEx has -- you have a nice ratio there, $64 million in sales, $30 million in OpEx, something along those lines. Should we see continued improvement in that? If so, how are you going to drive especially the OpEx side of that ratio?

That is a very good question. As we look at going forward, as Terry graduated and I'm just starting school, I guess would be the best way I could describe it, we have to balance three things: this continued accelerated revenue growth. Our goal is always to grow the bottom line faster than the top, and we will run the business that way.

But the third piece of that is getting this innovation out to the market, and how much do we spend to get these new products out? And how much do we spend to expand our field efforts and get more people aware of our technology? So we're always balancing those three things.

Our ratios have clearly improved in 2013. We would hope they continue to improve in 2014, and certainly that's our plan.

That being said, as we look at our innovation opportunities, as we look at clinical studies we plan to do, as we look at possibly, additional field expansion if things go very well, we will wait and see how those ratios shake out for next year. We will feel the need to keep going fast and go faster. And so that's how we look at it day to day.

Okay. A question on the European markets, how do you -- what's going to be your approach for expansion there? How are you going to attack those markets?

Our biggest win there over the past few months, as we are starting to gain traction to get reimbursement from the reimbursement authorities for CGM as a standalone. A couple of countries, Switzerland and Slovenia have now approved CGM for patients, and there is efforts ongoing in several of the larger countries as well, because they see the benefit of that.

Right now, our European business is to a large extent, cash pay from patients or also physicians who use it as a diagnostic. They're not getting reimbursed by insurance. As we get reimbursement in the European companies, that will be our biggest driver in those other markets.

Thank you very much, and congratulations again.

The next question here comes from Tao Levy from Wedbush. Please go ahead.

Hello, good afternoon. A couple quick questions, I think in prior calls you've talked about either the penetration of CGM into the type 1 diabetics in the US market in the upper single digits, close to 10%. And assuming you're splitting share with Medtronic, we're still at that level. Were your guesstimates off last year, in the sense that maybe the penetration was lower than you thought? Or was it a lot of attrition of CGN patients in prior years?

I don't think our estimates were off, per se. I do think we had a bigger attrition [provincy]. Here's the other factors.

We don't have great visibility into Medtronic's numbers. We know what our numbers are, and we're pretty comfortable at what percentage penetration we have into the type 1 market in the US.

While our attrition on Seven Plus may have been a little bit worse than we had initially anticipated as we converted the (inaudible), we remain very comfortable with our prior statements where we were, and particularly over the course of this past year in 2013, and where we're growing. It's hard sometimes I think to compare apples to apples between our numbers and the numbers that Medtronic puts out because our patients go on CGM and they continue to use CGM on a go-forward basis.

We believe that in Medtronic's numbers, there are a number of things. There are patients who may try the sensor, may fall off the sensor. There are also -- they report revenues and sensor utilization for a completely different product, for their iPro product, which is really just a diagnostic product. If they lumped that into quotations using CGM, it's not really apples to apples, because these are not patients who are using CGM on a real-time basis going forward; these are patients who might use it once a quarter or once or twice a year.

So it's hard to characterize those, in my opinion, as real-time CGM users. So it gets really tough to quantify when we don't have great visibility into their numbers as to what the overall CGM penetration into the type 1 space is.

So basically, but the math and how you're seeing the attrition now with the G4, penetration rates should materially move higher.

We've given guidance, and obviously in that guidance, it assumes a pretty healthy new patient add rate over the course of the year. And we've talked about our reduced attrition rates, et cetera. So yes, we assume that we at DexCom are going to continue to penetrate and grow our share of the type 1 space in the US for sure.

One big-picture question, as more providers start entering into accountable-care type arrangements and potentially share some of those cost savings tied to patients achieving certain A1C levels, does the discussion with these doctors start to revolve around the use of CGM, their ability to get their patients' A1C levels down? And the doctors in return, they get paid more from the insurance companies and patients do well, and DexCom does well. Are we there yet, or is it still too early in the conversations?

It's not too early for the conversation. It is too early for the implementation. But we have long been of the position that we are quite willing to go at risk with the payer opportunity to say to the payer, set forth your strategy or the patient group that you would like us to address, and that we are willing to, like I said, go at risk.

And along with that in the end, if we save the payer system money, we want to this share in the savings. I think that's what is eventually going to happen, you're going to first see it at the physician level from payment; they're going to get paid for success.

But I am of a belief, personally, that the industry that is addressing this population are also going to have to have some skin in the game in the future as part of this whole payment structure. And I do believe -- and it's pretty clear that to use A1C as a criteria, every study that you have ever seen, to my knowledge, that is not probably meta-analysis, but in direct studies, demonstrate a significant reduction in A1C, depending upon the patients entering baseline, but reduction in A1C with the utilization of CGM versus any other technology within the diabetes space.

So I do see that as something coming forward, and we are happy to be part of that equation. I think it's a great opportunity for us then to really showcase what we can do with that environment. But it's literally at a discussion stage, not at an implementation stage.

That said, and I will diverse just for second, and that is in the hospital market, and why I get so excited about G4 is good enough to be in the hospital, and some of the attributes that Kevin talked about will drive it even further. That market is clearly one in which, if there is recidivism of a patient, then the hospital doesn't get paid.

So they already are experience that pushback from the government, and there is a lot of dialogue that is going on at the endocrinology level about trying to achieve a certain level, not only of A1C but actual recording of average glucose levels in order to keep them between a certain bandwidth where they started to allow that to ease up to around 180, and now some of the criteria says we want these patients back closer to 140. So the dilemma is, how do you get them to 140 without starving them, basically, while they are in the hospital? And that is actually a very active dialogue that is being communicated amongst the endocrinology population, and that is where we fit in quite easily. ¶ There's no better way to get a patient to 140, keep them north of 80 but below 140, than with CGM. You don't have to really worry about what they're eating; the last thing you want to do is starve a patient in a hospital setting just to achieve some artificial level of glycemic control.

Thank you. Thank you for the thorough response.

And at this time, I'm showing no further questions.

Thank you, everyone. Obviously an exciting call for us, and I always have this reflection as I transition to this new role. So here's my reflection for today.

Look at statistics, and today 1 in 10 adults in the US has diabetes, and it is projected that 1 in 3 will have diabetes by the year 2050. So according to the pharmaceutical research and Manufacturers of America Association, US biopharmaceutical research companies are currently developing 180 new medicines for diabetes.

You know the cost to bring a new medicine from concept to reality is well over $1 billion. And yet today, here is DexCom with tools in the field that improve, there again, glycemic variability. We don't need drugs, we already do it.

So we feel that we are extremely well placed to expand on our opportunities. As Kevin mentioned in his comments, do you hear us talk about how accurate we are today? You hear us talk about the ability to expand connectivity and convenience, and that is driving right into the sweet spot of this expansion of diabetes care.

We have tools and are developing tools, not research so much, but as developmental tools, because we have already done the research to get a highly accurate sensor. Now we can expand on that to make things simple to use by a much larger audience.

So I am thrilled about the prospects. Obviously we had to get to cash flow positive and ultimately to profitable. But, until that day arrives and we are certainly at a pace, we now have the leverage to expand our capability to a much larger market.

So with that I will sign off, and say thank you.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation, and you may now disconnect.