DexCom Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 27, 2021

Key Takeaways

  • DexCom reported 30% revenue growth (28% organic) in Q3 2021 with record new customer adds, reflecting strong global CGM adoption.
  • The company secured FDA clearance for its real-time API and in-app module, enabling partners like Garmin and UnitedHealth to integrate live glucose data into their apps.
  • DexCom launched its entry-level DexCom ONE system in four Eastern European markets via a direct-to-consumer e-commerce platform to reach new patient segments.
  • The next-generation G7 sensor remains on track for a Q4 2021 CE Mark launch in Europe, with a full U.S. FDA submission to follow imminently.
  • DexCom raised full-year 2021 revenue guidance to $2.425–$2.45 billion (26–27% growth) and reiterated targets of ~68% gross margin, ~16% operating margin, and ~25% adjusted EBITDA.
AI Generated. May Contain Errors.
Earnings Conference Call
DexCom Q3 2021
00:00 / 00:00

There are 17 speakers on the call.

Operator

Welcome to the DexCom Third Quarter 2021 Earnings Release Conference Call. My name is Daryl, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer Please note that this conference is being recorded. I will now turn the call over to Sean Christensen.

Operator

Sean, you may begin.

Speaker 1

Thank you, operator, and welcome to DexCom's Q3 2021 earnings Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will provide a summary of our progress on our Q3 highlights and strategic initiatives, followed by a financial review and outlook from Jeremy Sylvain, our Chief Financial Officer. Following our prepared remarks, we'll open the call up for your questions. Our Chief Technology Officer, Jake Leach, will also be present with us for the Q and A period. We ask analysts to limit themselves to one question, so we can provide an opportunity for everyone Please note that there are also slides available related to our Q3 performance on the DexCom Investor Relations website on the Events and Presentations page. With that, let's review our Safe Harbor statement.

Speaker 2

Some of the statements we

Speaker 1

will make in today's call may constitute forward looking statements. These statements reflect management's intentions, beliefs, expectations and assumptions about future events, strategies, based on information currently available to DexCom are subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward The factors that could cause actual results to differ materially from those expressed or implied by any of these forward looking statements are detailed in DexCom's Annual Report on Form 10 ks, most recent quarterly report on Form 10 Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward looking statements after the date of this presentation or to conform these forward looking statements Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non GAAP and cash based results. Unless otherwise noted, all references to financial metrics are presented on a non GAAP basis. 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.

Speaker 1

Please refer to the tables in our earnings release and the slides accompanying our Q3 earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now I will turn it over to Kevin.

Speaker 3

Thank you, Sean, and thank you everyone for joining us. Today, we reported another strong quarter for DexCom with 3rd quarter revenue growth of 30% compared to the Q3 of 2020 and 28% growth on an organic basis. This revenue growth rate represents continued momentum for DexCom CGM adoption around the world as we once again achieved a record quarter of new customer growth. The Q3 also saw several strategic accomplishments across our teams that laid a foundation for our future growth opportunities. In the U.

Speaker 3

S, we received FDA clearance for 2 key software solutions that continue to differentiate our connected products from those of our competitors and position us as a partner of choice across the healthcare and wearables ecosystem. 1st, in July, We received FDA clearance for our real time API. For those of you who are unaware, an API is the tool that allows one app to connect with another app. Prior to this clearance, our customers and clinicians could only utilize our retrospective API, which integrate DexCom data into 3rd party apps on a 3 hour delayed basis. We believe that by putting the power of choice at our users fingertips with real time data, We can help ease the daily burden of diabetes management and significantly improve quality of life for our customers.

Speaker 3

This tool will be available to partners invited by DexCom and we already have several that have begun the development process to enable real time displays for their communities. This includes Garmin, which became the first partner to launch apps connected to our real time API 2 weeks ago, bringing DexCom readings into their portfolio of wearables and cycling computers. 2nd, on the heels of the real time API clearance, We received FDA clearance in August for the DexCom app in app module. This module was specifically designed for With the integrated DexCom app, it is now even easier for our partners to access and display our CGM data, enabling single app solutions to simplify the experiences for DexCom users. UnitedHealth became our first partner to launch the integrated DexCom app in app module in late September, bringing the embedded app into their level 2 diabetes care program.

Speaker 3

Our connectivity software and data infrastructure solutions are a core strength of DexCom. These two recent Clearances reflect the increased investment that we put into software development and we believe increase our competitive advantages moving forward. In late September, we also announced the launch of DexCom 1 in 4 international markets where we previously had no presence: Bulgaria, Latvia, Lithuania and Estonia. DexCom 1 leverages the G6 hardware platform and a completely redesigned Our experience that focuses on simplicity and ease of use for our customers. This is the first product launch in our history that started exclusively through the DexCom e commerce platform, a platform that has been embraced by our customers in Canada and the UK over the past 2 years.

Speaker 3

With the proven performance of our CGM systems, the new software experience and efficient e commerce solution And affordable pricing plans, we believe that DexCom 1 will be an important product for us as we drive the business toward our long term targets. Most importantly, this differentiated product is a key step for us to bring DexCom CGM to significantly more Early feedback around the product has been very favorable And we look forward to seeing the full results from these launches as we leverage the full breadth of our expanding product portfolio to achieve our 2020 Investor Day goal of Medical Association in June, investigators published the results from the extension phase of the trial in diabetes care during the Q3. In this extension phase, we re randomized the population who are initially on CGM to see if the benefits would be retained Those who stayed on our G6 systems maintained greater time and range improvements over the 6 month extension phase compared to those who did not. The results confirm that for the significant population of people with type 2 diabetes on basal insulin, there is Our teams are working hard to leverage the conclusions for mobile and to greater access to our technology for people with type 2 diabetes.

Speaker 3

And this is just one area in which we are building the foundation for our long term growth. We are advancing our pilot efforts with UnitedHealth's Level 2, Teladox Livongo for diabetes, Wellvoc, We are generating strong clinical evidence for expanded indications for CGM use in inpatient settings and for women who are pregnant. We continue to leverage our advantages in connectivity by gaining new customers and progressing our pipeline of solutions with our leading insulin delivery partners. Finally, we continue to advance our G7 scale up and regulatory efforts during the quarter. We've had excellent communication with our notified body in Europe and believe that we remain on track to begin the launch of our G7 system in the Q4 upon receiving CE Mark clearance.

Speaker 3

In the U. S, we've made great progress in preparation for our regulatory submission and believe that we are now in the final stages of that effort. We look forward to the comprehensive G7510 submission, including G7 hardware and full Android and iOS to the FDA in the next few weeks. As you can see, our teams are working very hard and making great progress to advance our core strategic efforts, Whether it is in expanding our product portfolio, creating differentiated user experiences or laying the foundation for new market opportunities that will drive our So with that said, let me turn it over now to Jeremy for a review of our Q3 financial performance. Jeremy?

Speaker 2

Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as on our IR website. For the Q3 of 2021, we reported worldwide revenue of 6 $50,000,000 compared to $501,000,000 for the Q3 of 2020, representing growth of 30% on a reported basis and 28% on an organic basis. In late July, we were proud to complete the acquisition of our distributor in Australia and New Zealand.

Speaker 2

With this acquisition, we began generating Approximately 2% to our reported growth for the Q3. The transition from distributor markets to direct sales is one of several important The strategic initiatives that we outlined at our 2020 Investor Day as we seek to significantly grow our international presence. We believe a larger direct international footprint will give greater control to leverage our marketing strengths, invest in accelerating our growth and ensure that the direction of these core markets is aligned to our strategic interests. In terms of the financial impact of the 3rd quarter acquisition, we expect the transaction to be approximately neutral to our operating margin for the full year as it was in the 3rd quarter. U.

Speaker 2

S. Revenue totaled $490,000,000 in the Q3 compared to $399,000,000 in the Q3 of 2020, representing growth of 23%. We continue to see good momentum in the U. S. But we are benefiting from the increased market access and field presence that we've enabled over the past year.

Speaker 2

New customer growth remains strong across all segments of the population, including people with Type 1 diabetes, intensively managed people with Type 2 diabetes, where we have Our international business grew 57% in the 3rd quarter, totaling $161,000,000 Excluding the impact of non CGM distribution revenue generated By our acquisition of our distributor in Australia, New Zealand, growth for our international business was 46% in the 3rd quarter. We continue to see very encouraging growth across the board in our international markets with the majority of our markets delivering record sales in the 3rd quarter. Although it is still early, we believe that our strategic moves to broaden access in several markets have been very successful thus far and have left us well positioned to expand our growth profile internationally and you see that in the reflected current quarter results. Along those lines, Our global volume growth in the 3rd quarter remains strong, exceeding 40% for the quarter. This is well above our 28 product portfolio and provides another key element of our strategy to expand access to CGM globally.

Speaker 2

As we continue to scale our business In conjunction with our ambitious plans for customer growth, we are creating tools that allow us to serve our growing base in

Speaker 3

an efficient manner and the

Speaker 2

use of our e commerce platform for the initial Dexcom 1 launch is a good example of that focus. Our 3rd quarter gross profit was $446,900,000 or 68.7 percent of revenue compared to 68% of revenue in the Q3 of 2020. The year over year gross margin expansion is an impressive result, especially when you factor in our strategic efforts this year to drive efficiencies and position us to maximize our strategic opportunities. We continue to demonstrate the ability to leverage both our manufacturing operations and R and D teams to be ever more efficient in the delivery of our products. Operating expenses were $323,100,000 for Q3 2021 compared to 245 point $7,000,000 in Q3 2020.

Speaker 2

Operating expenses as a percentage of sales were relatively flat year over year As we offset investments in software development, G7 scale up and our expanded global commercial sales force with strong leverage of our general and administrative functions. Operating income was $123,800,000 in the Q3 of 2021 compared to $95,000,000 in the same quarter of 2020, holding flat 19% of revenue. As this result indicates, we've been able to retain much of our operating margin this year, even as we have significantly reinvested in our business. Adjusted EBITDA was $173,500,000 or 26.7 percent of revenue for the 3rd quarter compared to 146.9 or 29.3 percent of revenue for the Q3 of 2020. Net income for the Q3 was $89,500,000 or $0.89 per share.

Speaker 2

We closed the quarter with approximately $2,700,000,000 in cash and cash equivalents, giving us great financial flexibility to drive This includes the continued build out of our manufacturing facility in Malaysia and G7 scale up in Mesa, Arizona, as well as opportunities that align our business objectives such as our recent distributor acquisition. Turning to guidance. Our 3rd quarter performance has placed We now expect 2021 revenue to be between $2,425,000,000 $2,450,000,000 representing growth of 26% to 27% over This guidance includes approximately 100 basis points of non CGM inorganic growth related to our recent distributor acquisition. Turning to margins, we are increasing our full year 2021 targets. This includes non GAAP results to be approximately at the following levels, which include a neutral impact from our distributor acquisition, gross profit margins of approximately 68%, operating margins of approximately 16% and adjusted EBITDA margins of approximately 25%.

Speaker 2

With that, I will now turn the call back to Kevin.

Speaker 3

There are a number of things that we could celebrate and I'd like to take the time now to thank all of the teams at DexCom and specifically highlight a few things that we are proud of. First, to our new DexCom team members in Australia and New Zealand, we are absolutely thrilled to have you with us on our journey to empower people to take control of diabetes. We look forward to working together and learning from you as we bring our technology to those in need in these key markets. Our operations team has provided Another highlight in the Q3 as our G6 manufacturing yields reached all time highs and our warranty rates reached all time lows. Those are the kind of metrics that lead to the margin improvements that we've seen and reflect countless hours of work from our talented employees.

Speaker 3

And finally, our R and D team continues to innovate with several updates to our sensor pipeline as well as our leadership in data and software solutions. The 2 FDA clearances this quarter are a testament to those efforts and a nice validation of the strategy that we've As Sean mentioned at the start of the call, we've invited Jake Reach, our Chief Technology Officer to join us for the Q and A portion of the call in order to address any questions around these clearances and our product innovation. I would now like to open the call up for Q and A. Sean?

Speaker 1

Thank you, Kevin. As a reminder, we ask our audience to limit themselves to only one question at this time

Operator

And our first question comes from Jeff Johnson from Baird. Go ahead, Jeff.

Speaker 4

Thank you. Good afternoon, guys. I know we focus so on T1 and intensive T2 most of the time, but I wanted to ask this time maybe on the non intensive in the prediabetes markets. I guess I'm wondering more than anything your latest thoughts on how big those two markets could be over the next year or 2, especially with so many we see all these behavior Service is popping up with levels in SuperSapiens and others in prediabetes and obviously Level 2 and some of the others on the commercial side. It Your real time APIs and your app and app approvals would be helpful for some of those programs.

Speaker 4

So just kind of how do you see those two markets Developing in the short run kind of 1 to 2 years and your market share in those two areas maybe over the next couple of years as well. Thanks.

Speaker 5

Thank you, Jeff. This is Kevin. I'll take that one. We think those markets can develop nicely. We have some work to do on the product labeling sign and some work to do with the FDA as we migrate down that path and we've had some of those discussions.

Speaker 5

But the results are spectacular as we've seen people We'll use this product. In fact, we recently got an email from a physician. Again, this is in the Type 2 world, not intensive, but It was telling us about a recent experience with a patient who'd gone from an A1C in the 12s down to no medication to an A1C of 5.5 or something like that. It works there. It works also very much on the just the metabolic front in general.

Speaker 5

Anybody who wears a CGM and watches that data and particularly if you set those lines narrow between like 70 and 120, if you go above the 120 mark, Ask yourself what you ate, you can usually figure out and go back to something that you could do different. The effects of exercise, the effects of poor sleep, the effect of stress of an earnings call can all be demonstrated in CGM graphs. I think it's a wonderful market opportunity. The data has to be presented properly. That's where the live API and the approvals we talked about today come in.

Speaker 5

The API is A quick way to get there and Jake knows the technical stuff better than me, but the API also requires a person to run a DexCom app and the other app. With the other the app in app module that we talked about today, some of these larger programs, again, like Level 2 With UnitedHealth Group, you have one app experience with like a DexCom button or a DexCom experience right in the middle of it. So if you're branding a wellness situation and really want that to be your focal point, we can reside And you can have that experience. So we think both solutions, they offer speed, but they also offer different experiences. And then we'll pick the partners we want to work with on both sides, those that have the best need for 1 versus the other.

Speaker 5

So we're excited for both of them, Jeff. We're very excited for these markets and it's long been part of our long term strategy, but We need the technology to get there and our product pipeline truly supports going there over time.

Operator

And our next question comes from Robbie Marcus from JPMorgan. Go ahead, Robbie.

Speaker 6

Hi. This is actually Lily on for Robbie. Thanks for taking the question. Can you talk briefly about dynamics that you're seeing in Europe right now? You guys had a great quarter there.

Speaker 6

So any tangible stories of success from the increased patient access efforts that you've implemented over the last few months? Any color on that you could share would be helpful. Thanks.

Speaker 2

Sure. Yes. And thanks for the question. What you see in Europe Certainly, it's really in all the markets we've gone in with our access strategy as we've moved into various countries and obviously exchange price for access to populations that we historically haven't been able to get to. That we historically haven't been able to get to.

Speaker 2

And what you see in the quarter, I think, we talked a little bit about on the call It was a record revenue quarter in most of our international markets. So I think you see it playing through, on the revenue front. I think you saw 46 percent organic growth rate outside the U. S, which again, another incredibly strong quarter fueled by a lot of the access that we've been able to create. And then you look at the new patient growth, it's another record quarter for new patient adds in this quarter, Again, all pointing to some of the access that we've created outside the U.

Speaker 2

S. So I think some of the examples, I think we talked a little bit about them publicly last quarter With Canada, for example, in multiple different provinces, allowing us access to those publicly reimbursed channels. And I think in those channels, you're seeing just that. A lot of people now Have the access to DexCom CGM technology and they're taking advantage of that. So we'll continue to expect that to play through.

Speaker 2

It's why we ultimately made the decision to do it. And I think you've seen it play through in the financial results and our expectation as you continue to see it play through over the long haul.

Operator

And our next question comes from Danielle Antalffy from SVB Leerink. Go ahead, Danielle.

Speaker 7

Hey, good afternoon guys. Thanks so much for taking the question. Congrats on a really strong quarter. Jeremy, just a question for you. You guys have been investing pretty significantly in direct to consumer I'm wondering if you can talk now we're 3 quarters into this Sort of more concerted effort in the U.

Speaker 7

S. And whether we're we can really talk about how you're seeing a return on that investment as far as incremental new patient adds and maybe just where we are from a primary care

Speaker 2

And we talked a little bit about it last quarter, but I want to reiterate it is, in the U. S, we've doubled our covering prescriber coverage Over the past 18 months. And so what I mean by that is the amount of physicians that are writing DexCom scripts has doubled in 18 months. That's a testament to the work that's being done by the U. S.

Speaker 2

Commercial team, which has been fueled by multiple things, certainly direct to consumer advertising, doubling the size of the sales force. Those all really play into folks adopting the Technology. Just a couple of tangible things, which I think are helpful to see. Again, another record quarter for new patient adds. I think you can see that playing through.

Speaker 2

And In many ways, that's driven by the sales force. So you see that continued momentum. I'd say the one thing that we have noticed that It hasn't prevented us from being completely full effectiveness is some of the impacts of the Delta variant. I think that's probably the only thing that we've seen that's been a challenge, and that's just getting access to some of these offices, when they're no longer seeing And so you've seen a lot of physicians opening up and those locations were doing incredibly well. So there's more to work through and So I think in short, you're seeing the performance, you're seeing the growth, Seeing the new patient adds and we've ramped up very nicely.

Speaker 2

It's been an incredible year for us thus far, and very bullish on what it So I think that's really the feedback thus far. And again, as we get more and more data, we'll continue to share it as it becomes available.

Operator

And our next question comes from Matthew Blackman from Stifel. Go ahead, Matthew.

Speaker 8

Good afternoon, everybody. Thanks for taking my question. I wanted to ask about the G6 rollout in Japan. Just any commentary on early trends there? Could you also just remind us the sizing of the incremental opportunity in Japan and how meaningful a contributor you think it could be to either worldwide growth or OUS growth, however you want to frame it, as we move into 2022?

Speaker 8

Thanks.

Speaker 5

Yes, this is Kevin. We're early on in that launch with our partner Terumo. We've got some good traction, but literally with launch happening in earlier this summer, we're in a position of educating physicians, getting Samples out there, really teaching people about our product. We think over time the Japan market could be a very good one for us. While there's not a tremendous amount of Type 1 diabetes, there's also there is a large amount of Type 2 diabetes.

Speaker 5

If we can get across that broad spectrum With our product offerings, we can see this being one of our certainly one of our top 8 markets, possibly even a top 4 or 5 in the world as time goes on. We also know from a technological perspective, the physicians we've spoken with are very bullish on the performance of our product and Tremendously value the accuracy and precision of what we do, and the connectivity and all of those things. So we believe we have the right system For the market, but we're in early phases right now.

Speaker 2

Yes. And just to give you I know you asked for the size of the market. That's a market of around 300000 to 400000 intensively

Operator

is from Margaret Kaczor from William Blair. Go ahead, Margaret.

Speaker 9

Hi, good afternoon, guys. Thanks for taking the question. Yes. So the question is a little bit more of a theme and an expansion maybe on some of the partnerships that you referenced and just getting a better sense Around how many of your patient adds today, for example, may come from these partnerships and when you talk about expanding them, is that in the form of Covered lies, is it something else? And just as a follow on since Jake's on the call, I guess, The products and subscription services that you guys may offer these partnerships, how do those evolve, I guess, Over time, could that potentially accelerate some of the capabilities that Dexcom offers or the new products that they offer away from Pure technology that you've been in the past towards some of these other software or other potential offerings you have.

Speaker 9

Thanks.

Speaker 2

Sure. Yes. So let me start with maybe the financials side and how that migrates over time. And then Jake is obviously here. He'll take you through the technical Aspect of it and why we're so excited about it.

Speaker 2

So today, these partnerships are a combination of expanding TAM and expanding people that would want to access CGM technology over time, and today it's in the form of sensors. But over time, And as we've demonstrated with a couple of other software features we've obviously added over the past 6 months or Software can be a part of that package. And so we're really the monetization of that will come over time. Today, it's about how do we get as many folks as possible on to realize the value of CGM. So that's how we expand it.

Speaker 2

Jake, maybe you can take it through just kind of the general theme of where we're going in that space?

Speaker 10

Yes, sure, Jeremy. Thanks for the question. So really the way we think about it is the technology that we are bringing to market through these software Features is really about providing unique experiences for customer segments. And so if you think about the Type 1 segment or the Type 2 segment non intensive, You're solving different types of problems in those. And so what these software tools such as our live API provide is a way for our partners to serve those needs with Dexcom CGM and a connection to our product.

Speaker 10

The real time API is a real advancement in our cloud strategy and we're really excited about the list of partners that are working to integrate that into their systems to provide their customers with unique experiences.

Operator

And our next question comes from Matthew O'Brien from Piper Sandler. Go ahead, Matthew.

Speaker 8

Thanks and thanks for taking the question. So a lot of moving parts here and I'm not sure if I'm doing the math right, but I'm getting like $60,000,000 to $70,000,000 of a Pricing headwind this quarter and I'm not sure what the distributor conversion if that's right or not. I guess I'm just asking is that about right? Are we seeing a little bit more of the pricing headwind this quarter than we've seen over the last couple? So we'll see maybe a little less next year, it's getting pulled forward to the 21 and then, the reason I'm asking is that the increase sequentially from Q3 to Q4 is a little bit below trend line.

Speaker 8

Is that because you're expecting more Are the pricing headwinds to be seen here in 2021 versus 2022? Thank you.

Speaker 2

Yes. So there's a couple of pieces. So I'll 1st and foremost reiterate, The total pricing expectation for the year, the $250,000,000 is still the expectation. If anything, we might come a little bit light on that, But that still is the expectation. And so then the pricing in Q3 was generally in line with prior quarters, a little bit elevated, but it's not a material step change.

Speaker 2

That's a function of some of those OUS contracts kicking in. So really that's where we come from a pricing perspective. So it's not necessarily pulling anything in. We've often talked 2022 being relatively similar to 2021 and we're still on that trajectory. So I wouldn't necessarily expect any of that.

Speaker 2

To your question on how Q4 plays out in the guide and doing the math there, and you're doing the math right, One of the things we're mindful of and there's really 2 pieces to it as you think about it. There's the piece we talked about a little bit earlier, which is the Delta variant and getting into new Primary Care Offices and making sure that we're seeing that over time before we count on it. So that's the first piece of it and we're mindful of that. And then the second So that is

Operator

as more and more of

Speaker 2

our product is fulfilled through the pharmacy, the historical trends over time you're going to see start to migrate just a little bit. You saw it start This year in Q1, if you look back to Q1, our sequential pullback from prior year Q4 into Q1 was a bit muted. And you're going to see the same thing in this Q4, which means as more and more goes to the pharmacy, you no longer have folks in the DME space, they no longer have the high Health plans where folks are maximizing benefits at the end of the year. So we expect a little bit less seasonality as we progress. And in turn, we expect a little seasonality in Q1 of next year.

Speaker 2

That's what you're reading into it. That's ultimately what comes through in the guide. So you're doing the math right, but those are some of the expectations that went into it.

Operator

And our next question comes from Travis Steed from Barclays. Go ahead, Travis.

Speaker 8

Hi, thanks for taking the question. Jeremy, just to follow-up on the distributor. It sounds like the revenue impact this quarter was 13,000,000 All in the OUS line and just kind of curious how to model that going forward. Is it about $13,000,000 a quarter for 3 more quarters and then it gets into the base? And How to think about like is there a pricing benefit here without the distributor margin?

Speaker 8

Just a little more color on the distributor acquisition, if you will.

Speaker 2

Sure. So the pricing, we don't necessarily break down the pricing U. S. OUS in the overall number. And so at the end of the day, We're on the trajectory as a total company we talked about, and so obviously, you guys will do the math.

Speaker 2

But at the end of the day, we're on that same trajectory. In terms of your question on the distributor, the impact of the distributor acquisition on growth in the quarter in our CGM business, It rounds to 0%. And so it's because, there was 2 months in the quarter, and that Markup on the margin in the distributor market is relatively small. The question is, is why do you do it and what do you it's our ability to control Penetrating deeper into these markets and that's ultimately why we do it. It's not to try to get a margin uplift.

Speaker 2

It's actually to try to control investment. We're a company that has cash on the balance sheet. We're willing to invest in these markets and we want to continue to invest in these markets. So as we take them direct, The goal is then to reinvest and make sure that we're driving adoption. So the impact of the distributor really nominal on our And a growth rate like I said, it rounds to 0.

Speaker 2

So the 28% is the organic growth rate even including that. So hopefully that helps you around the acquisition. There isn't much there that changes the results this quarter.

Operator

And our next question comes from Matt Taylor from UBS. Go ahead, Matt.

Speaker 8

Hey, great. Thanks for taking the question. Excuse me. I was hoping you could give me more color on how things are going in the primary care channel. Could you give us any sense for how the sales force is maturing, how productive they are and if there's more

Speaker 5

to go there? Yes. This is Kevin. I'll take that. There's still more to go, but it is going very well.

Speaker 5

Our targets Are going very well as far as those we've called on. We've also learned there are some we have not had on the target list and we're expanding that coverage as well. We've had numerous situations where it's taken our person several attempts to get into an office, but once they get in and once we get a person out of DexCom, The response is so good based on the quality of the product that we get more. But it is a progressive effort and it doesn't we don't walk in and all of a sudden get, Hey, here's 50 new patients this month. It takes a little time and we have to build a lot of credibility.

Speaker 5

But the primary carrier audience, particularly for those on insulin, it's Gone very well so far, but it is a process and it does take some time.

Operator

And our next question comes from Joanne Wuensch from Citi. Go ahead, Joanne.

Speaker 6

Thank you very much for taking my question. It seems to me like the increasing evidence that you're building is going to really help the Type 2 population. But could you give us sort of an update on where you think or what you think you'll need to get into the non intensive Type

Speaker 5

This is Kevin. I'll take that. We've taken a several pronged approach to get in there and we're I'm not going to deviate from that approach. We're working with healthcare professionals, who are prescribing product for A non intensive type 2s night right now and getting great outcomes. We work with the payer network, for example, the Level 2 program at UnitedHealth.

Speaker 5

That's produced some very good results for them and very visible in their marketing materials and their efforts. The programs and with the technologies We got approved today, the app in the app and the API interfaces, that will be great for partners because they do want to control That experience for patients and ultimately getting to people directly. We've been very successful in our DTC campaigns For the intensive insulin users, there will come a time when we'll be able to go direct to those consumers in the Type 2 NIIT, as we call it, non intensive insulin therapy or Not on insulin therapy, get to these guys as well. And we have a high level of confidence in the products we're designing and the things we're planning, combined with the ability of our team to reach these markets once we turn them loose, once we have the opportunity to do so. So we'll go through all the steps.

Speaker 5

Continue on all four fronts. We're not going to back off on one of them.

Operator

And our next question comes from Cecilia Furlong from Morgan Stanley. Go ahead, Cecilia.

Speaker 6

Great. Thank you for taking our question. I wanted to ask just on gross margin. As you think about 4Q is implied with your updated guidance step down, but just what you're factoring in from the international access component versus G7 initial launch not quite being at scale and how we should think about the trajectory heading into 2022? Thank you.

Speaker 2

Sure. So the gross margin in Q4, we do expect to take a bit of a step back. Some of it is the international access as that ramps up. And the other piece to your point is the launch of G7 and turning on all of the machine, the depreciation and therefore the yields. A majority of that is going to be the G7 launch.

Speaker 2

And the reason why is we're not at full capacity at that point. Now Once we get to full capacity, there's no reason why we don't get back to our long term gross margin guides and we'll get into 2022 when we get there. But there's nothing structurally in those lines that would prevent us from meeting what we had talked about from our long term gross margin guide. There may be ebbs and flows Quarter by quarter as we ramp up, but I don't expect there to be any issues there. So if you're kind of asking the question, well, how would I weight the 2?

Speaker 2

Most of the impact is upon the launch of G7 and turning on those machines and the depreciation associated with it. As we get into 2022 and volumes start to build on those machines and you're able to absorb those fixed costs, there's nothing structurally that can't get us back to the gross margin Profiles that we've set for an organization.

Operator

And our next question comes from Jason Bedford from Raymond James. Go ahead, Jason.

Speaker 11

Hi. This is Pavan for Jason. I have Two quick questions here. First, will we see G7 clinical data before U. S.

Speaker 11

Approval? And the second one is how close Are you guys getting to the 75% of commercial payers into the pharmacy channel?

Speaker 10

Yes. So thanks for the question. This is Jake. So the we presented actually earlier this year, we presented at ATTD G7 data showing a MAD of sub-nine percent and very strong clinical accuracy, Better than G6 in fact. So we're very excited and happy with the result of the U.

Speaker 10

S. Pivotal and we'll be releasing that in the future.

Speaker 2

Yes. So now that you've seen that data, I think you have a feel for it. And obviously, that data as these as more products launch over time, you'll get access to it. But I think some folks ask, How do I know what it's going to look like before? There is public data available at ATD that should set kind of North Star.

Speaker 2

In terms of the transition, the migration in the pharmacy, we talked about this glide path from approximately 50% turning into 21 or at the end of 2020 into really 75% by the end of 2022. We're on that glide path right now. And so We're making headways. We haven't given a specific update as a percentage, but as you're charting that course, we're right where we'd be expected and right where you'd expect from a linear transition over time. So hopefully that helps.

Operator

And our next question comes from Larry Biegelsen from Wells Fargo, go ahead, Larry.

Speaker 8

Hi, this is Nathan Trebek on for Larry. Thank you for taking the question. Can you just provide us an update on how you're thinking about

Speaker 10

Yes, this is Jake. So Let's start on the hospital first. So, the way we're thinking about that is that really with the accuracy and reliability, that we have built into the G6 and G7 systems, It's a great CGM platform to then build a purpose built hospital product. So we're in the early stages of understanding what It's the exact CGM that meets the needs in the hospital. We've seen good success with G6 under times of COVID Use in the hospital, it is really serving a need, but it's not exactly the right workflow for the hospitals.

Speaker 10

And so what we want to do is better understand Pregnancy functionality and providing information that's important for expectant mothers into the G7 product. And so that's part of our roadmap and we're actively working on building that into the G7.

Operator

And our next question comes from Steven Lichtman from Oppenheimer. Go ahead, Steven.

Speaker 5

Thank you. Hi, guys. Kevin, you mentioned earlier all the work you continue to do on non intensive with partners, payers and collecting data. Wondering what your latest thoughts are on potential revenue per patient in that population or utilization overall for the non intensive. Thanks.

Speaker 5

At this point in time, the total revenue amount per year is still something we model out on a number in a What we've learned and what the data that we've seen most recently supports and we'll Continue to talk about is continuous use of the system provides much better healthcare outcomes than intermittent or sporadic use. The things that patients learn With this technology, having that feedback full time provides a much better outcome. With respect to the long term revenue model, And again, I'm speculating a bit here, but I'll just repeat what I say to the team internally. We're solving a much different problem for somebody who's not on insulin. It is not a life and death Decision for them.

Speaker 5

So I can see the revenue per patient being lower for this group over time, even in continuous use, but I don't know how much yet. Excuse me, there will certainly be intermittent use models that might be available and lead to good outcomes. But one of the mistakes There's a lot of these programs make in the beginning as they try and minimize the number of sensors because they're worried about the costs they're trying to control when in reality the benefits That these patients and these customers who use the systems get are derived from CGM data. So we have to balance those things and balance that against our And business model as well, but we do believe it's going to be a very good population. And there's there was long a belief that Well, these patients won't want to wear it all the time.

Speaker 5

No, they do. They very much enjoy the data and really Like knowing where they are, that has not been a problem at all.

Operator

And our next question comes from Robbie Misra from Berenberg. Go ahead, Robbie.

Speaker 12

Hi, thanks for taking the question. So I guess, One question on New Zealand Australia distributor. Just curious how quickly can you basically get through this, I guess inorganic revenue in terms of the impact of guidance, like is there still kind of a non CGM revenue that we With this acquisition or do you need to do more in this arena, this country or continent space to really get access to the population? Thank you.

Speaker 2

Sure. I can take that. So when we acquired the distributor, the distributor had multiple different product lines. And they have sales reps that cover these multiple different product lines. And so and ultimately, a distributor is about people and it's an incredible group of people.

Speaker 2

And so the

Speaker 8

key here is making sure we

Speaker 2

keep everybody together. So we'll Group of people and so the key here is making sure we keep everybody together. So we'll stay in that line. What we try to identify for you is the contributions to the overall guide in basis points. And so in our guide, we talked about 100 basis points on the full year.

Speaker 2

You'll do the math and figure out what the approximate impact is in Q4, and I think you'll have a pretty good feel for it. We'll make sure that we isolate it out over the long haul so that you're able to identify what is and what isn't out there. So I think you can feel comfortable there, provided it's material. In terms of the actual acquisition itself and being able to get into the market. This was this is a group of folks who have done an incredible job with CGM adoption in that country.

Speaker 2

And so When we get into these countries, we want to make sure, 1, we have the team, we make sure that there's nothing in their way from continuing to develop CGM awareness and develop CGM adoption. So there's nothing that prevents us under the structure. The only thing we mentioned in terms of investment is very similar to the way you've thought about our organization in the U. S. We know that investment in DTC and in sales reps where it makes sense and Sampling and all of the things that we've put in place makes great sense in other markets.

Speaker 2

You've seen us do some of that in Europe and certainly we've done some in Canada. And we expect to do more of that. And when we take it direct, we can do a little bit more of that. And so that's really what we're talking about. So there's nothing structurally that prevents us from taking the acquisition and continuing to proliferate

Speaker 5

Yes. And this is Kevin. I would just add to that. One of the reasons we do things of this nature, take a look Our direct business in Canada, the wins we've just had with the provinces and reimbursement there, with our financial muscle at the corporate level, we can take much And so we view this investment in Australia and New Zealand as one where we're going to be able to go after broader market This team needed our muscle to do that financially and we needed their talent To do it as well. So it works for both of us.

Operator

And our next question comes from Marie Thibault, go ahead, Marie from BTIG.

Speaker 13

Hi, yes. Thank you for taking the questions. Spending a little bit of I'm on the Dexcom ONE site. It strikes me as a very consumer friendly website. And I'm just curious Whether

Speaker 6

this is

Speaker 13

sort of a glimpse at the future, I know it's been launched into some Eastern European countries, but is this a model that you would look at in terms of sort of flexible Pricing and subscription plans and bulk order discounts, is this something that's sort of a preview of the broader appeal of CGM maybe into prediabetes and consumer markets?

Speaker 5

Yes, this is Kevin. This is a very important launch for us. It's the first time we've launched a product on a new software platform and had a new product launch. We're in a position now volume and manufacturing wise that we want to get this product to as many people as we can. And what DexCom 1 represents is really an opportunity where we can get DexCom technology into a geography easier than we could if we went through our traditional means with our G Series products.

Speaker 5

So we're offering this and as you talked about Flexible pricing plans, subscription models and things of that nature to get this product to this patient group. It definitely can be a precursor of things we can do in the future to take advantage of the scale that we've created within the business with our ability to manufacture more. And again, while the website I assure you the app that Jake's team and our marketing team have developed is every bit as easy to use as the website. This truly It's a step up for us from a product experience and then we'll evaluate those opportunities over time where we have a market, Where we can increase our volumes and gain more traction with this type of product offering rather than our traditional G Series, we will explore that.

Operator

And our next question comes from Josh Banning from Cowen. Go ahead, Josh.

Speaker 14

Hi, this is actually Neil on for Josh. Thanks for taking the question. And we've had some consultants recently talk about the potential for monitoring other analytes. I was just wondering if you could maybe share any updates there in terms of any development plans or program for extending monitoring to analyze outside of glucose, like ketones?

Speaker 10

Sure. Yes. The wearable platform that we've developed with the electrochemical sensors can be extended to other analytes, and we do have Active research programs within DexCom and also with some of our university colleagues that are researching other analytes that we could use on our platform. Today, we're not talking about exactly which ones, but we do feel that this platform can be extended to multiple analytes And provide more value around the CGM components.

Operator

And Our next question comes from Anthony Petrone from Jefferies. Go ahead, Anthony.

Speaker 15

Great. Thanks. And hope everyone's doing Two quick questions. One would be on supply chain constraints. Just wondering how that is expected to play out into 2022, Hearing a lot about inflationary upward pressure on cost of goods sold.

Speaker 15

So wondering how that's playing out for DexCom and what the offsets are? And then as we look into the 5 launch, just maybe an update on what percent of existing Omnipod users are currently not users of DexCom Solutions? Thank you.

Speaker 2

Sure. So I'll go ahead and take the Inflationary and supply chain. So I think everybody's nobody's immune to certain products and Certain areas that do have pressure based on supply chain, supply and demand. One of the things I think our team has done, there's 2 pieces of it, is 1, do you have enough product? And 2, can you manage the cost?

Speaker 2

And I think our team has done an incredible job in lining up, the Now that doesn't mean everybody's out of the woods, everybody's got supply chains they're naturally running through, but this team got ahead of it very early and has been working collaboratively with all of our suppliers well in advance to make sure that we're properly communicating the value of our product and making sure that we're working with them to secure Supply, and that's ongoing, but that's work that's been done well in advance of everybody else, kind of jumping on it. So we're very proud of that team. In terms of the inflationary measures, we're in a bit of a unique environment. There have been absolutely inflationary measures, but we're also making a lot more product. And so you kind of get economies of scale and purchasing power, which offset some of the challenges associated with inflation.

Speaker 2

So our expectation is we're able to navigate both of those and It will not impact kind of our longer term gross margins, because of that nature. So, hopefully that answers your question. Maybe I could turn it over to Well, actually, I can answer the Omnipod questions. So with Pod5, there are a decent amount of folks using it. There's Some studies out there, I don't want to quote them just because I don't know how accurate they are.

Speaker 2

We generally have a good feel for it, although we haven't put it out there publicly. We can let Omnipod do that if they want to. But we do know once Omnipod 5 is launched and the integration associated with Dexcom, it could provide a catalyst certainly for us. The one thing we will say is, when we continue to say it all the time is CGM first. And so we do believe that a lot of Do come to CGM and then ultimately could choose to go on to an integrated system.

Speaker 2

And most folks that do get on to our product today now are MDI. And so a lot of those are out there. That all being said, another AID system with one as novel As Omnipod, I think is certainly something that's interesting and for patients that like patch pumps, I think this is an incredible opportunity for folks to get on that platform.

Operator

And our next question comes from Kyle Rose from Canaccord. Go ahead, Kyle.

Speaker 14

Great. Thank you for taking the question. I just wanted to maybe ask another question on DexCom 1. I mean, you've talked a couple of times just about the patient I understand that the software is obviously completely different on the e commerce side, but maybe help us understand just what specifically is different from a patient Facing perspective with DexCom 1 versus what we've seen historically with G6 and previous generation products? Thank you.

Speaker 10

Yes, it's Jake. I'll take that one. Yes, DexCom won from the beginning, our intent around the design of that product was to make it simple. And so that kind of flows through, as you mentioned, the e commerce experience. But into the app, the mobile app itself, it's a new completely new app So it's a new piece of software.

Speaker 10

And the first part that users will see that's quite different is the onboarding modules. So we basically spent What onboard module does is really walks them through a simple process and how to get up and running quickly on their CGM. The other thing about it that's different than G6 is it has a simplified alert scheme. So it doesn't have some of the more sophisticated predictive alerts that G6 does it. It has a very simple, easy to use, approachable alert scheme.

Speaker 10

The other thing that we added is, With our current G6 system, a lot of the kind of data over time statistics are built into our Clarity software. With DexCom 1, we've actually incorporated that into the DexCom 1 app. So typical statistics like average glucose, time in range, estimated A1C, that's all built into the single DexCom 1 app. And then finally, in that vein of simplicity, there's no AID connectivity for DexCom 1. Also doesn't have the share remote monitoring feature.

Speaker 10

So it's really about bringing a simple CGM product to people who've never had access to DexCom CGM and haven't experienced life without finger sticks.

Operator

And our next question comes from Chris Wally from Guggenheim, go ahead, Chris.

Speaker 16

Thanks. I want to piggyback on that last question because I think that So it leads me to wonder who you're targeting specifically With this platform, it sounds like with the loss of sharing and predictive alerts, this is probably not going to be Type 1 or pediatric product, do you see this as a way to get more into the Type 2 population specifically? Is it a way to approach some emerging market territories where reimbursement may not be in place? We just love some thoughts on Where you see this going over time and who this product is really for? Thanks.

Speaker 5

It's all of those things. Certainly, you look at the 4 countries we launched in, they're not Huge countries, but there are markets where we've never been before. So with the e commerce platform and the creative pricing structures we have for subscription plans and things of that nature, It gives a group of people access to our technology that have never had it before. And as far as they're not sharing and they're not connecting to the ID systems, you're exactly right. It is a lower level of technology with respect to connectivity than what we offer.

Speaker 5

And so it is targeted to different people. Certainly, we'll have access to more Type 2 And access to insulin users. But again, some of these geographic plays in countries where there isn't anything, we felt this simpler solution is a better product to offer Then the other one and then we'll evaluate over time what products we offer where.

Operator

I'd like to turn it back to Kevin Sayer for final comments.

Speaker 5

Thank you. And thank you, everyone, for your questions and continued interest and support of DexCom. We've once again reported a number of important developments to position DexCom for the future on top of outstanding financial performance and continued growth. Going to wax a bit philosophical today, but my father passed away in late 2020, but he never missed an earnings call. And our routine after The call is very simple.

Speaker 5

He'd call me up and he'd say, this is what you guys were trying to say, and he was pretty much always right on point. So I'm preparing my closing remarks today. Let me reiterate what we're trying to tell you. Leverage and growth continue. Our 28% revenue growth achieved through sensor volume growth in excess of 40% demonstrates the continued commitment and talent of our commercial organization.

Speaker 5

Profitability continues to improve as well, yet we remain mindful of the investments we need to make in the future. Our global access strategy is working. We continue to achieve the numbers we've achieved while we've expanded access to our product globally through strategically shifting Our customers to channels which result in reduced revenue per customer annually and yet margins have increased. Next, G7 is on schedule and it's coming. All of the efforts related to G7 are moving at a frenetic pace around here.

Speaker 5

I've never seen our people so engaged in a single-minded purpose. And finally, our software development and data platform Are going to be critical in the future and you saw big steps this quarter. We spent a great deal of time talking about software as a differentiator today and we haven't over the past several months. You're beginning to see you're seeing the beginning of a great change with DexCom 1 and the data sharing and experience enhancing technologies Thanks and everybody have a great day.

Operator

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

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