DexCom Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2023

There are 19 speakers on the call.

Operator

And gentlemen, welcome to the DexCom 4th Quarter 2022 Earnings Release Conference Call. My name is Abby, 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 session. As a reminder, the conference is being recorded.

Operator

And I will now turn the call over to Sean Christiansen, Vice President of Finance and Investor Relations. Sean, you may begin.

Speaker 1

Thank you, Abby, and welcome to DexCom's Q4 2022 earnings call. Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jeremy Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions. At that time, we ask analysts to limit themselves to one question, so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our Q4 performance on the DexCom Investor Relations website on the Events and Presentations page.

Speaker 1

With that, let's review our safe harbor statement. Some of the statements we will make in today's call may constitute forward looking statements. These statements reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. All forward looking statements included in this presentation are made as of the date hereof 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 looking statements. 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.

Speaker 1

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 to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in 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. Please refer to the tables in our earnings release and the slides accompanying our Q4 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 2

Thank you, Sean, and thank you everyone for joining us. I'd like to start By reviewing some of DexCom's key accomplishments in 2022, total revenue grew 20% on an organic basis driven by another year of record new customer starts. This translates into more than $475,000,000 of organic revenue growth compared to last year as we saw another step forward for CGM awareness And DexCom brand loyalty. We added nearly 450,000 DexCom users to our base in 2022 And ended the year with close to 1,700,000 customers globally. Our team did a great job generating this customer engagement and growth, While simultaneously enhancing the scale and efficiency of our organization, our operations team demonstrated world class performance this year, Ensuring adequate supply in a difficult macro environment and providing on time delivery rates of greater than 99%.

Speaker 2

We drove over 500 basis points of operating expense leverage in 2022 despite broad inflationary pressure. This was not the result of reactionary cost cutting. Instead, it reflects decisions made years ago at our company to foster a culture of cost discipline as we grow. From a strategic perspective, we will look back at 2022 as a pivotal year for our company. We advanced several of our most important initiatives, Including multiple new product launches, significant access wins, new market development and a further extension of our market leading performance and connectivity.

Speaker 2

Everything we achieved this past year helps build a foundation for years of sustainable growth ahead. For example, In October, CMS published a proposed local coverage determination that would meaningfully expand access to CGM technology for the Medicare population. This proposal would broaden coverage to include people with type 2 diabetes using basal insulin only as well as certain non insulin using individuals that This result was led by the publication of DexCom's mobile study and furthered by a strong partnership with the diabetes community. We heard broad support and enthusiasm from key stakeholders during the comment period and expect the ruling to be finalized in the coming months. As a reminder, we size the basal only type 2 population of 3,000,000 people in the United States.

Speaker 2

Between this Medicare ruling and broader commercial coverage, Which we expect to follow shortly. This population has the potential to nearly double our addressable reimbursed market in the United States. Outside the United States, our team has been equally focused on building greater access. We drove many positive coverage decisions from global payers over the course of These access wins were in response to the strong clinical evidence we continue to generate as well as the introduction of our portfolio strategy In many of these markets, 2022 is the first time that we brought multiple DexCom products to a single market and this strategy has enabled us to significantly extend our reach. By offering multiple products, we can provide a unique value proposition that meets the specific needs of our diverse base of customers, clinicians, and payers.

Speaker 2

A great example is in the U. K, where Dexcom 1 was added to the national formulary for all people with intensively managed diabetes. Collectively, our international access initiatives have helped us expand our reimburse coverage by 3,500,000 lives over the past 18 months. 2022 will also be remembered as the year of G7. We received both CE Mark and FDA regulatory clearance for And initiated a full launch outside the United States.

Speaker 2

The feedback from our customers has been everything we'd hoped for. We're hearing consistent praise for the new features Such as the 60% smaller form factor, shorter warm up period, and more engaging and consumer friendly app. Perhaps The most encouraging is that 97% of initial users surveyed have found G7 easy to use. We designed this product to simplify the lives of our customers and we are thrilled to see that emphasis resonating. All of this leaves us incredibly Excited to bring G7 to the U.

Speaker 2

S. In fact, we began shipping this week into our U. S. Distribution channels to support our rollout. We have quickly ramped up production capacity to support the launch with our automated G7 lines already capable of producing more than 100,000 sensors a day.

Speaker 2

We want to get G7 into the hands of as many people as possible. So in conjunction with our launch, we've established a bridge program to simplify access for our early adopters. This program will provide new and existing customers access to G7 immediately and allow us to go to market in a broad and expedited manner. Behind the scenes, we continue to advance our discussions with payers to build reimbursement. Our conversations have progressed very well and we are well on track with our G7 coverage plans.

Speaker 2

More importantly, we are not going to be bashful about what we think of this product. G7 is the new gold standard in diabetes technology. This is the most accurate, easy to use and accessible CGM ever produced, and we want to share this message with the world. As a result, we will be releasing our 2nd ever Super Bowl commercial this Sunday. We're again teaming up with one of our most recognizable DexCom warriors, Nick Jonas, To announce that G7 is here.

Speaker 2

This is a great opportunity to connect not only with our loyal G6 users, but with the millions of people with diabetes that still do not use We want these individuals, their caregivers and their loved ones to know that DexCom can help them live healthier lives. With that, I'll turn it over to Jeremy for a review of

Speaker 3

the Q4 financials. Jeremy? 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.

Speaker 3

For the Q4 of 2022, we reported worldwide revenue of $815,000,000 compared to $698,000,000 for the Q4 of 2021, Representing growth of 20% on an organic basis. As a reminder, our definition of organic revenue excludes currency In addition to non CGM revenue acquired in the trailing 12 months, U. S. Revenue totaled $606,000,000 for the Q4 compared to 517,000,000 Q4 of 2021, representing growth of 17%. Our recent momentum in the U.

Speaker 3

S. Continued into Q4 as we delivered another Strong quarter of volume growth and solid new customer starts. We were very encouraged by the prescribing trends we saw in the 4th quarter, And we closed the year with around 75% of our commercial scripts going through the pharmacy channel. This represents the endpoint of a multiyear channel journey, We believe our current structure maximizes access for our users as the most covered CGM and supports greater customer choice in how they access the most accurate CGM. International revenue grew 15%, totaling $209,000,000 in the 4th quarter.

Speaker 3

International organic revenue growth was 27% For the Q4, we continue to take share in international markets as the introduction of new products and access wins over the past year Leave us in a wonderful position to compete for new users. For example, in response to the sizable U. K. Coverage decision we received last August, Our revenue growth has accelerated over the past 2 quarters in that region. Even though this was already one of our largest OUS markets, there has been a clear uptick in demand Following this broad expansion of access, our 4th quarter gross profit was $544,000,000 or 66.7 percent of revenue Compared to 67.7 percent of revenue in the Q4 of 2021, foreign currency was an 80 basis point negative impact on gross margin in the quarter.

Speaker 3

Operating expenses were $372,000,000 for the Q4 of 2022 compared to $461,000,000 in the Q4 of 2021. You may recall that in the Q4 of 2021, we recognized an $87,000,000 expense associated with a contingent milestone under the 2018 collaboration and license Verily Life Sciences. Absent this, our operating expenses for the Q4 of 2022 would have been relatively flat year over year. This represents another quarter of very disciplined cost management as we generated 800 basis points of OpEx leverage. Operating income was $172,100,000 or 21.1 percent of revenue in the Q4 of 2022 Compared to $12,000,000 or 1.7 percent of revenue in the same quarter of 2021, even excluding the Verily charge from 2021, This highlights incredibly strong operating expense leverage in our current year, which more than offsets our step backwards in gross margin.

Speaker 3

Adjusted EBITDA Was $237,100,000 or 29.1 percent of revenue for the Q4 compared to 67,300,000 percent of revenue for the Q4 of 2021. Net income for the Q4 was $136,300,000 or $0.34 per share. We remain in a great financial position, closing the quarter with approximately $2,500,000,000 worth of cash and cash equivalents. This cash level provides organizational flexibility to support our organic growth opportunity and assess strategic uses of capital on an ongoing basis, Such as the accelerated share repurchase program we executed in 2022 and ongoing development of our Malaysia manufacturing facility. Turning to 2023 guidance.

Speaker 3

As we stated last month, we anticipate total revenue to be in a range of $3,350,000,000 to $3,490,000,000 Representing growth of 15% to 20%. This reflects another year of strong underlying volume growth, which will again exceed our revenue growth rate for the year. To help provide some insight into the makeup of our guidance this year, we recently provided some additional color around our expectations. 1st, earlier on this call, Kevin discussed our plans to support our initial G7 customers with a bridge program. We expect this program to impact our revenue per customer early in the year as we provide G7 access at an affordable cash rate as we build reimbursement.

Speaker 3

We expect this impact to narrow over the course of the year as broader coverage is secured. Internationally, we estimate that around 1 third of our new customer will come in through the DexCom 1 platform. Therefore, this business will start to have a more material impact on numbers this year as that customer base builds. For the type 2 basal opportunity, we anticipate CMS reimbursement to be finalized for this population by mid year and begin contributing to our results in the second half 2023. We expect this population to contribute approximately 1% of our total revenue in 2023.

Speaker 3

Turning to margins, we expect gross profit margin to be in a range of 62% to 63%. This assumed year over year decline is Primarily related to the impact of the broader G7 launch. As with any launch, we will initially be running at lower production volumes. It will take some time for our new manufacturing lines to scale. Importantly, this is a temporary dynamic, and we still expect G7 product costs to be less than G6 at scale.

Speaker 3

Despite the step backwards in gross margin, we are guiding for operating margins to be relatively flat year over year at 16.5%, Which reflects another 150 basis points to 250 basis points of operating expense leverage in 2023. This is the result of ongoing cost initiatives at our organization, Which continue to drive leverage even as we allocate greater investment to support our global commercial infrastructure and G7 launch. Finally, we expect adjusted EBITDA margins of approximately 26% in 2023. With that, I will pass it back to Kevin. Thanks, Jeremy.

Speaker 3

To summarize, we are incredibly excited about the opportunity ahead with G7 and we're rolling out product to our distributors as we speak And we're ready for a big launch in

Speaker 1

the U. S. I would now like to open up the call for Q and A. Sean? Thank you, Kevin.

Speaker 1

As a reminder, we ask our audience to limit themselves to

Operator

Thank you. We will now begin the question and answer session. And we will pause for just one moment to compile the Q and A roster. We will take our first question from Jeff Johnson with Baird. Your line is open.

Speaker 4

Thank you. Good afternoon, guys. Let me ask you just a 2 part question on G7, if I could. Kevin, on your website, you talk about adding More commercial coverage for G7 every day. I guess, could you give us a number of what percentage of covered lives or lives are covered currently In the commercial channel for G7 and where you expect that to go maybe over the next quarter or 2.

Speaker 4

And I think Libre3 has now been in the pharmacy channel for about 4 months or so in the U. S, obviously your business looks like it's probably safe with the AID users in the Medicare channel. And for your standalone T1 users, have you seen any change in your attrition rate, anything as we kind of look at that Libre 3 versus G6 dynamic That has changed in the last few months that Libre A3 has been out there. Thank you.

Speaker 5

Thanks, Jeff. Yes, I appreciate that. This is Jeremy. So to your question on coverage, We're still in the throes of the commercial DME and the Medicare coverage. We talked about on G7 that taking about 90 days.

Speaker 5

But on the pharmacy side, we're actually a little bit ahead of schedule. Kevin referenced we're well on track to the point where we had talked about a $30,000,000 ish hit In Q1 as a result of our bridge program that number is more like $15,000,000 now and that's because some of those pharmacy contracts are coming in earlier. So we are making great progress, and we continue to get that every day. And the signs lead to more and more contracts coming over, maybe even ahead of schedule. In terms of the question then on competitive dynamics, maybe I can start and then Kevin will obviously have a few thoughts there.

Speaker 5

We had a record new patient start in Q4. If that gives you any context to we had another solid new patient order. While we have seen competitive product out there, we continue to do very, very well with G6 to the point where we have seen incredible strength there. And that's, of course, on the heels of a G7 launch, which, as we referenced, is coming out here in the next coming days. Kevin, I don't know if you had anything else to add

Speaker 2

No, I would tell you what we're also hearing is a great deal of excitement from our user base for G7. So with respect to your question regarding How are our G6 users doing? They're very anxious to get G7 and very excited to go. So we're feeling good about where we are right now.

Speaker 4

Understood. Thank you.

Operator

We'll take our next question from Larry Biegelsen with Wells Fargo. Your line is open.

Speaker 6

Good afternoon. Thanks for taking the question. Kevin, I wanted to ask about the ramp in the type 2 basal population. I think people were a little surprised you only expected 1% growth contribution in 2023. I guess on it that would be about $60,000,000 on an annual run rate.

Speaker 6

At the last investor meeting, you said you expect $700,000,000 in revenues in 2025 from sources other than insulin intensive patients. And And I think this was mostly Type 2 Basal. So the question is, do you still expect $700,000,000 by 2025 from these non intensive sources? And how do you see the ramp in the Type 2 basal population? Thanks.

Speaker 2

Larry, I'm going to talk for a bit. I'll turn it over to Jeremy. Our initial estimates, it's 1% of our total revenues would come from that. And that's a reasonably sized number. We plan for a July second half of the year approval and rolling it out from there.

Speaker 2

It may go faster than that, but we've been conservative in our estimates and we will make every attempt to beat those. As we look out to 2025, that non intensive insulin space is not just basal users. We believe our CGM product will be very valuable Amongst a number of markets in the Type 2 space and also in metabolic health. So it's not just basal users there, it's a lot more And Adam, many of the basal users as you well know move up to be intensive insulin users as well. So we view that population It's moving and shifting with us as they go.

Speaker 2

Jeremy, do you have anything else you want to add

Speaker 5

to that for me? Sure. Yes. And Larry, so the $60,000,000 Number you're referencing would assume, say, everybody started on July 1 and they went through the end of the year. The reality is, is some folks will start in July, some folks will start in December.

Speaker 5

And so really the Velocity is much higher than that on a run rate perspective. If you were to blend it average it over the course of the year, you're really only getting 3 months of revenue contribution. So you kind of do the math there and the exit rate is a little bit higher than I think what you're implying. So we are really, really bullish on it. But it is a recurring revenue business.

Speaker 5

So what we need to do is get those Get that coverage out there, get the scripts in. And so look, I understand the question. It's a big, big market with a big, big opportunity. We plan on playing in it, and we plan on playing it in a big way. But obviously, we want to be prudent around guidance.

Speaker 5

And certainly, if things go better than that, we'll

Operator

And we will take our next question from Margaret Kaczor with William Blair. Your line is open.

Speaker 7

Hey, good afternoon, everyone. Thanks I wanted to maybe take Larry's question a step further and just kind of talk about the And is it fair at all to compare it to, I guess, what the traditional type of insulin diabetic population is? Is it going to be easier or harder, I guess, To drive adoption or their guardrails on penetration. And then just because you brought up metabolic health and non insulin diabetics, 2025 is just around the corner. So should we expect, I guess, some more meaningful impacts from here as early as next year?

Speaker 7

Thanks.

Speaker 5

Yes. Let me start on the Basal and then I can turn it over to Kevin From that perspective and so the ramp in Basal is going to be a bit interesting. We'll give you kind of the way we think about it. I think about it as a I generally start with Type 2 intensive and you think about that ramp and You think about coverage and how that takes place. And if the coverage takes place over a similar time, you'd expect a relatively similar ramp.

Speaker 5

Now I'd caveat that By saying there's more awareness today, and hence, the Super Bowl commercial is a good opportunity for us to continue to raise that awareness. However, the place in which the basal patient seed is a wider swath of physicians. And so we don't have an exact crystal ball here. If you're using prior analogs, The best analog is type 2 intensive would be about the adoption rate. But I think as time moves on, we'll be able to give you a little bit more color.

Speaker 5

But that's kind of our best crystal ball. And then maybe Kevin, if you want to give just some general thoughts about metabolic health and the opportunities there.

Speaker 2

No. As we look out to the future, Margaret, Particularly with our easy to use G7 platform that we're launching today, we believe our future is very bright as we deal with metabolic health. We've changed our mission statement To help people control their health, not just diabetes anymore. We continue to see very positive results from several programs who are using sensors to assist people In these endeavors and over time and particularly with Type 2 management and all the Type 2 drug alternatives on the horizon, We believe CGM becomes a very important part of that health equation and we're continuing to work on product offerings and business models. So it will be differentiated From what we do today and geared towards that population, we're really excited about the opportunity.

Speaker 2

And it will continue to mature over 2023 and then see what happens in 2024. We've got a lot of basal patients to reach first. So let's go after them and then we'll continue to move to the other areas as well.

Operator

And we will take our next question from Robbie Marcus with JPMorgan. Your line is open.

Speaker 8

Great and congrats on a nice quarter. I wanted to ask about the European or OUS experience And looks like you're gaining share, you're doing well. How much of that is being driven by G7 and what's the feedback there and Any head to head color you could give us versus Libre 3 in the markets where it participates? And then also sort of same question on DexCom 1 and the impact you're seeing there. Thanks.

Speaker 2

I will start off. With respect to the sales and the revenue numbers, G7 and DexCom 1 Still early enough in their launch lifecycle that while they're additive, they're not what's driving a lot of the adoption, a lot of the growth that we've seen And European markets, a lot of that's been what we've established with G6. The additional coverage that we've obtained, as I talked about in the prepared remarks, in 18 months, we've added 3,500,000 more reimbursed lives. That being said, initial response to G7 has been everything we'd hoped for. People love the app.

Speaker 2

They love the receiver. Again, in many of these markets, the receiver is a very, very strong tool. My most recent conversation with the G7 user focused completely around the half hour warm up. A half hour warm up has eliminated 90 minutes of the longest 2 hours of somebody's life who'd ever used the G6. And certainly in the comparative front compared to the hour warm up again, it is a much better experience.

Speaker 2

The majority of our G6 users are new to DexCom. They're not DexCom upgrade I mean, G7 users. I apologize. The majority of our G7 users are new to DexCom. Some of them come from the competition, some of them have not used CGM before, but they're all finding it very easy to use and Having great experiences.

Speaker 2

So we're very happy with the product to this point in time. We've done very well.

Speaker 8

Great. Thanks a lot.

Operator

And we will take our next question from Joanne Wuensch with Citibank. Your line is open.

Speaker 7

Good evening and thank you for taking the question. So I'd like to spend just a minute on the gross margins And how you anticipate those ramping throughout the year? And then while I know we're sort of early to think be thinking about 2024, I do think people are looking That is sort of a more normalized margin rate and if you could sort of shed any light on how to think about that. Thank you.

Speaker 5

Sure. Hey, thanks, Joanna. Appreciate that. And we start off with obviously the Q4, we had a really strong gross margin. I think It's a demonstration of what's to come, with what our teams can do when you give them time with the new product launch.

Speaker 5

So I think as you think about the year, the cadence for 2023, we do expect in the first half of the year margins to be a little bit lower. And that's because of, as Kevin referenced earlier, the Bridge program, certainly that has an impact. But most importantly, it's the launch of G7. Volumes won't be at where, they would have been, say, in a more mature launch and we'll still be going through some of those early manufacturing Scrap and yield challenges we always see. But what we've proven time and time again is if you give our engineering and R and D team time with these lines, They continue to get yields better over time.

Speaker 5

So our expectation is as we start to exit the year in 2023, we start to come closer back to that long term guide Of 65% gross margins. And there's nothing longer term structurally that we don't believe, especially as J7 gets to scale, That gets us back to those long term guides that we've originally provided. So we'll continue to work towards that. Think about 2023 as the first half of the year is a little bit lower as we ramp up those lines in the back half, you start to tackle some of that absorption of those fixed overheads.

Operator

Terrific. Thank you. And we will take our next question from Matthew O'Brien with Piper Sandler. Your line is open.

Speaker 9

Good afternoon. Thanks for taking my question. Just on the bridging program, can you tease out a little bit more maybe Jeremy On expectations there, I think you'd said $20,000,000 to $30,000,000 You said you're trending better than that for Q1, which is great to hear. But I don't think you ever said how much the bridging program was going to cost you for the full year. It seems like it's going to be even better than expected overall versus maybe what you were thinking Starting off 23, but then also bridging is supposed to be more of a headwind on the gross margin side too.

Speaker 9

And if it's less of a headwind, Maybe that helps out the gross margin profile a little bit more, maybe sooner than expected. So I'm just wondering like Based on all these things on the bridging program specifically being better than expected, should we start to creep up a little bit more as far as our expectations For top line growth and then even gross margins for the full year? Thanks.

Speaker 5

Sure. Yes, I don't think we're at a point where we'd necessarily Change our guidance, but let me take your question head on, which is in isolation, what does this do? So certainly, what the bridging program, what this effectively means is we have Contracts in place a little bit more ahead of when we ultimately expected. And so ASPs will be a little bit higher, And that's as a result of most folks going through coverage as opposed to the bridging program. So that does a couple of things.

Speaker 5

Certainly, it does help revenue and it does help margin. That all being said, we're not changing guidance for the year, but I think what this does mean is, one, it's a great thing for patients who want to access the product. We talked about coverage being a key strategy. That's wonderful. It does help longer term, for those margin profiles.

Speaker 5

And while I wouldn't necessarily Guide you outside of our ranges? You are correct. It does help on revenue and gross margin on the full year. And your other question was is how much for the full year? We expected a majority of it, almost all of the $20,000,000 $30,000,000 in the Q1.

Speaker 5

We do expect a nominal amount in Q2. We haven't expected any of it beyond Q2. Really, A majority of your concern would be in Q1.

Speaker 9

Got it. Thank you.

Operator

And we will take our next question from Marie Thibault with BTIG, your line is open.

Speaker 10

Hi, good afternoon. Thank you for taking the questions and congrats Strong quarter. I wanted to ask a little bit more on kind of the backlog around the Medicare decision making. I'm very curious how physicians and patients, How aware they are of that decision, whether we might see a bolus of patients sort of come on once that Medicare coverage takes place?

Speaker 2

Thanks for the question. It will be up to us to drive awareness in that community to make sure people are aware of that decision. There will certainly be Those very familiar with DexCom and with continuous glucose monitoring will be aware of it and we'll pick it up quickly. But it will be up to us to drive Awareness in both communities, the physicians and the users of the product to go and ask for it and to create that environment. So we're not going to sit back and wait.

Speaker 2

We're going to have to push.

Speaker 10

Okay. Thank you very much.

Operator

And we'll take our next question from Travis Steve with Bank of America, your line is open.

Speaker 11

Hi, thanks for taking the question. So U. S. Growth the last couple of quarters has been around 17%. So second half of the year, I think was record patient growth for both quarters.

Speaker 11

So trying to think about ex the contravasin from the BRIDGE program, If we should be seeing acceleration here in the Q1 in the U. S. Growth specifically and how that builds over the course of the year. And on the Super Bowl ad, what kind of impact did you see on U. S.

Speaker 11

New patient starts last time you did that? Thank you.

Speaker 5

Sure. Yes. So I'll start with how we're thinking about Q1. And the way we've generally thought about Q1 is in terms of full year contribution, Absent any sort of bridging program, to be a very similar contributor, as a percentage of total year revenue In the Q1, so that's total company, not just U. S.

Speaker 5

Total company. And then you add the bridging program in and you pull it down from there. And that's generally how we think about the quarter, which is just an indication of continued strong new patient growth. Clearly, we'll be working Through driving new patients and driving growth over the course of the year. In terms of the Super Bowl and then how to think about the Super Bowl and how Last time we did it, there were 100 and 100 of 1000 of inbound leads.

Speaker 5

Not all of those obviously translated into patients, but there was a lot of interest. One of the challenges though, if you're winding the clock a couple of years is There wasn't as much coverage there. And so I think what we're hoping this time around is, 1, the awareness is the most important thing and the awareness as that gets out there will be very, very helpful. But as coverage starts to come through and we have this bridging program in place, it's a real opportunity to take advantage of it. We're not ready to give exact Patient numbers out there other than to say that the return on capital is a very strong investment.

Speaker 5

And so you should expect we do that math before we sign up for this. And we wouldn't be doing if we didn't expect a return on investment that was commensurate with what you and we would expect.

Speaker 11

Great. Thank you.

Operator

We will take our next question from Jayson Bedford with Raymond James. Your line is open.

Speaker 12

Hi, good afternoon. Just maybe an OpEx question.

Speaker 13

It looks like it's a bit bigger of

Speaker 12

a step up And Clyde in 'twenty three, I know the Super Bowl ad is a contributor, but just wondering if you can comment on kind of what are the sources of the OpEx Growth and maybe hit on any planned changes to the sales force in support of G7. Thanks.

Speaker 2

Thanks, Jason. This is Kevin. I'll take it rather big picture. We'll continue to invest in R and D. Our spend will grow some, but not As rapidly as it has in other years and quite honestly as a percentage of revenues probably come down a little bit.

Speaker 2

Same with on the G and A side, we'll continue to invest in infrastructure and And build things out for our continued growth, but a lot of that investing has been done. Our biggest dollar investment, our biggest increases are going to be on the commercial side And in all areas, create awareness in the sales force, marketing Across the board, we'll be spending on the commercial side. Those expenditures could adjust and move over the course of the year as we learn Moore, we've always been very adept at channeling those dollars where they can be the most effective. We're analyzing some of that now. We certainly have a plan, but we've never been afraid Deviate from it, if it makes more sense.

Speaker 2

And so we're looking at all those things. A lot of international investment this year, quite honestly, as a percentage Of our investment, international is getting a bigger piece of it than they have in the past because we really look at this opportunity as we've got G7 and Several of these companies combined with the DexCom 1 launch and all those covered lives we've added, we think there's great growth opportunities over there, but we've got to invest in that Yes.

Speaker 5

And just to kind of add to that one, Jason, just to give you some context. We launched outside the U. S. With DexCom 1 and G7, call it, in the first couple of phases. We have more phases to go.

Speaker 5

And so we're going to make the marketing push obviously with G7 in the U. S, but there's also a second phase of G7 launchings Outside the U. S. And a second and third phase of DexCom 1 outside the U. S.

Speaker 5

So sales and marketing is really where we want to put our investment And we'll get leverage elsewhere, but hopefully that gives you kind of some context for how we're thinking about that spend in 2023.

Speaker 13

Yes. Thank you.

Operator

And we will take our next question from Matt Taylor with Jefferies. Your line is open.

Speaker 14

Hey, guys. Thanks for taking the question. So I just want to get some thoughts on gross margin longer term. I know you touched on This year and obviously with the new product launch there's some initial depression and then you get spring loaded with leverage over time. So help us think about G7 over the next couple of years.

Speaker 14

Does that expand? How can that impact gross margin with and without the potential for a A longer wear label.

Speaker 5

Yes, I can start there. And you're 100% right. I mean, obviously, there's the levers to get the actual Cost of the product and we've been very transparent about it. We want to get to it basically $1 per day and a 10 day sensor or $10 sensors. And then we want to go even beyond that.

Speaker 5

But that was always been kind of our public goal. Then of course, as you move to a 15 day sensor, that cost is spread out over a longer So we have intentions over the long haul of doing all of that. Now the math if you do that would indicate there's some real opportunities in gross margin, Even beyond potential long term guide, the one thing we want to be mindful of is we don't want to shortchange ourselves and other opportunities to either partner or otherwise Over the long haul. So while the long term guide remains intact, there are certainly levers and opportunities for us to do well there. And so I think you're hitting on all the right points.

Speaker 5

That all being said, we really hold to that long term 65% gross margin. That's what we'll work to. And If there's other opportunities to fill you in on some other things we're doing in the future, we'll certainly do so.

Speaker 14

Okay. Thanks, Sharon.

Operator

And we will take our next question from Matthew Blackman with Stifel. Your line is open.

Speaker 15

Good afternoon, Everybody, thank you for taking my question. Jeremy, just curious, appreciate all the inputs That you gave us that roll up to the 15% to 20% guide. I'm just curious, have you contemplated in that 15% to 20% range any Competitive pressures in the event that your competitor gets approved to integrate with a pump sometime in 2023? Thanks.

Speaker 5

Yes. Thanks for the question, Matt. And yes, we do. We've considered all of that when providing that guidance. I mean, When we think about all the competitive pressures and then we think about all the opportunities ahead of us, we consider all that in the guidance.

Speaker 5

And you are right, there is the potential out there, at least According to some of the commentary that there could be some potential pressure out there, I would say that we've contemplated it. At the same time, we feel very confident in our In our product offering, and what it ultimately does, how it integrates and the safety features that people rely on our product for the accuracy, the ease of use. So I think we feel very confident about it, but yes, we did contemplate that in our guide.

Speaker 15

Appreciate it. Thank you.

Operator

And we will take our next question from Chris Pasquale with Nephron. Your line is open.

Speaker 14

Thanks. I'd love an update on how you guys are thinking about price. You said in the past that your U. S. Channel mix could start Stabilize once you hit 75 percent of the pharmacy, you're there now.

Speaker 14

But you also have D1 making a bigger portion of the OUS starts, Which I would imagine might pull down your international ASP a bit. So can you tell us what impact price had on revenue in 2022? And then how you're thinking about the potential impact this year?

Speaker 5

Yes. So we'll talk about 2022 since we gave kind of a guide there, which was around $200,000,000 in the U. S. And around $1,000,000 outside the U. S.

Speaker 5

And the full year of 2022 was generally in line with that. It was, I think, just south of $200,000,000 in the U. S. And just south $50,000,000 outside the U. S, so basically right in line with that.

Speaker 5

So I think you can feel good about what guidance we gave there. Going forward, the expectation is in the G Series That delta, that price volume delta starts to come down over time. What we would expect to see is and we're not going to give a specific number for 2023 Most of that migration is done, but we will have to lap the 2022 migration. And then if there's drift, say 75 set, drift to 80, You wouldn't expect material moves there, but those are all things we've contemplated in those figures. To your point, and I think you're hitting at The way we model the business, we model the business as a G Series and a DexCom 1.

Speaker 5

And I would suggest you do that going forward. And then to your point, DexCom 1 modeled as a percentage of total business will allow you to then understand the contributions to ASP there, which is why it was important for us To give you our expectation of new patient starts in 2023 that a third of them outside the U. S. Will be on DexCom 1. So I think the way you're thinking about the model is exactly the way we model internally and that's the way I'd go about doing that for 2023 and beyond.

Operator

And we will take our next question from Kyle Rose with

Speaker 16

Great. Thank you very much. I wanted to ask an additional question just on the commercial strategy moving forward. I understand the DTC advertising and you doubled the sales force a few years ago. But just as you prepare for basal approval in the U.

Speaker 16

S, How does the focus or the call point of the actual sales force need to change? Do you need to have make additional investments in people? Just help us understand how the targeting goes moving forward. Thank you.

Speaker 2

Yes, this is Kevin. I'll take that. Jeremy gave us a bit of color earlier. 75% of our calls already by our U. S.

Speaker 2

Sales force are in the PCP arena. And I think you'll continue to see that expand as our team spends more of their time addressing that marketplace. At the same time, Not ignoring the places where we've been so successful in the past with the intensive management diabetes. So we will look at That structure in great detail, on a geographical basis, even within the U. S, there may be some places where we need to expand geographically versus A large expansion across the entire country.

Speaker 2

We'll analyze that in great detail as we go. We're in the process of doing that now. We just brought on a new Chief Commercial Officer As many of you remember in early January and she's deep in the middle of that today as we manage Those thoughts and the launch and everything else going on. But we will look at it very strongly.

Operator

And we will take our next question from Steve Lichtman with Oppenheimer. Your line is open.

Speaker 5

Thank you. Good evening, guys. Question on DexCom 1 outlook. Can you talk about any Major new geographic regions you expect to roll out the platform this year? And should we expect to see any movement in bringing Dexcom 1 onto the G7 platform this year or is that a longer term play?

Speaker 5

Yes, it's a fair question. Let me just say, we're not necessarily going Give the playbook as to what countries we are going into. Now we have launched recently in Croatia, Romania and Greece for DexCom 1. That is out there now. So hopefully that gives you some context, but we will be launching in more countries.

Speaker 5

But rather than give the playbook publicly, we'll let our commercial team But just know we will go into more countries. So hopefully that gives you at least some context, we will go. In terms of the movement from DexCom 1 to the G7 form factor, we are absolutely going to be moving to that factor. It's going to take a little bit of time. And the reason it's going to take a little bit of time is, as we get economies of scale on G6, which we have Today across the existing user base as well as DexCom 1 as well as a lot of opportunity for new users on G7, we want to make sure we prioritize G7 and that form factor for those patients coming on to therapy on the G Series.

Speaker 5

Make no mistake though, as soon as possible right after that, we will be moving DexCom 1 to that G7 form factor. Stay tuned. We'll have some updates as the years progress on. But, you're thinking about it the right way. We will move there In relatively short order.

Speaker 5

Thanks, Jeremy.

Operator

We will take our next question from Josh Jennings with Cowen. Your line is open.

Speaker 13

Hi, good afternoon. I was hoping to follow-up on the pricing question and I'm not sure if you've given a recent update just on how Investors should think about the average reimbursement Dexcom receives in the U. S. For a G6 or a G Series patient. And then just a follow-up on that is, will that change with the G7 introduction for 1?

Speaker 13

And then 2, Is it important the share shifts in the pump market just considering the reimbursement Dexcom gets to the DME channel with Tandem pump versus the pharmacy channel with the Insulet pump. Thanks for taking those questions. Thank you.

Speaker 5

Yes, it's a good question. Look, I think the way to think about the ASP is it's really more about channel than it is about version. And so as you think about where folks and Who gets access? The general way to think about it is Medicare, which is publicly out there, I think after the increase, it's around $250,000,000 a month. There's a Delta there which goes to the distributor who ultimately fulfills that, so the net price to us is south of that.

Speaker 5

But ultimately that would be our price in that range. That's publicly available. Generally, commercial DME is higher than that and pharmacy is lower than that number. And so that's the way to think about it. In terms of then how ASP moves over Think about it less of generation of product and think about it more as where folks want to get their product.

Speaker 5

And so I think You're thinking about it the right way is we talked about 75% of our lives covered in commercial, 75% of those patients. Those patients obviously then come through at a lower price point. That if that drifts to say 80%, you could see that having a potential tick on there. Again, most of that is behind us, but that's the way to think about the split there. And then in terms of pump partners and how folks ultimately access it, it really depends again consumer preference.

Speaker 5

You're right. Tandem is generally accessed through the DME and insulates generally accessed through the pharmacy. So it makes sense that folks get their CGMs through that channel. That all being said, it's ultimately consumer preference and we believe the consumer experience through the pharmacy is great. We have some really great DME partners They do a wonderful job fulfilling product through that DME channel.

Speaker 5

And so we believe that folks can be fulfilled either way.

Speaker 6

Great. If I could sneak

Speaker 13

in just a quick follow-up, just thinking about your CGM platform attached to pumps, Is there a premium reimbursement that DexCom receives in that scenario versus standalone or is it all consistent across the board? It just depends on the channel as you said. Thank you. Sorry about that.

Speaker 2

No, right now there's one class of CGM products and reimbursements consistent across the board.

Operator

We will take our next question from Cecilia Furlong with Morgan Stanley. Your line is open.

Speaker 17

Good afternoon and thank you for taking the I was hoping to follow-up. You talked still the last quarter just about rolling out cash pay models in the U. S. Just curious if you could provide more color as you're thinking about that opportunity today and then for 2023 specifically, How we should think about potential incremental contributions from that? And thank you for taking the question.

Speaker 2

Our cash pay program for G7 to start with is going to be our bridging program and people will be able to pay cash for G7 that way ultimately as we get access in Coverage of G7 when people's co pays will be significantly lower than the bridging program cost, we'll phase that out and have a cash pay program on G7 that Individuals be able to access. We continue our cash pay program on G6, but that is not a major portion of our revenues. It's just a piece of them. We do this to create access primarily where people's insurance doesn't cover it and they can't get Through the federal or the other governmental channels as well. It's not a huge percentage of our revenues.

Speaker 2

We need To continue to be cognizant of it and address those patients' needs and that's why we have it there.

Operator

We will take our next question from Matt Miksic with Barclays. Your line is open.

Speaker 18

Thanks so much. If I could, just two quick follow ups on The topics that were covered earlier, so on ramping production for G7, talking about gross margins and the impact and improving Scrap rates and all that and just wondering by the end of the year, we're sort of hitting what you say is optimal manufacturing and sort of Yes. Representative margins maybe in facilities that you have. And then the other was just on the comment you had on contemplation of competition on the pump Integration front this year and if that were not to come, I'm just wondering not to put you in a tough spot or anything like that or Pressure the margin the guidance range, but if that were not to come, does that sort of a slight tailwind to the or put you at the top end of your guided range or how to

Speaker 2

This is Kevin. I'll take that bigger picture. Jeremy has been very familiar with the numbers, but

Speaker 14

I'll

Speaker 2

give you a bit of my With respect to no competition in the pump integration point, we may pick up more, we may not. What I do know is everybody using those Thompson Integrated Systems right now uses a DexCom, and they're achieving remarkable results with the technology we've developed over the years, And we'll continue to receive such. It is our position that the experience that they're going to have with algorithms based upon DexCom CGM that have been developed Through the data and the performance of our sensor, we'll continue to make us the leader in that space regardless of who the competing sensor is. And so we're very confident there that we will continue to have a very strong product offering going forward. With respect to the margin Change over the course of the year, there's a couple of factors in there.

Speaker 2

Obviously, Jeremy has talked about the bridging program in the first half of the year, Bringing margins down a bit because their revenue per patient will be a bit lower there when we start. But as we see that pick up, we'll pick that up on the revenue side. Then you have Basal come in And Medicare reimbursement is strong, so that will help on pricing. The flip side of that is it's sometimes lost on Folks, everything we do with G7 is different. All these lines are completely different.

Speaker 2

All the capacity is different. That's the only thing that's the same as we're building in Arizona and Building in San Diego and that's not going to be the same for a good portion of the year because we expect the factory in Malaysia to be up and running in the second half and producing product there. So you have a number of variables with respect to scrap, with respect to purchasing components, with respect to how these Lines run as we get them up and running and functioning at full speed versus where they are today and then bringing on a new factory. We have tried to contemplate every one of those variables as we've started and we'll update you as to how things Going as time goes on, but whenever you do a product launch, particularly one that's significant, because when we did our last big G6 product launch, we had similar margin Activity, but it was on a much smaller scale because we're so much bigger than we were before. There's just more variables that we have We've tried to be conservative and thoughtful in our guidance based on the performance we expect of our teams.

Speaker 2

We also expect our teams to be better Than this too. We don't ever lower the bar for them as they will tell you. But we've looked at all every one of those things in contemplating that And we meet on this literally every day to make sure we're covering all of our bases. This launch is really important to us as are our margins. But it's really important to get product out to all the users that want it.

Speaker 18

Thanks for the color.

Operator

And we will take our last question from Michael Pollard with Wolfe Research. Your line is open.

Speaker 14

Good evening. Thank you. I just wanted to follow-up on Q1 to make sure I have my modeling square. Jeremy, I heard in response to Prior to question, using the full year guide, you're thinking about 1Q consistent with seasonal patterns. The last 3 years, I had 21% of Full year revenue in the Q1, if I use the midpoint of your range this year, that's $720,000,000 But then you made the comment about the Bridge program Down from there, so that'd be another, say, 15 or 20 for the quarter.

Speaker 14

So I'd be at 700 or 70 Have I put this together correctly? If not, can you help? Thank you so much.

Speaker 5

Sure. Yes. I mean, you're not far directionally off. I mean, you are right. We do The Q1 contribution and really the sequential decline from Q4 into Q1 to be very similar to what you've seen in the past.

Speaker 5

So that will help you get a little bit closer as you think about sequential decline as well from Q4 into Q1. That will put you into a ballpark. And then from there, you're right. We updated our number. It's about $15,000,000 now as a result of the bridging program as opposed to the 20 to 30.

Speaker 5

But that will get you into the ballpark. You're not far off, but there's probably a little bit of tweaking to do around the edges there. But use that 21% contribution, but think also 10% sequential. Those little rounding differences ultimately matter in there. Hopefully that gives you the context you need though.

Speaker 14

Yes. Thank you.

Operator

And ladies and gentlemen, with no further questions at this time, I will turn the call back to Kevin Sayer for any additional or closing remarks.

Speaker 2

Thank you very much, and thanks everybody for joining us today. We spent a lot of time in our Q4 call talking about 2023. I want to just step back again and thank all of our great people here at this company for their hard work in a year where we delivered on our revenue targets. We controlled our costs. At the same time, we've advanced our technologies, our infrastructure and we've advanced coverage and accessibility For our product all over the world to enhance people's lives.

Speaker 2

But we are very excited for this launch. This is my 4th major launch here at DexCom and every single time it's taken our company to another level. The first time was G4 and that was when accuracy really came to bear and we truly established what accuracy standard should be for CGM and we will remain the most system in the world, G7 is going to be a better experience than G6. Every time we try to make the product easier to use And this is the biggest ease of use advancement we've ever had as we look at the responses from our users so far. And as always, we will make this product as accessible as we can.

Speaker 2

DexCom has always been the most accessible brand CGM as far as coverage and we will continue to do so. That's our commitment to drive that very hard for our end users. It's going to be a busy and great 2023. I am very confident we'll be sitting here a year from now and I'll be able to say the same things. Thanks everybody and have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call and we thank you for your participation. You may now

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Earnings Conference Call
DexCom Q4 2022
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