7/31/2019

speaker
Adrienne
Operator

Welcome to the Dexcom second quarter 2019 earnings release conference call. My name is Adrienne, and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star and 1 on your touchtone phone. Please note this conference is being recorded. I'll now turn the call over to Shawn Christensen. Shawn Christensen, you may begin.

speaker
Shawn Christensen
Host

Thank you, Operator, and welcome to Dexcom's second quarter 2019 earnings call. Our agenda begins with Kevin Sayre, Dexcom's Chairman, President, and CEO, who will provide a summary of the quarter, followed by a financial review and outlook from Quentin Blackford, our Executive Vice President and CFO, and then a strategic update from Steve Pacelli, our Executive Vice President of Strategy and Corporate Development. 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 and one follow-up so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our second quarter performance on the Dexcom Investor Relations website on the Events and Presentations page. With that, let's review our safe harbor statement. Some of the statements that 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, and are subject to various risks and uncertainties. An actual result 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-K, quarterly reports 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 to actual results. 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. Please refer to the tables in our earnings release and the slides accompanying our second quarter earnings presentations for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now I will turn it over to Kevin.

speaker
Kevin Sayre
Chairman, President, and CEO

Thank you, Sean, and thank you, everyone, for joining us today. We are pleased to report another outstanding quarter for Dexcom, with awareness of Dexcom's TGM continuing to rise within the diabetes community and beyond. Second quarter revenue grew to $336 million, a 40% increase over the second quarter of 2018, on a constant currency basis, continuing the momentum that we have seen for the past five quarters. As we have observed in previous quarters, the primary driver of our growth in all channels, including our U.S. commercial business, Medicare, and OUS businesses, remains volume growth attributable to new patients. In fact, new patient additions once again reached a record level in the second quarter. And as our results indicate, the volume growth that we are experiencing, is more than offsetting the pricing pressure that we anticipated with lower revenue per patient associated with our move to the pharmacy channel, as well as the continued expansion of our Medicare and OUS businesses. While attending the American Diabetes Association conference in San Francisco in early June, two conclusions became increasingly clear to me. First, awareness of real-time CGM is quickly progressing and driving CGM towards standard of care status. We have been on record for years stating that the future is CGM first, and we believe that future is here. At ADA, CGM was no longer a minor presence relative to the various drug therapies. Instead, Dexcom CGM featured prominently in standing room only product presentations, academic papers, and as the driver of automated insulin delivery devices, all of which reflect the growing market awareness that we are seeing. Time and range is quickly becoming the most important metric to assess glucose control, with new time and range guidelines being established this year. Only CGM can provide these types of metrics. It is very clear to us that CGM as a diagnostic tool will become another large market for us in the future. This is well-timed with the recent submission of our G6 Pro product, which we expect to launch in 2020. With significant room for further adoption in both the type 1 and intensive type 2 populations, we are ever more confident in the growth opportunity that lies ahead for these core business segments. Second, we are just scratching the surface of the potential for Dexcom CGM. Discussions around CGM and ADA were not limited to traditional intensive insulin-using populations, but extended to preliminary studies on use in pregnancy and inpatient settings, And as we stated on the last call, we are exploring applications of our technology into these settings as we position Dexcom to maximize its long-term growth opportunity. To support these significant opportunities, our team's operational performance remains critically important. At the start of the year, we established the ambitious goal of doubling our G6 production capacity, and I'm pleased to report that we are on track to achieve that goal. We are excited about the fact that we have initiated production of our low-cost transmitter in our San Diego and Mesa locations. We are now building inventory as we prepare for launch. Based on the hard work of our operations teams in both San Diego and Mesa, we continue to strengthen our G6 capacity. This positions us well to expand the launch of G6 in the second half of this year. We look forward to bringing G6 to Canada later this year, and driving the ongoing transition to G6 and additional OUS markets. We remain committed to a G6 launch for our Medicare patients later this year and believe that this should drive incremental demand and patient satisfaction in an already strong category. Also on the Medicare front, as a number of you have seen, CMS recently differentiated reimbursement between Class II and Class III CGMs. And while the rate for the G6 system will be less than a Class III CGM, please keep in mind that we will ship fewer sensors and no BGM supplies with the future G6 bundle. Based on our better-than-expected second quarter performance, we are pleased again to be able to increase our revenue outlook for 2019, as well as our full-year operating margin and adjusted EBITDA targets. I will now turn the call over to Quinton, who will provide detail on this outlook, as well as a review of our financials.

speaker
Quentin Blackford
Executive Vice President and CFO

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. Today we reported worldwide revenue of $336.4 million for the second quarter of 2019, compared to $242.5 million for the same quarter in 2018, representing growth of 39% on a reported basis. Our momentum continues to be strong, with this being the third consecutive quarter that we have added more than $90 million in absolute dollar growth on a year-over-year basis, and as Kevin stated, another quarterly record of new patient additions for the company. On a geographic basis, our revenue growth continues to be strong in both our U.S. and O.U.S. businesses, which grew at 40% and 37% respectively on a constant currency basis in the second quarter. I'd like to remind you that our growth comps in both our US and OUS businesses were meaningfully more difficult in the second quarter than the first quarter and will continue through the remainder of the year. Our second quarter growth profit was $206.5 million or 61.4% of revenue representing 120 basis points sequential improvement over the first quarter of 2019 while increasing our G6 capacity and was in line with our expectations. On a year-over-year basis, gross margin was negatively impacted by our ongoing investments to drive capacity expansion as well as the increasing mix in both our OUS and pharmacy channels. Our four-year gross margin expectations remain unchanged. As we invest in the long term, our team has done an excellent job of introducing automation and innovation into the sensor manufacturing process and therefore decreasing the cost profile of our systems. We are confident that we can continue to do this both within the G6 platform and as we progress toward the launch of G7, providing the company with flexibility as we evaluate future growth opportunities. Operating expenses were $200.3 million for Q2 2019 compared to $155.8 million in Q2 2018. This reflects an increase of 29% year-over-year. As a result of our continued outperformance on the top line, we realized an uptick in our variable operating expenses for the quarter, In addition, the second quarter included two sources of higher than expected expense that we expect to normalize in the near term. First, we made a number of investments in the quarter toward the development of G7 as we continue to prepare for launch. We made good progress in the quarter, which triggered a small incentive charge of $3.2 million to Verily for accelerating development work. Even as we continue the worldwide rollout of our G6 system, we are beginning to invest aggressively in the products, and manufacturing innovation, which will ensure a rapid introduction of our G7 product when launched. Second, we incur duplicative costs within our customer service organization as we ramp our operations in Manila. We remain willing to incur these costs through this transition and believe we have built a world-class team in our Dexcom Manila location. However, we recognize that our third-party service capabilities have not met our expectations and are working to bring them up to the same level. Normalizing for these unusual items, operating expense growth would have been approximately half the rate of revenue. Overall, we are on track to demonstrate good operating leverage this year and anticipate continued improvement in operating margins in the second half of the year. Operating income was $6.2 million in the second quarter of 2019 compared to an operating loss of $2.2 million in the same quarter of 2018. Even with the second quarter expenses that I just highlighted, We achieved nearly 300 basis points of year-over-year operating margin expansion in a quarter. Adjusted EBITDA was $45.9 million, or 13.6% of revenue for the second quarter, compared to $24.5 million, or 10.1% of revenue for the second quarter of 2018. We remain well-positioned to achieve our long-term margin targets that we established at our investor day in late 2018, while generating cash to invest in the next wave of innovation that will extend our growth trajectory. This includes our investment in the G7 platform, as well as our exploration of the value of CGM in new markets. Our net income was $7.8 million, or 8 cents per share. We ended the second quarter in strong cash position with nearly $1.4 billion on our balance sheet, providing the company with significant financial and strategic flexibility. For now, as evidenced by the $47 million of capital expenditures in the second quarter, our priority remains the expansion of our production capacity. And as Kevin stated in his remarks, we are tracking towards our target of doubling G6 capacity this year while beginning to invest for G7 production. Given the strength of our first half performance and the continued demand that we are seeing for Dexcom real-time CGM, we now anticipate 2019 total revenue of approximately $1,325,000,000 to $1,375,000,000, reflecting reported growth of 28% to 33% for the year, up from our prior outlook of 21% to 26%. As I mentioned previously, our full-year gross margin expectations stand at 64% to 65%, and approaching 70% as we exit the year, driven primarily by the broad introduction of our lower-cost G6 transmitter in the back half of the year. In light of our better-than-expected revenue growth, we now expect operating margins of approximately 7% and adjusted EBITDA margins of approximately 18.5%. reflecting an increase of 100 basis points and 50 basis points, respectively, from prior guidance. With that, I'm now turning the call over to Steve for a strategic update.

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

Thank you, Quentin. With another great quarter in the books, we are excited about the growing acceptance of CGM around the world as a first-line technology for people with diabetes on intensive insulin therapy. Despite a number of rapidly changing market dynamics, Dexcom is capitalizing on a massive growth opportunity and we are confident that the business is well-positioned to succeed over the long term. One of the core strategic objectives entering 2019 was to expand access to Dexcom CGM. Within the U.S. market, our teams have been focused on two primary areas. First, as we have discussed in detail, we are making a strong push to ensure that patients have access to Dexcom CGM through the pharmacy channel. Although this has not been a primary driver of our volume growth in the first half of the year, patients, clinicians, and for Dexcom over the long term. The second area where we have sought to expand access is in the intensive insulin type 2 population. With an estimated more than 1.5 million people with type 2 diabetes using mealtime insulin, this population effectively doubles the addressable market of our core business in the U.S. Most importantly, as CMS recognized when they first approved our CGM for the Medicare population, This is a group of patients that clearly stands to benefit from our technology for better glucose management and safer insulin dissing. Our proactive effort to drive these two initiatives will be crucial in driving CGM to the standard of care over the long term and has also been the primary factor behind the pricing headwinds that we have detailed throughout the year. While it will take time to realize the full benefit of these strategic priorities, we are pleased to report that we are gaining steady traction in both of these efforts. Our insulin delivery partners are progressing well toward the commercialization of integrated products. On the pump side, both Tandem Diabetes and Insulet presented encouraging results in ADA related to their respective automated insulin delivery systems. We believe that these solutions will not only gain share among pump users, but will attract those interested in pump therapy. At ADA, we also announced our intent to integrate the Dexcom G6 into Tidecool Lube. This represents yet another example of Dexcom's support of patient choice and interoperability in the diabetes ecosystem as we leverage our ICGM designation. We remain excited about our partnerships with Novo Nordisk on the SmartPen side and with Eli Lilly on the development of both a SmartPen and a connected pump. As a reminder, the majority of people with diabetes on intensive insulin therapy around the world continue to choose insulin pens as their preferred means of insulin delivery, which highlights the importance of our SmartPen relationships. In early June, we also announced a collaboration with smart pen maker Companion Medical, which allows us to integrate insulin data from Companion's pen users into Dexcom's Clarity software. We are committed to helping people manage their diabetes by bringing together the two critical components of treatment decisions, glucose levels and insulin dosing, to give patients and clinicians a comprehensive picture for their diabetes management. We intend to continue delivering additional sources of insulin data into the Dexcom ecosystem over time. As Quentin mentioned, even as we roll out G6 to additional markets, the development of our G7 platform remains the key strategic objective for the company. With its significantly reduced form factor, our market-defining accuracy, and a one-piece disposable wearable, we are confident that G7 will be highly desirable to our existing and prospective patients, as well as a product that accelerates our entrance into new markets outside of our core intensive insulin business. On this front, we are pleased to reaffirm our timelines for a limited launch in late 2020 ahead of a broader launch in 2021. With that, I will pass it back to Kevin. Thank you, Steve.

speaker
Kevin Sayre
Chairman, President, and CEO

Anytime you exit the first half of the year, having raised full year revenue guidance by $150 million or more than 10%, you know that the year must be going well. And it has truly been a great first half of 2019 for Dexcom. To grow at our current scale, there are a lot of things that have to come together, and this is a great testament to the team that we have here at Dexcom. To those in the field, in the clean rooms, and those thinking years down the road asking what's next, thank you for your commitment to Dexcom and to the people we serve. There is still a huge growth opportunity ahead for Dexcom's core business in diabetes and beyond. The technology that we have worked so hard to develop positions as well to go after any significant market opportunity that we choose. In summary, it's been a great first half of 2019, but we're just getting started and we will not rest. I would now like to open up the call for Q&A.

speaker
Shawn Christensen
Host

Sean? Thank you, Kevin. As a reminder, we ask our audience to limit themselves to only one question and one follow-up. Operator, please provide the complete Q&A instructions.

speaker
Adrienne
Operator

Thank you. We'll now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have an audio question, please press star, then 1 on your touch-tone phone. And our first question comes from Robbie Marcus from JP Morgan. Your line is open.

speaker
Robbie Marcus
Analyst at JP Morgan

Great, and congratulations on another really nice quarter here. Thank you. Maybe I could start, and I don't want to get greedy here, and this is for Quentin, but after the big beats and raises you put up in the first half of the year with north of 45% growth in the first half of the year, Guidance implies 17 to 25% growth in the back part of the year. I know there's a lot of moving parts here in terms of pricing as you switch from DME to pharmacy, Medicare, international, but maybe as a catch-all question here, Quentin, help us understand some of the moving pieces here and the impact that each of them have on guidance for the back part of the year.

speaker
Quentin Blackford
Executive Vice President and CFO

Sure, Ronnie. You point out the decelerating growth in the back half of the year, which is accurate. I think probably the most important thing just to draw everybody's attention to is the fact that the comps get meaningfully more difficult in the back half of the year to the tune of roughly 15% to 20% percentage points of headwinds in the third and fourth quarter respectively. So you think back to the launch of G6 last year, you saw growth in the back half of the year start to get up into the mid-40s, even north of 50% in the fourth quarter. We're now anniversaring that, and it creates a meaningful comp headwind. So I think you start to normalize for that, and you get growth rates back into the ranges that you're seeing in the first half of the year. So you have to be mindful of that aspect. And then certainly from a price perspective, we continue to anticipate that we'll see those headwinds throughout the course of the back half of the year. even probably accelerating just a bit in the fourth quarter when you start to contemplate some of the incremental moves that CMS has made with the Medicare business. That will create a little bit of an incremental headwind from a pricing perspective, although from a margin perspective, we feel pretty good that over time it's actually going to be beneficial to us as we no longer have to provide all the BG and supply. So we feel good about where that goes longer term, but it's going to create a bit of headwinds. So I think those are the big moving pieces, but the biggest one being the tougher comps.

speaker
Robbie Marcus
Analyst at JP Morgan

Okay, great. And then a follow-up question. Everybody's focus is ahead all the way to G7 as we sit here today. Can you lay out just the timelines of what we should expect? I know with an ICGM filing, it's going to be different than what we've historically seen for your different iterations, but give us sort of the timelines of what we'll see, when we'll see it, whether it's data presentations or manufacturing ramping up and product out there. Help us understand the timelines from here on out. Thanks.

speaker
Kevin Sayre
Chairman, President, and CEO

Yeah, Robbie, this is Kevin. I'll take that one. We continue a lot on the development side on G7. We're making some very big decisions over the next couple of months before we lock in design and go. As far as clinical trial presentations in Ocander, we probably will not have much until the product's approved and the pivotal's been submitted to the FDA because we really don't want to play our hand. We are running small trials all over the place right now looking at configurations and things we may consider putting in that product, but none of those are really contemplated for publication. The push on this one since our ICGM standards is we know what the outcome has to look like. Therefore, we're going to run a trial that will meet those outcome points, and no one should be overly surprised. We're confident that the G7 platform will perform very well. We have some really wonderful things going into it and technology that we've been developing for years. As far as the launch, as Steve said in his remarks, it will be a limited launch in late 2020. We will not have the capacity to roll it out to everyone in the fourth quarter. and we're not going to try. We do not want to. We've learned enough about capacity this year. We're not going to relearn those lessons in an even bigger way. We will then, once we get approved, roll this thing out as we get our manufacturing plant up and fully ready to go to whereby we can support significant volumes. Another lesson we've learned on G6 from G5 is The conversion to the new technology can actually be very fast. We probably underestimated the rate at which our patients would convert from G5 to G6, just given what we know about our patient behavior. We're not going to underestimate this conversion. It's going to go fast. And it is going to be a wonderful product. So 2021, we really want the capacity to be able to swap everybody out. We will continue to support G6 in specific markets and with integrated products and such. But G7 becomes our flagship product by the end of 2021, with G6 supporting it and filling different roles.

speaker
Robbie Marcus
Analyst at JP Morgan

Thanks a lot. Appreciate it.

speaker
Adrienne
Operator

And our next question comes from JT McKim from Piper Jaffrey. Your line is open.

speaker
JT McKim
Analyst at Piper Jaffrey

Hi, good afternoon. Thank you for taking the question. I'd like to just touch on the pharmacy, if you could just give us an update on where you are in terms of coverage and maybe volume going that way. And if you could... touch a little bit on the Walgreens announcement. It was in the PowerPoint, but you didn't talk about it in your prepared remarks. So maybe talk about that partnership and what that could do for you guys going forward.

speaker
Quentin Blackford
Executive Vice President and CFO

Sure, Davey. I'll speak to the pharmacy question, and Kevin will give you an update on the Walgreens. You know, we continue to make good progress on the pharmacy front in terms of, you know, adding wives that are able to access the product through pharmacy coverage. So we continue to move down that path. I think importantly, the new patients that continue to come into the company continue to come in through the pharmacy channel. We see good progress being made there. Obviously, we've got an existing business that we've put in place over the years, have trained folks how to navigate through the DME channel, and they're still accustomed to that. So that shift out of DME into pharmacy on the existing base has gone a bit more slowly than what we see coming in with the new patients. So We fully anticipate that the business model over time will be through the pharmacy channel. We continue to push the organization down that pathway, and we're making good progress. But there's still a lot of runway ahead of us. There's still a lot of room to go. So we'll continue to focus on it. You'll hear us talk about it for quite some time, I'm sure.

speaker
Kevin Sayre
Chairman, President, and CEO

And with respect to Walgreens and that announcement, Walgreens has been a good partner of ours for quite a while. In fact, as we started pharmacy coverage for patients, One of our best distribution outlets in the early days was the Walgreens specialty pharmacies where our patients could very easily get access to the technology if they had pharmacy benefit. Going forward, with all the data we gather from our patients, and all the data we gather from our patients and other devices and other sensors and such going forward, with Walgreens and the data they have, we view this as an opportunity to be a very strong data partner for general healthcare. What we have certainly meets their ambitions. And we need the partner in the relationship. We think it will be a great place for patients to get their product over time, and we're looking forward to working much closer together. So this is the beginning. And if you take a look at their website and how they've talked about this, it's pretty front and center, so we're very happy.

speaker
JT McKim
Analyst at Piper Jaffrey

That's helpful. And, Quinn, if you could just address, like, the delta and the growth rate between, you know, the segments on transmitter and receiver's, especially on the receiver side with down 4%. So I assume it has to do with international and the move into the pharmacy, but if you could just maybe give people some expectations around why the growth rates should be so different across the various products.

speaker
Quentin Blackford
Executive Vice President and CFO

That's a great question. And to your point, the receiver is actually down from a dollar perspective in the reported figures. I can tell you from a unit basis they were up significantly. And as Kevin mentioned, pointed out in his prepared remarks, our new patient numbers were at record levels, an all-time record for us again in the second quarter. So volumes continue to trend very well. What you're seeing play out there is really a dynamic in how we think about strategically pricing the product for the future, both as we move into the pharmacy, but as well as we start to think about new product iterations like G7 over time that start to remove the transmitter or the receiver components altogether. And so where the value ends up getting placed is a bit different from a category perspective, but it's not reflective of the underlying volume growth in the business. So I think that's what you're seeing play out there. It's certainly something that we have made very distinct decisions around in terms of how we set up these pricing strategies, and you're now seeing it start to play through in the categories from a dollar perspective, but nothing that would indicate any underlying concerns that anybody needs to pay attention to. Volume growth is incredibly strong. New patient growth is as strong as it's ever been.

speaker
JT McKim
Analyst at Piper Jaffrey

Thank you.

speaker
Jeff Johnson
Analyst at Baird

And our next question comes from Jeff Johnson from Baird. Your line is open. Thank you. Good afternoon, guys. Can you hear me okay?

speaker
JT McKim
Analyst at Piper Jaffrey

Yep.

speaker
Jeff Johnson
Analyst at Baird

All right, great. Hey, Quentin, maybe I'll follow up on that question there and, you know, trying to move away from looking at sensors versus transmitters versus receiver revenue. You know, conceptually we've thought of you guys kind of generating maybe $3,000 per year per patient in kind of X receiver revenue anyway. With G7 launching late next year into 2021 and going from maybe 10 to 14 or more likely I think 15 days, What do you think that $3,000 per year per patient revenue, what are the puts and takes on where that could go?

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, Jeff, we're not going to get into the specifics of that price point. I think importantly, as we sit down with the payers and negotiate positions, we tend to look at this from an average value per patient on an annual basis. And so to the degree that we're going to give that information, we're putting a playbook out there in front of everybody to see, particularly the payers. And you can imagine that as soon as it's out there, you're going straight there. I think the important thing to know is that we understand the configuration of G7 when it comes into the marketplace. It's very different than the G6 product. We're having discussions with payers today around how we structure these contracts so that G7 can come in very seamlessly and we move right into it. And so the revenue does start to change across each of the buckets. And it does start to come down on an annual basis on a per... user perspective. So as we move further into the pharmacy, we know it has to come down over time. And I would just point you back to our long-term goals. You know, when we put out the $2 to $2.5 billion of revenue, we absolutely anticipated that the revenue per patient had to come down over time. And we're playing right along the pathway of what we anticipated that might look like. We're executing nicely on that front and feel very good about the progress being made.

speaker
Jeff Johnson
Analyst at Baird

All right, fair enough. And then on your fourth quarter comments around Medicare and with that Class 2 bundle down, I think 13% or 14% or something like that, you know, you sized that as one of the impacts why 4Q may be modestly impacted or the guidance implies maybe a little bit slower growth then. You know, how do we think about that into 2020? Understanding you're not giving 2020 guidance, but is that a rounding error as we start thinking about 2020? Is that something we need to put a finer point on in our models, thinking about next year's revenue growth, just that change in the Medicare dollars? Thanks.

speaker
Quentin Blackford
Executive Vice President and CFO

I think you need to be mindful of it. It is going to be a headwind for us as we now will have a full year of impact relative to this one quarter of 2019. So it's certainly something that's We'll speak more about it as we get closer to the end of the year and start talking about 2020, but you're going to want to be mindful of it. I think importantly, the ability to eliminate the BGM supplies from the bundle or no longer having to provide that actually puts us in a position where it becomes margin accretive relative to the current position that we're in with Medicare Channel. So overall, we view it as an opportunity from a margin perspective to show some It's not going to move the needle in a significant way, but it doesn't become the headwind that it's been.

speaker
Jeff Johnson
Analyst at Baird

Fair enough. Thank you.

speaker
Adrienne
Operator

And our next question comes from Margaret Kayser from William Blair. Your line is open.

speaker
Margaret Kayser

Hey, guys. Thanks for taking the questions. Maybe one for me, switching over to the OUS dynamic a little bit. If you can walk us through the near and long-term outlook of And really, what are the two or three scenarios for you guys in a bear and bull case? You know, where and when will market penetration be outside the U.S., you know, above 20 percent, above 50 percent penetration?

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

Yeah, I mean, look, I think, you know, for us, Europe is lagging a little behind our penetration in the U.S., but there's no reason that particularly in the reimbursed markets in Western Europe that over time Western Europe should look a whole lot like our U.S. business, as frankly should supermarkets. Japan and Canada and Australia and the other developed markets. You know, we're not going to give, obviously, specifics on when and how quickly we think we can get to those levels of penetration, but it's coming. But the European business, you know, one comment I would make on the European business and revenues, particularly in the second quarter, is that we've said this time and again on our calls, that the European business, because it's still predominantly through third-party distribution, tends to be a little more choppy. We don't have the same seasonality from DME deductibles that reset in the first quarter and the European distribution network. Their order patterns just tend to be a little choppier. So the European business is still humming along. It's a big bright spot for us, and we expect it to continue to be great from a growth perspective.

speaker
Margaret Kayser

Good. And then Quentin just wanted to follow up a little bit on some of the outsource support organization and some of the commentary you guys had on that. you know, walk us through what you guys maybe have missed, what you guys are doing to fix it, and over kind of what time horizon should we still assume that everything's on track towards the operating margin goal long term? Thanks.

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, I don't think you should have or walk away from the call with any incremental concern being added to an operating margin goal. We are tracking incredibly well from that perspective, and and feel great about the decision that we've made there, and it's going to be a really nice leverage point for us over time. I think the difference is when we stood up that Philippines operation, we started with really two paths. There was a direct Dexcom employee base that has performed incredibly well. And then there's a third-party outsource component that we've utilized as well. And I think what we've learned is the standard that we hold ourselves to honestly is just not the same standard that other parties probably hold themselves to. And so the question or the issue that we're starting to remedy is to get into those situations, elevate the standard that we expect, and hold them accountable to deliver that for us and to us. I think it's going to be a few months here as we work through it. It's front and center. It is a priority for the team. We've got our resources all over it. The reality is we can do better, and I think that's what we're trying to say here is we understand the challenge. The experience can get better for our patients. We know that, and we're after it. And so we're committed to investing and improving in that. You shouldn't look at that as a significant investment beyond the current spend rate that you see us executing to now.

speaker
Margaret Kayser

Great. Thanks, guys.

speaker
Adrienne
Operator

And our next question comes from Joanne Wench from BMO.

speaker
Joanne Wench
Analyst at BMO

Thank you for taking the question. I just want to get my head around the move to the pharmacy channel a little bit more. It sounds like last quarter you were able to announce or share that the Cigna had granted pharmacy benefit. Are there any other larger insurers that you can give us an update on or another way to look at it, a percent coverage moment?

speaker
Kevin Sayre
Chairman, President, and CEO

You know what, I'll take that. We haven't had any large contracts that we disclosed that have come to fruition this quarter, but we continue to roll along really well. One of the things we're struggling with, in all honesty, is how to define how many covered lives we have, because as we look at all the payers we have and our competitor may have, we go, well, we have about the same, but we don't really want to disclose that same percentage. We know we're well over 50%. We're on our way to getting where we want to be. The more important factor, Margaret, I mean, not Margaret, Joanne, I'm sorry, in this situation is we've got to get patients moved to the coverage that we have. As we continue to pull the new patients through there, that will be helpful. And as we continue to, we'll just continue to have programs and relationships. You'll see a lot of effort there in the future. Our strategy has been working very well. As we go before payers, and I've gone before a couple of them, Our presentation has been very strong, and we've been able to get the reimbursement that we wanted and very frequently get to the pharmacy channel. But we've just got to keep knocking them out.

speaker
Joanne Wench
Analyst at BMO

Thank you. Just as a follow-up, if I calculate this correctly, on a dollar basis, your international revenue was flat sequentially. Am I looking at that right? And is there something going on there I should know about?

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, you are looking at it correctly. I don't think there's anything there that you need to particularly be concerned about. You know, I think from a sequential perspective, your point is accurate. To Steve's point earlier, this is a lumpy business. You know, nearly half of it still flows through the distributor channel. And I can tell you, you know, in a market or two, the matter of an order coming through in the first quarter or second quarter or falling into the third quarter, it can cross over from time to time. And so we did have a little bit of that that played out in the second quarter. that would change that sequential trend. I think the important thing is when you look at new patient adoption, you look at existing patient performance in these markets, it's consistent with what we've seen. There's no change in that trend. So I think you're seeing more of a timing issue when you look at it from a sequential perspective. And certainly year over year, I think the other thing just to point out is you've got a meaningfully more difficult comp in the second quarter than what you had in the first quarter in this international business. Nearly 30 points of incremental growth that showed up in Q2 of last year versus Q1, which, again, I think just kind of comes back and demonstrates the lumpiness in the international business. So nothing that we're concerned about, you know, playing out there. We still are incredibly bullish on the international business. The new patient opportunities continue to be strong, and probably most importantly, the overall adoption of our technology in the market is still quite light, which leaves a lot of room to run.

speaker
Joanne Wench
Analyst at BMO

Thank you. Another nice quarter. Thanks.

speaker
Adrienne
Operator

Our next question, Constantinelle from SVB. Your line is open.

speaker
Constantinelle
Analyst at SVB

Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on another really, really strong quarter. Quentin, I was hoping you could give a little bit more color on the pricing headwind that you've seen so far year to date. I know you guys talked about $100 million for the year. How much of that's been absorbed thus far, and how much incremental should we expect in the second half? And I have a follow-up.

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, so I think you go back to the first quarter. We commented then that it was a bit less than the $20 million. Here in the second quarter, you know, it was closer to the $25 million that we've kind of commented on on a per-quarter basis. I would tell you it was right in line with expectations. I think, you know, in the back half of the year, we expect that to accelerate a bit. I think, importantly, there's a a couple dynamics playing out. Certainly the move into the pharmacy is a big priority for us, and we've talked very clearly around our intent to allow price to come down a bit to open up that channel. You've got the Medicare, you know, revision in their rates that will play a bit into a bit of a headwind there as well. And then I think importantly, we're also seeing a willingness and opportunity with the payers to continue to even move in the DME channel to create easier access to product and technology And so we're willing to give a bit of price in that scenario as well, knowing that over time it's going to have to walk itself down. So, you know, in those negotiations, generally what happens is you're negotiating for easier access to the technology, less paperwork, less requirements in terms of logging glucose levels. Those are the kind of things that if we can make that easier for the patient, we're willing to concede price a bit because we understand that volumes are likely to pick up, and we certainly have seen that play out. We've got that baked into the back half as well. That should give you some color on the incremental price in the back half versus first.

speaker
Constantinelle
Analyst at SVB

Okay, that's helpful. And then my follow-up is at a very high level. Kevin, I don't know if you want to take this one, but, you know, you talked about it's not necessarily been the pharmacy yet that's been driving the outperformance. And I'm just curious if you can talk about, like, what has been driving that. the outperformance, what level of visibility do you have? You've raised guidance $150 million, but you've only beat consensus here today by $65 million. So you clearly have some level of visibility into that, I would expect. And it sounds like it's expanded access. Could you quantify at all how much over the last 12 months access has actually expanded as a percentage of your addressable patient population has increased by a certain percent or something? Thanks.

speaker
Kevin Sayre
Chairman, President, and CEO

You know what, I'll walk through that, and if Steve and Quinn have anything they want to add, they're welcome to. I think there's a couple factors. I think awareness has become a huge factor in our marketplace. Many more people are aware of CGM and what it can do now than have ever been before. As we do our own marketing research and ask about our brand awareness and CGM awareness, the responses are much, much better than we've ever seen. I would tell you also that G6 is a big deal. As patients have learned about G6 and learned the experience they can have and all that it does, this has been extremely helpful in our growth. There's other little things. You know, Tandem having an approved pump that's integrated with our system has certainly been helpful in driving new patients to Dexcom. The growth in the international markets. And it's interesting. Oftentimes we would look at growth, and like back in the old days, I look at Steve, you all would ask us, well, what about PEDS? Is PEDS driving growth? And then recently, is Medicare driving growth? Every segment is growing. Every single business line is growing and growing nicely. The commercial business, the Medicare business, you look at PEDS and adults. They're both growing. You look at Europe. It's very much across the board. It is really driven by CGM Awareness. and the fact that people really are figuring out that this is something they really need to control and manage their diabetes. I don't know if you guys have anything else you want to add to that. That's it. Okay.

speaker
Adrienne
Operator

Thanks so much.

speaker
Jason Bedford
Analyst at Raymond James

Thanks.

speaker
Adrienne
Operator

And our next question comes from David Lewis from Morgan Stanley. Your line is open.

speaker
David Lewis
Analyst at Morgan Stanley

Good afternoon. Just a couple for me. Maybe first for Quintin. So, Quintin, I think ADA was the first time you offered some qualitative specifics around what G7 COGs could be. I think specifically you said you think G7 COGs can get down to competitor levels at scale. I just want to be sure there's a couple things. What you think those levels are, how do you define scale from a revenue perspective, and what's driving your confidence now in kind of providing that kind of qualitative commentary?

speaker
Kevin Sayre
Chairman, President, and CEO

You know, this is Kevin. I'll take that, David. When we started the G7 project back in 2015, one of the things we put on the table was a cost target that was very aggressive, and we didn't think we'd ever be able to meet. But we've marched to that cost target going forward. We know when we roll the thing out the door in the beginning, we're not getting at that target. But over time, as we look at the cost of the electronics, the battery, the manufacturing processes, We're implementing that are different than anything we've done before. Even the number of parts in the insertion system, everything has been designed not only to perform at our standard, but it's been designed to manufacture. It's been designed to manufacture at a lower cost in a more reliable way. So we're very confident we can get to lower COGS. Quite honestly, I sat in a meeting yesterday, our G6 COGS, as we get to volumes next year and as we've increased our manufacturing capacity and fill out our Mesa plant. are going to come down significantly as well. Our cogs are moving in the right direction. It's just taking more time. And as we've invested dollars to expand, before the expansion, things get a little bit tough on the absorption side. But as we fill that plant and keep working hard in San Diego, we're very confident we'll get there. But G7 is just designed completely different than anything we've ever done.

speaker
David Lewis
Analyst at Morgan Stanley

Okay. That's very helpful, Kevin. The second thing is just pharmacy coverage percentage. I think you said 50% last quarter. Can you just sort of date us what that number is today? I think one of your competitors shared that they were at 75% this quarter. So where are you guys today? And just give us any sense by year end what percent of revenue you think will come through the pharmacy and just a sense of scale in that number, what that number could be perhaps in a year from now. Thanks so much.

speaker
Kevin Sayre
Chairman, President, and CEO

This is Kevin. I'll go to a year from now because I think that's easier than today. We would be I can set a goal. We certainly would want to be in the 80% range as far as coverage a year from now. And that certainly is what we're shooting for. As far as where we are today, we know we're above 50%. We've gotten some more contracts. It's better than it was last quarter, but we haven't done a lot of these calculations. I've heard one number of 57. I've heard others above 60. I don't have the perfect number for you. David, but we're comfortable where we are. Like I said earlier in our comments, we've gone through each payer. We do this on a regular basis. What do we have? What does the rest of the market have? We don't see a lot of difference there. So maybe we compute our lives different or whatever. It doesn't matter. We're making the progress that we want to make. As far as the percentage of our business going through, I'll reiterate Quentin's comments. We've never disclosed that percentage, and we won't. until it becomes very obvious. At the end of the day, our new patients are very much going over there. We have not launched a major effort to move the existing patients over there. And again, this relates to people being comfortable with how they processed things in the past, having good insurance that covers it in DME. This is going to be a process that's going to take time. But we'll get there.

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

Yeah, I mean, David, as we were talking in our preparations earlier today, Kevin pointed out, we spent 13 or 14 years, the last 13 or 14 years, building a big DME business, and it's just not going to shift overnight. Our doctors, our field sales force, our patients are used to processing their existing business. So you'll see new patients shift to the pharmacy much quicker because we're obviously pinning every new patient who comes in the door to see if we have pharmacy coverage. But transitioning the DME base over to pharmacy is going to take some time.

speaker
David Lewis
Analyst at Morgan Stanley

Great. Thank you. Nice quarter.

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

Thanks, David.

speaker
Adrienne
Operator

And our next question comes from Travis Steed from the Bank of America. Your line is open.

speaker
Travis Steed
Analyst at Bank of America

Congrats on a great quarter again. So, you know, we've heard a lot about capacity strains, both from you and from patients. So I wanted to get a sense for how much of a limiting factor capacity has actually been on adding new patients in the first half of the year and what you could see from a tell when as you double capacity in the second half.

speaker
Kevin Sayre
Chairman, President, and CEO

Well, I'll start. We don't think we've lost many new patients for capacity. The issue that we've had literally is timing of shipments and we've delayed things a bit. And at the end of the quarter, we really have filled pretty much everything patient-wise and direct patient-wise that was on the books. The double capacity, the goal is to have it in place by the end of the year. We will not have double capacity running as we go through the rest of the year. That's a process that is ongoing and we've got some new processes. For example, we have our first fully automated G6 lines up and running here in San Diego, and we'll then replicate those lines over in Arizona over the next several months to get those things up and running. And the fully automated G6 process is really exciting, at least it is for me to see. Over the course of the end of the year, again, you can see capacities constrain us a bit still. We are delaying the Medicare launch to the fourth quarter. We have Canada coming on later this second half of the year, but it's not coming on immediately. And there's some other international geographies we want to be in with G6 as well, and we want to swap out the G5 patients, particularly those in our European markets and in our existing Medicare base. So we're still a bit constrained on all the things we would like to do. But we'll work through it, and we think by the end of the year we'll be in a very good place.

speaker
Travis Steed
Analyst at Bank of America

Great, thanks for that. And Quentin, gross margin in the first half of the year, you know, low 60% range and still committing to that approaching 70% by Q4. Anything you can give us confidence and really in the ramp in the back half and gross margin, how much of that's coming from the lower cost transmitter versus other things?

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, sure. It's a great question. And the vast majority of our ability to get that 70% range in the fourth quarter is really tied to that lower cost transmitter. So I think what you ought to plan to see is Q3 will step probably somewhat in line with what you saw Q2 over Q1 be. I think you'll see that same kind of sequential improvement, and then you'll see the nice improvement in the fourth quarter to 70%. In terms of trying to deliver a little bit of confidence or help you become more confident in that number, we've got our first low-cost units off the production lines as we speak. We're producing them now in San Diego. They've come off the lines in Mesa. We have a high degree of confidence in being able to to scale that up and ramp it, and so our confidence level is quite high that we can get to these numbers.

speaker
Unknown
Unknown

Great, thank you.

speaker
Adrienne
Operator

And our next question comes from Doug Shankle from Cowan. Your line is open.

speaker
Ryan
Analyst for Doug Shankle at Cowan

Hi, this is Ryan. I'm for Doug. Thanks for taking my questions. You talked of making steady progress expanding coverage for intensely managed type 2 patients in the U.S. Is there anything more quantitative you can say? I believe Medicare represents about a third of this patient population. How much progress have you made within commercial payers specifically? Do 50% of commercial labs have coverage or anything close to 50%?

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

That's a great question. I don't know that we have a specific answer for you. We continue to make progress certainly as we push to move to the pharmacy, pushing for

speaker
Kevin Sayre
Chairman, President, and CEO

And an example I could give you is in the past, as you go back a couple years, one of the things we would give up to get better access for our type 1 patients was type 2 access sometimes. And our contractional pricing discussions, that's not going on now. We are pushing aggressively to get the type 2 insulin users covered. And quite honestly, having CMS issue that type of guidance has been very helpful for us. It's been a catalyst for us to go to payers and say, look, if Medicare patients get this so should the others. So we're making progress. We're not there yet.

speaker
Ryan
Analyst for Doug Shankle at Cowan

Okay, that's helpful. And then I apologize if I missed this. I think previously you had talked about launching a decision support system for MDI patients along with a SmartPen partner, you know, around late this year or early next year. Is that still on track or has that been pushed out a little bit? Thank you.

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

Yeah, so our first commercial SmartPen launch will be together with Companion, right, where we're doing a really retrospective review of insulin data together with CGM data in our Clarity system. With respect to a real-time display of insulin in the Dexcom app, that still could happen later this year or first part of next year. We haven't been specific with who and what and what that product might look like, but we're still making good progress.

speaker
Kevin Sayre
Chairman, President, and CEO

I'll just add that we don't view that as a revenue driver as we sit here today. That would be nice to have.

speaker
Adrienne
Operator

And the next question comes from Jason Bedford from Raymond James. Your line is open.

speaker
Jason Bedford
Analyst at Raymond James

Thanks. Just a couple quick ones here. In terms of the new transmitter, I realize the COGS benefit to Dexcom, but are there features and benefits to users?

speaker
Quentin Blackford
Executive Vice President and CFO

It's identical to the existing G6 transmitter.

speaker
Kevin Sayre
Chairman, President, and CEO

But I will add, we couldn't go to direct Apple Watch until we got to this new configuration. So there is some better electronics that we'll be able to use the features on and get some new firmware in and such. But as far as performance, I guess it's my understanding the range is a little bit longer. But it's not a huge change. OK.

speaker
Jason Bedford
Analyst at Raymond James

And then, excuse me, I just want to get back to the international commentary that's kind of the flat sequential. You mentioned that half the business goes through distributors. Did you see more consistency from the direct business? And I guess the other question is, have you seen any change in market dynamics in Europe?

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, so we do see more consistency in that direct business. That revenue cycle is a little bit different. We're recognizing revenue upon the the sale to the end user, whereas the distributor, generally they'll take inventory positions, work through inventory, replenish, and so forth. So you get a bit more lumpiness in that distributor business than you do in the direct. In terms of end market trends or anything changing, no. And I think we were pretty clear with the comments earlier. The new patient numbers continue to be very nice for us, continue to track in terms of what we've seen historically from the overall international business. existing patient trends from an overall international perspective looking very good as well. And so, again, I come back to it's a bit of a lumpiness. You've got a tough comp. Honestly, you're going to have a tough comp in the third quarter as well in that international business. You know, last year, the third quarter growth rate was even beyond what it was in Q2. So I think you'll see this again for another quarter, and then I think you start to see it, you know, pick up again in the fourth quarter. But nothing unusual here, nothing that is drawing our concern. We stay very close to it. We understand the Patient dynamics quite well, and we're very encouraged with what we see. Thank you.

speaker
Adrienne
Operator

And your next question comes in Raj Denhoi from Jefferies. Your line is open.

speaker
Raj Denhoi
Analyst at Jefferies

Hi. Good afternoon. You know, I guess it's late in the call, but I figured I'll ask the question anyway just on competition, right? So it's been asked on most conference calls. You know, we're still waiting for Libre 2.0 to get approved here. You know, I guess, do you have any updated thoughts on that product or the competitive landscape and really anything about the delay on that product getting approved?

speaker
Kevin Sayre
Chairman, President, and CEO

No, we don't. And we're not going to give them our airtime. We've dealt with competition ever since we've been here, and we'll deal with that one when it comes. So, no, we don't have anything to add.

speaker
Raj Denhoi
Analyst at Jefferies

Fair enough. You know, for my second question, I just wanted to ask about your expectations around, you know, you mentioned some of the pump partnerships, and I guess over the next several months we're going to start to see the first automated instant delivery systems with your CGM. Do you have any thoughts on what that could do to CGM adoption or your growth really into next year?

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

I'll somewhat defer to Tandem, but their latest public guidance is that their in-control system would launch in Q4 of this year, so that'll be a Dexcom G6 sensor with the Dexcom slash Type 0 algorithm running on the Tandem X2 pump. The beauty, as I said before, the beauty of the architecture of that field upgrade their systems. So many of their existing patients are already joint patients. They're already using the G6 system. You know, it remains to be seen as, you know, I've said this on a number of occasions. Do these automated insulin delivery systems, as we get more automation, does that kind of reinvigorate, reaccelerate growth in the pump market? pump therapy, be it tandem, insulate, you know, that's obviously a benefit for all of us.

speaker
Raj Denhoi
Analyst at Jefferies

Okay, that's helpful. Thank you.

speaker
Adrienne
Operator

And the next question comes from Chris Pasquale from Guggenheim. Your line is open.

speaker
Chris Pasquale
Analyst at Guggenheim

Yeah, thanks. Quentin, I wanted to follow up on a question about gross margin. You had talked about not assuming that the level we exit this year at is a sustainable one for you in 2020. given ongoing pricing pressure. Could you just update thoughts on where gross margin shakes out over the course of the next 12 to 18 months?

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, again, we're not going to get into setting the expectation for 2020 just yet. Obviously, you see where the fourth quarter is expected to exit. And again, we feel very good about that number approaching the 70% range. So I think it talks to the potential that we have in front of us. But we are trying to be very transparent about the fact that the pricing headwinds are going to continue to exist. We're going to continue to navigate towards the pharmacy channel. We know Medicare is a bit of a headwind from a top line, but from a margin perspective, without giving the BGM supplies, we actually feel like that could be a bit accretive. So we'll get more color as we start to get closer to the end of the year or exit the year, but I don't think you should anticipate it being up at that 70% range that we see in Q4. I think That's a fine starting point, but then you start to model in the pricing headwinds that we talk about and the pressure that comes from the shifting mix of the business, even as OUS becomes a bigger component. You can start to work yourself into a number, but we're not going to give any more specifics than that at this point. It's just too early.

speaker
Chris Pasquale
Analyst at Guggenheim

That's fine. That's helpful. And then if I do a little bit of math here on the duplicative cost piece that you talked about, it looks like it was about $7 or $8 million in the quarter by my math. Is that in the right ballpark, and how does that trend change? over the back half of the year? Does it stay in there or does it gradually come out?

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, I think you're a little bit high, to be honest with you. You're not meaningfully off, but you're a bit on the higher end of where that is. So I wouldn't look at that and annualize that per se, but you're getting down the right path. We do think that that starts to alleviate a bit in the back half of the year. So one of the things that we said that we would do and be very careful about was we would ensure that we had the capabilities stood up in our new facility before we would let resources go here. And we are now demonstrating that. We have had a wave of resources go or two. We'll see that continue to play out in Q3. And so the duplicative cost will start to step down in the back half of the year. Thanks.

speaker
Adrienne
Operator

And our next question comes from Steven Lichtman from Oppenheimer. Your line is open.

speaker
Steven Lichtman
Analyst at Oppenheimer

Thank you. Hi, guys. Yeah, as you continue to move toward G7, I was wondering if you could update us on your latest thoughts on how you see the usage model within the non-intensive patient population. Do you still expect it to be intermittent use? Just your latest thoughts overall on moving into that large channel long term.

speaker
Kevin Sayre
Chairman, President, and CEO

You know, long term, if we had a device that would be reimbursed that patients could wear all the time, I think they would wear it. The issue becomes what is going to be reimbursed and what type of model is going to serve those patients best. from a cost perspective. I can tell you and give you feedback on at least three programs we're aware of where intermittent use of G6 is going on right now, and different levels of intermittent use, somewhere for three months straight, somewhere one, somewhere for one month, depending upon where they are. And the outcomes in these patients exceeds anything ever in a type two patient in any drug. They learn more from wearing a sensor than any pharmaceutical product that's ever been introduced in that market. We're very optimistic. we can make a big difference there. And we will continue to work on that business model with our G6 platforms and with those parties we're working with, the programmatic people, the payers and such, to develop the right model. So when we're ready, we're ready to go. And we wouldn't, quite honestly, we wouldn't walk away from an opportunity if somebody wanted to use G6. It's just not the perfect product with the reusable three-month life transmitter to attack that. But We're learning a lot. We've committed a lot of resources to this. We're very confident we can make a huge difference. But the business model has yet to be developed.

speaker
Steven Lichtman
Analyst at Oppenheimer

Great. Thanks. That's helpful, Kevin. And then just secondly, on international, Steve, you mentioned Japan briefly. I was just wondering if you could provide an update on that opportunity and when you think it can start becoming a personal and not just professional use there.

speaker
Steve Pacelli
Executive Vice President of Strategy and Corporate Development

Yeah. We're still working through the regulatory aspects of G6 in Japan. So if you remember, we actually launched in Japan with a professional version utilizing the G4 slash G5 sensor platform. So I would tell you it's probably not before the end of this year, but probably sometime I'm hoping in the first part of next year we're launching G6 as a direct-to-patient consumer use product.

speaker
Steven Lichtman
Analyst at Oppenheimer

Thanks, guys.

speaker
Adrienne
Operator

And our next question comes from Suraj Kalia from Northland Securities. Your line is open.

speaker
Suraj Kalia
Analyst at Northland Securities

Good afternoon, everyone. Thanks for taking my questions. Kevin, can you hear me all right?

speaker
Kevin Sayre
Chairman, President, and CEO

Yes, I can hear you fine.

speaker
Suraj Kalia
Analyst at Northland Securities

Perfect. So just one question. Most of the questions have been asked, and maybe this is a better position for Quentin. Quentin, I know this whole thing about you all have been consistent about Q4 margins, you know, stepping up to 70%. At least the math has suggested this. Q3 is going to be, give or take, 63%, and then it steps up to 70%. Can you help us fill in the blanks here? So I just did some rough math. If the transmitters, those are the ones that are going to cause a step change. You know, am I right that they have to be 80% plus gross margins on that? How should we think about that? Because I'm not getting to that 70%. Any additional fill in the blanks would be greatly appreciated. Gentlemen, thank you for taking my questions.

speaker
Quentin Blackford
Executive Vice President and CFO

Yeah, I don't think, Siraj, we've never given specific gross margin profiles of any particular product of ours. But I will tell you, the cost reduction that we have in that transmitter from where it was is significant. It is orders of magnitude less costly than what it used to be. So we're not going to give you the specifics, but it was a very meaningful reduction. The team did an incredible job. Really, both the R&D teams and the operation teams combined in designing cost out from a design perspective, but also just the process of manufacturing the product was a whole team effort that generated incredible benefit. Thank you.

speaker
Adrienne
Operator

And that concludes the question and answer session. I'll now turn the call back over to Kevin Sayre for final remarks.

speaker
Kevin Sayre
Chairman, President, and CEO

Thank you, Operator. I just want to talk about one other recurring theme at ADA that kept coming to me over and over again. I met numerous people there that I've known for a number of years who have type 1 diabetes, and I literally heard the same thing over and over again. I haven't stuck my finger for six months. I haven't stuck my finger for eight months. I heard a story from one patient who said he rubbed his wife on her shoulder, and she said for the first time in many, many years, his fingers didn't have scales on them or weren't rough. Other patients said, I've never been healthier in my life because this is so easy to use. One well-known physician actually took the opportunity to make me aware of the responsibility we have as a company because his patients rely now only on G6 to manage all of their diabetes and no one sticks their finger anymore. These are great stories. But to assume that type of responsibility, we have to be really good. We have to continue to perform on the financial side. so we can meet our goals on the technology, manufacturing, and operations side. There are things we have to do better. As Quentin said earlier, we will address our customer service area, particularly outside service, and we will get that in line with all of the wonderful experiences our patients have with our product. We appreciate everybody's continued support, our patients, the physician community, our investors, and especially our employees. Our sustained performance and the sectional performance we've had over the first half of the year only shines a brighter light on what we think is going to happen in the future. Thank you.

speaker
Adrienne
Operator

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

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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