DexCom, Inc.

Welcome to the Dexcom Third Quarter 2019 Earnings Release Conference Call. My name is Erin, and I'll 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. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Sean Christensen. Sean, you may begin.

Thank you, Operator, and welcome to Dexcom's third 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 COO 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 so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our third 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 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-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 third quarter earnings presentation for reconciliation of these measures to their most directly comparable GAAP financial measure. Now I will turn it over to Kevin.

Thank you, Sean, and thank you, everyone, for joining us today. The third quarter was another great period of growth for Dexcom. There are many things that we could highlight today, but let me give you three key statistics that point to the strength of our business. The third quarter represents our highest U.S. growth rate since the first quarter of 2016, when the business was much smaller. The third quarter included the highest absolute dollar growth in the history of our company, increasing nearly $130 million over the third quarter of 2018. We not only achieved profitability in the third quarter, but for the first time ever, through nine months, we are profitable on both the GAAP and non-GAAP basis. The explanation for this performance remains relatively simple. More and more people are becoming aware of the value of Dexcom's real-time CGM. And with G6, we have the right product to meet their needs. We often highlight access and awareness as the primary answers for the growth that we are experiencing. But this is the result of years of work from the Dexcom team. It is the result of many people embracing our core value to think big. We think big in the way we design our products, the way we serve our patients, our approach to device integration and empowering user choice, and the way we structure our business to meet the expectations of our patients, our employees, and our shareholders. Thinking big includes thinking about long-term profitability, As I stated earlier, through the first nine months of the year, we find ourselves profitable on both a gap and non-gap basis and on our way to our first gap profitable year. But even as we embrace this visionary mindset, it has not come without challenges. This explosive growth continues to leave supply levels much tighter than we expected as we've ramped capacity. And because of these supply constraints, our customer-facing infrastructure is has been stretched to its limits. As Quinton will explain later, our guidance considers these challenges. I can assure you that as we think about Dexcom's opportunities in diabetes and beyond, we are continuing to think big. In addition, as many of you have recently seen, we've had some key developments over the past few months. In September, we began selling G6 in Canada and have seen a great response to this launch. In early October, we officially began shipping G6 to our Medicare patients. Toward this end, we are partnering with Walgreens to ensure that all Medicare patients can fill their prescriptions for Dexcom CGM through any of Walgreens' nationwide retail locations. This provides a wonderful opportunity to improve upon the Dexcom experience for our Medicare patients and is an important step in our long-term move to the pharmacy as our primary distribution channel. As you can see, we are innovating beyond great product design and focusing on the customer experience that we create around the product. Whether this involves Dexcom directly or work with our valued partners, we are thinking with the interests of our patients in mind. We continue to make excellent progress with our insulin delivery partners. As Tandem Diabetes said on their call, They are on the verge of launching their advanced hybrid closed-loop with Control IQ system. On top of that, Insulet is making great progress with their Horizon closed-loop pump with Dexcom G6 integration. The combination of Insulet and Dexcom will provide a unique and compelling user experience and form factor. Our strategy for the intensive insulin delivery business is playing out according to our plan and, in fact, vastly exceeding our initial expectations. As we look to the future, we continue to gather data on markets to pursue outside of our core intensive insulin business. We are investing in our new markets team to execute on this strategy and expect to increase investment there in the future. Time and time again, we are learning that our product has an incredible impact in these markets. Doctors all over the world are clamoring for real-time CGM use in the hospital to improve patient outcomes and streamline workflows for healthcare professionals in this environment. We continue to believe that the opportunity for expanded use of Dexcom in pregnancy is significant and are aware of several independent studies in progress around the world that will demonstrate the importance of CGM in this patient population. And finally, with respect to type 2 non-intensive diabetes and prediabetes, data from CGM usage continues to point to promising outcomes. including potential long-term cost reductions for this costly patient group. The experience here reminds us of where we were many years ago when we started our CGM First campaign for the intensive insulin market. While there may be many use cases for these patients, we believe that CGM will be the primary tool to drive improved outcomes in the type 2 non-intensive and prediabetes populations, and we all know the size of these markets. Overall, 2019 continues to exceed our expectations. Based on the strong third quarter results, we are pleased again to be able to increase our revenue outlook as well as our full year operating margin and adjusted EBITDA targets. I will now turn the call over to Quentin, who will provide detail on this outlook as well as a review of our financials.

Quentin? 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 $396.3 million for the third quarter of 2019 compared to $266.7 million for the same quarter in 2018, representing growth of 49% on both a reported and constant currency basis. Our momentum has continued, driven by strong new patient additions and customer satisfaction with G6. As Kevin mentioned, these factors drove absolute dollar growth of nearly $130 million versus the prior year, a new Dexcom record and significantly above anything we've seen in the past. The U.S. business grew 53% in the third quarter, the fastest pace since early 2016 as the rapid adoption of CGM in the U.S. across all of our major channels continues to exceed our expectations and has been the primary driver of our outperformance this year. We continue to gain traction in our effort to prioritize customer access in our commercial business and believe that our efforts to remove upfront barriers across all channels, including the pharmacy, are contributing to new patient growth. Our OUS business continues to grow very well, ahead of our internal expectations. In the third quarter, we came up against our highest OUS growth comp in the past six years, with 93% year-over-year growth in the third quarter of 2018. Despite that, we were still able to grow at 39% on a constant currency basis or 36% on a reported basis, both of which represented a nice sequential uptick with solid increases across the board for both our direct and distributor markets. Our third quarter gross profit was $246.9 million or 62.3% of sales compared to 63.2% of sales in the third quarter of 2018. The Q3 sequential improvement of 90 basis points was in line with our expectations that we noted on the second quarter call. While pricing remains consistent with our expectations and we are gaining the cost benefit of our new transmitter design, we did experience challenges with one of our automated G6 sensor production lines late in the third quarter which temporarily lowered production levels. This lower production output combined with the strong product demand have left inventory levels tight as we head into the fourth quarter. As a result, the remaining transition from G5 to G6 for certain channels of our business will be slower than originally anticipated. We still expect a strong sequential improvement in gross margin in the fourth quarter, but the magnitude will be less than original expectations. We now expect full-year gross margin of approximately 63%, slightly lower than prior guidance. Operating expenses were $187.8 million for Q3 2019, compared to $153.9 million in Q3 2018. This reflects an increase of 22% year-over-year. The business continues to demonstrate excellent operating leverage, with third-quarter revenue growth once again exceeding the growth in operating expenses by more than two times. As a result of our continued focus on operational discipline and commitment to process improvement, robotics, automation in our Manila location, we are achieving leverage while maintaining investments into research and development of our core business, while also increasing investments in new market opportunities. Operating income was $59.1 million, or 14.9% of revenue, in the third quarter of 2019, compared to $14.7 million, or 5.5% of revenue in the same quarter of 2018. This reflects a year-over-year improvement of 940 basis points in operating margins for the quarter. Adjusted EBITDA was $92.5 million, or 23.3% of revenue for the third quarter of 2019, compared to $48 million, or 18% of revenue for the third quarter of 2018. As our operating margin and adjusted EBITDA margin indicate, We are making great progress toward our profitability targets, and we see these as strong indicators for the long-term cash flow potential of the business. Net income for the third quarter was $60.4 million, or 65 cents per share. Through the first nine months of the year, we are now GAAP profitable for the first time in our company's history, and we are on track to deliver our first-ever full year of GAAP profitability. We remain in a strong cash position with greater than $1.4 billion of cash and cash equivalents on the balance sheet at the end of the third quarter. Our immediate priority remains the expansion of our G6 production capacity as well as capital investment in preparation for the eventual launch of G7. We also continue to have flexibility as we invest to lengthen our growth runway, including our investments in support of our new markets team. Turning to guidance, Given the incredible growth that we have experienced through the first nine months of the year, we now anticipate 2019 total revenue of $1,425,000,000 to $1,450,000,000, an increase of greater than $85 million at the midpoints of our prior and current guidance, respectively. Importantly, and unlike prior guidance, this contemplates the production capability that we currently anticipate for the fourth quarter. The revised revenue guidance implies annual growth of 38 to 41%, which is an impressive organic growth number for a company of our size. As I mentioned previously, we now expect full year gross margin of approximately 63%, improving sequentially in the fourth quarter as we start to realize the benefit of a full quarter of our new low-cost transmitter. In light of our better than expected revenue growth, we now expect operating margins of approximately 9%, and adjusted EBITDA margins of approximately 19.5%, reflecting increases of 200 basis points and 100 basis points, respectively, from our prior guidance. With that, I will now turn the call over to Steve for a strategic update. Thanks, Quentin.

Our great results in the third quarter are a validation of our strategic efforts, and we remain well positioned to take advantage of our long-term growth opportunity. As some of you may have seen at September's EASD conference in Barcelona, the full three-year results of our Commissaire study showed that Dexcom CGM, when paired with either insulin pumps or pens, drove an average increase of more than 20% to time and range. That is nearly five hours per day of improved glycemic control. Another clear validation of Dexcom CGM as the first-line defense for people with diabetes and that CGM-connected devices are here to stay. Our insulin delivery partners continue to make progress on CGM-enabled integrated systems. As Kevin mentioned, with the pending approval and launch of Control IQ, we are thrilled to be bringing our first advanced hybrid closed-loop technology to market and commend Tandem on their progress to date and their dedication to bring this best-in-class platform to reality. Dexcom is proud to provide the enabling CGM and AP algorithm technology for this platform. Together, these tools helped keep the system in closed-loop mode 92% of the time during the pivotal study. Similarly, Eli Lilly, Novo Nordisk, and Companion Medical are all making progress in their efforts to commercialize connected smart pins. We are seeing more and more interest from additional insulin delivery companies that recognize the value of connectivity to CGM, and we will continue to be the demonstrated leader in these efforts. As we expand the rollout of G6, we are simultaneously taking steps to prepare the way for G7, which we still plan to launch on a limited basis in late 2020 and more broadly in 2021. We intend to be very thoughtful on the rollout of G7 as we scale the infrastructure necessary to support the anticipated demand for this exciting new platform. On our previous call, we announced the FDA submission of our G6 Pro product, and we were pleased to announce its approval in early October. This is another strong example The streamlined review process enabled our ICGM designation, giving us the opportunity to quickly iterate products to serve the needs of different customer segments. The G6 Pro represents the first disposable professional CGM product that is indicated for either blinded or unblinded real-time use. In blinded mode, the product is available for all people ages 2 and up. In unblinded mode, G6 Pro is indicated for all people with diabetes ages 2 and up. Both options provide valuable insights into the impact of activity, food choices, medications, and other factors on people's glucose levels. It also provides clinicians a wonderful tool to introduce their patients to real-time CGM and to adjust or optimize treatment based on observable patterns and time and range. We've spoken at length this year about our efforts to improve access for our patients, whether advocating for coverage for type 2 intensive patients, pushing for ways to reduce the upfront cost to our patients, or negotiating for the removal of administrative hurdles for patients to start on CGM. As you can see from various public and private data sources, we are making good progress with the long-term transition of the U.S. business to the pharmacy channel. As we've noted previously, this is a complex task. We have longstanding relationships with our DME distributors, and many of our patients have grown accustomed to their process through the DME channel. With these challenges noted, our field team is doing solid work, and we look forward to continued expansion through the pharmacy channel. Specific to formula replacement, we don't plan to comment on every contract win, as this is a normal part of our business operations. What we will say, as many of you have likely seen, is that we have good momentum here in our efforts. The value of Dexcom CGM speaks for itself, and payers and PBMs continue to demonstrate their understanding of what our product brings to the customer. With that, I will pass it back to Kevin.

Thank you, Steve. It is hard to continue to put words around the growth that we have seen since the launch of G6, and the third quarter is certainly no exception. At Dexcom, we have the stated mission to empower people to take control of diabetes. As this quarter and clinical studies like Commissaire continue to demonstrate, We have a product that is enabling people to do just that. It seems like every day we hear stories of people gaining confidence with their health, children and patients living with less fear, and overall quality of lives improving. These are the stories of people being empowered. To wrap up, 2019 has proven to be a wonderful year thus far, and we remain excited for the long road ahead. To the Dexcom team, let's finish the year strong. I would now like to open up the call for Q&A.

Sean? Thank you, Kevin. As a reminder, we ask our audience to limit themselves to only one question at this time and then re-enter the queue if necessary. Operator, please provide the Q&A instructions.

If you have a question, please press star then 1 on your touchtone phone, or 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 a question, please press star then 1 on your touchtone phone. And your first question comes from Daniel Antelfly with SVB Learing. Your line is open.

Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on what can only be described as a phenomenal quarter. I'll follow instructions and keep it to one question. Kevin, you mentioned some capacity challenges and the line that went down during the quarter. Can you give some additional color on how that factors into your guidance for the remainder of the year and why you aren't concerned about meeting increasing demand going forward? Thanks so much.

Thanks for the question, Danielle. Give a little history here. You know, we launched G6 a year ago, and we launched it earlier than we planned, and we've been chasing this ever since we started. As you look at 2019, we've grown over $300 million in the first three quarters and $130 million in the last quarter. And while we've experienced large growth percentages in the past, we've never experienced anything like this. We committed to doubling our capacity this year, and by the time we exit the year, in all fairness, we will have double the capacity to build G6 product that we had before. We're doing everything we can to put additional capacity in place to meet the demand for the fourth quarter. As we talked about, manufacturing line went down in September, you know, late in the third quarter and for some time early in the fourth quarter. That's production we can't make up today. We do have some levers to pull and some things that might come on board in December. We can see some upside to making that up, but in our worst case, We assume in our guidance this year that we're not going to make that up. We're not going to plan on that. And if we do, there's some upside there. So by the time we exit the year, we will have doubled our G6 capacity. And I can tell you we have more automated lines coming on, some in the first quarter, more in the second quarter, to the point by the time you get to the middle of 2020, we will have doubled our capacity again and be able to serve everybody. We're confident we have enough capacity to meet the numbers that we've given you. We believe we have an opportunity to do more if certain things go well, and we'll go from there.

And your next question comes from Margaret Kingser with William Blair. Your line is open.

Hey, guys. Good afternoon. Thanks for taking the question. The first one for me, it's a little bit tagging on to Danielle's in terms of the marketplace demand that you're seeing. Given the capacity constraints you have, I assume a lot of the growth that you're seeing is actually push-driven, meaning that patients are educated and they're reaching out to you versus you trying to convince them. So is that true? And then should we assume that patient ad growth is still growing at the same pace or better than U.S. revenue growth, and why that shouldn't change going forward? Thanks.

You know what? Let me start with that, and if Quint and Steve want to jump in, they can. With respect to new patients, Q3 was very comparable to Q2. We had a very good new patient third quarter, and so that has not been an issue. With respect to patients reordering, we have not seen a change in reordering patterns from our patients. They're ordering what and when they can, and when their insurance will reimburse for them. So there's no real difference here as to what we've experienced in the past. In reality, what we're experiencing, what we're working through is getting product out to them as quickly as we can. Sometimes they wait just an extra day for the product. Sometimes it's as long as a week. But we are getting product to everybody. We'd like to get it to them sooner, and we'd like to have more at our discretion here. But we're keeping up with everything. And we're doing well.

I think, Margaret, the only thing I would add is it's a combination of both, right? I mean, patients continue to become more and more aware of the technology and find their way to the device. And clearly our commercial team continues to do just an outstanding job of creating opportunities as well. So it's a bit of both. And, you know, the new patient additions continues to outpace overall revenue growth. So it's a strong indicator of where the business is heading.

Great. Thank you, guys.

And your next question comes from Jeff Johnson with Baird. Your line is open.

Thank you. Good afternoon, guys. I was wanting to ask, I know, Steve, you said you're not going to say a lot on formulary status, but we've seen a few positive moves in sizable payers for 2020. with regards to Dexcom's placement. So I'm wondering what's driving that favorable treatment into next year? Maybe how does some of your tiering placements for next year compare to your lower-priced competitor? And, Quentin, are you still comfortable with the $100 million to $125 million pricing headwind next year as you give up some price to move into pharmacy or have these big wins maybe push that expectation a little bit higher in tradeoff for volume? Thank you.

So I'll start off and then I'll turn it over to Quinton on the numbers. Yeah, look, I mean, this is what we told you guys. We're executing on exactly what we told you we would do, which is why, you know, it was somewhat tongue in cheek, the prepared remark that we're not going to put a press release out every time we get a new pharmacy win. But this is what we told you we would do. We've been telling you we would do this and we're executing on our plans. And you know, with respect to pricing, Quentin, you can comment.

Yeah, no, it's right in line with what we have always anticipated, Jeff. I don't, at this point, see any need to kind of revise the expectation we've put out there. I think that $100 to $125 million of headwinds is something that we'll continue to see, you know, throughout the course of next year, but we aren't changing our strategy here. I think what's being demonstrated is that our plan is being effective, it's working, and the payers are seeing the value of our product, and they understand it for the premium product that it is, and and we're opening doors, so no change there.

And your next question is from Ryan Flicker with Cohen. Your line is open.

Hi, thanks for taking my questions. For G7, how much progress have you made working on automating your manufacturing processes over the past few months? And is there still a significant amount of work to be done nailing down your exact manufacturing process? And then for G7 overall, What are the biggest steps in the development process you hope to accomplish over the next few months? Thank you.

Hi, this is Kevin. I'll take that. G7 is on schedule as we sit right now with the schedule that we put together on all fronts. We are now in the process of evaluating the final tweaks to the configuration to lock down the entire design. The majority of the design is locked down, but we've got to – as always, when we get to this point in the sensor – What's that exact sensor configuration going to be? And then we've got some algorithm and some app work to do, but none of that will slow down the clinical study. With respect to the total automation of the G7 plant, Steve very, very truthfully said we are going to do a limited launch in 2020 and be careful how we launch in 2021. We don't want to put ourselves in the position we're talking about today because we see that as a product that we can market to the world at great, great, with great, great success. So our automated lines are in design. They're being built. The equipment's not all in yet because the process isn't completely done. But things like ordering molds, which have a long lead time and things of that nature, are happening. And you will see significant capital expenditures by us over the next several months as we get these lines up and running. We have a great automation team. We have good processes that we're counting on. They'll certainly be adjusted as the product becomes more mature and The product was designed to be more manufacturable than G6. So we think these processes could be simpler over time. And I'll just add one other thing. We're not just asking the guys to automate G7. At the same time, they're automating the G6 factory as well as we have automated lines for the assembly of our G6 product going up both in San Diego and in our Mesa facility. So we've got a lot on our plate manufacturing-wise. We're confident with the progress we're making, what the guys are doing, and expect a very successful launch and product.

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

Good afternoon and congrats on a great quarter. Quinn, just in terms of just the fourth quarter guidance, you typically guide a fair amount of sequential deceleration kind of in line with historical precedent. In the fourth quarter, it's a little heavier than normal coming off a very, very strong third quarter. Is there anything from a timing perspective or pull forward perspective for the fourth quarter that's worth calling out?

Let me just talk through the fourth quarter for a second and give you a little bit of color on it. There's nothing significant in terms of timing that I think changes the impact of either Q3 or Q4, but one thing to keep in mind is the OUS business is a bit more choppy than the rest of our business. The sequential trends there can move around a little bit. If you look historically, international has typically been flat to slightly down in the fourth quarter, and we continue to expect that's how it will play out this year. I think the other thing to keep in mind is that as we continue to move more and more of the business toward a subscription-based model, the historic seasonality is going to play a little bit differently in the current year than what we've seen throughout history. So we're trying to model that as well. I think the other thing just to keep in mind is Q3 was truly a remarkable quarter for us. We were up 18% sequentially from Q2, whereas historically we've been up 8% to 10%. So for us to look at that and call it a trend and anticipate that we're going to see the same sequential increase into the fourth quarter, that's a bit premature. We want to see this play out a little bit longer than just 90 days' worth of experience in the third quarter. So we're trying to be mindful of that. And I think the other thing just that is worth noting, and Kevin has hit on it, You know, we are capacity, you know, we're at the top end of the capacity in our guidance range. And if we can pull some of these incremental opportunities forward in terms of production lines, then terrific. There's going to be, you know, opportunity to exceed what we set the expectation for. Worst case scenario is those lines come up in the very early part of January and we're off and running at that point. But if we can get those brought forward, then there's potential upside.

And your next question comes from Robbie Marcus with J.P. Morgan. Your line is open.

Thanks, and congrats on a great quarter. I was wondering if you could just help parse out what the drivers of growth were. Clearly breaking down the barriers of cost at the pharmacy is having a big impact, but anything you could add on Medicare versus pharmacy versus DME would be really helpful. Thanks.

Our big driver this quarter was the U.S. commercial business. Our U.S. commercial business, not Medicare, but our U.S. commercial patients and our U.S. commercial revenues grew at a rate faster than any quarter we've ever seen, and that was the primary driver. Medicare growth continues to be good, but in all fairness, in the third quarter, we know there's some pent-up demand for patients to shift over to G6. We expect Medicare to really take off next year as we roll out our Walgreens and pharmacy delivery mechanism for the Medicare patients and make it much easier for them and get them all over to G6. International was also a great quarter. The growth sequentially there was very strong. Quinton talked about the fact that we're comparing to a 93% growth quarter internationally last year, and we still grew 39% over that number. So the international markets were good as well. I really can't tell you whether it's DME or pharmacy that's driving it. I think just the drive is awareness. And people are becoming much more aware of CGM and what it can do for them and having great experiences with the product that we have.

And your next question comes from Kyle Rose with Cane Cord. Your line is open.

Great. Thank you very much for taking the questions, and congrats on a terrific quarter. You talked a little bit or talked at length about some of the capacity from a manufacturing perspective. But if we look back at some of the last two years, when you think about some of the growth you've had, you've also been somewhat constrained just from a customer support perspective. Given the surging growth from a new patient perspective, maybe help us understand just what other investments and infrastructure changes you're making from a customer support perspective, both currently now with the G6. I know you went to OUS or an offshore, some of that support earlier this year, but also in prep for G7 in 2020 and then 2020 and beyond. And then I'll hop back in queue. Thank you.

Yeah, well, certainly the operation that we've set up in Manila has turned into a real corporate asset of ours. I think you look at the performance that we're seeing there, both from a quantitative, qualitative perspective, quite honestly, we're operating at some of the highest levels that we've ever seen in the company's history. And that's allowing us to scale more aggressively than what we have historically and address some of the increasing demand that we see. I think another thing that we've spent a tremendous amount of time looking for opportunities in the organization is just around what we call RPA or robotic automation and taking processes that are incredibly labor-intensive and finding those aspects of those processes and automating those so that the folks who are doing those things can focus really more on value-added capabilities to the organization and serving the patients or even our commercial team in a much better way. And I think encouragingly, we're seeing MPS scores start to reach some of their highest levels here in recent weeks than what we've seen over the last 18 to 24 months, even before we started down the path of of taking some of the things outside the states and into the Philippines. So we're encouraged by what we're seeing. We continue to make investments in those ways. I think as we continue to head into the future, the more we can automate the patient experience with us and eliminate the need for, you know, a live person to be on the other end of every phone call, the greater we're going to have an ability to scale and improve the patient experience along the way. So those are the things we're focused on. We're encouraged by what we're seeing, but To be fair and truthful, it has been a challenge over the time that the growth has really put pressure on it, and we're doing everything we can to stay out ahead of it.

I just add one other thing. We have an opportunity with G7 to reset the bar as to how we're going to interact with patients and what distribution and reimbursement channels we'll pursue. Everything we're doing with G6 is positioning us to put G7 in its most accessible light to make sure patients can get right to it. Again, our Walgreens announcement with the Medicare patients to whereby Medicare patients will be able to go to Walgreens and get their monthly supplies rather than calling us and being on the phone with us or our distributors is a major win. I was on the phone with a physician just a couple weeks ago and he explained to me his frustration with we have three or four Medicare distributors on ourselves and all three of us ask, all of us ask for different paperwork. We think we can make this much more efficient for our patients with that move and that's part of the innovation and thinking big eyes referring to. We're gonna make this easier. And so everything we're doing with G6 is gonna fly right into G7 and we are preparing to become a company that serves several million patients, not just several hundred thousand.

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

Thanks and good afternoon. So I guess just given the US growth, I think it begs a question around traction in people with insulin-dependent type 2 diabetes. So can you just comment on what you're seeing in this patient population and the impact the pharmacy has had on penetrating this opportunity?

I'll take that, Jason. We are growing in that space, but in all fairness, we do not have the broad reimbursement for insulin-using type 2 patients that we so desire. Medicare covers those patients. and some of the payers have come along and some of them have not. We think it will continue to grow over time, but even with our pharmacy contracts, there are sometimes limitations as to what insulin-using patients can have access to our technology. We are negotiating through that. We are willing to give, for example, willing to give price to have those patients covered if they will cover them. The Medicare patients do have coverage, and that's where a large portion of this population exists. and we will be able to get those and go after them. But it's still a chore, and it's certainly not the majority of our business, even the majority of our Medicare patients at this point in time. It's a great growth opportunity for us.

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

Hi. Congratulations on an outstanding quarter. So it's been almost a year since you laid out the various non-core market opportunities at your analyst day. You've got a dedicated team, you know, looking at that and doing research there. I'd just love to hear kind of what you've learned over the last year, if there's anything you can elaborate on in terms of different business models or any different views on the market sizes there.

Yeah, this is Kevin, and I'll let Steve and Quentin take a little more of that, too, because we've all had interesting experiences. As this has evolved, we've gone from we're going to have a complicated type 2 program to using other programs to having payers run the thing to – you know, how's this model going to go? And the one learning that I've seen that I'll share with you is it doesn't matter what the model is, CGM is what drives it. And I think there's going to be opportunities across the board, directly with payers, directly with the programmatic entities, directly with employers, directly with clinics to better manage these patients. And you'll see CGM usage vary from model to model. There are some who think you need a specific number per year, but the most recent group I talked to said, I just put them on it all the time because we get such good results. We don't know how it's going to play out, but again, look at the size of that market and look at the amount of dollars spent taking care of those patients. Look at the cost of drugs for those patients and their effectiveness. We think there's a cost savings play here that might be even greater than what we're saving in a type one space. an intensive insulin-using space when all is said and done, if we can develop the right algorithms and get into the right groups. I don't know. Steve, Quint, you guys have anything? I think you hit it just right.

I don't have anything to add to that.

Okay.

Andrew, next question comes from J.P. McMillan, Piper, Jeffrey. Your line is open.

Afternoon. Thanks for taking my questions. It's actually Matt. I'm for J.P. So as I look back at the business on the top line over the last five years, you guys haven't grown less than 25% per year. Any of those last five and last two, it's been much, much faster than that. So as we think forward a little bit, you know, I know you've got a little bit of capacity constraint at the moment, but it seems like you've got a lot of tailwinds here on the Medicare side and the pharmacy side. So is there anything specifically that could keep you from that level of growth as we look forward?

I think, Matt, more than anything else, as the business gets larger and you get into kind of the law of large numbers, the growth rate continues to come under pressure. I think that you look at last year, we grew $300 million year over year in terms of absolute dollar growth. This year, at the midpoint, we're talking about $400 million of absolute dollar growth, yet the growth rate is arguably a little bit slower, still at elevated levels, but arguably slower. So I think that, you know, as we continue to move into the future, the rate's going to just be pressured from the tougher and tougher comps that we have and larger base of business. But, you know, you hit the nail on the head. There's a lot to be bullish about. And we couldn't be more bullish around the opportunities that sit in front of us within the core business itself, the alternative market opportunities. I mean, these markets are enormous. And I think what we learn more and more every day is that at the end of the day, it's CGM device that really opens up the opportunity to either impact cost, improve a patient's life, whatever it might be, it comes right back to our device. So we couldn't be more bullish about the future, but at the same time, you know, we're not going to get ahead of ourselves. We're going to be thoughtful, but we're going to pursue every one of those growth opportunities as hard as we can.

And your next question comes from Matthew Blackman with Stifle. Your line is open.

Good afternoon, everyone. You guys spent a lot of time answering questions about the pricing implications of pharmacy access. I was hoping you could talk a bit about the potential profitability implications of increasing mix running through the pharmacy. Thanks.

Yeah, I think the pharmacy is a very, very attractive business model for us. Obviously, it reduces the burden that a patient and a physician and even our back office staff here has to work through to get a patient onto the technology. So it's attractive from that perspective, but it's also very attractive from a profitability perspective. We firmly believe that we can make more profit dollars per patient through the pharmacy channel than we can through the DME channel. And much of that comes by way of reducing the back office effort and just reducing the amount of time that it takes to get that patient onto the product. And then it clearly opens up by having easier access, the opportunity to address more of the market. So for all those reasons, you know, pharmacy is very attractive to us, but from a profitability perspective, it's going to deliver profit dollars on a per patient basis that are higher than the DME channel.

And your next question comes from Stephen Lichman with Alpenheimer. Stephen, your line is open.

Thank you. Hi, guys. Yeah, just following up on the very strong international performances, Were there any standouts in particular that stood out, or was it across the board? And what are some of the big new opportunities you're focused on ahead outside of the U.S.? Thanks.

I'll speak to the quarter itself. I mean, it's pretty simple, and maybe Steve or Kev can speak to the opportunities. But, you know, within the quarter, it was very widespread. It was across our direct markets. It was across our distributor markets. And it was across all of the regions. You know, there wasn't any one country in particular that far and away led the pack. There wasn't any one country that was far and away behind the pack either. So it continues to be very broad-based strength across each and every one of our markets, and the teams are doing a remarkable job with it.

I just add, you know, I spoke a bit about the Canadian launch in September, and that launch was a great success and win for our Canadian team. If I had to pick one other geography, the one I'll call out is the UK. They had a month in September that far exceeded anything they'd ever done, and we're pretty proud of their results. And we got an email, hey, we just hit this mark. And it's pretty exciting because we don't have widespread reimbursement in the UK. It's regional, and there's a lot of cash pay. We think as we grow in the UK – we can get widespread reimbursement and then this becomes a much greater market for us. So kudos to the UK team as well.

Yeah, I think the only final ad for me would be, you know, as you guys are building models, don't build anything significant this year from Japan. But Kevin and I just spent some time over in Japan and kind of detailed G6 for the first time. G6 is filed in Japan and we expect to launch it there probably the first half of next year. And there's some real excitement around that product. So we'll get you guys updated. when the time comes, but that's still really a non-existent market for us at this point.

Once again, if you have a question that is star then one on your phone, your next question comes from Chris Pascal with Guggenheim. Your line is open.

Thanks. Congrats on the quarter, guys. Quentin, the SG&A leverage this quarter was very impressive. Can you talk about the sustainability of that? You didn't raise EBITDA guidance by quite as much as I thought you may have given the progress this quarter. So I'm just wondering if there was anything in terms of timing of spend that may have shifted some dollars from 3Q into 4Q.

No, nothing specific around timing of spend, although I will tell you in the fourth quarter, we're going to start to see some incremental spend, particularly around the development efforts of automating these G7 lines. You know, we have the product, you know, pretty well dialed in in terms of its design. Now it's all about designing these lines and conceptually we know what the lines need to look like, what they need to produce. Now it's, you know, fine tuning that work and making sure that we have them up ready to start to roll. So you've got that cost coming through in the fourth quarter that you didn't necessarily have in the third quarter. You know, to your point, on a year-to-date basis, we've made incredible traction from a profitability perspective. OpEx has levered over 1,000 basis points. And on a full-year basis, you know, we're going to see tremendous leverage from both an operating margin and EBITDA margin, you know, even though it might not have been raised in line with what you were expecting. It's still tremendous improvements. I think what it tells you is that this business has the capability to perform at very appealing profitability, you know, measures, if you will. There's nothing structurally in the business model that keeps us from being able to do that. I think what we want to be able to do is balance the investments that are going to open up all these new growth opportunities that we continue to become more convicted are real. And so we're going to balance that over time. But we remain committed to those long-term profitability goals we've laid out. We're making tremendous progress towards them and feel good about where we're at today. So we're pleased with the progress that's being made.

And there are no questions at this time.

All right. This is Kevin. I'm going to close up as I usually do. We want to thank everybody for participating on the call this quarter. In closing, I want to acknowledge the contribution of all of our team members to get to this point. $130 million in growth in this quarter combined with our best financial results ever. We've never delivered a quarter like this, and we've asked our people to go above and beyond in 2019 to achieve these things. While our year-to-date revenue growth is near 50%, I can assure you all that our volume growth of all product components far exceeds that number. We've been running all year to keep up, and while we see a light at the end of the tunnel, it's just not as quickly as we'd hoped for. Our commercial teams have hit on all cylinders this year. International growth remains strong and a great opportunity going forward for us as global access and awareness continues to improve. We also talked about the effectiveness of our U.S. reimbursement team in positioning us for the future. enabling our shift to more efficient distribution channels with numerous contract wins, and our relationships throughout our distribution channels have been nothing but strengthened over the course of the year. And finally, our U.S. sales team, both internal and external. They've navigated through some very difficult situations with respect to our supply constraints, yet remain engaged and effective. There isn't a better group anywhere. Many of our accomplishments this year can't be measured by numbers. all of the letters and emails of lives that we've changed. Standing up a facility and a business in the Philippines over the past nine months that's grown to a nearly 700-person workforce of people as committed to this company as everybody here in the States and who demonstrate the commitment to patients that we've always had that have made Dexcom the company that it is today. We look forward to continuing this success in the future. Thank you.

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