DexCom, Inc.

Welcome to the Dexcom Fourth Quarter 2019 Earnings Release Conference Call. My name is Cheryl, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star, then 1 on your touchtone phone. Please note that this conference call is being recorded. I will now turn the call over to Shawn Christensen, so you may begin.

Thank you, Operator, and welcome to Dexcom's fourth quarter and full year 2019 earnings call. Our agenda begins with Kevin Sayre, Dexcom's Chairman, President, and CEO, who will provide a summary of the quarter and full year 2019, 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 fourth 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 out 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 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 fourth quarter and full-year 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. 2019 was another fantastic year for Dexcom. I want to take a few minutes to highlight some of our accomplishments before we turn our attention to 2020. This was the second consecutive year that our organic growth exceeded 40%. To put this into perspective, given that we started the year on a revenue base greater than $1 million, this means that we added more than $440 million of absolute growth in the year. New patients continue to be the primary driver behind the growth and includes growing traction in the insulin-dependent type 2 market, where we continue to expand access in addition to our existing coverage in Medicare. We ended the year approaching 650,000 net active patients globally who are benefiting from Dexcom CGM technology. And as a reminder, we only count someone as a patient when they are consistently reordering product. We are also achieving this growth with operational and spending discipline as an organization. 2019 was the most profitable year in Dexcom's history and represented our first full year of GAAP profitability. We are demonstrating great operating leverage, even as we doubled G6 capacity in 2019 and continue to invest in R&D to drive our future growth. As we grow, we are building and adapting our infrastructure to serve meaningfully more patients. In the U.S., we are making great progress in our effort to transition to the pharmacy channel, as we expanded covered lives by more than 50% in 2019. We are now fully underway in the launch of G6 into Medicare and look forward to those patients having access to the no-fingerstick G6 technology. We have built an extensive global business services team in Manila in 2019, exiting the year with progress on all of our key customer service metrics. Our business services team will be a great asset for us as we continue to scale the company and strive to offer our customers the best possible experience. We are also transparent with you and our customers about the things we must improve. As many of you heard in late November, we experienced a temporary server outage that impacted the ability of family and friends to monitor glucose levels of loved ones via our share and follow apps. I told our customers, healthcare providers, and shareholders that we needed to do better. We needed a system in place to greatly improve communication with our customers. In the weeks since, we have taken significant steps to do just that. We have launched a system status page on our website ahead of schedule. This provides real-time updates on system functionality 24 hours a day, 7 days a week. We are also in the final stages of rolling out an in-app messaging system that will provide quick communication with our customers. As you can see, we are not sitting still, even with the rapid growth that we've experienced since the launch of G6. The reason for this is simple. We believe that there is a huge opportunity still ahead of us for our sensor platform. For our core markets, we remain confident in the underlying shift from finger sticks to CGM as the standard of care. Outside of our core markets, our excitement for the potential of Dexcom CGM to address broader global health issues continues to grow. We are beginning to see great early-stage data demonstrating the value of CGM for all people with type 2 diabetes, including those not on insulin therapy. Our work with United Health Group has progressed very well, and we look forward to the expanded use of Dexcom CGM in their Type 2 populations in 2020. We will look to extend the presence of Dexcom CGM for Type 2 customers through additional partnerships with programs offered by digital health players like OnDuo, Livongo, and WellDoc, all integrating CGM data into their respective coaching platforms. And we continue to work directly with providers. As we recently discussed at an investor conference, our initial pilot work for non-insulin using type 2 customers with Intermountain Healthcare revealed gross cost savings of nearly $5,000 per member per year for those using Dexcom CGM relative to those using finger sticks. We look forward to providing additional details like these related to type 2 and other new markets as we progress in 2020. With all of this G6-driven growth in our core markets and ongoing learnings in our new markets, we enter 2020 with an eye toward the biggest product launch in Dexcom's history, G7. We have a busy year ahead, but the team has done a great job thus far for us to progress toward our goal of a full-scale launch in 2021. To summarize, 2019 was another great year for Dexcom, but we're pressing forward to capitalize and execute in 2020 on these many long-term opportunities. I will now turn the call over to Quentin for a review of our financials.

Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as on our IR website. For the fourth quarter of 2019, we reported worldwide revenue of $462.8 million compared to $338 million for the fourth quarter of 2018, representing growth of 37% on both the reported and constant currency basis. As a reminder, the fourth quarter of 2018 represented the most difficult comp for the entire year of 2019 for both our worldwide and U.S. business. New patients adopting our technology remains the primary driver of our growth as people continue to gain awareness of the value of Dexcom CGM. As Kevin noted, we've been pleased to see that this new patient growth includes steady traction among the type 2 population where we continue to push for increased market access. Throughout 2019, these increasing patient volumes and strong customer satisfaction with G6 are fueling our momentum. Despite the most difficult quarterly growth comp in 2018, our U.S. business continued to grow very well, with growth of 34% in the fourth quarter of 2019. As our revenue indicates, our volume growth initiatives are more than offsetting the lower revenue per patient that accompanies our transition to the pharmacy channel. Similar to what we saw in the first nine months of the year, this growth came from all of our U.S. channels, as expanding CGM awareness is driving strong growth in Medicare, DME, and our growing pharmacy business. We saw great performance from our international business in the fourth quarter as well, with 54% constant currency growth compared to the fourth quarter of 2018. The response to the launch of G6 has exceeded our expectations. We continue to see excellent growth in direct markets like Germany and the UK, and our distributor markets are also growing very well with strength across the board. Of note, for the first time in our company's history, we launched our e-commerce platform in Canada and were more than pleased with the results as we saw the number of new patients nearly double in the fourth quarter. Our fourth quarter gross profit was $309.3 million, or 66.8% of revenue, compared to 65.9% of revenue in the fourth quarter of 2018. As anticipated, we saw a significant sequential step-up in our gross margin, and the 66.8% for the quarter represented the highest point since 2017. The year-over-year margin improvement was in line with our expectations noted on the third quarter call. Our teams continue to focus on designing incremental improvements that reduce product cost and increase automated manufacturing, giving us flexibility in our efforts to improve patient access and prioritize efficient channels without meaningfully compromising gross margin. As we head into 2020 and transition the Medicare customer base to G6 from G5, We will receive the full cost benefit of our new G6 transmitter design, which helps to offset certain items such as the cost to scale up G6 and G7 manufacturing lines. Operating expenses were $205.7 million for Q4 2019 compared to $168.4 million in Q4 2018. This reflects an increase of 22% year-over-year and a 540 basis point reduction as a percentage of revenue from the fourth quarter in 2018. The expense growth in the fourth quarter was primarily driven by incremental R&D spend related to our G7 efforts as we advanced toward our launch plans. For the full year, the 23% growth in operating expenses remained well below our 43% total revenue growth, even as we invested significantly to capitalize on Dexcom's long-term growth opportunity. Operating income was $103.6 million, or 22.4% of revenue in the fourth quarter of 2019, compared to $54.4 million or 16.1% of revenue in the same quarter of 2018. This reflects a year-over-year improvement of 630 basis points in operating margin for the quarter. Adjusted EBITDA was $141.7 million or 30.6% of revenue for the fourth quarter compared to $83.6 million or 24.7% of revenue for the fourth quarter of 2018. Given the strength of the fourth quarter, our full-year operating margin of 10.9% and adjusted EBITDA margin of 20.7% came in well ahead of our revised full-year guidance of 9% and 19.5% respectively as provided on the third quarter call. As these numbers support, we remain confident in our leverage potential and the discipline that we are exhibiting as an organization. But we will also continue to invest opportunistically as we scale manufacturing for both G6 and G7 in 2020 and explore the use of our real-time CGM in new markets. Net income for the fourth quarter was $106.5 million, or $1.15 per share. In 2019, we also established for the first time in our company's history our first full year of GAAP profitability with full year GAAP net income of $101.1 million. We remain in a strong cash position with greater than $1.5 billion of cash and cash equivalents on the balance sheet as we exit the year. Given the growth opportunities that are ahead of us, our priority continues to be capital allocation that supports our organic growth opportunity. Turning to 2020 guidance, as we stated last month, we anticipate four-year revenues of between $1,725,000,000 and $1,775,000,000, representing growth of 17 to 20%. This growth contemplates many of the same factors that we navigated in 2019, including a higher rate of volume growth as access and awareness of Dexcom CGM continue to grow, our expanded launch of G6 to populations like Medicare, and new Dexcom integrated systems that come to market. These tailwinds are offset by the continued realization of a reduction in average annual revenue per patient as we navigate towards channels with lower prices, as well as considerations surrounding the competitive environment. Turning to margins, we continue to track well toward our long-term targets established at our 2018 Investor Day. For 2020, we anticipate the following non-GAAP results. Gross margins improving to approximately 64%. Given that we remain in the early stages of patient adoption of our technology in our core market, as well as validation in our patient base that type 2 patients are realizing the value of our technology, we must begin to plan and invest for growth beyond our San Diego and Mesa manufacturing centers. Included in our gross margin guidance are costs associated with identifying and beginning to send up a third manufacturing site that will reside outside of the United States. This third site will further our efforts to reduce the overall production cost of our products, better support our international expansion strategy, and support our long-term gross margin expectations of the mid-60s. We expect operating margins to increase to approximately 13%, which contemplates the continued benefits of our global shared services center in the Philippines, offset by increasing investments in our DTC and G7 efforts. Finally, we expect that adjusted EBITDA margins will expand to approximately 23%. As you can imagine, with our ambition to double G6 capacity in the first half of the year, invest in the scale-up of G7, and expand our manufacturing footprint outside of the United States, 2020 will require capital expenditures in excess of what we saw in 2019. With that, I will now turn the call over to Steve for a strategic update.

Thanks, Quentin. As our 2018 and 2019 results indicate, G6 has been a game changer for people with diabetes, with 2019 revenue more than doubling from the year before G6 was launched. Customer satisfaction with G6 remains very high, and we look forward to the benefits of the capacity expansion that we achieved throughout the course of 2019 and continuing into 2020. We plan to double capacity again in the first half of 2020, enabling us to expand our G6 launch in our existing markets, as well as new geographies, and to ramp our efforts in these new markets with direct-to-consumer marketing. We are now more than a year and a half into the launch of G6, and we still have a long way to go to realize its full potential. As Quintin mentioned, the launch of our e-commerce platform in Canada has been a great success, and we look forward to expanding the rollout of this platform to additional markets throughout 2020. We expect to complete the transition of our Medicare base to G6 by mid-2020. Many of these customers have waited a long time for G6, and we are thrilled to be providing it to them, as well as the many more Medicare patients who stand to benefit from access to G6 as soon as possible. We will continue to push for expanded market access and look forward to the introduction of G6 in markets like Japan and South Korea later this year. Our payer and market access teams have done a great job to position us for continued momentum in 2020, including their efforts to open up pharmacy access, both for people with type 1 and type 2 diabetes on insulin. As a reminder, the process of transitioning our DME customer base to pharmacy will not happen overnight, even with the progress we've made for customer lives covered through the pharmacy. But we believe we are well positioned to make meaningful progress in this transition in 2020, which we have contemplated in our guidance. We are excited to be in the position to drive multiple Dexcom integrated insulin delivery systems in 2020. We are very excited about the work that we are doing with Insulet and the Horizon integrated system. In December, Insulet began their pivotal trial, and they remain on track for a launch later in the year. Our commercial agreement with Eli Lilly was officially signed in December and represents another step forward in bringing their system to market with G6, which will initially focus on a smart pen offering. In January, Tandem launched their latest integrated pump offering, the Control IQ system, incorporating the Dexcom G6 sensor and our Type 0 algorithm to automate insulin delivery. This is the first integrated system to offer automated correction boluses based off the customer's CGM readings and RAP algorithm. These are the kind of achievements that do not happen overnight simply because we obtain the regulatory designation of an ICGM or an ACE pump or an eye controller. In fact, our relationship with each of the companies that I just mentioned goes back multiple years. It takes hard work and significant time to integrate CGM with insulin delivery systems, and Dexcom remains the leader in the effort to bring innovative technologies to the diabetes community. Even with the ongoing success of G6, much of our attention is turning toward G7. With G7, we are moving the performance of Dexcom real-time CGM into a fully disposable product that is only slightly larger than a nickel, and we believe that customers are going to love the result. As Kevin mentioned, we affirmed our G7 timeline today for a full rollout in 2021. We are currently focused on the G7 clinical trial, which we expect to be much larger than the size of the trial that we ran for G6, and we are initiating the scale-up of manufacturing for G7 to support the launch timelines that we have mentioned. From the outset, G7 has been designed for scale to support our belief in the market potential for real-time CGM. which we continue to think has opportunity to address far greater numbers of customers and disease states than we currently serve. From product development and the expansion of Dexcom CGM into our existing markets, to new geographies, to the ongoing development of new market opportunities, our strategy is focused as we head into 2020. With that, I will pass it back to Kevin.

Thank you, Steve. Last year, I spoke on this call and talked about 2018 as a year of milestones. 2019 was a year of continued momentum, but there was a lot of work behind the scenes to ensure that momentum. We're entering 2020 as excited as ever for the opportunity that lies ahead and with Dexcom very well positioned. We are in our best inventory position since the launch of G6 and are focused on the right channels for efficient growth and learning each day about how to expand the use of Dexcom CGM to additional customers. 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.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then one on your touchtone phone. If you are using a speakerphone, you need to pick up your handset first before pressing any numbers. Once again, if you'd like to ask a question, please press star then one on your touch-tone phone. Our first question comes from Jeff Johnson from Baird. Your line is now open.

Thank you. Good afternoon, guys. Congratulations on the year. Can you hear me okay? We can hear you. Absolutely. All right. Great. Kevin, I guess with my one question, a lot of places I could go, but let me focus maybe on the U.S. commercial business. We'd love to hear how you feel about the mix of new patient ads this year and with MDI versus maybe competitive share gains, and specifically would love to hear maybe your thoughts with some of the formulary changes we've seen at the start of this year, how you think that might help sensor volumes this year. Thank you.

That's a pretty complicated one question, so I'll deal with those as best I can. With respect to the new patient ads this year, there was a majority of our new patient ads, a pretty significant majority of our new patient ads, who are multiple daily injection patients, who are using Pantan insulin to control their insulin delivery. We still have a number of pump patients as well, but to expand the way we've expanded and to grow as quickly as we've grown, do the math. We have to be getting patients on multiple daily injections. On the competitive front, we're very pleased with our growth and the number of insulin-using patients that we're picking up here. It was just a great year all around on the new patient front. With respect to the formulary and the increased access that we see coming, there's a couple things we think that will be very good for next year that we see right now. The first is more increased type 2 intensive insulin access for many of our patients. And under many of the plans, plans are starting to open up and follow the Medicare guidelines there. That really opens a lot of doors for us, and that'll be good. And then increased pharmacy coverage. While our pharmacy rollout has been a bit choppy as we're trying to learn here how to do that best, that has not been our core business going to the drugstore since we started. We'll learn to be better and get better there, but as we can make the product more accessible and easy to get, over and over again we see the utilization is higher and retention is better. So all those things point to a very strong 2020 for us.

Thank you. Our next question comes from Jason Bedford from Raymond James. Your line is now open.

Hi. Good afternoon. I'll ask an uncomplicated question. In terms of – and I'm not sure I missed part of the call, but G7 timing, is your expectation that you get it approved here in 2020?

Our expectation is that we launch it full scale in 2021. And – You know, we've spoken several times about a limited launch in 2020, and that's still one of our primary goals and objectives. But we don't want anybody believing that this rollout is going to happen in 2020. We need to get the trial done, the filing in and reviewed, and our manufacturing scaled up and apply those lessons we learned with G6 to G7. So our big focus and the focus we want everybody to focus on is that launch in 2021. As we get more information we can share, we'll share it. But that's our timeline and that's our commercialization timeline for now. We're really not given any filing or trial timelines today. We can talk more about that as we go on.

Thank you. Our next question comes from Travis Steed from Bank of America. Your line is now open.

Great. Congratulations on a great year. So I had a question for Quentin. You've got goals for operating margin of 15% by 2023, which looks a lot more conservative now than it did before. And if revenues end up coming in better this year, you could potentially achieve that this year. So just trying to think about the long-term profitability of this business. Is there anything long-term, as you have more business through the pharmacy channel, G7s at scale, is there anything that would be structurally inhibiting this business from being at a 25% to 30% operating margin? And additionally, is there anything about G7 launching that where gross margins would step back, or can you manage through that?

Yeah, it's a good question. You know, when we put out the 15% operating margin guidance, at that point in time, we were just trying to draw a reference out in the future that we were confident we could navigate towards, but it was never an end goal that we had in mind. It was more along the lines of the progress we thought we could make. And if you recall, when we did that, that was 1,500 basis points away from where we were at that point in time. So, You know, to your point, we've closed the gap quite considerably even faster than what we anticipated, but there's nothing structurally in this business that won't allow us to go beyond the 15%. We're not ready to revise kind of those long-term expectations of where we can go. We couldn't be more bullish and excited about the investment opportunities in these new markets that are in front of us. You know, you think about the hospital, gestational, the non-intensive type twos, the international expansion. All of these things are incredible opportunities that we're going to make sure we're investing into to make sure that we open them up. But none of that is going to keep us from being able to get to the 15% and then on beyond that in time. So, no, there's nothing structurally that concerns us whatsoever. G7, I would just remind you, that product was designed from the very beginning with cost in mind. And the idea was to be able to produce that at a very low cost profile that will go far below even where G6 we've been able to get it to. So from my perspective, all that does is open up even greater opportunity to compete in lower price channels if we need to, to be aggressive in the marketplace, to push volumes in a way that we need to. But all of it complements the long-term profitability profile that we're trying to achieve here. So I think very complementary to what we're trying to do.

Thank you. Our next question comes from Robbie Marcus from JP Morgan. Your line is now open.

Thanks, and I'll echo. Congrats on a really nice quarter and year. Quentin, you know, we've looked over the past two years and you've meaningfully exceeded your initial guidance range. We see something similar in 2020. You know, maybe if you could just help us understand why this is the right place to start off the year. And then I remember last year you kind of walked us through what volume versus mix versus price would be. If you could do the same and maybe break down U.S. versus international in what's assumed in the guidance range, that would be really helpful. Thank you.

Sure. You know, we continue to be very bullish on the opportunity that sits in front of us from a revenue perspective, just in the core markets that we participate in today. I think we're very early in the adoption of the technology, which leaves a lot of runway. But we also know there are very different patient profiles in that adoption cycle and how quickly they come onto the technology or how long it takes to convince them. It's hard to predict, and we're not going to get ahead of ourselves in that respect. I think if you look at Our guidance, the way we thought about it, is from an absolute dollar perspective, our guidance assumes a $250 to $300 million increase year over year. And we've been very clear that there are price headwinds that continue to be contemplated in that guidance as we walk, you know, average revenue per patient down over time is contemplated in the numbers we put out there. That's about $150 million in 2020. So, If you add that back to the net increase that we've guided to, that takes the gross revenue increase on an apples-to-apples basis versus prior year to about $400 to $450 million increase. You compare that to what we just did in 2019 of a $444 million increase, and I think you start to get your mind wrapped around the guidance that we've provided. So we feel good about it. We think there's incredible opportunity. It doesn't make sense to get ahead of ourselves at this point in time and feel like we've got guidance dialed in appropriately.

Thank you. Our next question comes from Margaret Cazor from William Blair. Your line is now open.

Hey, good afternoon, guys. Thanks for taking the question. Maybe first I wanted to elaborate a little bit on some of the partnerships and updates that you guys have had over the last several months because there have been a lot, including some of the data at J.P. Morgan and so on. So how should we think about some of those? Are there more in the pipeline beyond that this year, especially since, Kevin, you've talked about thinking really, really big? And how should we think about the timing to those partnerships becoming more material commercial activity? Thanks.

Yeah, I mean, I think you have to look, this is Steve, I think you need to kind of bifurcate the partnerships into kind of our core intensive insulin business, both U.S. and OUS. You know, we've got Tandem currently launching Control IQ, Insulet launching Horizon later this year. tandem with Basel IQ in Europe and hopefully, you know, I don't want to speak for tandem on their timelines, but hopefully Control IQ at some point later this year. So those are all, you know, meaningful, you know, near-term revenue contributors, right? Because these are folks who are going on, many of them are probably already our patients or, you know, some portion are already Dexcom patients as they go on these systems, but there will certainly be incremental new patient additions as a result of those product launches. So those are really exciting The update with Lilly, you know, we're still some period of time out before we launched the first Lilly product, but we're definitely making some progress there. The partnerships and the data that we talked about really on the non-intensive side of the business at J.P. Morgan, that's still a really early stage. I mean, the way we're trying to frame that, Margaret, is that, you know, a year ago around J.P. Morgan, We kind of talked about this new markets opportunity strategy, particularly in the non-insulin-using Type 2 space. We kind of followed that up. The goal this year at J.P. Morgan was to follow that up with really some early-stage but concrete evidence that there's a real opportunity here, right, between the work we're doing with United, the cost savings we showed with Intermountain, with one of the payer systems we're working with. I wouldn't look to certainly not 2020 as a meaningful revenue contribution from really that non-insulin-using type 2 business. But we're super excited about it. The data is supporting that there's a huge opportunity there. And I think in the out years, when you start thinking about 21, 22, 23, I think there's going to be a much more significant revenue contribution from businesses outside of kind of our core intensive insulin businesses.

Thank you. Our next question comes from Ryan Flicker from Cohen. Your line is now open.

Hi. Thanks for taking my questions. You talked about strong and growing contributions from the intensely managed type 2 patient population. Is there anything you can quantify for us on that front, either how big that population is now as a proportion of the install base or new patient additions? And then just overall, do you expect new patient ads to grow in 2020 versus 2019? Thank you.

Yeah, this, Kevin, I'll take that. We won't really break out the type 2 patients in the patient base. We don't stratify it between Medicare, PEDS, those types of things right now. We did give everybody a patient number this year, and I think it's a good place for everybody to start. Second part of the question. Yeah, why don't you go ahead.

I think the growth rate, you know, probably slows a bit, but the absolute number continues to be comparable, if not up slightly, is the way to think about it.

Thank you. Our next question comes from Danielle Antofi from SVB Learing. Your line is now open.

Hey, good afternoon, everyone. Thanks for taking the question, and congrats on a really fantastic year. Quentin, I just wanted to ask about seasonality as we look at Q1 specifically and how to think about moving through the year. Is there anything we need to be cognizant of as we go into Q1, which I think is usually a seasonally weak quarter? Any color you can give on the quarterly cadence would be helpful on modeling. Thanks so much.

Sure, yeah. I think at this point in time, you know, historic seasonality that we've seen in the business that generally would have, you know, Q1 represent close to 20% of the full year is probably the right way to think about it. We've seen where the street has modeled, you know, currently 2020. I think we feel good about that. So, yeah. I think you guys have got it dialed in pretty well in terms of how you're thinking about seasonality. I do think over time, as the business continues to mature, as you get more revenue flowing through the pharmacy channel, as Medicare continues to represent a bigger part of the overall business, that seasonality may begin to change a bit, but probably not in 2020. I think historic trends are a good way to think about it, and roughly 20% is probably the right way to model.

Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is now open.

Thanks, Quinn. Just to follow up on the 2020 guidance, if I look at the implied leverage for 2020 relative to 18 and 19, the implied leverage for 20 is a little lower. I just look at revenue dollars versus op expense Is the right way to think about this year kind of the guidance reflects the expenses that are sort of dialed in for the year and that incremental upside, that there is going to be incremental upside to revenue that is likely to fall down at a higher rate? Thanks so much.

Yeah, so I think what you'll see is we'll continue to be very disciplined in how we manage the business. You know, David, to your point, in the last 24 months, we've driven about 2,200 basis points of OPEX leverage in this business. So the team has been very thoughtful, accountable, disciplined in how we steward our resources. But we also see some significant opportunities sitting in front of us to really pour some investment into. For example, in 2019, we never really poured the fuel on the fire from a DTC spend perspective in the commercial business. We didn't have the capacity from a manufacturing perspective to really open that channel up and support the demand that we thought it might create. we will open DTC up in a meaningful way in 2020, and that is contemplated in our spend. You know, if that drives revenue, if it drives it beyond kind of how we guided, then, you know, I think to your point, we'd be very thoughtful and disciplined around how we let that flow through. And yeah, I would think that it would drive incremental margin. But we want to make sure we're not passing on the investment opportunities around things like DTC, what we're learning in the new market efforts, particularly around, you know, that non-intensive population and knowing that we can take cost out of caring for these patients, we're going to make sure we set that up for success into the future. So that's where we're investing at. If revenue outperforms, then I think you'll see us perform well on the margin front.

Thank you. Our next question comes from Kyle Rose from Canaccord. Your line is now open.

Great. Thank you very much for taking the questions, and congrats on a strong year and quarter. Steve, you talked a little bit about some of the non-intensive type 2 opportunities, but at the Analyst Day, you also broke out opportunities like hospital use and gestational use. It looks like there'll be some gestational data at next week's ATTD, but just wanted to kind of understand how we should think about when those potential opportunities start flowing through the model in 2021 and beyond.

Yeah, so if you're asking specifically about about opportunities outside of non-intensive, non-insulin using type 2s. You know, there's certainly, there's work being done, there's research being done. You're going to see basically a cascade. As we've kind of done some preliminary work in the clinical side, we've recognized that type 2 non-intensive would be the next logical kind of lowest hanging fruit for us. So that's where you're going to see us, what you're going to see us go after first, with probably hospital being a close second. In terms of gestational, like you said, it's an exciting market, but a little bit more limited in terms of touch points into the OBGYN's offices and things like that. So we're working on a strategy there as well. We need to update our labeling, certainly for hospital and for pregnancy, and there's some initiatives underway there. But you're going to see a cascade of, what I would say, incremental and increasing contribution over the next several years in all of those categories.

Thank you. Our next question comes from Matthew O'Brien from Piper Jaffrey. Your line is now open.

Thank you. It's actually Piper Sandler. But I would love to ask a multi-part question that I'm sure Kevin will hate. But I just want to follow up a little bit more on the non-intensive type 2 commentary. First of all, you're not signaling any kind of concern about a slowdown in your traditional intensive managed group. And then secondly, I don't know if it's for Steve or not, but if you kind of frame up the opportunity that you're thinking about there, you know, there's a million and a half type ones, a million and seven MDI patients. Is this non-intensive group around that level? And can you access that group without some level of reimbursement?

This is Kevin, and I can take both of those. We do not believe at all that our intensive business is going to slow down. And, in fact, as we look at our strategy, our first pillar is to continue to serve that patient base and continue to grow there. With CGM penetration still on a combined basis in a 35% to 40% range in the U.S. and much less than that in other geographies, there is plenty of room to grow. And as CGM becomes a standard of care here, again, I've said for a number of years, I think 80% market penetration is possible, and I will hold to that, certainly here in the U.S. So there's plenty of room to grow in the intensive business, particularly as we get more automated integrated systems out on the market. With respect to the Type 2 non-intensive business, no, we're not talking 1.5 to 1.7 million people. We're talking 30 million people in the U.S. and hundreds of millions of people around the world. I'll address that a little bit more in my closing comments and things that we've learned. But we believe CGM has a tremendous, tremendous benefit there. And we're going to make sure that we can maximize that in the space. But thanks. It's a good question.

Thank you. Our next question comes from Matthew Blackman from Stiefel. Your line is now open.

Good afternoon, everyone. Thanks for taking the question. Quentin, you called out DTC as an investment priority in 2020. So can you talk about the magnitude of returns you get on DTC investment dollars? And then how quickly do you typically see those returns manifesting in revenues? Thanks.

Yeah, so you'll see us start to turn DTC spend on really in the back half of the year. Our goal from a capacity perspective is to double where we exited 2019 by the time we get to the mid part of 2020. So we will double capacity once again by the mid part. Once we are there, we feel like we've built enough, you know, supply that we can handle any demand that might come from the DTC efforts. It's one of the highest returns on any investment we can make in the company. We monitor it very closely. It's not something that I'm going to disclose in terms of exactly what that rate is, but I will tell you it's one of the best investments we make. And typically, you know, it's going to take, you know, a couple months to start to see that turn back up into real tangible results in the business, but you could see some benefit in the back part of the year.

Thank you. Our next question comes from Raj Denhoi from Jefferies. Your line is now open.

Hi, good evening. Quentin, I have a question, actually. You know, coming into 2019, you had talked about kind of absorbing 10 points of mix, price mix offset due to the channel mix that you're experiencing. I guess this year, it sounds like 150 million. It's roughly another 10 points. You know, when do you imagine that settles out? You know, is there a point at which, you know, the price of the sensor is at a point where you're, you know, you're more normalized and perhaps we're not absorbing that level of impact every year? Yeah.

Well, I think what we've demonstrated, Raj, is that our strategy to walk price down over time and have volume more than offset that has played out incredibly well. You know, we started to walk price down really two years ago. And we walked it down again last year. You're going to feel that impact this year. But we've got a price point or a revenue per patient point in mind that we're trying to get to. And there's probably... You know, a couple more years, 2020, you know, being one of those that will continue to feel this from, and I think volume will more than offset it. But then we're at a very – Very good price point that we feel great when you consider the fact that we'll be bringing G7 into the market at that price point. We feel like we're set up to compete incredibly well. So there's probably a couple years here that we'll continue to navigate through it and have volume more than offset it, but then we're at a point where we think is quite sustainable into the future with an incredible product being G7.

Thank you. Our next question comes from Robbie Misra from Barenburg Capital. Your line is now open.

Hi, good afternoon. Can you hear me okay?

Yes. Yep.

Hi, good afternoon. So just a question on just a little bit on the transmitter revenue. It's a pretty strong quarter there on that line item, more so than we had expected. Can you just walk us a little bit through what was the reasoning behind that strength in terms of reorders or new patient starts? Thanks.

Yeah, I think you continue to see the strength of the new patient numbers show up there. I I will point out the fact that if you just look at it from a comp perspective, there was a bit of an easier comp on the transmitter line than there was on the sensor line in the fourth quarter. So if you go back a year ago and look at sensor versus transmitter revenue, there was an easier comp sitting on that transmitter line that drove a little bit of that growth. I would just make sure you contemplate that. And then keep in mind, as we continue to evolve as a company, as we continue to think through our pricing strategy and position ourselves in a way that we can very easily step into the G7 product, which is a very different form factor where the sensor and the transmitter are one unit versus two distinct units in G6, it ends up having a bit of an impact on how we account for the revenue in each one of those buckets. We're going to have to contemplate, you know, the revenue buckets that we continue to report into the future. We want to make sure we're giving you something that is the right way to think about the business and model it. But what you're seeing play through that right now is just a little bit of accounting nuance and how we allocate revenue based upon these new pricing strategies.

Thank you. Our next question comes from Steven Lichtman from Oppenheimer. Your line is now open.

Thank you. Hi, guys. On international, obviously, it's been very strong, and there's been a lot of breadth there. As you look ahead, just one of the countries I think later this year, Steve, you mentioned is Japan. Can you talk a little bit more about when you think you'll have that launched and what the opportunity is on the personal side in Japan looking ahead?

So the hope is to have a personal use CGM in G6 approved in the first half of this year. The big still unknown, if you will, is whether and to what extent we get reimbursement for that product. So if it comes in this cycle, that's great. If not, it could come next year or the year after. So I would tell you that growth, like in all of our outside of the U.S. markets, growth is really instigated by reimbursement. So We're taking a little bit of a wait-and-see approach there, and we're certainly going to launch the product in Japan once we get approval. But as you know, in the cash pay world, it's not always as easy. So I'd say wait for updates on the reimbursement front on Japan is really what you're looking for.

Thank you. And our final question comes from Marie DeBalt from BTIG. Your line is now open.

Thanks for taking the question. Nice to see such a great year. I'll wrap it up. I wanted to hear a little bit more about details on your plans for the third manufacturing site, OUS, and what cadence or milestones we should be looking for throughout 2020 as it impacts the growth margin line.

Sure. So we couldn't be more excited about the opportunity that sits in front of us in our core business, but as well the international business. We're very early in the stages of really taking advantage of that market. We probably have sub 15% of that opportunity and I think over time you're gonna see us put a lot of focus and effort there and standing up a manufacturing capability that gets much closer to the end user is a very strategic move on our part while also identifying locations where we can ultimately reduce the overall cost of production that will let us compete in a lower price environment. So strategically it makes a tremendous amount of sense You'll hear us talk more about it over the course of the year as we settle in on exactly where we select to start to build out that capability. But what we know is that these things take multiple years to stand up. You know, we won't be producing out of that facility for a couple years here. But we've got to start the work now to ensure that once we get the full capacity in our San Diego and Mesa facilities, we're ready to step right into that international opportunity and ensure that we have no impact on supply. So, We're getting ahead of it, ensuring that we don't hold up the business, and we're excited about what it can do for us.

And that concludes our question and answer session. At this time, I would like to turn the call back over to Kevin Sayre for closing comments.

Thank you very much, and thanks, everybody, for participating today. Last week, we had all of the leaders of our company around the world here in San Diego for a leadership summit. We wanted to accomplish a couple things. The first thing we wanted to do was celebrate 2019 like we did today on this call for the amazing year that we had. And the theme is universal around that group. We did have an amazing year, but growth like this is hard. And I want to thank our people for all their hard work. The second thing we wanted to do was lay out our plans to our group and what we intend to do and what we expect for the future, similar to how we have in our investor conferences. that we will never leave our core markets and will continue to care for our intensively managed patients and offer the best alternative there, and then move this great technology to other applications with a focus on type 2 diabetes. As I left that summit, oftentimes things reaffirm what you said and what you tell people. Not long after leaving the summit on the intensive management side, we got a note from from a provider about one of their patients, a young woman who had an A1C above 13, and she was wondering if she would ever have children because she was afraid what would happen to the child because of her poor diabetes control. After six months on Dexcom, her A1C is down to five, and she's expecting her first child. Great outcome, and that's why we're committed to this business. On the type 2 side, in the past two weeks, I've had conversations with a couple of physicians and asked the following question. How often should people with type 2 diabetes be wearing a CGM? Because we hear numerous answers as we go about in the community, and to my surprise, both of them looked at me and said, all the time. They should be wearing this thing all the time. You need to figure out a way to do it. Hence, another facility. Hence, we continue to grow and expand. And hence, we continue to invest in our business on the R&D side and on the commercial side. We couldn't be more bullish about our company than we are today. And thanks, everybody, for listening.

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