DexCom, Inc.

Welcome to the Dexcom third quarter 2021 earnings release conference call. My name is Darrell 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 one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Shawn Christensen. Shawn, you may begin.

Thank you, Operator, and welcome to Dexcom's third quarter 2021 earnings call. Our agenda begins with Kevin Sayre, Dexcom's chairman, president, and CEO, who will provide a summary of our progress on our third quarter highlights and strategic initiatives, followed by a financial review and outlook from Jeremy Sylvain, our chief financial officer. Following our prepared remarks, we'll open the call up for your questions. Our chief technology officer, Jake Leach, will also be present with us for the Q&A period. We asked 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, expectations, and assumptions 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, most recent quarterly report on Form 10-Q, and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements 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 a 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 we reported another strong quarter for Dexcom with third quarter revenue growth of 30% compared to the third quarter of 2020 and 28% growth on an organic basis. This revenue growth rate represents continued momentum for Dexcom CGM adoption around the world as we once again achieved a record quarter of new customer growth. The third quarter also saw several strategic accomplishments across our teams that laid a foundation for our future growth opportunities. In the U.S., we received FDA clearance for two key software solutions that continue to differentiate our connected products from those of our competitors and position us as a partner of choice across the healthcare and wearables ecosystem. First, in July, we received FDA clearance for our real-time API, For those of you who are unaware, an API is the tool that allows one app to connect with another app. Prior to this clearance, our customers and clinicians could only utilize our retrospective API, which integrated Dexcom data into third-party apps on a three-hour delayed basis. We believe that by putting the power of choice at our users' fingertips with real-time data, we can help ease the daily burden of diabetes management and significantly improve quality of life for our customers. This tool will be available to partners invited by Dexcom and we already have several that have begun the development process to enable real-time displays for their communities. This includes Garmin, which became the first partner to launch apps connected to our real-time API two weeks ago, bringing Dexcom readings into their portfolio of wearables and cycling computers. Second, on the heels of the real-time API clearance, we received FDA clearance in August for the Dexcom App-in-App module. This module was specifically designed for people with non-intensive type 2 diabetes and can directly integrate into another third-party healthcare app. With the integrated Dexcom app, it is now even easier for our partners to access and display our CGM data, enabling single app solutions that simplify the experiences for Dexcom users. United Health Group became our first partner to launch the integrated Dexcom App-in-App module in late September, bringing the embedded app into their Level 2 diabetes care program. Our connectivity, software, and data infrastructure solutions are a core strength of Dexcom. These two recent FDA clearances reflect the increased investment that we put into software development and we believe increase our competitive advantages moving forward. In late September, we also announced the launch of Dexcom 1 in four international markets where we previously had no presence, Bulgaria, Latvia, Lithuania, and Estonia. Dexcom 1 leverages the G6 hardware platform and a completely redesigned software experience that focuses on simplicity and ease of use for our customers. This is the first product launch in our history that started exclusively through the Dexcom e-commerce platform. a platform that has been embraced by our customers in Canada and the UK over the past two years. With the proven performance of our CGM systems, the new software experience, an efficient e-commerce solution, and affordable pricing plans, we believe that Dexcom One will be an important product for us as we drive the business toward our long-term targets. Most importantly, this differentiated product is a key step for us to bring Dexcom CGM to significantly more people with diabetes who previously did not have access to our products. Early feedback around the product has been very favorable, and we look forward to seeing the full results from these launches as we leverage the full breadth of our expanding product portfolio to achieve our 2020 Investor Day goal of tripling our international addressable market by the end of 2023. Building from the strength of our mobile trial that was published in the Journal of the American Medical Association in June, investigators published the results from the extension phase of the trial in diabetes care during the third quarter. In this extension phase, we re-randomized the population who were initially on CGM to see if the benefits would be retained for those who stayed on CGM compared to those who returned to finger stick monitoring. Once again, the results were clear. Those who stayed on our G6 systems maintained greater time and range improvements over the six-month extension phase compared to those who did not. The results confirmed that for the significant population of people with type 2 diabetes on basal insulin, there is significant benefit in continuous CGM use to optimize therapy and support behavior modifications. Our teams are working hard to leverage the conclusions from mobile into greater access to our technology for people with type 2 diabetes, and this is just one area in which we are building the foundation for our long-term growth. We are advancing our pilot efforts with UnitedHealth's Level 2, Teladoc's Livongo for Diabetes, WellDoc, OnDuo, and others. We are generating strong clinical evidence for expanded medications for CGM use in inpatient settings and for women who are pregnant. We continue to leverage our advantages in connectivity by gaining new customers and progressing our pipeline of solutions with our leading insulin delivery partners. Finally, we continue to advance our G7 scale-up and regulatory efforts during the quarter. We've had excellent communication with our notified body in Europe and believe that we remain on track to begin the launch of our G7 system in the fourth quarter upon receiving CE-MAR clearance. In the U.S., we've made great progress in preparation for our regulatory submission and believe that we are now in the final stages of that effort. We look forward to the comprehensive G7 510K submission, including G7 hardware and full Android and iOS software to the FDA in the next few weeks. As you can see, our teams are working very hard and making great progress to advance our core strategic efforts, whether it is in expanding our product portfolio, creating differentiated user experiences, or laying the foundation for new market opportunities that will drive our future growth. So with that said, let me turn it over now to Jeremy for a review of our third quarter financial performance. Jeremy?

Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as on our IR website. For the third quarter of 2021, we reported worldwide revenue of $650 million compared to $501 million for the third quarter of 2020. representing growth of 30% on a reported basis and 28% on an organic basis. In late July, we were proud to complete the acquisition of our distributor in Australia and New Zealand. With this acquisition, we began generating revenue for certain non-CGM healthcare products, which we have categorized as inorganic growth for the quarter. This non-CGM distribution revenue contributed approximately 2% to our reported growth for the third quarter. The transition from distributor markets to direct sales is one of several important strategic initiatives that we outlined at our 2020 Investor Day as we seek to significantly grow our international presence. We believe a larger direct international footprint will give us greater control to leverage our marketing strengths, invest in accelerating our growth, and ensure that the direction of these core markets is aligned to our strategic interests. In terms of the financial impact of the third quarter acquisition, we expect the transaction to be approximately neutral to our operating margin for the full year, as it was in the third quarter. U.S. revenue totaled $490 million in the third quarter compared to $399 million in the third quarter of 2020, representing growth of 23%. We continue to see good momentum in the U.S., where we are benefiting from the increased market access and field presence that we have enabled over the past year. New customer growth remains strong across all segments of the population, including people with type 1 diabetes, intensively managed people with type 2 diabetes, where we have significantly expanded market access in the past year, and even early adopters in the Type 2 non-intensive population. Our international business grew 57% in the third quarter, totaling $161 million. Excluding the impact of non-CGM distribution revenue generated by our acquisition of our distributor in Australia and New Zealand, growth for our international business was 46% in the third quarter. We continue to see very encouraging growth across the board in our international markets, with the majority of our markets delivering record sales in the third quarter. Although it is still early, we believe that our strategic moves to broaden access in several markets have been very successful thus far and have left us well positioned to expand our growth profile internationally, and you see that in the reflected current quarter results. Along those lines, our global volume growth in the third quarter remains strong, exceeding 40% for the quarter. This is well above our 28% organic revenue growth rate and supports the momentum behind Dexcom CGM globally. as we aggressively seek to advance access to our technology and drive better health outcomes and quality of life for people with diabetes. As Kevin mentioned, the launch of Dexcom One adds to our product portfolio and provides another key element of our strategy to expand access to CGM globally. As we continue to scale our business in conjunction with our ambitious plans for customer growth, we are creating tools that allow us to serve our growing base in an efficient manner And the use of our e-commerce platform for the initial Dexcom 1 launch is a good example of that focus. Our third quarter gross profit was $446.9 million, or 68.7% of revenue, compared to 68% of revenue in the third quarter of 2020. The year-over-year gross margin expansion is an impressive result, especially when you factor in our strategic efforts this year to drive greater mix through the pharmacy channel and expanded international access. This is a credit to our teams who have innovated and embraced change where necessary to drive efficiencies and position us to maximize our strategic opportunities. We continue to demonstrate the ability to leverage both our manufacturing, operations, and R&D teams to be ever more efficient in the delivery of our products. Operating expenses were $323.1 million for Q3 2021 compared to $245.7 million in Q3 2020. Operating expenses as a percentage of sales were relatively flat year-over-year as we offset investments in software development, G7 scale-up, and our expanded global commercial sales force with strong leverage of our general and administrative functions. Operating income was $123.8 million in the third quarter of 2021 compared to $95 million in the same quarter of 2020, holding flat 19% of revenue. As this result indicates, we've been able to retain much of our operating margin this year even as we have significantly reinvested in our business. Adjusted EBITDA was $173.5 million or 26.7% of revenue for the third quarter compared to $146.9 million or 29.3% of revenue for the third quarter of 2020. Net income for the third quarter was $89.5 million or $0.89 per share. We closed the quarter with approximately $2.7 billion in cash and cash equivalents, giving us great financial flexibility to drive our strategic initiatives. This includes the continued build-out of our manufacturing facility in Malaysia and G7 scale-up in Mesa, Arizona, as well as opportunities that align our business objectives, such as our recent distributor acquisition. Turning to guidance, our third quarter performance has placed us in a position to once again raise our full-year 2021 outlook for revenue and margins as we look to wrap up another excellent year. We now expect 2021 revenue to be between $2.425 and $2.450 billion, representing growth of 26% to 27% over 2020. This guidance includes approximately 100 basis points of non-CGM inorganic growth related to our recent distributor acquisition. Turning to margins, we are increasing our full-year 2021 targets. This includes non-GAAP results to be approximately at the following levels, which include a neutral impact from our distributor acquisition, gross profit margins of approximately 68%, operating margins of approximately 16%, and adjusted EBITDA margins of approximately 25%. With that, I will now turn the call back to Kevin.

There are a number of things that we could celebrate, and I'd like to take the time now to thank all of the teams at Dexcom and specifically highlight a few things that we are proud of. First, to our new Dexcom team members in Australia and New Zealand, we are absolutely thrilled to have you with us on our journey to empower people to take control of diabetes. We look forward to working together and learning from you as we bring our technology to those in need in these key markets. Our operations team has provided another highlight in the third quarter as our G6 manufacturing yields reached all-time highs and our warranty rates reached all-time lows. Those are the kind of metrics that lead to the margin improvements that we've seen. and reflect countless hours of work from our talented employees. And finally, our R&D team continues to innovate with several updates to our sensor pipeline, as well as our leadership in data and software solutions. The two FDA clearances this quarter are a testament to those efforts and a nice validation of the strategy that we discussed to leverage software as a competitive advantage and a key area of investment. As Sean mentioned at the start of the call, we've invited Jake Leach, our Chief Technology Officer, to join us for the Q&A portion of the call in order to address any questions around these clearances and our product innovation. I would now like to open the call up for Q&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-answer the queue if necessary. Operator, please provide the Q&A instructions.

If anyone has a question, you can press star then one on your touchtone phone. Once again, if you have a question, it's star then one on your touchtone phone. And our first question comes from Jeff Johnson from Baird. Go ahead, Jeff.

Thank you. Good afternoon, guys. I know we focus so much on T1 and Intensive T2 most of the time, but I wanted to ask this time maybe on the non-intensive and the pre-diabetes markets. You know, I guess I'm wondering more than anything, your latest thoughts on how big those two markets could be over the next year or two, especially with so many, you know, we see all these behavioral services popping up with levels and super sapiens and others in pre diabetes and obviously level two and some of the others. on the commercial side, it feels like your real-time APIs and your app and app approvals would be helpful for some of those programs. So just kind of how do you see those two markets developing in the short run, kind of one to two years, and your market share in those two areas maybe over the next couple years as well? Thanks.

Thank you, Jeff. This is Kevin. I'll take that one. We think those markets can develop nicely. We have some work to do on the product labeling side and some work to do – with the FDA as we migrate down that path, and we've had some of those discussions. But the results are spectacular as we've seen people use this product. In fact, we recently got an email from a physician. Again, this is in the type 2 world, not intensive, but was telling us about a recent experience with a patient who'd gone from an A1C in the 12s down to no medication to an A1C of 5 1⁄2 or something like that. It works there. It works also very much on just the metabolic front in general. Anybody who wears a CGM and watches that data, and particularly if you set those lines narrow between like 70 and 120, if you go above the 120 mark, you ask yourself what you ate, you can usually figure out and go back to something that you could do different, the effects of exercise, the effects of poor sleep, the effect of stress of an earnings call. can all be demonstrated in CGM graphs. I think it's a wonderful market opportunity. The data has to be presented properly. That's where the live API and the approvals we talked about today come in. The API is a quick way to get there, and Jake knows the technical stuff better than me, but the API also requires a person to run a Dexcom app and the other app. With the other, the app and app module that we talked about today, some of these larger programs, again, like Level 2 with United Health Group, you have one app experience like a Dexcom button or a Dexcom experience right in the middle of it. So if you're branding a wellness situation and really want that to be your focal point, we can reside in that app and you can have that experience. So we think both solutions, you know, they offer speed, but they also offer different experiences. And then we'll pick the partners we want to work with on both sides, those that have the best need for one versus the other. So we're excited for both of them, Jeff. We're very excited for these markets. And it's long been part of our long-term strategy. But we need the technology to get there. And our product pipeline truly supports going there over time.

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

Hi, this is actually Lillian for Robbie. Thanks for taking the question. Can you talk briefly about dynamics that you're seeing in Europe right now? You guys had a great quarter there, so any tangible stories of success from the increased patient access efforts that you've implemented over the last few months? Any color on that you could share would be helpful. Thanks.

Sure, yeah, and thanks for the question. You know, what you see in Europe, and certainly it's really in all the markets we've gone in with our access strategy, is we've moved into various countries and, you know, obviously exchanged price for access to populations that we historically haven't been able to get to. And, you know, what you see in the quarter, I think we talked a little bit about on the call, is it was a record revenue quarter in most of our international markets. So I think you see it playing through on the revenue front. you saw 46 percent organic growth rate outside the US which again another incredibly strong quarter fueled by a lot of the access that we've been able to create and then you look at the new patient growth you know it's another record quarter for new patient ads in this quarter again all pointing to some of the access that we've created outside the US so I think some of the examples I think if we talked a little bit about them publicly last quarter you know with Canada for example and multiple different provinces allowing us access through those publicly reimbursed channels. And I think in those channels, you're seeing just that. A lot of people now have the access to Dexcom CGM technology, and they're taking advantage of that. So we'll continue to expect that to play through. It's why we ultimately made the decision to do it. And I think you've seen it play through in the financial results and our expectation is you continue to see it play through over the long haul.

And our next question comes from Danielle Antoleffi from SVP Lyric. Go ahead, Danielle.

Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on a really strong quarter. Jeremy, just a question for you. You know, you guys have been investing pretty significantly in direct-to-consumer marketing and ramping up the Salesforce initiatives around primary care physicians. I'm wondering if you can talk, you know, now we're three-quarters into this, you know, sort of more concerted effort in the U.S., and whether we can really talk about how you're seeing a return on that investment as far as incremental new patient ads and maybe just where we are from a primary care physician coverage perspective. Thanks so much.

Sure, absolutely. You know, so where we sit today, and we talked a little bit about it last quarter, but I want to reiterate it is You know, in the U.S., we've doubled our covering prescriber coverage over the past 18 months. And so what I mean by that is the amount of physicians that are writing Dexcom scripts has doubled in 18 months. That's a testament to the work that's being done by the U.S. commercial team, which has been fueled by multiple things, certainly direct-to-consumer advertising, doubling the size of the sales force. Those all really play into folks adopting the technology. Just a couple of tangible things, which I think are helpful to see. Again, another record quarter for new patient ads. I think you can see that playing through, and in many ways that's driven by the sales force. So you see that continued momentum. I'd say the one thing that we have noticed that hasn't prevented us from being at completely full effectiveness is some of the impacts of the Delta variant. I think that's probably the only thing that we've seen that's been a challenge, and that's just getting access to some of these offices and when they're no longer seeing folks in person. And so you've seen a lot of physicians opening up and those locations were doing incredibly well. So there's more to work through and that's a function of just navigating through these COVID landscapes more than anything else. So I think in short, you're seeing the performance, you're seeing the growth, seeing the new patient ads, and we've ramped up very nicely. It's been an incredible year for us thus far and very bullish on what it means for next year. So I think that's really the feedback thus far. And again, as we get more and more data We'll continue to share it as it becomes available.

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

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

Yeah, this is Kevin. We're early on in that launch with our partner, Terumo. We've got some good traction, but literally with launch happening earlier this summer, we're in a position of educating positions, getting samples out there, really teaching people about our product. We think over time the Japan market could be a very good one for us. While there's not a tremendous amount of type 1 diabetes, there is a large amount of type 2 diabetes. If we can get across that broad spectrum with our product offerings, we can see this being certainly one of our top eight markets, possibly even a top four or five in the world as time goes on. We also know from a technological perspective that physicians we've spoken with are very bullish on the performance of our product and tremendously value the accuracy and precision of what we do. and the connectivity and all of those things. So we believe we have the right system for the market, but we're in early phases right now.

Yeah, and just to give you, I know you asked for the size of the market. You know, that's a market of around 300,000 to 400,000 intensively managed patients across type 1 and type 2. So it's a large market with a lot of folks, a smaller prevalence of T1, but obviously a market that can be an incredible landing spot for us in that space.

And our next question comes from Margaret Kadsor from William Blair. Go ahead, Margaret.

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

Sure. Yeah. So let me start with maybe the financials side and how that migrates over time. And then Jake's obviously here. He'll take you through the technical aspect of it and why we're so excited about it. So today these partnerships are a combination of expanding TAM and expanding people that would want to access CGM technology over time. And today it's in the form of sensors. But over time, and as we've demonstrated with a couple other software features we've obviously added over the past six months or so, software can be a part of that package. And so the monetization of that will come over time. Today it's about how do we get as many folks as possible on sensors to realize the value of CGM. So that's how we expand it. Jake, maybe you can take it through just kind of the general theme of where we're going in that space.

Yeah, sure, Jeremy. Thanks for the question. So really the way we think about it is the technology that we are bringing to market through these software features is really about providing unique experiences for customer segments. And so if you think about the Type 1 segment or the Type 2 segment, non-intensive, you're solving different types of problems in those. And so what these software tools such as our live API provide is a way for our partners to serve those needs with Dexcom CGM and a connection to our product. The real-time API is a real advancement in our cloud strategy, and we're really excited about the list of partners that are working to integrate that into their systems to provide their customers with unique experiences.

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

Thanks, and thanks for taking the question. So a lot of moving parts here, and I'm not sure if I'm doing the math right, but I'm getting like $60 to $70 million of a pricing headwind this quarter, and I'm not sure with the distributor conversion if that's right or not. I guess I'm just asking, is that about right? Are we seeing a little bit more of the pricing headwind this quarter than we've seen over the last couple? So we'll see maybe a little less next year. It's getting pulled forward at a And then the reason I'm asking is the increase sequentially from Q3 to Q4 is a little bit below trend line. Is that because you're expecting more of the pricing headwinds to be seen here in 21 versus 22? Thank you.

Yeah, so there's a couple pieces. So I'll first and foremost reiterate the total pricing expectation for the year, the $250 million, is still the expectation. If anything, we might come a little bit light on that. but that still is the expectation. And so then the pricing in Q3 was generally in line with prior quarters, a little bit elevated, but it's not a material step change. And that's a function of some of those OUS contracts kicking in. So really that's where we come from a pricing perspective. So it's not necessarily pulling anything in. We've often talked about 2022 being relatively similar to 2021, and we're still on that trajectory. So I wouldn't necessarily expect any of that. To your question on how Q4 plays out in the guide and doing the math there, and you're doing the math right. You know, one of the things we're mindful of, and there's really two pieces to it as you think about it. There's the piece we talked about a little bit earlier, which is the Delta variant and getting into new primary care offices and making sure that we're seeing that over time before we count on it. So that's the first piece of it, and we're mindful of that. And then the second piece of it is as more and more of our product is fulfilled through the pharmacy, The historical trends over time, you're going to see start to migrate just a little bit. You saw it start this year in Q1. If you look back to Q1, our sequential pullback from prior year Q4 into Q1 was a bit mooted. And you're going to see the same thing in this Q4, which means as more and more goes to the pharmacy, you no longer have folks in the DME space. You no longer have the high deductible health plans where folks are maximizing benefits at the end of the year. So we expect a little bit less seasonality as we progress. And in turn, we expect a little seasonality in Q1 of next year. So that's what you're reading into it. That's ultimately what comes through in the guide. So you're doing the math right, but those are some of the expectations that went into it.

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

Hi, thanks for taking the question. Jeremy, just to follow up on the distributor, it sounds like the revenue impact this quarter was $13 million all in the OUS line. And just kind of curious how to model that going forward. Is it about $13 million a quarter? for three more quarters and then it gets into the base and how to think about, like, is there a pricing benefit here without the distributor margin? Just a little more color on the distributor acquisition, if you will.

Sure. So the pricing, we don't necessarily break down the pricing, US, OUS, and the overall number. And so, you know, at the end of the day, you know, we're on the trajectory as a total company. We talked about, you know, and so obviously you guys will do the math. But, you know, at the end of the day, we're on that same trajectory here. In terms of your question on the distributor, you know, the impact of the distributor acquisition on growth in the quarter in our CGM business, it rounds to 0%. And so it's because, you know, there was two months in the quarter and that markup on the margin in the distributor market is relatively small. You know, the question is, well, why do you do it? It's our ability to control growth. penetrating deeper into these markets, and that's ultimately why we do it. It's not to try to get a margin uplift. It's actually to try to control investment. We're a company that has cash on the balance sheet. We're willing to invest in these markets, and we want to continue to invest in these markets. So as we take them direct, the goal is then to reinvest and make sure that we're driving adoption. So the impact of the distributor, really nominal on our organic growth rate. Like I said, it rounds to zero, so the 28% is the organic growth rate, even including that. So hopefully that helps you around the acquisition. There isn't much there that changes the results this quarter.

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

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

Oh, yeah, this is Kevin. I'll take that. There's still more to go, but it is going very well. Our targets are going very well as far as those we've called on. We've also learned there are some we have not had on the target list, and we're expanding that coverage as well. We've had numerous situations where it's taken our person several attempts to get into an office, but once they get in and once we get a person on a Dexcom, you know, their response is so good based on the quality of the product that we get more But it is a progressive effort, and we don't walk in and all of a sudden get, hey, here's 50 new patients this month. It takes a little time, and we have to build a lot of credibility. But the primary care audience, particularly for those on insulin, it's gone very well so far. But it is a process, and it does take some time.

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

Oh, thank you very much for taking my question. It seems to me like the increasing clinical evidence that you're building is going to really help the type 2 population, but could you give us sort of an update on where you think or what you think you'll need to get into the non-intensive type 2s?

You know, this is Kevin. I'll take that. We've taken a several-pronged approach to get in there, and we're not going to deviate from that approach. We're working with healthcare professionals who are prescribing product for a non-intensive type 2s, and I right now and getting great outcomes. We work with the payer network, for example, the Level 2 program at UnitedHealth. That's produced some very good results for them and very visible in their marketing materials and their efforts. The programs and with the technologies Jake outlined, you know, that we got approved today, the app in the app and the API interfaces, that will be great for partners because they do want to control that experience for patients and ultimately getting to people directly. You know, we've been very successful in our DTC campaigns for the intensive insulin users. There will come a time when we'll be able to go direct to those consumers in the type 2 NIIT, as we call it, non-intensive insulin therapy, or not on insulin therapy, get to these guys as well. And we have, you know, a high level of confidence in the products we're designing and the things we're planning, combined with the ability of our team to reach these markets once we turn them loose, once we have the opportunity to do so. So we'll go through all the steps. We'll continue on all four fronts. We're not going to back off on one of them.

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

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

Sure. So, you know, the gross margin in Q4, we do expect to take a bit of a step back. You know, some of it is the international access as that ramps up. And the other piece, to your point, is the launch of G7 and turning on all of the machine, the depreciation, and therefore the yields. A majority of that is going to be the G7 launch. And the reason why is we're not at full capacity at that point. Now, once we get to full capacity, there's no reason why we don't get back to our long-term gross margin guides. And we'll get into 2022 when we get there. But there's nothing structurally in those lines that would prevent us from meeting what we had talked about from our long-term gross margin guide. There may be ebbs and flows quarter by quarter as we ramp up. But I don't expect there to be any issues there. So if you're kind of asking the question, well, how would I weight the two, most of the impact is upon the launch of G7 and turning on those machines and the depreciation associated with it. As we get into 2022 and volumes start to build on those machines and you're able to absorb those fixed costs, there's nothing structurally that can't get us back to the gross margin profiles that we've set for an organization.

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

Hi, this is Pavan for Jason. I have two quick questions here. First, will we see G7 clinical data before U.S. approval? And the second one is, how close are you guys to getting to the 75% of commercial payers into the pharmacy channel?

Yeah, so... Thanks for the question, Jake. So we presented, actually, earlier this year, we presented at ATTD G7 data showing an MARD of sub-9% and very strong clinical accuracy, better than G6, in fact. So we're very excited and happy with the result of the U.S. Pivotal, and we'll be releasing that in the future.

Yeah, so now that you've seen that data, I think you have a feel for it. And obviously that data, as more products launch over time, you'll get access to it. But I think some folks ask, well, how do I know what it's going to look like before? You know, there is public data available at ATD that should set kind of North Star. In terms of the transition, the migration, you know, in the pharmacy, you know, we talked about, you know, this glide path from approximately 50% turning into 2021 or at the end of 2021. into really 75% by the end of 2022, we're on that glide path right now. And so we're making headways. We haven't given a specific update as a percentage, but as you're charting that course, we're right where we'd be expected and right where you'd expect, you know, from a linear transition over time. So hopefully that helps.

And our next question comes from Larry Beagleson from Wells Fargo. Go ahead, Larry.

Hi, this is Nathan Trey back home for Larry. Thank you for taking the question. Can you just provide us an update on how you're thinking about CGM for hospitals and gestational diabetes? Thanks.

Yeah, this is Jake. So let's start in the hospital first. So the way we're thinking about that is that really with the accuracy and reliability that we have built into the G6 and G7 systems, that it's a great CGM platform to then build a purpose-built hospital product. We're in the early stages of understanding what is the exact CGM that meets the needs in the hospital. We've seen good success with G6 under times of COVID use in the hospital. It is really serving a need, but it's not exactly the right workflow for the hospitals. And so what we wanna do is better understand how do we build a CGM that really meets the needs of that segment. On the pregnancy side, we're very excited about the building in pregnancy functionality and providing information that's important for expectant mothers into the G7 product. And so that's part of our roadmap, and we're actively working on building that into the G7.

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

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

You know, at this point in time, the total revenue amount per year is still something we model out in a number of cases. What we've learned and what the data that we've seen most recently supports and will continue to talk about is continuous use of the system provides much better healthcare outcomes than intermittent or sporadic use. That the things that patients learn with this technology, having that feedback full-time provides a much better outcome. With respect to the long-term revenue model, and again, I'm speculating a bit here, but I'll just repeat what I say to the team internally. We're solving a much different problem for somebody who's not on insulin. It is not a life and death decision for them. So I can see the revenue per patient being lower for this group over time, even in continuous use, but I don't know how much yet. There will certainly be intermittent use models that might be available and lead to good outcomes. But one of the mistakes that a lot of these programs make in the beginning is they try and minimize the number of sensors because they're worried about the costs. they're trying to control when in reality the benefits that these patients and these customers who use the system get are derived from CGM data. So we have to balance those things and balance that against our current business model as well. But we do believe it's going to be a very good population. And there was long a belief that, well, these patients won't want to wear it all the time. No, they do. They very much enjoy the data and really like knowing where they are. That has not been... a problem at all.

And our next question comes from Robbie Mizra from Barenburg. Go ahead, Robbie.

Hi, thanks for taking the question. So I guess I'll use my one question of New Zealand-Australia distributor. Just curious, how quickly can you basically get through this I guess, inorganic revenue in terms of the impact of guidance? Like, is there still kind of a non-CGM revenue that we assume in quarter four? And maybe help us think about, I guess, what the market size that you think you're able to kind of go after with this acquisition, or do you need to do more in this arena, this country or continent space to really get access to the population? Thank you.

Sure, I can take that. So when we acquired the distributor, the distributor had multiple different product lines. And they have sales reps that cover these multiple different product lines. And ultimately, a distributor is about people, and it's an incredible group of people. And so the key here is making sure we keep everybody together. So we'll stay in that line. What we try to identify for you is the contributions to the overall guide in basis points. And so in our guide we talked about 100 basis points on the full year. You'll do the math and figure out what the approximate impact is in Q4. And I think you'll have a pretty good feel for it. We'll make sure that we isolate it out over the long haul so that you're able to identify what is and what isn't out there. So I think you can feel comfortable there, provided it's material. In terms of the actual acquisition itself and being able to get into the market, this was This is a group of folks who have done an incredible job with CGM adoption in that country. And so when we get into these countries, we want to make sure, one, we have the team. We make sure that there's nothing in their way from continuing to develop CGM awareness and develop CGM adoption. So there's nothing that prevents us under the structure. The only thing we mentioned in terms of investment is very similar to the way you've thought about our organization in the U.S. We know that investment in DTC and in sales reps where it makes sense, and in sampling. And all of the things that we've put in place makes great sense in other markets. You've seen us do some of that in Europe, and certainly we've done some in Canada. And we expect to do more of that. And when we take it direct, we can do a little bit more of that. And so that's really what we're talking about. So there's nothing structurally that prevents us from taking the acquisition and continuing to proliferate CGM adoption in those countries.

Yeah, this is Kevin. I would just add to that. One of the reasons we do things of this nature, take a look at our direct business in Canada, the ones we just had with the provinces and reimbursement there. With our financial muscle at the corporate level, we can take much more risk than a distributor could on their own. And so we view this investment in Australia and New Zealand as one where we're going to be able to go after broader market, increase access, reimbursement, and really make an impact. This team needed our muscle to do that financially, and we needed their talent. to do it as well. So it works for both of us.

And our next question comes from Marie Tebow. Go ahead, Marie, from PTIG.

Hi, yes, thank you for taking the questions. You know, spending a little bit of time on the Dexcom One site, it strikes me as a very you know, consumer-friendly website. And I'm just curious, you know, whether this is sort of a glimpse at the future. I know it's been launched into some Eastern European countries, but is this a model that you would look at in terms of sort of flexible pricing and subscription plans and bulk order discounts? Is this something that's sort of a preview of, you know, the broader appeal of CGM maybe into prediabetes and consumer markets?

Yeah, this is Kevin. This is a very important launch for us. It's the first time we've launched a product on a new software platform and had a new product launch. We're in a position now, volume and manufacturing-wise, that we want to get this product to as many people as we can. And what Dexcom 1 represents is really an opportunity where we could get Dexcom technology into a geography easier than we could if we went through our traditional means with our G-series product. So we're offering this, and as you talked about, flexible pricing plans, subscription models, and things of that nature to get this product to this patient group. It definitely can be a precursor of things we can do in the future to take advantage of the scale that we've created within the business with our ability to manufacture more. And again, while the website is very easy to use, I assure you the app that Jake's team and our marketing team have developed is every bit as easy to use as the website. This truly is a step up for us from a product experience. And then we'll evaluate those opportunities over time where we have a market, where we can increase our volumes and gain more traction with this type of product offering rather than our traditional G-Series. We will explore that.

And our next question comes from Josh from Cowan. Go ahead, Josh.

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

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

And our next question comes from Anthony Patron from Jefferies. Go ahead, Anthony.

Great, thanks, and hope everyone's doing well. Two quick questions. One would be on supply chain constraints, just wondering how that is expected to play out into 2022, hearing a lot about inflationary upward pressure on cost of goods sold, so wondering how that's playing out for Dexcom and what the offsets are. And then as we look into the 05 launch, just maybe an update on what percent of existing Omnipod users are currently not users of Dexcom solutions? Thank you.

Sure. So I'll go ahead and take the inflationary and supply chain. So, you know, I think, you know, everybody's, you know, nobody's immune to, you know, certain products and certain areas that do have pressure based on, you know, supply chain, supply and demand. One of the things I think our team has done, there's two pieces of it, is one, do you have enough product, and two, can you manage the cost? I think our team has done an incredible job in lining up the product. Now, that doesn't mean everybody's out of the woods, that everybody's got supply chains they're naturally running through, but this team got ahead of it very early and has been working collaboratively with all of our suppliers well in advance to make sure that we're properly communicating the value of our product and making sure that we're working with them to secure supply And that's ongoing, but that's work that's been done well in advance of everybody else kind of jumping on it. So we're very proud of that team. In terms of the inflationary measures, we're in a bit of a unique environment. There have been absolutely inflationary measures, but we're also making a lot more product. And so you kind of get economies of scale and purchasing power, which offset some of the challenges associated with inflation. So our expectation is we're able to navigate both of those, and it will not impact kind of our longer-term gross margins because of that nature. Hopefully that answers your question. Maybe I could turn it over to... Actually, I can answer the Omnipod questions. So with Pod 5, there are a decent amount of folks using it. There's some studies out there. I don't want to quote them just because I don't know how accurate they are. We generally have a good feel for it, although we haven't put it out there publicly. We can let Omnipod do that if they want to. But we do know once Omnipod 5 is launched and the integration associated with Dexcom, it could provide a catalyst certainly for us. The one thing we will say is, you know, when we continue to say it all the time, is CGM first. And so we do believe that a lot of folks do come to CGM and then ultimately could choose to go on to an integrated system. And most folks that do get on to our product today now are MDI. And so a lot of those are out there. That all being said... you know, another AID system with one as, you know, novel as Omnipod, I think is certainly something that's interesting. And for patients that like patch pumps, I think this is an incredible opportunity for folks to get on that platform.

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

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

Yes, Jake, I'll take that one. Dexcom 1, from the beginning, our intent around the design of that product was to make it simple. And so that kind of flows through, as you mentioned, the e-commerce experience, but into the app, the mobile app itself. It's a completely new app architecture for us, so it's a new piece of software. And the first part that users will see that's quite different is the onboarding module. So we basically spent a lot of time studying human factors and how users use the products, particularly when they're first learning how to use it. So what the onboard module does is really walks them through a simple process in how to get up and running quickly on their CGM. The other thing about it that's different than G6 is it has a simplified alert scheme. So it doesn't have some of the more sophisticated predictive alerts that G6 does. It has a very simple, easy-to-use, approachable alert scheme. The other thing that we added is with our current G6 system, a lot of the kind of Data over time statistics are built into our Clarity software. With Dexcom 1, we've actually incorporated that into the Dexcom 1 app. So typical statistics like average glucose, time and range, estimated A1C, that's all built into the single Dexcom 1 app. And then finally, in that vein of simplicity, there's no AID connectivity for Dexcom 1. It also doesn't have the share remote monitoring feature. So it's really about bringing a simple CGM product to people who've never had access to Dexcom CGM and haven't experienced life without finger sticks.

And our next question comes from Chris from Guggenheim. Go ahead, Chris. Thanks.

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

It's all of those things. Certainly you look at the four countries we launched in. They're not huge countries, but they're markets where we've never been before. So with the e-commerce platform and the creative pricing structures we have for subscription plans and things of that nature, it gives a group of people access to our technology that have never had it before. And as far as the not sharing and the not connecting to the ID systems, you're exactly right. It is a lower level of technology with respect to connectivity than what we offer. And so it is targeted different people. Certainly, we'll have access to more type 2 patients and access to insulin users. But again, some of these geographic plays in countries where there isn't anything, we felt this simpler solution is a better product to offer out of the gate than the other one. And then we'll evaluate over time what products we offer where. So you were right on point with pretty much all your observations.

And we have no more questions at this time. I'd like to turn it back to Kevin Sayre for final comments.

Thank you. And thank you, everyone, for your questions and continued interest in support of Dexcom. We've once again reported a number of important developments to position Dexcom for the future, on top of outstanding financial performance and continued growth. I'm going to wax a bit philosophical today, but, you know, my father passed away in late 2020, but he never missed an earnings call. And our routine after the calls was very simple. He'd call me up and he'd say, this is what you guys were trying to say. And he was pretty much always right on point. So I'm preparing my closing remarks today. Let me reiterate what we're trying to tell you. Leverage and growth continue. Our 28% revenue growth achieved through sensor volume growth in excess of 40% demonstrates the continued commitment and talent of our commercial organization. Profitability continues to improve as well, yet we remain mindful of the investments we need to make in the future. Our global access strategy is working. We continue to achieve the numbers we've achieved while we've expanded access to our product globally through strategically shifting our customers to channels which result in reduced revenue per customer annually, and yet margins have increased. Next, G7 is on schedule and it's coming. All of the efforts related to G7 are moving at a frenetic pace around here. I've never seen our people so engaged in a single-minded purpose. And finally, our software development and data platform commitments are going to be critical in the future and you saw big steps this quarter. We spent a great deal of time talking about software as a differentiator today and we haven't over the past several months. You're beginning to see, you're seeing the beginning of a great change with Dexcom 1 and the data sharing and experience enhancing technologies recently approved by the FDA also demonstrate this. It's only the beginning. Our long-term focus has always been for the data generated from our devices to be consumed in a way that really makes an impact on people's lives and on their health care in general. Thanks, and everybody have a great day.

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