DexCom, Inc.

Q4 2021 Earnings Conference Call

2/10/2022

spk19: Welcome to the Dexcom fourth quarter 2021 earnings release conference call. My name is Adrienne and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note this conference call is being recorded. I'll now turn the call over to Shawn Christensen. Shawn, you may begin.
spk03: Thank you, operator, and welcome to Dexcom's fourth quarter and full year 2021 earnings call. Our agenda begins with Kevin Sayre, Dexcom's chairman, president, and CEO. We'll provide a summary of our fourth quarter and full year highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jeremy Sylvain, our chief financial officer. Following our prepared remarks, we will open the call up for your questions. 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, 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 fourth quarter and full year earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now, I will turn it over to Kevin.
spk16: Thank you, Sean, and thank you, everyone, for joining us. I want to take time at the start to highlight some of Dexcom's key accomplishments in 2021 that reflect our progress relative to the priorities that we establish at the start of the year and our long-term goals. Total revenue grew 26% on an organic basis over the prior year, with rising CGM awareness and Dexcom brand loyalty leading to another year of record new patient additions. This translates to nearly $500 million of organic growth for the year. leading us to exceed the midpoint of our original guidance for the year by more than $160 million. We laid the foundation for significant expansion of our addressable markets in the future with differentiated product solutions and clinical evidence. In June, we presented results from the mobile randomized controlled trial for people with type 2 diabetes being managed with basal insulin. The results were clear. Dexcom CGM can do significantly more to help these people manage diabetes. And with this conclusion being validated in the Journal of the American Medical Association, as well as in the recently updated ADA Standards of Care, we are hopeful that we can bring access to our technology for the estimated 3 million people on basal insulin therapy in the U.S. and many more outside the U.S. Alongside the mobile clinical evidence, we drove several updates to our product portfolio to broaden the ways that customers can engage with our technology. We've consistently spoken about our investments in software and data infrastructure as a significant competitive advantage. In the third quarter, we received two key FDA clearances for Dexcom software tools that reflect this commitment and strength. Our real-time API allows us to directly integrate Dexcom CGM data in real time to the displays of approved third-party apps. And our app-in-app solution creates an FDA-cleared Dexcom app experience that can be integrated directly with the app of a Dexcom partner. Both of these creative solutions have already been rolled out with Dexcom partners, and we believe they position us well to provide extensive options for our customers, partners, and potential partners as CGM use continues to expand into new populations. We again strengthen our product portfolio through differentiated software with the CE mark and launch of our Dexcom 1 product in the fourth quarter of 2021. In a relatively short period since launch, we've already seen strong adoption in both Type 1 and Type 2 customers, and the health systems in two of our four launch countries established reimbursement. With a focus on ease of use and affordable price point, we believe that Dexcom 1 will be a significant part of our story as we look to extend CGM access globally. Perhaps most importantly, in 2021, we completed the pivotal trials in support of our next generation G7 system and submitted the results for both CE mark and FDA clearance. As many of you recently saw in our January presentation and will soon see in a publication, the performance of the G7 system is outstanding, achieving unsurpassed performance levels relative to the FDA's ICGM special controls. Even with customers on our G6 system expressing record net promoter scores at the end of 2021, we are incredibly excited for them to experience G7. We believe that we are very close to receiving CDMark and are navigating the final stages of that review. In the meantime, our teams continue to work to prepare the manufacturing scale-up and commercial efforts in anticipation of G7 launches throughout the year, as well as launches with some of our partners on their upcoming connected insulin delivery devices. On that front, we were excited to see the news of the FDA's recent clearance of Insulet's Omnipod 5, the first tubeless automated insulin delivery pump. With this clearance for Insulet and the ongoing success of Control IQ for tandem diabetes, we believe that we are enabling automated insulin delivery for the best tubeless pump on the market and the best tethered pump. The outcomes that customers are seeing with these Dexcom integrated systems are outstanding, and we are proud that our commitment to connectivity is helping advance the market and enhance the quality of life for our customers. These accomplishments align with the strategic priorities that we established at the start of last year, showing the resilience and execution of the Dexcom teams in a challenging environment. These accomplishments are not merely 2021 events, but they are the foundation that we will continue to build on as we press forward in 2022 and beyond. Many of you likely saw the recent update to the IDF estimates for global diabetes prevalence and cost. There are now greater than 500 million adults with diabetes globally, and costs to treat the disease alone are estimated to be approximately $1 trillion per year. In addition, the CDC now estimates that 38% of adults in America, or 96 million people, have prediabetes. There is a real opportunity here for Dexcom to do something great to address this epidemic, empower diabetes management, and down the road even work towards diabetes prevention and better health outcomes broadly. The future for Dexcom is bright. With that, I will turn it over to Jeremy for review of the fourth quarter financials and discussion of the 2022 outlook. Jeremy? Thank you, Kevin.
spk05: 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. In line with our January pre-announcement, we reported worldwide revenue of $698 million for the fourth quarter compared to $569 million for the fourth quarter of 2020, representing growth of 23% on both a reported and constant currency basis and 20% on an organic basis. The organic revenue excludes non-CGM revenue that we generated in the fourth quarter following our acquisition of our distributor in Australia and New Zealand. U.S. revenue totaled $517 million in the fourth quarter, compared to $451 million in the fourth quarter of 2020, representing growth of 15%. Unit volume growth, which is a general representation for the growth of our user base, remained in the high 30% range compared to the fourth quarter of 2020, and we continue to see the strength in our strategic shift to the pharmacy channel. Our teams continue to work very hard to broaden our prescriber base and take advantage of the significant reimbursement access that we have driven in the past two years in both the U.S. and international markets. The uptick in COVID cases has created some challenges for us in the fourth quarter and into the early first quarter, but it is a credit to the resilience of our field team and the strength of the category that global new customers remain near record levels in the fourth quarter. Our international business executed very well in the fourth quarter, with revenue growing 54%, totaling $181 million. Excluding non-CGM revenue that resulted from our 2021 distributor acquisition, international growth was 41% in the fourth quarter. The international result reflected broad-based strength, including record results in all of our direct markets. This growth continues to validate the strategic moves that we made over the course of 2021, most notably the progress that we made to broaden access to our technology through advocacy, flexibility gained from operating efficiencies, and a differentiated product portfolio. We look forward to extending this momentum now as we progress into 2022. Our fourth quarter gross profit was $472.6 million or 67.7% of revenue compared to 70.2% of revenue in the fourth quarter of 2020. The fourth quarter gross margin was slightly above our expectations, as certain costs related to the G7 scale-up and commercial preparation remain in our R&D costs until we receive CE mark. We made excellent progress to drive efficiencies across our product design, procurement, manufacturing, and logistics functions, leading to a full year 2021 gross margin that finished 360 basis points above our original 2021 guidance. Operating expenses were $373.6 million for Q4 2021, compared to $294.7 million in Q4 2020. The increase in operating expenses as a percentage revenue relative to the fourth quarter of 2020 was primarily a result of development and operational costs incurred in preparation for the launch of G7, as well as investments to support our global commercialization efforts. Operating income was $99 million in the fourth quarter of 2021 compared to $104.4 million in the same quarter of 2020. As a reminder, when we provided the outlook for 2021, we determined it was in the best interest to make investments in the business continue to fuel CGM growth and awareness. As we wrap the year, we are proud to report that we outpaced our initial 2021 operating margin guidance by more than 200 basis points, all of which came despite significant investments to solidify our software advantages advance the G7 clinical, regulatory, and manufacturing programs, significantly expand our global sales force presence, and significant efforts to build brand awareness. And we are committed to driving further leverage in the years to come as we strike the right balance between investing to maximize our growth opportunity and turning that opportunity into cash flow generation for the business and our stakeholders. Adjusted EBITDA was $154.5 million, or 22.1% of revenue for the fourth quarter, compared to $159.2 million, or 28% of revenue for the fourth quarter of 2020. Net income for the fourth quarter was $69 million, or 68 cents per share. As many of you also saw in our press release and our gap reconciliations, we also recognized an $87 million expense associated with contingent milestone under the 2018 Collaboration and License Agreement with Verily Life Sciences. Terms of our amended contract with Verily are available in the SEC filings that were originally published in November 2018 and updated in November of 2021. We closed the quarter with greater than $2.7 billion in cash and cash equivalents. We have demonstrated the ability to generate positive cash flow, and going forward we remain in a very flexible position to continue to advance strategic initiatives and opportunities. Most notably, we will continue our development of our manufacturing facility in Malaysia, as we expect to have that facility validated for production by the end of 2022. Turning to 2022 guidance, as we stated last month, we anticipate full-year total revenues of $2.82 to $2.94 billion, representing growth of 15% to 20%. Given the success of our strategic transition to the pharmacy channel over the past three years, We anticipate that 2022 will be the final year where we see a significant shift of our existing base from the durable medical equipment channel to pharmacy. With this ongoing shift, as well as the majority of our new customers now coming through the pharmacy channel in the U.S., our expectations for customer growth in 2022 are again higher than our revenue growth rate, continuing to reflect the large end markets we serve and the growing demand for Dexcom CGM worldwide. We have several scenarios built in conjunction with our Plan G7 launches, and factoring in the respective regulatory approvals and competitive environment, we will provide updates as the year progresses. Turning to margins, we are establishing the following guidance for 2022. We expect gross profit margins of approximately 65% for the year, in line with the expectation that we established for our 2025 long-range plan. the slight step back relative to our 2021 result is primarily related to the launch of our G7 system during the year, as we begin production at lower volumes and gradually scale in conjunction with our launches. Despite that step back in gross margin, we expect to offset that impact completely with approximately 400 basis points of operating expense leverage. We anticipate our operating margins for 2022 of approximately 16%. This factors in the ongoing investments that are driving significant returns for Dexcom and setting us up for sustainable growth, including our DTC marketing efforts and investments in our product portfolio pipeline. But we are making these investments with the discipline throughout the organization, driving towards the margin expansion that we've established in our long-range plan. Finally, we expect adjusted EBITDA margins of approximately 25% in 2022. With that, I will turn the call back to Kevin.
spk16: Thanks, Jeremy. To summarize, we set out in 2021 with a few key goals in mind. To complete the clinical and regulatory process for G7 and prepare for significant launches. To validate health and economic outcomes for Dexcom CGM beyond the intensive insulin-using population. To broaden access to Dexcom CGM globally through evidence, advocacy, and leveraging our growing scale and efficiency. and to strengthen our product portfolio for future growth through differentiated software capabilities. Our progress on all these initiatives contributed to a great 2021 and have us looking forward to a big year ahead in 2022. I would now like to open up the call for Q&A. Sean?
spk03: 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.
spk19: Thank you. We'll now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone. And our first question comes from Matthew O'Brien from Piper Sandler. Your line is open.
spk13: Afternoon. Thanks for taking the question. It's a G7 question. It has two parts, but they're kind of interwoven. So for starters, Kevin, just talk about the data and the importance of the data when you commercialize G7 versus just like, hey, how much is the price of it? And then the second part of it is on the gross margin side with the big step back that we're seeing, it looks like it's entirely because of G7. So what are you anticipating as far as the impacts You know, from the G7 rollout, what does that say for the timing in Europe specifically? Is it like a month or two? And then the timing of approval here in the States. Thank you.
spk16: There's many parts to your two-part question. I'll deal with some of them, and then I'll give them to Jeremy, Matt, but thanks. Let me talk about the data first. Dexcom has long built its legacy on having the best product in the market with respect to performance and a product that everybody can rely on. And time and time again, we've launched products where we publish great clinical performance, real life experience always ends up better than what we publish. I've been looking at glucose sensors since the mid 90s. This data is better than anything I've ever seen. And I think from a marketing perspective and from a customer experience perspective, it's absolutely critical that we remain top of the industry. And this data puts us in there and it demonstrates really the thought and effort that's gone into this product. Let's not forget, we've changed pretty much everything. There's a new algorithm, new hardware, new electronics, new app, you name it, new receiver. Everything in here is different than what we've had before. So this has been a monumental effort that's taken a lot of time. And to be able to produce this type of clinical results, we think, just show the diligence of the effort. And with respect to approvals, we think it's also very important that we not leave room for error or room for doubt with the data that we submitted, which is exactly what we've done. When you look at the size of that study and, you know, 39,000-some match pairs, there's really no room for doubt that this product is ready for prime time from a performance perspective. On the approval timelines, as I said in the prepared remarks, we're down to the last steps for CE-MARC, literally procedural type discussions with documentation. that will take place in the near term. We're very confident that we'll get CMARC very soon, and then we will start our limited launch in Europe and then roll out to the full launch after that. We've had initial dialogue with the FDA on our submission, and so far those discussions go well. We currently are not anticipating a delay, but we don't control that any more than we control the CMARC delays either that we've just experienced. By providing great clinical data, though, that certainly takes a large element out of the process. Couldn't be more excited about G7, though, Matt. I'll kick it over to Jeremy for the financial ramifications. Sure.
spk05: Yeah, so it's a good question on the margins. You know, we exited 2021 north of 68% with our G6, right? So you're certainly seeing G6 firing on all cylinders from an efficiency perspective. And so your question is, well, how does the sequencing and timing of G7 work? How does that impact the margin in relation to the timing throughout the course of the year? And it's a little bit of an insulation. So if it rolls out a little bit slower, certainly the cost to produce G7 are higher, but that means we're ultimately selling more G6. And so you have this little bit of this transition, whereas you think about it from a multitude of different scenarios, it really zones back in on this 65% margin. And that's the reason why we feel comfortable with the guidance there. I'll give you the opposite scenario. If G7 is able to come out a little bit faster, the regulatory approval happens quicker. certainly we'll be selling more of it and we'll be able to leverage the fixed cost infrastructure and certainly improve yields. And so you ultimately get to that end goal a little bit quicker. So I think under both scenarios, whether regulatory approval and launches sooner or later, I think that 65% gross margin really speaks to the entirety of the year.
spk19: And our next question comes from Danielle Antolfi from SVB Lee Rink. Your line is open.
spk18: Hey, good afternoon, everyone. Thanks so much for taking the question. Kevin and Jeremy, my question is around how to think about Q1 and potential COVID impact that you're seeing thus far. And also kind of, you know, if you could opine on what you have factored in.
spk05: Jeremy, go ahead. Sure. Yeah, I'll take that one. Yeah, sorry about that. We cut a little bit in and out there, but I think I got the question, which is, you know, how do we thought about it? And I'd say for the full year guidance, we have factored in the impact of COVID and how that would impact us. Now, we did talk a little bit about it on the call, you know, and I think you saw this really across, especially the United States, really where Omicron, you know, was pretty strong throughout the course of January, and we see it starting to dissipate here in February. So we will see that as it impacts our ability to get in front of primary care physicians and access new patients, but it's not a It's not a question of if, it's more a question of when. And so that was all contemplated in the guidance. And, you know, as we think about the full year, there's a lot of other things that we think are certainly interesting benefits as we think about, you know, certainly Dexcom 1 and the launches Kevin referred to of G7 with the incredible data. So, you know, we really contemplated all of those in the guidance, but certainly we know that as we exited January, certainly there were some primary care physicians that were closed to outside participants, but we are starting to see some of that thaw as we move into February.
spk16: Yeah, I'd even add to that, I actually got out in the field here earlier this week, and I heard from the reps and the teams out there that they've not had the access they wanted here in the first quarter, but it is starting to open up a little bit. Time will tell.
spk19: And our next question comes to Jeff Johnson from Baird. Your line is open.
spk17: Thank you. Good afternoon, guys. Kevin, now that you've got the mobile data published and the ADA standard of cares has been published and updated, how should we think about maybe the pathway to U.S. coverage for non-intensive or for basal only just at the CMS level and maybe expanding commercial coverage? And could you just remind us, ballpark, how many commercial payers right now are in some form or another reimbursing for basal only or non-intensive T2 effects?
spk16: There is some limited reimbursement for basal only and some non-intensive type 2s, but it's not a very big number. Jeff, it's kind of on a haphazard basis and it's not something that actually we sell to or market to because there's just not that much of it out there. The pathway for approval will be similar to what we've done in the past given this mobile data. We're certainly presenting this on the commercial side and working to get coverage. at various payers, and hopefully some of those will drop over the course of the year. On the CMS side, now that we have really good data, we have a good CMS plan to work with and go with them, make them more aware. You know, lest we forget, we did leave the charge for Medicare approval for CGM in general as a company here, so we have experience on this front, and we'll continue to push it, but it takes time, and there's always variables, and in all fairness, I was completely wrong on Medicare approval before, it was approved 18 months earlier than I said it was going to come when I made a commitment there. So I'm rather hesitant to make any commitments on that front. We're just going to keep pushing. The most important thing, though, is the outcomes are there. I got a note from a patient not long ago who is a type 2 patient in this category, and while the patient got put on a new drug, she attributed her four-month A1C drop in six months to being out of Dexcom, not to the new drug. drug. It's because she knew what her glucose values were, and we've seen this time and time again, and we're very confident this is how this plays out over time.
spk19: And our next question comes from Robbie Marcus from JP Morgan. Your line is open.
spk12: Oh, great. Thanks for taking the question. I wanted to see if you could speak to the commercial launch strategy here. It sounds like you're spending a lot in fourth quarter and 2022 ahead of G7. You have Omnipod 5 launching. You also have Medtronic in a tight spot with the warning letter with a lot of patients potentially moving over to partner therapies here. So maybe just talk to us about the strategy, how you're going to be spending your DTC dollars, how we should think about those ramping up, and what the competitive message from your reps will be this year. Thanks.
spk16: Well, our competitive message from our reps is going to be the same. It's always been, we're the best. And you're right, Robbie. We have a tremendous opportunity on the integrated system front with our partners to go grab as many of these users as we possibly can. And we're in talks with both Tandem and Insulet to let's go make Hey, Wilder Sunshine and get as many as we possibly can as those individuals rotate off warranty and have an opportunity to get into a new system. I think it speaks to our connectivity strategy and partnering with others. Now we have two options. And we know a big driving factor for both those partners is the fact that they pair with the best product on the marketplace. So we will aggressively work with our partners on that front and make sure we have a joint message together. With respect to our own DC, you know, our own direct to consumer marketing, we have specific messages literally down to the geography. standpoint where in some states we target Medicare patients more than than others and other states we target pediatrics and others. And then we analyze the effectiveness of those ads the return on those investments and then adjust from there. I think 2022 we're in an interesting year because we're going through a product launch that really isn't going to affect our behavior. We have to we have to get more users on the G6 system as we go. and then some of those ads will ultimately shift over to G7. But we're not going to slow down, and we're not going to create anticipation. We'll market what we have, sell what we have, and then as time comes, we'll pull the switch and go over.
spk19: And our next question comes from Matt Taylor from UBS.
spk11: Hi. Thank you for taking the question. So I wanted to ask you more about the dynamics of Dexcom's One, and we're hearing about Libre 3 being rolled out more broadly. Are you seeing anything different on the competitive front? And maybe talk about how you're going more head-to-head with Dexcom 1. I'd love for you to just flesh out those dynamics and the opportunities it's creating for you now that you didn't have before.
spk16: Well, again, let's remind everybody our original Dexcom 1 launch is in four relatively small countries. The results have been very good. We launched it as only an e-commerce platform and two of the four countries have now put the standards in place to reimburse for it because of ease of use and the, you know, the acceptance of that product and the price point. So, Dexcom One does give us an opportunity, first of all, to expand in new geographies where there may not be reimbursement, where the path to reimbursement would be difficult and there's not a lot of integrated systems. We look forward to that as a geographical expander. where we don't have infrastructure. The other opportunity we have with Dexcom 1, in all honesty, is looking at a possible two-product strategy in some geographies where we believe we can support our G-series for those intensive insulin users, particularly those who are on partner systems and integrated systems and those who need all the share and follow function, pediatrics in particular. There's another population that may not need all those features, and in those geographies, we believe Dexcom 1 is an excellent product offering that could round out our portfolio very nicely. As far as Libre 3 rolling out, we haven't seen that much of it so far. I know there's been a lot of announcements. It was approved several years ago, so we'll see how that rollout goes.
spk19: And our next question comes from Larry Beagleson from Wells Fargo.
spk10: Good afternoon. Thanks for taking the question. Just one for me on G7 and the OUS launch. Kevin, I heard you say initially it'll be a limited launch. What does that look like? How many markets? How long is a limited launch? And how should we think about the ramp of G7 once it is approved? Thank you.
spk16: Our limited launch will be a relatively short period of time and really focus on one geography primarily. And after that, we'll then roll it out to... Really, the larger markets, the larger more reimbursed markets and the larger markets where we can get reimbursement very quickly and then go down to the smaller ones. So we again have the geographies divided up in tiers. Tier one countries first, then tier two and tier three along those lines. And that will roll out over the course of 2022, certainly to the larger markets. Then the other geographies will come after that.
spk19: And our next question comes from Joanne Wench from Citibank.
spk21: Thank you very much. I just want to double check two things. I want to make sure I saw either at the earlier presentation in January or today, your patient volumes in the United States are up 30%. Is there a similar number you can share outside the United States?
spk05: Yeah, so what we had mentioned is in the U.S. they were in the high 30s, and globally they were also in the high 30s. And so that's the two numbers. So we gave you the global ones, certainly. in early January, and then today we mentioned the U.S. was also in the high 30s as well.
spk21: Okay. And could you remind us what your view is on pricing headwinds for this year and if and or they roll into next year?
spk05: Sure. Yeah. So this year our pricing headwinds we had talked about, what we call channel mix, was really around $250 million, $200 million in the U.S. and about $50 million outside the U.S. We came in a little bit light of that this year. but generally in line with that. And we expect similar type mixed headwinds into 2022 and then dissipating significantly as we move into 2023.
spk19: And the next question comes from Jason Bedford from Raymond James.
spk06: Good afternoon. I wanted to ask about the U.S. business in the fourth quarter. It's been about a month since you last updated investors. You mentioned COVID a couple times on the call, but is there anything else you could share with us with respect to kind of U.S. growth, which was obviously a bit slower than the prior three quarters?
spk05: Sure. Yeah, thanks, Jason. Appreciate the call. So, you know, what we saw from a growth perspective is about 15%. It was a little bit slower from a growth revenue dollars perspective. Now, we did see unit volumes in the high 30%, which you know, indicates that the underlying patient base continues to be strong. I think the one thing that we did see, and I think you referenced it earlier in your question, was we didn't hit our new patient targets. We still had near a record new patient add, and so it was still a solid addition, and we're still very happy. But we did have some challenges getting into the primary care physician offices, and, you know, Kevin alluded to it earlier. He was out in the field, and when Omicron was really running at its height, a lot of those offices were really not seeing outside visitors. And so that creates a little bit of a challenge as you're ultimately getting to know these physicians and getting them to ultimately understand how to use the product. That was the predominant driver of what you saw in the Q4. And in our early calls, when we kind of released early numbers, we had mentioned that and we've confirmed that over the past few weeks, is that was predominantly the driver. As Omicron dissipates and we're able to get back in front of these primary care physicians, We remain bullish that folks will ultimately adopt the technology, similar to what you've seen prior to that. But that was really the predominant driver, nothing really beyond that.
spk16: And the only thing I'd add to that, Jason, again, these volume numbers still remain very high. So again, as channel mix shifts, the growth rate is lower than the volume numbers. Add to that the fact that our NPS scores are higher than they've ever been. So patients are very happy and satisfied with the Dexcom experience. which leads to them staying on the system and also being on the system more time. So as you look at revenue factors going forward, two of the biggest ones are patient retention and utilization, and we're doing very well on that front. And so, you know, that pretty much sums it up.
spk19: And the next question comes from Matthew Blackman from Stiefel. Your line is open.
spk01: Good afternoon, everybody. Thanks for taking my question. I've got one for Jeremy on the operating leverage you're guiding to in 22. How should we think about where that leverage manifests in the P&L? Is it disproportionate to the SG&A side because you're scaling into those large Salesforce additions, or is it skewed to R&D because G7 costs are rolling off? Just any help on how to think about the moving parts there. Thanks.
spk05: Sure. Yeah, no, it's a fair question. And it's split about 50-50. I think what you're going to see is you're going to see us leveraging mostly the G&A line and the SG&A line. We'll continue to make sure that we're allocating funds to sales and marketing. But you're going to see us leveraging the G&A line and continuing to do so. And then you will see some of the fall-off on some of the R&D side. As we leverage R&D and as we post G7 launch, we don't have to incur as many costs associated with a launch establishment. So think about it 50-50 across both of those and G&A, not S&M and R&D.
spk15: And our next question comes from Marie Sebald from BTIG. Hi, thank you so much for taking the questions. I wanted to ask a question about, you know, the Salesforce progress. I think it was about a year ago that you doubled the Salesforce and the Obviously, outside of the Omicron challenges here more recently, we'd like to hear how their progress has been and what else might be needed at this point. Thank you.
spk16: We're really happy with the efforts of the sales team. And again, I got out in the field for the first time this week and just had a couple of meetings with some regional teams. I'm very impressed with the quality of the people we were able to bring on. Dexcom is a name here in the US as one that attracted great candidates and literally there were thousands of people that applied for these jobs. We very much had our pick of the cream of the crop. They're all getting very much up to speed. I'm very also impressed with the diversity of the group with respect to experiences. And what we've learned is they brought from their companies. You have some from pharma, some from devices, some from diabetes, some who used to be clinicians. So you have a very different team with very good ideas to go about this. We're confident the team is making very good progress. We missed the opportunity, in all fairness, to have them all together, and I am in particular, to get to know more of them. The growth in new patient starts has not been linear with the expansion of the sales force, but as we get down into these other markets, we can't expect it to be the same because they don't see as many of the people with diabetes as in our traditional endocrinology market. But we're happy with the growth that they've achieved. We have very ambitious targets for next year. What might be needed in the future is something we debate a great deal internally. We're happy with what we have now, and let's let this play out for a while longer before we make any changes. I don't see anything changing right now. If anything, again, this is all about awareness on our side. And if what we need to generate more awareness has more feet on the street, that's the direction we would go. For right now, we don't feel that way, but we may in the future. So we'll see. We're never adverse to trying pilot programs in specific geographies to see if another option can work. And we will do that all throughout 2022. And if something sticks, we'll move in that direction.
spk19: And our next question comes from Chris Pasquale from Guggenheim. Your line is open.
spk08: Thanks. I wanted to follow up on the factors impacting 4Q and what lessons we should take from that as we look at 1Q. So you said COVID was the main headwind, but your channel mix has also changed a lot over the past couple of years. Do you think that's resulting in less seasonality than you used to see in the year end? And then the corollary to that would be, you know, should we expect the typical step down in one queue? Could it be more muted because of that reduced seasonality? Or was COVID really more of a factor in January than it was in December? Just help us sort of balance those different factors. Thanks.
spk05: Sure. Yeah. No, I'm happy to walk through it. So you are correct. As time moves on, the move of the commercial business certainly more and more to pharmacy than DME should give us more of a situation where Q1 and Q4 are less pronounced. And so you are 100% correct there. And over the longer haul, that's where we expect it to go. In terms of seasonality for this quarter, you know, we do expect it to be relatively similar to last year. And again, that's just more of us trying to navigate through, one, that migration, but two, you know, the Omicron variant this year was certainly more than we saw in January of last year. And so we're really comparing year over year. And so I think it's fair to say that. So we expect, you know, that those two things really offset each other. So you see a little bit of a seasonality in this Q1 of 2022, similar to that you've seen in the past. Longer term, you are correct, and we will expect absent all macro factors that ultimately impact people's ability for movement and seeing physicians, et cetera, it will migrate to more of that situation. But we'll keep you posted as years get forward about that seasonality. For now, that's our expectation.
spk19: And our next question comes from Margaret Cazor from William Blair.
spk04: Hi, everyone. This is Brandon on for Margaret. I just wanted to ask you a question on the type 2 basal population and maybe some of the non-intensive patients. I can appreciate you guys are still early there. but you're pretty far in with the mobile data. So maybe you've talked to some, gone out in the field and talked to some endos or some other physicians, and maybe you have a few patients already on Dexcom that are using. And so I'm curious what early feedback you're getting from those less intensive type 2 patients in terms of either utilization, pricing, or demand, anything that kind of early there that we can read through what the commercialization might look like going forward.
spk16: Well, I'll start with basal insulin because the ADA in their recent guidelines came out and recommended CGM continuous use for people on basal insulin, which is a far departure from where we were in the past. This is very encouraging for us because the fact that this group has now recommended that is a big step for us going forward. And as far as that population utilization in our mobile study and even in the other things that we've heard, they have no problem wearing CGM all the time. For non-intensive patients, you know, we've had our program with Level 2 at United Healthcare. We've had other programs with Intermountain Health, On Duo, Well Doc, a number of them. And the results remain the same over and over again. Patients on CGM do better than those who are not. And the information provided by CGM enables them to make the proper changes to have better overall health, very much like I said in my prepared remarks earlier. We see A1Cs go down because people know what the consequences of their meds, of their exercise, of their diets, of sleep, of all these factors has on their overall health. With respect to the pricing and the business model, we've often said we are solving a different problem when we're going after type 2 less intensive diabetes, and we therefore think the pricing model will be different than the current product that we have. And we are working on what that optimal solution is right now, and you'll hear more from us on that front over the course of 2022.
spk19: And our next question comes from Celia Furlong from Morgan Stanley.
spk20: Good afternoon and thank you for taking the question. I wanted to ask on Dexcom 1 again, just how you're thinking about further geographic expansion in 2022 as well as expectations for relative contributions to new patient volumes OUS in 2022 and where you think this can go over the longer term. And thank you.
spk16: I'll start, and Jeremy can maybe have some more specific numbers after I'm done if he's got any. Again, as I said earlier, there are two great uses for Dexcom 1. The first one is those geographies where we're not and where we don't have infrastructure or a distribution arrangement with a distributor or another distribution partner lined up. We can drop an e-commerce platform in there, have cash pay payments, patients, and we can get them on the system and we can go. Our results in our four initial countries have been outstanding, and so we'll have other new geographies up over the course of the year like that. They will not have major contributions to our revenue, but they do expand our footprint and do position us ultimately to get reimbursement in those countries. Again, as we've seen in the first four where we launched it, we now have reimbursement in process for two of those. The other opportunity for Dexcom 1 is in many of the major established markets, particularly OUS, we have an opportunity with Dexcom 1 to implement a dual product strategy. Our G-Series does a lot more than our Dexcom 1 product with connectivity, share and follow, the predictive alerts and all the other things that we have in that system. We believe it merits a different price point. Again, it solves a different problem. It's a different use case. We will very opportunistically pick geographies where we could launch Dexcom 1 and augment our business in those geographies, again, adding more patient volume and more revenue to the process. As far as giving you numbers or plans, I'm not going to give you all of that. That's on the strategy side and something for us not to unwind on. to the world, but suffice it to say those plans are in progress. I don't know, Jeremy, if you have anything to add.
spk05: I think the safe bet is just to assume multiple country entries with Dexcom 1, and we'll get you a little bit more color once we're into those countries. We'll hold those back for strategic purposes.
spk19: And our next question comes from Kyle Rose for Canaccord. Your line is open.
spk02: Great. Thank you for taking the questions. So, you know, a lot's been asked, but I'd I'd like to just touch on the longer-term product pipeline. Look, I realize you haven't launched G7 yet, so you're probably not going to be thrilled with me asking about what's next. But with G7 launching over the course of the next 12 to 18 months globally, you've got Dexcom 1 scaling as well. What should investors expect from a product development and a product launch perspective? Is it combination products? Is there different analytes that you're going to be testing for? Just trying to really understand what the medium to longer-term you know, hardware type of product pipeline looks like here.
spk16: I love the what's next question, but these guys have kept me off after 15 minutes, so I'd have to stop. You know, first of all, let's look at G7 and everything that's changed. We have plans in place to modify and make everything with G7 better already. We have, for example, a major cost initiative to reduce our manufacturing costs even before they are You can expect us to be very diligent in efforts to get that up to a 15-day life from a product perspective because that certainly has a big impact on our P&L. We have, for example, alternative electronic structures, all those types of things going on. We've never stopped improving our sensor technology. You know, so all of these things we continue to work on in our core business. At some point in time, there may be some diminishing returns, particularly given the accuracy of the data on the current system. So we balance that. But a lot of these efforts, again, we focus all our product development, performance, patient experience, or customer satisfaction and cost. And we look at all those buckets. I can tell you there will be a lot of software initiatives here going forward with the G7 platform. We believe with Dexcom 1, we've merely scratched the surface of our ability to differentiate products through different software experiences, again, creating different business models and expanding our reach. With respect to other analytes, we continue to study that. We've studied that for quite some time. What we have to determine is what are real commercial markets for us. And in all fairness, we haven't found anything that compares to glucose yet. And we have a lot of things that we need to conquer on the glucose side. But we do have studies going on for some of the other analytes that you certainly be familiar with that you've heard others talk about. It just becomes a question of us for when and do we have the right platform and what changes we need to make to it to get there. So there are numerous things in the pipeline. Don't ever think we've stopped here. It's going.
spk19: And our next question comes from Steven Litchman from Oppenheimer. Your line is open.
spk07: Thank you. Kevin, maybe building on that, you talked today about the steps you're taking now on basal only with the mobile data and ADA recommendations in hand. Last ATD, we saw some positive data on non-insulin type 2. What are the next steps here in 2022 in terms of going after that opportunity and even pre-diabetes?
spk16: You know, it is part of our strategy, and we build our pillar around four, you know, we call it the four piece here. You've got the physicians, you've got programs, you've got all the clinics who do this, and you've got the patients themselves. And we're attacking on all four fronts with the diabetes programs. We've had positive data from Level 2. We have other companies we know will be reporting positive data in the near term and using this product on Type 2 patients who are not on insulin. The outcomes remain strong. We're going to attack it on all four fronts. We believe the experience for these customers, again, is gonna be a different experience than those who are intensively using insulin. And it's an opportunity for us to use our software capabilities to design a different experience for them that will keep them engaged. The key to any technology, as far as providing a good outcome, is engagement. And one of the things we've been very successful at, if you look at all of our studies, where we have these incredible outcomes The users of our systems remain tremendously engaged, and we are trying to build a type 2 solution around that level of engagement, and that's why we're taking some time as we look at this product opportunity. So you'll see us attack on all fronts. I don't know, Jeremy, if you had anything to add to that, you're welcome to.
spk05: No, I think one of the things that if you think about this opportunity that we really prepared ourselves for, even beyond our product and our engagement there, is some of the software with connectivity that we've built. And so the real-time API, for example, is our way of trying to move into this market and think about, well, if you're building an app and your app is built around whatever that happens to be, whether it is, to your point, pre-diabetes, health and wellness, we want to be able to be the partner of choice. Now, we have to work on labels and things around those lines, which we'll absolutely do over the long haul. But we've really set ourselves up to be what we believe is the partner of choice, and we'll continue to do so. So that's another way we're going about it, which I think you'll continue to see us push down that path as well.
spk19: And our next question comes to Josh Jennings from Cowen.
spk09: Hi. Good evening. Thanks for taking the question. I just wanted to ask about gross margins and just the outperformance in 2021. And if you could just run through maybe, Jeremy, just some of the drivers of the outperformance relative to your initial guidance. and why some of those drivers couldn't repeat in 2022. I'm assuming that part of it is the G7 launch timing in 2022, but also just was curious about how the acquisition of international distributors contribute to the margin performance in 2022, and really just thinking about whether there's upside to this initial guidance range for 2022. Thanks so much. Sure.
spk05: Yeah, absolutely. you know, let's think about 2021. And just as you think about that overperformance, really, there's a couple real drivers of it. It's one, we've built a lot of automated machinery. And as a result of that, yields have gone up over time. And so you've seen that the team has done an incredible job of building those yields, really driving those through. And that, you know, the reduction of waste and the increase of efficiency and the increase of the absorption of those fixed costs really was an incredible step forward. Also, through the through our experience with G6, we've reduced our warranty exposure. And as you have warranties, you're sending out replacements, you're sending those out. We're starting to maximize our logistics departments and reducing those freight costs ultimately and fulfilling it. So all of those things we're all hitting on and maximizing those for G6. Now, when you launch G7, you've got brand new machinery. So you've got to go through the yields process again. It's a new product, and so you actually have to work through the warranty and how you ultimately navigate that. And so when you get to the question, well, what happened in 2021, that's exactly what happened. The team did an incredible job. And in 2022, as we launch G7, we're going to go through that journey. And as you saw with the step back that you saw when we launched G6, there was a step back, and then we were able to navigate our way through it. We expect to be able to do the same with G7. However, in the year of launch, we know we're going to have to navigate through that. And so What could be potential upside to that could be effectively if we're able to navigate through either yields or warranties quicker than expected, which again, dovetails into how quick regulatory approvals happen, et cetera. So that's the primary driver. Over the long haul, there's no reason to believe that we can't continue to be more efficient over time. G7 was designed with efficiency in mind. And we have tons of different work streams that are going on around how to maximize, Kevin referred to it earlier, on how to maximize the cost potential within that line. And so we'll continue to do that over time. We'll get to 2023 when we get there. But over the course of 2022, we're very excited about launching G7 and then going through the improvements.
spk19: And our next question comes from Frank Pino from Jefferies. Your line is open.
spk14: Hi. Thank you for taking the question. I guess just looking at your user base, it looks like you've grown that by three to four times over the last several years. I'm wondering to what degree that's sustainable given G7, Dexcom 1, prediabetes, obviously a lot of things on slate. And is there a point that you see where OUS revenues eclipse U.S. revenues? Thank you.
spk16: You know, in our long-term plans, we certainly show OUS revenues becoming a larger portion of our overall revenue picture than they are today. We don't have them eclipsing U.S. revenues in our current five-year plan because we have so much opportunity in the U.S. market. I think the user base is a great question because over time, the characteristics of that user base changes as we are into more, for example, Dexcom 1-type products where it's an e-commerce platform. We don't know how sticky those patients are going to be right now. We have developed a great model for stickiness with respect to our current user base And we are designing our products and our software experiences to maintain that type of engagement in a model where people can afford to pay for the product. You know, for many years, the number one reason an individual quit using Dexcom was cost. And we are trying to knock that barrier down more and more as we speak. We need to make sure we address those issues going forward. Our customer experience team has been fabulous at identifying things we can do to make our product better and and increase that base and have them stay. It's not just getting them. Getting the users is one task, but maintaining them is another one. And our record is unlike anybody else's in this industry. We're really good at this.
spk05: Yeah, and I think just to your question in terms of, you know, how is it repeatable over time in terms of the patient base, look, I mean, a majority of Dexcom's existence has been really focused on the intensive insulin user. But we know that there's an unmet need as you move into a basal user, and that's with the mobile study. And that's a large increase in addressable population. We also know that the type 2 space, there's a huge demand for that product there, but it's a question, as Kevin referred to, ultimately how do we go to market in there? And we have some great ideas about how it should look, and we're working through those. So I think we're in a pretty good spot, but we're navigating through that. And then to your point, the prediabetes population and health and wellness population is huge. And so it's really a matter of us getting the right product into those folks' hands. And I think that's what you see us doing over time. All the investment in software and platforms is really designed around how do we engage not only our existing population and engage them better, but also engage these new population, which means the TAM for this potential product is incredibly large.
spk19: And that concludes our question and answer session. I'll turn the call back over to Kevin Sayre for final remarks.
spk16: Thanks a lot, operator. You know, as we spend today looking back at 2021, I just want to spend a minute and acknowledge our teams today. We have a commercial team who generated 26% revenue growth and volumes that far exceeded that in a time when we're putting them through rapid expansion efforts as we doubled the U.S. sales force, acquired distributors, and did a number of things to make it more difficult. We have an operations and quality group who during all this time when the world is talked about, Component shortages and not being able to produce product has delivered every single month. In addition to delivering, we've opened a large regional distribution center in Arizona, and we're building our factory in Malaysia, and we're hitting our schedules and timeframes there. You look at the innovation at this company from R&D clinical and quality groups with respect to the work and efforts on G7. As we got those filings in, and those filings are pristine with respect to the data that we presented, And then we're getting up and ready to scale on the upside. And then just, you know, from a day-to-day basis, our HR group has walked us through thousands of hires literally in the past year. And the finance guys haven't missed a beat. And IT, as we've moved to home, we've not had any trouble. This has been a great year for Dexcom. And a lot of people have contributed. It's never just one group or one thing. So I just wanted to thank everybody, acknowledge everybody's accomplishments, and we look forward to a great year next year. Thanks. Thanks.
spk19: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
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