DexCom, Inc.

Ladies and gentlemen, welcome to the Dexcom fourth quarter 2022 earnings release conference call. My name is Abby 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 one on your touchtone phone. As a reminder, the conference is being recorded. And I will now turn the call over to Sean Christiansen, Vice President of Finance and Investor Relations. Sean, you may begin.

Thank you, Abby, and welcome to Dexcom's fourth quarter 2022 earnings call. Our agenda begins with Kevin Sayre, Dexcom's Chairman, President, and CEO, who will summarize our recent 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. At that time, we ask analysts to limit themselves to one question so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our fourth quarter performance on the Dexcom Investor Relations website on the events and presentations page. With that, let's review our safe harbor statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, and expectations about future events, strategies, competition, products, operating plans, and performance. All forward-looking statements included in this presentation are made 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 of 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 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. I'd like to start by reviewing some of Dexcom's key accomplishments in 2022. Total revenue grew 20% on an organic basis driven by another year of record new customer starts. This translates into more than $475 million of organic revenue growth compared to last year as we saw another step forward for CGM awareness and Dexcom brand loyalty. We added nearly 450,000 Dexcom users to our base in 2022 and ended the year with close to 1.7 million customers globally. Our team did a great job generating this customer engagement and growth while simultaneously enhancing the scale and efficiency of our organization. Our operations team demonstrated world-class performance this year, ensuring adequate supply in a difficult macro environment and providing on-time delivery rates of greater than 99%. We drove over 500 basis points of operating expense leverage in 2022, despite broad inflationary pressure. This was not the result of reactionary cost cutting. Instead, it reflects decisions made years ago at our company to foster a culture of cost discipline as we grow. From a strategic perspective, we will look back at 2022 as a pivotal year for our company. we advanced several of our most important initiatives, including multiple new product launches, significant access wins, new market development, and a further extension of our market-leading performance and connectivity. Everything we achieved this past year helps build a foundation for years of sustainable growth ahead. For example, In October, CMS published a proposed local coverage determination that would meaningfully expand access to CGM technology for the Medicare population. This proposal would broaden coverage to include people with type 2 diabetes using basal insulin only, as well as certain non-insulin-using individuals that experience hypoglycemia. This result was led by the publication of Dexcom's mobile study. and furthered by a strong partnership with the diabetes community. We heard broad support and enthusiasm from key stakeholders during the comment period and expect a ruling to be finalized in the coming months. As a reminder, we size the Basel-only Type 2 population of 3 million people in the United States. Between this Medicare ruling and broader commercial coverage, which we expect to follow shortly, this population has the potential to nearly double our addressable reimburse market in the United States. Outside the United States, our team has been equally focused on building greater access. We drove many positive coverage decisions from global payers over the course of 2022. These access wins were in response to the strong clinical evidence we continue to generate, as well as the introduction of our portfolio strategy in many of these markets. 2022 was the first time that we brought multiple Dexcom products to a single market, and this strategy has enabled us to significantly extend our reach. By offering multiple products, we can provide a unique value proposition that meets the specific needs of our diverse base of customers, clinicians, and payers. A great example is in the UK, where Dexcom One was added to the national formulary for all people with intensively managed diabetes. Collectively, our international access initiatives have helped us expand our rainburst coverage by 3.5 million lives over the past 18 months. 2022 will also be remembered as the year of G7. We received both CE mark and FDA regulatory clearance for G7 and initiated a full launch outside the United States. The feedback from our customers has been everything we'd hoped for. We're hearing consistent praise for the new features such as the 60% smaller form factor, shorter warm-up period, and more engaging and consumer-friendly app. Perhaps the most encouraging is that 97% of initial users surveyed have found G7 easy to use. We designed this product to simplify the lives of our customers, and we are thrilled to see that emphasis resonating. All of this leaves us incredibly excited to bring G7 to the US. In fact, we began shipping this week into our US distribution channels to support our rollout. We have quickly ramped up production capacity to support the launch, with our automated G7 lines already capable of producing more than 100,000 sensors a day. We want to get G7 into the hands of as many people as possible. So in conjunction with our launch, we've established a bridge program to simplify access for our early adopters. This program will provide new and existing customers access to G7 immediately and allow us to go to market in a broad and expedited manner. Behind the scenes, we continue to advance our discussions with payers to build reimbursement. Our conversations have progressed very well, and we are well on track with our G7 coverage plans. More importantly, we are not going to be bashful about what we think of this product. G7 is the new gold standard in diabetes technology. This is the most accurate, easy-to-use, and accessible CGM ever produced. And we want to share this message with the world. As a result, we will be releasing our second-ever Super Bowl commercial this Sunday. We're again teaming up with one of our most recognizable Dexcom warriors, Nick Jonas, to announce that G7 is here. This is a great opportunity to connect not only with our loyal G6 users, but with the millions of people with diabetes that still do not use CGM. We want these individuals, their caregivers and their loved ones, to know that Dexcom can help them live healthier lives. With that, I'll turn it over to Jeremy for a view of the fourth quarter financials.

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 fourth quarter of 2022, we reported worldwide revenue of $815 million, compared to $698 million for the fourth quarter of 2021, representing growth of 20% on an organic basis. As a reminder, our definition of organic revenue excludes currency in addition to non-CGM revenue acquired in the trailing 12 months. U.S. revenue totaled $606 million for the fourth quarter, compared to $517 million in the fourth quarter of 2021, representing growth of 17%. Our recent momentum in the U.S. continued into Q4 as we delivered another strong quarter of volume growth and solid new customer starts. We were very encouraged by the prescribing trends we saw in the fourth quarter, and we closed the year with around 75% of our commercial scripts going through the pharmacy channel. This represents the endpoint of a multi-year channel journey. and we believe our current structure maximizes access for our users as the most covered CGM and supports greater customer choice in how they access the most accurate CGM. International revenue grew 15%, totaling $209 million in the fourth quarter. International organic revenue growth was 27% for the fourth quarter. We continue to take share in international markets as the introduction of new products and access wins over the past year leave us in a wonderful position to compete for new users. For example, in response to the sizable UK coverage decision we received last August, our revenue growth has accelerated over the past two quarters in that region. Even though this was already one of our largest OUS markets, there has been a clear uptick in demand following this broad expansion of access. Our fourth quarter gross profit was $544 million, or 66.7% of revenue, compared to 67.7% of revenue in the fourth quarter of 2021. Foreign currency was an 80 basis point negative impact on gross margin in the quarter. Operating expenses were $372 million for the fourth quarter of 2022 compared to $461 million in the fourth quarter of 2021. You may recall that in the fourth quarter of 2021, we recognized an $87 million expense associated with a contingent milestone under the 2018 Collaboration and License Agreement of Verily Life Sciences. Absent this, our operating expenses for the fourth quarter of 2022 would have been relatively flat year over year. This represents another quarter of very disciplined cost management as we generated 800 basis points of OPEX leverage. Operating income was $172.1 million, or 21.1% of revenue in the fourth quarter of 2022, compared to $12 million, or 1.7% of revenue in the same quarter of 2021. Even excluding the verily charge from 2021, this highlights incredibly strong operating expense leverage in our current year, which more than offsets our step backwards in gross margin. Adjusted EBITDA was $237.1 million or 29.1% of revenue for the fourth quarter compared to $67.3 million or 9.6% of revenue for the fourth quarter of 2021. Net income for the fourth quarter was $136.3 million or $0.34 per share. We remain in a great financial position, closing the quarter with approximately $2.5 billion worth of cash-in-cash equivalents. This cash level provides organizational flexibility to support our organic growth opportunity and assess strategic uses of capital on an ongoing basis, such as the accelerated share repurchase program we executed in 2022 and ongoing development of our Malaysia manufacturing facility. Turning to 2023 guidance, as we stated last month, we anticipate total revenue to be in a range of $3.35 to $3.49 billion, representing growth of 15% to 20%. This reflects another year of strong underlying volume growth, which will again exceed our revenue growth rate for the year. To help provide some insight into the makeup of our guidance this year, we recently provided some additional color around our expectations. First, earlier on this call, Kevin discussed our plans to support our initial G7 customers with a bridge program. We expect this program to impact our revenue per customer early in the year as we provide G7 access at an affordable cash rate as we build reimbursement. We expect this impact to narrow over the course of the year as broader coverage is secured. Internationally, we estimate that around one-third of our new customer starts will come in through the Dexcom One platform. Therefore, this business will start to have a more material impact on numbers this year as that customer base builds. For the Type 2 Basel opportunity, we anticipate CMS reimbursement to be finalized for this population by mid-year and begin contributing to our results in the second half of 2023. We expect this population to contribute approximately 1% of our total revenue in 2023. Turning to margins, we expect gross profit margin to be in a range of 62% to 63%. This assumed year-over-year decline is primarily related to the impact of the broader G7 launch. As with any launch, we will initially be running at lower production volumes, and it will take some time for our new manufacturing lines to scale. Importantly, this is a temporary dynamic, and we still expect G7 product costs to be less than G6 at scale. Despite the step backwards in gross margin, we are guiding for operating margins to be relatively flat year-over-year at 16.5%, which reflects another 150 to 250 basis points of operating expense leverage in 2023. This is the result of ongoing cost initiatives at our organization, which continue to drive leverage even as we allocate greater investment to support our global commercial infrastructure and G7 launch. Finally, we expect adjusted EBITDA margins of approximately 26% in 2023. With that, I will pass it back to Kevin.

Thanks, Jeremy. To summarize, we are incredibly excited about the opportunity ahead with G7, and we're rolling out product to our distributors as we speak, and we're ready for a big launch in the U.S. I would now like to open up the call for Q&A.

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

Thank you. We will now begin the question and answer session. If you have a question, please press star 1 on your touchtone phone. If you wish to be removed from the queue, press star 1 once again. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. And we will pause for just one moment to compile the Q&A roster. We will take our first question from Jeff Johnson with Baird. Your line is open.

Thank you. Good afternoon, guys. Let me ask you just a two-part question on G7, if I could. Kevin, on your website, you talk about adding more commercial coverage for G7 every day. I guess, could you give us a number of what percentage of covered lives or lives are covered currently in the commercial channel for G7 and where you expect that to go maybe over the next quarter or two? And I think Libre3 has now been in the pharmacy channel for about four months or so in the U.S., You know, obviously your business looks like it's probably safe with the AID users in the Medicare channel, but for your standalone T1 users, have you seen any change in your attrition rate? Anything as we kind of look at that Libre 3 versus G6 dynamic that has changed in the last few months that Libre 3 has been out there? Thank you.

Thanks, Jeff. Yeah, I appreciate that. This is Jeremy. So, you know, to your question on coverage, You know, we're still in the throes of the commercial DME and the Medicare coverage. We talked about on G7 that taking about 90 days. But on the pharmacy side, we're actually a little bit ahead of schedule. Kevin referenced we're well on track to the point where we had talked about, you know, about a $30 million-ish hit in Q1 as a result of our bridge program. That number is more like $15 million now, and that's because some of those pharmacy contracts are coming in earlier. So we are making great progress, and we continue to get that every day, and signs lead to more and more contracts coming over maybe even ahead of schedule uh in terms of the question then on you know competitive dynamics maybe i can start and then kevin will obviously have a few thoughts there you know we had a record new patient start in q4 if that gives you any context to you know we had another solid new patient order so you know while we have seen competitive product out there we continue to do very very well with g6 to the point where we have seen incredible strength there and that's of course on the heels of a g7 launch which as we referenced, is coming out here in the next coming days. Kevin, I don't know if you had anything else to add there.

No, I would tell you what we're also hearing is a great deal of excitement from our user base for G7. So with respect to your question regarding how are our G6 users doing, they're very anxious to get G7 and very excited to go. So we're feeling good about where we are right now.

Understood. Thank you.

we will take our next question from larry bagelson with wells fargo your line is open uh good afternoon thanks for taking the question um kevin i wanted to ask about the ramp uh in the type 2 basal population i think people were a little surprised you only expected one percent growth contribution in 23. i guess on it that would be about 60 million dollars on an annual run rate um at the last investor meeting you know you said you expect 700 million in revenues in 2025 from sources other than insulin-intensive patients, and I think this was mostly type 2 basal. So the question is, you know, do you still expect $700 million by 2025 from these non-intensive sources? And, you know, how do you see the ramp in the type 2 basal population? Thanks.

Well, Larry, I'm going to talk for a bit. I'll turn it over to Jeremy. Our initial estimates, it's 1% of our total revenues would come from that. And that's a reasonably sized number. We plan for a July, you know, second half of the year approval and rolling it out from there. It may go faster than that, but we've been conservative in our estimates and we will make every attempt to beat those. As we look out to 2025, that non-intensive insulin space is not just basal users. We believe our CGM product will be very valuable amongst a number of markets in the type 2 space and also in metabolic health. So it's not just basal users there. It's a lot more than that. And many of the basal users, as you well know, move up to be intensive insulin users as well. So we view that population as moving and shifting with us as they go. Jeremy, do you have anything else?

Sure. Yeah. Larry, so the $60 million number you're referencing would assume, say, everybody started on July 1st and they went through the end of the year. The reality is that some folks will start in July, some folks will start in December. And so really the exit velocity is much higher than that on a run rate perspective. If you were to blend it, average it over the course of the year, you're really only getting three months of revenue contribution. And so you kind of do the math there and the exit rate's a little bit higher than I think what you're implying. So we are really, really bullish on it. But it is a recurring revenue business. So what we need to do is get that coverage out there, get the scripts in. And so look, I understand the question. It's a big, big market with a big, big opportunity. We plan on playing in it, and we plan on playing it in a big way, but obviously we want to be prudent around guidance, and certainly if things go better than that, and we'll always try to do so, we'll report back to everybody.

And we will take our next question from Margaret Cazor with William Blair. Your line is open.

Hey, good afternoon, everyone. Thanks for taking the questions. I wanted to maybe take Larry's question a step further and just kind of talk about the potential pace of adoption within type 2 basal, maybe not just this year, but really moreover in 18 months, you know, 24-month period. And is it fair at all to compare it to, I guess, what a traditional type of insulin diabetic population is? Is it going to be easier or harder, I guess, to drive adoption or other guardrails and penetration? And then just because you brought up metabolic health and non-insulin diabetics, you know, 2025 is just around the corner. So should we expect, I guess, a more meaningful impact from here, you know, as early as next year? Thanks.

Yeah. So let me start on the basal and then I can turn it over to Kevin, you know, from that perspective. And so, you know, the ramp in basal is going to be a bit interesting. We'll give you kind of the way we think about it. You know, you know, I think about it as a type, I generally start with type two intensive and you think about that ramp and, You think about coverage and how that takes place. And if the coverage takes place over a similar time, you'd expect a relatively similar ramp. Now, I'd caveat that by saying there's more awareness today, and hence, you know, the Super Bowl commercial is a good opportunity for us to continue to raise that awareness. However, the place in which the basal patient seed is a wider swath of physicians. And so we don't have an exact crystal ball here. If you're using prior analogs, the best analog is type 2 intensive, would be about the adoption rate. But I think as time moves on, we'll be able to give you a little bit more color. But that's kind of our best crystal ball. And then maybe, Kevin, if you want to give just some general thoughts about metabolic health and the opportunities there.

No, as we look out to the future, Margaret, particularly with our easy-to-use G7 platform that we're launching today, we believe our future is very bright. As we deal with metabolic health, we've changed our mission statement to help people control their health, not just diabetes anymore. We continue to see very positive results from several programs are using sensors to assist people. In these endeavors and over time, and particularly with you know type two management and all the type two drug alternatives on the horizon. We believe cgm becomes very important part of that health equation and we're continuing to work on product offering the business models that will be differentiated from what we do today and geared towards that population we're really excited about the opportunity. And it'll continue to mature over 2023, and then we'll see what happens in 2024. We've got a lot of basal patients to reach first, so let's go after them, and then we'll continue to move to the other areas as well.

And we will take our next question from Robbie Marcus with J.P. Morgan. Your line is open.

Oh, great, and congrats on a nice quarter. I wanted to ask about the European or OUS experience. And it looks like you're gaining share, you're doing well. How much of that is being driven by G7 and what's the feedback there? And any head-to-head color you could give us versus Libre 3 in the markets where it participates? And then also sort of same question on Dexcom 1 and the impact you're seeing there. Thanks.

I will start off with respect to the sales and the revenue numbers. G7 and Dexcom 1 are still early enough in their launch life cycle that while they're additive, they're not what's driving a lot of the adoption, a lot of the growth that we've seen in European markets. A lot of that's been what we've established with G6, the additional coverage that we've obtained, as I talked about in the prepared remarks. In 18 months, we've added 3.5 million more reimbursed lives. That being said, initial response to G7 has been everything we'd hoped for. People love the app. They love the receiver. Again, in many of these markets, the receiver is a very, very strong tool. My most recent conversation with the G7 user focused completely around the half-hour warm-up. A half-hour warm-up has eliminated 90 minutes of the longest two hours of somebody's life who'd ever used the G6. And certainly, in the comparative front, compared to The hour warm-up, again, it is a much better experience. The majority of our G6 users are new to Dexcom. They're not Dexcom upgrades. I mean, G7 users. I apologize. The majority of our G7 users are new to Dexcom. Some of them come from the competition. Some of them have not used CGM before, but they're all finding it very easy to use and having great experiences. So we're very happy with the product to this point in time. We've done very well.

Great. Thanks a lot.

We will take our next question from Joanne Wentz with Citibank. Your line is open. Good evening, and thank you for taking the question.

So I'd like to spend just a minute on the gross margins and how you anticipate those ramping throughout the year. And then while I know we're sort of early to be thinking about 2024, I do think people are looking at that as sort of a more normalized margin rate, and if you could sort of shed any light on how to think about that. Thank you.

Sure. Hey, thanks, Joanne. I appreciate that. And, you know, you start off with, obviously, the fourth quarter, we had a really strong gross margin. I think it's a demonstration of what's to come with what our teams can do when you give them time with the new product launch. So I think as you think about the year, the cadence for 2023, we do expect in the first half of the year margins to be a little bit lower. And that's because of, as Kevin referenced earlier, the bridge program, certainly that has an impact. But most importantly, it's the launch of G7. Volumes won't be at where they would have been, say, in a more mature launch, and we'll still be going through some of those early manufacturing, you know, scrap and yield challenges we always see. But what we've proven time and time again is if you give our engineering and R&D team time with these lines, they continue to get yields better over time. And so our expectation is as we start to exit the year in 2023, we start to come closer back to that long-term guide of 65% gross margins. And there's nothing longer term structurally that we don't believe, especially as J7 gets to scale, that gets us back to those long-term guides that we've originally provided. So we'll continue to work towards that. Think about 2023 as the first half of the year is a little bit lower as we ramp up those lines in the back half, you start to tackle some of that absorption of those fixed overheads.

Terrific. Thank you. And we will take our next question from Matthew O'Brien with Piper Sandler. Your line is open.

Matthew O' Thanks for taking the question. Just on the bridging program, can you tease out a little bit more, maybe, Jeremy, on expectations there? I think, you know, you'd said 20 to 30 million. You said you're trending better than that for Q1, which is great to hear. You know, I don't think you ever said how much the bridging program was going to cost you for the full year. Seems like it's going to be even better than expected overall versus maybe what you were thinking starting off 23. But then also, you know, bridging is supposed to be more of a headwind on the gross margin side, too. And if it's if it's less of a headwind, you know, maybe that helps out the gross margin profile a little bit more, maybe sooner than expected. So I'm just wondering, like, you know, based on all these things on the bridging program specifically being better than expected, Should we start to creep up a little bit more as far as our expectations for top line growth and then even gross margins for the full year? Thanks.

Sure. Yeah, I don't think we're at a point where we'd necessarily change our guidance. But let me take your question head on, which is in isolation, what does this do? So certainly what the bridging program, what this effectively means is we have contracts in place a little bit more ahead of when we ultimately expect it. And so ASPs, will be a little bit higher, and that's as a result of most folks going through coverage as opposed to the bridging program. So that does a couple things. Certainly it does help revenue, and it does help margin. That all being said, we're not changing guidance for the year, but I think what this does mean is, one, it's a great thing for patients who want to access the product. We talked about coverage being a key strategy. That's wonderful. It does help longer term for those margin profiles, and while I wouldn't necessarily guide you outside of our ranges, you are correct. It does help on revenue and gross margin on the full year. And the other question was, is how much for the full year? We expected a majority of it, almost all of the 20, 30 million in the first quarter. We do expect a nominal amount in Q2. We haven't expected any of it beyond Q2. Really, a majority of your concern would be in Q1.

Got it.

Thank you.

And we will take our next question from Marie Tibble with BTIG, your line is open.

Hi, good afternoon. Thank you for taking the questions, and congrats on a strong quarter. I wanted to ask a little bit more on kind of the backlog around the Medicare decision-making. I'm very curious how physicians and patients, how aware they are of that decision, whether we might see a bolus of patients sort of come on once that Medicare coverage is in place.

You know, thanks for the question. It will be up to us to drive awareness in that community to make sure people are aware of that decision. There will certainly be those very familiar with Dexcom and with continuous glucose monitoring will be aware of it and will pick it up quickly. But it will be up to us to drive awareness in both communities, the physicians and the users of the product, to go and ask for it and to create that environment So we're not going to sit back and wait. We're going to have to push.

Okay. Thank you very much.

And we'll take our next question from Travis Steve with Bank of America. Your line is open.

Hi. Thanks for taking the question. So U.S. growth the last couple quarters has been around 17%. The second half of the year, I think, was record patient growth for both quarters. So I'm trying to think about X, the contra revs, and for the bridge program. if we should be seeing an acceleration here in the first quarter in the U.S. growth specifically and how that builds over the course of the year. And on the Super Bowl ad, what kind of impact did you see on U.S. new patient starts last time you did that? Thank you.

Sure. Yeah, so I'll start with how we're thinking about Q1. And the way we've generally thought about Q1 is in terms of full-year contribution, absent any sort of bridging program, to be a very similar contributor as a percentage of total year revenue in the first quarter. So that's total company, not just U.S. total company. And then you add the bridging program in and you pull it down from there. And that's generally how we think about the quarter, which is just an indication of continued strong new patient growth. Clearly, we'll be working through driving new patients and driving growth over the course of the year. In terms of the Super Bowl and then, you know, how to think about the Super Bowl and how that contributes, you know, last time we did it, there were hundreds and hundreds of thousands of inbound leads. Not all of those obviously translated into patients, but there was a lot of interest. One of the challenges, though, if you rewind the clock a couple years, is there wasn't as much coverage there. And so I think what we're hoping this time around is, one, the awareness is the most important thing, and the awareness as that gets out there will be very, very helpful. But as coverage starts to come through and we have this bridging program in place, it's a real opportunity to take advantage of it. We're not ready to give exact patient numbers out there other than to say that the return on capital is a very strong investment. And so you should expect we do that math before we sign up for this. And we wouldn't be doing if we didn't expect a return on investment that was commensurate with what you and we would expect. Great. Thank you.

We'll take our next question from Jason Bedford with Raymond James. Your line is open.

Good afternoon. Just maybe an OpEx question. Looks like it's a bit bigger of a step up implied in 23. I know the Super Bowl ad is a contributor, but just wondering if you can comment on kind of what are the sources of the OpEx growth and maybe hit on any planned changes to the Salesforce in support of G7. Thanks.

Thanks, Jason. This is Kevin. I'll take it rather big picture. We'll continue to invest in R&D. Our spend will grow some, but not as rapidly as it has in other years. And quite honestly, as a percentage, revenues probably come down a little bit. Same with on the G&A side. We'll continue to invest in infrastructure and build things out for our continued growth. But a lot of that investing has been done. Our biggest dollar investment, our biggest increases are going to be on the commercial side. And, you know, in all areas, create awareness in the sales force, marketing. Across the board, we'll be spending on the commercial side. Those expenditures could adjust and move over the course of the year as we learn more. We've always been very adept at channeling those dollars where they can be the most effective. We're analyzing some of that now. We certainly have a plan, but we've never been afraid to deviate from it if it makes more sense. And so we're looking at all those things. a lot of international investment this year, quite honestly, as a percentage of our investment. International is getting a bigger piece of it than they have in the past because we really look at this opportunity as we've got G7 and several of these companies combined with the Dexcom One launch and all those covered lives we've added. We think there's great growth opportunities over there, but we've got to invest in that infrastructure.

Yeah, and just to kind of add to that one, Jason, just to give you some context, we launched outside the U.S. with Dexcom 1 and G7, call it in the first couple of phases. But we have more phases to go. And so we're going to make the marketing push, obviously, with G7 in the U.S. But there's also a second phase of G7 launchings outside the U.S. and a second and third phase of Dexcom 1 outside the U.S. So sales and marketing is really where we want to put our investment. And we'll get leverage elsewhere, but hopefully that gives you kind of some context for how we're thinking about that spend in 2023. Yeah, thank you.

And we will take our next question from Matt Taylor with Jefferies. Your line is open.

Hey, guys. Thanks for taking the question. So I just want to get some thoughts on gross margin longer term. I know you touched on this this year, and obviously with the new product launch, there's some initial depression and then you get you get spring-loaded with leverage over time so help us think about g7 over the next couple years as that expands how can that impact gross margins with and without the potential for a longer wear label yeah I can start there and um you're 100 right I mean obviously there's the levers to get the actual cost of the product and we've been very

transparent about it. We want to get to basically a dollar per day and a 10-day sensor, a $10 sensor. And then we want to go even beyond that. But that has always been kind of our public goal. Then, of course, as you move to a 15-day sensor, that cost is spread out over a longer period. So we have intentions over the long haul of doing all of that. Now, the math, if you do that, would indicate there's some real opportunities in gross margin even beyond potential long-term guide, the one thing we want to be mindful of is we don't want to shortchange ourselves and other opportunities to either partner or otherwise over the long haul. So while the long-term guide remains intact, there's certainly leverage and opportunities for us to do well there. And so I think you're hitting on all the right points. That all being said, we really hold to that long-term 65% gross margin. That's what we'll work to. And if there's other opportunities to fill you in on some other things we're doing in the future, we'll certainly do so.

Thanks, Jeremy.

And we will take our next question from Matthew Blackman with Stiefel. Your line is open.

Good afternoon, everybody. Thank you for taking my question. Jeremy, just curious, appreciate all the inputs that you gave us that roll up to the 15% to 20% guide. I'm just curious, have you contemplated in that 15% to 20% range any competitive pressures in the event that – your competitor gets approved to integrate with a pump sometime in 2023? Thanks.

Yeah, thanks. Thanks for the question, Matt. Yes, we do. We've considered all of that when providing that guidance. I mean, when we think about all the competitive pressures and then we think about all the opportunities ahead of us, we consider all that in the guidance. And you are right. There is the potential out there, at least according to some of the commentary that there could be some potential pressure out there. I would say that We've contemplated it. At the same time, we feel very confident in our product offering and what it ultimately does, how it integrates, and the safety features that people rely on our product for, the accuracy, the ease of use. So I think we feel very confident about it, but yes, we did contemplate that in our guide. Appreciate it. Thank you.

And we will take our next question from Chris Pasquale with Nefron. Your line is open.

Thanks. We'd love an update on how you guys are thinking about price. You said in the past your U.S. channel mix could start to stabilize once you hit 75% in the pharmacy. You're there now. But you also have D1 making a bigger portion of the OUS starts, which I would imagine might pull down your international ASP a bit. So can you tell us what impact price had on revenue in 22 and then how you're thinking about the potential impact this year?

Yeah, so we'll talk about 2022 since we gave kind of a guide there, which was around 200 million in the US and around 50 million outside the US and the full year of 2022 was generally in line with that. It was saying just South of 200 million in the US and just South of 50 million outside the US. So basically right in line with that. So I think you can. You can feel good about what guidance we gave there going forward. The expectation is in the G series that that delta that price volume delta starts to come down overtime. What we would expect to see is, and we're not going to give a specific number for 2023 since most of that migration is done, but we will have to lap the 2022 migration. And then if there's drift, say 75, say it drifts to 80, you wouldn't expect material moves there. But those are all things we've contemplated in those figures. To your point, and I think you're hitting at the way we model the business, we model the business as a G-series and a DEXCOM 1. And I would suggest you do that going forward. And then to your point, Dexcom 1 modeled as a percentage of total business will allow you to then understand the contributions to ASP there, which is why it was important for us to give you our expectation of new patient starts in 2023, that a third of them outside the U.S. will be on Dexcom 1. So I think the way you're thinking about the model is exactly the way we model it internally, and that's the way I'd go about doing that for 2023 and beyond.

And we will take our next question from Kyle Rose with Canaccord. Your line is open.

Great, thank you very much. Wanted to ask an additional question just on the commercial strategy moving forward. I understand the DTC advertising and you doubled the sales force a few years ago, but just as you prepare for basal approval in the US, how does the focus or the call point of the actual sales force need to change? Do you need to make additional investments in people? Just help us understand how the targeting goes moving forward. Thank you.

Yeah, this is Kevin. I'll take that. Jeremy gave us a bit of color earlier. You know, 75% of our calls already by our US Salesforce are in the PCP arena. And I think you'll continue to see that expand as our team spends more of their time addressing that marketplace. At the same time, not ignoring the places where we've been so successful in the past with the intensive management diabetes. So we will look at that structure in great detail. On a geographical basis, even within the U.S., there may be some places where we need to expand geographically versus a large expansion across the entire country. We'll analyze that in great detail as we go. We're in the process of doing that now. We just brought on a new chief commercial officer, as many of you will remember, in early January, and she's deep in the middle of that today as we manage those thoughts and a launch and everything else going on. But we'll look at it very strongly.

And we will take our next question from Steve Littman with Oppenheimer. Your line is open.

Thank you. Good evening, guys. Question on Dexcom 1 outlook. Can you talk about any major new geographic regions you expect to roll out the platform this year? And should we expect to see any movement in bringing Dexcom 1 onto the G7 platform this year, or is that a longer-term play?

Yeah, it's a fair question. Let me just say we're not necessarily going to give the playbook as to what countries we are going into. Now, we have launched recently in Croatia, Romania, and Greece for Dexcom 1. That is out there now, so hopefully that gives you some context. But we will be launching in more countries. But rather than give the playbook publicly, we'll let our commercial team execute that and give you that feedback. But just know we will go into more countries. So hopefully that gives you at least some context. We will go. In terms of the movement from Dexcom 1 to the G7 form factor, we are absolutely going to be moving to that factor. It's going to take a little bit of time, and the reason it's going to take a little bit of time is as we get economies of scale on G6, which we have today across the existing user base as well as Dexcom 1, as well as a lot of opportunity for new users on G7, we want to make sure we prioritize G7 and that form factor for those patients coming on to therapy on the G series. Make no mistake, though, as soon as possible, right after that, we will be moving Dexcom 1 to that G7 form factor. Stay tuned. We'll have some updates as the years progress on. But you're thinking about it the right way. We will move there in relatively short order.

Thanks, sir.

We will take our next question from Josh Jennings with Cowan. Your line is open.

Hi, good afternoon. I was hoping to follow up on the pricing question and I'm not sure if you've given a recent update just on how investors should think about the average reimbursement Dexcom receives in the U.S. for a G6 or a G-series patient. And then just a follow-up on that is, will that change with the G7 introduction for one? And then two, is it important the share shifts in the pump market, just considering the reimbursement Dexcom gets to the DME channel with the tandem pump versus the the pharmacy channel with the insulate pump? Thanks for taking those questions. Thank you.

Yeah, it's a good question. Look, I think the way to think about, you know, the ASP is it's really more about channel than it is about version. And so as you think about where folks and who folks get who gets access, the general way to think about it is Medicare, which is publicly out there. I think after the increase, it's around 250 a month. There's a there's a Delta there, which goes to the distributor, who ultimately fulfills that. So the net price to us is south of that. But ultimately, that would be our price in that range. That's publicly available. Generally, commercial DME is higher than that, and pharmacy is lower than that number. And so that's the way to think about it. In terms of then how ASP moves over time, think about it less of generation of product, and think about it more as where folks want to get their product. And so I think you're thinking about it the right way is, You know, we talked about 75% of our lives covered in commercial, 75% of those patients. Those patients obviously then come through at a lower price point. If that drifts to, say, 80%, you could see that having a potential tick on there. Again, most of that is behind us, but that's the way to think about the split there. And then in terms of, you know, pump partners and how folks ultimately access it, it really depends, again, consumer preference. You're right, Tandem is generally accessed through the DME, and Insula is generally accessed through the pharmacy, so it makes sense that folks get their CGMs through that channel. That all being said, it's ultimately consumer preference, and we believe the consumer experience through the pharmacy is great, but we have some really great DME partners that do a wonderful job fulfilling product through that DME channel, and so we believe that folks can be fulfilled either way.

Great. If I could see just a quick follow-up, just thinking about your cgm platform attached to pumps is there a premium reimbursement that deck time receives in that scenario versus standalone where is it all consistent across the board it just depends on the channel as you said thank you sorry about that no right now there's one class of cgm products and and reimbursements consistent across the board we will take our next question from cecilia furlong with morgan stanley your line is open

Great. Good afternoon, and thank you for taking the question. I was hoping to follow up. You talked the last quarter just about rolling out cash pay models in the US. Just curious if you could provide more color as you're thinking about that opportunity today, and then for 2023 specifically, how we should think about potential incremental contributions from that. And thank you for taking the question.

You bet this, Kevin. I'll take it. Big picture, our cash pay program for G7 to start with is going to be our bridging program. And people will be able to pay cash for G7 that way. Ultimately, as we get access and coverage of G7, when people's co-pays will be significantly lower than the bridging program cost, we'll phase that out and have a cash pay program on G7 that individuals will be able to access. We continue our cash pay program on G6, but that is not a major portion of our revenues. it's just a piece of them. We do this to create access primarily where people's insurance doesn't cover it and they can't get access through the federal or the other governmental channels as well. It's not a huge percentage of our revenues. We need to continue to be cognizant of it and address those patients' needs, and that's why we have it there.

We will take our next question from Matt Mixick with Barclays. Your line is open.

Thanks so much. If I could, just two quick follow-ups on some of the topics that we covered earlier. So on ramping production for G7, talking about gross margins and the impact and improving on scrap rates and all that, and just wondering, by the end of the year, we're sort of hitting what you'd say is optimal manufacturing and sort of representative margins maybe in facilities that you have. And the other was just on the comment you had on contemplation of competition on the integration front this year. And if that were not to come, I'm just wondering, not to put you in a tough spot or anything like that or pressure the margin or the guidance range, but if that were not to come, does that sort of a slight tailwind or put you at the top end of your guided range or how to think about that? Thanks.

This is Kevin. I'll take that bigger picture. Jeremy's been very familiar with the numbers, but I'll give you a bit of my perspective. With respect to no competition in the pump integration point, we may pick up more, we may not. What I do know is everybody using those pumps and integrated systems right now uses a Dexcom, and they're achieving remarkable results with the technology we've developed over the years and will continue to receive such. It is our position that the experience that they're going to have with algorithms, Based upon Dexcom CGM that have been developed through the data and the performance of our sensor will continue to make us the leader in that space, regardless of who the competing sensor is. And so we're very confident there that we will continue to have a very strong product offering going forward. With respect to the margin change over the course of the year, there's a couple of factors in there. Obviously, Jeremy's talked about the bridging program in the first half of the year. David Wiltshire- Bringing margins down a bit because their revenue per patient will be a bit lower there when we start, but as we see that pick up. David Wiltshire- will pick that up on the revenue side, then you have basil come in and and medicare reimbursement is strong, so that will help on pricing the flip side of that is a it's sometimes lost on. David Wiltshire- folks everything we do with G seven is different all these lines are completely different all the capacity is different. David Wiltshire- about the only thing that's the same as we're building in Arizona and we're building in San Diego and that's not going to be the same. For a good portion of the year, because we expect the factory in Malaysia to be up and running in the second half and producing product there. So you have a number of variables with respect to scrap with respect to purchasing components. With respect to how these lines run as we get them up and running and functioning at full speed versus where they are today and then bringing out a new factory we've tried to contemplate every one of those variables. as we've started, and we'll update you as to how things are going as time goes on. But whenever you do a product launch, particularly one this significant, because when we did our last big G6 product launch, we had similar margin activity, but it was on a much smaller scale because we're so much bigger than we were before. There's just more variables that we have to plan for. We've tried to be conservative and thoughtful in our guidance based on the performance we expect of our teams. We also expect our teams to be better We don't ever lower the bar for them, as they will tell you. But we've looked at every one of those things in contemplating that, and we meet on this literally every day to make sure we're covering all of our bases. This launch is really important to us, as are our margins, but it's really important to get product out to all the users that want it. Thanks for the call.

And we will take our last question from Michael Pollark with Wolf Research. Your line is open.

Good evening. Thank you. I just wanted to follow up on first quarter to make sure I have my modeling square. Jeremy, I heard in the response to prior question, you know, using the full year guide, you're thinking about one cue consistent with seasonal patterns. The last three years, I had 21% of full year revenue in the first quarter. If I use the midpoint of your range this year, that's 720 million. But then you made the comment about the bridge program, you know, down from there. So, you know, that'd be another say 15 or 20 for the quarter. So I'd be at 700 or 705. Have I put this together correctly? If not, can you help? Thank you so much.

Sure, yeah. I mean, you're not far directionally off. I mean, you are right. We do expect the Q1 contribution and really the sequential decline from Q4 into Q1 to be very similar to what you've seen in the past. And so that'll help you get a little bit closer as you think about sequential decline as well from Q4 into Q1. That'll put you into a ballpark. And then from there, you're right. We updated our number. It's about $15 million now as a result of the bridging program as opposed to the $20 to $30 million. But that'll get you into the ballpark. You're not far off, but there's probably a little bit of tweaking to do around the edges there. But use that, you know, 21% contribution, but think also 10% sequential. Those little rounding differences ultimately matter in there. Hopefully that gives you the context you need, though.

Yep. Thank you.

And ladies and gentlemen, with no further questions at this time, I will turn the call back to Kevin Sayre for any additional or closing remarks.

Thank you very much, and thanks everybody for joining us today. We spent a lot of time in our fourth quarter call talking about 2023. I want to just step back again and thank all of our great people here at this company for their hard work in a year where we delivered on our revenue targets. We controlled our costs. At the same time, we've advanced our technologies, our infrastructure, and we've advanced coverage and accessibility for our product all over the world to enhance people's lives. But we are very excited for this launch. This is my fourth major launch here at Dexcom. And every single time, it's taken our company to another level. The first time was G4, and that was when accuracy really came to bear. And we truly established what accuracy standards should be for CGM. And we will remain the most accurate system in the world. G7 is going to be a better experience than G6. Every time we try to make the product easier to use, and this is the biggest ease of use advancement we've ever had as we look at the responses from our users so far and, as always, we will make this product as accessible as we can. Dexcom has always been the most accessible brand cgm as far as coverage and we will continue to do so that's our commitment to drive that very hard for our end users it's going to be a busy and great 2023. i am very confident we'll be sitting here a year from now and i'll be able to say the same things thanks everybody and have a great day thank you ladies and gentlemen this concludes today's conference call and we thank you for your participation you may now