Dexcom Inc Q3 FY2021 Earnings Call

Thank you, Operator. And welcome to DexCom's Third Quarter 2021 Earnings Call. Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will provide a summary of our progress on our third quarter highlights and strategic initiatives, followed by a financial review and outlook from Jeremy Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions. Our Chief Technology Officer, Jake Leach, will also be present with us for the Q&A period. We ask the analysts to limit themselves to one question so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our third quarter performance on the DexCom Investor Relations website on the events and presentations page. With that, let's review our Safe Harbor Statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, expectations, and assumptions about future events, strategies, competition products, operating plans, and performance. All forward-looking statements included in this presentation are made as of the date hereof, based on information currently available to DexCom, are subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-Q, most recent quarterly report on Form 10-Q, and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP. With respect to our non-GAAP and cash-based results, unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our third quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now, I will turn it over to Kevin.

Thank you, Sean. And thank you, everyone for joining us. Today we reported another strong quarter for DexCom, with third-quarter revenue growth of 30% compared to the third quarter of 2020, and 28% growth on an organic basis. This revenue growth rate represents continued momentum in DexCom CGM adoption around the world as we once again achieved a record quarter of new customer growth. The third quarter also saw several strategic accomplishments across our teams that laid the foundation for our future growth opportunities. In the U.S., we received FDA clearance for two key software solutions that continue to differentiate our connected products from those of our competitors and position us as a partner of choice across our healthcare and wearable ecosystem. First, in July, we received FDA clearance for our real-time API. For those of you who are not aware, an API is the tool that allows one app to connect with another app. Prior to this clearance, our customers and clinicians could only utilize our retrospective API, which integrated DexCom data into third-party apps on a three-hour delayed basis. We believe that by putting the power of choice at our users' fingertips with real-time data, we can help ease the daily burden of diabetes management and significantly improve the quality of life for our customers. This tool will be available to partners invited by DexCom, and we already have several that will begin the development process to enable real-time displays for their communities. This includes Garmin, which became the first partner to launch apps connected to our real-time API two weeks ago, bringing DexCom readings into their portfolio of wearables and cycling computers. Second, on the heels of the real-time API clearance, we received FDA clearance in August for the DexCom app and app module. This module was specifically designed for people with non-intensive type 2 diabetes and can directly integrate into another third-party healthcare app. With the integrated DexCom app, it is now even easier for our partners to access and display our CGM data, enabling single-app solutions that simplify the experience for DexCom users. United Health Group became our first partner to launch the integrated DexCom app and app module in late September, bringing the embedded app into their level 2 diabetes care program. Our connectivity software and data infrastructure solutions are a core strength of DexCom. These two recent FDA clearances reflect the increased investment that we put into software development, and we believe increase our competitive advantages moving forward. In late September, we also announced the launch of DexCom ONE in four international markets where we previously had no presence: Bulgaria, Latvia, Lithuania, and Estonia. DexCom ONE leverages the G6 hardware platform and a completely redesigned software experience that focuses on simplicity and ease of use for our customers. This is the first product launch in our history that started exclusively through the DexCom e-commerce platform, a platform that has been embraced by our customers in Canada and the UK over the past two years. With the proven performance of our CGM systems, the new software experience, and efficient e-commerce solution, and affordable pricing plans, we believe that DexCom ONE will be an important product for us as we drive the business to our long-term targets. Most importantly, this differentiated product is a key step for us to bring DexCom CGM to significantly more people with diabetes who previously did not have access to our products. Early feedback around the product has been very favorable and we look forward to seeing the full results from these launches as we leverage the full breadth of our expanding product portfolio to achieve our 2020 Investor Day Goal of tripling our international addressable market by the end of 2023. Building from the strength of our mobile trial that was published in the Journal of the American Medical Association in June, investigators published the results from the extension phase of the trial in diabetes care during the third quarter. In this extension phase, we re-randomized the population that were initially on CGM to see if the benefits would be retained for those who stayed on CGM compared to those who returned to finger-stick monitoring. Once again, the results were clear. Those who stayed on our G6 systems maintained greater time and range improvements over the 6-month extension phase compared to those who did not. The results confirmed that for a significant portion of people with type 2 diabetes on basal insulin, there is significant benefit in continuous CGM use to optimize therapy and support behavior modifications. Our teams are working hard to leverage the conclusions from the mobile trial into greater access to our technology for people with type 2 diabetes. And this is just one area in which we are building the foundation for our long-term growth. We are advancing our pilot efforts with United Health's level 2, Teladoc's Livongo for diabetes, and others. We are generating strong clinical evidence for expanded indications for CGM use in inpatient settings and for women who are pregnant. We continue to leverage our advantages in connectivity by gaining new customers and progressing our pipeline of solutions with our leading insulin delivery partners. Finally, we continue to advance our G7 scale-up and regulatory efforts during the quarter. We have had excellent communication with our notified body in Europe and believe that we remain on track to begin the launch of our G7 system in the fourth quarter upon receiving CE mark clearance. In the U.S., we've made great progress in preparation for our regulatory submission and believe that we are now in the final stages of that effort. We look forward to the comprehensive G7-510K submission, including G7 hardware and full Android and iOS software to the FDA in the next few weeks. As you can see, our teams are working very hard and making great progress to advance our core strategic efforts, whether it is in expanding our product portfolio, creating differentiated user experiences, or laying the foundation for new market opportunities that will drive our future growth. So with that said, let me turn it over now to Jeremy for a review of our third quarter financial performance.

Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release, as well as on our IR website. For the third quarter of 2021, we reported worldwide revenue of $650 million compared to $501 million for the third quarter of 2020, representing growth of 30% on a reported basis and 28% on an organic basis. In late July, we were proud to complete the acquisition of our distributor in Australia and New Zealand. With this acquisition, we began generating revenue for certain non-CGM healthcare products, which we have categorized as inorganic growth for the quarter. This non-CGM distribution revenue contributed approximately 2% to our reported growth for the third quarter. The transition from distributor markets to direct sales is one of several important strategic initiatives that we outlined at our 2020 Investor Day as we seek to significantly grow our international presence. We believe a larger direct international footprint will give us greater control to leverage our marketing strength, invest in accelerating our growth, and ensure that the direction of these core markets is aligned with our strategic interests. In terms of the financial impact of the third-quarter acquisition, we expect the transaction to be approximately neutral to our operating margin for the full year, as it was in the third quarter. U.S. revenue totaled $490 million in the third quarter compared to $399 million in the third quarter of 2020, representing growth of 23%. We continue to see good momentum in the U.S., where we are benefiting from the increased market access and field presence that we have enabled over the past year. New customer growth remains strong across all segments of the population, including people with type 1 diabetes, intensively managed people with type 2 diabetes, where we have significantly expanded market access in the past year, and even early adopters in the type 2 non-intensive population. Our international business grew 57% in the third quarter, totaling $161 million. Excluding the impact of non-CGM distribution revenue generated by our acquisition of our distributor in Australia and New Zealand, growth for the international business was 46% in the third quarter. We continue to see very encouraging growth across the board in our international markets, with a majority of our markets delivering record sales in the third quarter. Although it is still early, we believe that our strategic moves to broaden access in several markets have been very successful thus far and have left us well positioned to expand our growth profile internationally. And you see that reflected in the current quarter results. Along those lines, our global volume growth in the third quarter remained strong, exceeding 40% for the quarter. This is well above our 28% organic revenue growth rate and supports the momentum behind DexCom CGM globally as we aggressively seek to advance access to our technology and drive better health outcomes and quality of life for people with diabetes. As Kevin mentioned, the launch of DexCom ONE adds to our product portfolio and provides another key element of our strategy to expand access to CGM globally. As we continue to scale our business in conjunction with our ambitious plans for customer growth, we are creating tools that allow us to serve our growing base in an efficient manner. The use of our e-commerce platform for the initial DexCom ONE launch is a good example of that focus. Our third quarter gross profit was $446.9 million or 68.7% of revenue compared to 68% of revenue in the third quarter of 2020. The year-over-year gross margin expansion is an impressive result, especially when you factor in our strategic efforts this year to drive greater mix through the pharmacy channel and expanded international access. This is a credit to our teams who have innovated and embraced change where necessary to drive efficiencies and position us to maximize our strategic opportunities. We continue to demonstrate the ability to leverage both our manufacturing operations and R&D teams to be ever more efficient in the delivery of our products. Operating expenses were $323.1 million for Q3 2021 compared to $245.7 million in Q3 2020. Operating expenses as a percentage of sales were relatively flat year-over-year as we offset investments in software development, G7 scale-up, and our expanded global commercial sales force with strong leverage of our general and administrative functions. Operating income was $123.8 million in the third quarter of 2021 compared to $95 million in the same quarter of 2020, holding flat at 19% of revenue. As this result indicates, we've been able to retain much of our operating margin this year, even as we have significantly reinvested in our business. Adjusted EBITDA was $173.5 million or 26.7% of revenue for the third quarter, compared to $146.9 million or 29.3% of revenue for the third quarter of 2020. Net income for the third quarter was $89.5 million or $0.89 per share. We closed the quarter with approximately $2.7 billion in cash and cash equivalents, giving us great financial flexibility to drive our strategic initiatives. This includes the continued build-out of our manufacturing facility in Malaysia, G7 scale-up in Mesa, Arizona, as well as opportunities that are aligned with our business objectives, such as our recent distributor acquisition. Turning to guidance, our third-quarter performance has placed us in a position to once again raise our full-year 2021 outlook for revenue and margins as we look to wrap up another excellent year. We now expect 2021 revenue to be between $2.45 and $2.5 billion, representing growth of 26% to 27% over 2020. This guidance includes approximately 100 basis points of non-CGM inorganic growth related to our recent distributor acquisition. Turning to margins, we are increasing our full-year 2021 targets. This includes non-GAAP results projected at the following levels, which include a neutral impact from our distributor acquisition: gross profit margins of approximately 68%, operating margins of approximately 16%, and adjusted EBITDA margins of approximately 25%. With that, I will now turn the call back to Kevin.

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

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

And our first question comes from Jeff Johnson, from Baird. Go ahead, Jeff.

Thank you. Good afternoon, guys. I know we focus so much on Type 1 and Type 2 most of the time, but I wanted to ask this time maybe on the non-intensive and the pre-diabetes market. I guess I'm wondering more than anything, your latest thoughts on how big those two markets could be over the next year or two, especially with so many, we see all these behavioral services popping up with levels and super sapiens and others in prediabetes, and obviously level two, and some of the others on the commercial side. It feels like your real-time API and your app and app approvals would be helpful for some of those programs. So just how do you see those two markets developing in the short run, one to two years in your market share in those two areas, maybe over the next couple of years as well? Thanks.

Thank you, Jeff. This is Kevin. I'll take that one. We think those markets can develop nicely. We have some work to do on the product labeling side and some work to do with the FDA as we migrate down that path and we've had some of those discussions. But the results are spectacular as we've seen people use this product. In fact, we recently got an email from a position, again, this isn't the type 2 world non-intensive but was telling us about a recent experience with a patient who had gone from an A1C in the 12s down to no medication to an A1C of 5.5 or something like that. It works there or it's also very much on the metabolic front-end general. Anybody who wears a CGM and watches that data, and particularly if you set those lines narrow between like 70-120, if you go above the 120 Mark, you ask yourself what you ate. You can usually figure out and go back to something that you could do differently. The effects of exercise, the effects of poor sleep, the effects of stress during an earnings call can all be demonstrated in CGM graphs. I think it's a wonderful market opportunity. The data has to be presented properly. That's where the live API and the approvals we talked about today come in. The API is a quick way to get there, and Jake knows the technical stuff better than me, but the API also requires a person to run a DexCom app and the other app between the two. With the other app and app module that we talked about today, some of these larger programs that again like Level Two with United Health Group, you have one app experience with a DexCom button or a DexCom experience right in the middle of it. So if you are branding a wellness situation and really want that to be your focal point, we can reside in that app, and you can have that experience. We think both solutions offer speed but also offer different experiences, and then we'll pick the partners we want to work with on both sides, those that have the best need for one versus the other. So we're excited; we're very excited for these markets and it's why we consider it part of our long-term strategy. But we need the technology to get there, and our product pipeline truly supports moving in that direction over time.

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

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

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

And our next question comes from Danielle Antalffy from SVB Leerink. Go ahead, Danielle.

Good afternoon. Thank you for the questions and congratulations on a strong quarter. Jeremy, I have a question for you. You've been making significant investments in direct consumer marketing and enhancing sales force initiatives focused on primary care physicians. Now that we are three quarters into this focused effort in the U.S., can you discuss the return on that investment in terms of new patient additions and the current status of primary care physician coverage? Thank you.

Sure. Absolutely. So where we sit today, and we talked a little bit about it last quarter, but I want to reiterate it is, you know, in the U.S., we've doubled our covering prescriber coverage over the past 18 months. And so what I mean by that is the amount of physicians that are writing DexCom scripts has doubled in 18 months. That's a testament to the work that's being done by the U.S. commercial team, which has been fueled by multiple things, certainly direct-to-consumer advertising, and doubling the size of the sales force. Those all really play into folks adopting the technology.

Just a couple of tangible things which I think are helpful to see. Again, another record quarter for new patient additions, I think you can see that playing through, and in many ways that's driven by the sales force. So you see that continued momentum. I would say the one thing that we have noticed that hasn't prevented us from being at completely full effectiveness is some of the impacts of the Delta variant. I think that's probably the only thing that we've seen that's been a challenge, and that's just getting access to some of these offices when you're no longer seeing folks in person. And so you've seen a lot of positions opening up, and those locations we're doing incredibly well. So there's more to work through and that's a function of just navigating through these COVID landscapes more than anything else. So I think in short, you're seeing the performance, you're seeing the growth, seeing the new patient adds, and we've ramped up very nicely. It's been an incredible year for us thus far. I'm very bullish on what it means for next year. So I think that's really the feedback thus far, and again, as we get more and more data, we'll continue to share it as it becomes available.

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

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

This is Kevin. We recently launched our product with our partner Terumo, and we're seeing some positive momentum. Since the launch earlier this summer, our focus has been on educating physicians and showcasing our product. We believe the Japan market has strong potential for us. Although type 1 diabetes is not very prevalent, there is a significant number of type 2 diabetes patients. If we can capture a wide range of this market with our product offerings, we envision it could become one of our top markets worldwide. Feedback from physicians indicates they are optimistic about our product’s performance, particularly appreciating its accuracy, precision, and connectivity. We are still in the early stages, but there is a considerable market of approximately three to four hundred thousand intensively managed patients with type one and type two diabetes. This represents a substantial opportunity for us in this space.

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

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

Sure. Let's begin with the financial side and how it will develop over time. Jake will then discuss the technical aspects and the reasons for our excitement. Currently, these partnerships are focused on broadening the total addressable market and reaching more individuals interested in CGM technology. At present, this involves sensors; however, over time, as we've shown with some software features added in the last six months, software will also be part of this offering. Our monetization strategy will evolve, but right now, the priority is to get as many people as possible using sensors to appreciate the benefits of CGM. Jake, could you share the overall direction we're heading in this area?

Thank you for the question, Jeremy. We perceive our technology as a way to offer distinct experiences tailored to different customer segments. For instance, when addressing the type 1 and type 2 non-intensive segments, we are tackling various issues. Our software tools, including the real-time API, enable our partners to meet these needs using DexCom CGM, marking significant progress in our cloud strategy. We are enthusiastic about the partnerships currently working to incorporate this technology into their systems to enhance customer experiences.

Our next question comes from Matthew O'Brien from Piper Sandler. Go ahead Matthew.

Thanks for taking my question. There are a lot of factors at play, and I'm not sure if I'm calculating correctly, but it appears that we're experiencing a pricing headwind of around $60 to $70 million this quarter. I'm uncertain about the distributor conversion, so I'm wondering if that's accurate. Are we facing somewhat more of a pricing headwind this quarter compared to previous ones? It seems like there might be a slight reduction expected next year, possibly due to the 21. Also, I'm curious if the sequential increase from Q3 to Q4 is slightly below trend because you're anticipating more pricing headwinds in '21 compared to '22. Thank you.

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

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

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

Sure. We don't break down the pricing for USO, the U.S., and the overall number. However, we are on the same trajectory for the total company we discussed. You can do the math, but we remain on that path. Regarding the impact of the distributor acquisition on growth in our CGM business for the quarter, it rounds to 0%. This is due to two months included in the quarter and the relatively small markup on the margin in the distributor market. The key question is our ability to penetrate deeper into these markets, which is why we pursue this strategy. It's not about margin uplift; it's about controlling investment. We have cash on our balance sheet and intend to continue our investments in these markets. As we take them direct, our goal is to reinvest to drive adoption. Thus, the impact of the distributor is minimal on our organic growth rate; as mentioned, it rounds to 0%. Therefore, the 28% organic growth rate accounts for that. I hope this clarifies the situation regarding the acquisition. There isn’t much that changes the results for this quarter.

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

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

Yeah, this is Kevin. I'll take that. There's still more to go, but it is going very well. Our targets are performing well based on those we've approached. We've also identified some additional targets and are expanding our coverage. There have been many instances where it took multiple attempts to gain access to an office, but once we do and a person starts using a DexCom, their feedback is very positive due to the quality of the product, leading to more opportunities. However, this is a gradual process; we don’t just walk in and receive 50 new patients in a month. It requires time and builds our credibility. The primary care audience, especially those on insulin, has been responding positively so far, but it is indeed a process that takes time.

And our next question comes from Joanne Wuensch from Citi. Go ahead Joanne.

Thank you very much for taking my questions. It seems to me like the increasing clinical evidence that you are building is going to really help the Type 2 population. But could you give us sort of an update on where you think or what you think you'll need to get into the non-intensive type 2 market?

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

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

Thank you for taking our question. I wanted to ask just on Gross Margin as you think about Q4, what is implied with your updated guidance step-down, but just what you're factoring in from the International access component versus G7 initial launch not quite being at scale and how we should think about the trajectory heading into 2022. Thank you.

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

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

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

Thank you for your question, Jake. Earlier this year, we presented data from the ATTD G7 showing a mean absolute relative difference of below 9% and very strong accuracy, which is better than G6. We are very pleased with the results from the U.S. pivotal trial and will share that information in the future. Now that you have seen the data, you likely have a sense of it. As more products are launched, more data will become available. Some have asked how they can anticipate what it will look like without public data available at ATTD, which should be a guiding reference. Regarding the transition in the pharmacy, we previously mentioned a trajectory from about 50% at the end of 2020 to approximately 75% by the end of 2022, and we are currently on that path. While we haven't provided a specific update as a percentage, we are progressing as anticipated and in line with what you would expect from a gradual transition over time. I hope that clarifies things.

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

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

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

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

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

At this time, we are still modeling the total annual revenue in various scenarios. Our recent data supports the idea that continuous use of the system results in significantly better healthcare outcomes compared to intermittent use. The feedback patients receive when using the technology consistently leads to improved long-term revenue models. I want to emphasize that we are addressing a different challenge for individuals who are not on insulin; for them, this is not a life-or-death situation, so I anticipate that revenue per patient in this category may be lower over time, even with continuous use. However, I am unsure of the exact figures at this stage. There will be models for intermittent use that could yield positive results. One common mistake made by many programs is trying to reduce the number of sensors due to cost concerns; they mistakenly attempt to control usage, whereas the true benefits for patients come from the continuous glucose monitor data. We need to find a balance between these factors and our current business model. Despite initial beliefs that all patients would want to use the system constantly, they actually do appreciate the data and enjoy knowing their status, which has not posed any challenges.

And our next question comes from Ravi Misra from Berenberg. Go ahead, Ravi.

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

Sure, I can take that. So when we acquired the distributor, the distributor had multiple different product lines. They have sales reps that cover these multiple different product lines. And ultimately a distributor is about people and it's an incredible group of people. And so the key here is making sure we keep everybody together. So we'll stay in that line. What we tried to identify for you is the contributions to the overall guide in basis points. And so in our guide, we talked about a 100 basis points on the full year. You'll do the math and figure out what the approximate impact is in Q4, and I think you'll have a pretty good feel for it. We'll make sure that we isolate it out over the long haul so that you're able to identify what is and what isn't out there. So I think you can feel comfortable there.

Provided material regarding the acquisition and entering the market, this group has performed exceptionally well in promoting CGM adoption in that country. Therefore, when engaging in these markets, we want to ensure that we have the right team in place and that there are no obstacles to continuing the development of CGM awareness and adoption. There are no structural barriers to this. The only aspect we mentioned concerning investment is quite similar to how we approach our organization in the U.S. We understand the importance of investing in direct-to-consumer marketing, sales representatives where appropriate, and sampling, which we believe makes sense in other markets. We have already implemented some of these strategies in Europe and Canada and anticipate doing more as we adopt a more direct approach. This is essentially what we mean. There are no structural barriers preventing us from proceeding with the acquisition and further promoting CGM adoption in those countries.

This is Kevin. I want to add that one reason we pursue initiatives like this is to look at our direct business in Canada and the recent successes we've achieved with the provinces and reimbursement. Our corporate financial strength enables us to take more risks than a distributor might be able to alone. We see our investment in Australia and New Zealand as an opportunity to expand market access and reimbursement, making a significant impact. This team needed our financial support, and we required their expertise, so it's mutually beneficial.

And our next question comes from Maury Kibo. Go ahead, Maury from BTIG.

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

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

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

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

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

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

Great. Thanks and hope everyone is doing well. Two quick questions. One would be on supply chain constraints. I'm just wondering how that is expected to play out into 2022, hearing a lot about inflationary upward pressure on cost of goods sold. So wondering how that's playing out for DexCom, what the offsets are. And then as we look into the G7 launch, just maybe an update on what percent of existing Omnipod users are currently not users of DexCom solutions? Thank you.

I'll address the inflationary and supply chain issues. Everyone is experiencing pressure in certain products and areas due to supply chain dynamics. Our team has effectively focused on two key aspects: ensuring adequate product availability and managing costs. They have done an exceptional job of securing product supply. While it’s true that challenges remain in the supply chain, our team proactively collaborated with suppliers early on to clearly communicate the value of our products and to secure supply. This proactive approach sets us apart, and we take pride in our team's efforts. Regarding inflation, we find ourselves in a unique situation. Although there are inflationary pressures, we are also producing more products. This increased output allows us to benefit from economies of scale and enhances our purchasing power, which in turn mitigates some inflation-related challenges. We expect to manage these factors without adversely affecting our long-term gross margins. Now, about the Omnipod question, we have a good number of users for Pod 5. There is some research available on this, but I won’t cite specific studies as I can't confirm their accuracy. We generally have a good understanding of the usage, although we haven’t made official public statements; we’ll leave that to Omnipod. However, we anticipate that once Omnipod 5 is launched and integrated with DexCom, it could serve as a significant catalyst for us. One point we consistently emphasize is that continuous glucose monitoring (CGM) is a priority. We believe many users start with CGM before considering an integrated system, and most current users of our products are on multiple daily injections (MDI). With that said, another advanced insulin delivery system like Omnipod presents a compelling opportunity for patients who prefer patch pumps.

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

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

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

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

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

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

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

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

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