Dexcom Inc Q4 FY2021 Earnings Call

Welcome to the DexCom Fourth Quarter 2021 Earnings Release Conference Call. My name is Adrian, and I'll be your operator for today's call. Please note, this conference call is being recorded. I'll now turn the call over to Sean Christensen. Sean, you may begin.

Thank you, operator, and welcome to DexCom's Fourth Quarter and Full Year 2021 Earnings Call. Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will provide a summary of our fourth quarter and full year highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jereme Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions. Please note that there are also slides available related to our fourth quarter performance on the DexCom Investor Relations website on the Events and Presentations page. With that, let's review our safe harbor statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, expectations and assumptions about future events, strategies, competition, product, operating plans and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to DexCom, are subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-K, most recent quarterly report on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash-based results. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our fourth quarter and full year earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now I will turn it over to Kevin.

Thank you, Sean, and thank you, everyone, for joining us. I want to take time at the start to highlight some of DexCom's key accomplishments in 2021 that reflect our progress relative to the priorities that we established at the start of the year and our long-term goals. Total revenue grew 26% on an organic basis over the prior year, with rising CGM awareness and DexCom brand loyalty leading to another year of record new patient additions. This translates to nearly $500 million of organic growth for the year, leading us to exceed the midpoint of our original guidance for the year by more than $160 million. We laid the foundation for significant expansion of our addressable markets in the future with differentiated product solutions and clinical evidence. In June, we presented results from the MOBILE randomized controlled trial for people with type 2 diabetes being managed with basal insulin. The results were clear. DexCom CGM can do significantly more to help these people manage diabetes. And with this conclusion being validated in the Journal of the American Medical Association as well as in the recently updated ADA standards of care, we are hopeful that we can bring access to our technology for the estimated 3 million people on basal insulin therapy in the U.S. and many more outside the U.S. Alongside the MOBILE clinical evidence, we drove several updates to our product portfolio to broaden the ways that customers can engage with our technology. We've consistently spoken about our investments in software and data infrastructure as a significant competitive advantage. In the third quarter, we received two key FDA clearances for DexCom software tools that reflect this commitment and strength. Our real-time API allows us to directly integrate DexCom CGM data in real-time to the displays of approved third-party apps. And our app in-app solution creates an FDA-cleared DexCom app experience that can be integrated directly with the app of a DexCom partner. Both of these creative solutions have already been rolled out with DexCom Partners, and we believe they position us well to provide extensive options for our customers, partners and potential partners as CGM use continues to expand into new populations. We again strengthened our product portfolio through differentiated software with the CE Mark and launch of our DexCom 1 product in the fourth quarter of 2021. In a relatively short period since launch, we've already seen strong adoption in both type 1 and type 2 customers, and the health systems in two of our four launch countries established reimbursement. With a focus on ease of use and affordable price point, we believe DexCom 1 will be a significant part of our story as we look to extend CGM access globally. Perhaps most importantly, in 2021, we completed the pivotal trials in support of our next-generation G7 system and submitted the results for both CE Mark and FDA clearance. As many of you recently saw in our January presentation and will soon see in a publication, the performance of the G7 system is outstanding, achieving performance levels relative to the FDA's iCGM special controls. Even with customers on our G6 system expressing record Net Promoter Scores at the end of 2021, we are incredibly excited for them to experience G7. We believe that we are very close to receiving CE Mark and navigating the final stages of that review. In the meantime, our teams continue to work to prepare the manufacturing scale-up and commercial efforts in anticipation of G7 launches throughout the year as well as launches with some of our partners on their upcoming connected insulin delivery devices. On that front, we were excited to see the news of the FDA's recent clearance of Insulet's Omnipod 5, the first tubeless automated insulin delivery pump. With this clearance for Insulet and the ongoing success of Control-IQ for tandem Diabetes, we believe that we are enabling automated insulin delivery for the best tubeless pump on the market and the best tethered pump. The outcomes that customers are seeing with these DexCom integrated systems are outstanding, and we are proud that our commitment to connectivity is helping advance the market and enhance the quality of life for our customers. These accomplishments align with the strategic priorities that we established at the start of last year, showing the resilience and execution of the DexCom teams in a challenging environment. And these accomplishments are not merely 2021 events, but they are the foundation that we will continue to build on as we press forward in 2022 and beyond. Many of you likely saw the recent update to the IDF estimates for global diabetes prevalence and cost. There are now greater than 500 million adults with diabetes globally, and cost to treat the disease alone are estimated to be approximately $1 trillion per year. In addition, the CDC now estimates that 38% of adults in America or 96 million people have prediabetes. There is a real opportunity here for DexCom to do something great to address this epidemic and power diabetes management and down the road even work towards diabetes prevention and better health outcomes broadly. The future for DexCom is bright. With that, I will turn it over to Jereme for a review of the fourth quarter financials and discussion of the 2022 outlook. Jereme?

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. In line with our January pre-announcement, we reported worldwide revenue of $698 million for the fourth quarter compared to $569 million for the fourth quarter of 2020, representing growth of 23% on both a reported and constant currency basis and 20% on an organic basis. The organic revenue excludes non-CGM revenue that we generated in the fourth quarter following our acquisition of our distributor in Australia and New Zealand. U.S. revenue totaled $517 million in the fourth quarter compared to $451 million in the fourth quarter of 2020, representing growth of 15%. Unit volume growth, which is a general representation for the growth of our user base, remained in the high 30% range compared to the fourth quarter of 2020, and we continue to see strength in our strategic shift to the pharmacy channel. Our teams continue to work very hard to broaden our prescriber base and take advantage of the significant reimbursement access that we have driven in the past two years in both the U.S. and international markets. The uptick in COVID cases has created some challenges for us in the fourth quarter and into the early first quarter, but it is a credit to the resilience of our field team and the strength of the category that global new customers remain near record levels in the fourth quarter. Our international business executed very well in the fourth quarter, with revenue growing 54%, totaling $181 million. Excluding non-CGM revenue that resulted from our 2021 distributor acquisition, international growth was 41% in the fourth quarter. The international result reflected broad-based strength, including record results in all of our direct markets. This growth continues to validate the strategic moves that we made over the course of 2021, most notably the progress that we made to broaden access to our technology through advocacy, flexibility gained from operating efficiencies and a differentiated product portfolio. We look forward to extending this momentum now as we progress into 2022. Our fourth quarter gross profit was $472.6 million or 67.7% of revenue compared to 70.2% of revenue in the fourth quarter of 2020. The fourth quarter gross margin was slightly above our expectations as certain costs related to the G7 scale-up and commercial preparation remain in our R&D costs until we receive CE Mark. We made excellent progress to drive efficiencies across our product design, procurement, manufacturing, and logistics functions leading to a full-year 2021 gross margin that finished 360 basis points above our original 2021 guidance. Operating expenses were $373.6 million for Q4 2021 compared to $294.7 million in Q4 2020. The increase in operating expenses as a percentage of revenue relative to the fourth quarter of 2020 was primarily a result of development and operational costs incurred in preparation for the launch of G7 as well as investments to support our global commercialization efforts. Operating income was $99 million in the fourth quarter of 2021 compared to $104.4 million in the same quarter of 2020. As a reminder, when we provided the outlook for 2021, we determined it was in the best interest to make investments in the business to continue to fuel CGM growth and awareness. As we wrap the year, we are proud to report that we outpaced our initial 2021 operating margin guidance by more than 200 basis points, all of which came despite significant investments to solidify our software advantages, advance the G7 clinical, regulatory and manufacturing programs, significantly expand our global sales force presence and significant efforts to build brand awareness. And we are committed to driving further leverage in the years to come as we strike the right balance between investing to maximize our growth opportunity and turning that opportunity into cash flow generation for the business and our stakeholders. Adjusted EBITDA was $154.5 million or 22.1% of revenue for the fourth quarter compared to $159.2 million or 28% of revenue for the fourth quarter of 2020. Net income for the fourth quarter was $69 million or $0.68 per share. As many of you also saw in our press release and our GAAP reconciliations, we also recognized an $87 million expense associated with contingent milestone under the 2018 collaboration and license agreement with Verily Life Sciences. Terms of our amended contract with Verily are available in the SEC filings that were originally published in November 2018 and updated in November 2021. We closed the quarter with greater than $2.7 billion in cash and cash equivalents. We have demonstrated the ability to generate positive cash flow. And going forward, we remain in a very flexible position to continue to advance strategic initiatives and opportunities. Most notably, we will continue our development of our manufacturing facility in Malaysia as we expect to have that facility validated for production by the end of 2022. Turning to 2022 guidance. As we stated last month, we anticipate full year total revenues of $2.82 billion to $2.94 billion, representing growth of 15% to 20%. Given the success of our strategic transition to the pharmacy channel over the past three years, we anticipate that 2022 will be the final year where we see a significant shift of our existing base from the durable medical equipment channel to pharmacy. With this ongoing shift as well as the majority of our new customers now coming through the pharmacy channel in the U.S., our expectations for customer growth in 2022 are again higher than our revenue growth rate, continuing to reflect the large end markets we serve and the growing demand for DexCom CGM worldwide. We have several scenarios built in conjunction with our plan G7 launches. And factoring in the respective regulatory approvals and competitive environment, we will provide updates as the year progresses. Turning to margins. We are establishing the following guidance for 2022. We expect gross profit margins of approximately 65% for the year, in line with the expectation that we established for our 2025 long-range plan. The slight step back relative to our 2021 results is primarily related to the launch of our G7 system during the year as we begin production at lower volumes and gradually scale in conjunction with our launches. Despite that step back in gross margin, we expect to offset that impact completely with approximately 400 basis points of operating expense leverage. We anticipate our operating margins of 2022 of approximately 16%. This factors in the ongoing investments that are driving significant returns for DexCom and setting us up for sustainable growth, including our direct-to-consumer marketing efforts and investments in our product portfolio pipeline. We are making these investments with discipline throughout the organization, driving towards the margin expansion that we've established in our long-range plan. Finally, we expect adjusted EBITDA margins of approximately 25% in 2022.

Thanks, Jereme. To summarize, we set out in 2021 with a few key goals in mind: to complete the clinical and regulatory process for G7 and prepare for significant launches, to validate health and economic outcomes for DexCom CGM beyond the intent of insulin-using population, to broaden access to DexCom CGM globally through evidence, advocacy and leveraging our growing scale and efficiency, and to strengthen our product portfolio for future growth through differentiated software capabilities. Our progress on all these initiatives contributed to a great 2021 and have us looking forward to a big year ahead in 2022. I would now like to open up the call for Q&A. Sean?

Thank you, Kevin. Operator, please provide the Q&A instructions.

Our first question comes from Matthew O'Brien from Piper Sandler.

I have a question about G7 that has two parts, which are somewhat connected. First, Kevin, could you discuss the significance of data in the commercialization of G7 compared to previous models, and what is the pricing for it? The second part relates to gross margin, which seems to have taken a significant hit, likely due to G7. What are your expectations regarding the impact of the G7 rollout? Specifically, what does this mean for the timeline in Europe, over the next month or two, and what is the approval timeframe here?

There's many parts to your two-part question. I'll deal with some of them, and then I'll give them to Jereme, Matt, but thanks. Let me talk about the data first. DexCom has long built its legacy on having the best product in the market with respect to performance and a product that everybody can rely on. And time and time again, we've launched products where we published great clinical performance and real life experience always ends up better than what we published. I've been looking at glucose sensors since the mid-1990s. This data is better than anything I've ever seen. And I think from a marketing perspective and from a customer experience perspective, it's absolutely critical that we remain top of the industry. And this data puts us in there and it demonstrates really the thought and effort that's gone into this product. Let's not forget, we've changed pretty much everything. There's a new algorithm, new hardware, new electronics, new app, you name it, new receiver, everything in here is different than what we've had before. So this has been a monumental effort that's taken a lot of time and to be able to produce this type of clinical results we think just show the diligence of the effort. And with respect to approvals, we think it's also very important that we not leave room for error or room for doubt with the data that we submitted, which is exactly what we've done when you look at the size of that study. And of 39,000-some matched pairs, there's really no room for doubt that this product is ready for prime time from a performance perspective. On the approval timelines, as I said in the prepared remarks, we're down to the last steps for CE Mark literally procedural-type discussions with documentation that will take place in the near term. We're very confident that we'll get CE Mark very soon, and then we will start our wanted launch in Europe and then roll out to the full launch after that. We've had initial dialogue with the FDA and our submission. And so far, those discussions go well. We currently are not anticipating a delay, but we don't control that any more than we controlled the CE Mark delays either that we've just experienced. By providing great clinical data, though, that certainly takes a large element out of the process. I couldn't be more excited about G7 though, Matt. I'll kick it over to Jereme for the financial ramifications.

Sure. Yes. So it's a good question on the margins. We exited 2021 north of 68% with our G6, right? So we are certainly seeing G6 firing on all cylinders from an efficiency perspective. And so your question is, well, how does the sequencing and timing of G7 work? How does that impact the margin in relation to the timing throughout the course of the year? And it's a little bit of an insulation. So if it rolls out a little bit slower, certainly, the cost to produce G7 are higher, but that means we're ultimately selling more of G6. And so you have this little bit of this transition, where as you think about it from a multitude of different scenarios, it really zones back in on the 65% margin, and that's the reason why we feel comfortable with the guidance there. I'll give you the opposite scenario of G7 is able to come out a little bit faster. The regulatory approval happens quicker. Certainly, we'll be selling more of it, and we'll be able to leverage the fixed cost infrastructure and certainly improve yields. And so you ultimately get to that end goal a little bit quicker. So I think under both scenarios, whether regulatory approval and launches sooner or later, I think that 65% gross margin really speaks to the entirety of the year.

And our next question comes from Danielle Antalffy from SVB Leerink.

Kevin and Jereme, my question is around how to think about Q1 and potential COVID impact that you're seeing thus far? And also kind of if you could opine on what you have factored in?

Jereme, go ahead.

Sure. Yes, I'll take that one. Yes. Sorry about that. We cut a little bit in and out there, but I think I got the question, which is how we thought about it. And I'd say for the full year guidance, we have factored in the impact of COVID and how that would impact us. Now we did talk a little bit about it on the call. And I think you saw this really across, especially in the United States, really where Omicron was pretty strong throughout the course of January, and we see it starting to dissipate here in February. So we will see that as our ability to get in front of primary care physicians and access new patients, but it's not a question of if, it's more a question of when. And so that was all contemplated in the guidance. And as we think about the full year, there's a lot of other things that we think are certainly interesting but it's as we think about certainly Dexcom 1 and the launch, as Kevin referred to of G7 with the incredible data. So we've really contemplated all of those in the guidance. But certainly, we know that as we exited January, certainly, there were some primary care physicians that were closed outside participants, but we are starting to see some of that though as we move to February.

Yes, I'd even add to that. I actually got out in the field earlier this week, and I heard from the rep and the teams out there that they've not had the access they wanted here in the first quarter, but it is starting to open up a little bit. Time will tell.

And your next question comes to Jeff Johnson from Baird.

Kevin, now that you've got the MOBILE data published and the ADA standards has been published and updated, how should we think about maybe the pathway to U.S. coverage for non-intensive basal only just at the CMS level and maybe expanding commercial encouraging? Could you just remind us ballpark how many commercial payers right now or in some form or another reimburse basal-only or non-intensive T2?

There is some limited reimbursement for basal only and some non-intensive type 2s, but it's not a very big number, Jeff, it's kind of a half-hazard basis. And it's not something that we sell to or market to because there's just not that much of it out there. The pathway for approval will be similar to what we've done in the past. Given this MOBILE data, we're certainly presenting this on the commercial side and working to get coverage at various payers. And hopefully, some of those will drop over the course of the year. On the CMS side, now that we have really good data, we have a good CMS plan to work with and go with them, make them more aware. Unless we forget, we did lead the charge for Medicare approval for CGM in general as a company here. So we have experience on this front, and we'll continue to push it. But it takes time, and there's always variables. In all fairness, I was completely wrong on Medicare approval before. It was approved 18 months earlier than I said I was going to come. So when I made a commitment there, so I'm rather having to make any commitments on that front. We're just going to keep pushing. The most important thing, though, is the outcomes are there. I got a note from a patient not long ago, who is a type 2 patient in this category. And while the patient got put on a new drug, she attributes her 4-month A1C drop in 6 months to being on DexCom, not to a new drug because she knew what her glucose values were, and we've seen this time and time again. And we're very confident this is how this plays out over time.

And your next question comes from Robbie Marcus from JPMorgan.

Great. I wanted to see if you could speak to the commercial launch strategy here. It sounds like you're spending a lot in the fourth quarter and 2022 ahead of G7. You have Omnipod 5 launching. You also have Medtronic in a tight spot with the warning letter with a lot of patients potentially moving over to partner therapies here. So maybe just talk to us about the strategy, how you're going to be spending your DTC dollars, how we should think about those ramping up? And what the competitive message from your reps will be this year?

Well, our competitive message from our reps is going to be the same it's always been, we're the best. And you're right, Robbie, we have a tremendous opportunity on the integrated system front with our partners to go grab as many of these users as we possibly can, and we are in talks with both Tandem and Insulet to let's go and get as many as we can as those individuals rotate off warranty and have an opportunity to get into a new system. I think it speaks to our connectivity strategy and partnering with others now we have two options. And we know a big driving factor for both those partners, the fact that they pair with the best product on the marketplace. So we will aggressively work with our partners on that front and make sure we have a joint message together. With respect to our own direct-to-consumer marketing, we have specific messages literally down to the geography standpoint, where in some states, we target Medicare patients more than others. In other states, we target pediatrics and others. And then we analyze the effectiveness of those ads, the return on those investments and then adjust from there. I think 2022, we're in an interesting year because we're going through a product launch. That really isn't going to affect our behavior. We have to get more users on the G6 system as we go. And then some of those ads will ultimately shift over to G7. But we're not going to slow down, and we're not going to create anticipation. We'll market what we have and sell what we have. And then as time comes, we'll pull the switch and go over.

And your next question comes from Matt Taylor from UBS.

So I just wanted to ask you more about the dynamics of DexCom 1, and we're hearing about Libre 3 being rolled out more broadly. Are you seeing anything different on the competitive front? And maybe talk about how you're going more head-to-head with DexCom? I'd love you to just flush out those dynamics and the opportunities it's creating for you now that you didn't have before?

Well, again, let's remind everybody our original DexCom 1 launch is for relatively small countries. The results have been very good. We've launched it as only an e-commerce platform, and two of the four countries have now put the standards in place to reimburse for it because of these and the acceptance of that product and the price point. So DexCom 1 does give us an opportunity, first of all, to expand in new geographies where there may not be reimbursement, where the path to reimbursement would be difficult, and there's a lot of integrated systems. We look forward to that as a geographical expander, where we don't have infrastructure. The other opportunity we have with DexCom 1 in all honesty is looking at a possible two-product strategy in some geographies where we believe we can support our G-Series for those intense insulin users, particularly those who are on partner systems and integrated systems and those who need all the share and follow function, pediatrics in particular, and there's another population that may not need all those features. And in those geographies, we believe DexCom 1 is an excellent product offering that could round out our portfolio very nicely. As far as Libre 3 rolling out, we haven't seen that much of it so far. I know there's been a lot of announcements that were approved several years ago. So we'll see how that rollout goes.

And your next question comes from Larry Biegelsen from Wells Fargo.

Just one for me on G7 and the OUS launch. Kevin, I heard you say initially it will be a limited launch. What does that look like? How many markets? How long is the limited launch? And how should we think about the ramp of G7 once it is approved?

Our limited launch will be a relatively short period of time and really focus on one geography primarily. And after that, we'll then roll it out to really the larger markets, the larger, more reimbursed markets and the larger markets where we can get reimbursement very quickly and then go down to the smaller ones. So we, again, have the geographies divided up in tiers: Tier 1 countries, Tier 2 and Tier 3 and along those lines. And that will roll out over the course of 2022, certainly to the larger markets then the other geographies will come after that.

And your next question comes from Joanne Wuensch from Citibank.

I just want to double-check two things. I want to make sure I saw either at the earlier presentation in January today. Your patient volumes in the United States were up 30%. Is there a similar number you can share outside the United States?

Yes. So what we had mentioned is in the U.S., they were in the high 30s and globally, they were also in the high 30s. And so that's the two numbers. So we gave you the global one, certainly in early January. And then today, we mentioned the U.S. was also in the high 30s as well.

Okay. And could you remind us what your view is on pricing headwinds for this year and if and/or they roll into next year?

Sure. Yes. So this year, our pricing headwinds, we had talked about is really what we call channel mix was really around $250 million, $200 million in the U.S. and about $50 million outside the U.S. We came in a little bit light of that this year, but generally in line with that. And we expect similar type mix headwinds into 2022 and then dissipating significantly as we move into 2023.

And your next question comes from Jayson Bedford from Raymond James.

I wanted to ask about the U.S. business in the fourth quarter. It's been about a month since you last updated investors. You mentioned COVID a couple of times on the call. But is there anything else you could share with us with respect to kind of U.S. growth, which was obviously a bit slower than the prior three quarters?

Thank you, Jason. I appreciate the call. From a growth standpoint, we observed about 15%, which was slightly slower in terms of revenue growth. However, unit volumes were in the high 30s, indicating a robust underlying patient base. One key point we encountered, as you mentioned earlier, was that we did not meet our new patient targets. Despite this, we still achieved near record new patient additions, which we view positively. We faced some challenges in accessing primary care physician offices. Kevin noted that when Omicron was widespread, many of these offices were not allowing outside visitors, creating difficulties in establishing relationships with these physicians and helping them understand how to use the product. This situation predominantly influenced the results we reported for Q4. In our early calls with preliminary numbers, we highlighted this, and we have reaffirmed it in the weeks since. As Omicron wanes and we can return to these primary care physicians, we are optimistic that adoption of the technology will resemble the trends we observed before the surge. This was really the main issue, with no other significant factors at play.

And the only thing I'd add to that, Jason, again, these volume numbers still remain very high. So again, as channel mix shifts, the growth rate is lower than the volume numbers. Add to that the fact that our NPS scores are higher than they've ever been. So patients are very happy and satisfied with the DexCom experience, which leads to them staying on the system and also being on the system more time. So as you look at revenue factors going forward, two of the biggest ones are patient retention, utilization, and we're doing very well on that front. And so that pretty much sums it up.

And the next question comes from Matthew Blackman from Stifel.

I've got one for Jereme on the operating leverage you're guiding to in '22. How should we think about where that leverage manifests in the P&L? Is it disproportionate to the SG&A side because you're scaling into those large sales force additions? Or is it skewed to R&D because G7 costs are rolling off? Just any help on how to think about the moving parts there?

Sure. Yes. No, it's a fair question. And it's split about 50-50. I think what you're going to see is you're going to see us leveraging mostly the G&A line and the SG&A line. We'll continue to make sure that we're allocating funds to sales and marketing, but you're going to see us leveraging the G&A line and continuing to do so. And then you will see some of the falloff on some of the R&D side as we leverage R&D. And as we post G7 launch, we don't have to incur as many costs associated with a launch establishment. So think about it 50-50 across both of those and G&A, not S&M and R&D.

And your next question comes from Marie Thibault from BTIG.

I wanted to ask a question about the sales force progress. I think it was about a year ago that you doubled the sales force. And obviously, outside of the Omicron challenges here more recently, I would like to hear how their progress has been and what else might be needed at this point?

We're really happy with the efforts of the sales team. And again, I got out in the field for the first time this week and just had a couple of meetings with some regional teams. I'm very impressed with the quality of the people we were able to bring on. DexCom is a name here in the U.S. that has attracted great candidates. And literally, there were thousands of people that applied for these jobs. We very much had our pick of the cream of the crop. They're all getting very much up to speed. I'm also very impressed with the diversity of the group with respect to experiences. And what we've learned is they brought from their companies. You have some from pharma, some from devices, some from diabetes, some of who used to be clinicians. So you have a very different team with very good ideas to go about this. We're confident the team is making very good progress. We missed the opportunity in all fairness to have them all together, and I am in particular, to get to know more of them. The growth in new patient starts has not been linear with the expansion of the sales force. But as we get down into these other markets, we can't expect it to be the same because they don't see as many of the people with diabetes in our traditional endocrinology market. But we're happy with the growth that they've achieved. We have very ambitious targets for next year. What might be needed in the future is something we debate a great deal internally. We're happy with what we have now, and let's let this play out for a while longer before we make any changes. I don't see anything changing right now. If anything, again, this is all about awareness on our side. And if what we need to generate more awareness has more feet on the street, that's the direction we would go. For right now, we don't feel that way, but we may in the future. So we'll see. We're never averse to trying pilot programs in specific geographies to see if another option comes to work, and we will do that all throughout 2022. And if something sticks, we'll move in that direction.

And your next question comes from Chris Pasquale from Guggenheim.

I wanted to follow up on the factors impacting 4Q and what lessons we should take from that as we look at 1Q? So you said COVID was the main headwind, but your channel mix has also changed a lot over the past couple of years. Do you think that's resulting in less seasonality than you used to see in the year-end? And then the corollary to that would be, should we expect the typical step down in 1Q could be more muted because of that reduced seasonality? Or did was COVID more of a factor in January than it was in December? Can you just help us sort of balance those different factors?

Sure. Yes. No, I'm happy to walk through it. So you are correct. As time moves on, the move of the commercial business certainly more and more to pharmacy than DME should give us more of a situation where Q1 and Q4 are less pronounced. And so you are 100% correct there. And over the longer haul, that's where we expect to go. In terms of seasonality for this quarter, we do expect it to be relatively similar to last year. And again, that's just more of us trying to navigate through, one, that migration; two, the Omicron variant this year was certainly more than we saw in January of last year. And so we're really comparing year-over-year. And so I think it's fair to say that. So we would expect that those two things really offset each other. So you see a little bit of a seasonality in this of 2022 similar to that you've seen in the past. Longer term, you are correct, and we will expect absent all macro factors that ultimately impact people's ability for movement and seeing physicians, etc., it will migrate to more of that situation. But we'll keep you posted as years get forward about that seasonality. For now, that's our expectation.

And your next question comes from Margaret Kaczor from William Blair.

This is Brandon filling in for Margaret. I wanted to ask about the type 2 basal population, particularly regarding some of the non-intensive patients. I understand that you are still in the early stages, but you have gathered significant data from the MOBILE study. Have you had the chance to engage in field discussions with endocrinologists or other physicians? Additionally, do you have any insights from the patients already using DexCom? I’m interested in any early feedback regarding utilization, pricing, or demand from those less intensive type 2 patients. Is there anything we can interpret about the potential commercialization moving forward?

Well, I'll start with basal insulin because the ADA in their recent guidelines recommended CGM continuous use for people on basal insulin, which is a far departure from where we were in the past. This is very encouraging for us because the fact that this group has now recommended that is a big deal for us going forward. And as far as that population utilization in our MOBILE study and even in the other things that we've heard, they have no problem using CGM all the time. For non-intensive patients, we've had our program with Level 2 at United Healthcare. We've had other programs with Intermountain Health, Onduo, Welldoc, a number of them. And the results remain the same over and over again. Patients on CGM do better than those who are not. And the information provided by CGM enables them to make the proper changes to have better overall health very much like I said in my prepared remarks earlier. We see A1Cs go down because people know what the consequences of their meds, of their exercise, of their diets, of sleep, of all these factors has on their overall health. With respect to the pricing and the business model, we've often said we are solving a different problem when we're going after type 2 less intensive diabetes. And we, therefore, think the pricing model will be different than the current product that we have. And we are working on what that optimal solution is right now, and you'll hear more from us on that front over the course of 2022.

And your next question comes from Cecilia Furlong from Morgan Stanley.

I wanted to ask on DexCom 1 again. Just how you're thinking about further geographic expansion in 2022 as well as expectations for relative contributions to the patient volumes, OUS in 2022? And where you think this can go over the longer term?

I'll start, and Jereme can maybe have some more specific numbers after I'm done if he's got any. Again, as I said earlier, there are two great uses for DexCom 1. The first one is those geographies where we're not and where we don't have infrastructure or a distribution arrangement with a distributor or another distribution partner lined up. We can drop an e-commerce platform in there and have cash pay patients, and we can get them on the system and we can go. Our results in our four initial countries have been outstanding. And so we'll have other new geographies up over the course of the year like that. They will not have major contributions to our revenue, but they do expand our footprint and do position us ultimately to get reimbursement in those countries. Again, as we've seen in the first four where we launched it, we now have reimbursement and process for two of those. The other opportunity for DexCom 1 is in many of the major established markets, particularly OUS. We have an opportunity with DexCom 1 to implement a dual-product strategy. Our G-Series does a lot more than our DexCom 1 product with connectivity, sharing, follow, the predictive alerts and all the other things that we have in that system, we believe it merits a different price point. Again, it solves a different problem. It's a different use case. We will very opportunistically pick geographies where we could launch DexCom 1 and augment our business in those geographies, again, adding more patient volume and more revenue to the process. As far as giving you numbers or plans, I'm not going to give you all of that. That's on the strategy side and something for us not to unwind to the world. But suffice it to say, those plans are in progress. I don't know, Jereme, if you have anything to add?

I think the safe bet is just to assume multiple country entries with DexCom 1. And we'll get you a little bit more color once we're into those countries, hold those back for a strategic purpose.

And your next question comes from Kyle Rose from Canaccord.

A lot has been discussed, but I want to address the long-term product pipeline. I understand you haven't launched G7 yet, so you may not be pleased with my inquiry about future plans. With G7 expected to launch globally in the next 12 to 18 months and DexCom 1 also scaling, what can investors anticipate in terms of product development and launches? Will there be combination products or different analytes being tested? I'm trying to get a clearer picture of what your hardware product pipeline looks like in the medium to long term.

I love what's next question, but these guys are cut me off after 15 minutes, so I'd have to stop. First of all, let's look at G7 and everything that's changed. We have plans in place to modify and make everything with G7 better already. We have, for example, a major cost initiative to reduce our manufacturing costs even where they are. You can expect us to be very diligent in efforts to get that up to a 15-day life from a product perspective because that certainly has a big impact on our P&L. We have, for example, alternative electronic structures, all those types of things going on. We've never stopped improving our sensor technology. So all of these things, we continue to work on our core business. At some point in time, there may be some diminishing returns, particularly given the accuracy of the data on the current system. So we balance that. But a lot of these efforts, again, we focus on our product development, performance, patient experience, our customer satisfaction and cost. And we look at all those buckets, I can tell you there will be a lot of software initiatives here going forward with the G7 platform. We believe with DexCom 1, we've merely scratched the surface of our ability to differentiate products through different software experiences, again, creating different business models and expanding our reach. With respect to their analytes, we continue to study that. We've studied that for quite some time. What we have to determine is what are real commercial markets for us? And in all fairness, we haven't found anything that compares to glucose yet. And we have a lot of things that we need to conquer on the glucose side. But we do have studies going on for some of the other analytes that you certainly be familiar with that you've heard others talk about. It just becomes a question of when and do we have the right platform and what changes we need to make to get there. So there are numerous things in the pipeline. Don't ever think we've stopped here.

And your next question comes from Steven Litchman from Oppenheimer.

Kevin, maybe building on that, you talked today about the steps you're taking now on basal only with the MOBILE data and ADA recommendations in hand. Last ATD, we saw some positive data on non-insulin type 2. What are the next steps here in 2022 in terms of going after that opportunity and even prediabetes?

It is part of our strategy, centered around four key areas. We focus on physicians, programs, clinics involved, and the patients themselves. We are addressing all four areas with these initiatives. Positive data has emerged from Level 2 studies, and we anticipate other companies will soon report similar positive results, especially using this product for type 2 patients not on insulin, where outcomes remain strong. Our approach will cover all bases. We believe the experience for these customers will differ from those who are heavily reliant on insulin. This presents an opportunity for us to utilize our software capabilities to create a unique engagement experience for them. Engagement is crucial to achieving favorable outcomes with any technology. Our studies show that users of our systems are highly engaged, and we are focused on building a type 2 solution that emphasizes this level of engagement, which is why we are taking our time with this product opportunity. You can expect to see us tackle this from all angles. Jereme, do you have anything to add?

No, I think one of the things that if you think about this opportunity that we really prepared ourselves for, even beyond our product and our engagement there is some of the software with connectivity that we've built. And so the real-time API, for example, is our way of trying to move into this market and think about, well, if you're building an app and your app is built around whatever that happens to be, whether it is health and wellness, we want to be able to be the partner of choice. Now we have to work on labels and things around those lines, which we'll absolutely do over the long haul. But we've really set ourselves up to be what we believe is the partner of choice, and we'll continue to do so. So that's another way we're going about it, which I think you'll continue to see us push down that path as well.

And your next question comes from Josh Jennings from Cowen.

I wanted to ask about gross margins and the strong performance in 2021. Could you, Jeremy, explain some of the factors that contributed to the outperformance compared to your initial guidance? Also, why were some of those factors unable to be replicated in 2022? I assume part of it relates to the timing of the G7 launch in 2022. Additionally, how did the acquisition of international distributors impact margin performance in 2022? Lastly, do you see any potential upside to the initial guidance range for 2022?

Yes, definitely. Looking back at 2021, there were several key factors contributing to our strong performance. First, we've invested in a significant amount of automated machinery, which has led to improved yields over time. Our team has excelled at enhancing these yields while also reducing waste, increasing efficiency, and better absorbing fixed costs, which has been a significant advancement. Additionally, through our experience with G6, we've been able to lower our warranty exposure. This means that as we send out replacements, we are optimizing our logistics and reducing freight costs in the process. All of this has been beneficial for G6. As we prepare to launch G7, we will be introducing new machinery, which means we will need to go through the yield process again since it's a new product. We'll also have to handle warranties effectively. So, when we look at what transpired in 2021, that's the essence of it. Our team performed admirably, and as we launch G7 in 2022, we will navigate a similar journey as we did with G6. You might recall the initial challenges we faced with G6, but we successfully overcame them, and we anticipate doing the same with G7. However, in the year of launch, we recognize we'll need to manage through those challenges. Potential upside could come if we can address yields or warranties faster than anticipated, which will depend on factors like the speed of regulatory approvals. This is a key consideration. Looking ahead, we see no reason why we can't continue to improve efficiency over time. G7 has been designed with efficiency as a priority, and we have numerous initiatives underway to optimize costs associated with it. We'll continue to focus on this in the future. As we approach 2023, we're very enthusiastic about launching G7 and the improvements that will follow.

And your next question comes from Frank Pinel from Jefferies.

I guess just looking at your user base, it looks like you've grown that by 3 to 4X over the last several years. I'm wondering to what degree that's sustainable given G7, DexCom 1, prediabetes, type 2, obviously, a lot of things on slate. And is there a point that you see where OUS revenues eclipse U.S. revenues?

In our long-term plans, we certainly show OUS revenues becoming a larger portion of our overall revenue picture than they are today. We don't have them eclipsing U.S. revenues in our current 5-year plan because we have so much opportunity in the U.S. market. I think the user base is a great question. Because over time, the characteristics of that user base changes as we are into more, for example, DexCom 1 type products where it's an e-commerce platform. We don't know how sticky those patients are going to be right now. We have developed a great model for stickiness with respect to our current user base. And we are designing our products and our software experiences to maintain that type of engagement in a model where people can afford to pay for the product. For many years, the #1 reason an individual could use DexCom was cost. And we are trying to knock that barrier down more and more as we speak. We need to make sure we address those issues going forward. Our customer experience team has been fabulous identifying things we can do to make our product better and increase that base and have them stay. It's not just getting them. Getting the users is one task, but maintaining them is another one. And our record is unlike anybody else's in this industry, we're really good at this.

Yes. And I think just to your question in terms of how is it repeatable over time in terms of the patient base. Look, I mean, the majority of DexCom's existence has been really focused on the intensive insulin user. But we know that there's an unmet need as you move into a basal user, and that's with the MOBILE study. And that's a large increase in addressable population. We also know that the type 2 space, there's a huge demand for that product there, but it's a question, as Kevin referred to, ultimately, how do we go to market in there? And we have some great ideas about how it should look, and we're working through those. So I think we're in a pretty good spot. But we're navigating through that. And then to your point, the prediabetes population and health and wellness population is huge. And so it's really a matter of us getting the right product into those folks' hands. And I think that's what you see us doing over time. All the investment in software and platforms is really designed around how do we engage not only our existing population and engage them better but also engage these new populations, which means the TAM for this potential product is incredibly large.

And that concludes our question-and-answer session. I will turn the call back over to Kevin Sayer for final remarks.

Thanks a lot, operator. As we spend today, looking back at 2021, I just want to spend a minute and acknowledge our teams today. We have a commercial team who generated 26% revenue growth and volumes that far exceeded that in a time when we're putting through rapid expansion efforts as we doubled the U.S. sales force, acquired distributors and did a number of things to make it more difficult. We have an operations and quality group who were doing all this time when the world has talked about component shortages and not being able to produce product has delivered every single month. In addition to delivering, we've opened a large regional distribution center in Arizona, and we're building our factory in Malaysia, and we're hitting our schedules and time frames there. You look at the innovation at this company from R&D, clinical and quality groups with respect to the work and efforts on G7 as we got those filings in and those filings are personal with respect to the data that we presented. And we're getting up and ready to scale on the upside. And then just from a day-to-day basis, our HR group has walked us through thousands of hires literally in the past year. And the finance guys haven't missed a beat. And IT as we move to home, we've not had any trouble. This has been a great year for DexCom. And a lot of people have contributed. It's never just one group or one thing. So I just wanted to thank everybody, acknowledge everybody's accomplishments, and we look forward to a great year next year. Thanks.

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