Dexcom Inc Q1 FY2023 Earnings Call

Welcome to the DexCom First Quarter 2023 Earnings Release Conference Call. My name is Abby and I will be your operator for today's call. I will now turn the call over to Sean Christensen, Vice President of Finance and Investor Relations. Mr. Christensen, you may begin.

Thank you, Abby, and welcome to DexCom's first quarter 2023 earnings call. Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will summarize our recent 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. At that time, 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 first quarter performance on the DexCom's investor relations website on the events and presentations page. With that, let's review our Safe Harbor statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, and expectations about future events, strategies, competition, products, operating plans, and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to DexCom and are subject to various risks and uncertainties. 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 our tables in our earnings release and the slides accompanying our first 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 excellent quarter for DexCom with first quarter organic revenue growth of 19% compared to the first quarter of 2022. Momentum for global CGM adoption remains very high, and we continue to see a growing appreciation for the differentiated experience that DexCom provides. It has been an exciting start to 2023. Our teams advanced some of our most important strategic initiatives in the first quarter that will continue to build on our foundation for growth in the years ahead. There is growing momentum behind the rollout of our G7 system as we initiated our full launch of G7 in the U.S. This launch represents years of hard work to bring to market a product based on feedback from our customers that meets their specific needs. G7 is the most accurate CGM on the market. It is simple to use and is supported by the most covered CGM brand. We expect this differentiated feature set will add to our leading customer satisfaction metrics. We were thrilled with the opportunity to announce this launch on the biggest stage with our second-ever Super Bowl commercial. Over 100 million people were watching the game when our commercial aired, and the customer clinician outreach that followed was incredibly encouraging, as we expected it would be. The ad generated 3 times as many impressions for DexCom as our 2021 Super Bowl commercial, exceeding our initial expectations on engagement and awareness. We also heard from members of the diabetes community who shared their DexCom magic moments and pride in feeling represented on a platform of this size. Awareness remains a critical element to driving broader access and adoption for CGM, and we designed this campaign to demonstrate the life-changing potential of our system; G7 is incredibly simple to use. Millions of people with diabetes do not use CGM, and this provided us with an opportunity to both connect with them and advocate on their behalf. While we are still early in our U.S. launch of G7, we have been very encouraged by the initial response. We have seen a steady ramp of new users, and the initial feedback from both customers and clinicians has been consistently great. We have also seen this product attract new prescribers altogether. Already in the early weeks of this rollout, nearly 1,000 healthcare providers have prescribed G7 who previously were not prescribing DexCom CGM. Perhaps most encouraging is the progress we have made in building reimbursement for G7 in only a short period of time. Medicare coverage was established for G7 only days after our Super Bowl commercial, which coincided well with the timing of our launch and came in about a month earlier than anticipated. We also finalized our commercial DME contracts relatively quickly and G7 commercial DME coverage is now already on par with G6 levels. Commercial pharmacy coverage has also progressed rapidly. In our reimbursement discussions, payers are clearly recognizing the value proposition that exists with DexCom G7. As a result, we already have more commercial pharmacy coverage established for G7 today than our competitor does for their sensor platform. Payers continue to value our premium feature set, leading customer engagement metrics, best-in-class performance, and proven outcomes backed by robust clinical evidence. Overall, we have advanced coverage more quickly than anticipated, and we expect G7 to be covered by all major PBMs by the end of the second quarter. These coverage decisions for G7 also position us well as our industry takes a significant step forward in terms of access for CGM. In early March, CMS finalized their proposal to expand access to include people with type 2 diabetes using basal insulin only, as well as certain non-insulin-using individuals that experience hypoglycemia. With coverage officially kicking in last week, this decision represented the largest single expansion of access to CGM in our industry's history. As a reminder, we size the basal-only type 2 population alone at around 3 million people in the U.S., with around half being of Medicare age. We are incredibly excited to start serving this population more broadly going forward, as we see a significant opportunity to help these individuals live healthier lives. Our mobile trial demonstrated meaningful improvements in time in range, A1C levels, and hypoglycemic events among this population wearing DexCom sensors, as sensor engagement proved to produce behavior changes within this cohort that supported greater glycemic control. We are in a great position to compete as this market develops, as accuracy, performance, and customer engagement will continue to be the defining features of delivering outcomes. Customers and clinicians have historically indicated a preference for a differentiated product where reimbursement exists, and we expect this dynamic to endure as access continues to expand. Along those lines, we will continue to leverage our mobile data as well as the updated ADA standards of care to build broader coverage. We are in active discussions with private payers in the U.S. to establish basal reimbursement and will similarly advocate for broader coverage in international markets. Our international G7 rollout also continues to go well with good initial uptake and high customer satisfaction rates. The majority of our international G7 customers continue to be new to DexCom altogether, suggesting the new form factor and feature set is attracting both people new to CGM as well as those using competitive systems. We view this as a very positive sign as we broaden our rollout in the coming months. In the second quarter, we will be launching G7 in eight new international markets as part of our strategic effort to get this product to as many people as possible. From a capacity perspective, we remain in great shape to support this broader rollout. We are ramping up production quickly and have plenty of G7 inventory on hand to support our growth ambitions. Additionally, we expect our Malaysia plant to start producing commercial products around midyear, which will further support our G7 scale-up. Finally, we look forward to seeing many of you in June at the American Diabetes Association's 83rd Annual Scientific Sessions in our hometown of San Diego, California. We are always excited to connect with thought leaders across the industry at this event, as we collectively work to map out the future of DexCom CGM technology in Diabetes Care & Beyond. In conjunction with the conference, we are planning an investor event where we will provide our latest vision around the future of DexCom and share incremental details on many of our key strategic initiatives. We hope to see you there. With that, I will turn it over to Jereme for a review of the first quarter financials.

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 our IR website. For the first quarter of 2023, we reported worldwide revenue of $741 million compared to $629 million for the first quarter of 2022, representing growth of 19% on an organic basis. As a reminder, our definition of organic revenue excludes currency in addition to non-CGM revenue acquired in the trailing 12 months. U.S. revenue totaled $526 million for the first quarter compared to $451 million for the first quarter of 2022, representing growth of 17%. We experienced another quarter of strong new customer starts in Q1, as we saw a continuation of steady demand for our G6 as well as an encouraging initial uptake of G7 with our launch in the final weeks of the quarter. As Kevin mentioned, we have been able to progress our commercial pharmacy coverage for G7 faster than anticipated in the quarter. This caused the impact of our bridge program to be around half of the $15 million level we expected, as more customers were able to access G7 through reimbursed channels. Accordingly, the impact on revenue from this program should continue to shrink going forward, given our established commercial coverage for G7. International revenue grew by 21%, totaling $216 million in the first quarter. International organic revenue growth was 27% for the first quarter. For another quarter, we continued to gain share in international markets in Q1 as customers have been responding well to our broad access initiatives and new product launches. As anticipated, DexCom ONE is having a growing impact on our results as this product has enabled us to enter new markets and compete much more broadly within existing markets. In the U.K., access to DexCom ONE was recently simplified with the addition of the product's transmitter to the national formulary, with the entire system now covered by the drug tariff. This reduces the administrative steps for clinicians in a market where we already have considerable underlying momentum. We will continue to work on delivering these types of wins, making it easier and simpler for customers to get reimbursed access to DexCom products. Our first quarter gross profit was $469.8 million or 63.4% of revenue compared to 63.3% of revenue in the first quarter of 2022. Our first quarter gross margin reflects the traditional step-down relative to what we see in the fourth quarter as we serve a greater mix of pharmacy customers and less contribution from our DME users with high deductible health plans. This was a better-than-expected Q1 result for gross margin as we delivered incremental efficiencies in our G6 lines while managing production for our G7 launch. However, we continue to anticipate gross margins for the full year in line with our original guidance as we scale our global G7 production. Operating expenses were $391.2 million for Q1 of 2023 compared to $347.8 million in Q1 of 2022. Operating expense management continues to be an ongoing point of emphasis for our team as part of our broader cost efforts, and it continues to be on display this quarter. In line with our expectations, we generated over 250 basis points of OpEx leverage in the first quarter, even as we allocated greater commercial investment to support our G7 launch. We are very proud of the efforts our team has made and continues to make on these efficiency initiatives. Operating income was $78.6 million or 10.6% of revenue in the first quarter of 2023 compared to $50.3 million or 8% of revenue in the same quarter of 2022. Adjusted EBITDA was $145.9 million or 19.7% of revenue for the first quarter compared to $112.4 million or 17.9% of revenue for the first quarter of 2022. Net income for the first quarter was $68.5 million or $0.17 per share. We closed the quarter with approximately $2.6 billion worth of cash and cash equivalents remaining in a great financial position. Our balance sheet provides us with significant flexibility to organically support our ongoing growth investments, including the build-out of our Malaysia manufacturing facility, and continually assess our strategic uses of capital. As Kevin mentioned, we are expecting our Malaysia facility to start producing commercial products around midyear, which we view as a pivotal moment in our global manufacturing journey. This plant will provide significant new capacity and be a key element of our long-term growth and cost reduction plans. Turning to guidance, we are raising our full year 2023 revenue guidance to a range of $3.4 billion to $3.515 billion. For margins, we are reaffirming our prior full year guidance of gross profit margins in the range of 62% to 63%, operating margins of approximately 16.5%, and adjusted EBITDA margins of approximately 26%. The increase of approximately $38 million at the midpoint of revenue guidance reflects our increased confidence in the business and the underlying market. This factors in our strong first quarter results as well as a benefit from CMS finalizing type 2 basal coverage earlier than originally anticipated. With that, I will turn it back to Kevin.

Thanks, Jereme. I would now like to open up the call for Q&A. Sean?

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

And we will take our first question from Robbie Marcus with JPMorgan.

Congratulations on a great quarter. To start, let's focus on the type 2 basal expansion that began last week. Could you discuss the expectations and timeline outlined in the guidance? What do you anticipate the initial reception and awareness will be, and how much education is needed for the market from you and your competitors in the CGM space? Additionally, following the Super Bowl ad, what are your thoughts on patient awareness and acceptance of wearing a CGM full time for type 2 basal?

Thanks, Robbie. This is Jereme. Appreciate that. In terms of guidance, maybe I'll start there and then I can turn it over to Kevin in terms of thought process around wear times. In terms of guidance, we had talked about basal prior to approval if it started in the middle of the year being about 1%. And our updated guidance has us higher than 1%, certainly more in that 1.5-ish percent range, but not necessarily changing integer. So hopefully, that gives you some context to where that's going. Certainly, we expect it to be a market change in terms of what I would say is reimbursement for the longer term. In terms of adoption, we're obviously just getting in those approvals and just getting in the reimbursement. So it's going to take a little bit of time for us to ultimately see how that cadence of adoption is. But you've got our expectations. And over the long term, we expect adoption to be, quite frankly, very, very positive. Maybe I can turn it to Kevin in terms of awareness in the channel and in kind of where times longer term.

Yes. Thanks, Jereme. With respect to wartime, our best plan of reference is our mobile study that provided the really most important data in securing this approval. Over 90% of the individuals who wore sensors during the study did not want to give them up. They felt the information was very valuable and useful and provided them with a scorecard on how they can manage their diabetes going forward. So it doesn't progress, and they could have much better outcomes. So we're very confident in the full-time wear. From an educational perspective, we do have some work to do in the PCP community. We did a big sales force expansion last year in anticipation of going more broadly, and we continue to evaluate our marketing and our full on direct distribution efforts to see what adjustments need to be made to create more awareness. We work very hard with our channel partners and believe we are in a very good position with them to go take on this front. So it's about creating awareness. It's about making it easier for patients to get their product and use it. I've been out in the field a few times, and the one thing I'm definitely hearing as I speak with a lot of the primary care physicians who are going to serve this market is G7 is so much easier to use, and it's much easier to use versus G6. They view this as a very real and very strong opportunity for their patients to achieve better outcomes. So we know we have the right product. We'll just work on creating awareness at the proper places to get it out there. But we're comfortable that people will wear it all the time once they get started.

And we will take our next question from Jeff Johnson with Baird.

So Kevin, I heard you talk about Jereme, I guess, probably it was you who talked about the Bridge program and kind of half the impact of that you thought originally in 1Q. You didn't hear anything on the cash pay program. We're starting to see on GoodRx and Amazon Pharmacy that some of these price points roll out in the $170, $180 range for your product. Just any updated thinking what are the initial responses you're seeing to that cash pay program, how additive do you think that could be to revenue this year? And how to think about the margin implications at those discounted prices?

Sure. Yes. Thanks for asking the question. So you obviously updated the Bridge program. The Bridge program is where a significant amount of folks are taking advantage of it. That price point is a little bit lower at this point. And great news, of course, is the coverage has come in a little bit earlier. And so certainly, we haven't had to have folks take as much advantage of it. In terms of those cash pay programs, we have seen some encouraging initial adoption, but it is relatively initial. So as you see those start to come through, longer term, we think it can be additive, and we believe it will be. In the shorter term, it's really not a material contributor, but longer term, again, Jeff, we're very excited about what this opportunity offers to folks. Longer-term margins perspective, we feel good about the pricing in those cash pay programs. We don't expect it to have a long-term drag on margins. As you've seen in the quarter, we continue to do really well designing cost out of our product, and we'll continue to work on doing that both with G6 and G7 to where these programs won't necessarily be dilutive to our long-term gross margin.

And we'll take our next question from Larry Biegelsen with Wells Fargo.

Congratulations on a strong start to the year. Jereme, I have two questions. The first quarter showed about 20% growth when excluding the bridging program, while the guidance is between 17% to 21%. Can you discuss the expected growth pace for the rest of the year? Is there any reason growth wouldn't pick up from Q1, especially with the G7 and basal launches? Additionally, what was the volume growth in the U.S.? People will likely compare your roughly 18% growth in the U.S., adjusted for the bridging, to Abbott's 50%. Can you provide any insight into that?

Sure. Yes, I'll start with the volume question first. Well, we're not necessarily disclosing volume specifically in quarters going forward. What we can say is our patient base, if you look at where we were exiting 2022. Our patient base grew in the mid-30%. As we've talked about what that patient base looks like when we disclose patients, and we'll do that every year, so folks have an understanding. That continues to play through. To give you some context to the first quarter, the first quarter was a record for new patients. And so our unit volume growth continues to be very strong. So as you compare the two, we feel very good about our unit volume growth relative to competitors, and we'll continue to feel good about that for the balance of the year. In terms of how to think about the cadence of the year, I do think the cadence of the year will be a little bit heavier weighted into the back half relative to prior years. That's just given the timing of the basal approval and as that starts to get going. But as you think about Q2, we recognize where The Street is today, and we realize that number will have to go up a little bit. And so as the overperformance you see in Q1, certainly record new patients, that will play through into Q2. And so you'll see some of the increase in guidance that is specifically related to some increase in expectations in Q2 performance. So hopefully, that covers your questions.

We will take our next question from Matt Taylor with Jefferies.

So I wanted to ask you one about just how quickly the coverage has been established in the DME and the pharmacy channel. I thought it was an interesting comment that you made that you think you have more coverage in pharmacy than your competitor. Maybe you could compare that and talk about what that means for ultimately how much of the basal opportunity you think you can garner?

Yes. This is Kevin. I'll address that, and Jereme can provide additional insights afterward. Regarding the basal opportunity, it’s essential to remember that the Medicare sales process involves durable medical equipment, and we maintain strong relationships with our distributors in that area. We have put in significant effort to ensure their success with basalt patients, which makes us confident in our position. Concerning our coverage, our primary objective is to reduce out-of-pocket expenses for our customers. As we have mentioned previously, 30% of Dexcom users with commercial insurance at pharmacies have zero co-pay, while 70% have co-pay amounts that are lower or at least equal to those of our main competitor. We strive to facilitate their coverage rather than rely indefinitely on the bridging program. Our team has been quite effective in achieving this. While the bridging program remains available, many customers go to the pharmacy and find they do not require it. The pharmacy coverage we have established enables them to lower their monthly expenses, which is crucial for our users. This is why we have pursued our coverage strategies so proactively. In fairness, we have discussed G7 sufficiently; the payers were eager to engage in discussions, and they welcomed us warmly as they are excited about introducing this new product.

We'll take our next question from Margaret Kaczor with William Blair.

Kevin, I don't want to get too far away from basal, which is clearly a huge driver in the short term and where a lot of focus is. But I guess, can you give us some context on the steps that you're taking today to drive adoption and to even earlier stage type 2 patients, whether GLP-1s or orals; and is this going to require clinical data? Are you guys working on that? Or are the partnership programs, I guess, at this point, sufficient upscale where coverage can broaden, I guess, without something like a mobile study?

We are working on all fronts there, Margaret. Thank you for the question. We see tremendous benefit as type 2 diabetes treatment gets more sophisticated. I was with a physician recently, and he talked about CGM being the scorecard. How do you do this? And how do you aggressively treat type 2 diabetes without knowing the scorecard? CGM offers a tremendous opportunity. It offers an opportunity to reduce or increase medications for individuals who aren't succeeding and bring A1Cs down significantly in combination with therapies. We think it will become a vital part. We'll continue to gather data from programs like we have done in the past. We're contemplating studies, but nothing we're ready to publish or announce. We don't announce our studies early on; we like to wait until we get done. But we are contemplating and seeing study proposals that could provide great data. The question is, do we want to do a 100,000 type 2 patient study that takes 3 years? Not right now. We don't think we need that type of evidence, but there is a very strong body of evidence in all of the individuals that we've seen that are on insulin that show CGM provides a great benefit when you're using a DexCom sensor where you can rely on the accurate information, and you can use it. So stay tuned on that market. We'll talk more about it in the future. But it is coming. We believe we play a vital role there in spite of all these advances that we're reading about.

We will take our next question from Matthew O'Brien with Piper Sandler.

Jereme, can you talk a little bit more about the pricing commentary that you just made? I think you said volumes up in the first quarter in the 30s, but yet overall, and this is a domestic question, overall, up 17%, 18% in total. So that would mean pricing came down quite a bit. Is that a trend we should anticipate? And then with your competitor take pricing up, are you really just trying to close the gap entirely here and just be done with this pricing delta between the two of you?

I appreciate the question. I wasn't trying to imply anything specific. What I meant is that our underlying patient base is increasing in the mid-30s, based on our annual updates. I wasn't commenting on specific volume for the quarter. However, I can say that the volume this quarter was fairly robust, marking another good performance for us, driven by a record number of new patients added. I don't want to delve into specifics regarding volumes. In general, prices and volumes tend to converge over time. We're seeing a shift from DME to pharmacy, and that channel has stabilized significantly. There is still some annualization happening, and we are going through that process, along with the ongoing bridge program, albeit to a lesser extent. Prices are moving as expected. I didn't mean to suggest there was an increasing gap between the two. I wanted to provide context about the solid underlying patient base this quarter. I apologize if I misled you.

We'll take our next question from Danielle Antalffy with UBS.

Congratulations on a strong start to the year. I want to pose a question, Kevin, although I know you’ll provide an update at ADA in two months. When considering the basal opportunity, we're looking at insulin-intensive type 2 as a benchmark. It appears that insulin-intensive type 2 is seeing a penetration rate of over 50% about five years after obtaining Medicare coverage. Is there a possibility that we could see a similar trend for basal? Could it potentially increase at an even faster rate, especially considering we are significantly further along than we were in 2018 in terms of technology and awareness? I'd appreciate any insights you can provide without preempting the Analyst Day.

No, it's a good question, and it's one we discuss a lot internally. Remember, to start, reimbursement with Medicare is only for patients, and that's about half the population. It has always been our experience that we've got to drive reimbursement from the private payers and then through the Medicaid programs also to get extensive penetration. With type 2 intensive insulin therapy, we're now pretty much there across most of the payer landscape. A bit of work to do on the Medicaid side still, but we're there with Medicare and the private payers. You'll see reimbursement evolve early on, and we get more coverage. Then I think we've got to generate these experiences with these users over time. Danielle, but in a five-year period, I can definitely see that, and maybe it does go faster because we have such a large group of end-users who will be getting reimbursement on the Medicare side. At the same time, they're not all seeing endocrinologists. So we've got a broader base of education with respect to their healthcare providers that we need to cover as well. So we'll factor all that in as we go, and we'll talk more about it later. But those are the factors we consider as we look at it.

We'll take our next question from Jayson Bedford with Raymond James.

I have two quick questions that I need brief answers for. Jereme, you mentioned that the first quarter was a record for new users. Can you clarify if that means it was a record for the first quarter specifically, or are you saying that you added more new users in the first quarter compared to the fourth quarter?

We've added more users in 1Q than we ever have in any quarter in DexCom's history.

Very clear. And then, Kevin, I was intrigued by your comment around actively talking to payers in Europe around basal reimbursement. I'm just kind of curious, is this something that you would expect in '23? And if not, is this something that could happen in '24?

It will take time and it's not going to happen overnight. The outcomes data we provided from the mobile study offers a good initial overview. I believe that as we achieve success with users in the United States and obtain outcomes, while potentially collecting more economic data from working with certain patients, we will need that type of evidence. Personally, I don’t think we have enough yet; the team might have a different view, but I feel we need to develop more. However, it is definitely a topic we can now discuss because once CMS approves a policy like this, it captures attention. We are beginning to engage with international audiences on this matter, and we will continue to advocate for it.

We will take our next question from Joanne Wuensch with Citibank.

Nice start to the year. I want to make sure I understood this new user comment. I'm going to assume that this also includes DexCom ONE patients that are in there. That might be adding to the difference between the dollar growth and the user group. And then I'm curious in how many countries DexCom ONE is in currently?

Yes, sure. It does include DexCom ONE users. So this is the entire group. DexCom ONE is now, and I want to say it's about 10 to 12 countries. I'm trying to do the math in my head across all. It's about 10 to 12. We're starting to really see some uptick in some of those smaller countries that we initially launched. And then, of course, some of the bigger countries where we have coverage, like the U.K., we're also seeing some nice uptick as well.

We will take our next question from Cecilia Furlong with Morgan Stanley.

Just a quick follow-up on DexCom as well. I know you talked about entering the year, thinking about one-third of new patient starts out of the U.S. stemming from DexCom ONE. Just curious if you could talk about where you are right now in Q1? And then as you think about geographic expansion contributions to that going forward through the year, just your expectations there as well?

Yes, sure. The expectation still is one-third of new patients. As you can see, some of the encouraging things, for example, with the U.K. formulary decision to include transmitters; that just makes it easier. The way we can make it easier, the easier it's going to be. So that's still our expectations. Right now, a majority of the DexCom ONE product is sitting in the EU region. So when you think of geographies, think of the European region, including the U.K. in that as well, where I think you'll expect to see most of the growth associated with DexCom ONE and really most of the growth for the foreseeable future until we can launch in other jurisdictions meaningfully across the world.

We will take our next question from Matthew Blackman with Stifel.

Another international one for me, just curious for an update on Japan now that you've got a broader reimbursement with G6. Can you really just give us a sense of how much that business is annualizing at and how important a component it is in your 2023 outlook?

Yes. This is Kevin. I'll take it. It's still a relatively small component in our 2023 outlook. We are working with our partner, Terumo, there, and with the broadened coverage we'll obviously see an increase, but it is not a material part of our plan this year. We're looking forward over time to getting G7 launched over there. We think G7 provides us a stronger opportunity in the Japanese market with all of its great features. We've grown a bit in Japan, not as much as we'd like. As we look at the year, we're looking at ways to go faster. G7 will be one of those and be a bigger part of our '24 plan than it is in '23 substantially.

And we will take our next question from Marie Kibble with BTIG.

You started the call by describing how much prescribers seem to like the G7 format and that you had new prescribers coming on to DexCom. I just want to clarify, are these competitive wins? Are these prescribers coming completely new to CGM? And then how much of the launch or the intro is complete as and how many of the potential prescribers have you been able to get G7 in front of?

Yes. This is Kevin. I'll take that. We have a lot of prescribers to go for G7 because it's going to be a very broadly used product, particularly as you look at the basal opportunity we have ahead of us. We know we have new prescribers we have to gain, and we structured our sales force and designed their workflow and goals for the year to go after and educate those that we need to engage with. A lot of the prescribers who are prescribing G7 could, in fact, be new to CGM. What we do know is they're new to DexCom, and that's what's most important to us. So if they're new to DexCom, it's one of two things: either they're new to CGM in general or they've come after using competitors' products, both of which we view as good. With G7, again, the excitement in the doctor's office is the ease of use. It is just so easy to use and simple for somebody to get started on G7 with a 0.5-hour warm-up with the easy insertion with the small form factor that we have. If a patient chooses to use a receiver, that receiver experience is much better than what they've had before. We really are getting great feedback on the new receiver and the accuracy of the system. The system, what we're hearing back performs extremely well, and people are very happy with what they're seeing. So word of mouth has been very strong on this product. Our campaigns have obviously been aggressive, but the strength of the product has supported what we've said.

We will take our next question from Travis Steed with Bank of America.

I guess I wanted to touch on margins. Gross margin in Q1 was actually above the full year guidance. So I want to understand the bridge on gross margin? And then maybe talk a little bit about OpEx leverage while we're on the margin topic and maybe the potential to see upside longer term above that long-term margin guidance.

Sure. Yes, thanks for the question. You're right, Q1 came ahead of expectations. We really saw continued efficiencies on our G6 lines that really played through in the quarter, which certainly is favorable. Given there's a large portion of our base, of course, that sits on those G6 lines that played through. So it was ahead of the full year. We do expect, as more and more folks move over the course of the year, as we're turning on Malaysia, ultimately ramping up our G7 launch, we will go through a bit of a margin dip as we make that transition. I still expect the year to fall in line with the 62% to 63% gross margin. But you are right, Q1 came in strong, and I think it just shows the capabilities of our teams. When you give them time, they can do amazing things in terms of designing cost out of product on manufacturing lines. We expect something similar to happen with G7 in future years. In terms of the margin profile, operating margin profile we gave the long-term guidance to get to 20% margins by 2025. If you assume the year was at 65% gross margin, we're starting to get close to that even in 2023. That just goes to show you the leverage we're building into the business. While we're not in a position to change our long-term guide. To your question, do we think that there are opportunities to leverage this business over the long haul? We do, and we're putting the levers in place right now; that's part of what we're doing as an organization. So we're very excited about that opportunity. I'm glad you pointed it out. We do believe there's opportunity in this business longer term to continue to generate more profits, and we'll continue to work on doing so.

We will take our next question from Chris Pasquale with Nephron Research.

I want to ask a couple of questions about the middle of the income statement. SG&A grew quite a bit faster than sales this quarter. Just was there anything specific that drove that? And then R&D spending has been down year-over-year now four quarters in a row. Should we expect that trend to continue? Or does it start to ramp back up as we go through this year?

Yes, that's a great question. It mainly depends on timing. Let's start with R&D. If you recall, around this time last year, we were finishing up a lot of work related to G7 and prototype development. During that period, we experienced higher spending reflected in the profit and loss statement. As the year progressed, R&D expenses decreased as the G7 costs either diminished or shifted to other areas since those lines had been validated. You could see that shift occurring. Looking ahead over the year, I don't anticipate the same level of leverage on R&D. We will continue to manage it as a percentage of sales, but it won’t be similar to what you observed this quarter. SG&A is the opposite situation. Last year, we did not have a Super Bowl commercial or a G7 launch in the first quarter, but this year, we did in the U.S. As a result, spending was higher than expected based on our long-term guidance. This was anticipated, which is why you noticed the change. Additionally, we are incurring costs related to building our factory in Malaysia as we approach the go-live date. Until we launch, those costs will be included in G&A. Moving forward, we will start to leverage SG&A more as the year progresses. In contrast, we will leverage R&D somewhat less, but ultimately we expect to achieve leverage across both categories by year-end.

We will take our next question from Matt Miksic with Barclays.

Some follow-up here on the basal opportunity. Clinicians we speak to describe a significant amount of pent-up demand in the Medicare patient community for basal patients. I was wondering if you have any sense of how long you believe this setup will take to address that pent-up interest in the community. Additionally, regarding pricing and margins for this category, considering the mix factor across all the different types of channels you manage, how does this compare to your core business or possibly some of your other channels in terms of margins, pricing, and mix?

Yes, I'll start, and then I'll let Jereme go from there. We do see pent-up demand, and we do see people very excited for this opportunity. We've got to get, as I said earlier, we worked very hard with our channel partners to prepare, and so we're ready for that with our DME distributors to handle the influx of users that will come through that. With respect to pricing models, Jereme can expand a little more specifically; again, this is the same Medicare pricing that we have in our Medicare business for those who are on intensive insulin therapy. The only thing that would change is a larger portion of our patients could become Medicare patients and subject to Medicare reimbursement. On an overall basis, Medicare is very favorable for us. We're in a very good position there with these patients, and we're very excited to serve them. Jereme, do you want to add to that?

Yes, I think that's exactly right. I mean, at the end of the day, it depends on what the reimbursement would come through at that will ultimately determine margins. Thus far, the reimbursement has come in generally in line in a favorable manner. Over the long term, we'll keep an eye on what that reimbursement looks like. Then we'll have that conversation to ensure you understand where this is going. But throughout this process, we'll be looking at reimbursed, and we'll also be looking at how we deliver our products at what we see to be a lower cost. That will be our way of helping manage through that as well.

We will take our next question from Kyle Rose with Canaccord.

Great. Good evening, everyone. I guess I'll be the guy that asks what's next when you're in the early stages of a new product launch. But just wondered if you could set some expectations with respect to extending the days of use as well as adding back some of those software features that you pulled at the request of the FDA in the second half of last year. Just help level-set expectations for R&D on a go-forward basis here.

I will begin with the software updates. We have made substantial investments in this area. For instance, we temporarily disabled the alarms feature for up to six hours in the U.S., but this will be reintroduced to the app before the year's end. We anticipate a consistent stream of upgrades to the app moving forward. Our software team will provide ongoing enhancements and launches more frequently than in the past. The engineering behind G7 was designed to establish a software platform that allows for easier and more comprehensive upgrades. We are eager to bring back that feature soon, and our users share this excitement. Looking ahead, our top priority in R&D is to increase the number of days for sensor wear. As previously mentioned, we have some work to do on the new patch that will enter manufacturing soon, using an improved process. We also have several additional programs aimed at extending the life of the product. Our initial target of 10 days was set to ensure we deliver the reliability our users expect. With the upgraded patch and other adjustments, we are confident we can meet this goal. You can expect to see an extension of product life in the near future. This remains our primary focus, and our team is making excellent progress.

We will take our final question from Steve Lichtman with Oppenheimer.

I was curious about the opportunity in non-insulin-using patients as we consider the LCD, especially with a strong focus on basal-only treatments. I know this will be a smaller group due to the LCD and hypoglycemia risk, but the overall patient numbers are significant. How are you approaching this segment, and are you also considering commercial opportunities in this area?

Yes, it's a good question. Maybe I can start, and then certainly, Kevin can fill in. Obviously, a massive market. Within that market, there are different use cases as you go through the acuity; even the subacute stages within that market. We are thinking about it from multiple different levels: one, is it an area where we want to reimburse where we worry about hypoglycemia? Is there a software change we need to make to target a hyperglycemic approach? So we're thinking about how to either fit form software and product features and/or does the existing product make sense, which, again, in many cases, we think it does. So we are working with payers and thinking about how we go after that market. In terms of price point and use cases, I think that's what we're still working on because the acuity level may be different. There may be someone who is moving more on the acute side that will want to use it just like a basal or an intensive user, where it's going to help maybe reverse the progression of the disease as opposed to someone that's more diagnostic on the front end to help curb changes earlier on. That's something we are working through. I think there will be a bunch of different use cases. It's hard to model that price out because I think it will be different based on who exactly is using it and what stage of the disease state they're in.

No, Jereme, I think you've hit it very well. It is a different market, and it will be a different use case. It's up to us to determine the proper value equation for that so that somebody gets what they expect to pay for. The problem isn't as severe as somebody integrated with an AID system. On the other hand, the results can save the system as much, if not more, money over time. We're looking at that balance and how best to position our technology in that market. But we're very excited to address it in the future.

And ladies and gentlemen, that concludes our question-and-answer session for today. I will now turn the call back to Mr. Kevin Sayer for closing remarks.

Listen, I want to thank everybody for listening today. This was a great quarter for us, record new patients, a great beat on the top line, continued leverage on our operating expense line in general, based on what we know, given the fact that it's the first quarter of the year, we couldn't be happier here, and it's going to be a great year for DexCom. Thanks for listening. Have a great day.

And ladies and gentlemen, this concludes today's conference, and we thank you for your participation. You may now disconnect.