Matt Dolan - DexCom, Inc. Kevin Ronald Sayer - DexCom, Inc. Steven Robert Pacelli - DexCom, Inc..

Michael Weinstein - JPMorgan Securities LLC David Ryan Lewis - Morgan Stanley & Co. LLC Jeff D. Johnson - Robert W. Baird & Co., Inc. J. P. McKim - Piper Jaffray & Co. Danielle J. Antalffy - Leerink Partners LLC Kyle William Rose - Canaccord Genuity, Inc. Raj Denhoy - Jefferies LLC Ryan Blicker - Cowen & Co. LLC Margaret M. Kaczor - William Blair & Co.

LLC Chris Cooley - Stephens, Inc. Tao L. Levy - Wedbush Securities, Inc. Joanne Karen Wuensch - BMO Capital Markets (United States) Jayson T. Bedford - Raymond James & Associates, Inc..

Welcome to the DexCom Second Quarter 2017 Earnings Release Conference Call. My name is Karen, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Matt Dolan, Vice President of Corporate Development. Mr. Dolan, you may begin..

Thank you, Karen, and welcome to DexCom's second quarter 2017 earnings call. With us today is Kevin Sayer, DexCom's President and CEO; Steve Pacelli, our Executive Vice President of Strategy and Corporate Development; and Kevin Sun, our Vice President of Finance and Interim CFO.

We will begin with our prepared remarks and then open the call up for your questions. At that time, we ask that you limit yourselves to one question and one follow-up, so we can provide an opportunity for everyone participating today. I'll begin with our Safe Harbor statement.

Some of the statements that 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, 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, quarterly reports 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 cash-based operating results.

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. With that, I'll turn it over to Kevin Sayer..

Thank you, everyone, for joining us today. The first half of 2017 has been very positive for DexCom. Our revenues have grown 23% year-to-date, and we remain on track with our full-year targets.

More and more people with diabetes are adopting CGM that is the primary tool to manage their condition, especially as we've seen a substantial uptick in the number of covered lives worldwide in the past 12 months.

The CGM First message is being broadcast not only by DexCom, but by a growing proportion of the clinical community, as the body of evidence supporting the value of CGM continues to build.

This was the clear takeaway for DexCom leaving the American Diabetes Association Meeting, the biggest diabetes conference of the year, which was held in our hometown of San Diego during the second quarter. The second key takeaway was that DexCom CGM platform continues to generate market-leading performance.

Additional presentations from studies like DIaMonD and GOLD reaffirm that DexCom CGM systems can drive significant clinical outcomes in both MDI and on patients.

We left ADA with the strength and belief that CGM will represent the standard of care in intensive diabetes management over time regardless of age or choice of insulin therapy by the patients. Our U.S.

business is being driven by these dynamics where an estimated two-thirds of our new patient additions were using multiple daily injections and approximately one-third were on insulin pump therapy. This is consistent with our first quarter results and aligns with the underlying mix in the U.S. Type 1 market.

We continue to educate clinicians and patients about the benefits of making DexCom CGM the first tool prescribed for people with diabetes, and it is working. Patient adoption in our international markets has also been robust with our U.S. revenue growing more than 50% in the first six months of the year.

We are seeing solid growth across Europe led by Germany and the Nordic countries. To us, this validates our strategy to focus on our commercial efforts on geographies where we have coverage for CGM. It is in these markets that patient adoption is rapidly accelerating.

Turning to Medicare, since receiving the CMS ruling in January, we've taken several important steps toward beginning to provide therapeutic CGM devices to Medicare eligible patients in the United States, including receiving a local coverage decision and establishing a fingerstick supplier partnership.

As of July 1, there are specific therapeutic CGM billing codes, eliminating the need for DexCom and our distributors to use miscellaneous codes to try and obtain reimbursement from Medicare patients.

Although, we did not generate any material revenue for Medicare patients in the first half of the year, I am pleased to tell you that in recent weeks we have begun shipping our first Medicare bundles. I will provide more color on our Medicare rollout momentarily.

Finally, during the quarter, we successfully raised $400 million at convertible senior notes with favorable financial terms. Although, DexCom had already been in a strong financial position, we continue to see multiple growth opportunities ahead of us both in the intensive and non-intensive diabetes markets.

This capital infusion provides us with greater flexibility to leverage our CGM market leadership across the number of key initiatives, including the expansion of our manufacturing capacity to meet anticipated demand, growth and development in key international markets, support for our Medicare rollout, and our efforts to make CGM an integral tool in the non-intensive diabetes market.

We believe our strengthened balance sheet better aligns our capital structure with the opportunities we see in front of us. With that, I will turn the call over to Steve for a review of our financials, after which I will provide a business update..

Thanks, Kevin. Before I dive into the numbers, I would like to make our audience aware of an addition to our reporting as of the second quarter to help with your models. Specifically, we are providing more detail on our revenue performance, including a geographic breakdown of U.S.

versus OUS and as well as revenue by category divided into our sensor consumables, transmitters, receivers and other revenue. For comparison purposes, we've posted figures for these revenue categories on a quarterly basis back to the first quarter of 2016.

You can find this historical data in a supplemental document on the Investor Relations portion of our website. Now, back to the second quarter discussion. DexCom reported revenue of $171 million for the second quarter of 2017 compared to $137 million for the same quarter in 2016, a $33 million or 24% increase.

Sequentially, revenue for Q2 was up approximately 20%. This result was consistent with our expectations as the U.S. business typically rebounds from the Q1 seasonality we experienced due to resetting insurance deductibles.

In addition, as we stated on our last earnings call, because of the January CMS ruling, we were again prohibited by law in Q2 from billing our existing cash pay Medicare eligible patients. We've also seen another good uptick in our international business and remain optimistic about our OUS growth prospects.

Our second quarter gross profit was $118 million generating a gross margin of 69%, compared to a gross profit of $86 million and a gross margin of 62% for the same quarter in the prior year. We do remind investors that in Q2 of 2016, we took a $3.5 million inventory write-down which negatively impacted our gross margin in that period.

Our gross margin rebounded year-over-year and sequentially due to an improvement in our warranty rate, primarily within our receiver lines. Some final thoughts on our revenues and our gross profit. Our mix between durable and consumable products was within our normal historical range in Q2 at approximately 30% durable and 70% consumable.

On the durable side, we note that receiver sales continue to be less significant component of our overall revenue as patients increasingly rely on their smartphones. As anticipated, the ASP for our hardware has remained stable and average sensor pricing came in at around $70.

Finally, our international business showed continued year-over-year growth generating $30 million in revenue during the quarter, up 69% from last year and 14% sequentially. This now represents 17% of our total revenue.

Research and development expense totaled $45 million for Q2 of 2017, compared to $36 million in Q2 of 2016 and down approximately 6% sequentially.

Selling, general and administrative expense totaled $86 million in Q2 of 2017 compared to $69 million during the same quarter in 2016, with the increase due primarily to year-over-year increases in head count in our field sales and customer support organizations, including support for the initial phase of the Medicare launch, as well as a ramp in our patient-focused marketing expenses and our OUS expansion.

SG&A was flat sequentially due to the absence of share-vesting payroll tax expenses and one-time charges that we incurred in the first quarter. Our GAAP net income was $3 million or $0.03 per share in the second quarter of 2017, which included a $17 million non-cash tax benefit related to the issuance of our senior convertible notes in May.

Excluding the non-cash tax benefit, non-GAAP net loss was $14 million or $0.16 per share for the second quarter of 2017. Absent $37 million in non-cash charges, primarily share-based compensation and non-cash interest expense and excluding the tax benefit, our non-GAAP cash-based net income was $23 million for Q2.

We ended the second quarter with $497 million in cash and marketable securities on our balance sheet, versus $124 million at the end of 2016. During the quarter, we raised $400 million in gross proceeds from our convertible notes offering and paid down the $75 million outstanding on our $200 million credit facility.

With respect to 2017 guidance, we continue to expect global revenue of $710 million to $740 million. And for Q3, we anticipate a mid to high-single digit increase sequentially, roughly consistent with 2016. With that, I'll turn the call back to Kevin for a business update..

CGM will become the standard of care and DexCom CGM has set the performance standard for the industry. As we make our systems more convenient and easier to use, we believe we are only scratching the surface of our CGM opportunity.

I would like to thank our team as we work tirelessly to capitalize on the potential we see in front of us, both in the intensive and non-intensive markets. We are all driven by the impact we know our CGM technology has on people with diabetes.

And we are energized by the many recent positive milestones we have achieved, so that we can make DexCom CGM available to a much larger number of patients worldwide. I would now like to open the call up for Q&A..

Thank you. And our first question comes from Mike Weinstein from JPMorgan. Please go ahead. Your line is open..

Thank you, and good afternoon, everybody. Let me start with two questions. One, on your Medicare bundles in terms of where you are on being able to deliver in large volumes to Medicare patients and how many you think you'd be able to get to by the end of the year.

And then, second, on Germany specifically where obviously you'd be able to make progress this quarter, where are you on the percentage of the market that is now covered? Are you at 50%? Thanks..

Hi. This is Kevin. I'll take that one. On the Medicare side, we have just started shipping bundles in the past – last two weeks of July. And quite honestly, Mike, we haven't been paid for any of the bundles that we shipped yet, so we're moving a little cautiously. Once we get going, we think we can process this quickly and move on.

We will use some distributors in this process, but we're projecting right now to process the bulk of it directly. I can't give you a number as to how many we'll do by year-end. We're optimistic we can meet most of the demand and push it out. And we will hire the people and make the investments necessary to do so.

We're not going to let a customer opportunity go away. We just need to get the processes down before we go add bunch of bodies running around not really sure how to do this. But we are learning as we go. On the Germany side, we don't have 50% yet. We're very close to the two big contracts we talked about last quarter.

What is happening in Germany as we grow is, where we don't have an official contract, we're still getting payment after filling out more paper work and doing a little extra. I think those bigger contracts, we're hopeful to land those in the very near future.

We haven't been quite as quick as we wanted, but again we're still making progress and doing very well there. So we'll stick with what we have..

Okay. So it sounds like, Kevin, just on the Medicare contribution this year, obviously Medicare aged patients were a negative to your first half performance. It sounds like still with where you are on the ability to fill and get paid, the contribution over the balance of the year will still be relatively modest.

I would throw out they're certainly less than $10 million?.

Mike, that will depend upon how quickly we can get this thing going. If we can get at these patients – certainly, in Q3, we don't see it as being a big factor, if we get this thing up and running smoothly in Q4.

And as we modeled and talked about last time, the startup revenue for a Medicare patient for that first billing for that first month is going to be much less than what we get for a recurring commercial patient. So the Medicare play is a longer term end of subscription model that we have built.

But we think it could contribute more than $10 million in Q4, but I can't give you a number yet. I'd see what we can get fulfilled..

Okay. Last question, I'll let others jump in. The third quarter commentary would seem to set a relatively low bar. You talked about mid to high-single digit sequential growth effectively in line with what you saw last year. Just recall that last year you did have the recall and you had the lost receiver revenue.

So the comparison to last year, shouldn't that be a relatively easy comparison and shouldn't we be thinking about something that maybe a little bit better than mid to high-single digit sequentially?.

No, I mean a couple of things. If you look over the past several years, the trends are fairly similar, right? We see some slowdown during the summer months both in Europe and in the U.S., so new patient additions aren't as robust. We've got the Medicare issue that, as we mentioned, is rolling out a little slower.

And look, we decided to break out components of hardware just to, what you guys know, that receivers are becoming a much smaller component of the overall hardware mix anyway. So I don't know that the receiver, even as of last year, was not a significant contributor. So I don't think we're sandbagging in anyway.

I mean the historical trend suggests that Q1 to Q2 sequential up is usually pretty good, it's a little flatter going to Q3 and then we get the big bump in Q4. So I don't think there's much more to it..

Okay. Thank you, guys..

Thank you. And our next question comes from David Lewis from Morgan Stanley. Please go ahead. Your line is open..

Thanks so much. A few quick questions here. Steve, just following up on Mike's question on the guidance and Kevin's commentary on Medicare in the fourth quarter. So your third quarter guidance kind of implies similar growth trends to the second quarter this year.

Are you still confident you can get to the upper end of the 25% to 30% for the year? And is the way to think about that, it's all about Medicare frankly. Because my sense is, if we do over 30% in the fourth quarter, you do sort of the low end of 25% to 30%.

If Kevin's right and you see $10 million plus in the fourth quarter, you could certainly get close to the mid to upper half of the range.

So at this point, does it all kind of come down to Medicare traction in the fourth quarter?.

This is Kevin. I'll take that. Certainly, some piece of it does, particularly as you get to the upper end of the range, which is why we kept the range where it was. We think that the Medicare will help. I'd give another perspective on the Medicare side.

While it is a help in the fourth quarter quite frankly for the first couple of quarters, it's made our lives much more difficult. As you go out into an office and visit with a physician, many of our executives – we've gone out on trips and we hear a very similar theme, team, go and get my Medicare patients taking care of and I'll give you more.

So while it is a long-term accelerator, it's been a short-term disruptor and it will put us in a better place. So, David, you've got all those things factoring against each other, and that's why we kept our year-end guidance where it is.

We always have a much bigger fourth quarter with ordering patterns from our existing patients and new patients as they get reimbursed and get through the end of their deductibles. We don't see that changing. And you add all those factors and that's why we're looking at it the way that we do..

Okay. And maybe just two more quick ones. Kevin, a strategic one for you on just Medicare. I think filling direct is the right strategic move for the company clearly. Initially, you talked about Medicare patient per month revenues of kind of $250, maybe $2,800, $3,000 for the year.

Now that you're going direct, can you just talk to us about just very generally how you think about those revenues on a per annum – annual per patient basis? And how you think their profitability relates relative to third-party payers now that you sort of are direct, but you also have the bundle?.

The gross margins will not be as good with the Medicare patients, we've talked about that before, because we have the bundle where we have to add the strips and the other supplies. And as we've said earlier, we're accepting the Medicare pricing. We'd like to get better. But it is what it is and we'll take it.

We're hoping that if we can develop an efficient process that maybe the operating margins on the Medicare patients will become lower, because this will be something routine and we can just do it in lockstep.

The other thing as we look forward to the future in all candor, as you get to a G6 system, for example, that's a 10-day approved sensor; now we're down to three sensors a month instead of four. And we're hopeful we can have the same fixed monthly charge.

So we've designed our systems in the future to being very successful in this type of environment, assuming we can keep the monthly charge at a reasonable level. So future, I think we're very fine with this model.

I think there'll be a little pain upfront with patients as we add them, because you're getting data receiver, the Medicare price for the receiver in that first selling is like $250 and that's not a whole lot of our cost. So margin there won't be great and you get a transmitter with your first bundle.

But you'll be getting billed again the recurring amount. Then in month two, there is no transmitter; month three, there is no transmitter. So in the early phases, profitability will be pretty tough, but over time we think it will be fine.

And it's our job, quite frankly, to get the cost of the devices down to whereby we can make money there, and we will..

All right. Maybe I'll (26:47) just quickly jump in one last one, I'll jump back in queue. But, Steve, the highlight for us obviously this quarter was the international business was very strong and Germany has not sort of fully kicked in yet.

So can you just give us a sense relative to the first quarter some of the factors that contributed to that strong report here in the international markets? You talked about some pricing experiments in the first quarter, but just sort of what drove the strength during the second? Thanks so much..

Yeah. I mean, obviously it's reimbursement, right? It wasn't just Germany. I mean, as Kevin mentioned in the prepared remarks, the Nordics have done quite well, where there is robust reimbursement, but the UK has done well, Canada has done well. We've quickly moved into a leadership position in Australia.

What I would tell you is in the markets where we have robust reimbursement, we're competing quite favorably against any other potential competitors out there. And so, we're even seeing, take Abbott in particular, in the markets where we're paid for, we're seeing quite a few Abbott customers shifting over to the DexCom platform.

So it's really nothing more than superior performance. We've already said and then our clinical data clearly demonstrates that our sensors are just much more accurate than anything else available on the market. And that resonates with patients, particularly when they're receiving reimbursement..

Thank you. And our next question comes from Jeff Johnson from Robert Baird. Please go ahead. Your line is open..

Thank you. Good evening, guys. Kevin, wondering when might you know when those initial CMS claims are adjudicated cleanly.

Is that something we should get some clarity on that over the next few weeks, is that something you would openly discuss then as we try to fill that model? And then, SG&A levels have been holding kind of around 50% for the last six quarters or so, give or take a little bit I guess.

But as you go the direct model in CMS, where should we be thinking about those SG&A levels going maybe over the next 12 to 18 months?.

Well, let's start with your expense equations. As we've looked at our direct costs for going to Medicare, we've modeled that out and we hope that our overall percentage will increase very much. Because as we continue to grow revenue, we do have money we can continue to invest on the SG&A side.

And a lot of that will be done on billing at the Medicare platform in doing that. But we can update you on that further.

Now, and I'm suffering from amnesia, your first question, Jeff?.

Just on when those initial claims potentially get adjudicated cleanly and when will you report....

I can tell you, I walk down to Kevin Sun's office pretty much every morning and say if we got paid yet. So we're out a few weeks on the first one and we're not even three weeks on the first ones. And once we get that first adjudication and find out, then we'll hopefully kick it up a little bit.

But these will be the first thing we ever paid with the CGM code through the Medicare system. So it'll be a big deal for us. We won't issue a press release or anything, but we'll inform you guys how long it's taking and how it's going on in the next earnings call..

All right. Thank you. And then my follow-up question just on – you made some pump comments about two of the pump companies out there that are obviously struggling a bit at this point.

Between those two companies and with the Bigfoot news, I guess my question is, where do you think, your pump relationships need to go? Or is it getting to a point where maybe you need to go with some exclusive arrangements, you need to do something to tie in some of these other pump players more tightly to your business on a go-forward basis, just as that pot maybe dwindles a little bit of different pump companies out there? Thank you..

Yeah. This is Steve, I'll take that. So still of the mindset that we don't believe we'll need to own a pond, as we mentioned to you in the last couple quarters, where two-thirds of our new patient additions have been MDI patients. And so, particularly outside of the U.S., the MDI patient population is where our biggest source of growth will come in.

Let's take a couple of pump partners. Animas hasn't been adding a significant number of patients. Tandem, besides from their potential financial woes is doing reasonably well in terms of new patient additions.

But keep in mind, the vast majority of pumps that Tandem is selling today are the X2 pump, which is the appropriate pump for them to be selling, because as soon as we receive FDA approval for the X2 G5, we'll be able to upgrade those patients immediately and they can become Gen 5 patients.

Then, as Tandem moves down the path to a PLGS system and ultimately to a hybrid-closed loop system, those patients will be able to retain the same hardware and field upgrade through software changes, field upgrade their pumps to accommodate new and better technology. So we're going about it the right way.

It just resulted in a couple quarters of softer competitions on our end from Tandem. We also are seeing great additions from Insulet. I think Insulet has been the big winner here. We continue to move forward on the development side with Insulet. I think we're making great progress there.

And as Kevin mentioned in the prepared remarks, there are number of other initiatives that we have ongoing that frankly we can't disclose yet. And hopefully within the next six to nine months, we'll be able to have some more to tell you about some of the other things we're working on. So it's not a time to jump into the pump business by any stretch.

I think we've got the right relationships in place and we're just going to keep pushing forward..

And just one thing, I'd add, Jeff, to your comment. We consider unique relationships of these partners going forward and something that we have yet done, yeah, we would. If it benefits the patient, if it help us expand the market and get more people on DexCom centers.

We'll look at a number of business models going forward, and we'll look at them in very creative ways..

Thank you..

And our next question comes from Matt O'Brien from Piper Jaffray. Please go ahead. Your line is open..

Hi, good afternoon. This is J. P. on for Matt. Thanks for taking the question. I think in the prepared remarks you said that you've got one MAC who put out (32:52).

So where are we with the other MACs or how many more do we need I guess, throughout the remainder of the year to get all the Medicare covered?.

No. I mean, that process is done..

That is done..

There is only the two region – there's two MACs that cover the four regions. So we're done there. From a logistics and processing perspective, it's really making sure that we're submitting claims with the appropriate paper work to support the medical policy established by the MACs.

And we're running tests – as we mentioned in our prepared remarks, running some test cases and making sure that we get those processed and paid before we start to turn on the flood a little bit, because we want to make sure we're not submitting a bunch of claims that are just going to be denied by the MACs.

So the pieces are all in place, now it's just kind of finalizing some of the logistics..

Got you. And then, on the pipeline, you're at 20,000 new patients, up from 10,000 in Q1. Do you have any good kind of historical data of when you actually do start promoting aggressively? Is it historically when you start promoting aggressively to those patients it goes from – that doubles in size at 40,000 or even triples at 60,000.

Or does your strategy need to be different with how you attack these Medicare patients from a promotional standpoint?.

Our strategy for promoting to the Medicare patients will be different. We've certainly with our DTC campaigns now have directive strategies to our young population or young adult population, to adults and then the seniors, and we'll go to different markets for seniors.

How quickly that will ramp remains to be seen (34:38) DTC campaigns as they initially launch obviously, they ramp faster and then some of the effect goes away and you've got to change.

The most important thing for us before we launch the campaign is to fulfill the customers that we have, not only the 20,000 new, but the other several thousand that we were shipping to before and who are paying on a cash basis. So we've got a lot of work to do, and then we'll see where those promotions lead..

Got it. Thank you..

And our next question comes from Danielle Antalffy from Leerink Partners. Please go ahead. Your line is open..

Thanks so much. Good afternoon, guys, and thanks so much for taking the question. I'll try to limit it to just one and one follow-up like you guys asked. So just a question, Kevin, for you on the higher level strategy here, especially now that you know who the next CFO is going to be.

As we approach the Type 2 market, you provided some color in the prepared remarks.

But just wondering if you could give any more color on the go-to-market strategy there, how the business needs to change to facilitate supply for such a massive market opportunity?.

exercise, diet and their meds. We're finding that CGM has an impact on all three. Very frequently, we find patients who when they go on CGM, a very simple example I can give you, that they just change the time they take their metformin pill.

We saw one patient's average glucose in three weeks go down from 190 to 110 simply by changing the time of day they took their metformin, no change in diet or exercise. We see things like this all the time as we get on more patients. And so, we need to develop the models and figure out a way to put this into the system.

You've got a number of patients who don't spend that much money on their care, so this is not going to be the revenue model for the patients that we have with our existing business. We need to make a revenue model that works with the payers as well and is easy to administrate by the clinicians.

It's something that we're going to be thoughtful in developing, and our first step is to obtain a bunch of clinical data to develop the proper model. And we'll share some of that data really in 2018 as we develop these programs further, but it's going to start there. Our new CFO, we're really excited to have him.

He's had a lot of medical device experience and experience on a number of fronts that we think helps round out our team and will be a great addition. So we're very excited about that too..

Okay. That's very helpful. And my one follow-up is just as it relates to as new products come closer to market, what you guys are seeing as far as the time to convert a patient? We've heard pump companies talk about that and I know, right now, you're the only stand-alone sensor in the market.

But just as voice (38:09) around Abbott, Libre gets louder and regardless of whether the patient ultimately goes on a DexCom or a Libre or what have you, are you seeing any sort of extended conversion cycle from a patient deciding to go on CGM and ultimately making the choice of what product they go on? Or is that sort of status quo? Thanks so much..

You know what, Danielle, I'll let Steve kick in if he wants to. We see a lot of that is dependent upon our reimbursement arrangements. If a patient has pharmacy benefit, for example, and could go to the drug store and pick it up, that conversion cycle becomes a couple of days and it becomes very quick. They require very little documentation.

I think there is a direct correlation between the reimbursement criteria and the coverage criteria from the payers and the patient's ability to get on it quickly, I'd say from an overall market perspective. So now I'm going to go much bigger and much more global.

Whereas in the past, our patient base in my early years here was very, very intensive people managing their diabetes, today, as we've got more DTC campaigns and we're further extending into the patient base, you've got people probably not as committed to going on CGM as the ones we got three and four years ago.

That cycle may in fact be extended by them going, yeah, I saw this on TV and I've got an iPhone or I've got an Android phone now, it might be cool, but maybe, you know? So we are getting to a broader base of patients that may in fact take a little more time. But at the end of the day, it's still pretty good..

Thank you. And our next question comes from Kyle Rose from Canaccord. Please go ahead..

Great. Thank you very much for taking the question.

Can you hear me all right?.

Sure, yeah..

Great.

So just kind of to dovetail off of Danielle's question there, just now that we've got a few quarters of CGM adoption that's kind of in line with the broader MDI versus pump breakdown, just can you talk about any changes in or any differences in utilization or attrition in this new or more MDI patient population? And then, just from a bigger picture perspective, when we think about your new products coming to the market, you obviously talked to the FDA a lot, you've done a lot of work with G6 and it sounds like the first Verily product there.

Can you just talk about where the FDA stands with respect to a factory collaborated device, as well as going directly to a smartphone as the primary receiver?.

Sure. I'll take that one on. With respect to attrition or utilization, I think those factors are relatively similar based on what we see. Again, we never encourage patients to go beyond seven days or labeling of seven days.

It's a seven-day sensor, i.e., the one anecdote I can tell you is, in Germany where this is reimbursed, seven days appears to be norm, which is really good there. I think utilization and attrition again often times become a function of reimbursement.

In the first quarter, since a lot of patients have bought a bunch of sensors in Q4, they will not be buying as many sensors in Q1. And over time as we look at our business models and we've gone to the phone, we learn over and over again. We'll try and develop the model to determine which patients would quit, we'll then go make a bunch of phone calls.

Have you left us? No, we haven't left you. Well, we haven't seen your stuff (41:48) up in our phone service. I went back to my receiver for a while, or things like that. I think our attrition and our utilization models really, really require more development over time and it's going to be good and we'll learn it.

Ultimately, if we have everybody in the phone, we'll know a lot more. With respect to the FDA and no-calibration sensors and that type of technology going straight to the phone. But in Europe we have a configuration that does go straight to the phone that doesn't demand the receiver.

And the majority of our new patients in Europe, quite frankly, are not buying receivers. They are buying the transmitter and the sensors. And it's reimbursed that way in Europe, so we're doing very well with that configuration. I think over time the FDA, we could go directly to the phone and we could file that configuration and do it.

For Medicare right now, since we have the receiver, we continue to sell it and have it part of the system. We have a new receiver we're launching here in the fall that will be here for the patients. And so, we'll see over time. But it does take cost out of the system and it's certainly the future we'll consider.

With respect to no-calibration sensors and FDA discussions and where all that is, we've had preliminary and initial discussions. We don't have final confirmation on anything. I can tell you we will run and simulate our G6 pivotal data, the 300 plus patients, more like 340 and 30,000 matched pairs.

We'll have the opportunity to keep that data and simulate it and see how a no-calibration system would perform and have discussions directly with the FDA about that and we think we can get very clear guidance. And the Verily system will be based upon that algorithm in the Gen 6 sensor and that sensor platform.

So we'll have a very good indication on how that system is going to perform long before we launch it, long before we file it. And I think it's our job to be very diligent over the next couple of quarters to make sure we present data to the FDA in the best possible manner so we can get very clear rulings and guidance from them..

Great. Thank you very much for taking the question..

And our next question comes from Raj Denhoy from Jefferies. Please go ahead, your line is open..

Hi, good afternoon. What if I could just start on the competitive landscape a bit, 670G has sort of cast a bit of a shadow over the space, at least amongst investors anyway. And they seem to be a little bit supply constrained now in being able to put sensors in the market and get patients on that device.

So I guess the question is really do you think we've seen the worst of that in terms of its potential impact on your – what's your current thinking about 670G?.

I think consistent with Medtronics other launches, there is a lot of noise at the beginning and there is a lot of confusion, and some of that noise and confusion have gone away.

I can tell you as I talk to physicians in my personal conversations, I am hearing a very similar tune over and over again that the majority of our patients really will do very well with CGM (44:58) and that is the solution for the masses and that's where we want to be.

I think if and when they (45:06) and can ship sensors, we'll have to see how it works. But we hear the same you just talked about, continued delays and continued patients not being happy, not getting the systems they've signed up and paid for. So we'll just have to play it out..

Okay. Fair enough. And then maybe just my follow-up, we've heard recently that JDRF and Helmsley Trust are going to be embarking on a bit of an advertising campaign to drive CGM utilization. I think they've stated the goal is to double the – or get the penetration of CGM, I should say, to 50% of eligible users over the next year.

I know that's a fictitious goal, but do you have any thoughts around that plan and whether it could impact your numbers?.

I'm really happy that they're going to advertise for us. You know what, I hope it does impact our numbers. I've had discussions with Helmsley Trust and JDRF on the program and we're certainly happy to be involved and help any way we can.

The tools we've given JDRF and Helmsley in this endeavor when you look at the DIaMonD study, you look at the GOLD study, you look at the commissary study over in Europe as well. For the first time ever, we've got a body of clinical evidence that really shows that CGM is a great benefit to patients.

And if you're going to invest then really that's going to improve care in a patient's life, there is nothing better to invest in than CGM and I think they will capitalize on that messaging goal. I think we need to combine their messaging that's going to patients and healthcare providers to the payers as well.

And I think it's a three-pronged approach, it's not just one or two. So we're happy to participate in that and we will take any efforts to increase awareness we're thrilled with..

Great. Thank you very much..

And our next question comes from Doug Schenkel from Cowen. Please go ahead. Your line is open..

Hi, this is Ryan on for Doug. Thanks for taking my questions.

Last quarter you noted Germany was 20% of international revenue, what was it in Q2? And as we look to the rest of 2017, is there any reason why international revenue wouldn't continue to increase sequentially?.

Yes..

You got that, Steve?.

Yeah. I don't have the number in front of me, I think it was around 25% of international this quarter. And is there any reason to think it won't continue to increase sequentially on an absolute basis? Yeah, of course, it will. We continue to grow reimbursement in Germany and other countries.

There is no reason to think that international is going to continue to grow. But as we've noted directly and indirectly on the call, the U.S. business tends to do a little better in the back half of the year, particularly in Q4 as insurance deductibles are met and patients have a much easier financial means to obtain the product.

So I don't know that international will continue to outpace, but it's going to continue to be a good growth driver for us..

Got it. And then on G6, can you comment at all on the results of the pivotal trial? Were performance results in line with the preclinical data you've previously presented? Thank you..

To the credit of my team, they did not show me the results of the pivotal study, so I can't comment, and we wouldn't anyway. We'll submit it and then that'll be published later. But we're very confident in that system. It's great sensor technology with a very strong algorithm..

Excellent. Thank you..

And our next question comes from Margaret Kaczor from William Blair. Please go ahead. Your line is open..

Hey. Good afternoon, guys. First question from me is, I think at the beginning of the call you mentioned you were taking a look at some of the timing for the Verily first-generation product, and that's based on the G6 platform.

Are you guys looking at ways to accelerate the timing of that launch, whether it's the first generation or the second generation and what kind update should we be looking for?.

We are looking for ways to accelerate everything with respect to our G6 product and the first Verily launch and as we look forward to our future products. And we're looking to international strategies where we can get combination of those products out and really meet some unmet patient considerations over there.

I think next quarter what you can expect is a little clear guidance from us. We need some more guidance with the agency. We need to run our data and our pivotal and see what our no-calibration data is going to look like for the Verily product and really have some good discussions with the agency.

And, look, they've been nothing but cooperative with us as we reached out to them, but this is going to be a very good dataset for us to base a conversation on. We still have scale-up and engineering work to do on the first-generation Verily product. If it got approved tomorrow, we certainly could manufacture 10 million of them.

But we have scale-up work to go. So there's a normal timeline here, things that would have to fall into place when we go. I think we'll just give you more clarity and talk about more of the tests and things we have been building on. I think we can talk about clinical study schedules and everything like that.

And we're hoping to be able to do better in the next earnings call. So we can let you know where we are..

Okay. And then, you referenced the FDA's view on calibration and you talked a little bit about dosing.

But in your view and in your recent discussions, are alerts and alarms and that fingerstick like accuracy that sticking point at this point in order to get that dosing plan? And then, again, in terms of calibration, have you had discussions with some of our factored calibrator devices and what do you think the FDA's view of that is today?.

I'm not going to speak for them. I can talk to you about our view and my view, in particular. With respect to our intensively managed patients, we need to deliver safe experience.

We were looking at – quite candidly, we had a user guide the other day and it talks about – and there's a statement right in the user guide that says when this thing is at 60 or below, the chances are 40% you're between 80 and 180 and you can't rely on this for accurate measurement in the low range.

With our G5 505 Software, if our device reached 60 or below, the chances of you being above 80 are 2% to 3% and above 120 are zero. I take 2% to 3% of our 40% any day, and the FDA has already seen non-adjunctive sensors where they've given a label with that level of accuracy. So we know we're going to have to perform.

I don't know if they're waiting for a fingerstick accuracy, Margaret. It'd certainly be lovely if we can get it. We know, as we run our pre-pivotals with no-calibration data, quite honestly, we actually get better performance in the first day because of the occasional outlier from a calibration at this point in time.

I think the industry is going to mature. I think we need to have really robust technology and algorithms and systems with no-calibration sensors to keep patients safe. We talk with the FDA and we talk with others about is there a different class of product for non-intensively managed Type 2s. I think that type of product can develop over time as well.

But we're at the very beginning on this. We're kind of at the same place we were many years ago when we first started. And we're looking forward to the challenge and I'm pretty confident we can deliver the technology to get us there. But it's going to be a process. And the FDA has been nothing but cooperative.

But I think they're proceeding with caution; and that's okay, they should. It's important with these patients that they're safe..

And if I can squeeze one more in, in terms of the patient demand trends outside of Medicare, I think you mentioned earlier that MDIs were two-thirds of your new patient adds, maybe in the first half, I assume that's true in the quarter as well.

What kind of indicators are you guys looking at that can continue to drive that double-digit growth, what's there in the next few years in the MDS? Thanks..

I think one thing that'll drive that double-digit growth is, we'll have systems for MDI patients where there'll be Bluetooth apps on phones where we can combine MDI data with CGM data and really give the patient a good view of their overall diabetes picture similar to what they get on the face of their insulin pump today when they have a glucose sensor.

I think those will be helpful. I think from a cost perspective, in a lot of these you look at payers and what they're spending on the cost of diabetes and integrated pen solution is going to be a less expensive alternative than going on the insulin delivery systems that we have today and a CGM.

So I think there is a number of ways we can drive this we need (54:12) technology and devices that will make it much more accessible and much better for the patients..

And our next question comes from Chris Cooley from Stephens. Please go ahead. Your line is open..

Hey. Good afternoon, guys, and I appreciate you squeezing me in here at the end. Just two quick ones from me. One, maybe either Kevin or Steve, could you just remind us – I realize that as we see the growth in the Medicare opportunity that this is a script model.

But are there any variances to the cadence or the order patterns that we should expect in the early penetration of that opportunity that you'd want to make sure that we're all mindful of and I realize we're still I guess pre-first inning in that regard? And then, secondly, I just want to clarify I think, Kevin, your prior response in the cost to serve or the cost to acquire those patients, saying it was essentially just a little bit above the commercial pay patient today.

I just want to make sure I fully understand the puts and takes there with the incremental product you have to ship, as well as what I would assume be added hand holding their time from an administrative level? Thanks so much..

Yeah. So I'll take the first part, I think it's a great question, because there are two critically important points to keep in mind about the Medicare patient.

Kevin spoke to one in one of his responses which is the initial contribution from a Medicare patient, it will be substantially lower than a commercial or private payer patient, because best case we're going to get close to $500 out of the gate from a new Medicare patient based on the receiver and a first month bundle, whereas we might get $1,000 or $1,500 or more from a private payer patient depending on how many boxes of sensors their insurance company would let us ship on an initial sale.

So that's when you're modeling certainly important not to get ahead of yourself on the initial contribution. But the follow-up to that is we love the model that Medicare has set forth, where it's attractively a subscription model.

So this around $250 a month, once we have the systems in place, it's great, we can pick up the phone and reach out to that patient every month and figure out exactly what supplies we need and we ship them.

And so, once the initial paperwork is done, once we've got them up and running over the course of a 12-month period, the Medicare patient becomes a great patient in terms of our ability to fulfill them on a more consistent basis. So I think those are the important points..

And as far as – Hi, Chris – we know and we've done logistics settings. We know, for example, a call from a Medicare patient takes us longer to respond to than a call from a non-Medicare patient. In Arizona, where we set up our second call center and our new building, we have a Medicare call team set up ready to go with the Medicare patients.

Now they are answering other calls now and dealing with folks who haven't got their systems yet and want to know when they are coming. But, ultimately, we're building a structure around this to try and figure it out.

And as Steve said with the monthly cost – with the monthly opportunity to interact, we believe over time it will be a very good business model. We just got to get the systems in place. We can get our cadence down to whereby we understand how it works, and it is different than what we do today with our current patients. It really is..

Thanks, Chris. Next question, please..

Our next question comes from Tao Levy from Wedbush. Please go ahead. Your line is open..

Great. Thank you.

So maybe first off, in terms of the new patient trends that you're seeing in the U.S., any general comments you can provide? I know you obviously had a good quarter here in the second quarter, but versus Q4 first quarter, how are things shaping up in the field as new patients start coming on-board?.

New patients are hitting and that's certainly a big portion of our numbers. I would tell you, on an overall basis, the amount the new patients contribute now that we have this much bigger installed base isn't as big, in the overall revenue picture, as servicing the ones that we have. Our opportunities for new patients continue to grow rapidly.

We get a lot of leads. I would tell you the only thing we've seen and this is what it is. That more of our leads come from social media.

In our DTC campaigns, it takes a little longer to close those than it does to close some of the ones we've gotten from physicians directly where your physician says, you're a candidate for CGM, you need this, you need to wear it versus somebody who goes online and we have to go through conversations and then call their doctor who will tell your patient who wants this system, who wants to use this system and go through that versus a patient who gets a script directly from your doctor and reaching out to us.

So I'd say close time on some of those leads is a little longer and they may not be as committed to the others. So we have more opportunity than we've ever had. Our close rate is probably not as high as it used to be, but that's expected as you expand your market and do what we're doing. But new patients are good.

I think the limiting factor on new patients, I've said it earlier, has been the ability of our field team to focus on new patients as they've dealt with the Medicare issues and the physicians saying I want my Medicare patient taken care of. We need to get those folks taken care of. But our team is doing well..

Okay. Great. Thanks. And also just as a quick follow-up. Steve, you made an interesting comment in your prepared remarks where you kind of talked about the patients in Europe who initially were on Libre now transitioning to your system.

What type of insight is that I guess anecdotal information providing you? How does that make you feel or how do you think about how that might impact things here in the U.S. or even internationally over time? Thanks..

I don't really want to comment on the U.S. because we still don't know if Abbott gets approved, what their labeling is going to look like, et cetera.

But frankly what our field folks who, as we've gone direct in a number of these markets and even with the distributors who we're closer to, they say once reimbursement's put in place, patients, clinicians, everybody involved absolutely prefers real-time alerts and alarms and they absolutely prefer the improved accuracy of our system over what Libre is able to provide them, particularly when you look at performance accuracy, performance in the hypoglycemic range.

So when Libre was competing purely on a cash basis and offering it on a per day basis, so slightly less expensive product, it was tougher. But when patients are able to get it paid for, they're becoming DexCom users..

Great. Thank you..

And your next question comes from Joanne Wuensch from BMO Capital Markets. Please go ahead..

Thank you very much for taking for my question. A lot of them have already been answered. Last quarter, you had quantified, I think, it was $2.5 million of sort of a Medicare patient loss associated with the implementation of the program.

Should we think a similar number happened this quarter?.

Sure, yeah. And what we said, just to clarify for everybody, is we have several cash paying Medicare patients that was between $2 million to $3 million in Q1 and we have the same thing again in Q2. We're not billing any of these people and not collecting any money..

And should we anticipate that the headwind for the remainder of the year or just to sort of easy off as you get more paperwork and process in place..

Our goal is to get our existing patients up and running quickly and then take on the new ones as well. So we love to say, we're going to get a lot more than $2.5 million in Medicare revenues in Q3. But I really can't quantify a number today and I think we would be widely unsuccessful if we could get more than $2.5 million in Q4.

So I think over time it will reverse itself and the trend will be positive..

Excellent. Congratulations on hiring Quentin.

Is there something that he will be tasked with that you can explain as we think about him coming on board?.

We're excited to get him. And I think if you look at what we've done over the past couple years at our company, I believe and I firmly believe this, I'm taking away from my closing remarks, I'll take it now. I've compared us to other diabetes companies for a long time and never seen a team that's good as the one that we have here.

And what we've done in the past couple of years is we've added, for example, a new HR person, a new Head of Quality, a new Head of IT. We just brought in the payer person from the pharma world. We have added really, really strong talent, because we've learned to go to the next level we need some new skills.

We've been very good at diabetes and very good at what we've done, but there are other skills that these new folks have brought to the table that are going to make this a better company, combined with the excellent team that we have now, and I think Quentin will fit into our team very nicely.

And yeah, I got a list for them, but I'm not going to go over it on the phone..

Thank you very much. Have a great evening..

Thank you. And our last question comes from Jayson Bedford from Raymond James. Please go ahead..

Thanks for squeezing me in. Just a couple of quick ones.

The incremental cost is growing direct for Medicare, is that absorbed into the expense guidance that you laid out earlier this year?.

Yes..

Okay.

And then, second, on the Type 2 market, is the DIaMonD data or even CMS willingness to cover intensive Type 2 patients had any influence with commercial payers have been potentially getting broader coverage for Type 2s?.

We're just starting to write that story now, but we hope that it does..

All right. Thank you..

And we have no further questions. Turning it back over to you, Kevin..

the new factory we put us in Arizona are 180,000 square feet; our relationship with Verily to bring literally telecom technology and microelectronics to diabetes; our thoughtful approach to our new markets in our Type 2 efforts; our strengthened balance sheet with our $400 million in cash we just raised and even more capacity for debt if we had a great opportunity; and by the strength of this management team that we continue to build.

This opportunity remains exceptional and it's got a lot of legs. Thank you very much..

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