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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the DexCom Fourth Quarter and Full-Year 2017 Earnings Release Conference Call. My name is Darryl and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I would now turn the call over to Matt Dolan. Matt, you may begin.
Thank you, and welcome to DexCom's fourth 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 Quentin Blackford, our Executive Vice President and Chief Financial Officer. We will begin with our prepared remarks and then open the call up for your questions. At that time, we will limit analysts to one question and one follow-up so we can provide an opportunity for everyone participating today.
I will 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 and cash-based 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. Please refer to the tables in our earnings release in the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.
With that, I'll turn it over to Kevin.
Thank you for joining us on our year-end call today. We're going to do things a little bit differently than we've done on previous calls. I'll provide an introduction and pass it to Quentin for a financial review, followed by Steve who will provide an update on several of our key strategic initiatives. I will then conclude with my thoughts on the business and our outlook before we open things up to Q&A.
2017 was another year defined by a number of important achievements for DexCom, as we initiated our rollout to the Medicare population in the United States, significantly expanded our international presence, made meaningful progress with our product pipeline, including our next generation system DexCom G6, which is now under review with the FDA, saw the results of our landmark DIaMonD study published along with several other important studies, which provide the best clinical evidence we've ever had to support real-time CGM as an essential tool for all intensive insulin using patients, and finally, we initiated our first pilot experiences in the non-intensive Type 2 diabetes population.
Our 2017 financial performance was also strong with revenue growing at 25% in 2017, led by a very solid fourth quarter where we saw momentum build as we exited the year with sales growth of 29%. I am pleased to report that U.S. revenue growth accelerated in the last quarter of the year, including our commercial business, which realized its strongest growth quarter of the year, and our international business grew more than 60% for the full year.
Our team also demonstrated good expense control with the P&L improving in the back half of 2017. Consistent with our plans, second half operating expenses grew at a rate of less than half of our revenue growth compared to the second half of 2016.
As we look ahead, we believe we're in a very solid position with a major global product launch slated for later this year and multiple strategic initiatives moving forward.
More on these key programs in a moment, but now I will turn the call over to Quentin for a review of our financials.
Thanks, Kevin. DexCom reported record revenue of $221 million for the fourth quarter of 2017 compared to $171 million for the same quarter in 2016, resulting in our strongest growth quarter of the year with growth of 29%. Sequentially, revenue was up 20%, driven by a 24% quarter-over-quarter increase in our U.S. business, fueled by the ramp of our Medicare business and a greater-than-anticipated increase in our U.S. commercial business.
As Kevin alluded to, DexCom's U.S. revenue demonstrated increasing momentum growing 25% year-over-year in the fourth quarter of 2017, and the OUS business posted another solid growth rate at 58% year-over-year. And while we are still in the early stages of ramping our Medicare business, we were pleased to see the pickup in the U.S. commercial growth given the significant distraction we had called out in the first three quarters of the year.
Our fourth quarter gross profit was $154 million, generating a gross margin of approximately 69% compared to a gross margin of 68% in the same quarter in the prior year. For the full year, gross margin was 68%. As we provided within the tables of our press release, our Q4 geographic revenue mix was more heavily weighted towards our U.S. business given the stronger-than-anticipated performance resulting in a positive impact on gross margins.
In addition, our Q4 product mix favored sensor sales, which are having a more favorable margin profile. Average sensor pricing was consistent with recent quarters, while transmitters and receivers saw some reductions due primarily to, one, the Medicare rollout and the realized pricing for our bundle, and two, some lower upfront cost initiatives in our international markets.
Operating expenses totaled $142 million for Q4 compared to $123 million in Q4 of 2016. This reflects an increase of 15% year-over-year, nearly half the rate of revenue growth for the same period and demonstrates the potential opportunity of our financial leverage over time. Most encouraging was that while spending was approximately up by only half the rate of revenue growth, we continued to invest in our key initiatives including accelerated direct-to-consumer marketing, OUS expansion and our R&D pipeline.
Adjusted EBITDA, which excludes the impact of share-based compensation and is a good proxy of the cash earnings of our business was 19% for the fourth quarter, and up 58% from the prior year. Our GAAP net loss was $9 million or $0.11 loss per share. Included in our GAAP net loss was an $18 million tax expense. This tax expense was driven by the reversal of a tax benefit we realized in the second quarter associated with our convertible notes offering.
At the time of recording the tax benefit in Q2, we had anticipated that the company would be in a taxable net loss position for the year, thereby resulting in recording the tax benefit. As a result of the strong finish to the year, as well as migrating IP associated with our international business into foreign jurisdictions, we ended the year in a tax profitable position resulting in the reversal of the previously-recorded tax benefit.
Excluding the non-cash tax expense in Q4, non-GAAP net income was $9 million or earnings per share of $0.10, representing the most profitable quarter in our history. We ended the year well capitalized with $549 million in cash and equivalents on our balance sheet versus $526 million at the end of Q3 and $124 million at the end of 2016. The entire $200 million revolving line of credit remains available.
Looking ahead to 2018, we provided our initial outlook in early January and we continue to anticipate total revenues of $830 million to $850 million with sensor volumes, international growth and the patient base all expected to grow faster than our revenues. We remain comfortable with our mid to upper 60% expectation for gross margin this year and expect core operating expenses to increase by approximately 10%.
As we noted previously, this excludes any additional spend associated with our non-intensive programs, which are beginning to ramp this year. For the first quarter, we remind investors that our sales would decline sequentially, due primarily to the resetting of annual health insurance deductibles in the U.S. Therefore, we expect seasonality within the year will be consistent with the past several years and anticipate that no more than 20% of our 2018 revenue will be generated in the first quarter.
With that, I would like to turn the call over to Steve for a strategic update.
Thanks, Quentin. Our insulin partners are making significant progress with DexCom integrated systems. Both Tandem and Insulet presented very strong pilot data at ATTD for their automated insulin delivery systems and we remain heavily invested in these collaborations. Early results demonstrated what would be market leading outcomes, including very strong improvements to time and range. We believe each of these systems will be highly differentiated once they're commercially available.
Our recently-announced collaboration with Eli Lilly, which is intended to generate both pump and smart pen integration, is also moving forward nicely and recently saw first in-human experience. We continue to drive other pump and smart pen integrations and expect to update the market when appropriate.
Turning to the non-intensive opportunity, development of a fully disposable real-time CGM system with Verily is moving ahead with the first generation system currently expected to complete development this year. As we have stated previously, the timing of this product launch is contingent on a number of factors, including our no calibration regulatory strategy with G6. Our smaller and more cost effective second generation system is taking shape and we are optimistic in our ability to introduce this device in 2020.
These products are well-suited for multiple new opportunities for DexCom, including our expansion into the non-intensive segment of the market. At CES in January, many of you saw the announcement of the initiation of our pilot activities with United Healthcare and their members are now actively enrolling in this diabetes management program. As we've outlined in prior calls, the goal of this program is to drive both health and economic benefits in the management of people with Type 2 diabetes. The ability to provide connected real-time CGM data will be a critical component of this program allowing patients and caregivers the ability to see the impact of their behavior and drug therapy and take immediate action.
And although we are still early in developing the non-intensive market, the need for better management couldn't be clearer. For example, earlier this month, a study was published indicating that of people aged 45 and over who visited the ER, roughly 25% had diabetes and those patients aged 45 to 64 were almost twice as likely to be hospitalized following a visit to the emergency room.
With our CGM technology, we believe we have the ability to fundamentally improve both how these patients manage their diabetes and how they impact our health care system. We hope to fully enroll the pilot with United and evaluate next steps by the end of 2018.
With that, I will pass it along to Kevin.
Thank you, guys. I am very pleased with our team's performance in 2017. Our U.S. business accelerated in Q4 and our commercial patient additions were at record levels. Internationally, we had a breakout year after significantly expanding our OUS team beginning in 2016. And from a financial perspective, we are seeing leverage in our P&L, all while maintaining solid revenue growth and preparing for the future.
As we look to the balance of 2018, interest in DexCom CGM is robust with a strong increase in new patient opportunities, fueled in part by our ability to process Medicare eligible patients.
Leaving ATTD in Vienna earlier this month, DexCom was in a spotlight with buzz around strong clinical and competitive data. More broadly, CGM was a consistent theme throughout ATTD, and it is clear to me that CGM is the standard in diabetes therapy for patients on MDI or pumps, and should become the standard for all people suffering with diabetes as we drive early efforts to move into the non-intensive population. Nearly every scientific session included CGM data, whether it was the primary focus of the presentation or simply a measurement of the effectiveness of another device or drug therapy.
Considering global penetration rates remained very, very low, we believe this environment creates a significant opportunity for DexCom to capitalize on for the next several years. And as we move to our next generation platform, we are well positioned to take advantage of this opportunity.
Our interactions with the FDA continue to be productive and we believe we will launch a no calibration G6 platform globally this year with the goal of introducing it by midyear. Our outlook reflects these important opportunities, but also accounts for an evolving marketplace, including the potential impact of competitive activity, like we haven't experienced in the past.
The decision by J&J to transition the Animas pump business, and potentially more anticipated pricing pressure than we've experienced in prior periods as well.
Now I'll turn to our product pipeline update. As I mentioned, our biggest priority in 2018 surrounds the launch of our next generation G6 CGM system. The performance and feature set of this platform represents a step function improvement from what is currently available to people with diabetes. We have improved ease-of-use with a simplified applicator, 10-day wear, no calibrations and a reduced form factor. And the data we have seen to-date suggests that patients will benefit from improved performance characteristics, including a better day one consistency and no interference from drugs like acetaminophen. We know patients favor DexCom's real-time CGM because of its accuracy, reliability, alerts and connectivity and are excited to soon build on this foundation with the important enhancements offered by G6.
Beyond the core system, we continue to leverage the advantages of DexCom's real-time connectivity with our apps and wearables. The number of customers using mobile devices continues to tick up on both IoS and Android, allowing them to take advantage of our share system. We recently upgraded our app to offer a customizable alert schedule, and the option to override the mute function. We know there continues to be questions surrounding Medicare patients and their access to our valuable mobile app. We remain in discussions with CMS and hope to be able to resolve this in the next six months.
Wearables are also becoming increasingly important in driving patient convenience and we continue to make strides in expanding our offerings there with the Apple Watch, Fitbit and other Android wear devices.
In summary, we had a great finish to the year and we're off to a solid start in 2018. I would now like to open the call up for Q&A. Matt?
Thank you, Kevin. As a reminder we ask our audience to limit themselves to only one question and one follow-up. Operator? Please provide the complete Q&A instructions.
Thank you. And our first question is from Mike Weinstein from JPMorgan. Go ahead with your question.
Hi. Good afternoon, guys. Two quick questions. The second one may be less quick. The first is relative to the pre-announcement, you did come in better than you pre-announced, so if you could just highlight where the difference came from?
And then second, the question is really on the first quarter commentary. I noted historical percentage of sales that have come in the first quarter of the last several years, you're familiar with that obviously. But your guidance implies 17% to 19% year-over-year growth in the first quarter versus the 29% you did in the fourth quarter. You know it implies $166 million to $170 million revenues versus The Street's $182 million. So why does revenue growth step-down as much as you're guiding to from 4Q to 1Q? What drives that and maybe you could just shed some more color on what you're seeing today in the business? Thanks.
Yes, Mike. So this is Quentin here. I think with respect to Q4, obviously JPMorgan was very early, you know, in January. We weren't certainly not going to get ahead of ourselves there. We felt very good about where the quarter had come together, particularly in the U.S. business. We knew Medicare was strong, but the commercial business was particularly strong, and we just wanted to make sure that we had our arms around all of the issues that were going on in that business. And like I said, sets us up to where we knew we weren't going to get ahead of ourselves, but felt very confident that we'd be able to deliver on that number, and that's the way we approached it as we went into the JPMorgan conference. So that's what you have there.
Again, the majority of all of that upside came out of the commercial business in the U.S. With respect to the seasonality, I think a couple things to keep in mind. The sequential uptick from Q3 into Q4 was about 5 points stronger than what we've historically seen, particularly against last year anyhow or the 2016 year, and we're not in a position yet to call that a trend.
Again, we were very happy with the momentum that we saw. We saw it play out in the commercial business, but we're one quarter into it and the majority of that came in the back part of the quarter as well. So we're not going to get ahead of ourselves with respect to that item either. I think the way to think about it is if you just looked historically at seasonality Q1 is roughly 20% of about every year that you can go back and look at and that's the way we're thinking about 2018 for this particular point in time. If we can navigate it well and the momentum continues, then we're going to be in a great position, but again no need to be out ahead of ourselves here.
Yes, Mike. This is Kevin. I'll just add a bit to that, high deductible plans haven't gone away if anything they've increased. We've had, as we said on our call, very good interest early this year, awareness has been very, very good. And so things have gone well, but high deductible plans do make it tougher even for the reordering patients because they have to hit those deductibles and these are headwinds we've encountered in the first quarter every year and it's really no different than it has been before. So as Quentin said, we'll wait and see if this is a trend after a little while and go from there.
And our next question comes from Jeff Johnson from Baird. Go ahead with your question.
Thank you, guys. So maybe I could build on Mike's question just a little bit here on the first quarter guidance. First part of the question I guess just what are you seeing in your U.S. commercial business, especially here two months into the first quarter? Obviously competition has increased a bit here over the last 8 weeks to 10 weeks or so as Libre has launched in the U.S. So just wondering kind of any qualitative comments you can provide or even quantitative on where U.S. commercial trends have been over the last couple of months.
Sure. This is Kevin, I'll comment on that one. Increased awareness has helped our business tremendously. Make no mistake about it, our DTC campaigns ramped up in the first quarter of the year. Many people I run into tell me they've seen a DexCom ad. So we are reaching people. On top of that you have increased awareness being generated by our competitors as well. When patients go see the physician and say, hey, I've been made aware of CGM technology what do I need? Well, physicians definitely know the difference between us and the competitive systems and we're getting a large number of referrals.
So the pipeline of new patient opportunities has been outstanding. Where we run into the same thing we run into the first quarter of every year is, okay, how much is my out of pocket for this first quarter and we have to make sure we manage those expectations and get those patients on as best we can. But right now we are seeing very good demand and very good response in the U.S. The other thing in the first quarter again just to remember, as a bigger piece of our first quarter business and our new starts in that first quarter are more than likely Medicare patients and they have a lower revenue per start than our traditional commercial patients, as do a lot of our European patients as we grow in those markets in the first quarter as well, so all those things kind of blend to the story that we told earlier.
All right. That's helpful, And then my follow-up question I guess just on the investment you seem to make passive investment, but investment in tandem here recently looks like you bought some shares on their secondary offering. I know in the past you talked about not wanting to own a pump company but just wondering kind of is this a first step in that direction? Or what else maybe drove the buying on their secondary? Thank you.
No, Jeff. This is Steve. I'll take that one. No, this should not be viewed by The Street as a first step to an acquisition by any stretch. In fact, I would start to answer the question by saying we're extraordinarily committed to all of our pump partners, not just Tandem, we're committed to Lilly, we're committed to Insulet, we're committed to others that we're still keeping confidential.
So, no, I mean, at the end of the day, we discussed it with Tandem, discussed how our participation might influence our offering, and we agreed that if they raised a sufficient amount of capital that we would be willing to participate and that's really what happened. Like with Animus exiting the market when it became clear during Tandem's offering that they were going to raise more than enough capital to get to a place where we believe they can have a couple of really significant new product launches that incorporate our technology, it became sort of a no brainer.
I would just add one other comment as we were at ATTD like many others were, and we saw the data from their closed loop system and the data that it produced as one long time diabetes person said to me, he looked at that data and said I finally believe that this stuff is going to work. It was very, very compelling and we think it's a very, very good time. We saw the same thing with Insulet, we saw great data in Europe with their system as well. So we're beginning to see that we're going to have some closed loop and some automated insulin delivery solutions out there. So both of those events are great for us too.
And our next question comes from David Lewis from Morgan Stanley. Go ahead with your question.
Good afternoon. Just a couple of quick ones for me. So the U.S. was obviously very strong, and that was called out in your remarks. Can you just talk about the ex-U.S. business this particular quarter? I think it was flatter or marginally down sequentially. And was that just tied, I think, (24:29) mentioned some new hardware strategies ex-U.S. So was that the principal driver here sequentially? And how should we think about 2018 in light of the fourth quarter number ex-U.S.?
Hey, David. It's Quentin here. So, obviously, very pleased with the momentum we continue to have in that international business. Growing nearly 60% in the fourth quarter is something we continue to be happy about. And if you get into the details of it, what you end up finding is the direct business that we have there was all in excess of that 60% growth year-over-year. But part of our business there continues to be through distributors, and the distributer business is not as seasonal and has a bit more lumpiness in it than the direct business. So nothing there that concerns us.
We continue to be very encouraged by what we see on both the direct and the distributer side of the business. But nothing to read into from that perspective. If you think about 2018, international is going to continue to be a growth driver for us over the course of the year. So you're going to continue to see growth far in excess of the overall corporate average. I would just remind you we're probably less than 5% penetrated in that overall marketplace, so there's a lot of runway ahead of us to continue to drive growth there.
Okay. Very helpful. Then back on the U.S. market. Just Medicare commentary. I think the last quarter, the third quarter call, you mentioned 4,000 patients processed, 20,000 backlog. Can you update us on those numbers? And sorry, Quentin. I forgot to ask for you, the expense number for 2018. Can you share any kind of range we can think about for the United spending in 2018? And I'll jump back in queue. Thanks so much.
Yes. So I'll take the spending number real quickly. You know, we've been very committed to finding ways to drive efficiencies in the business, and the company has done a great job in doing that over the course of 2017. And you started to see some of that leverage really play out in the third quarter, then again into the fourth quarter. And what you'll see in the core business next year is that our core spending, excluding this Type 2 non-intensive investment, will be up roughly 10%, or nearly half the rate of revenue. So we continue on with the plans that the company had already put in place.
With respect to the non-intensive programs, I would say somewhere between $10 million to $20 million at this point in time is kind of where our heads are at. But at the same time, we're not going to hold back here. We see the opportunity to really drive incremental growth and invest in the future of this company. We're going to do it. But I think that's probably the right way to frame it up at this point in time, based upon what we know. The first question, again, repeat that one? Or do you have it?
No. I've got it. It was Medicare; you talked about Medicare and the pipeline. We're not going to go into our pipeline details anymore. We wanted to let everybody know that we had a valuable Medicare pipeline and patients were interested. We did get many of the patients processed and a lot of it out the door. The pipeline remains robust, but we're not going to break out Medicare versus commercial revenues as an ongoing thing.
And our next question comes from Margaret Kaczor from William Blair. Go ahead with your question.
Hi, guys. This is actually Alexa in for Margaret. Can you hear me okay?
Yes.
Perfect. So my first question is actually on the sales force and where the sales team is intended to focus this year. Are they more going to focus on commercial patient adds, pruning (27:45) existing relationships, Medicare? And how we should think about sales force spending and presence relative to digital marketing spend throughout the year.
Yes. This is Kevin. I can address that one. We did not expand the sales force this year from last in the U.S., our commercial sales force. We feel that it's right-sized, and we feel we got a lot of inroads with physicians who we had not called on, on a regular basis last year with the expansion that we did. So we're going to keep that team the size that it is now. They will push all the business, new patients, commercial new patients Medicare. That varies a lot territory-to-territory. They're compensated based upon bringing new patients to us, and we don't assign a quota for peds or Medicare or adults or commercial patients.
Our spend, we will continue to invest in the digital platforms. We've seen very good results in increasing awareness from our digital platforms, and we're getting a lot of traction from the ad campaigns that we're running. Our biggest spend on the commercial front, quite frank, would be the G6 launch. We've been reviewing G6 launch plans for later this year internally and the things that we want to do. That's going to be a very big dollar spend for us, and we'll attack every single avenue that we have when we get that product out there because we really believe it's a home run.
Okay. Great. That's helpful. Thanks.
I'm sorry. She dropped off. Our next question comes from Kyle Rose from Canaccord.
Great. Thank you very much for taking the questions. Can you hear me all right?
Yes.
Yes.
Great. So wanted to take a step back and just ask a little bit more on the G6 side. I appreciate the incremental guidance from a gross margin standpoint, and Kevin, you kind of touched on potentially increased competition leading to price pressures this year. But you're also launching the new products as far as the G6 sensor, the new applicator, new receiver, and things of that sort. Just wanted to see how we should think about those new products just from a cost standpoint, particularly with the new Mesa facility coming online? And just how the G6 and the new introductions over the course of this year will set up the company from a margin perspective relative to potential price pressures we see in the market?
Over time, we have long planned to take manufacturing costs out of our products and do things more efficiently, and G6 is going to be a result of that. For example, we have our initial launch transmitter configuration. We have a second transmitter coming not long after that that promises a significant cost reduction with improved performance and the way our team has developed automated lines around G6 processing.
Ultimately, we're very confident that even with the new applicator configuration the cost per sensor will decrease. With the 10-day labeled wear, we're hoping that margins are better with that.
So as you add all those things up, the margin percentage over time should be the same, but you add in the variable you brought out, we're going to add some fixed costs in for the Mesa factory as we bring it online. So that will affect margins a bit negatively as we get going, we're supporting two facilities, but eventually as we fill that up and volumes even out between the two, margins will get back to where they need to be. So we baked that into our assumptions, and we'll go from there.
I don't know, Quentin, if you have anything you want to add to that?
No. I think you hit the nail on the head. Over the course of 2018 as we stand up the Mesa facility, there are going to be a bit of headwinds, and that's what our gross margin guidance contemplates. That's why we talked about it in the mid- to upper-60%s coming off of what is 68% for the 2017 year. So we're trying to dial those in and contemplate those.
There's a little bit of pressure from a mix perspective. Obviously the Medicare business, as we continue to bring new patients into that, has a lower margin profile early on in the OUS business as it becomes a more meaningful part of the overall revenue contribution also can weigh on the gross margin. But as we start to scale this Mesa facility in the 2019 and on and you really start to lever the fixed cost overhead that's within that facility, you see meaningful improvements in the gross margin profile over time.
So I think 2018 is somewhat of a transition year for us. You get into 2019 and further, you're going to see the cost profile of our products and what's in the product roadmap really start to come down.
Great. I appreciate the color there. And then kind of dovetailing off some of the previous commentary OUS, just wondered if you can give us an updated view on reimbursement internationally? I think last year you talked about hoping to hit your 50% of contracted lives in Germany. Just thoughts on where we should see that number go in 2018? And then just broader thoughts on any potential reimbursement wins internationally as we move forward?
Yes. I think we definitely – we ended the year north of that 50% goal in Germany, and we continue to make progress kind of rounding out Germany as a whole. We've made some progress in France. We're still kind of pushing there on some of our legacy technologies.
Obviously, we're in a bit of a transition phase as we look to bring G6 to market, so some of this will actually accelerate more as we launch the G6 in some of the global markets besides just the U.S. So I think you could still see some potential for a win in the UK.
As we talked about on previous calls, we're going to launch in Japan. There is currently reimbursement for our professional solution in Japan, so in theory (33:20) we're launching a potential product into an already reimbursed market there, although we do think the consumer version of the product is going to be more appropriate for patients there.
So there's a number of things OUS. Without giving you any details specifically, you could see us make a couple of additional announcements later this year.
And our next question comes from J. P. McKim from Piper Jaffray. You can go ahead with your question.
Hi. Thank you. I wanted to touch on guidance real quick, and just trying to understand the delta between this year and next year. So if you finish this year at 25% and midpoint for next year is 18%, so the delta is around 8% in terms of just the overall growth rate. Can you help at least qualitatively give us how much is that from pricing pressure, maybe more than you think? Or just taking into volume on the competitive side and handicapping that?
Yes. So Kevin hit a little bit on this in his prepared remarks. You know the volume side, the unit side of the business continues to be very, very healthy, and the momentum coming out of Q4 we were very pleased with even into the first part of the quarter. You know all indications have been very strong, but even the competitive headwinds that are out there, the noise around some of our competitors and new products coming into the marketplace, other folks kind of getting their act together as we move over the course of the year.
I think it's prudent for us to think about those as potential headwinds, and that's what we're trying to contemplate in our guidance. So we've talked about there being roughly 5 points to 10 points of contemplation in our numbers for those associated impacts, whether it's price or competitive headwinds, if we can navigate that well, then fantastic. We really are going to be in a great position over the course of the year. If they come to fruition then we've dialed in appropriately.
Okay. And then just one on G6. In your early discussion, does it seem like that they will force you to shut the system off after 10 days? Or since you have the ability to maybe calibrate if you want, could it potentially run longer?
We are having discussions on that very subject with the agency as we speak. And we do have, you know, one of the things we haven't been real public about but we can talk about on this call since you mentioned it. We did leave the opportunity for a patient if they wish to calibrate the system to go ahead and do it. We think this is very important for our IP partners, they'll be able to calibrate their systems. And there are times and there are users who have come to me directly and said well we appreciate no calibration, we're going to want to be able to stick our finger in it from time to time just as a comfort matter. So we are going to offer that feature. We don't have a final decision on shutoff or not.
Okay. Thank you.
And our next question comes from Doug Schenkel from Cowen. Go ahead with your question, Doug.
Hi. This is Ryan (36:22) on for Doug. Thanks for taking my questions. I know you said you're not going to breakout Medicare revenues, but it is a pretty important growth driver for 2018. Can you provide a little more color on what you saw in the quarter, or so far in Q1 as well as what's embedded in your 2018 guidance?
Well, with respect to Q4, I think most folks have been modeling somewhere around $10 million of revenue or so in terms of the contribution for Medicare. We'll tell you that we didn't deliver the $10 million in the quarter, but we saw a meaningful increase coming off of Q3 into Q4. So very pleased with the way that we see that business continuing to build and ramp, and as we continue to learn how to navigate it internally, the processes becomes an easier and more smooth process for us to navigate through. So you're right. It's going to be a meaningful growth driver for us in 2018, but we're not going to break that out and continue to talk about it, but it did uptick well in Q4, but it wasn't at the $10 million run rate that many had modeled.
Okay. And then on pricing. You talked about anticipating some pricing pressure within your guidance, primarily within durables. Last call you started to talk about early discussions with U.S. commercial payers regarding pricing. Is there any – have you had any further conversations? And is there any update you can provide on how you're thinking about the longer-term outlook here? Thank you.
Sure. This is Kevin. I'll address that. We have had discussions with U.S. payers, and again, even given the competitive environment, payers are very cognizant of the fact that our device is different than the ones we're competing with, and we've been able to maintain the pricing structure that we have.
We'd also be foolish to say they aren't aware of the lower price models that are being offered in the category as well. Combine that with the fact that the Medicare pricing model is different than anything that we've ever had in the past with respect to the subscription model, and we do see a lot of noise in the pricing world.
For today, our discussions have been very good. Our payer team has done a wonderful job keeping us in the right position. We have always been willing to trade price for access and simplicity and getting on the system. And so you'll see us make trades and have discussions of that nature over the course of the year.
It's a very exciting time with the payers. Again increased awareness raises all votes. And it gives us the opportunity to have a lot more candid discussions with them, and we welcome those opportunities. So, so far, so good.
And our next question comes from Danielle Antalffy from Leerink.
Hey, guys. Good afternoon. Thanks so much for taking the question. Just on the UNH partnership or I guess I should say the trials that's ongoing, can you talk a little bit about exactly what you and United Health are going to be looking for? Maybe give a little bit more color on how that should inform your go-to-market strategy for Type 2 patients. And then last I'll ask all my questions at once and then last question related to that, what we as investors should expect to see come out of that over the next 12 months to 18 months. Thanks so much.
So, Danielle, this is Steve. I'll take this one. So look, we said this before 2018 is very much an investment year for us and really exploring together with our partners at United Healthcare what this business model might look like. The goal is obviously clear. It's to drive cost savings and improve outcomes using a variety of technologies, most importantly CGM.
So these patients will have – they'll wear sensors, they'll have activity tracking data, you saw Fitbit talked about us a little bit in their call, I think it was yesterday. We'll have diet, exercise information, we'll have some real-time coaching, so there's a combination of input spend and the goal here is to develop a program with a business model that works that we can invest in these patients a little bit and then in the back end save a bigger chunk of money on whether it's on revisiting their current drug regimen, preventing them from having to go on additional drugs, et cetera.
So the Type 2s are extraordinarily costly to the system and as the key sensing component, I mean we think we're adding the most value to this program. I would tell you it really is too early today to try to pin down what the business model's going to look like for us. It'll evolve out of this we talked about doing initially about 10,000 patients. It'll really evolve out of that and we'll have to give you guys more color as it evolves.
And our next question comes from Matt Taylor from Barclays. Matt, you can go ahead with your question.
Hi. Thanks for taking the question. So I wanted to ask you about the G6 launch and what you're assuming there. And I guess the core of my question is we've always assumed that going to no calibration would be a big deal and so I wouldn't think you would argue with that, but could you compare this launch and what you're expecting with G6, assuming it does come midyear, would there be some initial stocking? And what kind of uptake do you think you could drive out of the gate given that big change?
This is Kevin. I'll take that one. I'll answer it the easiest way I can. I got an e-mail from the parent of a patient today whose child had been in the G6 study. The child won't go back to G5. The child wants G6 and we don't have it available yet and the parent asked is there anything we can do to get back on the system that my child wants to wear.
We think there will be a big uptick and we think this will be a very exciting launch for us. This is the first all of world launch we've ever tried and I think you all should be cognizant of the fact that this isn't just a new algorithm or it isn't just a new sensor. This is a new everything. The sensor is new, the membranes are new, the applicator is new, the manufacturing processes are different, the algorithm is different, the calibration scheme is different, everything across the board is different than anything we've ever done before.
We keep our distributors on a very – and there we have great relationships with them. They don't get much past a month of inventory, so there's not going to be a big stock up opportunity of G6 and in fact, as we see G5 winding down the beauty of having a three-month transmitter is they can fill out their G5 stock as these patients have their transmitters that expire and then we can do a very natural shift over to the G6 platform for our patients. So we don't see there's going to be a big stock up opportunity of this per se. And we really haven't had that with any of our launches, but we will roll it out and we will have to go get reimbursement contracts across the board.
We'll have to get a new Medicare contract for G6 because it's a different product than G5. So there will be a lot of work to do that we have lined out and laid out upon approval. We can't do all this now until we have the product out and available in the market but, I can tell you, the response in the community is going to be superb. We're really bullish about this.
Thanks. And you've consistently said that you're going to give us more updates on your next gen product with Verily when you get more clarity on when G6 is coming out. Is that still your approach? And when might we see more about that system in terms of form and function?
Well, the first Verily system is a derivative G6. It has a G6 sensor, and it has the same hardware that the G6 system has. It is a 14-day use. We have plans over time to take our 10-day G6 out to 14 days as well. And so a lot of that is going to be inter-connected.
Once we get G6 approved and get through all of our discussions with the FDA and no calibrations, we'll immediately go back there and say, okay, here's our plan to get to 14 days with the new system and go from there. But activity thus far is finalizing the design, validating and verifying the system, and making sure it works properly are going on as we speak. Everybody is very busy with the first Verily system and our 14-day version of G6. While at the same time, I'm asking them to work overtime to do the G6 launch. So we're busy here with all that stuff, and you will hear more as the year goes on.
And our next question comes from Steven Lichtman from Oppenheimer. Go ahead with your question.
Thanks. Hi, guys. I was wondering if you could highlight what direct-to-patient initiatives we should see from you guys this year. And will you look to increase your sales force this year?
The sales force, we're not looking to increase the U.S. commercial force this year. There are some geographies overseas where we will increase our sales force. We have a couple of direct market opportunities where we will increase our presence, but it's not huge hires. We did a German expansion late in 2017, and that force is up in the 20s now in Germany. So that's a good-sized group there. As far as our DTC campaigns, again, we're very focused on different age groups. We have messages for parents and kids. We have messages for adults. We have messages for our seniors. We will ramp that effort up significantly with the G6 launch, but I can't give you all of the details because then I'd be letting the cat out of the bag. So I'll stop.
Okay. And then, Kevin, you mentioned some app enhancements with what sounds like some more alerts and alarms, flexibility for patients. Can you talk a little bit more about that, what that means for patients?
This is very cool. There are two things that are in the new app, and kudos to our team for getting this out. We went when we got non-adjunctive, based on several discussions, we decided that it was bad to over-ride, to not have the thing alarm all the time on your phone. So we overrode the mute button. And I had an attorney come in here one day, explain to me that while he was doing closing arguments with a jury, his alarm on his phone would not stop. And, please, will you fix this. And we got, in all candor, we got 80% positive feedback on the mute override, but 20% negative. We now have a feature in the app where you can, I think, it's called the app will run as the phone runs. So you turn that on and it's going to run just like the phone does. And it will mirror the phone.
With respect to the alerts and the alarms, we call them flexible alerts, a flexible alert schedule. So if you're a patient during the day, if you want your high or low alerts to be at one level, you can set them. And then when you go to bed at night time, and one of the feedbacks we got from our patients for example, they might set their low alert a little higher while they're sleeping than they would during the day because they'd want to be woken up if they're turning on low very quickly. They also might set the high alert even higher because they don't want to have to wake up if they go above 250 while they're sleeping.
So what we're going to do is give patients the flexibility to set an alert schedule that goes more with their lifestyle. There's another alarm in the G6 system coming out that is a predictive low glucose event that will, patients will be able to use. And that will basically give them 20 minutes warning, I think 20 minutes or 30 minutes, before they hit the low 55 threshold – rather than waiting until they get down below a specific number, which we've got feedback in our studies has been very useful and very well-accepted with patients. So this app format is going to give us a lot of flexibility in the future to give patients the features they want. And these, all three of these features, are things that patients have asked for. So we are responding to what people really need.
And our next question comes from Jayson Bedford. Jayson, you can go ahead with your question.
Thanks, and good afternoon. I just wanted to follow up on a comment earlier, Kevin, on new payer contracts associated with G6. Is this something that you'll have in place upon approval? Or will this, these, will there be a bit of a delay here before these payer contracts are in place?
It all varies payer to payer. We have some relationships where we can go immediately. We have others where we have to put a new contract in place with the 10-day device. Undoubtedly, we'll have to have pricing discussions. So I would imagine we're going to want to get in front of every payer anyway because this system is such a step-up from what we've had before. We want to increase access and making it available to more patients. So the way I look at it is we're going to make this as big event as possible, and I want to get in front of all of them. I don't want to just get in front of a few.
All of our launches have been like this. You know we went from G4 to G5, and we suddenly had four transmitters a year instead of two transmitters a year. And with seven plus we had one transmitter a year, and then to two. All of this stuff does take time to go through our system, but we're pretty experienced with it, and we definitely have a valid plan as to who we're going to call and when and how we're going to get out there. All those steps are being outlined as we speak.
Okay. And just following up on Medicare and kind of the use of the app. Is this dynamic slowing adoption? And should we look at it as this constraint is lifted, should we look for an acceleration in your Medicare business?
I don't know that it's necessarily slowing adoption. I certainly would love the opportunity to market the connectivity feature of Medicare and be able to go to the senior community and say if you have diabetes and you suffer from hypoglycemia unawareness, your caretakers can now follow you and find out. We can't say that right now. I would love to be able to say that message in my own personal gut feel is that certainly would enhance our ability to market to Medicare patients. But I have nothing quantitatively to build on that, other than my own thoughts.
And we have no more questions at this time. And I'll hand the call back to Kevin for closing comments.
Well, thanks, everybody, for participating today. As we wrap up our discussion on 2017, I'd really like to celebrate a few of our accomplishments this year and how hard everybody worked to achieve them. You know we initiated a launch as a direct supplier into the Medicare community with a completely different reimbursement model than we've ever had before. And trust me this has been a huge undertaking, all the while continuing to drive our U.S. commercial growth, and manage our current patient base.
Our international growth exceeded our expectations and really demonstrated a return on the expansion efforts that we've carried out over the past two years in a very competitive environment. We achieved a whole bunch of milestones on other key initiatives as well, including our data platform with its API infrastructure that we're now offering to potential software partners, expanded manufacturing in our new Arizona facility. This should be up and running in 2018. We plan for our future and execute it at the same time.
And finally, our early success in developing a non-intensive strategy. We believe we're very well setup for success in 2018 and our expectations here are always high. Especially with this new product launch coming that's going to be the biggest ever that we've ever had. There may be variables in play, but at the end of the day, the CGM market stands to grow significantly in coming years. And as I look at the market space and my other takeaway from ATTD that I told everybody, I can truly see a day when we can eliminate finger sticks and improve access and expand awareness for these devices. And as the leader in real-time CGM with our product offerings and our pipeline, we're going to be able to lead this category to the standard-of-care in diabetes treatment. Thank you.
And thank you, ladies and gentlemen. This concludes today's conference. Thanks for participating. You may now disconnect.