Welcome to the DexCom's second quarter earnings call. My name is Anthony 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 like to turn the call over to Terry Gregg. Mr. Gregg, you may begin.

Thank you operator and thank you for joining DexCom today for our second quarter 2010 earnings call. Joining me today from DexCom are Steve Pacelli, our Chief Operating Officer and Jess Roper our Chief Financial Officer. Steve will start off and give you our Safe Harbor statement.

Thanks Terry. Some of the statements that we will make in today's call may constitute forward-looking statements. These statements reflect management's expectations about future events, operating plans and performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under risk factors and elsewhere in our annual repost on Form 10-K, our quarterly report on our Form 10-Q and other reports filed at SEC, we undertake no obligation to update publicly or revive these forward-looking statements for any reason. Thanks Terry.

Thanks Steve. Now Jess will provide you with a financial review of the quarter, then I'm going to move into the commercial overview of the quarter including clinical and regulatory partnerships update on looking to the present and future of our technology by concluding remarks and then we will provide you with the opportunity to ask us a few questions, Jess?

Thank you, Terry. DexCom reported product revenue with approximately $9.0 million for the second quarter of 2010, compared to $4.1 million for the same quarter in 2009, an increase of 120%. Sequentially, product revenue for Q2 increased by 34% from the prior quarter, during Q2 we sold over 3,500 systems. Sequentially, essential revenues were up 37% from the prior quarter. Total revenues for the second quarter of 2010 was $11.8 million, compared to 6.8 million for the same quarter in 2009, and included $2.7 million in development grant and other revenue from our development and collaboration agreements. Cost of sales including both product and non-product totaled $7.3 million for the quarter. Product cost of sales totaled $6.3 million for Q2 2010, compared to $4.6 million for the same quarter in 2009. Sequentially, product of cost of sales increased by $1.2 million from to Q2 2010, due to the increased number of units sold during the quarter. The corresponding improved product gross margin totaling $2.7 million in Q2, compared to $1.6 million in the prior quarter was due mainly to additional product revenue. Development grants and other cost of sales totaled $0.9 million for the second quarter of 2010, compared to $3.2 million during the same quarter of 2009. The decline was due to lower expenditures related to the development of our hospital-based system. Sequentially, development in other cost of sales remained flat quarter-to-quarter. Research and development expense increased $2.0 million in total $5.4 million for Q2 of 2010, compared to $3.5 million in Q2 of 2009. The increase in R&D cost was attributable to additional efforts associated with their next generation ambulatory products. Sequentially, R& D cost increased by approximately $0.7 million in the prior quarter, as a reminder R&D cost associated with our development and collaboration agreements Animus and…

Thanks Jess. We were extremely pleased with our performance in the second quarter of 2010 as we delivered yet another quarter of sequential growth. We again exceeded analyst consensus estimate for product revenue and we achieved a positive product gross margin of 30%. Highlighting some key metrics from the second quarter, total product revenue grew approximately 34% sequentially from Q1 2010 to Q2 2010, and was up 120% compared to the second quarter of 2009. We sold over 3,500 starter kits for the SEVEN Plus in the second quarter, amounting to a 37% increase in starter kit sales compared to the first quarter of 2010 and up 84% compared to the second quarter of 2009. And we posted an increase of approximately 37% in Sensor revenues quarter-to-quarter as we continue to see increased stickiness among patients who go on the system and increased sensor utilization among our patients. We are pleased to report that the demand for our SEVEN Plus is strong heading into the third quarter and we expect the positive trends in sensor utilization we've seen over the last few months to continue throughout the remainder of the year. We continue to see progress in our direct-to-patient initiative, particularly through our online campaigns. Normally, there is a seasonal downturn in internet social media during the summer months. But we believe the campaigns we initiated in the second quarter have positioned us well with the third quarter. Highlights from Q2 include an online pilot program with dLife, an outbound e-mail campaign targeting the MBI patient and a campaign targeting Abbott navigator patients, who were unable to obtain supplies during Abbott's recent supply challenges. The reimbursement bottleneck continues to ease, and while not disclosing specifics, we are aware of a number of insurance plans who have or are in the…

Thank you. We will now take questions [Operator Instructions]. Our first question comes from Tom with Piper Jaffray. Please go ahead.

Hi and good afternoon. Terry I guess I just have one broad question and that would be your comment in the prepared remarks of being on the cusp of something big. The CGM train has left the station, is gaining speed. You mentioned STAR III and then at subsequent publication and our coincident publication and during one general of medicine JDRF again NEJM reimbursement is easing, it's the year of the patient. When you go to the meetings it seems more doctors and more field personnel educators get it on the CGM side and yet it’s still likely penetrated and if we're on the cusp, do you see from sort of the overall view of diabetes or maybe your history with MiniMed? Is there something else that we need to add to this or is it just time and effort that makes this goes through?

Now that's a great question and I think it’s just time and effort. I don't think there is necessarily a particular ad that will drive the adoption quicker. I think for the first time, if we look at the categories of penetration and the Type I market, our guess is somewhere north of 3% and less than 5% as a category. If you look at historical penetrations of novel technologies, once they get to around 7% - 8 %, they begin to have an acceleration phase because you change the channel distribution dynamics. Right now we're still in many ways pushing the channel we're culling on positions, educators, those individuals recommend in to their patients. We're beginning to see the first trickle I would say patients demanding the product. So we begin to give in scripts from physicians that we don't actually call on and maybe coming from our partners, either Insulet or Animus and may be coming entirely separately. We do see that some of the scripts are not from endocrinologist and some are actually from family practice or general practitioners. So we see that movement and I think you'll continue to see that increase in adoption as time goes on. We really still need to drive it down into the broader base of the healthcare professionals who treat the disease that are not necessarily endocrinologist.

Our next question comes from Ben of William Blair. Please go ahead.

Terry, just wanted to follow-up on the MDI push in some of the programs that you've put in place over the last several quarters. It sounds like and may be talk about the dLife program. What sort of impact that's having and are you seeing a change in the mix of new patients that you are adding?

Hey Ben this is Steve, I'll respond, I am actually a little bit closer to the details that Claudia is working on, on in the marketing side. So in the dLife program, we really just ran a kind of a pilot program but as you know dLife is one of the larger organizations really internet focused actually to have a small television program as well. They are primarily internet focused, they have probably north of $500,000 may be north of $600,000 active subscribers and primarily focused on the Type I patient. So, really limited and kind of the efforts that we put forth thus far, just sort of piloting starting with some banner advertising and then, expanding that out just to reach to their folks. But we may be able to extend that. Again the outbound email program campaign targeting MDI patients, we're lesser available, we're able to purchase information to enable us to really directly target the insulin using, insulin using Type 1 patient. The Abbott campaign, pretty much speaks for itself as you know Abbott announced several months ago that they were having challenges with respect to being able to supply those hardware and sensors to their patient. And we obviously kicked into gear very quickly, a campaign to help those navigator patients who are interested in switching continuing on CGM to switch over to DexCom. Again from a SG&A perspective, either or not expensive programs by means, those are largely internet focused and don't expect from marketing perspective, don't expect the marketing dollars to increase dramatically with this direct to patient campaign that these multiple campaigns that we're running.

Okay, can you address the MDI mix? Is that moving at all yet?

Honestly haven't surveyed the patients recently. The latest data we have is still kind of that 60-40 split between pumpers and MDI patients.

Okay and then maybe a question on the bottlenecks if any in the business at this point, is it patient flows, training, physician awareness and what you can do to kind of keep moving the different (inaudible).

Well I think its just geographical representation. We added four new territories this year, a new district and so I think that we're expanding more into areas that were under served. The bottleneck on the back office is certainly easing and we mentioned, we look at some of the plans that are either in process of amending their policies to require fewer documents and I think again what you need, as I mentioned to Thom Gunderson today in this call was you're going to get this adoption. It’s not a matter of, if it's going to happened, it's just a matter of when. We are beginning to see that groundswell where patient are more familiar with it, more physicians are familiar with it, but that takes time to resonate with those various populations. We pounded at this since 2006 at the endocrinologist level really to the two years that we were talking about that and we moved to the healthcare provider in terms of the diabetes educator. We did a great job there and now this year again extending back out to the patient and some of those campaigns that Steve was talking about. I think the other factor to it, so we’ve got a PMA spending with the Food and Drug Administration with Insulet that's another 100 or so bodies on the street. You've got Animas has that opportunity with another 200 plus bodies on the street. So I think those things will drive just the general awareness of it beyond the endocrinology base that we are now calling on.

Our next question comes from Bill of Canaccord. Please go ahead.

Just a couple of clarification points. You mentioned just moving the ball forward with the payers and I'm curious as the documentation becomes more streamlined, have you seen any opening of the opportunity from Type I to Type II patients yet or is that something that is probably kind of a little further down the line?

No I think that's definitely further down the line. The opening up that we have seen, really has to do with a reduction in the requirements for some of those policies that are in place today for the Type I patient. I still think what we need to see in order to gain any reasonable reimbursement for the Type 1, just a meaningful clinical outcomes data and there just isn't any today. We are aware we've talked publicly about a study that's currently being conducted out of Walter Reed, the latest I have heard is that study will be concluded later this year in the fall and then we can only hope that it will be positive and the interview published sometime shortly thereafter. And I think until we have some meaningful outcomes data in that patient population, I wouldn't expect to see much reimbursement there.

Okay, great and then just another point of clarification. You talked about seasonality and kind of Q3 it sounds like the momentum you have you feel is kind of rolling through the summer and should continue through the back half of the year. Am I reading that correctly?

You are definitely reading it correctly. As I indicated in the prepared remarks, we're certainly one month in to the third quarter and we do not provide guidance but it’s just historically as I said historically expectation and certainly we believe that the adoption of CGM would supersede the seasonality that from (inaudible) DME product experienced, particularly in the summer months.

Okay, fantastic, and then another comment you made which is relative to I believe kind of reorder rates and attrition rates and you haven't commented this specifically in the past but would you say you are in to a single digit attrition rate at this point with the new generation?

Yes, we are not going to comment on that Bill. You know I almost hesitated when we went back and forth on the prepared remarks. Just trying to give the market a sense of what we are seeing which is certainly reductions in our historical attrition and what we've said before is that we're living, kind of looking on our business from early '09 for when we really started to see some meaningful reimbursement and patients who were coming on to system today are typically coming on with some form of reimbursement. We've seen certainly if an attrition improved dramatically and we've also seen stickiness in number of the sensors that we believe patients use and we believe the percentage of patients who are using the systems on a more full time basis has improved. Couple of reasons we're not going to close the specific, but the primary reason it’s hard to pin down particularly in terms of sensor utilization and how many sensors the patient utilizes. But we can certainly track re-order patterns, but as you know, we're labeled for seven days. The patients are able to use the system for longer than seven days, and so we have to make estimates in terms of how long we believe the patient might be using a single sensor. And so, it’s still a little bit of guess work on our part and to determine how many sensors the patient is using on a monthly basis. But on a broad scale, just looking at the install base and looking at reorder patterns, we're definitely seeing increased utilization across the entire base.

Yes, I mean if I look at the numbers, its kind of just the way the utilization improved double digit sequentially.

Again, not going to comment on the specifics.

Okay and then just as we look at the kind of development revenues, if you could just help us out a little on the modeling and quarterly, how should we think of, is it 27.50 a quarter going through the balance of this year and then what is it in 2011 in terms and then are there any major milestones that pop in any of the quarters that we should think about. Did development revenues kind of quarterly flow and then any milestones that pop in?

The developmental revenue through the end of 2010 is a straight line model. It is roughly $2.6 million a quarter and we have some non-product revenues in there as well, some services revenue. And that goes through 2010 and that would end, but we also have some milestone dollars totaling about $17 million that we are eligible to receive between Animus and Edwards, and that could be received in 2010 or beyond.

Most of you recognized on a one-time basis as received.

Our next question comes from Mimi Pham with Soleil Securities. Please go ahead.

Can you clarify, just do you believe this strong sequential growth and new patient adds this quarter was driven more by deeper penetration at your sort of current customer CGM prescribers or was it driven more by new scripts or references, referrals from new doctors?

It’s a combination of both. I think if you back to earlier comments about MDI campaigns, one of things that we’ve done with the existing prescriber base is to initiate a desire in these direct-to-patient initiatives on MDI in particular, so that we are focusing on it from a two prong attack line, point into the account and asking for the MDI business specifically and secondly then to encourage patients on MDI to ask their physicians for CGM. And I think that’s harder but obviously as I mentioned we are beginning to get scripts from outside of our current call pattern indicating neither one of two things and we haven’t dialed it down as to those referrals coming from our partners or are they coming from patients who have simply walked into a office and said I want a DexCom SEVEN Plus. But I think both of those factors are contributing to the increase sequentially.

And then in terms of the second quarter new patient adds, did that include any significant amount of folks on the navigator switching?

No one knows specifically, Mimi. The challenge we’ve had even in running this navigator campaign. It’s tough to know who the navigator that the navigator patients are because Abbott never had a direct sale force. So even Abbott would probably have a tough time rather than perhaps the regulatory organization would have a tough time telling you exactly who their patients are. They are all through larger DME suppliers, but all through a distribution, the patients aren’t necessarily required to tell us that we can track those, but then there are others that I am sure have come in and that has become frustrated otherwise with navigator, but Mimi, looking at total number in the quarter of 3,500 starter kits, navigator will contribute very level to that.

And then, did you break out the international contribution to that 3,500?

We haven’t, but I will tell you, it’s still very, very small

So when does reimbursement sort of not become an issue, someone through the US situation so then or national side, do you…

We’re at least a year to two years away from that becoming. We’ve got doc GA before committees today in multiple countries but this is as I said in previous quarters this is a seeding effort on our part with our distributors and it’s going to take a while particularly given the economic situation and year off before we see broad-based imbursement.

Okay. Thank you very much.

Our next question comes from John with Capstone Investments. Please go ahead.

I was wondering if you have seen any pushback due to the economy here in the United States.

John, we start little bit in the first quarter and we zeroed out the various accounts flexible spending accounts in that and as I indicated we saw we had a soft January, a bit of soft February in the first part and then we came roaring back second half of February march and the second quarter event has been a pleasant surprise for all of us. So, were not seeing that now as those deductibles are getting met. We don’t see that same kind of resistance that we saw in the first quarter.

Okay, and unemployment and loss of benefits you don’t think there has been an issue in the second quarter either?

We can’t tell, but it certainly does not seem to be that way. I haven’t heard anything from our, there hasn’t been a complaint raised from our sales organization in the field portion will be the people you’d expect to hear that from. We look at our pipeline in terms of opportunities right now is just as full as we’ve ever seen it. It’s just a matter of us processing all of those opportunities, but we have not seen any bit of softness from that sampling.

And can you comment on pricing if it’s stable here?

Yes, actually, our ASPs have held study if not improved just slightly. So we are still somewhat estimated just north of $750 for our starter kit and just north of $60 for a sensor for seven day sensor, held very steady.

Our next question comes from Bud of Global Hunter Securities. Please go ahead.

Just a couple of question here. One on the slight up-tick in the FC&A. Were there any new sales adds to that figure?

As I mentioned we added four new territories which totaled as due look at a territory. It comprises of a territory sales manager and a clinical education specialist and with the expansion we had as a Regional Sales Director. We also created a move in that for a new Strategic Affairs Directors who calls on third-party payer system which was actually one of our existing regional sales directors. So we now have four regions, approximately 60 people in the field. So, there was an up-tick in expense on that.

And then, just kind of a longer range question and co-incident with your initiation of pediatric CGM clinical trials. Are you seeing using and payer posture towards preexisting conditions and type 1 as a result of Obama care or is it still a may be a little early to look at that. Just kind of wondering what your expectations were and maybe what you are hearing anecdotally.

Yeah, and I think it very early to see the impact, what that’s going to mean for easy enough restrictions or pre-existing conditions. We’ve never really seen an issue there. So, I mean adding to that base of some $30 million plus coverage live. We will have to see that’s going to take time to kind of get installed.

And then just quickly, Jess, did you have an exact stock-based comp, I know you listed some of the charges and said that was a majority of it. But I was just wondering if you had an exact figure there.

I believe it was $2.7 million for the quarter.

(Operator Instructions) Our next question comes from Richard of Wedbush Securities. Please go ahead.

Can you maybe go into a little bit more detail about your agreement with Insulet to kind in terms of the marketing strategy and how reimbursement works there? And maybe he was responsible for work on each of those.

Sure you will remember we only have two (inaudible) partnerships, one with Animus, one with Insulet. For a period of three years from the commercial launch, Animus has an exclusive outside of the US. So the Insulet relationship for at least the first three years of commercialization will only encompass the US. And in the US, it is actually right down the middle. There is no revenue share or any product sharing. And Insulet will be responsible for selling their system which will include the handheld controller and disposable omni pods. We will be responsible for selling directly to the patient, the transmitter component and then supplying the patients with durable or disposable sensors. And there is no revenue, so they retain all the revenue from their disposables business and we retain all the revenue from our disposables business. From a reimbursement perspective, we are responsible for billing the patient’s insurance company directly for the CGM component.

I just wondered if you didn’t see any change in Abbott, any update there if and when you think they might come back into the market?

John, this is Terry. No, I have not seeing any change there from the standpoint when they will be back in the market, so we are watching this closely as everyone else to see what their decision making there as on that.

Has anyone figured out what their problem really was?

I know. As I’ve said publicly, I think their sensor technology is a good sensor technology and very accurate, so I’m hopeful, philosophically is that they come back in the market obviously having three competitors in the market from a category awareness is better than two and let the companies compete for patient, and let the patient choose the best product that meets their needs.

At this time I show no further questions.

I would like to kind of wrap it up, and as I have expressed on several quarters, we are meeting and exceeding expectations both financially and product technology introduction. The market is rewarding us with a significant degree of competence and we treat that competence with great respect. We have a very interesting scenario unfolding before us. The market acceptance of CGM as a category and IVD is growing and should reach double-digit penetration in the US Type I population in the next couple of years. That (inaudible) at the forefront of technology with Gen IV, Gen V, the integration with pumps, integration with consumer-oriented wireless devices and integration in the hospital sector. At the same time the regulatory environment is getting more challenging, and that translates into a greater distance between DexCom and competitors, current and future. It is certainly a good place for DexCom to be. Thank you.

Thank you ladies and gentlemen, this concludes today’s teleconference. Thank you for participating. You may all disconnect.