Tippie College of Business | - Medical Devices Stock Rating ......devices part of these systems...

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Dexcom Abbott Laboratories Medtronic

Dexcom, Inc. is the leader in continuous glucose monitoring (CGM) technology within the Health care Medical Devices industry since its formation in 1999. Dexcom was approved by the FDA in 2006 and primarily focuses on the design, development and commercialization of CGM systems for people with diabetes.1 The small implantable devices part of these systems transmits blood glucose levels to patients via their mobile device. CGM is attractive to individuals with diabetes because it no longer requires the traditional method of finger-pricking to obtain glucose readings.2 Last year marked a record-breaking year for Dexcom, as it released the Dexcom G6 device. This industry-leading technology provides patients with the information they need to prevent hypoglycemic and hyperglycemic incidents.3

Krause Fund Research Spring 2019

Dexcom Inc. (NYSE: DXCM) Health Care – Medical Devices

April 12, 2019 Stock Rating: HOLD

Analysts

Ian Jongewaard Nathan Kelsay [email protected] [email protected] Sarah Langholz Scott Tribbey [email protected] [email protected]

Target Price: $135 – $145

Investment Thesis

DCF Model DDM Model Relative Multiple

$ 137.28 $ 79.59 $ 154.43

Stock Performance Highlights

Current Price 52wk high 52wk low

$ 117.88 $ 156.16 $ 72.04

Share Highlights

Market Cap (B) Shares Outstanding (M) EPS (2019E) P/E Forward

$ 10.609 $ 88.20 $ -1.43 $ 1.37

We recommend a hold rating for Dexcom because of the positive outlook on continuous glucose monitoring technology, its dynamic growth in a highly competitive space, and its growing presence in untapped international markets. Drivers of Thesis Dexcom’s CGM products will continue to grow in popularity

as more patients become educated and accepting of CGM technology.

We forecast total revenues to grow between 30-45% annually for the next five years, as Dexcom claims a first-mover advantage over its competitors.

Dexcom’s G6 CGM product is FDA classified as a class II product, the only product with class II classification in the CGM market and the lowest risk device to ever be released.

Risks to Thesis Dexcom currently only produces CGM products and faces

high research and development expenses year over year. High R&D costs could restrict Dexcom’s profitability in the short-term.

Dexcom does not have an established sales force and competes with industry giant Medtronic and Abbott Laboratories who both have more experienced organizations.

Company Performance Highlights

Gross Margin Profit Margin

64.36% -12.32%

Financial Ratios

Current Ratio Debt to Equity Ratio

7.64 1.89

Company Description

Earnings Estimates

Year 2017 2018 2019 2020 2021 2022 EPS (0.58) (1.44) (1.43) (1.43) (1.15) 0.01

12 Month Performance

Relative Financial Performance

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Our team is issuing Dexcom (NYSE:DXCM) a HOLD rating for the Krause Fund Portfolio. Our hold rating is based on both the positive and negative outlooks that we have outlined in this report. Although Dexcom is currently not profitable, has an unfavorable cash flow and debt fundamentals, we believe the Krause Fund should hold shares in Dexcom rather than sell because of their dynamic revenue growth, product differentiation, research and development leadership, and positive trends in the health care industry. Our Discounted Cash Flow and Economic Profit model resulted in an intrinsic value of $137.28, which indicates the stock is undervalued as of April 12, 2019.

Demographics Changing demographics in the United States is a driving factor affecting the health care sector on a broad scale. According to the Centers for Disease Control (CDC), the percentage of people with type 2 diabetes in the U.S. rose to 9.4%, more than twice the number of people 25 years prior.4 The rate of people with diabetes is growing faster than the population in the United States translating to a necessary increase in medical care for the long-term future. The International Diabetes Federation (IDF) estimates the number of people with diabetes in the United States will grow from 46 million in 2017 to 62 million in 2045, a 35% increase.5 We believe that a continuous growth of people with type 2 diabetes will provide Dexcom a larger market to promote their product and treat patients in the United States.

Source: Center for Disease Control4 In addition to a growing number of diabetes diagnoses, the CDC found that over 84 million people in the U.S. have prediabetes, “a condition that if not treated often leads to type 2 diabetes within five years.”4 Additionally, the IDF

estimates that 17 million people in the United States are diabetic, but not diagnosed. We think that with growing health care coverage in the U.S. and better medical care for low-income citizens will reveal increased diabetes diagnoses for the foreseeable future. We believe Dexcom is poised to be the leader in CGM medical care for diabetes patients. Americans age 65 and up made up 15.6% of the United States population in 2016, according to the latest census data.6 Statista estimates the senior population will grow to 22.1% by 2050 as baby boomers continue to age.7 The aging population is at greater risk for chronic diseases and injury and therefore demand additional medical services.8

Source: United States Census Bureau6 The life expectancy in the U.S. has experienced slight declines since 2014 due largely to premature deaths related to substance abuse and increasing rates of suicide.9 An increasing mortality rate has contributed to higher health care costs and a sicker workforce which can result in a less competitive economy. We believe the increase in people of retirement age will be a beneficial factor for the health care industry. With older people requiring more medical treatment, pharmaceuticals and health care insurance companies will benefit financially from this demographic transition. The aging of America will provide a long-term investment opportunity for people seeking investment in the health care sector.

U.S. Real Gross Domestic Product (GDP) Real GDP is an inflation-adjusted measure of the total value of the country’s production during a given period of time and a main indicator of the U.S. economy’s health. The current administration has emphasized prioritization of economic growth and introduced the Tax Cuts and Jobs Acts of 2017 (TCJA). We believe this was the main driver in experiencing real GDP growth of 4.2% in the second quarter of 2018, the highest in the last three years.5 We expect real GDP growth to slow in the coming quarters as the effects of the current trade war with China settle into U.S. companies. Slow GDP growth may affect the health care industry because a decrease

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Percentage of U.S. Population with Diabetes

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Percentage of Population 65 or Older

Executive Summary

Economic Outlook

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in consumer spending may have adverse effects on health care expenditures. However, we predict that slowed GDP growth will affect the health care industry less than other industries because of its inelastic nature during poor economic conditions. Consumers will continue to spend money on health care regardless of their financial circumstances.

Source: Trading Economicsl5 Real GDP relates closely to health care spending as nearly 18% of GDP in 2017 was due to health care expenditures.10 According to the Centers for Medicare and Medicaid Services (CMS), “National health spending is projected to grow at an average rate of 5.5% per year for 2018-2027 and grow 0.8% faster than GDP during the same time frame.”11

Although we expect Real GDP in the U.S. to slow in the coming year, we think that health care expenditures will increase in proportion to Real GDP and continue to grow irrespective of Real GDP growth. With health care spending outpacing Real GDP growth, we expect the increased spending to fuel growth in the health care sector.

Government Regulation Government regulation is an important macroeconomic factor that affects many facets of the health care industry. Government regulation is needed in the health care industry to ensure safety and quality for patients. Because government can impact the spending, availability, and competition in the industry, health care companies are at the mercy of government legislation. Approximately 20 million Americans have received health care through federally instituted exchanges. However, the number of new enrollments decreased in 2018 compared with the year prior. The number of enrollments in 2019 decreased by 300,000 from the prior year.12 The Tax Cuts and Jobs Act repealed the individual mandate for people to be covered by health insurance which went into effect this year.9 With no mandatory fee, new enrollment in federally subsidized health care is likely to decline. We expect this to have a negative

impact on Dexcom’s growth and bottom line because diabetes is often classified as a pre-existing condition and may be excluded from medical care treatment. Without coverage for diabetes, patients may not be able to afford Dexcom products and may resort to traditional finger stick products instead.

Early in 2018, the Trump Administration suspended the medical device tax that was included in the original Affordable Care Act (ACA) legislation. The 2.3% tax on medical device sales is to be reinstated in January of 2020.13 The suspension of the tax is seen as a temporary positive for medical device companies in the health care industry. Our team expects to see pressure from medical device companies as 2020 nears by lobbying to permanently suspend the tax from reinstatement.

Unemployment The unemployment rate, which represents the percentage of the labor force without a job, largely impacts the health care sector since employed individuals often have more access to private, adequate health care insurance. The Bureau of Labor Statistics reported that the unemployment rate stood at 3.8% in March of this year, a decrease from the 4.1% unemployment rate in March of the previous year.14 We believe this has a positive macroeconomic effect on the health care industry since a lower unemployment rate will result in more people able to enroll in a health care plan provided by their employer. According to the U.S. Census Bureau, 56% of people with a health insurance plan were enrolled through a private employer, the largest portion of total coverage. Increased private coverage signals a positive outlook for health care companies in the current labor force climate.

Source: Trading Economics15 Although a low unemployment rate is beneficial to the health care sector, our team is pessimistic in the short-term about the unemployment rate as we believe that it will rise above 4% before the end of 2019. Historically, the United States has not

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been able to sustain an unemployment rate below 4% for an extended period, and our expectations are consistent with that notion. We do not anticipate a spike in unemployment in the next 12-18 months, however, we believe the unemployment rate will increase 1-2% between now and through 2020. An increase in unemployment is a concern for the health care industry as fewer people would have access to health insurance.

Treasury Yields Current treasury yields in the United States have been low in recent years. Capital expenditures increase during a low interest environment since it costs relatively less money to borrow during this time. The current 30-year bond yield is 2.94% and our team expects the 30-year bond to remain close to 3.00% for the remainder of 2019 and rise slowly to 3.25% by the end of 2020. A low interest rate environment will allow companies in the health care space to grow and expand, mainly through M&A.

Source: U.S. Department of the Treasury16 Low treasury yields historically spur more M&A activity since companies can borrow at a low cost. M&A transactions have increased in volume and value throughout recent years. In 2018, there were 1,182 deals completed, a 14% increase compared to the year prior. Deal value declined 31.4% from the previous year, due to the CVS-Aetna megadeal at the end of 2017.17 Although deal value dropped from the previous year, we believe increased deal volume still suggests room for growth which is a positive indicator for companies in the health care sector.

Industry Description The Global Industry Classification Standard (GICS) identifies Dexcom in the Health Care sector. The sector is known for relatively inelastic demand, heavy government

involvement, and a growing global market. The GICS further classifies Dexcom into the Health Care Equipment and Supplies Industry.18 This industry is extremely complex, made up of companies in a variety of therapeutic areas which supply thousands of products. Within the health care equipment and supplies industry, Dexcom falls into the medical device manufacturing sub-industry. According to the Federal Food, Drug, and Cosmetic Act of 1938, medical devices are defined as “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar article that is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease.”19

Source: S&P Dow Jones Indices20 In order to gain perspective on the environment and market that Dexcom operates within, it is important to define the medical products that it manufactures. The medical products sub-industry is comprised of two categories: conventional devices and high-technology products. While conventional devices are mass-produced and require little technological variation, high-technology products, which Dexcom produces, require scientific innovation to target specific diagnostic applications. The margins for high-technology products tend to be quite large, especially when companies can develop useful devices and face relatively little competition. Large corporations within this industry hold advantages over small and mid-sized companies because they have the resources to devote a significant amount of funds to research and development and also manufacture a mixture of both conventional and high-tech products. However, Dexcom has found opportunity in the CGM space, a niche market where its innovation drives its success.19

CGM Products Market Continuous Glucose Monitoring (CGM) technology is hitting its stride in terms of acceptance and sales growth. In late

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5 Year Industry Performance

Health Care S&P 500 HC Equipment

Industry Analysis

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2017, Abbott Laboratory’s launch of the Libre 1.0 device marked the first no-stick calibration CGM to hit markets. 19 This non-intrusive method of managing Type 1 and intensive Type 2 diabetes is becoming the preferred standard of care for these individuals. It is estimated that at the end of 2017, about 1 million individuals with diabetes were using CGM systems, with about 420,000 of those from the U.S. alone. 19 Currently, information from the American Diabetes Association, Center for Disease Control & Prevention, and JDRF indicates that there are 1.6 million Type 1 diabetics and 1.3 million Type 2 intensive diabetics in the United States who would benefit from CGM technology.4 Globally, there are about 10 million individuals with Type 1 diabetes and that number is only expected to rise. It is estimated that only 14% of the U.S. market is penetrated and 10% across the globe.19 This signifies great opportunity for growth for companies competing within this market. If historical trends continue, in 2021-2022 alone rates will climb by 42.8%.19 With Dexcom at the forefront of innovation for CGM systems, we are very optimistic about its growth potential and profitability in coming years.

Regulatory Environment The health care sector, specifically the Medical Equipment Supplies and Services industry, is heavily influenced by governmental regulation and is something to factor in looking forward. The U.S. spent $3.3 trillion on health care in 2016 alone, with 25% of that being spent on diabetes.19 The U.S. combined with the European Union and China account of roughly 70% of total health care spending across the world.19 Developed countries such as these generally require adherence to more stringent criteria for approval on a device’s risk to the patient and availability of comparable devices. Before device manufacturers in the U.S. can sell or export their products, they must be approved by the U.S. Food and Drug Administration (FDA). To gain this approval, companies must submit extensive documentation concerning their products’ safety and effectiveness. The FDA classifies products into 3 different classes based on risk level, with Class I classified as the least risky. As technology and devices move down from Class III to Class I, the approval process becomes less stringent, and devices move into markets much more quickly. The Integrated Continuous Glucose Monitoring technology in Dexcom’s G6 model moved from a Class III designation to Class II.19 It is now the only class II device in the CGM market and it enables Dexcom’s subsequent devices using this technology to move through a streamlined 510(k) regulatory pathway. Dexcom’s closest competitor, Abbott Laboratories, has not received this designation for its latest model and will face a longer

approval process for its systems.22 The chart below shows the number of first premarket approvals for medical devices per year by the FDA. First premarket approvals are for class III devices. While the decrease in approvals last year might lead one to believe that the FDA is enforcing more stringent regulations, it is actually the result of recognizing more devices as class II equipment. This reclassification has led many to believe that the FDA is sincerely working to streamline the approval process so that devices can hit markets in a shorter time frame.19

Source: Statista.com21

Competition Competition in the Health care Equipment and Supplies industry runs extremely high. Firms strive to engineer devices superior to their peers in order to capture market share and increase profits. Companies operating within the industry must heavily focus on research and development, as well-funded rivals are constantly aiming to improve existing models. Below are the market capitalization, price, and future price-to-earnings ratios of Dexcom and its four main competitors within this industry. Dexcom lacks the market capitalization of Medtronic and Abbott, but we believe they lead the niche industry with its superior technology.

Source: ThomsonOne22 Like the health equipment and supplies industry as a whole, the relatively unpenetrated continuous glucose monitoring market is intensely competitive, The population among this market is steadily increasing, providing Dexcom with ample opportunity to grow. In comparison to its peers, mainly Abbott Industries and Medtronic, Dexcom’s commitment to technological advancement in continuous glucose monitoring

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Number of First Premarket Approvals (PMA/HDE)

NameMarket Cap - (millions) Price

P/EFY1

DEXCOM 10,609.41 117.88 216.34

MEDTRONIC 116,344.80 86.75 16.84

ABBOTT 137,022.30 78.01 24.31

INSULET 5,569.15 93.35 387.18

ABIOMED 12,176.77 270.08 53.15

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is what puts them ahead. Both Abbott and Medtronic have recognized the opportunities that this market presents, but the products that they have developed have fallen short to the newly FDA approved Dexcom G6. The chart below compares key features of CGM devices from the market’s top three competitors: Dexcom G6, Abbott Libre 2.0, and Medtronic Guardian Connect.

Source: Integrated Diabetes Services23

Dexcom G6 vs. Abbott Libre 2.0 The continuous glucose monitoring systems that belong to Dexcom are unmatched in terms of accuracy, feature set, and interconnectivity. Abbott Industry’s family of glucose monitoring products, the Libre systems, require active scanning and fail to transmit data continuously like that of the G6.22 Dexcom’s G6 system is equipped with Integrated Continuous Glucose Monitors (iCGMs). The FDAs approval of this technology in March 2018 was based on “special controls” criteria, testing for accuracy, reliability, safety, and clinical relevance. The designation classifies iCGMs as Class II medical devices, allowing for a far less rigorous review process for approval and more streamlined integration with pump technology.22 While Abbott expects to receive this designation looking forward, it is unlikely that it will be able to deliver the quality of product that Dexcom has created at a similar price point.22 Like Dexcom, Abbott recently transitioned to an upgraded system (Libre 2.0) from its original model (Libre 1.0). However, the underlying diagnostic chemistry and form-factor from this upgrade remained virtually unchanged.19 The only major difference is the improved system’s ability to alarm patients when their glucose levels have drifted outside a healthy range. Even with this “flash” feature capability, the system will still require manual scans to be performed to test levels.22 On the other hand, Dexcom is already working on its next system, the G7, which is forecasted for approval in late 2020 and will come equipped with several improved features. In collaboration with Verily, Dexcom has manufactured the G7 device with smaller form factor, 14-day wear, iCGM, finger-stick replacement, and continuous data transmissions

without sacrificing quality and accuracy. We believe the future development of the G7 will push Dexcom further ahead in the domestic and global market and become the widely adopted CGM system for diabetes patients globally.

Indirect Competition While Dexcom competes directly with other CGM device manufacturers, it also faces competition from companies manufacturing glucose meters. Today, the most common treatment for diabetes patients is still blood glucose monitoring systems (BGMs).24 This system utilizes blood glucose meters and strips to obtain glucose readings. The downfall of using these systems compared to CGM systems is that patients must stick their fingers multiple times a day to obtain readings. However, as individuals with diabetes recognize the technological and cost advantages that CGM systems pose, BGM systems may soon be replaced as the standard for care. The overwhelming majority of blood glucose meter brand sales comes from private labels. Lifescan’s One Touch meters and Roche Diagnostics’ Accu-Check meters have proven to be some of the biggest players in the market.23

With ground breaking technology in continuous glucose monitoring, these companies will need to rethink their business models. Currently, blood glucose meters and strips are more cost-effective than CGM systems.24 These companies may likely experience success in international markets with patients who cannot afford CGM systems. However, these companies will face their largest obstacle when CGM systems reach price parity with BGM systems in the coming years. Dexcom’s collaboration with Verily is expected to match the cost of BGM systems, taking away the only advantage that it once had. This system is expected to hit markets within the next two years, and many other companies are expected to follow suit with their own cost-effective devices.

Source: Statista.com21

Dexcom G6 Libre 2.0 Guardian Connect

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Warmup Time 2 Hours 12 Hours 2 Hours

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Sales in Millions of U.S. Dollars

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Porter’s 5 Forces Barriers to Entry – High In comparison to other industries within the United States, the medical device industry has a relatively high barrier to entry. Combined with the economic, regulatory, and legal obstacles standing in their way, large and diversified companies within the industry make it difficult for new companies to enter the market. These large manufacturers have well-established relationships with their buyers, making it hard for small and mid-sized companies to compete with them for purchasing contracts.19 Additionally, a significant amount of funds must be devoted to the research and development of new products. It must prove to regulators and buyers that their products are safe for consumers and that they are significantly better than existing products. The regulations established by the FDA often involve extensive testing and documentation for devices before they can be approved and sold.19

As it pertains to Dexcom and the CGM market, the barrier to entry remains high. Dexcom and its competitors have made significant contributions to R&D in order to further the technology of their CGM systems. For a company to enter this market, they would need to manufacture a product that is significantly better in technology or price than the existing products. Power of Suppliers – Moderate The suppliers in the Medical Device industry are located across the world, thus providing them with less power. Medical devices, however, often require specific parts that are unique to the individual product. For this reason, companies will commonly have single suppliers, giving suppliers more power. Dexcom purchases certain device components from single sources.19 Due to quality considerations and cost constraints from regulatory measures.19 Many of the relationships with these suppliers can be terminated with little notice, which puts pressure on Dexcom. In the case of termination, Dexcom would likely have a hard time finding a new supplier because it would have to undergo an approval process from the FDA. A supply interruption would hinder Dexcom’s ability to manufacture devices and would have a substantial effect on their business.

Power of Buyers – Moderate Within the industry, hospitals and other health care providers represent a large portion of the buyers. As these buyers have consolidated and merged together in recent years, they have gained a substantial amount of leverage over the medical equipment and supplies industry.19 These hospitals are

attracted to companies that can manufacture and supply them with a variety of products, making smaller manufacturers like Dexcom less appealing. However, because CGM systems are not easily substituted and have few manufacturers, this takes some power away from the buyers.

Threat of Substitutes – Low to Moderate The threat of substitutes is low to moderate because costs associated with to switching devices tend to be high. Often, medical professionals are trained to use a certain type of equipment, which can take a significant amount of time and resources to do.19 Therefore, they would not want to sustain further costs by switching to new equipment. For smaller devices that incur less costs, switching could result in unfavorable outcomes for the patient. In the continuous glucose monitoring market, there are only three companies that are currently manufacturing CGM systems.19 While this number is low, the threat of substitutes remains. If another company can manufacture a product with superior technology to Dexcom, Dexcom’s sales could be largely affected.

Rivalry among Existing Competitors – High Markets within this industry tend to have high rivalry among existing competitors. The life cycle of companies is usually very short because newer, more improved devices are manufactured every one or two years. Not only do manufacturers aim to develop the most innovative technology, but also produce the most efficiently to provide higher margins. Small and mid-sized companies that target a specific device application bear higher risk because they often do not have the product diversification that larger companies do. The CGM market is highly competitive but with few competitors. Three companies, Dexcom, Abbott, and Medtronic, dominate the field and account for nearly all of sales.19 While we believe that the Dexcom G6 device is the currently the most technologically advanced CGM system on the market, we cannot expect with certainty that this will last. Well-funded companies, like Abbott and Medtronic, can contribute heavily to R&D expenditures and M&A that will push them ahead.

Key Industry Metrics

R&D as Percentage of Sales Research and development play a large role in the expenses of a company within the industry. Often large firms have a distinct advantage over small and mid-sized firms in this area. They have the resources to hire the top professionals and can funnel more money into clinical trials to obtain the necessary approval. In 2018, Dexcom invested 40.46% of sales dollars

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towards R&D. However, for large, well-established companies, spending between 5% and 15% of sales dollars on R&D programs is common. However, small and mid-sized companies often devote larger portions than that, because their sales are substantially lower.22 Likewise, in order to find success in these niche markets, smaller companies must develop products that are technologically superior to their counterparts. Looking forward we do not expect this as a consistent percentage of sales to be devoted towards R&D. In 2018, Dexcom paid Verily $250 million in a collaboration to create their next model, the G7 device. This will not be reflected in future R&D expenses as it was a milestone payment and the next payment will not be made for at least two more years.1 Upon the launch of the device and revenue milestones, Dexcom will pay Verily an additional $280 million. The device is estimated to release late in 2020 or early 2021.1

Gross Margin Percentage The gross margin percentage signifies whether a company can produce devices at low costs in this industry. A company’s success within the medical device industry is not simply determined by their ability to produce products with the best technology, but to produce them in the most cost-effective manner. The gross margin percentage indicates how much profit the firm is making on the devices it has sold, without factoring the SG&A or R&D costs. In comparison to its competitors, Dexcom has an average gross margin percentage compared to its competitors, sitting at 64.36%.19 With the creation of its G7 model, Dexcom and Verily aim to bring the cost of this device down, while improving the device’s technology. If Dexcom can bring the cost of manufacturing each device down, it will be able invest more money into other aspects of its organization, such as R&D and marketing.

Return on Assets Return on assets compares a company’s profits to its assets. In other words, it can be used to determine how well managers within a company are utilizing its assets to generate income. Dexcom’s largest asset accounts are cash, inventory, and property and equipment. This metric tells us how well it is using its larger assets to generate income. Currently, it is in the earlier stages of growth, so it is not yet generating a positive net income. However, we project that it will have a positive net income in year 2022 and after. This will provide them with a positive ROA, which we expect to grow towards the industry’s average.

Inventory Turnover Ratio The inventory turnover ratio is one of the most important metrics to be concerned with in the medical device industry. The ratio is a good indicator of how well a medical device company is selling its products. The turnover will be slightly lower within specialty medical devices than conventional because of their specific application. In comparison to its competitors, Dexcom greatly outperforms in this metric. The table below displays Dexcom’s ability to successfully manage its inventory, as its turnover is nearly double that of its competitors.

Current Ratio The current ratio is a liquidity ratio designed to show how well the company stands to meet its short-term obligations. Too low of ratio could mean that a firm is not able to meet these obligations while too high of ratio might indicate that a firm is not effectively using its cash. The chart below shows that Dexcom’s current ratio greatly exceeds that of its competitors in the recent year. This is due to its large cash balance in the recent year compared to its short-term liabilities. Moving forward we expect this number to decrease to about 2-3 as the company begins to pay back some of its debt and devote larger amounts to R&D.22

Source: ThomsonOne22

Corporate Strategy Dexcom’s corporate strategy focuses on their continuous innovation of CGM products and growing distribution to serve type 1 and type 2 diabetes patients internationally. Dexcom aims to continue developing ground-breaking CGM products through recent collaborative R&D with Verily Life Science. In the next five years we expect Dexcom to increase profits through growing sales volume, product differentiation, and globalization. We expect sales volume to grow at a decaying rate between 45-30% in relation to their corporate strategy. It has invested heavily into research and development to stay on top of the market for CGM products. Dexcom has opportunity to grow exponentially based on the

Name R&D / Total Sales Gross Margin % ROACurrent Ratio

Inventory Turnover

DEXCOM 40.5% 64.4% -7.4% 7.64 6.35

MEDTRONIC 7.5% 70.1% 6.6% 2.28 2.59

ABBOTT 7.5% 59.3% 4.6% 2.26 3.36

INSULET 15.7% 65.7% 4.0% 3.99 3.68

ABIOMED 12.7% 83.4% 18.2% 5.84 2.32

Company Analysis

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unserved global market and their superior product innovation.

Business Segments Dexcom has one primary business segment that it reports on, which is the design, development and commercialization of CGM products. We determined within the segment there are three pieces of the CGM product that generate revenue: Sensors, Transmitters, and Receivers. In addition, there are two important classifications to disaggregate their revenues: Geographic Revenues and Revenue Channels. We believe that there are significant growth opportunities in both classifications that pose positive outlooks for Dexcom.

Disposable Sensors Dexcom’s main revenue stream derives from their disposable sensors that track glucose levels in diabetes patients. Sensor revenue represents roughly 70% of Dexcom’s revenue each year. With the recent release of the Dexcom G6 CGM, patients are now able to use the same sensor for 10 days as opposed to only a week with the G5.3 Dexcom is continuously innovating to make using a CGM less work by increasing disposable sensor duration. Dexcom announced that their G7 product will include disposable sensors that last 14-15 days,25 further increasing the duration of the sensors. Although patients will use fewer sensors, we expect similar revenue margins for sensor revenue and that it will remain the main representation of Dexcom’s revenue.

Transmitters The Dexcom G6 transmitter represents roughly 20% of Dexcom’s revenues year over year. Each Dexcom G6 transmitter lasts around three months for patients and transmits glucose data to patients’ receivers and smart devices. Since Dexcom provides a one stop shop for revolutionary continuous glucose monitoring, we expect that transmitter revenue as a percentage of total revenue will remain constant year over year.

Receivers The receiver that comes with the first purchase of a Dexcom CGM represents the smallest portion of revenues generated each year, accounting for only about 10%. Receivers collect all the data from the transmitter to display a patient’s glucose levels throughout the day. Although many patients use their smart devices to receive data about their glucose, we believe the transmitter will continue to be included as a part of the package when patients receive their first Dexcom product. Since the demographic for Dexcom’s patients include older

patients and we don’t see the demographic changing, we can expect Dexcom to continue to sell receivers into perpetuity.

International Sales Growth In 2018, Dexcom reported that 79% of revenues were generated in the United States, while 21% were international.1 According to their 10-k, no individual country outside the United States generated revenue that made up more than 10% of their total revenue, so their revenue is categorized based on sales made in the U.S and outside of the U.S. Most of Dexcom’s international sales are in Canada, Australia, New Zealand, and some countries in Europe.1 Over the last three years, international revenues have grown 181%. The figure below outlines the increase in international sales revenue as reported and as a percentage of total revenue in the last three years. International revenues have grown faster than domestic revenues in the last three years and we expect the trend to continue to grow as the international market for CGM products is largely unpenetrated.

Source: Dexcom Annual Earnings Report1

Direct Sales Organization Efforts As a new CGM company with few other operations, Dexcom has a direct sales organization that is still developing. The company built the organization to contact physicians and diabetes educators who can increase the adoption of CGM products for patients.1 In relation to their competitors, Dexcom is a small organization that has to compete with much more established organizations. We believe this is a risk that Dexcom faces as it currently depends more on distribution sales rather than its direct sales force. If a major distributor of Dexcom’s products decides to end the relationship, its future cash flows could materially decrease. Our team is optimistic about the growth of Dexcom’s direct sales force as the revenue channel has grown significantly over the last year as a percentage of Dexcom’s total revenue. The figure below outlines the growth in Dexcom’s direct

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sales force from the last three years. As the company grows and becomes more established, we believe their direct sales channel will become a big player in their revenue growth both domestically and internationally. Since the international market is still largely unserved, we believe an established sales force will allow Dexcom to capitalize on the growing acceptance of CGM worldwide.


Analysis of Recent Earnings Dexcom has maintained impressive revenue growth year over year and we predict continued growth into the foreseeable future based on revenue growth shown in both domestic and international sales. At the end of 2018, Dexcom reported revenue growth of 44% from the previous year due to increased sales volume of CGM products both domestically and internationally.1 Cost of sales expenses increased 62% over the year, which was primarily due to increased sales volume and obsolete inventory expenses due to the release of the Dexcom G6 during 2018.1 Over the last eight years, Dexcom has averaged a yearly revenue growth rate of 46%. We predict consistent dynamic growth into the future as Dexcom is continually improving their customer base through education and acceptance of CGM technology. The figure below illustrates the revenue growth of domestic and international revenue over the last five years. Moving forward, we expect Dexcom to continue to add value to investors by expanding their networks internationally and developing new outlets for sales across the untapped markets in Europe, South America and Asia. Management is targeting increased manufacturing capacity for the G6 in 2019 to meet high demand.19 With increased manufacturing capacity to match global demand, Dexcom will be able to grow their service to diabetes patients around the world.


Personnel Dexcom relies on the intelligence and guidance of an advisory board to solve problems and accelerate innovative developments. They engage with advisors from academic, consultancy, governmental, and other institutions to assist them. According to the company’s 10-k, as of December 31, 2018, it employs 2,800 full-time employees and 1,100 contract and temporary employees globally. None of the employees are a part of labor unions, and Dexcom considers their employee relations to be good.1 We expect that as Dexcom continues to expand its operations it will require the retention of qualified and able-bodied personnel. One consideration we have made is that Dexcom may see rising labor costs as the competition for skilled employees becomes fiercer, and in an environment where the skills needed are scarce, Dexcom will need to retain their best personnel to continue growing.

Catalysts for Growth

Research and Development Dexcom is currently developing the Dexcom G7 CGM with Verily. The two companies are partnering to create miniaturized sensor electronics on an adhesive patch to make CGM less disruptive to diabetes patients.26 Dexcom expects to release the G7 in 2020 and made widely available by 2021.24 As a part of the agreement, Dexcom made an initial collaborative R&D payment of $217.7 million through the issuance of common stock to Verily.1 Dexcom will potentially make more milestone and incentive payments including revenue milestone payments. We expect these specific R&D fees to be bottom line roadblocks to positive cash flows in the short-term. However, we are optimistic that the collaborative efforts will lead to dynamic top line growth and positive long-term cash flows. The new G7 will be much more effective for type 2 diabetes patients and will give

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Dexcom growing market share in the type 2 diabetes space. By eliminating the need for a finger stick to measure glucose levels, type 2 diabetes patients can live more comfortable and safe lives.

Foreign Sales and Earnings In 2016, Dexcom acquired the European distribution company Nintamed, the first push Dexcom made to tap into the international market. Nintamed is responsible for all sales distribution in Germany, Switzerland and Austria.1 Since the acquisition, Dexcom has increased their percentage of sales from outside the United States drastically. We predict Dexcom will look for other profitable distribution companies to purchase internationally to grow their presence and globalize their brand. With more distribution opportunities globally, Dexcom will continue to capture international market share.

S.W.O.T. Analysis

Strengths Dexcom is the leader in the continuous glucose monitoring market in terms of technology and innovation. This position is the result of consistent efforts towards R&D and strategic partnerships. Currently, Dexcom has the only CGM system on the market with a Class II designation from the FDA, which streamlines the approval process for its future devices. In their partnership with Verily, Dexcom is manufacturing their G7 system, which will not only have the latest technology, but will be leading rival devices in cost-effectiveness as well.19 This technological leadership has led Dexcom to have a First-Mover Advantage within the CGM market.

Weaknesses Dexcom has reported negative earnings from operations thus far as the result of heavy R&D and SG&A expenses. We expect this number to turn positive in 2022 and continue an upward trend thereafter. It reported negative earnings from operations as the result of heavy R&D and SG&A expenses. While we expect this number to turn positive in 2022, for the next few years it will contribute to a net loss for Dexcom which could ultimately lead to negative sentiment among shareholders.

Opportunities There are many opportunities for Dexcom because of its position within this market. Currently, it is estimated that only 10% of the international market and 14% of the

domestic market for CGM systems have been penetrated. Globally, there are around 10 million individuals with Type 1 diabetes and this population is expected to rise. Over the past three years, international sales have climbed by 181%. This growth outperforms domestic sales and we expect that trend to continue.16 In terms of legislation, Medicare and Medicaid have begun covering the costs of CGM devices. This plays a large factor into the standard of care for individuals with diabetes and could lead to faster adoption.16

Threats The primary threat to the business of Dexcom is its competitors. Abbott Laboratories and Medtronic are currently two large manufacturers within the CGM industry that directly compete with Dexcom.20 Only producing CGM devices, Dexcom does not have the diversification of high-technology and conventional devices that these other companies do. This could leave Dexcom vulnerable in poor market conditions, when conventional device sales provide companies with more stability.16 Technological breakthroughs from Dexcom’s competitors pose another large threat. Within this niche market, Dexcom heavily relies on its ability to consistently lead in innovation and cost-effectiveness. If a competitor can manufacture devices with better technology and a similar price point, Dexcom’s sales

would likely decrease.

Methods of Valuation Our target stock price was determined after considering the financial, economic, and strategic factors that drive the equity value of Dexcom. We considered health care industry trends that may influence projected growth rates, future cash flows, or capital expenditures. We used three different valuation models to gain better understanding of Dexcom’s intrinsic value. In our analysis we used a Discounted Cash Flow model (DCF), an Economic Profit model (EP), and relative valuation metrics with specific comparable firms in Dexcom’s space. We believe the DCF model gives the best representation of Dexcom’s intrinsic value because we used specific assumptions to capture the most influential variables that affect Dexcom’s share price. We took into account Dexcom’s growth strategies, financial decisions, and business operations to make specific assumptions that reflect our expectations for the performance of Dexcom’s stock. We projected Dexcom’s cash flows over the next 12 years to capture its value in the health care industry.

Valuation

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Revenue Decomposition & Growth Our revenue forecasts are derived based on the historical sales of Dexcom products. We projected revenue growth to increase at a decaying rate between 45-30% for the next five years before decreasing modestly until reaching terminal value. Based on our outlook of the macroeconomic economy, health care industry, and Dexcom’s expected product development, we think Dexcom will have dynamic growth in revenues. 2018 revenues totaled $1.03 billion from combined sensor, transmitter and receiver sales. We expect 2019 revenues to reach $1.49 billion based on historical growth rates in years after a new product release.

Continuing Value (CV) Growth CV growth was projected based on the long-term estimate we expect for real GDP growth in our macroeconomic analysis. We projected a CV growth of NOPLAT of 3% to reflect a balanced estimate that Dexcom would continue to grow at in relation to real GDP and inflation. We believe that 3% is the most balanced estimate that accurately reflects our predictions on the health of the economy and long-term inflation rates.

Cost of Sales (COGS) as Percent of Sales Our cost of sales assumption in our first forecasted year is based off a five-year average of COGS as a percentage of revenues. Our result is a cost of sales prediction of 30% of revenues for 2019. As Dexcom continues to grow and experiences economies of scale we expect their cost of sales to slowly decay to a terminal value in the next five years. We projected that cost of sales as a percentage of revenue will decrease 1% for the next five years before arriving at a terminal value of 25% in 2024. We expect that by 2024 Dexcom will have more established manufacturing facilities worldwide and will not experience much variation in their cost of sales expenses.

Research and Development (R&D) as a Percent of Sales Dexcom’s success is dependent on their ability to continually make innovative CGM products that will improve the day to day lives of diabetes patients. With that in mind, our team believes that R&D is closely related to annual revenues. We expect that R&D will continue to be a major cost driver for Dexcom in the next five years. We calculated a five-year average of R&D as a percentage of revenues to forecast 2019 R&D costs. We expect that Dexcom will incur R&D expenses of 30% of sales for 2019. We anticipate Dexcom’s R&D to slowly decline in the next five years as it continues

to grow globally. We project that R&D as a percentage of revenues will decline by 1% per year over the next five years and arrive at a terminal R&D expense as a percentage of sales at 25%. We explored competitors in Dexcom’s space and found that many other companies have much lower R&D expenses as a percentage of sales. We believe that because Dexcom is in the growth phase of their company and it is completely focused on CGM as opposed to CGM being just a division of the company, R&D expense will be much higher than competitors in their realm. We believe Dexcom’s historical dedication to research and development will continue and be a positive driver of their future cash flows.

Selling, General, and Administration Expense (SG&A) Selling, general and administrative expenses for Dexcom are mostly driven by the direct sales organization Dexcom uses to advertise their product, payroll-related expenses and increased sales-related expenses.1 We used a five-year historical average of SG&A expenses as a percentage of revenues to determine the 2019 forecasted SG&A expense. According to their 10-K, Dexcom is still developing their direct sales force that advertises and educates physicians and patients on continuous glucose monitoring technology. We expect that as the development of their sales organization continues, it will experience economies of scale and incur less costs as a percentage of their revenues. We forecasted their SG&A as a percentage of revenues to decay at 1% every year into perpetuity to arrive at a 37% of sales in the terminal value year, 2030. We expect that in 2030 Dexcom’s sales force to be completely established in global markets and it will not experience volatility in their SG&A expenses. As Dexcom continues to grow, it will have favorable declines in sales-related expenses as their product is more widely accepted and diabetes patients become more educated on CGM products.

Capital Expenditures Capital Expenditures are an important facet of Dexcom’s growth strategy. Each of the last five years, Dexcom has spent significant cash to lease more space for manufacturing of their product, which is included in their property and equipment line item on the balance sheet. In the last three years, Dexcom been more actively looking to acquire companies to expand their global presence. Part of Dexcom’s growth strategy includes the acquisition of distribution companies internationally to tap into markets that have not yet been penetrated. We concluded between the increase in leases related to manufacturing space and acquisition of

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distribution companies that capital expenditures are directly related to revenues, so we forecasted capital expenditures using a five-year historical average as a percentage of sales. In 2019, we expect Dexcom to spend approximately $120 million on capital expenditures, 8% of 2019 revenue and a 33% increase year-over-year. We expect capital expenditures to slowly decline as Dexcom increases their exposure to domestic and international markets. We project that capital expenditures will decay 1% in 2020, and then continue to decay by .5% for 4 years before arriving at a terminal value of 5% of sales in 2024. We believe that once Dexcom establishes itself in global markets, there will less need to invest in capital expenditures in distribution and manufacturing and it will have developed a fixed budget based on a percentage of sales.

Long-term Debt In both 2017 and 2018, Dexcom completed offerings of senior convertible notes each due in five years. The notes were offered at a stated rate of .75%. We concluded based on Dexcom’s growth strategy that Dexcom will meet the conversion prices of $99.99 in 2022 and $167.24 in 2023 when the notes are due. We believe that Dexcom currently owns a large amount of debt and may need to make more offerings in the future. However, we believe since the debt is convertible and Dexcom is in a growth phase, the company will be able to convert the debt as opposed to having to pay it back with cash. Between the two notes that were offered, a total of 7.21 million shares will be issued during the two years. The newly issued shares would only represent 6.89% of total shares and would not materially shift ownership of the company. We expect that Dexcom will not need to continue to issue large amounts of debt in order to finance their operations. We predict they may continue to borrow in the near-term since the borrowing rate is historically low, but we don’t believe Dexcom needs to take on debt in the future to finance their operations.

Income from Equity Investments During 2018, Dexcom entered into a collaboration agreement with Tandem Diabetes, which provides various insulin delivery products that incorporate Dexcom technology. We expect that through the partnership Dexcom will realize gains from the Tandem investment annually. Although we expect Tandem Diabetes to grow in the future, we used the historical equity income amount of $80.1 million in 2018 to forecast the income from equity investments into terminal value. We are optimistic that Dexcom will continue to search for companies that share their space to collaborate and incorporate their technologies to continue the development of less intrusive diabetes products. In the case of more

collaborative agreements, we believe Dexcom will see greater income from equity investments.

Marginal Tax Rate Dexcom has currently turned a loss in each year of their existence. We project that Dexcom will continue to incur a net loss until 2022. As of December 31st, 2018, Dexcom has tax net operating loss carryforwards of $619.8 million.1 Since Dexcom currently pays tax at an effective rate of 2.21%, we expect that Dexcom’s marginal tax rate will increase as it applies their tax deductions and their taxable income increases. We forecasted Dexcom’s 2019 marginal tax rate to be 7%, which gradual increases each year until it reaches a 21% marginal tax rate in 2023. We expect that in 2023 Dexcom will only have an immaterial amount of future deductions left and will pay the highest marginal tax rate in the United States, which currently sits at 21%. Our team expects that as Dexcom continues to grow globally it will begin to incur tax liabilities in other countries. Since Dexcom currently serves patients in over 12 other countries but no country accounts for more than 10% of revenue, 1 there is not adequate information to calculate a marginal tax rate that includes international taxes. We expect that as Dexcom grows to terminal value, it will incur a tax liability greater than 21%.

Weighted Average Cost of Capital (WACC) We calculated Dexcom’s weighted average cost of capital to be 7.90%. The WACC is used in the Discounted Cash Flow valuation and Economic Profit valuation to find Dexcom’s intrinsic share price.

Cost of Equity

Risk-Free Rate: 2.56% Firm Beta: 1.217

Equity Market Risk Premium: 4.69% Cost of Equity: 8.27%

We calculated Dexcom’s cost of equity using the Capital Asset Pricing Model (CAPM). We found Dexcom’s raw beta using Bloomberg and the 10-year risk-free rate using Trading Economics. We gathered our equity risk premium from New York University professor Aswath Damodaran which was calculated to be 4.69%.

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Cost of Debt

Risk-Free Rate: 2.56% Default Spread: 2.882%

Pre-Tax Cost of Debt: 5.44% We found Dexcom’s default spread using Bloomberg. For our risk-free rate, we used the 10-year Treasury bond from Trading Economics and added it to the default spread to calculate a pre-tax cost of debt at 5.44%. Since Dexcom is a new company and in the growth stage, we expected that Dexcom’s cost of debt is high relative to its peers.

Valuation Models We have calculated an intrinsic value range for Dexcom of $135-145. We calculated this range based on our discounted cash flow (DCF) model and economic profit (EP) model which reported an intrinsic value of $137.28. We determined our target range based on the stock’s somewhat volatile behavior and expansive potential for growth. We believe that the intrinsic value calculated from the DCF and EP method are more representative of the true value of Dexcom because Dexcom does not declare dividends and is a relatively new company to the industry.

Discounted Cash Flow & Economic Profit Model We calculated Dexcom’s intrinsic stock price to be $137.28 using the discounted cash flows and economic profit intrinsic value calculations. We believe this is the most accurate representation of the company’s stock price because it takes into account firm-specific assumptions about growth-strategy and short-term cash flow sacrifices for long-term growth in bottom line profit. Our valuation model used assumptions needed for the calculation, including a terminal value growth rate of 3%, a terminal value return on invested capital of 29.64%, and our WACC calculation mentioned above.

Dividend Discount Model (DDM) Dexcom does not currently issue dividends and does not plan on doing so in the near future,1 so we believe our dividend discount model is not representative of the intrinsic value of the stock. We calculated an undervalued stock price of $88.30, which we believe is undervalued due to the fact that Dexcom does not pay dividends. The value of the stock using the dividend discount model is not an accurate representation of the company in our opinion.

Relative Valuation We compared Dexcom to four other companies for our relative valuation model: Medtronic, Abbott Laboratories, Abiomed, Insulet Corporation and Becton, Dickinson and Company. Using these five industry competitors, we calculated Dexcom’s relative valuation to be $154.43. We compared the companies using a price to sales average of the five companies and applying it to Dexcom’s expected 2019 sales. We do not believe this calculation is very representative of Dexcom’s value because the comparable companies are different in terms of company stage and revenue streams. Dexcom is currently the only company in its industry that is solely focusing on CGM products. All of Dexcom’s competitors are either more established health care companies that also sell diabetes products or are smaller companies that sell products that are in indirect competition with Dexcom. Medtronic, Abbott Laboratories, and Becton Dickinson and Company have many other revenue outlets and have much higher annual revenues than Dexcom. Abiomed and Insulet Corporation manufacture in the diabetes space, but not specifically in CGM and directly compete with Dexcom. The factors described above are causing Dexcom to trade at a misleading premium compared to the industry.

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Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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References 1. Dexcom 2018 Form10-K. SEC Filing 2. Bloomberg Terminal Search Dexcom Company

Description 3. Srunyon. (2019, March 05). Dexcom G6

Continuous Glucose Monitoring (CGM) System. Retrieved from http://www.dexcom.com/g6-cgm-system

4. New CDC report: More than 100 million Americans have diabetes or prediabetes | CDC Online Newsroom | CDC. (n.d.). Retrieved from https://www.cdc.gov/media/releases/2017/p0718-diabetes-report.html

5. United States GDP Growth Rate. (n.d.). Retrieved from https://tradingeconomics.com/united-states/gdp-growth

6. IDF diabetes atlas - 8th edition. (n.d.). Retrieved from https://diabetesatlas.org/resources/2017-atlas.html

7. Centers for Medicare and Medicaid Services, (2018, December 11). Retrieved from https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html

8. US Census Bureau. “The Population 65 Years and Older: 2016.” The Population 65 Years and Older: 2016, 29 Oct. 2018, www.census.gov/library/visualizations/interactive/population-65-years.html.

9. “U.S. - Seniors as a Percentage of the Population 1950-2050 | Statistic.” Statista, www.statista.com/statistics/457822/share-of-old-age-population-in-the-total-us-population/.

10. “Eight Demographic Trends Transforming America's Older Population.” Population Reference Bureau, www.prb.org/eight-demographic-trends-transforming-americas-older-population/.

11. “National Obesity Rates & Trends.” The State of Obesity, stateofobesity.org/obesity-rates-trends-overview/.

12. Individual Mandate Penalty You Pay If You Don't Have Health Insurance Coverage. (n.d.). Retrieved from https://www.health care.gov/fees/fee-for-not-being-covered/

13. Mershon, E. (2018, April 12). Congress delays medical device tax for two years. Retrieved from

https://www.statnews.com/2018/01/22/congress-medical-device-tax/

14. Bureau of Labor Statistics, “The Employment Situation” March 2019, https://www.bls.gov/news.release/pdf/empsit.pdf

15. United States Unemployment Rate. (n.d.). Retrieved from https://tradingeconomics.com/united-states/unemployment-rate

16. U.S. Department of the Treasury. (n.d.). Retrieved from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

17. US health services quarterly deals insights: PwC. (n.d.). Retrieved from https://www.pwc.com/us/en/industries/health-industries/library/health-services-quarterly-deals-insights.html

18. Renaud, Erik, and Andrew S. Teufel. Fisher Investments on Health Care. Wiley, 2010.

19. Industry Surveys Disclosure. (n.d.). Retrieved from https://www.cfraresearch.com/legal/industry-surveys-disclosure/

20. S&P Dow Jones Indices. (n.d.). Retrieved from https://us.spindices.com/

21. Health care - statistics and market data. (n.d.). Retrieved from https://www.statista.com/stats/health care

22. ThomsonOne, (n.d.). Retrieved from https://www.thomsonone.com/Workspace/Main.aspx?View=Action=Open&BrandName=www.thomsonone.com&IsSsoLogin=True

23. Scheiner, G. (2018, April 19). Choosing a CGM: 3 Heads are Better Than One. Retrieved from https://integrateddiabetes.com/choosing-a-cgm-3-heads-are-better-than-one/

24. Production Assistant, D. I. (2018, July 28). CGM Will Replace BGM; Is There a Future for BGM? Retrieved from http://www.diabetesincontrol.com/is-there-a-future-for-bgm/

25. Net Advantage – Kevin Huang DXCM report. Retrieved from https://search.lib.uiowa.edu/

26. What's Coming from Dexcom in 2020? A Low-Cost, Slimmer, Fully Disposable CGM. (2019, January 08). Retrieved from https://diatribe.org/whats-coming-dexcom-2020-low-cost-slimmer-fully-disposable-cgm

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27. Miniaturized CGM. (n.d.). Retrieved from https://verily.com/projects/sensors/miniaturized-gcm/

DexcomRevenue Decomposition

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

(In millions)

Sensor and Other Revenue 401.31 515.50 758.10 1,086.22 1,498.99 2,143.55 2,958.10 3,845.53 4,922.28 6,152.85 7,506.48 9,007.78 10,358.95 11,394.84 11,964.58

% of Total Revenue 70.00% 71.75% 73.49% 72.62% 72.62% 72.62% 72.62% 72.62% 72.62% 72.62% 72.62% 72.62% 72.62% 72.62% 72.62%

Year over year growth 42.61% 28.45% 47.06% 43.28% 38.00% 43.00% 38.00% 30.00% 28.00% 25.00% 22.00% 20.00% 15.00% 10.00% 5.00%

Transmitter Revenue 114.66 144.90 189.10 287.93 397.34 568.20 784.11 1,019.35 1,304.77 1,630.96 1,989.77 2,387.72 2,745.88 3,020.47 3,171.49

% of Total Revenue 20.00% 20.17% 18.33% 19.25% 19.25% 19.25% 19.25% 19.25% 19.25% 19.25% 19.25% 19.25% 19.25% 19.25% 19.25%


Receiver Revenue 57.33 58.10 84.40 121.67 167.90 240.10 331.34 430.74 551.35 689.18 840.80 1,008.96 1,160.31 1,276.34 1,340.16

% of Total Revenue 10.00% 8.09% 8.18% 8.13% 8.13% 8.13% 8.13% 8.13% 8.13% 8.13% 8.13% 8.13% 8.13% 8.13% 8.13%


Total Revenue 573.30 718.50 1,031.60 1,495.82 2,064.23 2,951.85 4,073.55 5,295.62 6,778.39 8,472.99 10,337.05 12,404.46 14,265.13 15,691.65 16,476.23


DexcomIncome Statement


(in millions, except per share data)

Product revenue 573.30 718.50 1,031.60 1,495.82 2,064.23 2,951.85 4,073.55 5,295.62 6,778.39 8,472.99 10,337.05 12,404.46 14,265.13 15,691.65 16,476.23

Development grant and other revenue ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Total revenues 573.30 718.50 1,031.60 1,495.82 2,064.23 2,951.85 4,073.55 5,295.62 6,778.39 8,472.99 10,337.05 12,404.46 14,265.13 15,691.65 16,476.23

Product cost of sales (179.90) (210.30) (338.60) (448.75) (598.63) (826.52) (1,099.86) (1,376.86) (1,694.60) (2,118.25) (2,584.26) (3,101.12) (3,566.28) (3,922.91) (4,119.06)

Development and other cost of sales ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Depreciation of PP&E (14.40) (16.10) (28.60) (31.46) (46.61) (63.43) (85.49) (112.80) (143.45) (177.04) (219.40) (270.50) (330.58) (396.33) (463.03)

Amortization of intangible assets (0.60) ‐ (0.50) (0.43) (0.43) (0.43) (0.43) (0.43) (0.43) (0.43) (0.43) (0.43) (0.43) (0.43) (0.43)

Cost of sales (194.90) (226.40) (367.70) (480.63) (645.66) (890.37) (1,185.78) (1,490.08) (1,838.48) (2,295.71) (2,804.09) (3,372.04) (3,897.29) (4,319.66) (4,582.51)

Research and development (156.10) (185.40) (199.70) (448.75) (598.63) (826.52) (1,099.86) (1,376.86) (1,694.60) (2,118.25) (2,584.26) (3,101.12) (3,566.28) (3,922.91) (4,119.06)

Collaborative research and development fee ‐ ‐ (217.70) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Selling, general and administrative (286.20) (349.20) (432.80) (717.99) (970.19) (1,357.85) (1,833.10) (2,330.07) (2,914.71) (3,558.66) (4,238.19) (4,961.79) (5,563.40) (5,962.83) (6,096.20)

Earnings from operations (63.90) (42.50) (186.30) (151.55) (150.25) (122.89) (45.18) 98.60 330.61 500.38 710.51 969.52 1,238.15 1,486.25 1,678.46

Other income (expense) (0.70) 3.40 (8.10) (2.16) (2.99) (4.27) (5.89) (7.66) (9.81) (12.26) (14.96) (17.95) (20.64) (22.70) (23.84)

Interest income 0.40 3.30 10.50 6.53 6.69 6.87 7.04 7.22 7.41 7.60 7.79 7.99 8.19 8.40 8.62

Income from equity investments ‐ ‐ 80.10 80.10 80.10 80.10 80.10 80.10 80.10 80.10 80.10 80.10 80.10 80.10 80.10

Interest expense (0.70) (12.80) (22.70) (54.98) (54.98) (54.98) (37.15) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Earnings before income taxes (64.90) (48.60) (126.50) (122.06) (121.42) (95.17) (1.09) 178.26 408.31 575.82 783.44 1,039.66 1,305.81 1,552.04 1,743.34

Current income tax expense (0.90) (1.60) (2.80) (8.54) (12.14) (14.28) (0.20) (37.44) (85.74) (120.92) (164.52) (218.33) (274.22) (325.93) (366.10)

Deferred income tax expense 0.20 ‐ 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20

Income tax (expense) / benefit (0.70) (1.60) (0.60) (6.34) (9.94) (12.08) 2.00 (35.24) (83.54) (118.72) (162.32) (216.13) (272.02) (323.73) (363.90)

Net loss / income (65.60) (50.20) (127.10) (128.41) (131.36) (107.25) 0.92 143.03 324.76 457.09 621.12 823.53 1,033.79 1,228.32 1,379.44

Basic earnings per share (0.78) (0.58) (1.44) (1.43) (1.43) (1.15) 0.01 1.37 3.04 4.20 5.59 7.27 8.95 10.42 11.48

Weighted average shares outstanding 83.60 86.30 88.20 89.96 91.76 93.60 97.48 104.63 106.72 108.86 111.03 113.26 115.52 117.83 120.19

Dividend per share ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

DexcomBalance Sheet


(In millions)

AssetsCash and cash equivalents 94.50 441.50 1,137.00 874.39 602.05 303.23 92.98 290.89 334.15 453.14 683.88 1,062.73 1,639.86 2,436.67 3,449.41

Short‐term marketable securities 29.20 107.10 248.60 254.96 261.49 268.19 275.05 282.09 289.31 296.72 304.32 312.11 320.10 328.29 336.70

Accounts receivable, net 101.70 134.30 226.70 258.44 350.92 494.44 672.14 860.54 1,084.54 1,334.50 1,602.24 1,891.68 2,139.77 2,314.52 2,389.05

Inventory 45.40 45.20 70.70 117.28 161.85 231.44 319.39 415.21 531.47 664.34 810.49 972.59 1,118.48 1,230.33 1,291.84

Prepaid and other current assets 9.20 16.60 16.50 29.67 40.95 58.56 80.81 105.05 134.47 168.08 205.06 246.07 282.98 311.28 326.85

Total current assets 280.00 744.70 1,699.50 1,534.75 1,417.26 1,355.85 1,440.37 1,953.78 2,373.94 2,916.78 3,605.99 4,485.18 5,501.19 6,621.09 7,793.85

Property and equipment, net 109.40 145.60 183.10 271.31 369.20 497.64 656.56 835.02 1,030.49 1,277.10 1,574.55 1,924.27 2,306.94 2,695.20 3,055.98

Restricted cash ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Goodwill (5.19) 12.10 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70

Other assets 2.10 1.70 14.70 14.28 13.85 13.43 13.00 12.58 12.15 11.73 11.30 10.88 10.45 10.03 9.60

Total assets 402.80 904.10 1,916.00 1,839.03 1,819.01 1,885.62 2,128.63 2,820.08 3,435.28 4,224.30 5,210.55 6,439.03 7,837.28 9,345.01 10,878.13

Liabilities and equityAccounts payable and accrued liabilities 68.10 87.20 147.10 167.00 230.46 329.55 454.78 591.22 756.76 945.95 1,154.06 1,384.87 1,592.60 1,751.86 1,839.45

Accrued payroll and related expenses 33.40 48.50 72.40 97.00 133.86 191.42 264.16 343.41 439.57 549.46 670.34 804.41 925.07 1,017.58 1,068.46

Current portion of long‐term debt ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Deferred revenue 0.90 3.20 2.90 4.05 5.58 7.99 11.02 14.33 18.34 22.92 27.96 33.56 38.59 42.45 44.57

Total current liabilities 102.40 138.90 222.40 268.05 369.90 528.96 729.97 948.95 1,214.66 1,518.33 1,852.36 2,222.83 2,556.26 2,811.88 2,952.48

Other liabilities 16.60 18.20 20.00 24.95 34.43 49.23 67.94 88.33 113.06 141.32 172.41 206.90 237.93 261.73 274.81

Long‐term debt, net of current portion ‐ 327.60 1,010.30 1,010.30 1,010.30 1,010.30 682.70 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Total liabilities 119.00 484.70 1,252.70 1,303.29 1,414.63 1,588.50 1,480.61 1,037.28 1,327.72 1,659.65 2,024.77 2,429.73 2,794.19 3,073.61 3,227.29

Common Stock and Additional paid‐in capital 905.80 1,093.80 1,560.70 1,561.54 1,561.54 1,561.54 1,911.52 2,903.27 2,903.27 2,903.27 2,903.27 2,903.27 2,903.27 2,903.27 2,903.27

Accumulated other comprehensive income (loss) (1.00) (2.60) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50

Accumulated deficit (621.00) (671.80) (798.90) (927.31) (1,058.67) (1,165.92) (1,165.01) (1,021.98) (697.22) (240.12) 381.00 1,204.53 2,238.32 3,466.63 4,846.07

Treasury stock at cost ‐ ‐ (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00)

Total stockholders' equity 283.80 419.40 663.30 535.74 404.37 297.12 648.02 1,782.80 2,107.56 2,564.65 3,185.77 4,009.30 5,043.09 6,271.41 7,650.84

Total liabilities and stockholders' equity 402.80 904.10 1,916.00 1,839.03 1,819.01 1,885.62 2,128.63 2,820.08 3,435.28 4,224.30 5,210.55 6,439.03 7,837.28 9,345.01 10,878.13

DexcomCash Flow Statement

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015 2016 2017 2018

(In millions)

Cash Flows ‐ Operating Activites: Net earnings (44.75) (54.50) (29.80) (22.40) (57.60) (65.60) (50.20) (127.10)

Adjustments to reconcile net loss to cash used in / provided by operating activities:

Non‐cash items ‐

Depreciation Expense 3.76 6.10 6.40 7.80 10.20 14.40 16.10 28.60

Amortization Expense ‐ 0.50 0.60 0.60 0.60 0.60 ‐ 0.50

Share‐based compensation expense 13.51 18.40 24.60 50.00 82.70 110.80 106.20 101.90

Non‐cash interest expense ‐ 0.10 0.40 0.30 0.20 ‐ 9.40 17.90

Change in fair value of contingent consideration 0.02 (0.60) 2.50 (0.20) ‐ ‐ ‐ ‐

Realized and unrealized income on equity investment ‐ ‐ ‐ ‐ ‐ ‐ ‐ (80.10)

Other non‐cash income and expenses 0.91 0.80 0.50 0.30 0.80 2.30 7.90 4.70

Non‐cash research and development charge through issuance of common stock ‐ 2.00 ‐ ‐ 36.50 ‐ ‐ 217.70

Changes in working capital accounts

Accounts receivable, net (5.88) (7.00) (6.50) (16.30) (31.70) (27.20) (31.80) (93.20)

Inventory (0.06) 0.70 (1.60) (7.00) (19.20) (9.80) 0.40 (25.50)

Prepaid and other assets 1.24 (0.80) (1.40) (0.40) (2.50) (3.90) (6.70) (3.00)

Restricted cash 0.78 (0.10) ‐ ‐ 1.00 ‐ ‐ ‐

Accounts payable and accrued liabilities 1.00 0.30 2.40 8.30 17.80 21.10 21.10 56.20

Accrued payroll and related expenses 1.07 2.40 5.80 2.20 7.70 8.50 14.80 23.80

Deferred revenue (1.65) 0.10 (1.20) ‐ 0.10 0.10 2.20 0.80

Deferred rent and other liabilities (0.08) 0.50 (0.30) 0.40 2.40 4.90 2.60 ‐

Net Cash used in / provided by Operating Activities (30.13) (33.10) 2.40 23.60 49.00 56.20 92.00 123.20

Cash Flows ‐ Investing Activities: Purchase of available‐for‐sale marketable securities (102.65) (66.40) (16.30) (13.80) (45.20) (39.20) (171.80) (452.50)

Proceeds from the maturity of available‐for‐sale marketable securities 64.29 104.30 45.10 13.20 27.50 38.70 93.40 392.10

Payments to acquire other investments ‐ ‐ ‐ ‐ ‐ ‐ ‐ (1.00)

Purchase of property, plant and equipment (8.01) (9.50) (7.90) (16.20) (33.30) (55.70) (66.00) (67.10)

Proceeds from the sale of equipment 0.00 ‐ ‐ ‐ ‐ ‐ ‐ ‐

Acquisitions, net of cash acquired ‐ ‐ ‐ ‐ (0.50) 0.30 ‐ (11.30)

Net Cash used in / provided by Investing Activities (46.37) 28.40 20.90 (16.80) (51.50) (55.90) (144.40) (139.80)

Cash Flows ‐ Financing Activites: Net proceeds from issuance of common stock 74.71 3.60 12.00 24.00 19.10 10.40 10.10 10.80

Purchase of treasury stock ‐ ‐ ‐ ‐ ‐ ‐ ‐ (100.00)

Net proceeds from issuance of long‐term debt ‐ 6.60 ‐ ‐ ‐ ‐ ‐ ‐

Proceeds from issuance of convertible debt, net of issuance costs ‐ ‐ ‐ ‐ ‐ ‐ 389.00 836.60

Purchase of convertible note hedge ‐ ‐ ‐ ‐ ‐ ‐ ‐ (218.90)

Proceeds from sale of warrants ‐ ‐ ‐ ‐ ‐ ‐ ‐ 183.80

Repayment of equipment loan (0.53) ‐ ‐ ‐ ‐ ‐ ‐ ‐

Repayment of long‐term debt ‐ ‐ (0.20) (2.20) (2.30) (2.30) ‐ (1.90)

Net Cash provided by Financing Activities 74.18 10.20 11.80 21.80 16.80 8.10 399.10 710.40

Effect of exchange rate changes on cash and cash equivalents (0.02) ‐ ‐ ‐ ‐ ‐ 0.30 1.80

Decrease / Increase in Cash and Cash Equivalents (2.34) 5.50 35.10 28.60 14.30 8.40 347.00 695.60

Cash and cash equivalents, beginning of period 4.89 2.60 8.10 43.20 71.80 86.10 94.50 441.50

Cash and Cash Equivalents, End of Period 2.55 8.10 43.20 71.80 86.10 94.50 441.50 1,137.10

DexcomCash Flow Statement

Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

(In millions)

Cash Flows ‐ Operating Activites: Net earnings (128.41) (131.36) (107.25) 0.92 143.03 324.76 457.09 621.12 823.53 1,033.79 1,228.32 1,379.44

Adjustments to reconcile net loss to cash used in / provided by operating activities:

Depreciation Expense 31.46 46.61 63.43 85.49 112.80 143.45 177.04 219.40 270.50 330.58 396.33 463.03

Amortization Expense 0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.43

Changes in working capital accounts:

Change in receivables (31.74) (92.48) (143.52) (177.70) (188.40) (224.00) (249.95) (267.75) (289.44) (248.09) (174.75) (74.54)

Change in inventories (46.58) (44.57) (69.60) (87.95) (95.82) (116.26) (132.87) (146.15) (162.10) (145.89) (111.85) (61.52)

Change in prepaid expenses and other current assets (13.17) (11.28) (17.61) (22.25) (24.24) (29.41) (33.62) (36.98) (41.01) (36.91) (28.30) (15.56)

Change in accounts payable and accrued liabilities 19.90 63.46 99.10 125.23 136.43 165.54 189.19 208.11 230.81 207.73 159.26 87.59

Change in accrued payroll and related expenses 24.60 36.86 57.56 72.74 79.25 96.16 109.89 120.88 134.07 120.66 92.51 50.88

Change in deferred revenue 1.15 1.54 2.40 3.03 3.31 4.01 4.58 5.04 5.59 5.03 3.86 2.12

Change in other non‐current liabilities 4.95 9.48 14.80 18.71 20.38 24.73 28.26 31.09 34.48 31.03 23.79 13.09

Net Cash used in / Provided by Operating Activities (137.43) (121.31) (100.26) 18.65 187.16 389.40 550.05 755.19 1,006.87 1,298.37 1,589.59 1,844.95

Cash flows ‐ Investing Activities: Change in short‐term investments (6.36) (6.53) (6.69) (6.87) (7.04) (7.22) (7.41) (7.60) (7.79) (7.99) (8.19) (8.40)

Capital Expenditures (119.67) (144.50) (191.87) (244.41) (291.26) (338.92) (423.65) (516.85) (620.22) (713.26) (784.58) (823.81)

Net Cash used in / Provided by Investing Activities (126.03) (151.02) (198.56) (251.28) (298.30) (346.14) (431.06) (524.45) (628.01) (721.25) (792.78) (832.22)

Cash Flows ‐ Financing Activites: Proceeds from issuance (payments) of long‐term debt ‐ ‐ ‐ (327.60) (682.70) ‐ ‐ ‐ ‐ ‐ ‐ ‐

Proceeds from issuance of common stock 0.84 ‐ ‐ 349.98 991.75 ‐ ‐ ‐ ‐ ‐ ‐ ‐

Net Cash Provided by Financing Activities 0.84 ‐ ‐ 22.38 309.05 ‐ ‐ ‐ ‐ ‐ ‐ ‐

Decrease / Increase in Cash and Cash Equivalents (262.61) (272.34) (298.82) (210.25) 197.91 43.26 118.99 230.74 378.85 577.12 796.82 1,012.74

Cash and cash equivalents, beginning of period 1,137.00 874.39 602.05 303.23 92.98 290.89 334.15 453.14 683.88 1,062.73 1,639.86 2,436.67

Cash and Cash Equivalents, End of Period 874.39 602.05 303.23 92.98 290.89 334.15 453.14 683.88 1,062.73 1,639.86 2,436.67 3,449.41

DexcomCommon Size Income Statement


(In millions)

Product revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Development grant and other revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Product cost of sales ‐31.38% ‐29.27% ‐32.82% ‐30.00% ‐29.00% ‐28.00% ‐27.00% ‐26.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00%

Development and other cost of sales 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Depreciation of PP&E ‐2.51% ‐2.24% ‐2.77% ‐2.10% ‐2.26% ‐2.15% ‐2.10% ‐2.13% ‐2.12% ‐2.09% ‐2.12% ‐2.18% ‐2.32% ‐2.53% ‐2.81%

Amortization of intangible assets ‐0.10% 0.00% ‐0.05% ‐0.03% ‐0.02% ‐0.01% ‐0.01% ‐0.01% ‐0.01% ‐0.01% 0.00% 0.00% 0.00% 0.00% 0.00%

Cost of sales ‐33.89% ‐31.51% ‐35.60% ‐38.28% ‐31.28% ‐30.16% ‐29.11% ‐28.14% ‐27.12% ‐27.09% ‐27.13% ‐27.18% ‐27.32% ‐27.53% ‐27.81%

Research and development ‐27.23% ‐25.80% ‐40.46% ‐30.00% ‐29.00% ‐28.00% ‐27.00% ‐26.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00% ‐25.00%

Selling, general and administrative ‐49.92% ‐48.60% ‐41.95% ‐48.00% ‐47.00% ‐46.00% ‐45.00% ‐44.00% ‐43.00% ‐42.00% ‐41.00% ‐40.00% ‐39.00% ‐38.00% ‐37.00%

Earnings from operations ‐77.15% ‐74.41% ‐82.42% ‐78.00% ‐76.00% ‐74.00% ‐72.00% ‐70.00% ‐68.00% ‐67.00% ‐66.00% ‐65.00% ‐64.00% ‐63.00% ‐62.00%

Other income (expense) ‐0.12% 0.47% ‐0.79% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14% ‐0.14%

Interest income 0.07% 0.46% 1.02% 0.44% 0.32% 0.23% 0.17% 0.14% 0.11% 0.09% 0.08% 0.06% 0.06% 0.05% 0.05%

Interest expense ‐0.12% ‐1.78% ‐2.20% ‐3.68% ‐2.66% ‐1.86% ‐0.91% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Earnings before income taxes ‐11.15% ‐5.92% ‐18.06% ‐8.16% ‐5.88% ‐3.22% ‐0.03% 3.37% 6.02% 6.80% 7.58% 8.38% 9.15% 9.89% 10.58%

Current income tax expense ‐0.16% ‐0.22% ‐0.27% ‐0.57% ‐0.59% ‐0.48% 0.00% ‐0.71% ‐1.26% ‐1.43% ‐1.59% ‐1.76% ‐1.92% ‐2.08% ‐2.22%

Deferred income tax expense 0.03% 0.00% 0.21% 0.15% 0.11% 0.07% 0.05% 0.04% 0.03% 0.03% 0.02% 0.02% 0.02% 0.01% 0.01%

Income tax expense / benefit ‐0.12% ‐0.22% ‐0.06% ‐0.42% ‐0.48% ‐0.41% 0.05% ‐0.67% ‐1.23% ‐1.40% ‐1.57% ‐1.74% ‐1.91% ‐2.06% ‐2.21%

Net loss / income ‐11.44% ‐6.99% ‐12.32% ‐8.58% ‐6.36% ‐3.63% 0.02% 2.70% 4.79% 5.39% 6.01% 6.64% 7.25% 7.83% 8.37%

DexcomCommon Size Balance Sheet (% of sales)


(In millions)

AssetsCash and cash equivalents 16.48% 61.45% 158.25% 58.46% 29.17% 10.27% 2.28% 5.49% 4.93% 5.35% 6.62% 8.57% 11.50% 15.53% 20.94%

Short‐term marketable securities 5.09% 14.91% 34.60% 17.05% 12.67% 9.09% 6.75% 5.33% 4.27% 3.50% 2.94% 2.52% 2.24% 2.09% 2.04%

Accounts receivable, net 17.74% 18.69% 31.55% 17.28% 17.00% 16.75% 16.50% 16.25% 16.00% 15.75% 15.50% 15.25% 15.00% 14.75% 14.50%

Inventory 7.92% 6.29% 9.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84%

Prepaid and other current assets 1.60% 2.31% 2.30% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98%

Total current assets 48.84% 103.65% 236.53% 102.60% 68.66% 45.93% 35.36% 36.89% 35.02% 34.42% 34.88% 36.16% 38.56% 42.20% 47.30%

Property and equipment, net 19.08% 20.26% 17.75% 16.79% 17.89% 16.86% 16.12% 15.77% 15.20% 15.07% 15.23% 15.51% 16.17% 17.18% 18.55%

Restricted cash 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Goodwill ‐0.90% 1.68% 1.81% 1.25% 0.91% 0.63% 0.46% 0.35% 0.28% 0.22% 0.18% 0.15% 0.13% 0.12% 0.11%

Other assets 0.37% 0.24% 1.42% 1.52% 0.67% 0.45% 0.32% 0.24% 0.18% 0.14% 0.11% 0.09% 0.07% 0.06% 0.06%

Total assets 67.38% 125.83% 257.52% 122.15% 88.12% 63.88% 52.25% 53.25% 50.68% 49.86% 50.41% 51.91% 54.94% 59.55% 66.02%

Liabilities and EquityAccounts payable and accrued liabilities 11.88% 12.14% 14.26% 11.16% 11.16% 11.16% 11.16% 11.16% 11.16% 11.16% 11.16% 11.16% 11.16% 11.16% 11.16%

Accrued payroll and related expenses 5.83% 6.75% 7.02% 6.48% 6.48% 6.48% 6.48% 6.48% 6.48% 6.48% 6.48% 6.48% 6.48% 6.48% 6.48%

Current portion of long‐term debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Deferred revenue 0.16% 0.45% 0.28% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27%

Total current liabilities 17.86% 19.33% 21.56% 17.92% 17.92% 17.92% 17.92% 17.92% 17.92% 17.92% 17.92% 17.92% 17.92% 17.92% 17.92%

Other liabilities 2.90% 2.53% 1.94% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67%

Long‐term debt, net of current portion 0.00% 45.59% 97.94% 67.54% 48.94% 34.23% 16.76% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total liabilities 20.76% 67.46% 121.43% 87.13% 68.53% 53.81% 36.35% 19.59% 19.59% 19.59% 19.59% 19.59% 19.59% 19.59% 19.59%

Common Stock and Additional paid‐in capital 158.00% 152.23% 151.29% 104.39% 75.65% 52.90% 46.93% 54.82% 42.83% 34.27% 28.09% 23.41% 20.35% 18.50% 17.62%

Accumulated other comprehensive loss ‐0.17% ‐0.36% 0.15% 0.10% 0.07% 0.05% 0.04% 0.03% 0.02% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01%

Accumulated deficit ‐108.32% ‐93.50% ‐77.44% ‐61.99% ‐51.29% ‐39.50% ‐28.60% ‐19.30% ‐10.29% ‐2.83% 3.69% 9.71% 15.69% 22.09% 29.41%

Total stockholders' equity 49.50% 58.37% 73.99% 42.50% 24.43% 13.45% 18.36% 35.55% 32.57% 31.45% 31.79% 33.13% 36.05% 40.60% 47.04%

Total liabilities and stockholders' equity 70.26% 125.83% 195.42% 129.63% 92.96% 67.27% 54.71% 55.14% 52.16% 51.04% 51.37% 52.72% 55.64% 60.19% 66.63%

DexcomValue Driver Estimation


(In millions)

EBITA: Operating Revenues 573.30 718.50 1,031.60 1,495.82 2,064.23 2,951.85 4,073.55 5,295.62 6,778.39 8,472.99 10,337.05 12,404.46 14,265.13 15,691.65 16,476.23

‐ Cost of Products Sold (179.90) (210.30) (338.60) (448.75) (598.63) (826.52) (1,099.86) (1,376.86) (1,694.60) (2,118.25) (2,584.26) (3,101.12) (3,566.28) (3,922.91) (4,119.06)

‐ Selling, General and Admin Expenses (286.20) (349.20) (432.80) (717.99) (970.19) (1,357.85) (1,833.10) (2,330.07) (2,914.71) (3,558.66) (4,238.19) (4,961.79) (5,563.40) (5,962.83) (6,096.20)

‐ Depreciation and Amortization Expenses (15.00) (16.10) (29.10) (31.88) (47.04) (63.85) (85.92) (113.22) (143.88) (177.46) (219.83) (270.93) (331.01) (396.75) (463.45)

‐ Research and Development Expenses (156.10) (185.40) (417.40) (448.75) (598.63) (826.52) (1,099.86) (1,376.86) (1,694.60) (2,118.25) (2,584.26) (3,101.12) (3,566.28) (3,922.91) (4,119.06)

‐ Other Operating Expenses (Development costs) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

+ Implied Interest on Operating Leases 2.86 2.62 3.20 4.75 6.46 8.71 11.49 14.61 18.04 22.35 27.56 33.68 40.38 47.17 53.49

EBITA (61.04) (39.88) (183.10) (146.80) (143.79) (114.18) (33.69) 113.22 348.64 522.73 738.06 1,003.20 1,278.53 1,533.42 1,731.94

Less: Adjusted Taxes:

Provision for Income Taxes 0.70 1.60 0.60 6.34 9.94 12.08 (2.00) 35.24 83.54 118.72 162.32 216.13 272.02 323.73 363.90

+ Tax Shield on Implied Lease Interest 0.60 0.55 0.67 1.00 1.36 1.83 2.41 3.07 3.79 4.69 5.79 7.07 8.48 9.91 11.23

+ Tax Shield on Interest Expense 0.15 2.69 4.77 11.55 11.55 11.55 7.80 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

‐ Tax on Interest or Investment Income (0.08) (0.69) (2.21) (1.37) (1.41) (1.44) (1.48) (1.52) (1.56) (1.60) (1.64) (1.68) (1.72) (1.76) (1.81)

+ Tax Shield on Non‐Operating Losses 0.60 0.55 0.67 1.00 1.36 1.83 2.41 3.07 3.79 4.69 5.79 7.07 8.48 9.91 11.23

Total Adjusted Taxes 1.96 4.69 4.51 18.51 22.80 25.84 9.15 39.86 89.56 126.51 172.26 228.60 287.26 341.78 384.55

Plus: Change in Deferred Tax Asset/Liability (0.20) 0.20 ‐ 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20

NOPLAT: EBITA ‐ Adjusted Taxes + Change in DTA/DTL (63.21) (44.38) (187.60) (163.11) (164.38) (137.82) (40.64) 75.56 261.28 398.42 568.00 776.80 993.47 1,193.84 1,349.59

Operating Current Assets: Normal Cash (lesser of actual cash of 2% of revenue) 8.54 19.16 40.60 38.97 38.55 39.96 45.11 59.76 72.80 89.52 110.42 136.45 166.08 198.03 230.52

Accounts Receivable, Net 101.70 134.30 226.70 258.44 350.92 494.44 672.14 860.54 1,084.54 1,334.50 1,602.24 1,891.68 2,139.77 2,314.52 2,389.05

Inventory 45.40 45.20 70.70 117.28 161.85 231.44 319.39 415.21 531.47 664.34 810.49 972.59 1,118.48 1,230.33 1,291.84

Prepaid Expenses and Other Current Assets 9.20 16.60 16.50 29.67 40.95 58.56 80.81 105.05 134.47 168.08 205.06 246.07 282.98 311.28 326.85

Operating Current Assets 164.84 215.26 354.50 444.36 592.26 824.39 1,117.45 1,440.56 1,823.28 2,256.43 2,728.21 3,246.79 3,707.31 4,054.16 4,238.26

Operating Current Liabilities: Accounts Payable 68.10 87.20 147.10 167.00 230.46 329.55 454.78 591.22 756.76 945.95 1,154.06 1,384.87 1,592.60 1,751.86 1,839.45

Accrued Payroll and Related Expenses 33.40 48.50 72.40 97.00 133.86 191.42 264.16 343.41 439.57 549.46 670.34 804.41 925.07 1,017.58 1,068.46

Deferred Revenue 0.90 3.20 2.90 4.05 5.58 7.99 11.02 14.33 18.34 22.92 27.96 33.56 38.59 42.45 44.57

Operating Current Liabilities 102.40 138.90 222.40 268.05 369.90 528.96 729.97 948.95 1,214.66 1,518.33 1,852.36 2,222.83 2,556.26 2,811.88 2,952.48

Net Operating Working Capital 62.44 76.36 132.10 176.32 222.36 295.43 387.48 491.61 608.61 738.11 875.85 1,023.96 1,151.06 1,242.28 1,285.79

Plus: Other Operating AssetsProperty, Plant, and Equipment, net 109.40 145.60 183.10 271.31 369.20 497.64 656.56 835.02 1,030.49 1,277.10 1,574.55 1,924.27 2,306.94 2,695.20 3,055.98

Present Value of Operating Leases 52.47 48.07 58.89 87.26 118.74 160.04 211.15 268.55 331.41 410.73 506.39 618.86 741.93 866.80 982.83

Other Operating Assets, net 2.10 1.70 14.70 14.28 13.85 13.43 13.00 12.58 12.15 11.73 11.30 10.88 10.45 10.03 9.60

Less: Other Operating LiabilitiesOther Liabilities (16.60) (18.20) (20.00) (24.95) (34.43) (49.23) (67.94) (88.33) (113.06) (141.32) (172.41) (206.90) (237.93) (261.73) (274.81)

Invested Capital 209.81 253.53 368.79 524.21 689.71 917.31 1,200.25 1,519.43 1,869.61 2,296.34 2,795.68 3,371.07 3,972.45 4,552.57 5,059.38

NOPLAT (63.21) (44.38) (187.60) (163.11) (164.38) (137.82) (40.64) 75.56 261.28 398.42 568.00 776.80 993.47 1,193.84 1,349.59

Beg. Invested Capital 69.10 209.81 253.53 368.79 524.21 689.71 917.31 1,200.25 1,519.43 1,869.61 2,296.34 2,795.68 3,371.07 3,972.45 4,552.57

ROIC ‐91.48% ‐21.15% ‐74.00% ‐44.23% ‐31.36% ‐19.98% ‐4.43% 6.30% 17.20% 21.31% 24.74% 27.79% 29.47% 30.05% 29.64%

Beg. Invested Capital 69.10 209.81 253.53 368.79 524.21 689.71 917.31 1,200.25 1,519.43 1,869.61 2,296.34 2,795.68 3,371.07 3,972.45 4,552.57

Spread (ROIC‐WACC) ‐99.37% ‐29.05% ‐81.89% ‐52.13% ‐39.26% ‐27.88% ‐12.33% ‐1.60% 9.30% 13.41% 16.84% 19.89% 21.57% 22.16% 21.75%

EP (68.66) (60.95) (207.63) (192.24) (205.78) (192.29) (113.08) (19.23) 141.28 250.76 386.65 556.01 727.24 880.11 990.04

NOPLAT (63.21) (44.38) (187.60) (163.11) (164.38) (137.82) (40.64) 75.56 261.28 398.42 568.00 776.80 993.47 1,193.84 1,349.59

Capital Expenditures (change in Working Capital) 140.71 43.72 115.26 155.42 165.50 227.59 282.94 319.18 350.18 426.73 499.34 575.39 601.38 580.12 506.81

FCF (203.92) (88.10) (302.86) (318.53) (329.89) (365.41) (323.58) (243.61) (88.90) (28.31) 68.66 201.41 392.10 613.72 842.77

Dexcom

Cost of EquityRisk‐free rate 2.56%

Market Risk Premium 4.69%

Beta 1.217

Cost of Equity 8.27%

Cost of DebtPre‐tax 5.44%

Tax rate 21.00%

After‐tax Cost of Debt 4.30%

Market Value of EquityShare Price 117.88

Shares Outstanding 88.20

Market Value of Equity 10,397.02

Market Value of DebtSTD & Current Portion LTD ‐

LTD 1,010.30

PV Op. Leases 58.89

Market Value of Debt 1,069.19

Market Weights% Equity 90.68%

% Debt 9.32%

WACC 7.90%

Weighted Average Cost of Capital (WACC) Estimation

DexcomDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 3.00%

CV ROIC 29.64%

WACC 7.90%


Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

DCF ModelNOPLAT (163.11) (164.38) (137.82) (40.64) 75.56 261.28 398.42 568.00 776.80 993.47 1,193.84 1,349.59

CapEx (Change in Invested Capital) 155.42 165.50 227.59 282.94 319.18 350.18 426.73 499.34 575.39 601.38 580.12 506.81

Free Cash Flow (FCF) (318.53) (329.89) (365.41) (323.58) (243.61) (88.90) (28.31) 68.66 201.41 392.10 613.72 842.77

Continuing Value 24,767.06

Cash Flow to Discount (318.53) (329.89) (365.41) (323.58) (243.61) (88.90) (28.31) 68.66 201.41 392.10 613.72 24,767.06

Discount Periods 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 11.00

PV of Cash Flows (295.22) (283.36) (290.90) (238.74) (166.59) (56.34) (16.63) 37.38 101.62 183.35 265.97 10,733.50

Value of Operating Assets 9,974.03

Add: Excess Cash 1,096.40

Add: Marketable Securities 248.60

Add: Other non‐operating assets 14.70

Add: Tax Loss Carryforwards 578.70

Less: PV of Operating Leases (58.89)

Less: ESOP (11.01)

Value of Equity 11,842.54


Intrinsic Value (per share) 134.27$

EP ModelNOPLAT (163.11) (164.38) (137.82) (40.64) 75.56 261.28 398.42 568.00 776.80 993.47 1,193.84 1,349.59

Beginning Invested Capital 368.79 524.21 689.71 917.31 1,200.25 1,519.43 1,869.61 2,296.34 2,795.68 3,371.07 3,972.45 4,552.57

ROIC ‐44.23% ‐31.36% ‐19.98% ‐4.43% 6.30% 17.20% 21.31% 24.74% 27.79% 29.47% 30.05% 29.64%

WACC 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90%

Economic Profit (192.24) (205.78) (192.29) (113.08) (19.23) 141.28 250.76 386.65 556.01 727.24 880.11 990.04

Continuing Value 20,214.49

Cash Flow to Discount (192.24) (205.78) (192.29) (113.08) (19.23) 141.28 250.76 386.65 556.01 727.24 880.11 20,214.49

Discount Periods 1 2 3 4 5 6 7 8 9 10 11 11

PV of Cash Flows (178.17) (176.76) (153.08) (83.44) (13.15) 89.54 147.29 210.48 280.52 340.06 381.42 8,760.52

Value of Economic Profit 9,605.25 + Beginning Invested Capital (T=0) 368.79

Value of Operating Assets 9,974.03

Add: Excess Cash 1,096.40

Add: Marketable Securities 248.60

Add: Other non‐operating assets 14.70

Add: Tax Loss Carryforwards 578.70

Less: PV of Operating Leases (58.89)

Less: ESOP (11.01)

Value of Equity 11,842.54


Intrinsic Value (per share) 134.27$

Adjusted Target Price $ 137.28

DexcomDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

EPS (1.43) (1.43) (1.15) 0.01 1.37 3.04 4.20 5.59 7.27 8.95 10.42 11.48

Key Assumptions CV growth 3.00%

CV ROE 25.85%


Future Cash Flows P/E Multiple (CV Year) 16.78

EPS (CV Year) 11.48$

Future Cash Flows 192.60

Discounted Cash Flows 80.38

Intrinsic Value 80.38$

For Discounting:

Number of Periods 1 2 3 4 5 6 7 8 9 9 10 11

Adjusted Target Price 82.19$

DexcomRelative Valuation Models

Sales (M) Sales (M)Ticker Company Price 2019E 2020E P/S 19 P/S 20

MDT Medtronic $90.50 $30,530.00 $31,710.00 0.0030 0.0029

ABT Abbott Laboratories $79.72 $31,827.00 $34,010.00 0.0025 0.0023

ABMD Abiomed $282.65 $780.90 $988.60 0.3620 0.2859

PODD Insulet Corporation $91.43 $680.40 $805.10 0.1344 0.1136 BDX Becton, Dickinson and Co. $251.27 $17,445.00 $18,376.00 0.0144 0.0137

Average 0.1032 0.0837

DXCM Dexcom $117.88 1,495.82 2,064.23 0.0788 0.0571

Implied Relative Value:P/S (19) $ 154.43 P/S (20) 172.71$

DexcomKey Management Ratios

Fiscal Years Ending 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

FormulaLiquidity RatiosCurrent Ratio (Current Assets / Current Liabilities) 2.73 5.36 7.64 5.73 3.83 2.56 1.97 2.06 1.95 1.92 1.95 2.02 2.15 2.35 2.64

Quick Ratio (Cash + ST Investments + A/R ) / (CL) 2.20 4.92 7.25 5.18 3.28 2.01 1.42 1.51 1.41 1.37 1.40 1.47 1.60 1.81 2.09

Cash Ratio (Cash / CL) 0.92 3.18 5.11 3.26 1.63 0.57 0.13 0.31 0.28 0.30 0.37 0.48 0.64 0.87 1.17

Activity or Asset‐Management RatiosReceivables Turnover Total Revenue / Beginning Receivables) 89.47 7.06 7.68 6.60 7.99 8.41 8.24 7.88 7.88 7.81 7.75 7.74 7.54 7.33 7.12

Days' Receivables (365 / Receivables Turnover) 4.08 51.66 47.52 55.32 45.70 43.39 44.30 46.33 46.34 46.72 47.12 47.15 48.40 49.77 51.27

Inventory Turnover (Cost of Products / Beginning Inventory) 4.84 5.00 6.35 5.11 4.63 4.53 4.31 4.06 3.88 3.84 3.80 3.78 3.73 3.68 3.63

Financial Leverage RatiosDebt Ratio (Total Debt / Total Assets) 0.30 0.54 0.65 0.71 0.78 0.84 0.70 0.37 0.39 0.39 0.39 0.38 0.36 0.33 0.30

Debt to Equity Ratio (Total Debt / Total Equity) 0.42 1.16 1.89 2.43 3.50 5.35 2.28 0.58 0.63 0.65 0.64 0.61 0.55 0.49 0.42

Equity Ratio (Equity / Total Assets) 0.70 0.46 0.35 0.29 0.22 0.16 0.30 0.63 0.61 0.61 0.61 0.62 0.64 0.67 0.70

Profitability RatiosGross Margin (Total Revenue ‐ COGS) / (Total Revenue) 66.00% 68.49% 64.36% 67.87% 68.72% 69.84% 70.89% 71.86% 72.88% 72.91% 72.87% 72.82% 72.68% 72.47% 72.19%

ROA (Net Income / Average Total Assets) ‐16.29% ‐5.55% ‐6.63% ‐6.98% ‐7.22% ‐5.69% 0.04% 5.07% 9.45% 10.82% 11.92% 12.79% 13.19% 13.14% 12.68%

ROE (Net Income / Total Stockholder's Equity) ‐23.11% ‐11.97% ‐19.16% ‐23.97% ‐32.49% ‐36.10% 0.14% 8.02% 15.41% 17.82% 19.50% 20.54% 20.50% 19.59% 18.03%

Profit Margin (Net Income / Total Revenue) ‐11.44% ‐6.99% ‐12.32% ‐8.58% ‐6.36% ‐3.63% 0.02% 2.70% 4.79% 5.39% 6.01% 6.64% 7.25% 7.83% 8.37%

Payout Policy RatiosDividend Payout Ratio (Dividends / EPS) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Retention Ratio (1 ‐ Dividend Payout Ratio) 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)In Millions In Millions

Operating Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Adjusted EBITDA margin: Leases

2019 14.4 2018 10.1 2017 7.5 2016 4.8

2020 16.9 2019 11.0 2018 9.9 2017 4.4

2021 17.3 2020 11.4 2019 10.8 2018 5.2

2022 6.6 2021 11.7 2020 11.2 2019 5.3

2023 4.7 2022 3.7 2021 11.5 2020 5.3

Thereafter 8.9 Thereafter 9.4 Thereafter 12.9 Thereafter 6.5

Total Minimum Payments 68.8 Total Minimum Payments 57.3 Total Minimum Payments 63.8 Total Minimum Payments 31.5

Less: Interest 9.9 Less: Interest 9.2 Less: Interest 11.3 Less: Interest 5.5

PV of Minimum Payments 58.9 PV of Minimum Payments 48.1 PV of Minimum Payments 52.5 PV of Minimum Payments 26.0

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 5.44% Pre‐Tax Cost of Debt 5.44% Pre‐Tax Cost of Debt 5.44% Pre‐Tax Cost of Debt 5.44%

Number Years Implied by Year 6 Payment 1.9 Number Years Implied by Year 6 Payment 2.5 Number Years Implied by Year 6 Payment 1.1 Number Years Implied by Year 6 Payment 1.2

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 14.4 13.7 1 10.1 9.6 1 7.5 7.1 1 4.8 4.6

2 16.9 15.2 2 11 9.9 2 9.9 8.9 2 4.4 4.0

3 17.3 14.8 3 11.4 9.7 3 10.8 9.2 3 5.2 4.4

4 6.6 5.3 4 11.7 9.5 4 11.2 9.1 4 5.3 4.3

5 4.7 3.6 5 3.7 2.8 5 11.5 8.8 5 5.3 4.1

6 & beyond 4.7 6.3 6 & beyond 3.7 6.6 6 & beyond 11.5 9.4 6 & beyond 5.3 4.7


Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011)

Operating Operating Operating Operating

Fiscal Years Ending Adjusted EBITDA margin: Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases

2015 3.1 2014 2.7 2013 2.6 2012 2.1

2016 3.6 2015 2.7 2014 2.7 2013 2.5

2017 4.0 2016 2.6 2015 2.7 2014 2.6

2018 5.0 2017 ‐ 2016 2.6 2015 2.7

2019 5.2 2018 ‐ 2017 ‐ 2016 2.5

Thereafter 11.8 Thereafter ‐ Thereafter ‐ Thereafter ‐

Total Minimum Payments 32.7 Total Minimum Payments 8.0 Total Minimum Payments 10.6 Total Minimum Payments 12.4

Less: Interest 6.8 Less: Interest 0.8 Less: Interest 1.3 Less: Interest 1.8


Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 5.44% Pre‐Tax Cost of Debt 5.44% Pre‐Tax Cost of Debt 5.44% Pre‐Tax Cost of Debt 5.44%

Number Years Implied by Year 6 Payment 2.3 Number Years Implied by Year 6 Payment 0.0 Number Years Implied by Year 6 Payment 0.0 Number Years Implied by Year 6 Payment 0.0

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 3.1 2.9 1 2.7 2.6 1 2.6 2.5 1 2.1 2.0

2 3.6 3.2 2 2.7 2.4 2 2.7 2.4 2 2.5 2.2

3 4.0 3.4 3 2.6 2.2 3 2.7 2.3 3 2.6 2.2

4 5.0 4.0 4 ‐ ‐ 4 2.6 2.1 4 2.7 2.2

5 5.2 4.0 5 ‐ ‐ 5 ‐ ‐ 5 2.5 1.9

6 & beyond 5.2 8.3 6 & beyond ‐ ‐ 6 & beyond ‐ ‐ 6 & beyond ‐ ‐


VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol DXCM

Current Stock Price $117.88

Risk Free Rate 2.56%

Current Dividend Yield 0.00%

Annualized St. Dev. of Stock Returns 43.97%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 100,000 8.02 0.95 110.05$ 11,005,269$

Total 100,000 8.02$ 0.95 110.05$ 11,005,269$

137.28$ 2.40% 2.45% 2.50% 2.56% 2.60% 2.65% 2.70% 137.28$ 18.00% 19.00% 20.00% 21.00% 22.00% 23.00% 24.00%

4.55% 149.83 147.75 145.72 143.35 141.80 139.90 138.04 4.50% 139.12 139.16 139.20 139.25 139.29 139.33 139.38

4.60% 147.45 145.43 143.45 141.13 139.62 137.77 135.96 4.75% 138.59 138.63 138.68 138.72 138.77 138.81 138.86

4.65% 145.13 143.16 141.23 138.97 137.50 135.69 133.93 Pre‐tax Cost of Debt 5.00% 138.06 138.11 138.16 138.20 138.25 138.29 138.34

Equity Risk Premium 4.69% 143.32 141.39 139.50 137.28 135.84 134.07 132.33 5.44% 137.14 137.18 137.23 137.28 137.33 137.38 137.43

4.75% 140.67 138.79 136.96 134.81 133.41 131.69 130.00 5.50% 137.01 137.06 137.11 137.16 137.21 137.26 137.31

4.80% 138.52 136.69 134.90 132.80 131.43 129.75 128.11 5.75% 136.49 136.54 136.59 136.65 136.70 136.75 136.80

4.85% 136.42 134.64 132.89 130.84 129.50 127.86 126.26 6.00% 135.97 136.02 136.08 136.13 136.18 136.24 136.29

137.28$ ‐28.50% ‐29.00% ‐29.50% ‐30.00% ‐30.50% ‐31.00% ‐31.50% 137.28$ 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25%

‐45.00% 138.04 137.95 137.87 137.78 137.70 137.62 137.53 33.00% 157.75 150.68 144.37 138.71 133.59 128.95 124.72

‐46.00% 137.87 137.78 137.70 137.62 137.53 137.45 137.37 32.00% 157.17 150.17 143.92 138.31 133.25 128.66 124.47

‐47.00% 137.70 137.62 137.53 137.45 137.37 137.28 137.20 CV ROIC 31.00% 156.55 149.63 143.45 137.90 132.89 128.34 124.20

SG&A as % of Sales ‐48.00% 137.53 137.45 137.37 137.28 137.20 137.12 137.03 29.64% 155.64 148.83 142.74 137.28 132.35 127.87 123.80

‐49.00% 137.37 137.28 137.20 137.12 137.03 136.95 136.86 29.00% 155.19 148.43 142.39 136.97 132.08 127.64 123.59

‐50.00% 137.20 137.12 137.03 136.95 136.86 136.78 136.70 28.00% 154.43 147.76 141.81 136.46 131.63 127.25 123.26

‐51.00% 137.03 136.95 136.86 136.78 136.70 136.62 136.54 27.00% 153.62 147.05 141.18 135.91 131.15 126.84 122.90

137.28$ 33.00% 32.00% 31.00% 29.64% 29.00% 28.00% 27.00%

‐5.75% 139.15 138.76 138.34 137.72 137.41 136.90 136.35

‐6.00% 139.10 138.71 138.29 137.67 137.37 136.85 136.30

‐6.25% 139.05 138.66 138.24 137.63 137.32 136.80 136.25

Cap Ex as % of Sales ‐8.00% 138.71 138.31 137.90 137.28 136.97 136.46 135.91

‐6.75% 138.95 138.56 138.14 137.53 137.22 136.71 136.16

‐7.00% 138.90 138.51 138.09 137.48 137.17 136.66 136.11

‐7.25% 138.86 138.46 138.04 137.43 137.12 136.61 136.06

Marginal Tax Rate

CV Growth of NOPLATCOGS as % of Sales

CV ROIC

Sensitivity Analysis

Risk‐Free Rate

Tippie College of Business | - Medical Devices Stock Rating ......devices part of these systems...

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