Grow_Short-DXCM - Sohn Conference Foundation

Short:
Where’s the insulin? DXCM is hyperglycemic.
Ticker: DXCM Price Target: $20 Return: 70% Marc T. Grow, CFA Columbia Business School DXCM Short-­‐ Summary
Investment Thesis: 1 2 Market UnderesXmaXng CompeXXon DXCM Summary Price – 5/2/16: $64.38 52 Week Range: $103.29 -­‐ $47.92 Shares Outstanding: Market Cap: OveresXmaXng Revenue Opportunity Net Cash: Enterprise Value: 2016 Revenue EsXmate: 3 Aggressive ValuaXon 83mm $5,371mm $105mm $5,266mm $464mm EV / 2016 Revenue: 11.4x Short Interest: 3.3% Cost to Borrow: GC A"rac&ve 3x Upside / Downside Ra&o 2 Company & Industry Overview
DXCM is a medical device company that develops and manufactures conXnuous glucose monitoring (CGM) systems for type 1 diabeXcs US Diabetes Market Insulin Pump Therapy Monitoring Devices: CGMs Blood Glucose Monitors Insulin Delivery: Pump Therapy InjecXons PaXents use monitoring devices to measure glucose levels Then use this informaXon to dose insulin Very few type 2 pa&ents monitor glucose levels Sources: Factset, Capital IQ, American Diabetes AssociaXon (ADA) CGM Sensor Transmi`er (DXCM, MDT, ABT) Only integrated device (MDT, PODD, JNJ, TNDM) Insulin Pump & InserXon Set T1D Represents a Small Percentage and is Limited to Popula&on Growth 3 Dexcom Today…
Market Share Leader (70% of CGMs) Technology Advantage (Most Accurate CGM) Revenue Growth (5yr Rev CAGR = 53%) Price/Sales 2016: 11x Sources: Factset, Capital IQ, IR PresentaXons Disclaimer: Past Performance Does Not Guarantee Future Returns 4 CompeGGon is Coming
Eversense Lowest Annual Cost Free OpXon: 90 day implantable Freestyle Libre Single InserXon Site KEY CATALYSTS MiniMed 640g MiniMed 670g G6 Mobile Sources: IR PresentaXons, Company Filings 2016
2017
2018
DXCM Will Lose Share Over the Next 12-­‐18 Months… 5 Share Loss Drivers
CGM Market Share Forecast Compe&&on Eroding Market Share §  Medtronic integrated device §  Developing single inserXon site technology §  Abbo` Labs success in EU with Freestyle Libre §  Senseonics 90 day implantable device §  Applied for CE Mark §  Expected 2017 Sources: IR PresentaXons, Company Filings, EsXmates But the Market Doesn’t Think So… 6 Overstated AdopGon
US Type 1 paXents: 1,200,000 X
Enterprise Value Today: $5.3b 100% T1 Adop&on Annual CGM Cost: $3,250 Type 1 AdopXon 100%: $3.9b Long-­‐term BULL CASE L/T Base Case 50%: $2.0b X
CGM AdopXon Rate: 15% 50% T1 Adop&on 2015 Market Sales 15%: $585m =
Total market sales (2015): $585mm Dexcom 2015 Sales: $402m DXCM 69% Sources: Investor RelaXons, EsXmates, ADA Long-­‐term CGM Adop&on is Overdone 7 AdopGon Headwinds Type 1 Pa&ents x CGM Adop&on = Total Addressable Market NOT EVERYONE WANTS TO BE PLUGGED INTO A DEVICE ADOPTION Growth §  “I decided to quit using my CGM because of the hassle of calibraXng [with finger pricks] and the alarms.” – Type 1 pa(ent and former CGM user §  “There’s a meaningful populaXon of Type 1s who do not want to be plugged into a device.” – Nurse Educator NOT EVERYONE CAN OR WANTS TO PAY FOR IT §  “Many Type 1s follow consistent regiments that allow them to know their levels with li`le variability, CGMs can be used every so ooen for calibraXon" – Former VP of Insulet NOT EVERYONE IS CANDIDATE FOR CGM & PUMP THERAPY §  “These devices require acXve management and significant training, not everyone is an ideal candidate” – Diabetes America Execu(ve CGM isn’t for Everyone 8 Falling Annual RPU – Sensor UGlizaGon
Annual Revenue Per User Primary Research Actual life > FDA recommended life 1.  Users wear sensors un&l they fall off 2.  Sensors get more accurate with Xme (no incen&ve to change) Arrives 2017 Should also expect pricing pressure per sensor from payers Sources: IR PresentaXons, Company Filings Next Gen Sensors Last Longer, Driving Down Annual RPU 9 Insiders Are Cashing OUT
Insider Ac&vity Insider Ac&vity: Since 2013: 5.6mm+ shares/awards sold (~4% of diluted CSO) for $305mm 10 year cumulaXve net loss $465mm Insiders currently own 1.9% CSO Source: Capital IQ Consistent Insider Selling 10 ValuaGon
2016 Summary US Type 1 PopulaXon DXCM Share Price & Valua&on 1.2mm AdopXon 18% Type 1 CGM users 216k DXCM Market Share 65% DXCM Users 140k Annual Revenue Per User $3,300 Total Revenue $464mm Sales Mul&ple 4x Value $1.8b Value Per Share $20.00 Near-­‐term profitability & cash flow mulXples are not meaningful Sources: IR PresentaXons, Company Filings, ADA, Capital IQ, Factset Long-­‐term Assump&ons Bull Case Bear Case AdopXon 65% 50% DXCM Market Share 70% 30% Pricing AppreciaXon 3% Flat A"rac&ve Risk / Reward 11 Revenue Bridge
Primary Primary RResearch
esearch: DXCM benefits from increased adopXon but there’s a ceiling 1. 
CGM adopXon isn’t likely to exceed that of pumps (35%) 2. 
Further adopXon would have to come with meaningful price concessions Variant View: Sensor
Street MTG Pricing U&liza&on Source: Company Filings Market Share, Pricing, and U&liza&on Represent Revenue Headwinds 12 Primary Research
Type 1 PaXents Medical Professionals Industry Experts Investors §  >15 type 1 diabeXcs who own CGM systems §  2 type 1 diabeXcs without CGM systems §  A`ended JDRF TypeOneNaXon Summit on 11/7/2015 §  Nurse Educator with type 1 §  ExecuXve of Diabetes America §  Elementary School Nurse with type 1 §  Former employee of Dexcom & Medtronic §  Sr. VP at Blue Cross §  Academic Researcher §  Former VP of Insulet §  VC investor of Dexcom §  Former Director of Dexcom 13 Key Risks
Risk 1 2 3 Mi&ga&on Realized price increases over Xme More likely that pricing per sensor would stay flat and avg. sensor life extends further driving down RPU Faster adopXon of CGM technology Next gen MDT device with a single inserXon site & ABT’s US release will take share of CGM growth Buyout risk Historical mulXples materially lower than today and new technologies threaten standard of monitoring 14 Summary – MulGple Ways to Win
Drivers Outlook NTM Type 1 PaXents x AdopXon x Market Share x UXlizaXon x Pricing = Revenue Limited to populaXon growth x Lower than expected x New compeXXon x Longer lasXng sensors x Pressure from payers = MISS 1.2mm x 18% x 65% x 10 Day Avg. x $70 = $464mm Sources: IR PresentaXons, Company Filings, ADA Priced for Perfec&on, DXCM Presents Mul&ple Ways to WIN EV/
Sales 11x 4x 15 Appendix
Salesforce Disadvantage
Primary Research Es&mated Salesforce Representa&ves MDT reps are already on-­‐site and can provide a suite of diabeXc therapy products Success is closely Xed to the coverage and efficiency of compeXng sales forces MDT 4.4x Advantage “I chose Medtronic for CGM because they were the only one with a presence in my endocrine’s office” – Type 1 pa(ent “Everyone I know is using Medtronic, I think they are the only company with sales reps in this area” – Type 1 pa(ent Sources: IR PresentaXons, Company Filings Medtronic Has A Substan&al Salesforce Advantage 17 Historical Price & ValuaGon
DXCM 5yr Chart & P/Sales Mul&ples Peer Group Mul&ple: 4x Sources: IR PresentaXons, EsXmates, Capital IQ, Factset Significant Risk of De-­‐Ra&ng 18 CompeGGon
Medtronic Senseonics Abbo" Labs Dexcom Current Model: MiniMed 530G Applied for CE Mark In EU only G5 Mobile Next Gen: MiniMed 640G Eversense Freesyle Libre G6 Mid 2016 2017 Mid 2016 2017 Annual Cost: $3,000 ? $1,800 $3,500 Sensor Life: 7 days 90 days 14 days 7 days (60% -­‐70%) -­‐ In EU only CGM only Expected Release: Pump Market Share: Sources: IR PresentaXons, Company Filings 19 UGlizaGon CalculaGon
Sensor Economics Revenue Based on FDA sensor life Sensors Per Year Sensor Price Expected Annual Sensor RPU 7 Day Sensor 10 Day Sensor -­‐ $70 10 Day Sensor -­‐ $60 Calcula&on 52 $70 $3,650 37 $70 $2,555 37 $60 $2,190 A B C = A*B Revenue Based on Actual Sensor life EsXmate of Actual Sensors Used/Year UXlizaXon 34 D 152% 152% 152% E = A/D Sensors Used Per Year 34 24 24 F = A/E Sensor Price $70 $70 $60 B $2,380 $1,680 $1,440 G = F*B (29%) (39%) Annual Sensor Revenue Per User Decline Sources: IR PresentaXons, Company Filings, EsXmates 20 Comparables Table
Company
Price Market
Capitalization
Enterprise
Value
2015
SALES
2016
2017
2015
EBITDA
2016
2017
Medtronic Plc
Insulet Corporation
Tandem Diabetes Care, Inc.
Abbott Laboratories
$79.15
$33.30
$11.13
$38.90
$110,892
$1,902
$338
$57,309
$131,115
$1,966
$311
$60,719
$20,261
$324
$73
$20,405
$28,723
$344
$111
$20,903
$29,612
$405
$150
$22,264
$6,034
($36)
($64)
$4,355
$9,719
($7)
($55)
$5,214
$10,224
$5
($40)
$5,614
DexCom, Inc.
$64.38
$5,371
$5,025
$402
$464
$531
($46)
($2)
$92
Company
Medtronic Plc
Insulet Corporation
Tandem Diabetes Care, Inc.
Abbott Laboratories
Price $79.15
$33.30
$11.13
$38.90
Mean
Median
DexCom, Inc.
Difference (Mean)
$64.38
2015
PRICE / SALES
2016
2017
2015
EV / EBITDA
2016
2017
Gross
Margin
SALES
CAGR
6.5x
6.1x
4.3x
3.0x
4.6x
5.7x
2.8x
2.9x
4.4x
4.9x
2.1x
2.7x
21.7x
nmf
nmf
13.9x
13.5x
nmf
nmf
11.6x
12.8x
nmf
nmf
10.8x
65.6%
45.7%
36.5%
53.7%
20.9%
11.7%
43.4%
4.5%
4.9x
5.2x
4.0x
3.7x
3.5x
3.6x
17.8x
17.8x
12.6x
12.6x
11.8x
11.8x
50.4%
49.7%
20.1%
16.3%
12.5x
10.8x
9.5x
nmf
nmf
nmf
71.5%
14.9%
7.6x
6.8x
5.9x
nmf
nmf
nmf
Sources: Factset, EsXmates 21 Short:
Where’s the insulin? DXCM is hyperglycemic.
Ticker: DXCM Price Target: $20 Return: 70% Marc T. Grow CFA Columbia Business School