There are currently 425 million people suffering from diabetes all around the world and by 2045, there are going to be 619 million diabetics. When there is a problem and a growing market, entrepreneurs look for solutions. One of these solutions to the problem is CGM (Continuous Glucose Monitoring) and Dexcom $DXCM is one of the leading company in this growing market.
The problem with diabetes is that the blood glucose level of patients are not regulated. Blood glucose level is controlled by the hormone insulin. When there is too much sugar in the blood, your pancreas will produce insulin to reduce that sugar. People suffering from type 1 diabetes have a defective pancreas which cannot produce that insulin while those suffering from type 2 diabetes have unhealthy lifestyles and have too much sugar in their blood. The simplest solution is to give diabetic patients insulin injections. However, too much insulin also is not good since it can reduce the amount of sugar too much and send that person in a coma. The blood sugar level needs to be in a specific range and it is important that it is monitored. You can prick your finger and do multiple blood tests daily but it is not comfortable and you are monitoring the blood sugar level continuously. The solution: CONTINUOUS GLUCOSE MONITORING Systems. These are implanted in the body and they monitor the blood glucose level continuously, warning you if it is too high or too low. There are 3 main companies making CGMs Medtronic $MDT , Abbott Laboratories $ABT and Dexcom $DXCM .
What makes Dexcom different? The Dexcom latest CGM, the Dexcom G6, doesn't need any calibration and doesn't require any blood at all. The sensor can also last longer. They can also integrate with smartphones and the Apple Watch. Next year, they are coming with Dexcom G7 which will be a very innovative compared to the current CGMs available in the market today. The only problem with Dexcom is that their products are expensive but customer satisfaction is very high compared to cheaper CGM and with the G7, there will be a reduction is price. Another advantage that Dexcom has is that they are partnering with both Apple $AAPL and Alphabet $GOOG , the parent company of Google, through Verily. Verily has an investment in Dexcom. Tim Cook recently said, "If you zoom out into the future and look back and you ask the question, what was Apple's greatest contribution to mankind? It is will be about health." We can expect partnership between Apple and Dexcom. Dexcom is also partnering with Tandem Diabetes Care $TNDM , which makes insulin pumps. Dexcom has three very important partners here and it is because they are really an innovative company going after something big. It is possible that in the future Dexcom is going to expand beyong diabetes. This company can be very big.
The CAGR of revenues over the last 5 years were 41%. CAGR for gross profit were 39% for the same period. Dexcom is still losing money but they are cash flow positive. They have a deficit of around $600 million but they have twice the amount of cash, so it is not that bad.
This is a wonderful company but the problem is that it is too expensive for me right now with a market cap of $15 billion. I am willing to invest at around $8 billion, although that would be a big premium. There is another problem, they are diluting shares and they have warrants which expire in 2023. These warrants can cause massive further dilutions. They have hedges against these warrants but they pay an interest of 0.75% on those. Because of all of this, I need a large margin of safety. I'm following this company very closely waiting for a better price.