Chit Chat Stocks - DexCom (Ticker: DXCM) with Nick Sciple

Episode Date: March 2, 2023

DexCom (DXCM) is a leading medical device company that develops and commercializes continuous glucose monitoring (CGM) systems for patients with diabetes. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Nick's work? Check out their Twitter here: https://twitter.com/investingnick?s=20 Contact us: [e-mail] Timestamps DexCom | (3:15) Future Products | (21:05) Management | (29:54) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I'm joined by my co-host, Brett Schaefer. Today is our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we have on the show, Nick Seipel. He's a senior analyst from Motley Fool Canada, and he's talking about Dexcom. We really enjoy having Nick on the show. He's a multi-time guest at this point, and we have just similar investing philosophies in general. um dexcom specifically was a pretty interesting business it's not typically where we focus and so kind of just uh i think having sort of a a fresh topic or a fresh industry was was fun to look at but before we get to the interview we want to talk about our sponsor which is stratosphere they are

our exclusive sponsor and they are our investing home screen for fundamental research they have a dashboard that lets us track all of our investments. It has SEC file aggregation. It's got a bunch of fundamental charting tools as well as company specific KPIs. And they just added employee count for companies as one of their tracking metrics, which is really nice. When we look at businesses, we like to look at revenue per employee to kind of measure productivity. And now they have that in the platform, which you can easily track and it dates back as long as they can find the data. So anyway, it's a really cool tool and we recommend using it. We use it ourselves. Check out stratosphere.io. It's totally free, or you can

upgrade to a paid plan with the code CCM, which you'll get 15% off. One more time, that's stratosphere.io. If you're more interested in the platform, stick around after the episode, we do a little three-minute interview with the founder, Brayden Dennis. But without further ado, Here's our interview with Nick Seipel. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast.

Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right. Welcome in, everybody. Today, we are joined by multi-time guests now. I'm not sure how many times you've been on. Three or four? This will be my third time. I talked to you about GameStop in, I think, 21.

Last year, I talked to you about WWE, and here we are. in 2023. That's right. And today we're talking about Dexcom, which people who watch the Super Bowl may now know what it is, but I think maybe a lot of the investors aren't familiar with the company. So we'll get into all that. But I guess maybe, can you explain, I should mention that Nick is a senior analyst for Motley Fool Canada. Feel free to, we'll link to his Twitter and everything and some of the Motley Fool Canada work. But now that the intro is out of the way, can you talk about, I guess, how you came across Dexcom as an investment to begin with? Yeah, sure. So Dexcom is a recommendation in Motley Fool Canada as of October of this year.

I've personally owned it going back since 2017. First came across it, you know, I was in law school at the time. One of my roommates, his girlfriend was living with us. She was a type one diabetic who used Dexcom for her treatment. Also at the time, in 2018, there was a presentation on Dexcom at the Capstone Student Investment Conference at Alabama, which is where I was in law school at the time. So I came across it a couple of different ways, one on the kind of personal side, another on the investing world. And so that's kind of where I first got exposed to it. And the stock has been a great story going back the past five years or so. And I think there's lots of room for growth here going forward the next five, 10 years.

Yeah. And it's just anecdotally, I'm seeing it more commercials, people in my life, stuff like that. So it seems like it's getting traction. We're going to get to all that and the trends. But first, what does Dexcom do? What problem are they solving in the diabetes market? Yeah. So Dexcom is a provider of continuous glucose monitoring technology. If you think about what that is, it's a small subcutaneous sensor that you wear on your arm or your belly. that gives you continuous glucose readings every five minutes rather than sticking your finger which is the traditional glucose treatment method which you would have to do that 288 times a day to get the same kind of results that you get with a continuous glucose monitor it's really been the

next uh standard of care when it comes to diabetic treatment and just for folks to you know set the stage on what diabetes is lots of folks know folks who have uh who who have been diagnosed with diabetes or the background of the disease has no known cure as many folks are familiar with it's it's caused by inability to properly manage glucose for a type 1 diabetic which is about 10 of the market that's a congenital disease that develops often in childhood and it means your body just doesn't produce any insulin at all which means you're entirely dependent upon insulin therapy to live your life as a normal person a much larger portion of the market about 90 of diabetics are type 2 diabetics and that develops much later in life because of poor

and a dietary and exercise habits just to give you some some context on the size of the diabetes market international diabetes federation estimates as of 2021 there were 537 million adults globally diagnosed with diabetes expected to grow to 783 million dollars by 2045 if you look at global expenditures on diabetes 966 billion dollars um as of 2021 so lots of money getting spent on diabetes treatment and that's because complications from diabetes can be very expensive if you run your glucose or your your glucose uh your blood sugar too high then you can have some really significant complications think about limb amputations kidney failure really extreme um extreme complications but on the other side if you run your glucose too low

your blood sugar runs too low you may fall asleep and not wake up so the complications of of not managing diabetes properly are incredibly expensive which is why you've had lots of demand for for uh previously finger sticks to manage diabetes and now continuous glucose monitoring and that idea of needing to stay in in that you can't go too high because that causes harm and you can't go too low that's really where cgm um comes in because rather than getting just a handful of of finger of readings throughout the day when you prick your finger you're getting hundreds of readings throughout the day to be able to accurately determine when you are in the proper glucose range. Another thing that's important to mention too is that every individual

is different when it comes to their responses to glucose, what drugs you're on, how much you exercise can impact how your body responds to blood sugar. And so that's why you really need to have accurate readings throughout the day in order to properly manage diabetes. And that's the technology that Dexcom has through CGM to help manage that. And you may have mentioned this, I might have missed it, but this is it's connected to like an app on your phone for the monitoring. Yeah, that's right. So you'll have the sensor that goes on, like I said, that you wear on your arm.

And then that that that has changed every 10 to 10 to 15 days working towards 15 day wear. And then that sends a reading to a transmitter. So you can either have a separate transmitter, which Dexcom provides, or more increasingly, you'll have that reading sent to an iPhone or your Apple Watch in order to manage your treatment throughout the day and keep track of your glucose throughout the day. Also, for type 1 diabetics and folks that are on intensive insulin management, these are folks that need to get regular injections of insulin throughout the day over the past several years, really starting in 2018, you've started to see automated insulin delivery where your continuous glucose monitor, whether it's Dexcom or other

folks on the market, can communicate with your insulin pump if you're a type 1 diabetic and automatically dose insulin based on your needs throughout the day rather than having to kind of be directly for you to actually have to punch in the buttons of how much insulin to administer. So, yeah, it talks to other devices, whether it's your phone or if you need to, can talk to some of your other diabetes management devices as well. Makes sense. Okay. Now, what is the, I guess, are they the only player in the industry? What does the competitive landscape look like?

And then what, I guess, advantages do they have over other peers? Yeah. So lots of different players in the space. You've got really large healthcare conglomerates, somebody like Medtronic. You have some smaller kind of focused CGM players like Senseonics, but the two biggest players really are Dexcom and Abbott Labs. If Abbott Labs has their Freestyle Libre product, obviously Dexcom is their G6, is getting ready to launch their G7 product. Those two together control the majority of the market. How Dexcom differentiates itself from others on the market is A, they're the technology leader.

They have been the leader when it comes to accuracy for a long period of time. obviously important when it comes to concerns about if your insulin goes too low, can really have some catastrophic impacts. They've also been kind of at the forefront of emerging technology. So I mentioned the ICGM came out in 2018 to be able to talk to your automated insulin delivery systems, Dexcom. Their G6 was the first one of those approved onto the market. The past couple years, they have gotten one of the first FDA-approved APIs for having their CGM data go talk to other partners out in the market, whether that's Garmin or Tandem in the diabetes care space. Also, again, as far as moving research forward, moving the market forward, one of the

things we'll talk about later probably is that there was an FDA rule change in October that's going to expand CGM coverage beyond insulin intensive diabetics to anybody who has had a history of hypoglycemic events, which is low blood sugar events, the types of folks that can make you pass out and fall asleep. That coverage was expanded, or there was a rule change put in place in October that's going to expand that coverage to anybody who's had a history of hypoglycemic events. And the research that informed that rule change was Dexcom's research. So A, the technology leader, David Gardner likes to say for the lead husky, the view never changes. They are one of those when it comes to that side of the market.

Then also on just the customer side of the market, they've had a strong reputation for just user friendliness, that being the easiest CGM to use. Now, part of that is they're agnostic when it comes to pumps. So you have your choice of multiple insulin pumps if you're a type one diabetes patient, because Dexcom has more integrations than other folks on the market. They were one of the first, or I think the first, to offer alerts and alarms overnight. So if you Think about it. If you're a patient who has a type one diabetic or a parent, excuse me, that has a type one diabetic patient and you're concerned that overnight their blood sugar might go too low. They were one of the first to come out on the market with with alerts that would give you that that peace of mind. And when he looks at ease of use, I mean, their next product, the G7 has a 97 percent of customers say it's easy to use.

They have the highest ever net promoter score. So on the on the technology side, they have the best technology on the market. But not only that, it's the easiest to use on the customer side. So assuming that you can get correct, you know, get reimbursed for the insurance payer and, you know, all prices are aligned across the board, then, you know, Dexcom is kind of the clear choice on the patient side. Now, we talked about some of this stuff before the episode, and I think this is a good time to hit it because we are talking about the competitive landscape. There are two risks.

I think one is more obvious that investors are probably seeing if recently is the Apple leak about the glucose monitoring thing they're trying to do. Can you talk about how Dexcom might have an advantage there and why this might not be as big of a deal of news? And then secondly, the new weight loss pills, maybe hit Apple and then the weight loss pills and that potential threat. Yeah. So if you look out, well, so maybe we talk about the Apple thing first. So, you know, one of the potential risks you'd say is maybe there's new entrants that come into the CGM market. And then there was a headline in this this past week that Apple has been working to develop its own glucose monitoring system, which they think will over the long term integrate with the Apple Watch. Just the thing that popped out to me from that news story is that this is technology that's been around before.

In the early 2000s, there was something called the Glucowatch Biographer that a company called Cygnus developed, which was a wristwatch that used the same technology to read glucose on patients. And that technology worked, but it didn't reach commercial success because it caused sight irritation. It caused irritation on the patients, and therefore, it just didn't scale up. You can also so what I question whether Apple is really breaking new ground here. Also, if you look at some of the contents of the article, they talk about the device still being kind of the size of an iPhone. Lots of work to do to to bring it down to scale. So I would question whether the technology is there. But even if even if the technology is there, you have to kind of meet accuracy requirements and those types of things. So I think we'd be kind of several years away from Apple getting involved in the market.

This isn't the first time that big tech has been has tried to get into the diabetes management space. So Google with their Verily division spent a number of years and tens of millions of dollars trying to develop a glucose monitoring contact lens. And that ultimately didn't work out. Dexcom has worked in partnership with Verily for a number of years developing new technology. So I'm confident that they're kind of they're not going to get surprised by some new new glucose sensing technology coming around the corner. They actually have a venture fund where they're investing in kind of emerging CGM and kind of a glucose technology. So potentially, could Apple get involved out there over the long term? Sure. But I don't think this is some some new technology that that the market has ever seen before.

Is there, I guess, do you know, is there any switching costs with like a CGM monitoring tool? Like, you know, if you use Dexcom and something new comes out, or I guess if you're using Dexcom, does it make more sense to stick with them like that specific provider or does it not really matter? Well, it depends on what type of patient you are and like your level of kind of care, right? So if you're a type one diabetic using an integrated insulin pump, it's probably going to be really hard to switch from Dexcom to another provider just because you don't have the same number of integrations. So if you're on a Medtronic system, for example, you're kind of stuck on Medtronic there. You don't have an option to around to a number of other systems. Also, you've kind of already got your habits in place, right?

I mean, if you if you are someone who is dependent on monitoring your glucose in order for your health and well-being, that time where you're switching over from one product to another is time that you could go without, you know, go without treatment. So I think there are some switching costs on that front. Also, you need to get you need to go through another for many patients, the vast majority of patients. You probably need to go through another approval kind of hoops with your insurance company. So I think there's a number of switching costs. And then lastly, if you have the most accurate, most user-friendly product on the market, I think that puts up a barrier to customers switching to other products as well. And that's what Dexcom has. Yep. And before we move on, let's hit the weight loss pill stuff because I thought you had some interesting ideas there on how that could potentially be a threat and also might be a bit overhyped as well.

Yeah, sure. So the big opportunity, just to kind of illustrate the big opportunity for Dexcom. So, I mean, looking back over the past 10 years, the company has compounded revenue at 30 plus percent, and the vast majority of that has been just this becoming the standard of care in the type one diabetic side of the market. Today, we're at penetration a little bit over 50 percent, and there's still some room for growth in the type one side of the market. But the real chunky, huge potential growth out there is what if CGM becomes standard of care for type two diabetics? I mentioned that that Center for Medicaid and Medicare services rule change that would potentially increase the addressable market by almost double. There is potential risk that that addressable market might not materialize to the extent it could because there are new treatments on the market for type two diabetes that may be chosen in place of CGM. So, you know, you hear all these headlines today about drugs like Ozempic and WeGoV.

I mean, Elon Musk, celebrities of all kinds are taking them for weight loss. And these are drugs that you basically it's a hormone like substance, a chemical substance that increases production of insulin, inhibits release of glucagon, reduces your basically reduces your diet, reduces how much you want to eat. And by doing that helps helps you lose weight and prevent the onset of type two diabetes. Now, these these products have just come on the market and, you know, by all accounts have been incredibly popular among folks trying to trying to get access to these drugs. But we're still not at the point where these are the standard of care for treatment of type two diabetes. We're still at the point where we're collecting data on how this on how these drugs perform compared to to other treatments. There are potential side effects, whether it's just obviously this is changing how your gut and your your dietary kind of habits work. And so that can affect your kind of digestion and things like that.

And then long term, you know, this is this is changing how your your pancreas works. So so, you know, increased risk of pancreatitis and cancers and things like that. So potentially over the long term, these drugs could cut off that like long tail of type two diabetic customers. but it's still, we're still kind of at a wait and see point. And what I will say is to actually treat the condition that causes type two diabetes, to change your habit is to really treat what's causing the disease. I think these pills, now customers really, patients really enjoy having to just take a pill and not have to actually do the work. But these are the types of things that I think are masking the underlying disease as opposed to curing the disease.

But, you know, to the extent the market accepts these, then it will cut off a lot of the or could cut off a lot of the growth potential in type two diabetics. How does Dexcom sell their devices? Are they selling like direct to consumer? I know they ran a Super Bowl ad, which I feel like usually when I see those, I think it's sort of a consumer, a direct to consumer model in some way. Or are they selling like through physicians? I guess, how do they how do they get their devices to market? it? Okay. So I think the answer to that is yes, you can buy it direct to consumer, but most of the sales are happening through the primary care physician. You get a prescription and you go

buy it in the pharmacy channel. Now that's been a big shift the past five years or so. It had traditionally been sold through the durable medical device channel. This is, you go to your endocrinologist, you go to your specialist and you order it direct through them. But over the past several years, the deployment model, the distribution model has shifted, like I said, to 75% purchase through the pharmacy channel. So what you do is you go to your primary care physician, you get a prescription for a CGM and you go buy it at your pharmacy, just like you would buy your glucose testing strips and things like that. And you've seen, if you look at the business, you've seen a big ramp up in SG&A the past five years. SG&A has doubled in the past

five years is they've built out the workforce to go market to these primary care physicians. They were established in endocrinologists. These are the specialists that would treat someone with type 1 diabetes. But in order to get ready to capture this market opportunity in type 2 diabetics, they've shipped it over to the pharmacy channel and significantly expanded their sales force. So today, and probably going forward for the long term, the main place you're going to get these products are at your pharmacy. What are some of the product launches they have coming down the line this year? You mentioned, I forget the exact name, but I think it ended with a seven. And what are you expecting as a shareholder in 2023 as they try to continuously

improve their glucose monitoring products? Yeah. So late 2022, their latest and greatest model, the Dexcom G7 was approved. And we're going to start seeing that rollout in the US throughout this year, 2023. This is their biggest launch since 2018 when the G6 got approved. And it's another big step up when it comes to the device. It's 60% smaller, so much lower profile for folks.

The warmup time goes from over an hour to 30 minutes. So as a patient, you're spending only 30 minutes without getting access to your, without kind of knowing your glucose levels, those sorts of things. They've also integrated the sensor and transmitter. Previously, you had the sensor that would last 10 days and then the transmitter that would last a couple of months. You had to take one part out of the... You had to take the transmitter out of the

sensor, throw the sensor away, and then put the transmitter in the new sensor. They've integrated all those things together to improve usability and make it easier to use for the customer. Really across the board, it's a better product. And they're expecting to start scaling that up here in the U.S. in 2023. At launch, it's going to have approval for Medicare customers in the U.S. So throughout 2023, what we're going to see is scaling up of the G7. Now, as an impact to that, as we scale up those lines and get through some of the initial manufacturing hurdles there, and also because you're running the G6 line at scale and scaling up the G7, you're probably going to see gross margin come in a little bit in 2023 as compared to where it was in 2022. That's

to be expected, again, because of the scaling up that the company is seeing. However, the company expects over the next several years, the G7 to be cheaper to produce than the G6, accretive to margins, and to scale that on a global basis. Another thing that we will continue to see in 2023 is expansion internationally in late 2021. I believe they launched Dexcom 1, which is targeted at markets outside the US that have a little bit lower reimbursement model. And what Dexcom 1 is, is it's built on the G6 platform, this platform that's already at scale. And what you do is you use some software limitation magic to offer the same product at a little bit lower price point in some of these other markets. Think about the UK, Eastern Europe. And they've been

able to take market share in some of those markets. So I think you're going to continue to see faster growth in Europe than you'd see in the US. And then longer term, what they expect is to move that Dexcom 1 platform as the G7 reaches scale. They're going to switch that over from being based on the G6, based on the G7. And so what Dexcom 1 allows you to do is penetrate into markets that you haven't been able to reach previously because of the reimbursement model, but take advantage of the scale that you have with the G6 platform and now with the G7. And lastly, the thing, so A, lots of growth in the US with the launch of the G7, the latest and greatest. B, growth overseas on the international side of things. And then C, I think you're going

to see more integrations with partners. I talked about that API where you're working with kind of third-party companies integrated with Garmin in 2021. They've integrated with a number of other companies as well. And that's starting to kind of dip their toe into the kind of glycemic health side of the business. So ultra long-term Dexcom sees opportunities, not just in the kind of traditional folks that have diabetes or are getting ready to have diabetes, but folks that are heavily concerned about their health and wellness, that want to kind of see how their body responds to diet and exercise and those types of things. You have one of Dexcom's partners, There's a company called Levels that launched early this year, officially launched, and is working on that health and wellness side of the business.

Dexcom changed its mission statement away from diabetes over to broader health. And so I think we'll see some of those kind of early steps into moving into broader health in 23. I guess I probably should have asked this earlier, but how is this paid for? Are they paying on a monthly basis? Is it kind of a one-time upfront cost? Or I guess, is there like a razor and blades model? Yeah, it's a razor and blade model for the typical patient is, you know, they're paying a copay with the vast majority of the cost being borne by payors, whether that's Medicare

in the US or various healthcare companies, as I mentioned earlier. The big cost for diabetes is not in the management and treatment, it's in the complications. And so they can pay a heck of a lot of money for CGM and still come out ahead over the long term. And they do. So if you look at what insurance companies are paying, you can look at hundreds of dollars a month to pay for these sensors and your CGM treatment. And yes, it's a razor and blade model. Currently, these are 10-day wear sensors. Every 10 days, you have to replace them. Dexcom is working towards a 15-day wear. We'll see where that goes. But every 10 days, you have to buy more from Dexcom. Yeah, that makes sense.

We'll maybe talk about more of the margins and stuff during the valuation section, which we'll get to if any of the listeners are out there. We have talked about product a lot on this episode. But one more thing before we move into that, kind of the last part, is the expansion beyond just this glucose monitoring system. I mean, they've become a huge company, $40 billion market cap, really off of this one product, correct me if I'm wrong, if that's not the case. What is the potential to expand here, like you mentioned, into the glycemic stuff or even more beyond that to just health monitoring in general? And maybe, I guess we'll just leave it at that. Yeah. We don't want to ask too many questions to you. Yeah. So listen, I think glucose monitoring is the application, right? That is

the technology for the most part. And I think that the big potential is we can reach, it becomes the standard of care for diabetic treatment. And you could potentially have among kind of health and fitness folks that are concerned about that. You know, I guess ultra long-term, you could see everybody wearing one of these to keep track of your health, but you need to see the product get significantly cheaper over the long-term to see that happen. But near term, the big opportunities are we're only at 55 to 60% penetration in the type one core portion of the market, and that's in the US. So I think over the long term, we're going to see that penetration head up close to 100%. If you look at the type 2 diabetic side of the market, the core kind of insulin intensive

part, only one in four of those folks have CGM today. I think you're going to see adoption of that head up over the longer term. And then again, we're seeing this expand into basal insulin folks, folks who are just using less insulin intensive treatment. I think you'll see over long-term, that penetration increased. Again, with the caveat there that that right tail could be cut off if kind of we go via nozempic and some of these drugs kind of take some of the potential patients. But then also within diabetes, there's some significant opportunities. So gestational diabetes, diabetes among pregnant women, significant opportunity there. If you look at the hospital market, there's a lot of nurses in hospitals today pricking people's

fingers in the hospital room. Management thinks that can be over a billion-dollar opportunity. And then on top of that, you've got whatever the potential health and wellness opportunity is. I think even if you just looked at the diabetes market alone, gestational diabetes, hospital, penetration in type one, penetration in type two, you can get a heck of a lot of growth. I think what gets me excited about potential opportunities in health and wellness is that you can project growth five plus years out in the future. If you think the technology kind of continues getting cheaper and cheaper as you as you penetrate into these other other markets, you could see an ultra long term kind of prospect where, you know, it's not just the diabetes customer that's wearing this. It's a person who's, you know, it's the person who goes to CrossFit, right? If half the folks at CrossFit are wearing this, plus everybody that has diabetes, all of a sudden this market is is crazy huge. So I think the potential in health and wellness for me just says I can forecast hypernormal growth for a very, very long time.

Right. Just just in the kind of what we have line of sight to in the diabetes market gives you incredibly strong growth. And I think you've got lots of runway even after that. Let's talk, I guess, about the actual management team of the company and dig through the financials. financials. Let's start, I guess, with the management team. Who are they? And then what do you think of them? Yeah. So, I mean, the big one is Kevin Sayre. He's the CEO. He's been there since 2010. He's basically responsible for all the scaling of the company. He's the one that's kind of banging the drum in a significant way about the opportunities in health and wellness today. He wears the product as someone who doesn't have diabetes in order to kind of get some idea

of where things are headed. But, you know, Kevin Sayre took over the company in 2010. Revenues were $40 million. 2022 revenues are $2.9 billion. Cash flow positive. We're seeing expanding margins. I think gross margin is 65%. That's their long-term target.

He told you what he was going to do and he did it. So there's not a lot that I have to complain about when you look at the execution of the business and kind of, again, kind of the roadmap they have in front of them. But what he set out to do is we're going to be the technology leader and we're going to be the leader in ease of use in the market. And lo and behold, that's what they've done. And the results have been pretty

good so far. I don't see them likely to change soon. Yeah. I mean, I looked at the stock price while you were talking earlier and 4,000% returns over a little less than two decades is pretty darn good. But let's talk about the business today. You recommended it back in October on the Motley Fool Canada service. How were you valuing it then? How are you valuing it today? Why did you think it was an attractive investment then? And any sort of important numbers you think investors need to know about this company? Yeah. Well, the big thing in October was that we had had the Medicare and Medicaid rule change that would open up coverage to the basal insulin population, really massively increases of the addressable market that they

can go after. So if you look at today, their penetration relative to the potential coverable market in the US is the lowest that it's ever been. So there's lots of opportunity ahead of this company. And this is a company that's over the past 10 years compounded revenue at over 30%. So I think that gives me confidence they can continue growing. How do you value it? It's a very, very, very difficult company to value. I mean, if you look at the entire history of where it's been out in the market, it's been 10x sales or higher, basically every step of the way, with a slight exception of the 2018-2019 period. And that was getting ready for the G6 launch. There was some concerns that Abbott had gotten ahead of them on the technology front. They had

a no calibration CGM just a couple months before Dexcom did. But all that to say is, I think this company is going to be expensive at all times. And given the way the TAM is going and where it's grown over the past five years, it's very difficult to put together a DCF where you're going to punch in the numbers necessary to get what you'd get. So I mean, just the last five years, which I've owned it for the past five years, there's no way I would have put into my DCF a 32% compound annual growth rate for revenue, but that's what they've given to you.

So I think for these types of companies, maybe it's lazy, I don't know, but I fall back on the, you know, I work at the Motley Fool, I fall back on the kind of David Gardner rule breaker approach. So if we want to just run through, and I've got another kind of framework you can throw on top of that too, but if you want to run through the six signs of rule breaker, one, top dog and first mover in an important emerging industry. We talked about how Dexcom has been the technology leader in CGM for a long, long time. We're still only at about 50% penetration in the core market, and we just doubled kind of the addressable market in terms of coverage in the U.S. Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors. The sustainable advantage is they've been the technology leader for a decade plus, and still, as of October, continues to kind of push the market forward with their research. Strong past price appreciation. Brett just told you, it's a 40X over 10 years. That's pretty good.

Good management and smart backing. The folks that are running it today have scaled it all the way to this point and are kind of continuing to run the business today. Five, strong consumer appeal. It has its highest ever net promoter score, 97% of customers at G7 say it's easy to use. It's just well-documented as the best on the market. Six, grossly overvalued according to financial media. Yes, it's 16 times sales.

It's always been a 10X sales company. So that's kind of the David Gardner framework. I think on top of that, I like to hang once you get to this point where it's grossly overvalued, according to financial media. Bill Gurley wrote an article for Above the Crowd, I think it was back in 2011, called The Keys of the 10X Revenue Club. It kind of runs through another kind of seven or eight kind of points to look for a company that has that type of valuation, whether it's justified. First one, sustainable, competitive advantage, remote. We already talked about the kind of technology advantage that the company has. Network effects. I don't think Dexcom qualifies as a network effect business in the sense that every person that kind of gets added to the network, does it increase the overall value of the network? Maybe not.

Maybe you could squint at it and say that because of their work with API and kind of data integrations with other folks on the market, they're becoming more interconnected. They're building kind of the octopus tentacles across the market where if they get pulled out, things start to break. maybe there's something there. I don't think there's necessarily a strong network effect. The third one, is the business revenue model highly visible and predictable? Yes. These are government payors on a razor and blade model, where if you turn off the treatment, there could be kind of catastrophic impacts for you. So I think you have a very high predictable revenue

model. Is there customer lock-in? Yes. We talked about that earlier. Gross margin levels, long-term Target is 65% gross margin. They've expanded margin over the past several years. Marginal profitability, yes, you just saw the company swing from loss-making to profitable over the past several years. If you look over the past several years, it's a little bit lumpy based on when you get R&D expense recognition, but their marginal profitability has been very strong. So, customer concentration is another thing to talk about. Yes, there's some customer concentration when it comes to the payors, the insurance companies. So, there is some potential pressure for the insurance companies to squeeze price over time.

But on the actual end-user side, you could not get more diverse when it comes to basically every individual patient. The second to last one is organic demand versus heavy dependence on marketing spend. They really haven't done significant marketing expense except for the past couple years. So the past two years in the Super Bowl, you've been able to see Nick Jonas talk about how he uses the Dexcom CGM. And that's really been, again, trying to push into this type two market. You've reached the point where there's a big enough market you can justify a Super Bowl ad. But historically, you haven't seen a heavy reliance on advertising. And actually, even despite doubling SG&A over the past five years to build out that sales force to sell to primary care physicians,

you've seen SG&A as a percentage of revenue fall by 800 basis points or so. So not too bad when it comes to marketing expense. And the last one he looks at is growth. Five-year revenue CAGR is 32%. Current guidance for this year is 15% to 20% revenue growth, adding a record number of new patients. And again, the addressable market increased 75%. So I think you run through kind of both of those kind of frameworks. I think you're checking off a lot of the qualitative things you look for. And the last thing I'll say is just if you want a number out there, I don't really want to... I don't get comfortable if I'm paying a sales multiple for a company. And it's hard to get... Because Dexcom just swung to profitability, it's really hard to

value it on earnings multiple. You're really starting to see it scale up. I want to be able to at least write down for the next five years that my revenue growth rate is equal to or greater than the sales multiple that the company is trading at. And I think you can do that for Dexcom. I think you can write down 15% sales growth for the next five years. So all those things get me to a point where, and I think they could surprise me to the upside there as well. And if you do, then you get some strong performance where I can, am I excited to pay 16X sales for this company today? No, I would much rather get it at 8X or whatever that you got it in 2018. But I think given the opportunity ahead of the business that just looking forward

at the diabetes opportunity, you can easily look forward to doubling sales or more over the next five years. And if you think you can increase penetration in health and wellness or increase penetration outside the US, then lots of opportunities long-term. I'll say currently outside of the US, revenue is 25% of the business. They expect long-term that to reach 35%. Their long-term gross margin target, I think it's like 65%, 66% or so. So if you work those numbers out and you want to do kind of mid-teens growth at those levels of margins and you want to extend that out at five plus years, then I think the stock can work from here. However, if CGM fails to become standard of care for all diabetics, if these new pills out on the market kind of cut off the right tail for type 2 diabetes or for whatever reason, the product doesn't get cheap enough to penetrate as deep as it would need to get that type of growth, then you could have a tough time, right? You could double sales and earnings over the next five years.

And if you see the sales multiple come back down to 8, 9, 10 times sales, then you could have a tough time. So there is certainly risk of margin contraction. But I think when compared against the opportunity for growth and really extended durable growth, I'm comfortable owning it today. I don't think anybody... I think it'd be very, very difficult to put the numbers into a DCF to get the results the company has given to you in the past. And I think it's going to be difficult to forecast what

the company is going to deliver going forward. Does that make sense? Yes, it does. And one quick follow-up on ballpark profit margins you think they could get if they stopped investing for growth, say, or free cash flow margins. Is it 25%, 30%, 35%? What are your thoughts? And obviously, you know this isn't an exact science yeah i mean i guess you would look at you know the numbers that we got to um you know in 20 i don't know maybe 20 or 21 you saw margins come in a little bit um last year as the g7 got ready to got ready to scale but they really started showing you some of what the company um could produce with the g6 at kind of maturity um so you know i would look at those numbers. But I think the company is going to be more efficient five years from now than it

is today. They are free cash flow positive today, even net of stock-based comp. Now, it's much less than a 1% free cash flow yield, but I think you're going to see stock-based comp stay flat to kind of modest increases. And I think you're going to see kind of revenue earnings, those types of follow at mid-teens or higher. Okay. Last question. And the one we always try to exit with is the premortem. How could basically the inverse of your thesis, how could things go poorly for an investment in Dexcom over the next, say, five years? Yeah. So I think on the competitive side, it's CGM fails to become standard of care in diabetes and new markets. And that's a couple of reasons, either these GLP drugs kind of become the standard

care in place of CGM, or maybe there's some new entrant, right? Maybe Apple really does have it in the bag and then they come take over the market. That could kind of impact the growth rate and what you need. And then that obviously would impact the business. I mentioned earlier, multiple contraction could kill returns. You could double, like I said, you could double sales revenue, those sorts of things. If the market decides to bring the sales multiple or the valuation multiple in closer to that 10x sales range, that's going to be a big headwind to performance. And then lastly, I would say, just operationally, if Dexcom hits a wall when it comes to product improvements and price reduction. So the way the company has succeeded

over the past 5, 10 years is for each successive iteration of the product to get more accurate, easier to use, less inconvenient for a customer when it comes to size, that sort of thing, while also getting cheaper to manufacture. And they've done that. They did that from the G4 to the G5 to the G6. They're trying to do that again with the G7. They expect to do that. And that's enabled the market to penetrate into less and less intensive insulin populations

from the type 1 folks that, gosh, they don't have insulin. They're not going to make it through next week to now we're moving into folks that may not even have type 2 diabetes yet, but we're trying to mitigate that developing. you need to continue to see the cost of the product get lower and lower and lower over time in order to penetrate these markets. So far, they have successfully been able to do that. Again, the cost has gotten lower. The margins have gone up even despite that. But you need to continue to see that happen. If they don't, if they hit a wall there, then the margins are not going to materialize to make the stock work. All right. I think that's all the questions we have.

Nick, appreciate the time. I guess for people that are new to the show or listeners that are new to the show and haven't heard your voice before, what's the best place to follow you? Yeah, you can find me on Twitter at Investing Nick if you're interested in my investing ideas and the stocks that we recommend. Join any of the Motley Fool Canada services. As I mentioned back in October, we recommended Dexcom and that service. Again, that was right before the earnings report where Dexcom started talking about some of these rule changes. So we're pleased with that. You can go check out Motley Fool Canada and find my work there.

Awesome. Well, that's going to do it. We want to throw a disclosure on this, as always. So Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you all for listening.

Thanks again, Nick, for coming on the show. And we will see you all next time. Okay. I'm welcomed by the founder of our exclusive sponsor, Stratosphere.io, Brayden Dennis. Brayden, welcome. I wanted to basically give listeners that are interested in Stratosphere, more context around what the platform is. So let's start there. What is Stratosphere and then why did you decide to start it? Yeah. Thanks for having me. I appreciate it. And I'm glad to be sponsoring the podcast as a listener myself. I like the deep dives. I like the different guests, the different perspectives on some interesting companies. So I think it's a

good concept for a podcast, which is kind of what led me down to making Stratosphere in the first place, which was I was making content online and frustrated with the tools that were available to me. So I started building a very scrappy version of the product just for free, just to figure out how can I overlay 10 years of financial side-by-side up to 35 years we have now, and how can I actually build out a proper database of company KPIs that are not just revenue, but like if you're looking at like costco like how many warehouses do they have how many paid members are are in like our costco members or you know if i want to do a comp against like the streaming like how many netflix subs versus uh hbo plus discovery plus no disney plus like

how do i build up proper comps of those because those are the metrics that actually move the business those are the ones that actually move the needle more than any like gap financial metric you'll find. And so it started off as just purely a passion project. And I figured, let's just make the leap into entrepreneurship and see where it goes. And, you know, it brought, brought us here today. Yeah. And like you mentioned, it is the stuff that you can't find anywhere else, at least not in a, I mean, you could find it page by page and on their front. Exactly. You can go through 35 PDF filings and find it. Be my guest. And that's basically what we did for a long time. So what do, I guess, maybe describe the pricing model so people know, but you're going to say

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If you use CCM, you get 15% off any of the paid plans. But I think that covers it pretty well. If you're interested, please go ahead and check out stratosphere.io we'll we'll have a link in the description as well but uh thank you brayden for joining us ryan keep it up i really like what you and brett are doing and i'll be listening along