DXCM JPM研报

North America Equity Research
13 September 2013
Initiation
Overweight
Dexcom
DXCM, DXCM US
Price: $27.51
CGM Approaching the Tipping Point; Initiating at

Overweight
Price Target: $32.00
We are initiating coverage of Dexcom with an Overweight rating and $32 December
2014 price target. Dexcom is the leader in the rapidly growing market for continuous
glucose monitoring serving Type 1 and 2 diabetics. The stock has had a great run this
year, and while a better entry point would be nice, we simply don't see the event that
causes a pullback. We expect 2Q momentum to continue in 3Q13 and beyond.
CGM technology is approaching a tipping point, in our view, with Dexcom best
positioned. CGM has been available to diabetics since 2005, but we are only today
at a point where the technology is ready for prime time. Accuracy for G4 Platinum
is meaningfully better than the competition (primarily MDT), particularly in the
hypoglycemia range, and Dexcom in turn has seen its prescriber base expand
significantly to 6,000 physicians and educators in the last 6+ months, including a
step-up in scripts from the general practitioner as patients are asking for the product.
This is a large, underpenetrated market, with CGM used today by only 7% of
Type 1 diabetics and well under 1% of Type 2s. Our latest physician survey and
recent interviews with key opinion leaders point to continued strong growth for
CGM, with Dexcom the leader. Penetration today is comparable to where insulin
pumps were in 1999, and if we use the insulin pump adoption curve (1999-2005) as
a guide, we arrive at a 2018 market potential of $1.5B. Our current forecasts are
lower, but likely to prove conservative given recent technology leaps and
reimbursement strides for CGM therapy.
Reimbursement has improved significantly over the last several years, both for
Type 1&2. Humana recently updated its CGM coverage to include all insulin-using
Type 2 diabetics, opening a big opportunity for Dexcom. We expect other payers
will follow, representing a population that is ~2.5x the size of Type 1s in the US.
We also see market expansion for Dexcom from a pediatric indication (YE 2013E)
as well as sensor-augmented pump partnerships with Animas and Tandem (2014+).
Medical Technology & Devices

Kimberly Gailun
AC
(1-617) 310-0740
kimberly.w.gailun@jpmorgan.com
Michael Weinstein
(1-212) 622-6635
mike.weinstein@jpmorgan.com
Bloomberg JPMA WEINSTEIN <GO>
Christopher Pasquale
(1-212) 622-6590
christopher.t.pasquale@jpmorgan.com
Ross Comeaux
(1-212) 622-1895
ross.w.comeaux@jpmorgan.com
J.P. Morgan Securities LLC
Price Performance
28
24
$ 20
16
12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
DXCM share price ($)

RTY (rebased)
Abs
YTD
98.6%
1m
0.4%
3m
0.4%
Rel
78.6%
0.9%
-7.4%
12m
100.4
%
76.3%
Dexcom has an experienced management team and a profitable model. CEO

Terry Gregg and CFO Kevin Sayer led MiniMed's development of the pump market
in the 1990s and have built an even stronger case at Dexcom, in our view. The
company has a clear path to profitability, driven by GM expansion and SG&A
leverage. We forecast cash profitability in 2014, followed by GAAP earnings in
2015. Our $32 December 2014 price target values Dexcom at 7.8x our 2016 revenue
forecast (on par with the companys current forward multiple), discounted back to
2014. We use a DCF model as a secondary metric, which gets us to a per share value
of $35.
Dexcom, Inc. (DXCM;DXCM US)
FYE Dec
EPS - Recurring ($)
Q1 (Mar)
Q2 (Jun)
Q3 (Sep)
Q4 (Dec)
FY
Bloomberg EPS FY ($)
2012A
2013E
2014E
2015E
(0.21)
(0.21)
(0.25)
(0.12)
(0.79)
-0.81
(0.16)A
(0.14)A
(0.11)
(0.07)
(0.48)
-0.52
(0.10)
(0.10)
(0.03)
0.04
(0.20)
-0.17
0.18
0.14
Source: Company data, Bloomberg, J.P. Morgan estimates.
Company Data
Price ($)
Date Of Price
52-week Range ($)
Market Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End Date
27.51
12 Sep 13
28.48-12.03
2,009.61
Dec
73
32.00
31-Dec-14
See page 33 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Table of Contents
Investment Thesis ....................................................................3
Risks to Rating and Price Target ............................................4
Company Description ..............................................................5
Company Overview ..................................................................6
The Diabetes Epidemic............................................................................................6
The Dexcom Solution: CGM First............................................7

The Product Pipeline: Whats Next? .....................................14
What the Docs Are Saying about Dexcom ...........................17
Propriety Survey ...................................................................................................17
Survey Details.......................................................................................................17
Barriers to Market Adoption ..................................................19

Financial Outlook ...................................................................20
Valuation .................................................................................22
Diabetes 101 ...........................................................................25
A Debilitating, Deadly Disease..............................................................................25
Diabetes Therapy: Controlling Glucose Levels Is Key ...........................................26
Continuous Glucose Monitoring ............................................................................27
Insulin Pumps .......................................................................................................28
Models .....................................................................................29
Kimberly Gailun
(1-617) 310-0740
Dexcom, Inc
(DXCM)
Overweight
We think CGM adoption will

progress more quickly than
pumps did over the last decade
given: (1) protection against
hypoglycemia; (2) physician
feedback, which suggests CGM
will continue to play a bigger
role in diabetes management; (3)
low penetration amongst nonpumpers; (4) only one pump
company currently offers CGM;
and (5) a real opportunity in
Type 2.

13 September 2013
Investment Thesis
CGM Adoption Is Approaching a Tipping Point; Dexcom Best Positioned
Continuous glucose monitoring devices have been available to patients since 2005,
but the technology is just now approaching a tipping point for adoption, in our view,
with improved accuracy, comfort, and reimbursement. Dexcom is the technology
leader with the G4 Platinum sensor and is seeing an increase in the depth and breadth
of its prescriber base, with patient referrals now driving prescriptions from the GP (in
addition to endocrinologists). Competition will likely intensify, but we think Dexcom
remains the technology leader and see room for multiple players to succeed in this
market.
Large Underpenetrated Market Opportunity
CGM today is used by ~6-7% of Type 1s in the US and well under 1% of Type 2s.
We forecast CGM moving to 16% of Type 1s by 2018, but note that using the insulin
pump adoption curve as a guide would imply CGM penetration closer to 20% come
2018. Couple this with incremental penetration into the Type 2 market, and we see a
market potential of $1.5B+ in the next 5 years. We think Type 1 CGM adoption
from here can progress more quickly than pumps given: (1) protection against
hypoglycemia; (2) physician feedback suggesting CGM will play a bigger role;
(3) low penetration for non-pumpers (~2%); and (4) the potential for Animas and
Tandem to expand this market with DXCM.
The Market Is Getting Bigger: Reimbursement Opens Doors for Type 2
Humana (6.7M lives) recently updated its CGM coverage policy to include all
insulin-using Type 2 diabetics, a huge step forward for access to CGM therapy in the
US. The line is blurring between Type 1 and Type 2 diabetics, and it is getting easier
for Type 2 patients to use CGM. If Dexcom and other CGM players are successful in
moving the market toward a CGM First model, the size of the Type 2 market (28M
people in the US, 10-15% dosing insulin) creates a multi-billion dollar opportunity
for CGM players. Lastly, CGM usage amongst pediatric patients (20-25% of Type
1s) is low, but a pediatric indication for G4 Platinum with better accuracy in the hypo
range represents a real opportunity.
Management has set targets for

30-40% revenue growth,
doubling its sales base every 22.5 years, which is essentially
what the same team did at
MiniMed with pumps in the
1990s.
Solid Management and Profitable Model

Dexcoms management team is best in class, in our view, with CEO Terry Gregg and
COO Kevin Sayer having led the MiniMed organization prior to its 2001 takeover by
Medtronic. Terry Gregg was President and COO of MiniMed from 1996-2001,
staying on as President until 2002. Mr. Gregg is well recognized and respected in the
diabetes community and, along with Kevin Sayer, has positioned Dexcom as the
market leader in a rapidly growing category. Kevin Sayer was CFO at MiniMed from
1994-2001 and President of MiniMed until 2002. The team understands the diabetes
patient and provider, and has developed proprietary manufacturing and technology
which, in our view, creates high barriers to entry for competitors. Dexcoms
manufacturing expertise has the company on track for cash EPS profitability in 2014
and GAAP profitability in 2015, with gross margins approaching 70%. Management
has set targets for 30-40% revenue growth, doubling its sales base every 2-2.5 years,
which is essentially what the same team did at MiniMed with pumps in the late
1990s.
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Worth noting is that our DCF

analysis turns in a value of
$35/share on what we view as a
fairly conservative set of
assumptions. However, we still
think meaningful EV/Sales
multiple expansion is unlikely
from these levels and, as such,
use this as the primary construct
for our valuation work.
December 2014 Price Target of $32 per Share

We are initiating coverage on Dexcom with an Overweight rating and a December
2014 price target of $32, which represents 16% upside potential from current levels.
Our target is based on 7.8x our 2016 sales estimate (on par with the companys
current multiple on 15E sales), discounted back over one period at 11%. This is a
premium to the companys peer group, but closer to in line when adjusted for the
companys top line growth rate. Dexcom is the only company we are aware of in the
space with a 30%+ revenue CAGR expected over the next five years with a huge
market opportunity and a clear path to profitability, all of which we think warrant a
premium multiple. We see the current multiple as sustainable over the next 12+
months, and see upside to both our and Street estimates. Worth noting is that our
DCF analysis turns in a value of $35/share on what we view as a fairly conservative
set of assumptions. However, we still think meaningful EV/Sales multiple expansion
is unlikely from these levels and, as such, use this as the primary construct for our
valuation work.
Risks to Rating and Price Target

Market Adoption Could Track Below Our Current Expectations
We currently forecast a ramp in CGM adoption from 6-7% penetration today to 16%
in 2018. There are still many barriers to starting new patients on CGM, including:
(1) cost to the patient and other socioeconomic factors; (2) limited reimbursement for
the physician practice; (3) inadequate staffing at many endo practices; (4) patient
compliance; and (5) many diabetics dont want to be constantly reminded of their
disease. Reimbursement also remains a significant barrier for Type 2 diabetics, but
this is improving, and we note that our CGM penetration projections do not assume
meaningful near-term traction amongst Type 2 patients.
Competitive Launches Could Be Detrimental to Dexcoms Market Position
Medtronics next generation CGM system, Enlite, is likely to be approved in the US
within the next 6-12 months. While Enlites performance is not as good as that of
G4, its better than the current system, and Medtronic could have success in
switching current Dexcom patients to its own product, particularly those who are
currently on a Medtronic pump. We view meaningful disruption as unlikely, but this
can not be ignored as an incremental risk, and we note that Medtronic is already
showing early data from next gen sensor technology. Abbott is looking to bring next
generation sensing technology to market, with a launch in Europe planned in the
second half of 2014, and both Roche and Becton Dickinson are in the prototype
phase. Meaningful success for any of these could have an impact on the Dexcom
growth trajectory.
Dexcoms R&D Pipeline Could Be Negatively Impacted by FDA Delays and/or
Unexpected Clinical Failures
Dexcom has a healthy product portfolio lined up over the next several years, and
failure to deliver on labeling expansion and new product timelines could have a
negative impact on the companys ability to grow the CGM market and on
competitive positioning.
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Dexcom Manufactures Its Products in House

We view Dexcom's manufacturing operations and expertise as a key competitive
advantage for the company. However, as with any medical device manufacturer,
supply chain disruptions or manufacturing failures could negatively impact the
business, both on the top line and in terms of profitability, including a slower-thanexpect gross margin ramp.
Outstanding Litigation with Abbott
These issues date back to 2005, before either company had a product on the market,
and potential fees and/or damages from the litigation could be greater than expected.
There has been a series of back and forth requests on patent reexamination and
potential interference filed by Abbott, but nothing meaningful has come of these
filings. Dexcoms intellectual property has expanded meaningfully since the time of
the original 2005 filing, and we think the two parties may ultimately settle on the
outstanding matters, but the company has not reserved for any potential damages.
Premium Valuation Could Suffer from Any Stumbles
Dexcom trades at 7.8x our CY15 sales estimate of $254M, making it the most
expensive name in our small cap group. While we think a premium multiple is
warranted given the company's projected growth rate as well as the size of its end
market opportunity, the shares appear priced for execution and any near(manufacturing, etc.) or longer-term (competitive inroads, failure of the CGM market
to develop) hiccups could have a negative impact on the stock price.
Company Description
Dexcom is a San Diego-based manufacturer of continuous glucose sensors for Type
1 and Type 2 diabetes patients. The companys primary market today is in personal
use for Type 1 patients, which we estimated is about 7% penetrated by continuous
glucose monitoring (CGM). Having said that, insulin-dependent Type 2 patients are
moving toward more intensive management, particularly as reimbursement and
awareness improves. Dexcom was founded in 1999 and launched its first sensor
product (the STS, first generation) in 2006. Since that time Dexcom has marketed a
series of glucose sensors and today sells its G4 Platinum sensor, which is the most
accurate sensor on the market.
Dexcom shares the personal CGM market primarily with Medtronic's MiniMed
division. The company has developed partnership agreements with Animas (part of
J&J) and Tandem Diabetes (private) to integrate its CGM technology into insulin
pumps, with the Animas product (Vibe) currently approved in Europe. Dexcom also
has a partnership with Edwards Lifesciences in the critical care space. Dexcom is
working through clinical data to spread the message of CGM First, with the idea
that informed insulin delivery is crucial to better management of the disease.
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Company Overview
Dexcom was founded in 1999 based on the research of two physicians, doctors
Updike and Hicks, who in 1967 published research on implantable glucose sensors
that measure the concentration of glucose in the body. In 2004 the companys first
sensor project (STS) began and in 2005 Dexcom completed its initial public offering,
listed on the NASDAQ as DXCM. Dexcom introduced its first continuous glucose
sensor in 2006, which was a 3-day sensor. In 2007 the company launched its Seven
(7-day) sensor, which was followed in 2009 by the Seven Plus system launch (Gen
3). In late 2012 Dexcom received FDA approval for its current sensor technology,
the best-in-class G4 Platinum. G4 Platinum is a brand new system that includes:
(1) improved accuracy and reliability; (2) smaller size with patient friendly features;
(3) open architecture (facilitating pump partnerships); and (4) advanced membrane
technology with less immune responsiveness.
Dexcom has a best-in-class management team, dating back to the 2007 hire of Terry
Gregg, former president and COO of MiniMed (now part of Medtronic), to the CEO
seat. This was a transformational hire for Dexcom, with Mr. Gregg recognized as one
of the most influential executives in the diabetes community. Mr. Gregg then hired
former MiniMed CFO Kevin Sayer in 2011, who currently serves as Dexcoms
President and Chief Operating Officer.
The Diabetes Epidemic

In the US alone, we estimate there are approximately 29 million people living
with diabetes (Type 1 and 2) of which only approximately 20 million have been
diagnosed. We estimate there are about $1.6 million people in the US living with
Type 1 diabetes formerly known as juvenile diabetes in which the body produces
little to no insulin. The complications associated with poor management of diabetes
are well documented. The landmark DCCT study (Diabetes Control and
Complications Trial) was published in the New England Journal of Medicine in 1993
outlining the elevated risk of heart disease and stroke, high blood pressure, blindness,
kidney disease, neuropathy, and amputation for Type 1 diabetics with poor glucose
control. Subsequent studies have shown similar risk for Type 2 diabetics, particularly
those who are insulin dependent with poor control. According to the American
Diabetes Association (ADA), average medical expenses for those with diabetes were
2.3x higher in 2012 than for those without diabetes, and the total cost of undiagnosed
diabetes was $245 billion.
Type 1 diabetics require intensive insulin therapy for survival and, as such, are
recognized as the primary target market for device-based diabetes management.
Having said that, Type 2 diabetics are today increasingly dependent upon insulin
injections to survive. Furthermore, improving reimbursement trends have started to
make device-based therapy a real possibility for Type 2 patients. Just under 30% of
Type 2 Diabetics today are taking insulin, with about 10-15% of Type 2s dosing with
insulin at mealtimes. Today, CGM is thought of for both Type 1 diabetics and
insulin-dependent Type 2 patients. We believe that longer term, CGM will be an
important technology for all diabetes patients.
Kimberly Gailun
(1-617) 310-0740

13 September 2013
The Dexcom Solution: CGM First
Dexcom is communicating its

"CGM First" strategy to
providers, patients and the
broader Endo community, with
the premise that no matter how
you deliver your insulin,
informed delivery based on CGM
output should be the starting
point for management of all
diabetics.
Continuous glucose monitoring (CGM) devices allow patients to monitor their

glucose levels over time, importantly looking at trends rather than single points in
time. Current generation devices must be calibrated with a finger stick every
12 hours. While early adoption of CGM was tempered by a lack of reimbursement as
well as technological shortcomings of first generation devices, we believe we are
approaching a tipping point for CGM therapy in both Type 1 and Type 2 patients.
Dexcom is today the clear technology leader, offering in G4 Platinum an accurate,
reliable, and comfortable sensor. Dexcom is communicating its "CGM First"
strategy to providers, patients and the broader Endo community, with the
premise that no matter how you deliver your insulin, informed delivery based
on CGM output should be the starting point for management of all diabetics.
The CGM Market: Approaching a Tipping Point

We estimate the Worldwide CGM market which is primarily shared by
Medtronic and Dexcom at approximately $350M in 2013, growing at a 20%
CAGR through 2018 to nearly $900M. We note that some revenues from
professional CGM devices are likely in this number, particularly for Medtronic, but
the driver going forward will be personal use CGM. Type 1 patients still represent
the primary market for CGM today, and in the US we estimate that approximately
7% of Type 1 patients are active users of continuous glucose monitors. We expect
US Type 1 penetration to grow from 7% today to 16% in 2018. Worth noting is that
amongst non-pumpers, CGM penetration is much lower (we estimate less than 2%),
pointing to a meaningful opportunity for expansion of Dexcom's "CGM First"
strategy. Continuous glucose monitoring is viewed by many thought leaders in the
Endocrinology community as the next workhorse technology in diabetes
management, particularly now with the availability of an accurate and reliable sensor
in Dexcoms G4 Platinum. We think our current estimates for both Dexcom and the
market could prove conservative as: (1) better hypoglycemia detection drives higher
penetration amongst pediatrics (20-25% of Type 1s); (2) technology improves; and
(3) the Type 2 opportunity unfolds.
If we assume CGM at 20% of
Type 1s in 2018 (vs our current
16%), as well as a modest step
up in Type 2 usage, we arrive at
a 5-year market opportunity of
$1.5B+.
While our market models project a current market of $350M, moving to nearly
$900M by 2018, we think these estimates are likely to prove conservative. If we
apply the US insulin pump adoption curve to CGM, CGM therapy today is at about
the same penetration level for Type 1 as insulin pumps were in 1999. If we just
assume that CGM follows the same trajectory, Type 1 penetration in 2018 would be
closer to 20% versus the 16% we model. We also note that the Type 2 opportunity is
becoming more real for CGM, which was not the case for pumps in the late
1990s/early 2000s due to both reimbursement and applicability. If we instead assume
CGM at 20% of Type 1s in 2018 (versus our current 16%), as well as a modest step
up in Type 2 usage, we arrive at a 5-year market opportunity of $1.5B+. Dexcom
generates ~$2,400 per patient annually, which we expect to hold on the Type 1 side.
Lower sensor usage is likely for Type 2s, and for this group we use per patient
revenue of $1,500/year.
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Table 1: CGM Market Penetration Outlook, 2013E-2020E

US CGM Penetration - Type 1 (JPME)
Implied Penetration using Pump adoption curve (99-06)
Delta
2013E
7%
8%
1%
2014E
8%
11%
3%
2015E
10%
13%
3%
2016E
12%
16%
4%
2017E
15%
17%
2%
2018E
16%
19%
3%
2019E
17%
22%
5%
2020E
18%
23%
5%
Source: Company reports and J.P. Morgan estimates.
The insulin pump adoption curve suggests current CGM market estimates will
likely prove conservative over the next 5-7 years. As mentioned, CGM adoption in
the US today is about where insulin pumps were in 1999 at ~7%. MiniMed brought
the first insulin pump to market in the 1980s, but the early pumps were inaccurate
and very difficult to use. Insulin pumps became smaller and smarter in the 1990s but
still had accuracy shortcomings which limited adoption. In the late 1990s/early
2000s, insulin pump technology improved meaningfully led by MiniMed, which
was acquired by Medtronic in 2001. It was a combination of technology
improvements, improved reimbursement, clinical data and marketing that took
insulin pump penetration from 7-8% in 1999 to 17% in 2003 and 19% in 2004. If the
US CGM adoption curve were to follow the same trajectory as insulin pump
therapy over the next four years, the market would reach nearly 20%
penetration by 2018, ahead of the 16% we currently model.
Continuous glucose monitors

have been commercially
available since 2005, but the
reality is the technology has
only just arrived with the G4
Platinum sensor.
With improved technology, CGM is approaching a tipping point

Patient-oriented continuous glucose monitors have been around since 2005, but the
reality is the technology has only just arrived with the G4 Platinum sensor. Feedback
on G4 has been overwhelmingly positive, as the prescriber base is increasing
exponentially, patients are wearing their sensors more frequently, and new patients
are asking for the technology. There are approximately 5,800 endocrinologists in the
US, only about 3,000 of who actively see patients. Dexcom indicated on its last
conference call that the number of prescribers of its sensor technology more than
doubled in 1H13 versus 2012 to about 6,000, including nurse educators and general
practitioners some of whom are now prescribing based on patient demand.
Following the G4 launch, Dexcom is seeing increased sensor usage across all three of
its major patient buckets: (1) super users, or those who are using sensors 100% of the
time; (2) those using most of the time; and (3) those using periodically. The main
driver of increased usage is better accuracy and performance, with heavy users
relying on their sensors to prevent dangerous hypoglycemia episodes and to inform
their insulin delivery decisions. Endocrinologists rely on CGM to help lower
patient A1c (a measure of long-term glucose control) and reduce the frequency
of hypoglycemic events, improving overall quality of life for diabetic patients.
Usage patterns were highlighted

in a user evaluation study (n=89)
published this year in Clinical
Diabetes by Chamberlain et al,
showing significantly higher
satisfaction and usage of
Dexcom sensors versus
Medtronic sensors, albeit with
earlier generation DXCM
technology (Seven Plus)
Dexcom is the clear technology leader

While Medtronic has more patients with access to CGM (as the company's insulin
pumps are CGM enabled), we believe Dexcom is the market leader with a greater
number of patients actively using its CGM devices due to better comfort, accuracy
and durability. Usage patterns were highlighted in a user evaluation study (n=89)
published this year in Clinical Diabetes by Chamberlain et al, showing significantly
higher satisfaction and u sage of Dexcom sensors versus Medtronic sensors. Worth
noting is that the survey primarily included Medtronic MiniLink users and Dexcom
Seven Plus wearers. While the Seven Plus was a good sensor, Dexcom has made big
Kimberly Gailun
(1-617) 310-0740

13 September 2013
strides with G4 Platinum with improved accuracy and reliability, smaller size, and
improved transmitter range.
Endocrine Group recommendations favor CGM
In October 2011, the Endocrine Society updated its recommendations for CGM
(published in the October 2011 issue of the Journal of Clinical Endocrinology and
Metabolism). The society recommendation suggests the use of approved CGM
devices for detection and management of hypoglycemia, even if on an intermittent
basis. It is suggested that: (1) Type 1 patients age 8+ years with A1c <7% should use
CGM to prevent hypo events; and (2) all Type 1 patients with A1c of 7% or more
should use CGM on a near daily basis to maintain target glycemic ranges.
CGM First: Where have you been and where are you going?
Continuous glucose monitoring is important because it shows high and low glucose
levels that might otherwise be missed by intermittent finger stick testing. While the
lowest hanging fruit for CGM in some respects has been insulin pump users (just
under 30% of Type 1 diabetics in the US), we believe the CGM opportunity is
bigger, with all diabetics particularly those taking insulin benefiting from more
informed insulin delivery. Dexcom, with the G4 Platinum, is delivering the message
of CGM First, changing the behavior patterns of physicians who might previously
have naturally migrated to pump therapy first. The company has pointed to good
early success with this campaign based on increasing awareness of the G4 Platinum
sensor performance, and we see further headway with the generation of: (1) clinical
data showing the efficacy of CGM with various insulin infusion regimens (multiple
daily injections, insulin pump); and (2) cost effectiveness data.
Dexcom sensors are a key component of artificial pancreas projects
The Holy Grail in diabetes management remains a closed loop system or artificial
pancreas. This years ADA meeting in June featured a notable increase in early data
on such systems, following FDA's issuance in early 2012 of draft guidance for
artificial pancreas programs. While these types of systems, such as the Bionic
Pancreas project at BU/MGH in Boston, are still in early development stages, we
are seeing proof of concept in humans, which is encouraging. Medtronic hosted inbooth presentations on the Pathway to the Closed Loop, highlighting its
technology offering, and we note that Kelly Close of Close Concerns recently shared
her positive experience as a member of the five-day BU/MGH bionic pancreas trial,
which used two Tandem pumps (one for insulin and one for glucagon) and a Dexcom
G4 sensor. JNJs Animas division also released favorable results from a 20-patient
feasibility study using the companys predictive Hypo-Hyperglycemia Minimizer
(HHM) System.
Professional CGM is being used by many practices as a door-opener for
personal use CGM. Professional use ranges from a few days to a week. Medtronic
has the iPro system for professional use, and Dexcom currently uses its Seven Plus
(G4 Platinum not yet approved for professional use). The Medtronic iPro is a blinded
sensor meaning that patients can not see the sensor readings while wearing it, but the
physician office is able to receive the readings in real time and create a trend graph
for the patient. With the Seven Plus for professional use, the patient is unblinded and
can see glucose readings in real time during the seven-day wear period. Physicians
we have spoken with have indicated that professional use (which is reimbursed) can
Kimberly Gailun
(1-617) 310-0740

13 September 2013
be a helpful introduction for patients, giving them a better sense of whether personal
CGM may be right for them. We have also received feedback that because of the
comfort of Dexcom sensors relative to Medtronic sensors, the conversion from
professional to personal CGM use is generally higher for Dexcom.
Competitive Landscape: Dexcom the Clear Leader

Today there are essentially two players in the market for personal use
continuous glucose monitors: Medtronic and Dexcom. Dexcoms sensor
technology is well recognized as market-leading, and this competitive edge has only
been magnified by the company's late 2012 launch of G4 Platinum. From a clinical
perspective, the most commonly used metrics evaluating sensor accuracy are the
Clarke Error Grid (clinical accuracy) and MARD (numerical accuracy), which stands
for mean absolute relative difference between CGM readings and corresponding intime reference blood glucose measurements. On the clinical side, the Clarke Error
analysis assesses the impact of sensor errors on patient treatment decisions.
Dexcoms G4 Platinum compares well against the competition across numerical
(MARD) and clinical (Clarke Error) datapoints (see below under Clinical Data
Overview"for details) and is, according to our feedback, a more reliable,
comfortable and durable sensor relative to Medtronics offerings. G4 has a
seven-day wear claim, with many patients using the sensor for two weeks or longer
and still getting good performance, versus a three-day wear claim for SofSensor/MiniLink. Our provider feedback also suggests that G4s profile, which is
flatter to the surface of the skin, is a benefit and tolerates exercise well.
Medtronic
Medtronics MiniMed division has the largest installed base of insulin pump users
worldwide and is the pioneer in device-based therapy for Type 1 diabetics, including
insulin pumps and continuous glucose monitors. MiniMed created the pump market
dating back to the 1980s and launched the first patient controlled CGM in 2005 on a
limited basis. MiniMed is still the 800-lb gorilla in the insulin pump market, but a
combination of (1) innovation from small players and (2) technology shortcomings
and regulatory delays have weakened Medtronic's position in both the insulin pump
and CGM markets over the last several years.
We expect Medtronic to be back with a new product cycle in the next 6-12
months. The company has the 530G pump system under review, including its new
Enlite sensor which has been available in Europe since 2011. The pump, which is
called Veo in Europe, includes a low glucose suspend feature and has been available
overseas since 2009. Medtronic is working through quality issues with the FDA, and
most recently indicated it is optimistic that the 530G system (Enlite plus pump with
low glucose suspend feature) will be approved in the US by the end of the current
fiscal year (April 2014).
We think Medtronic will ultimately help grow the CGM category with better
sensor technology. Currently, about 60% of Dexcoms patient base is on a pump and
about half of those are on a Medtronic pump. We would expect these patients to
continue using Dexcom once Enlite is approved based on (1) comfort with the G4
technology and sensor itself; and (2) better performance metrics for G4 Platinum
versus Enlite. Having said that, Dexcom has certainly benefited from Medtronics
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13 September 2013
share losses in the pump market, diversifying the pump user base and giving the
company an entre on the CGM side with better technology. Enlite is smaller and
more accurate than Sof-Sensor (with Revel or Guardian), with better adhesives and
an improved insertion process. Enlite is also indicated for six-day use versus three
days.
Feedback on Enlite in Europe has been generally favorable. Patient advocate
Kelly Close included a test drive of the sensor in 2001 in her diaTribe publication
which summarized the following advantages of Enlite versus MultiLink/Sof-Sensor:
Better stability on the body due to better adhesives; easy, painless insertion; higher
signal production and better resolution; more accurate on screen results; better results
at low and high glucose levels using the Veo algorithm. The disadvantages according
to the diaTribe test drive were: (1) about 10% more expensive than prior generation,
(2) not accurate on the first day, needs to be restarted on the second day and needs
two hours to start producing on-screen results. The user also found it was still better
to calibrate with finger stick when glucose levels were flat (i.e. not rising or falling).
Abbott
Abbotts Freestyle Navigator CGM system was FDA-approved in 2008 but was
never fully commercialized in the US. The Navigator was a good performance
sensor, as illustrated by early comparative studies with MARD scores in the lowdouble-digit range and continuous glucose error-grid scores in the upper-90% range
for zones A+B but not very user-friendly. Abbott has communicated that it is
working on a next generation sensing product as a follow-on to Navigator, which the
company expects to be approved in Europe in the second half of 2014. The company
showed early data from its Navigator II project at the ATTD meeting in late February
with a 33% smaller transmitter and good accuracy. We expect an update on Abbotts
CGM program at the EASD meeting in Barcelona in late September, where ABT will
host a symposium.
Becton Dickinson
Becton Dickinson is another company that is involved in the broader diabetes
marketplace and is looking to bring a continuous glucose sensor to market over the
next several years. The company is using microneedle optical sensing technology,
feasibility data from which looks encouraging. Management has talked about the
accuracy and minimal warm-up time of its sensor as a potential differentiator, and the
company continues to work to make the system smaller.
Others
There are a handful of other public and private companies working on continuous
glucose sensing technology, including Roche, Bayer, and Echo Therapeutics,
amongst others, none of which are out of the prototype phase. We could hear
another update on Roches program, which has turned in very good prototype
data (MARD 8.6%), at the EASD meeting in late September but are not
expecting new data on top of what we saw at ATTD in late February.
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If you ask a patient whether

they would rather have two
devices with a CGM that is
accurate and user friendly and
gives information they trust, or
one device that has a CGM that
is not user friendly and is
uncomfortable with a lot of false
alarms, they usually side with
the better CGM device leading
US Endo on sensor augmented
pumps.
Sensor Augmented Pumps

Only Medtronic offers a sensor augmented pump in the US today. What this
essentially does is allow the CGM to speak directly to the pump, reducing the device
burden by eliminating a separate handheld for sensor readings. Physicians and nurse
educators we speak with say they see real demand for a combo product, but it's
important that the sensor work well. One doctor we spoke with recently said he
thinks many patients could take advantage of sensor-augmented pump therapy, but
went on to say "however, if you ask a patient whether they would rather have two
devices with a CGM that is accurate and user friendly and gives information they
trust, or one device that has a CGM that is not user friendly and is uncomfortable
with a lot of false alarms, they usually side with the better CGM device I see this
happen a lot in my practice.
Dexcom has two partnerships in place with JNJs Animas and privately held
Tandem Diabetes for development of a sensor augmented pump using the
companys G4 Platinum sensor. The Animas Vibe is currently available in select
markets in Europe and has been filed for FDA approval, which we expect in 2014.
Clinical Data Overview

From a clinical perspective, the most commonly used metrics evaluating sensor
accuracy are the Clarke Error Grid (clinical accuracy) and MARD (numerical
accuracy), which stands for mean absolute relative difference between CGM
readings and corresponding in-time reference blood glucose measurements. On the
clinical side, the Clarke Error analysis assesses the impact of sensor errors on patient
treatment decisions. Sensor efficacy over the longer term is often measured by the
ability to lower a patient's A1c levels and reduce hypoglycemic events.
Use of CGM devices has been shown clinically to improve glucose control dating
back to the 2008 New England Journal of Medicine publication of JDRFs CGM
Study Group data (n=322). The trial randomized patients already on intensive
therapy to either CGM therapy or a control group (finger sticks), and showed that
more frequent CGM usage is associated with a greater reduction in A1c levels for the
adult population (age 25+). This was true for both patients on an insulin pump and
patients on multiple daily injections, but its worth noting that the number of patients
in the trial using MDI was too low for this to be statistically meaningful.
G4 Platinum offers better overall
accuracy than other sensors and
importantly is more accurate in
the hypoglycemic range, which
our physician feedback
suggests is giving patients
greater confidence.
12
Dexcoms G4 Platinum sensor ranks well both in terms of clinical and

numerical accuracy and ease of use, with the latter discussed in more detail
elsewhere in this report. On the data front, a comparison of the G4 Platinum with
Dexcoms prior generation Seven Plus was published in the Diabetes Technology &
Therapeutics periodical this year, showing for G4 Platinum a statistically significant
improvement in MARD on Days 4 and 7 (p<0.0001), with better accuracy in the
hypoglycemia range versus Seven Plus. The comparison, conducted by Christiansen
et al, compared a Seven Plus dataset (n=53) published in 2008 with the pivotal G4
Platinum dataset (n=72 at 4 US centers) collected in 2011. The MARD for G4
Platinum was 13.2% versus 16% for Seven Plus. The authors concluded that G4
Platinum represents a significant improvement in accuracy and reliability over the
Seven Plus, with sustained performance at seven days and particularly improved
accuracy in the hypoglycemia range. G4 Platinum has been associated with even
better MARD scores in independent analyses (see below), and accuracy improves as
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13 September 2013
we move out toward the seventh day of wear. Dexcom is also developing a new
version of G4 tailored to artificial pancreas programs with updated algorithms, where
early experiences have shown an MARD of 12%, also improving with dwelling time.
Dexcom has solid data in the pediatric age range (2-17), which it recently
submitted as part of its FDA request for a label expansion to include younger
patients. The study, which was presented at this year's ADA meeting in Chicago
(Laffel et al), included 176 pediatric patients from six US centers and was the largest
pediatric CGM study to date. The group turned in a G4 Platinum MARD of 15% in
aggregate, 14% on the abdomen and 16% on the buttocks. We note that in
comparative studies where G4 Platinum has been used in pediatrics, accuracy has
been even better for Dexcoms new sensor (including the Russell MGH comparison,
which was half children)
The CGM study that is getting
the most attention comes from
Dr. Steven Russell et al at Mass
General Hospital in Boston,
showing superior accuracy for
the G4 Platinum sensor.
The CGM study that is getting the most attention comes from Dr. Steven
Russell at Mass General Hospital in Boston. Russell and team conducted a
comparison of the Abbott Freestyle Navigator (not for sale in the US), Dexcoms G4
Platinum, and Medtronics Enlite with Veo algorithm (not for sale in the US) on 24
patients (12 adults, 12 children), with results presented at the American Diabetes
Association scientific sessions in June. In this study the patients wore all three
sensors as part of 48-hour closed loop experiments. The results were very compelling
for G4 Platinum, with a MARD of 10.8% and 85% of readings falling in Zone A of
the Clarke Error Grid. Navigator followed with a 12.3% MARD (84% of readings
Zone A) and then Enlite with a 17.9% MARD and 68% of readings in Zone A.
Table 2: Comparative CGM Analysis, MGH 2013
Sensor
G4 Platinum
Navigator
Enlite
Company
Dexcom
Abbott
Medtronic
MARD
10.8%
12.3%
17.9%
Clarke A+B
99.7%
99.7%
97.1%
Source: ADA 2013, Steven Russell et all, Massachusetts General Hospital; CloseConcerns.com.
Comparative Analysis: The Lag Effect. There are several older comparative
analysis papers and studies available looking at metrics across different sensors;
however, with the pace of innovation having picked up, the endocrinology
community has pointed to a lag effect for many of these studies, as they do not
include the most up to date technology. For example, doctors Russell and Damiano
in Boston published their review of three competitive sensors in Diabetes Care
(December 2012), comparing Abbotts Navigator (not available for sale in the US),
Dexcoms older generation Seven Plus and Medtronics Guardian (with Sof-Sensor).
The MARD scores for the three sensors were 12%, 17% and 20%, respectively, but
the study did not include Dexcoms G4 sensor.
Medtonic is awaiting FDA approval for its new Enlite glucose sensor, with the
current Sof-Sensor turning in MARD levels in the 20% range (2009 Revel pump
with Sof-Sensor; 2012 Damiano/Russell study). The Enlite study was a multi-center,
randomized, prospective study designed to evaluate the performance of the Enlite
Sensor over the course of six days. The primary study endpoint was sensor accuracy
using minimum calibration requirements (every 12 hours after the second
calibration). When reported as labeled on a prospective basis (with calibration
2x/day) the current generation Enlite sensor turned in an MARD of approximately
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13 September 2013
17.2% (ATTD, 2013), which compares with the 13.6% presented at ADA in 2012
using a different data analysis method. The prospective data was similar to the Enlite
MARD reported earlier this year by Russell et al (17.9%), which was presented at
ADA 2103.
The Product Pipeline: Whats Next?

On the back of a successful G4 Platinum launch in late 2012, Dexcom has put
together a solid product pipeline that we think will help drive CGM penetration for
both Type 1 and 2 diabetics over the next several years and beyond. Dexcom has
developed a good working relationship with the FDA, which we think is also
important as the company paves the way with new technology for glucose sensing.
Table 3: Dexcom Product Pipeline
Product
G4 Platinum
G4 Pediatric
Dexcom Share
Gen 5 Sensor
Animas Vibe
Tandem pump
GlucoClear
Gen 6 Sensor
Approval
Oct-12
YE 2013E
Early 2014E
2013-2015E
Early 2014E
late 2014E
2015E
2016+
Details
Improved accuracy and reliability, smaller, better transmitter, open architecture
Expands the call base to pediatric Endos; Peds are 20-25% of T1 diabetics
Remote monitoring system for caregivers
Mobile phone interface, new applicator, new transmitter, algorithm evolution
Sensor augmented pump using G4 Platinum; currently available in Europe
Sensor augmented pump using G4 Platinum
In-dwelling sensor collaboration with Edwards; available in Europe
Target label as replacement for finger stick testing
In the near term, the company is seeking approval for a label expansion to
include pediatrics, for patients as young as two years old. Dexcom filed for the
pediatric indication in March 2013 and in August indicated it is in labeling
discussions with the FDA. We view the pediatric label as an important next leg of
growth for Dexcom, meaningfully expanding the company's call base. We estimate
there are about 800-1,000 pediatric endocrinologists in the US and about 20-25% of
Type 1 diabetics are 2-18 years of age. The pediatric community provides an
extremely attractive patient base for the company's CGM First strategy, including:
(1) many newly diagnosed patients; and (2) a patient/parent group seeking tighter
disease management. Pediatrics have historically had lower compliance and, as such,
less effective outcomes with CGM, due to inaccuracy, discomfort, and/or the
adolescent patient's desire to be more discreet. We think G4 Platinum is a big
improvement on accuracy and comfort, which could meaningfully expand CGM
usage in this important category, particularly given accuracy in the hypoglycemia
range.
Dexcom has also filed for approval of its Dexcom Share system, which is a
remote monitoring system for caregivers and loved ones, including a docking station
for wireless transmission from the G4 Platinum sensor to a smart phone. The
caregiver can receive trend graphs and most importantly alert notifications if a
patient is going low in the middle of the night. Dexcom filed for this system in late
July 2013, and Share will be the first step in the companys move toward bringing
CGM technology to mobile phones.
The company will roll out its Gen 5 system in a series of updates over the next
two years. Gen 5 will not be a single platform update like Gen 4, but will include a
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variety of upgrades the first of which is the Dexcom Share system. Gen 5 will be an
open architecture system with an improved applicator and mobile phone interface.
There will be a new transmitter and algorithm evolution, but no change to the sensor
itself or related membranes.
The Gen 6 system, which is
likely a 2016+ event, is targeting
a labeling expansion to replace
finger stick testing. Success
here would be a big stride for
continuous sensing technology,
likely to meaningfully expand
CGM penetration for both Type 1
and 2 diabetics.
The Gen 6 system, which is likely a 2016+ event, is targeting a labeling

expansion to replace finger stick testing. Success here would be a big stride for
continuous sensing technology, likely to meaningfully expand CGM penetration for
both Type 1 and 2 diabetics. Recall that CGM today needs to be calibrated every 12
hours with finger stick testing and, as such, isnt a fully standalone technology.
Dexcom announced in August that is has received a $4M research funding grant
from the Helmsley Charitable Trust to help accelerate development of the G6
technology. The Helmsley Charitable Trust, in concert with the Juvenile Diabetes
Research Foundation (JDRF), supports medical research across a handful of disease
states, including Type 1 diabetes, and we note the importance of the Gen 6
technology for the variety of ongoing artificial pancreas studies.
We view Dexcoms pump

partnerships as another leg of
growth for the company, where
Dexcom sensors will effectively
be sold through the pump sales
forces of Animas (JNJ) and
privately held Tandem.
Dexcom has two partnerships in place with JNJs Animas and privately held
Tandem Diabetes for development of a sensor augmented pump using the
companys G4 Platinum sensor. The Animas Vibe is currently available in select
markets in Europe and has been filed for FDA approval (filed 2Q13), which we
expect by early 2014. Dexcom indicated in August that Animas recently received a
round of questions on its PMA for the Vibe, which, given the pace of FDA (as well
as Animas), will likely push a US Vibe approval to 1H14. We see the Vibe approval
as another growth driver for Dexcom. Currently about 60% of Dexcom patients are
also on a pump, with about 1/3 of the pumpers on Animas. We estimate Animas has
an installed base of about 90K pumpers in the US. The company will look to switch
its pumper base over to Vibe over the next several years, allowing it to compete more
effectively against Medtronic's sensor-augmented pump offering, which in turn
should benefit Dexcom in the form of a recurring revenue stream. Dexcom is also
developing a sensor augmented pump with privately held Tandem Diabetes, which
has had good early success with the launch of its t:slim pump. The t:slim, which was
launched in the US in 2H12, is a durable pump that offers a sleek design, large
insulin reservoir and attractive touch screen user interface. We received positive
feedback on t:slim at the ADA meeting in June, and Dexcom expects the company to
file for a sensor-augmented pump with G4 prior to year end.
Reimbursement
Patient Reimbursement/Coverage
Reimbursement strides have been meaningful over the last several years for Type 1
diabetics, particularly for private pay, which accounts for the majority of the Type 1
population. Today, most private plans routinely cover CGM for Type 1 patients,
which is a big improvement over the last five years. Having said that, the level of
coverage still varies, with patient copays ranging from 0% to 50%, according to our
discussions, which, while better than no coverage, can be a challenge for many
patients who are also paying for their test strips and possibly pump supplies. In our
US Endo survey (n=27, details below), 59% of physicians indicated that even with
reimbursement, out-of-pocket costs for CGM are still too much for many patients.
We see the reimbursement landscape continuing to improve, with Dexcom
announcing in August that Express Scripts added Dexcom CGM to its National
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13 September 2013
Preferred Prescription Drug Formulary. While we expect this to be a gradual

transition, the move to pharmacy benefit payment should make CGM reimbursement
much easier over the next few years.
Medicare does not routinely cover CGM for Type 1 or 2 patients, which will be a
key initiative for CGM manufacturers and patient advocacy groups over the next few
years. Medicare reimbursement is becoming more meaningful as Type 1 patients are
living longer and with the increasing insulin dependence of the Type 2 population.
We think the generation of economic data showing the benefits of CGM to both the
patient and the system will be a meaningful step toward a Medicare reimbursement
code.
Type 2 reimbursement is
improving, with Humana recently
updating its CGM coverage
policy to include insulin-using
Type 2 diabetics.
Type 2 reimbursement is improving: A meaningful catalyst

More recently, progress has been made on the Type 2 payment front, which we view
as a key step toward greater penetration into this large patient group. On its most
recent conference call in August, Dexcom announced that Humana (6.7 million
covered lives) has updated its CGM coverage policy to include all insulin-using Type
2 diabetics. While our feedback suggests that insulin-using Type 2 diabetics today
can very often get coverage, this typically requires a good deal of additional
paperwork. The Humana decision is the first we are aware of by a large national
provider to cover this large group of patients. We estimate there are as many as 5
million Type 2 patients actively taking insulin in the US today, representing a
market opportunity that is about 2.5x the size of the Type 1 diabetic population.
Physician Reimbursement/Coverage
Physician reimbursement for time spent training and managing CGM patients is a
barrier at some practices. Our Endo/nurse feedback suggests that a CGM program
can be profitable for a practice once it is up and running and efficient, but not all
Endo practices are so equipped, and we think help from the manufacturers will be an
important part of this progression going forward. Some of the more successful Endo
practices that we have spoken with (and those prescribing more CGM) have put in
place an efficient onboarding, training and follow-up process that allows for good
patient flow in the practice and better overall management. What was interesting to
us was in speaking with Endos and/or educators who tend to be the bigger prescribers
of CGM, many of them are Type 1 diabetics themselves, which really underscores
the utility of the technology.
Physicians can bill for the initial training sessions when onboarding a new patient to
CGM, for the patients quarterly visit, and for data download and interpretation,
which can even happen over the phone once the doc is comfortable with how to
interpret the data. Many busier Endo practices are using the Professional CGM
Model, which means they will first start a patient on Professional CGM with
Medtronics iPro or Dexcoms Seven Plus (G4 not yet indicated). Professional
CGM is covered by both private payers and Medicare and gives: (1) the nurse/Endo a
good sense of who will be good candidates to put on personal CGM (plus its
profitable); and (2) the patient a "test drive" opportunity so they can see what CGM
would do for them. We received a good amount of anecdotal feedback from both
Endos and nurses around the efficacy of Professional CGM first both for the practice
and for the patient.
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What the Docs Are Saying about Dexcom

Propriety Survey
We conducted a survey of 27 US Endocrinologists and conducted separate indepth interviews of a handful of Endos and nurse educators to get a better sense
for how the prescribing base is viewing the role of CGM technology in the
treatment and management of Type 1 and 2 diabetics.
Physician feedback points to
sustainable growth in new CGM
patient additions over the next
12+ months.
Our key takeaways are as follows:

(1) CGM is likely to be the next workhorse technology for the diabetes
market, particularly as manufacturers get closer to the claim for finger stick
replacement (Dexcoms Gen 6). The early experience with CGM was sour,
but newer sensors should overcome this with big leaps in precision and
reliability;
(2) Following a series of less accurate first generation products, the technology
is finally here with Dexcoms G4 Platinum sensor;
(3) Medtronics Enlite (awaiting FDA approval) will be an improvement versus
earlier generation sensors, but will still lag G4 Platinum in performance
(particularly in the low range), durability, and comfort;
(4) Reimbursement remains a challenge but has improved meaningfully for
both Type 1 and insulin-dependent Type 2 patients;
(5) Physicians from our survey and interviews are projecting healthy increases
in personal CGM usage at their practices over the next 12+ months; and
(6) DTC marketing could further accelerate the CGM adoption curve as CGM
awareness, particularly of new sensors, remains somewhat low at many
endocrinology practices. We heard from a few physicians many people
dont yet realize how much better (Dexcoms) G4 is.
Survey Details
Question 1: For what percentage of your Type 1 diabetics are you recommending:
(1) Professional CGM; and (2) Personal CGM?
Response: The Endocrinologists in our survey indicated that they recommend
professional CGM for 33% of their Type 1 patients and personal use CGM for 47%
of their patients.
Question 2: What percentage of your patient base are active CGM users amongst
both your Type 1 and Type 2 populations?
Response: The doctors in our survey indicated that 24% of their Type 1 patients are
active CGM users while 7% of their Type 2 patients use CGM. These are
encouraging numbers, in our view, and higher than the market as a whole, where we
estimate that only about 7% of Type 1 diabetics in the US use personal continuous
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glucose monitoring on a regular basis. On the Type 2 side, we believe that well under
1% of patients are active CGM users in the United States.
Question 3: Over the last 12 months, has the number of patients on CGM at your
practice increased, decreased, or stayed the same?
Response: Of the 27 endocrinologists in our survey, 22 or 81% indicated that the
number of patients on CGM has increased by an average of 27%. None of the doctors
said their CGM patients had decreased, and five said the number of patients had
stayed the same, for a weighted average increase of 22% over the last 12 months.
Question 4: Over the next 12 months, how will the number of patients using
personal CGM devices change at your practice?
The physicians in our survey are
projecting a weighted average
increase in patients on CGM of
23% over the next 12 months.
Response: Looking out 12 months, 23 of 27 Endos (85%) said they expect the
number of patients using CGM at their practice to increase, by an average of 27%.
None of the doctors are projecting a decrease, and four said the number would stay
the same, for a weighted average projected increase of 23%.
Question 5: What percent of your personal CGM patients are also on an insulin
pump?
Response: The Endos indicated that 79% of their CGM users are also on an insulin
pump. This is an interesting statistic, in our view, and consistent with Dexcoms
estimation that about 60% of its sensor users are also on a pump (about half on
Medtronic MiniMed, 30% on Animas). The implication here is that CGM penetration
remains very low (about 2% by our estimates) amongst Type 1 diabetics who are not
today on an insulin pump, giving ample room for CGM manufacturers with those
patients currently on multiple daily injections alone (about 70% of Type 1 diabetics).
Having said that, the non-pump users will also require more work in the form of
education and likely DTC advertising, because this group is likely to be less eager to
adopt new technology.
Question 6: Please indicate which CGM products you currently recommend for your
patients (check all that apply):
Response: Forty-one percent of the doctors indicated they currently prescribe G4
Platinum, while the remainder indicated they prescribe Medtronic sensors. While we
dont have great market data on the number of docs prescribing MDT versus
Dexcom, Dexcom has pointed to a broad prescriber base of approximately 6,000 in
1H13, double that of 2012.
Question 7: What are the most important factors driving your sensor
recommendation for CGM?
Response: The single most important factor cited was sensor accuracy and
reliability, with 74% of physicians citing this as a most important metric. Accuracy
was followed by comfort (67%), ease of use (63%), duration of the sensor (59%),
and profile of the sensor (41%). Other responses included good service from the
company and the ability to easily download data.
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Figure 1: Factors Driving Sensor Recommendation for CGM

80%
70%
60%
50%
40%
30%
20%
10%
0%
74%
67%
63%
59%
41%
Accuracy/Reliability
Comfort
Duration of Sensor
Profile of sensor
Ease of Use
Source: J.P. Morgan survey data.
Question 8: What are the biggest challenges to putting a new patient on CGM
therapy?
Response: The biggest challenges cited to putting patients on CGM therapy were:
(1) reimbursement (both for Type 1 and Type 2) and (2) out-of-pocket costs for the
patient. Seventy-four percent of Endos said reimbursement for Type 2 patients is a
challenge, which comes as no surprise given that we are still in the early days of
Type 2 coverage, even for insulin-using diabetics. This was followed by 59% of the
docs saying that out-of-pocket costs were too much for many patients, and 52%
saying Type 1 reimbursement can still be a challenge. Depending on the plan, the
patient may be responsible for anywhere between 0% and 50% of the costs of CGM
therapy. Some physicians (37%) also indicated that patient compliance is an issue,
while 26% said their practice has inadequate staffing/resources to support CGM
programs. Finally, 11% indicated that CGM is not profitable for their practice, while
another 11% cited complicated technology as a barrier to adoption.
Barriers to Market Adoption

The technology is here, in our view, but still 93-94% of Type 1 diabetics are not
using it. Several barriers to adoption remain for CGM technology, including:
(1) reimbursement is still a hurdle for some Type 1s (mainly Medicare) and most
Type 2s; (2) even after reimbursement, out of pocket costs are prohibitive for many
patients; (3) earlier generation devices that were not accurate and reliable have
clouded physician and patient perception on continuous monitoring devices; (4)
many physician practices dont have adequate resources to support a CGM program;
(5) CGM patient management is not well reimbursed; and (6) technology is
complicated and patient compliance can be an issue, particularly as diabetics often
want to be discrete and dont want to use devices to remind themselves or others of
their disease.
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The good news is perception is

improving with technology.
Endos we have spoken with who
have used and prescribed G4
Platinum are very enthusiastic
about the technology, and we
are hearing some anecdotal
feedback around the uptake of
Dexcoms CGM First
approach.
Earlier technologies did not work, creating market fatigue. From the
physicians perspective, many have had a bad first experience with earlier
generation technology (Dexcoms STS, the GlucoWatch) and/or the current SofSensor from Medtronic, leaving providers somewhat weary of personal CGM
technology for their patients. In addition, many Endocrinology practices in the US
are still not there in terms of best practices and may not have adequate staffing to
transition their patient base to more CGM usage. The good news is that perception
is improving with technology. Endos we have spoken with who have used and
prescribed G4 Platinum are very enthusiastic about the technology, and we are
hearing some anecdotal feedback around the uptake of Dexcoms CGM First
approach, particularly leading with Professional CGM to get a patient started.
Reimbursement is still a challenge for Type 1 patients, according to our survey
work, though this has improved meaningfully. Most of the physicians and nurses
we spoke with indicated that with the exception of Medicare, Type 1 is relatively
routinely reimbursed. Type 2 patients are by no means routine but are getting better
and better coverage, particularly those who are dosing insulin at mealtimes (recall as
well that Humana recently updated its CGM coverage policy to include insulin using
T2 patients). Even after reimbursement, the incremental cost of CGM therapy can be
a hurdle for many patients. Coverage plans vary widely, reimbursing anywhere from
50-100% of the costs per our feedback. Dexcoms starter kit costs about $850, with
sensor ASPs of about $65-70. If we assume the average patient uses about 25 sensors
per year, and that the average copay is 20%, the annual out-of-pocket cost is just over
$500, which is a hurdle for many patients.
Financial Outlook
Revenue
We forecast 2013 sales of $143.5M (+44% YOY), including product revenue of
$140M (+51% YOY) which is $2M ahead of Street consensus and compares with the
companys $130-140M guidance range. Over the next several years, we forecast a
revenue CAGR for Dexcom of 34%, reaching $428M in sales in 2017E. We see solid
top-line growth as sustainable as the company: (1) expands its call point to pediatrics
(20-25% of Type 1 diabetics, YE13), including the Dexcom Share system;
(2) leverages its sensor augmented pump partnerships with Animas and Tandem
(2014+); (3) builds out its clinical data package, including cost effectiveness support
(2014+); and (4) further penetrates the Type 2 population.
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Kimberly Gailun
(1-617) 310-0740

13 September 2013
Figure 2: Dexcom Revenue Trajectory, 2010-2017E

$450.0
$400.0
$350.0
$300.0
$250.0
$200.0
$150.0
$100.0
$50.0
$0.0
$427.7
$331.3
$254.0
$190.5
$48.6
2010
$76.3
2011
$99.9
2012
$143.5
2013E
2014E
2015E
2016E
2017E
Source: Company Reports and J.P. Morgan Estimates
Dexcom is coming off of a very solid 2Q result. Our sales outlook is $4M ahead of
Street consensus estimate for 2013 and $6M ahead for 2014. Our 2015 forecast is
$17M above the Street at $254M.
Operating Margins
In 2013, we forecast an operating loss for Dexcom of $34.2M. On a cash basis
(excluding D&A and share based compensation), the net operating loss is projected
to be $2.2 million. We expect the company to generate operating income in 2014 of
$24.9M on a cash basis, with a loss of $15M on a GAAP basis. On a GAAP basis,
we forecast operating profitability in 2015, with margins of 7% growing to 24% by
2017E. Margin expansion is driven by a combination of gross margin expansion and
leverage of operating expenses including both SG&A and R&D. On the gross margin
front, Dexcom is targeting sensor margins of 70-75% on its sensors and just under
50% on hardware. This highlights what we view as one of Dexcoms key competitive
advantages manufacturing efficiencies and know-how. We expect the company to
look to decrease sensor cost further in future generation models, particularly as the
company thinks about broader penetration in the Type 2 community. Our aggregate
gross margin forecast goes from 60% for 2013E to 70% in 2017E, as sensor margins
improve and sensors become a bigger piece of the overall business mix.
We forecast SG&A leveraging from 56% of sales in 2013E to 36% of sales in 2017E.
Dexcom went from 48 reps in mid-2012 to 68 reps today, and should be able to
leverage this new base going forward. We expect the company to continue to add
reps as it grows the business, but not likely at the same rate we've seen over the past
year or so. Recall that Dexcom should also benefit from sensor sales through its
sensor-augmented pump partnerships with Animas and Tandem as we move through
2014 and beyond.
Earnings
We forecast cash profitability for Dexcom in 2014 and GAAP earnings in 2015. For
2013, we project a loss per share of $0.48 on a GAAP basis and $0.03 on a cash
basis. Moving to 2014, we forecast a GAAP loss per share of $0.20 with cash
earnings of $0.32/share. Our GAAP EPS projections for 2015-2017E are $0.18,
$0.52, and $1.00, respectively.
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Kimberly Gailun
(1-617) 310-0740

13 September 2013
Cash Flow
Dexcom is cash flow positive today, and we forecast healthy cash flows through
2017E. The company has raised equity four times since its April 2005 IPO, with the
most recent round in May 2011. Based on meaningfully improved cash flow, we do
not expect the company to come back to the equity markets going forward. On a free
cash flow basis, we forecast a loss in 2013 of $17M, turning positive in 2014
($2.7M) and ramping to $92M come 2017E.
Figure 3: Dexcom Free Cash Flow Projections ($ in Millions)
$92.0
$100.0
$80.0
$56.1
$60.0
$40.0
$29.3
$20.0
$2.7
$0.0
($20.0)
($16.5)
($40.0)
2013E
2014E
2015E
2016E
2017E
Source: J.P. Morgan Estimates.
Valuation
We value Dexcom primarily on an EV/Sales basis, supported by DCF analysis. We
use a representative sample of other small cap MedTech companies as the relevant
comp group. We are introducing a December 2014 price target of $32 for
Dexcom, which is based on 7.8x our 2016 sales estimate, discounted back over
one period at 11%, implying 16% upside potential from current levels. Our
target multiple represents a premium to the companys peer group, but is closer to in
line when adjusted for the companys top line growth rate at 30%+. Based on JPM
and Bloomberg estimates, the peer group currently trades at 5.4x 2014 sales
estimates and 4.5x 2015E. Dexcom today is at a clear premium to the group, trading
at 10.4x 2014E sales and 7.8x 2015E sales. Having said that, Dexcom is the only
company we are aware of in the space with a 30%+ revenue CAGR expected over
the next five years with a huge market opportunity and a clear path to profitability,
all of which we think warrant a premium multiple.
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Kimberly Gailun
(1-617) 310-0740

13 September 2013
Table 4: EV/Sales Price Target Methodology

Projected 2016 Revenues
1-Year Forward Multiple
Enterprise Value
$331
7.8x
$2,582
Discount Periods (from Dec-2014)

Discount Rate
Implied Enterprise Value (Dec-2014)
1.0
11%
$2,326
Projected Cash (YE14)

Projected Debt (YE14)
Implied Market Cap
$47
$7
$2,365
Projected Shares Outstanding (YE14)
73.8
Implied Price per Share (Dec-2014)

Upside from Current Price
$32.00
16%
Source: J.P. Morgan Estimates
Physician, patient and industry feedback point to continued strength on a quarterly

basis. As such, we see the current multiple as sustainable over the next 12+ months
and see upside to numbers as (1) Dexcom expands its call base to pediatrics; (2) G4
Platinum awareness improves; and (3) the Type 2 opportunity unfolds.
Our Discounted Cash Flow Analysis Supports the Stock Higher
Our DCF analysis points to a share price of $35. Our model projects free cash flow
through 2024, where we assume from 2018-2024E revenue growth decelerates
toward 18%, with EBIT margins expanding from 23% in 2017E to 28% in 2024E.
These forecasts turn in free cash flow growth of 20% in 2024E, but we assume the
perpetual rate of growth is lower at 3-5%. Using a discount rate of 11%, which is
about in line with the company's WACC, our DCF model implies a fair value for
DXCM of $35. This is higher than our $32 price target, but we are hesitant to call for
any meaningful multiple expansion on an EV/Sales basis (in light of the comp group)
from these levels and, as such, are using EV/Sales as our primary metric.
23

13 September 2013
Kimberly Gailun
(1-617) 310-0740
Table 5: Dexcom Discounted Cash Flow Analysis

FY Ending
Sales
Sales growth
EBIT
EBIT margin
Tax-affected EBIT
Free Cash Flow
growth
Discount Rate
10.0%
10.5%
11.0%
11.5%
12.0%
-
Discount Rate
10.0%
10.5%
11.0%
11.5%
12.0%
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Dec-24
$142
$189
(35)
-24.4%
(35)
$9
(16)
-24.4%
(35)
$9
-77%
$252
32.8%
16
-8.3%
(16)
$2
NM
$328
33.4%
50
6.4%
10
$27
87%
$424
30.5%
99
15.3%
33
$50
70%
$543
29.1%
132
23.4%
64
$85
26%
$690
28.1%
173
24.4%
87
$107
30%
$871
27.1%
224
25.1%
116
$139
29%
$1,080
26.1%
286
25.8%
152
$179
28%
$1,319
24.1%
359
26.5%
196
$228
25%
$1,584
22.1%
439
27.2%
248
$286
23%
$1,871
20.1%
523
27.7%
307
$350
20%
A
+
Discounted
Cash
Flows
(2013-2024)
714
691
669
648
627
D
Net
Debt
(39)
(39)
(39)
(39)
(39)
B
=
PV of Terminal Value at a
Perpetual Growth Rate of
3.0%
4.0%
5.0%
3.0%
Firm
Value
4.0%
1,952
1,740
1,558
1,400
1,264
2,300
2,027
1,797
1,602
1,435
2,786
2,418
2,117
1,867
1,656
2,666
2,431
2,226
2,048
1,891
3,014
2,718
2,466
2,250
2,063
E
Total Equity Value
Equivalent Terminal EBITDA

Multiple (Forward 12-Months)
5.0%
3.0%
4.0%
5.0%
3,500
3,109
2,786
2,514
2,283
11.6x
10.8x
10.2x
9.6x
9.1x
13.5x
12.5x
11.6x
10.9x
10.2x
16.2x
14.8x
13.6x
12.5x
11.7x
Equity Value per Share
PV of Terminal Value as a
Percentage of Firm Value
3.0%
4.0%
5.0%
3.0%
4.0%
5.0%
3.0%
4.0%
5.0%
2,705
2,470
2,266
2,087
1,930
3,053
2,757
2,506
2,289
2,102
3,539
3,149
2,825
2,554
2,323
$38.16
$34.84
$31.96
$29.44
$27.22
$43.06
$38.89
$35.34
$32.29
$29.65
$49.92
$44.41
$39.85
$36.02
$32.76
73.2%
71.6%
70.0%
68.4%
66.8%
76.3%
74.6%
72.9%
71.2%
69.6%
79.6%
77.8%
76.0%
74.2%
72.5%
24
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Diabetes 101
A Debilitating, Deadly Disease
Diabetes is a widespread disease, marked by abnormally high blood sugar
levels. The statistical prevalence of the disease is staggering. The International
Diabetes Federation estimates there are 371 million people with diabetes worldwide.
In the United States alone, approximately 29 million people have diabetes. An
estimated 20 million people have been diagnosed according to the ADA, leaving
about 30% yet to be diagnosed. The annual economic cost of the disease is huge,
totaling approximately $245 billion in the US in 2012, according to ADA. These
costs included roughly $176 billion annually in direct medical costs and $69 billion
annually related to disability and mortality.
Diabetes is characterized by the inability to manufacture, or effectively utilize,
the hormone insulin. This hormone, produced in the beta cells of the pancreas,
enables the body's cells to take in glucose (sugar) from the bloodstream, providing
the cells with energy. In diabetes, glucose accumulates in the blood, and cells are
deprived of energy acutely. Untreated diabetes can produce symptoms such as weight
loss, frequent urination, increased hunger and thirst, tiredness, vision disturbances
and in severe cases, coma. Diabetics can also develop long-term chronic
complications, such as diseases of the eyes (retinopathy), kidneys (nephropathy),
nerves (neuropathy), and the heart.
There are two basic forms of diabetes: Type 1 and Type 2. Type 1 diabetics are
unable to produce insulin and they must receive daily insulin therapy to survive. In
this form of the disease, the pancreatic beta cells are destroyed by immune reactions
and the pancreas cannot produce insulin. Type 1 diabetes usually manifests itself in
childhood or adolescence and was previously known as juvenile diabetes, but adults
can also develop this variation of the disease. Type 1 diabetics represent 5-10% of all
patients with the disease. According to our estimates, there are approximately 1.6
million Type 1 diabetics in the United States, and the incidence of the disease
appears to be increasing worldwide.
Type 2 diabetics are not entirely insulin deficient. This form of the disease is
caused by the insufficient production of insulin by pancreatic beta cells.
Alternatively, the pancreas may produce normal amounts of insulin, but the body's
cells may be resistant to the effects of the hormone. Both scenarios result in reduced
uptake of glucose by cells and increased levels of glucose in the blood
(hyperglycemia). Obesity increases insulin resistance, and obese patients are
therefore predisposed to diabetes. Since Type 2 patients are not entirely insulin
deficient, some patients can be treated with oral medications to lower blood sugar
levels. More severe cases require insulin therapy as a supplement to, or instead of,
oral drug therapy. Type 2 diabetes is the most common form of the disease,
accounting for 90-95% of cases. This form of the disease usually manifests itself in
adulthood, but is on the rise among children and adolescents. The prevalence of Type
2 diabetes is on the rise in the United States owing to an aging population, increased
levels of obesity, and more sedentary lifestyles.
Other forms of diabetes include gestational diabetes and pre-diabetes. Pregnant
women who have never had diabetes before but have high blood glucose levels
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Kimberly Gailun
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13 September 2013
during pregnancy are said to have gestational diabetes. Seen in roughly 4% of all
pregnant women, there are about 135,000 cases of gestational diabetes in the United
States each year. When you have gestational diabetes, your pancreas works overtime
to produce insulin, but still fails to lower blood glucose levels, leading to
macrosomia or an overweight baby. Babies with excess insulin become children
who are at increased risk for obesity and adults who are at risk for Type 2 diabetes.
Also, there is a 2 in 3 chance that once a woman has had gestational diabetes, it will
return in future pregnancies. Furthermore, women with gestational diabetes usually
go on to develop Type 2 diabetes, albeit years later.
Diabetes Therapy: Controlling Glucose Levels Is Key

Treating diabetes is an enormous challenge. Diabetes is one of the most
frustrating and difficult to mange diseases and can be significantly debilitating. These
debilitating effects are a function of hyperglycemia and hypoglycemia (high and low
blood sugar levels). Remember that blood sugar levels tend to fluctuate through the
course of a day depending upon food intake (carbohydrate and fat content), exercise,
stress, illness, hormonal releases etc. As such, it is necessary to maintain these levels
within a somewhat normal range through frequent testing and the regular
administration of insulin via injections or pump therapy. Not only does this expose a
patient to the risk of over-correction, which can lead to rapid mood swings, but is
also a major time commitment. Prior to the emergence of intensive insulin
management, the conventional treatment for Type 1 diabetes included the
administration of 1-2 shots of insulin per day along with meals that had fixed
carbohydrate loads. For Type 2 diabetes, insulin therapy was often viewed as
treatment of last resort, as patients relied more on dietary management, exercise, and
oral drugs.
However, studies performed over the last decade or so show that the intensive
control of blood glucose levels can increase patients' life spans and reduce the
risk of complications. The goal of tight control is to maintain blood glucose levels
as close to normal as possible. Normal blood glucose levels are between 70-120
mg/dl before meals and less than 180 mg/dl after meals. The Diabetes Control and
Complications Trial (DCCT), a groundbreaking study, demonstrated that tight
control reduced the prevalence and seriousness of complications in Type 1 patients.
The study evaluated 1,441 patients with Type 1 diabetes for several years. Half of the
patients were treated with intensive management (tight control) of glucose levels,
using either an external insulin pump or at least three daily insulin injections, and
frequent blood glucose monitoring. The other half of the group received less rigid
standard treatment, with one or two daily insulin injections. The results demonstrated
a significant reduction in morbidity and long-term complications in the group with
tight control. Compared with the group receiving standard therapy, tightly controlled
patients demonstrated a 75% reduction in the onset of diabetic eye disease, a 50%
reduction in the onset of kidney disease, and a 66% reduction in the onset of nerve
disease. And in 1998, a second trial, the United Kingdom Prospective Diabetes study
(UKPDS), demonstrated that tight control also significantly reduces complications in
Type 2 diabetics.
Despite reducing the incidence of long-term complications, tight control can
have some negative consequences. First, the DCCT study demonstrated that tightly
controlled patients had a higher frequency of hypoglycemic (low blood sugar)
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Kimberly Gailun
(1-617) 310-0740

13 September 2013
episodes. Hypoglycemic patients can develop symptoms ranging from tiredness and
nervousness to disorientation. Tightly controlled patients must be cognizant of these
symptoms and they must be prepared to treat themselves. Second, intensively
managed patients appear to gain more weight compared with patients on standard
therapy. Finally, tight control costs more than less rigid, standard therapy. The
increased costs are due to more expensive supplies or more frequent use of supplies,
and increased visits to health care practitioners. Despite the challenges associated
with tight control, the positives of this type of treatment (increased well being,
decreased long-term complications, and greater lifestyle flexibility) generally
outweigh the negatives. As such, an increasing number of Type 1 diabetics are
resorting to intensive management. Furthermore, guidelines from the American
Diabetes Association suggest more aggressive treatment for Type 2 patients as
well, even as a first line therapy for some.
Intensive management requires frequent blood glucose measurements. The
traditional method of checking blood sugar levels requires the patient to prick their
finger with a needle in order to obtain a drop of blood. The drop of blood is applied
to a special test strip and a glucose meter measures the amount of glucose on the
strip. This procedure must be performed several times per day, depending on the
volatility of a patient's blood glucose. Finger stick measurements can be painful and
inconvenient, thereby reducing patient compliance.
Continuous Glucose Monitoring

Continuous glucose monitoring (CGM) devices allow patients to monitor their
glucose levels over time, importantly looking at trends rather than single points in
time. Current generation devices must be calibrated with a finger stick every
12 hours. While early adoption of CGM was tempered by a lack of reimbursement as
well as technological shortcomings of first generation devices, we believe we are
approaching a tipping point for CGM therapy in both Type 1 and Type 2 patients.
Dexcom is today the clear technology leader, offering in G4 Platinum an accurate,
reliable, and comfortable sensor. Currently, Medtronic and Dexcom have approved
CGM devices on the US market. In April 2007, CMS announced its preliminary
decision to grant new billing codes for CGMs, which started the technology on a
gradual path to better reimbursement.
Continuous glucose monitors measure glucose levels in the interstitial fluid, and
provide glucose readings every three minutes on average. This gives patients a much
better idea of where their glucose levels are on a consistent basis (vs. multiple finger
sticks per day) allowing for better overall control with fewer finger sticks.
Continuous glucose monitors aim to increase patient compliance, reduce pain, and
improve patient lifestyle.
In addition to measuring glucose levels at specific points in time, it is also important
to gauge the effectiveness of a diabetic's long-term glucose control. This assessment
can be performed by evaluating blood levels of Hemoglobin-A1c (HbA1c). A sample
of blood, drawn from a patient's arm by a health care professional, is sent to a
laboratory for testing. Hemoglobin in the blood can combine with glucose, and the
percent of hemoglobin that has glucose attachments (glycosylated) can be measured.
The extent of this reaction is dependent on blood glucose levels that were present
during the life span of currently circulating red blood cells. Therefore, glycosylated
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Kimberly Gailun
(1-617) 310-0740

13 September 2013
hemoglobin (HbA1c) blood tests reflect the level of hyperglycemia during the past
six to twelve weeks, and these measurements serve as a rough estimate of the
patients ability to control blood glucose levels during this time period. Normal
HbA1c levels for non-diabetic patients are usually between 4-6%. Diabetic patients
usually aim for a level below 8%.
Insulin Pumps
Insulin pumps are an increasingly popular method of insulin delivery, today being
used by nearly 30% of US Type 1 diabetics. Traditional insulin pumps consist of a
small, battery-operated, computer-controlled motor attached to a reservoir/cartridge.
The reservoir is similar to a syringe, but slightly larger, and the entire pump is
enclosed in a plastic case about the size of a pager. An insulin pump mimics the
human pancreas by automatically releasing small amounts of rapid-acting insulin
every few minutes. This basal rate of insulin can be adjusted to keep the blood sugar
levels steady between meals and during sleep. At meal times, the patient sets the
pump to deliver a bolus rate, which depends on the carbohydrate content of the meal.
This is accomplished by just a few button presses. A pump is connected to the patient
via an infusion set, which consists of a thin plastic tube, and a needle or soft cannula.
The needle or cannula is inserted under the skin, usually in the abdomen, and needs
to be changed every two to three days. The pump itself is worn outside the body, in a
pocket, a pouch, or on a belt holder. Insulet Corp (PODD) offers a disposable
alternative to traditional insulin pumps with its OmniPod wearable patch pump. With
OmniPod, the infusion set, tubing, cannula, insulin cartridge and batteries are all selfcontained in the disposable pod for a more discreet and easier to use solution.
28

13 September 2013
Kimberly Gailun
(1-617) 310-0740
Models
Table 6: Dexcom Annual Income Statement, 2012-2017E
Product Revenue
Development & Other
Total Revenue
2012
92.9
7.0
99.9
2013E
140.0
3.5
143.5
2014E
188.7
1.8
190.5
2015E
254.0
0.0
254.0
2016E
331.3
0.0
331.3
2017E
427.7
0.0
427.7
2013E
51%
2014E
35%
2015E
35%
2016E
30%
2017E
29%
44%
33%
33%
30%
29%
Product cost of sales

Other cost of sales
Total Cost of Sales
Gross Profit
48.4
5.0
53.4
46.5
56.1
1.2
57.3
86.2
67.1
0.5
67.6
122.9
80.6
80.6
173.4
101.9
101.9
229.5
126.2
126.2
301.5
16%
20%
20%
26%
24%
7%
85%
18%
43%
19%
41%
26%
32%
24%
31%
62.8
39.5
(55.8)
78.5
41.1
(33.4)
94.0
42.8
(14.0)
111.0
43.5
18.9
131.5
44.2
53.8
152.7
44.8
104.0
25%
4%
20%
4%
18%
1%
19%
2%
16%
2%
18.4
6.6
25.4
6.6
32.5
7.1
38.4
7.5
44.5
7.8
50.7
8.2
38%
28%
18%
16%
14%
Interest Income
Interest Expense
Pretax Income
0.1
(0.0)
(55.7)
0.0
(0.8)
(34.2)
0.0
(0.8)
(14.8)
0.0
(0.8)
18.1
0.0
(0.8)
53.0
0.0
(0.8)
103.2
Tax Expense
Net Income (Reported)
(1.3)
(54.4)
(34.2)
(0.0)
(14.7)
4.9
13.2
14.3
38.7
27.9
75.4
Reported EPS
Cash EPS
($0.79)
($0.45)
($0.48)
($0.03)
($0.20)
$0.32
$0.18
$0.56
$0.52
$0.92
$1.00
$1.40
Diluted Shares
68.7
70.9
73.2
74.0
74.7
75.5
2012
53.4%
46.6%
67.6%
39.5%
NM
NM
NM
NM
2013E
39.9%
60.1%
56.1%
28.6%
NM
NM
NM
NM
2014E
35.5%
64.5%
51.1%
25.6%
NM
NM
NM
NM
2015E
31.8%
68.3%
43.7%
22.6%
7.4%
7.1%
35.0%
5.2%
2016E
30.8%
69.3%
39.7%
19.6%
16.2%
16.0%
35.0%
11.7%
2017E
29.5%
70.5%
35.7%
16.6%
24.3%
24.1%
35.0%
17.6%
SG&A
R&D
Operating Income
Stock based compensation
Depreciation & Amortization
MARGIN ANALYSIS
COGS/Sales
Gross Margin
Sales and marketing
R&D
Operating Margin
Pretax Margin
Tax Rate
Net Margin
29
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Table 7: Dexcom Balance Sheet, 2012-2017E

2012
2013E
2014E
2015E
2016E
2017E
26.6
49.3
78.6
134.7
226.6
Net Accounts Receivable

Inventories
Prepaid Expenses and Other
Total Current Assets
8.1
40.6
19.5
7.4
2.0
77.6
22.4
5.8
3.0
57.7
30.2
5.6
3.0
88.0
40.6
6.7
3.0
128.9
53.0
8.5
3.0
199.1
68.4
10.5
3.0
308.5
Property and Equipment, Net

Restricted Cash
Other
Total Assets
18.9
1.0
8.5
106.0
20.5
1.0
8.5
87.7
22.6
1.0
8.5
120.2
25.4
1.0
8.5
163.7
28.7
1.0
8.5
237.3
32.8
1.0
8.5
350.8
Current Liabilites
Accounts Payable and Accrued Liabilities
Accrued Payroll and Related Expenses
Current portion of long term debt
Current portion of deferred revenue
Total Current Liabilities
8.7
9.2
0.2
1.4
19.5
8.4
9.0
0.2
1.4
19.0
10.1
10.7
0.2
1.4
22.4
12.1
12.9
0.2
1.4
26.6
15.3
16.3
0.2
1.4
33.2
18.9
20.2
0.2
1.4
40.7
Other Liabilites
Long-Term Debt
Total Liabilites
2.1
7.4
29.0
2.1
7.4
28.5
2.1
7.4
31.9
2.1
7.4
36.1
2.1
7.4
42.7
2.1
7.4
50.2
Stockholders' Equity
Common Stock
Additional Paid-In Capital
Accumulated Other comprehensive loss
Accumulated Deficit
Total Stockholders' Equity
0.1
522.6
(0.1)
(445.6)
77.0
0.1
601.0
(34.3)
(507.5)
59.3
0.1
691.1
(49.0)
(554.0)
88.3
0.1
794.8
(35.8)
(631.5)
127.6
0.1
914.0
2.9
(722.4)
194.6
0.1
1,051.1
78.3
(830.0)
300.6
Total Liabilities and Stockholder's Equity
106.0
87.7
120.2
163.7
237.3
350.8
Assets
Current Assets:
Cash and Cash Equivalents
Liabilites and Stockholders' Equity
30
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Table 8: Dexcom Statement of Cash Flows

2012
Cash Flows from Operating Activities:
Net Gain (Loss)
(54.5)
Depreciation & amortization
6.6
Share-based compensation
18.4
Accretion and amortization related to investments
0.8
Amortization of debt issuance costs
0.1
Release of valuation allowance against deferred tax assets
Change in fair value of contingent consideration
0.7
Changes in operating assets and liabilities
A/R
(7.0)
Inventory
0.7
Prepaids and other current
(0.8)
Restricted cash
(0.1)
A/P and Accrued expenses
0.3
Accrued payroll and related expenses
2.4
Deferred revenue
0.1
Deferred rent and other
0.5
Net Cash From/Used in Operating Activities
(33.1)
2013E
2014E
2015E
2016E
2017E
(34.2)
6.9
21.7
0.6
0.1
(14.7)
7.3
24.3
0.6
0.1
13.2
7.6
26.7
0.6
0.1
38.7
8.0
28.9
0.6
0.1
75.4
8.4
31.2
0.6
0.1
(2.9)
1.6
(1.0)
(0.3)
(0.2)
(1.3)
(7.9)
(7.8)
0.2
1.7
1.8
(1.3)
12.1
(10.4)
(1.1)
2.0
2.2
(1.3)
39.7
(12.4)
(1.8)
3.2
3.4
(1.3)
67.5
(15.4)
(2.0)
3.6
3.9
(1.3)
104.5
Free Cash Flow
(42.6)
(16.5)
2.7
29.3
56.1
92.0
(66.4)
(15.0)
104.3
40.0
20.0
(9.5)
28.4
(8.6)
16.5
(9.4)
10.6
(10.3)
(10.3)
(11.4)
(11.4)
(12.5)
(12.5)
3.6
6.6
10.2
10.0
10.0
Net Increase (Decrease) in Cash
5.5
18.5
22.7
29.3
56.1
92.0
Cash and Cash Equivalents at Beginning of Year

Cash and Cash Equivalents at End of Year/Period
2.5
8.0
8.0
26.6
26.6
49.3
49.3
78.6
78.6
134.7
134.7
226.6
Cash Flows from Investing Activities:

Purchase of available for sale marketable
securities
Proceeds from maturity of available for sale
marketable securities
Purchase of PP&E
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Proceeds from Issuance of Common stock
Proceeds from Issuance of Long Term Debt
Repayment of equipment loan
Net Cash Provided by Financing Activities
1.0
31
Kimberly Gailun
(1-617) 310-0740

13 September 2013
Dexcom: Summary of Financials

Income Statement - Annual
Revenues
Cost of products sold
Gross profit
SG&A
R&D
Operating income
Note: EBITDA
Net interest income / (expense)
Other income / (expense)
Income taxes
Net income - GAAP
Net income - recurring
Diluted shares outstanding
EPS - excluding non-recurring
EPS - recurring
Balance Sheet and Cash Flow Data
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Current assets
PP&E
Total assets
Total debt
Total liabilities
Shareholders' equity
FY12A FY13E FY14E FY15E

100
144
191
254
(53)
(57)
(68)
(81)
47
86
123
173
(63)
(79)
(94) (111)
(39)
(41)
(43)
(43)
(56)
(33)
(14)
19
(56)
(33)
(14)
19
0
(1)
(1)
(1)
1
0
0
(5)
(54)
(34)
(15)
13
(54)
(34)
(15)
13
69
71
73
74
(0.79) (0.48) (0.20)
0.18
(0.79) (0.48) (0.20)
0.18
FY12A FY13E FY14E FY15E
8
27
49
79
20
22
30
41
7
6
6
7
2
3
3
3
78
58
88
129
19
21
23
25
106
88
120
164
8
29
77
8
28
59
8
32
88
(55)
7
(4)
19
(33)
(34)
7
(4)
23
(8)
(15)
7
(5)
25
12
Capex
(10)
(9)
Free cash flow
(43)
(16)
Cash flow from investing activities
28
16
Cash flow from financing activities
10
10
Dividends
Dividend yield
Note: $ in millions (except per-share data).Fiscal year ends Dec
(9)
4
11
0
-
Net income (including charges)

D&A
Change in working capital
Other
Cash flow from operations
32
Income Statement - Quarterly

Revenues
Cost of products sold
Gross profit
SG&A
R&D
Operating income
Note: EBITDA
Net interest income / (expense)
Other income / (expense)
Income taxes
Net income - GAAP
Net income - recurring
Diluted shares outstanding
EPS - excluding non-recurring
EPS - recurring
Ratio Analysis
Sales growth
EBIT growth
EPS growth - recurring
Gross margin
EBIT margin
EBITDA margin
Tax rate
8 Net margin
36
128 Debt / EBITDA
Debt / Capital (book)
13
8 Return on assets (ROA)
(9) Return on equity (ROE)
27
40 Enterprise value / sales
Enterprise value / EBITDA
(10) Free cash flow yield
30
(10)
0
-
1Q13A 2Q13A 3Q13E

30A
36A
37
(13)A
(14)A
(14)
(18)A
(21)A
(19)
(9)A
(11)A
(11)
(11)A
(10)A
(8)
(11)A
(10)A
(8)
(0)A
(0)A
(0)
0A
0A
0
(11)A
(10)A
(8)
(11)A
(10)A
(8)
70A
73A
71
(0.16)A (0.14)A
(0.11)
(0.16)A (0.14)A
(0.11)
FY12A FY13E FY14E
31.0%
43.6%
32.8%
24.4% (40.1%) (58.2%)
16.0% (39.1%) (58.4%)
46.6%
60.1%
(55.8%) (23.3%)
(55.8%) (23.3%)
(2.3%)
0.0%
(54.5%) (23.8%)
4Q13E
41
(16)
(21)
(9)
(5)
(5)
(0)
0
(5)
(5)
72
(0.07)
(0.07)
FY15E
33.3%
(235.5%)
(189.2%)
64.5%
(7.3%)
(7.3%)
(0.3%)
(7.7%)
68.3%
7.4%
7.4%
27.0%
5.2%
NM
100.0%
NM
100.0%
0.4
100.0%
(48.1%) (35.3%)
(60.0%) (50.2%)
(14.1%)
(19.9%)
9.3%
12.3%
10.3
NM
0.2%
7.6
102.2
1.5%
NM
100.0%
20.0
NM
(2.3%)
13.8
NM
(0.8%)

13 September 2013
Kimberly Gailun
(1-617) 310-0740
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Dexcom (DXCM, DXCM US) Price Chart
50
40
30
Price($)
20
10
0
Feb
12
May
12
Sep
12
Dec
12
Apr
13
Aug
13
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
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Coverage Universe: Gailun, Kimberly: Insulet Corp (PODD), Mako Surgical (MAKO), NxStage Medical, Inc. (NXTM), The Cooper
Companies, Inc. (COO), Wright Medical Group (WMGI)
33
Kimberly Gailun
(1-617) 310-0740

13 September 2013
J.P. Morgan Equity Research Ratings Distribution, as of June 28, 2013
J.P. Morgan Global Equity Research Coverage

IB clients*
JPMS Equity Research Coverage
IB clients*
Overweight
(buy)
44%
56%
42%
76%
Neutral
(hold)
44%
50%
50%
66%
Underweight
(sell)
12%
40%
8%
55%
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(1-617) 310-0740

13 September 2013
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North America Equity Research

CGM Approaching the Tipping Point; Initiating at

Price Target: $32.00

Medical Technology & Devices

DXCM share price ($)

Dexcom has an experienced management team and a profitable model. CEO

Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 33 for analyst certification and important disclosures.

North America Equity Research

The Dexcom Solution: CGM First............................................7

Barriers to Market Adoption ..................................................19

We think CGM adoption will

North America Equity Research

Management has set targets for

Solid Management and Profitable Model

North America Equity Research

Worth noting is that our DCF

December 2014 Price Target of $32 per Share

Risks to Rating and Price Target

North America Equity Research

Dexcom Manufactures Its Products in House

North America Equity Research

The Diabetes Epidemic

North America Equity Research

The Dexcom Solution: CGM First

Dexcom is communicating its

Continuous glucose monitoring (CGM) devices allow patients to monitor their

The CGM Market: Approaching a Tipping Point

North America Equity Research

Table 1: CGM Market Penetration Outlook, 2013E-2020E

Source: Company reports and J.P. Morgan estimates.

Continuous glucose monitors

With improved technology, CGM is approaching a tipping point

Usage patterns were highlighted

Dexcom is the clear technology leader

North America Equity Research

North America Equity Research

Competitive Landscape: Dexcom the Clear Leader

North America Equity Research

North America Equity Research

If you ask a patient whether

Sensor Augmented Pumps

Clinical Data Overview

Dexcoms G4 Platinum sensor ranks well both in terms of clinical and

North America Equity Research

North America Equity Research

The Product Pipeline: Whats Next?

Source: Company reports and J.P. Morgan estimates.

North America Equity Research

The Gen 6 system, which is likely a 2016+ event, is targeting a labeling

We view Dexcoms pump

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Preferred Prescription Drug Formulary. While we expect this to be a gradual

Type 2 reimbursement is improving: A meaningful catalyst

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What the Docs Are Saying about Dexcom

Our key takeaways are as follows:

North America Equity Research

North America Equity Research

Figure 1: Factors Driving Sensor Recommendation for CGM

Source: J.P. Morgan survey data.

Barriers to Market Adoption

North America Equity Research