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JPM: Dexcom dishes on Google Verily partnership--its top R&D expense

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Dexcom ($DXCM) offered investors a glimpse of its high-profile partnership with Google Life Sciences to develop a next-generation continuous glucose monitor that would be tiny, disposable and affordable for the world's masses of Type 2 diabetics. A product isn't expected to result for another 5 years or so--but Dexcom has committed $40 million to the project, making this its largest R&D expense, the company said at this year's J.P. Morgan Healthcare Conference in San Francisco.

The diabetes device outfit played with the big boys at this year's industry conference, getting reassigned to a main room on the second floor reserved for the bigger market cap companies rather than being banished to the third floor like last year with the smaller market cap public and up-and-coming private companies.

That JPM move seemed appropriate since Dexcom is sitting at a valuation of about $6.3 billion, after gaining almost one-third on its share price in the last year. The CGM company has a number of near-term goals for 2016 such as continuing to perform on its launch last fall of its G5 system, the first CGM that obviates the need for a receiver other than the patient's smartphone.

In addition, this year Dexcom plans to reduce the size of its sensors and their insertion system as well as report data from its first outcomes-based trial designed to support reimbursement; it also expects to start on a second manufacturing facility in Arizona. Dexcom already has an existing manufacturing facility in San Diego, which it said has a capacity for 12 million sensors that it anticipates will no longer be sufficient in about two years.

But it was the details about its deal that dates to last summer with Google--now officially the med tech arm known as Verily under parent company Alphabet ($GOOG)--that really stole the show.

Dexcom CEO Kevin Sayer

"This is where CGM is headed," said Dexcom CEO and President Kevin Sayer at JPM. "Something the size of a penny that will sit on your body and be disposable, that's our goal."

He continued, "That will take us 5 years to get there, but the Bluetooth radio will be in there, the battery will be in there, the processor will be in there. This is the focus of what we're trying to work on with them to make CGM small enough whereby everybody can get it and less expensive. This partnership is going extremely well so far, we're having a great time."

Sayer added during the Q&A breakout session that cost is the biggest remaining stumbling block for a miniaturized, disposable CGM from Verily and Dexcom. He noted that the technology that each partner brings to the table is complementary.

"We've looked at CGM by attacking one side of the mountain, but Google has been looking at the other side of the mountain. They are working on components that we weren't working on. Over time, the biggest issue is going to be cost, not the technology," said Sayer. Dexcom added that it may develop a more feature-rich, expensive version of this miniaturized, disposable CGM that's aimed at developed markets, with a separate basic, inexpensive version that would be sold globally.

Sayer also disclosed Dexcom's existing patient base for the first time, which he said is 140,000 to 150,000. He offered a preliminary revenue figure of $129 million for the fourth quarter and guided to about $400 million in revenues for last year--that's up from $40 million just 5 years ago.

The company's base is roughly 20% to 25% international patients, whose purchasing patterns are less robust since they are typically paying out-of-pocket. But Dexcom declined to disclose its mix between adult and adolescent patients--the company has teen idol Nick Jonas as a spokesperson and has been initially particularly aimed at diabetic children.

Dexcom offered 2016 revenue guidance of $540 million to $565 million, with growth of 35% to 41%. It added that its gross margins of 67% to 70% would continue in 2016.

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