Recently, Dr. Jay Skyler, a director of DexCom, Inc. (NASDAQ:DXCM), spent nearly $1.1 million to buy 70,000 shares of the company at around $15.50 per share. Since Nov. 2011, DexCom’s share price has experienced a significant rise, from around $7 per share to $17 per share. Should investors be bullish about DexCom following its huge insider buy? Let’s find out.
A glucose monitoring business
DexCom is a medical device company focusing on glucose monitoring systems mainly for diabetes patient with two main product lines: Ambulatory product line including SEVEN PLUS and G4 PLANTINUM and In-Hospital product line including GlucoClear. DexCom, Inc. (NASDAQ:DXCM) has around 71 direct sales personnel to call on physicians and diabetes educators who could influence patient adoption of continuous glucose monitoring. The majority of its sales, $93 million, or nearly 93% of the total 2012 revenue, was generated from the product revenue while the development grant and other revenue contributed only $6.9 million in 2012 sales.
A fast growing top line and consistent operating losses
Since 2006, DexCom, Inc. (NASDAQ:DXCM) has experienced a huge growth in its revenue, increasing from $2 million in 2006 to $100 million in 2012. However, it consistently generated losses in the past seven years, varying in the range of -$45 million to -$56 million. The losses were due to the huge R&D costs and huge SG&A expenses. However, with the increasing revenue over time, DexCom has gradually reduced the percentage of R&D and SG&A expenses over revenue. In 2012, while the R&D expenses accounted for 39.54% of the total revenue, SG&A costs represented nearly 63% of the total sales. DexCom is quite conservatively capitalized. As of December 2012, it had $77 million in total stockholders’ equity, $49 million in cash and short-term investments, and only $7 million in total debt.
“Surf” the diabetes industry
In an interview with Life Sciences Report, William Plovanic, an analyst and managing director of Canaccord Genuity said that the key driver medical device companies on the stock market is their new product. Diabetes patients should get their blood glucose measured frequently to maintain their blood glucose levels within the normal range. Recently, DexCom, Inc. (NASDAQ:DXCM) has got PMA clearance of its G4 Platinum Continuous Glucose Monitor, with improved accuracy in the hypoglycemic range. He also had a $19 target price for DexCom. Indeed, DexCom seems to be a good business to “surf” on an increasing number of diabetes patients.
Quite expensively valued
At a current trading price of $17 per share, DexCom is worth nearly $1.2 billion on the market. The market values DexCom at 10.84 times trailing revenue. As DexCom generated negative EBITDA, the EV/EBITDA valuation is not valid for this company. Compared to its peers including Medtronic, Inc. (NYSE:MDT) and Boston Scientific Corporation (NYSE:BSX), DexCom is the smallest company among the three. Boston Scientific, at $8 per share, has a total market cap of around $10.3 billion. It is valued at a much cheaper valuation, at 1.4 times its revenue and 8.7 times EV/EBITDA. Medtronic is the biggest company, with $46.6 billion in total market cap. At around $46 per share, Medtronic is valued at 2.85 times sales and 10.14 times EV/EBITDA.
While DexCom generated operating losses, both Medtronic, Inc. (NYSE:MDT) and Boston Scientific Corporation (NYSE:BSX) delivered decent operating profits. Medtronic is the most profitable company, with a 28.24% operating margin whereas the operating margin of Boston Scientific is 13.17%. Among the three, only Medtronic pays shareholders dividends with a yield of 2.2%. Both DexCom and Boston Specific do not pay any dividends.
Foolish bottom line
In the long run, DexCom would continue to grow along with the increasing number of diabetes patients as diabetes patients could benefit from the company’s glucose monitor product. However, due to the extreme high valuation of nearly 11 times sales, I am personally not excited about DexCom despite its recent huge insider buy.
The article Insider Buys in This Fast Growing but Loss Generating Company originally appeared on Fool.com and is written by Anh HOANG.
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