Memorandum

Dexcom and Verily amend CGM collaboration agreement: Dexcom to pay Verily $250 million in stock, becomes Onduo preferred CGM; second-gen CGM by end of 2020 – November 20, 2018

Press release quotes Verily CEO Andy Conrad, shows clear Verily commitment to CGM in Type 2, especially in light of discontinuing contact lens; clear optimism for Onduo’s future

This afternoon, Dexcom announced that it has amended its license and collaboration agreement with Verily related to the companies’ work on next-gen CGM. Based on the updated terms (see below), we see this as a strengthening of the partnership, a sign of Verily’s continued commitment to CGM in type 2 diabetes (especially after discontinuing the glucose-sensing contact lens last week), and a tighter “preferred” relationship Dexcom and Onduo.

Notably, the second-gen, lower-cost, disposable Dexcom/Verily CGM is now targeted to launch “by the end of 2020,” accelerating from the more recent “late 2020/early 2021” plans – this is excellent news and back on track with the original 2015 (!) goal to launch the second-gen within five years. We are thrilled to see this very deliberate language. The first-gen version remains in a holding pattern (“evaluating near-term opportunities”), and it would surprise us to see this launch in a big way, given G6 is still rolling out now and Verily gen two is only two years away.

The new financial terms are notable: Dexcom will make an initial payment to Verily of $250 million in shares of its stock; notably, the 8-K notes that $235 million will actually go to Onduo, the Verily/Sanofi JV that has been using Dexcom CGM as part of its virtual type 2 diabetes clinic. Dexcom will then pay Verily up to $280 million in additional milestone payments upon achieving future product launch and revenue targets (not specified). With the amendment, Dexcom also becomes “the preferred CGM device supplier into Onduo’s Type 2 diabetes management program” – a smart competitive move and signaling optimism for Onduo’s future.

Notably, the 2015 agreement’s original royalty payments have been eliminated in the amended agreement, and Dexcom believes the new structure improves its future profitability. For context, the original agreement included a $35 million upfront payment in stock (already paid), $65 million in milestone payments (cash or stock; unclear if paid), and royalties only for annual product sales exceeding $750 million. While the upfront and milestone payments are clearly much larger now, Dexcom presumably has much clearer visibility on how large they will be.

In a great sign, today’s announcement quotes Verily CEO Andy Conrad: “This amendment strengthens our long-standing R&D collaboration with Dexcom and enables Verily to contribute more deeply to the Dexcom portfolio. As evidenced by our new equity position in Dexcom, we continue to believe CGM will have a significant impact on management of Type 2 diabetes and that Dexcom is poised to lead the way. I am thrilled to see Dexcom and Onduo partner to broaden adoption by people who need help managing their diabetes.” Onduo CEO Josh Riff also signed the agreement (8-K).

Since the payments are in stock, Verily/Onduo are invested in Dexcom’s continued financial success. This strategy has paid off so far: in September 2015, Dexcom’s share price was ~$90 on a market cap of ~$7 billion; now it’s at ~$118 on a market cap of ~$10.7 billion. If CGM really expands in type 2, it will be great for Dexcom to have avoided ongoing royalty payments.

Dexcom and Verily have also “expanded options to collaborate on the development of additional products and software pertaining to Dexcom’s products,” though no specifics were provided. We’d expect to see much more on the software side here, expanding on much of the hardware-focused work of miniaturization and disposable, low-cost electronics.

  • We saw some positive Onduo data at the ADA Real-World Data meeting this week and heard a bit at DiabetesMine too. The Onduo app, coaches, Telcare BGM, and select use of Dexcom CGM “sprints” (for those who qualify) seem to move the needle in those with a high A1cs (>8%), which is truly excellent. See our ADA RWD coverage.

  • Dexcom’s 3Q18 call announced two FDA clearances related to non-intensive use of CGM – G6 Professional CGM (disposable transmitter) and a G6 Glucose Program for Samsung (Android) phones with in-app coach chat and no CGM alarms. Dexcom said it will be using disposable G6 CGMs in “various pilot activities in 2019 and beyond,” though no further details were shared. This was discussed separate from the Verily gen one product (see 3Q18), which has always been positioned as a disposable transmitter but for a real-time device. We hope to hear more on the cadence and portfolio at the December 4 analyst meeting.

 

--by Adam Brown and Kelly Close