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Source: DexCom

DexCom (NASDAQ:DXCM) is building increasingly user-friendly devices that continuously monitor blood glucose levels, and a new collaboration between DexCom and Google (NASDAQ:GOOGL) (NASDAQ:GOOG) could lead to the smallest such devices yet.

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Source: International Diabetes Federation

Improving care
There are 387 million diabetic people worldwide and that number is estimated to grow to nearly 600 million by 2035. Because diabetes can lead to life-threatening conditions, such as heart disease, it is one of the most worrisome healthcare epidemics on the planet.

In an attempt to reduce the risk of developing these life-threatening diseases, it's incredibly important to help keep blood sugar in check. Unfortunately, DexCom estimates that an average diabetic spends greater than 70% of his or her time outside of a healthy blood glucose range.

For that reason, glucose monitors like those sold by DexCom are being increasingly more widely used by both type 1 and type 2 diabetics to get real-time insight into their blood sugar, including trending data that can be sent directly to a smartphone like handset. Using this data, diabetes patients can more accurately determine whether or not to eat or take their insulin, reducing the risks of blood sugar highs and lows.

Currently, sensors used in these devices are inserted under the skin, but with the help of Google's miniature electronics research, DexCom hopes to create tiny bandage-sized sensors that are cheap and disposable. If the company can do that, then these sensors could displace the need for finger sticks for most, if not all, patients.

"This partnership has the potential to change the face of diabetes technology forever," said Kevin Sayer, president and chief executive officer of DexCom. "Working together, we believe we can introduce products that will move us beyond our core Type 1 business to become the standard of care for all people living with diabetes."

Details of the deal
DexCom is paying Google $35 million in DexCom stock up front as well as potential milestones up to $65 million in cash or stock and single-digit royalties on any sales above $750 million. In exchange, DexCom will gain access to Google's vast expertise in miniaturizing electronics and information delivery.

Google's glucose monitoring expertise comes courtesy of GoogleX, a company research lab that developed a contact lens that uses miniature electronics and a glucose sensor to monitor sugar levels in a patient's tears. The contact lens evaluates the tears using glitter-sized processing chips and then transmits the findings to a device, such as a smartphone, via an antenna that's thinner than human hair.

DexCom and Google hope to leverage that expertise to build and then connect bandage-sized sensors automatically to the cloud, allowing data collected by them to be easily shared to any Internet-connected device or platform.

DexCom expects the first products from this collaboration to hit the market in the coming three years with additional products coming in five years.

Looking ahead
Because developing a cloud-based sensor could conceivably make DexCom's sensors device-agnostic, it could significantly broaden the company's share of the glucose monitoring market to more type 2 diabetics, and since these sensors will be disposable, these sensors could create an important and ongoing revenue stream for the company.

Given the size of the global diabetes market, tapping into the larger type 2 market could significantly grow DexCom's already fast-growing business. Last year, the company's sales grew 62% to $259.2 million and that momentum carried over into 2015 with DexCom reporting sales of $165.7 million through the first six months, up 58% year over year.

Since DexCom is a much smaller company than Google and the potential market for these sensors is large, this deal could prove to be more shareholder-friendly to DexCom investors than to Google investors. For that reason, I think DexCom is worth considering for long-haul portfolios. Because Google is willing to accept shares in DexCom as payment, it would seem that the company agrees.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.