1 Stock Helping Revolutionize Diabetes Monitoring

New products in development with partners Johnson & Johnson and Tandem could help Dexcom outmaneuver its chief competitor, Medtronic.

Apr 16, 2014 at 11:38AM

More than 365 million people have diabetes worldwide and estimates suggest that the number of diabetics will grow to more than half a billion people around the globe by 2030.

As a result, the market for new, innovative therapies that improve how diabetics monitor their blood sugar levels and administer their insulin is among the most intriguing for health-care investors.

One company with big plans for disrupting the diabetes device market with more accurate and convenient glucose monitoring is Dexcom (NASDAQ:DXCM). The company's wireless glucose sensors help both type 1 and type 2 diabetics control their blood sugar levels better, regardless of whether they use insulin pumps or injections.

DXCM Chart

DXCM data. Source: YCharts.

Knowledge is power
Dexcom markets the G4 Platinum, a continuous glucose monitor, or CGM, that provides diabetics not only with glucose levels every five minutes, but also displays the glucose trend.

The sensor, which is placed underneath the skin, wirelessly transmits a signal to a receiver that resembles a small smartphone. Patients can view the data, see glucose levels charted in a graph, and be alerted to important changes that require either eating or taking insulin.

Since the sensor is inserted for up to seven days, the G4 is arguably more discrete and convenient than traditional finger stick readings. Importantly, the deeper insight into the patient's trend allows diabetics to more accurately determine whether they should eat or take insulin, improving adherence, and reducing chances for blood sugar highs and lows.

Apparently, that message is resonating with patients. Despite Dexcom's sales force only calling on 2,000 doctors, there were over 7,000 unique prescribers of the G4 in the fourth quarter. That led to fourth quarter sales of $51 million, up 62% from a year ago and up 21% from the third quarter. 

And interest in Dexcom's G4 isn't limited to the U.S. Sales outside the country grew 80% year over year in the fourth quarter and now account for about 8% of total sales. Importantly, Dexcom is leveraging the jump in global unit volume to boost gross margin, which improved to 66% in Q4 from 54% a year ago.

Thanks to the rapid sales growth and margin expansion, Dexcom has been cash flow positive in each of the past two quarters. And while Dexcom still loses money, its loss was just $0.04 per share in the fourth quarter.

Dexcom should take another step forward in turning its first quarterly profit this year given the FDA recently expanded the use of the G4 platinum to children, too. Previously, the device was only available to patients over 18.

Automation is coming
The expanded label should help Dexcom get closer to profitability, but only if Dexcom continues to outmaneuver its chief competitor, Medtronic's (NYSE:MDT) MiniMed. Medtronic manufactures the Enlite sensor that is used in its newly approved, first-generation semi-automated 530G artificial pancreas.

While we're still years away from having a fully automated artificial version of the pancreas, such a device remains one of the most promising and sought after diabetes innovations. However, just because Medtronic doesn't use Dexcom's sensors in the 530G doesn't mean Dexcom will miss out on the potential market demand for such a device.

Johnson & Johnson's (NYSE:JNJ) Animas is a major player in the insulin pump market (Medtronic and Animas control 80% of all insulin pump business) and Animas is integrating Dexcom's sensors into its own semi-automated artificial pancreas. Johnson already sells the Animas Vibe in Europe and filed for FDA approval to market the device in the U.S. in April 2013.

Additionally, smaller firms like Tandem (NASDAQ:TNDM), which also uses Dexcom's sensors, are also working on their own version. Tandem reported sales of its current generation insulin pump totaled $29 million last year, including $10 million during the fourth quarter, which was up 32% from the third quarter.

Leading insulin pump makers' adoption of Dexcom's technology suggests Dexcom may ultimately be best positioned to capture next-generation device sales -- such as a future artificial pancreas -- given Dexcom is platform agnostic.

Foolworthy final thoughts
Sales of the G4 are growing rapidly and, given the number of patients living with diabetes is expected to nearly double to 44 million in the U.S. over the next 20 years, Dexcom could have a very long runway.

That means investors should keep a close watch on Dexcom to see whether unit volume pushes it over the profit plateau this year. Dexcom investors should also watch Johnson & Johnson and Tandem, given both use Dexcom sensors and each is closing in on launching Medtronic's 530G competitors. 

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Todd Campbell has no position in any stocks mentioned. He owns E.B. Capital Markets, LLC, whose clients may or may not have positions in the companies mentioned. He also owns Gundalow Advisors, LLC, whose clients do not have positions in the companies mentioned. The Motley Fool recommends and owns shares of Johnson & Johnson. It also owns shares of Medtronic. 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.

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