What happened

Shares of DexCom (DXCM -0.24%) surged higher on Friday, rising as much as 10.6%. At the end of the trading day, the stock was still up 7.3%, even as the broader market indexes crumbled.

The catalyst that sent the medical device maker higher was a pending decision by Medicare that could be a game changer.

So what

Piper Sandler analyst Matt O'Brien raised his price target on DexCom to $120, up from $110, while maintaining an overweight (buy) rating on the shares. This would represent a 17% gain compared to Thursday's closing price. 

The analyst cited a proposed local coverage determination (LCD) that appeared on the Centers for Medicare and Medicaid Services website. If finalized, it would provide coverage for basal insulin patients and others. O'Brien estimates this determination would expand the total addressable market for continuous glucose monitoring (CGM) for diabetes patients in the U.S. by two times, increasing the market by roughly $2 billion in domestic revenue. Furthermore, he posits that DexCom "will reclaim its position as the highest multiple name in diabetes following this announcement."

Stifel analyst Mathew Blackman came to a similar conclusion, boosting his price target on DexCom to $120, up from $112, while maintaining a buy rating. He noted that the LCD "appears to pave the way" for near-term CGM coverage for basal insulin users. He views the news as "an unequivocally positive development" for DexCom and Abbott Laboratories (ABT 1.81%), its rival in the space. 

Now what

A local coverage determination is a decision made by a Medicare Administrative Contractor regarding coverage of a specific item or service in its jurisdiction, based on whether it is considered "reasonable and necessary." It's worth noting that this is a proposal and not a final determination, and it will still be some time before a decision is reached. 

That said, this is no doubt a positive development for DexCom, which has long been one of the leading providers of CGM technology. Increasing the market by $2 billion would be a big deal, particularly in light of the fact that DexCom's full-year revenue in 2021 was roughly $2.5 billion. 

Investors shouldn't buy the stock solely based on this development, but there are plenty of other reasons to believe DexCom is a buy.