Successful investors think about the future by focusing on what the new opportunities might be. They also pay attention to threats that could emerge that might impact the stocks they own. Sometimes, those threats come out of the blue, but other times, they're identifiable well in advance.
If you own shares of Abbott (ABT -0.42%) or DexCom (DXCM 2.84%), there's a looming threat to know about. It's not from another medical device make -- it's from an innovative biotech company. Should Abbott and DexCom investors be worried about Vertex Pharmaceuticals (VRTX -2.62%)?
Depending on diabetes products
DexCom's entire business is built around diabetes. Every penny of the company's first-quarter revenue of $921 million came from its continuous glucose monitoring (CGM) systems. These CGM devices are primarily used to monitor insulin levels for individuals with type 1 diabetes (T1D), although they can also be used by people with type 2 diabetes.
Much of DexCom's growth strategy centers on introducing new and improved CGM devices used mainly by individuals with T1D. For example, the company is currently transitioning users of its G6 device to the G7 device, which is smaller and worn by adults on the back of the upper arm instead of the abdomen.
Abbott markets a wide range of medical devices, diagnostic products, medicines, and nutrition products. Despite this diversified product lineup, the company depends heavily on its FreeStyle Libre for growth. Like DexCom's CGM devices, FreeStyle Libre is primarily used by individuals with T1D to monitor their insulin levels.
In Q1, FreeStyle Libre raked in $1.2 billion in sales -- over 12% of Abbott's total revenue. Diabetes care was the company's fastest-growing business in the quarter, thanks to 50% year-over-year sales growth in the U.S. for FreeStyle Libre.
Vertex's potential game changer
Vertex Pharmaceuticals is known for its blockbuster drug Trikafta, which treats cystic fibrosis, and its recently approved Casgevy gene-editing therapy for the rare blood disorders sickle cell disease and transfusion-dependent beta-thalassemia. How does Vertex present a threat to Abbott and DexCom? It doesn't -- yet. However, the big biotech is determined to develop a cure for T1D.
T1D is caused by the body's immune system destroying islet cells in the pancreas. This leads to reduced insulin production (or no insulin production at all), which causes blood glucose levels to get out of control. Vertex's goal is to make islet cells from stem cells to restore insulin production.
It's off to a good start. At the European Association for the Study of Diabetes (EASD) annual meeting in October 2023, Vertex presented encouraging data from a phase 1/2 study of its experimental islet cell therapy VX-880. Three of six patients in the study achieved insulin independence (i.e., they no longer required insulin shots to control their type 1 diabetes). One of these patients had T1D for nearly 42 years, while another had T1D for 19 years.
Vertex reported at the J.P. Morgan Healthcare Conference in January 2024 that the efficacy of VX-880 "continues to show curative potential." The company plans to present updated data in June.
The biggest downside to VX-880 is that the body's immune system may try to reject the islet cells. As a result, immunosuppressants must be given to any patient who takes the therapy. That's a big problem since it increases the patient's risk of infection by bacteria and viruses.
Vertex thinks it has a solution to that big problem. The company is evaluating VX-264 in phase 1/2 testing. VX-264 uses the same islet cell approach as VX-880 but encapsulates the cells in a device that protects them from rejection by the immune system -- eliminating the need for immunosuppressants. Vertex is also researching how to edit islet cells so they're hidden from the immune system.
Time to worry?
Vertex has a long way to go with its T1D program, and there's no guarantee it will be successful. It's also possible that Vertex's T1D therapies could be limited only to patients with severe hypoglycemia (around 125,000 of the 3.8 million total T1D patients).
Make no mistake about it, though: Vertex wants a one-time functional cure for T1D. If the disease can be cured for the broader patient population, the demand for CGM devices will plunge.
DexCom is obviously at greater risk since its entire business revolves around diabetes. The company plans to launch a new device called Stelo this summer that targets individuals with diabetes who aren't insulin-dependent. This could cushion DexCom somewhat if a T1D cure is on the way. However, investors will have to wait and see how Stelo fares in the marketplace.
Abbott's growth would be negatively impacted if Vertex cures T1D. The good news for the company is that it continues to introduce new products that could reduce its dependence over time on FreeStyle Libre.
Should Abbott and DexCom investors worry about Vertex? Maybe not just yet. But I think they should absolutely keep tabs on Vertex's progress with its islet cell therapies. If Vertex disrupts the CGM market, no one can say they couldn't have seen it coming.
