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Are DexCom's Best Days Behind It, or Still to Come?

By Todd Campbell - Apr 28, 2016 at 7:20PM

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DexCom's shares have slipped in the past six months, but its business continues to grow.

Image source: Dexcom, Inc.

Worry that its valuation had run too far, too fast has resulted in DexCom's (DXCM -2.36%) shares tumbling from more than $100 last September to less than $70. However, the maker of medical devices that help diabetics better track their blood sugar has only begun to penetrate a big and growing market. Can DexCom expand itself from a niche maker of products for type 1 diabetes into a much larger company, or is this as good as it gets?

Some background
Diabetics with type 1 disease have been using finger sticks to manage their blood sugar levels for decades, but according to DexCom, that approach isn't nearly as effective as it may seem.

Despite patients being well educated on the risks associated with being out of their desired ranges, the average person with diabetes is outside of their target blood glucose range 70% of the time.

Because blood sugar highs and lows can lead to diabetes progressing to a point where it can cause heart disease and other life-threatening complications, innovating new strategies that allow patients to more accurately track and manage their blood sugar levels is critical.

Image source: Dexcom, Inc. 

Capitalizing on a new approach
Rather than evaluating blood glucose levels via random finger sticks, DexCom has developed a blood glucose monitor that uses sensors to continuously track and report levels to patients.

Because DexCom's devices provide a level of clarity that has previously been lacking, increasing use by patients eager to chart their levels has led to increasingly larger sales of monitors and the disposable sensors necessary to use them.

Although payer reimbursement headwinds have limited the adoption to type 1 patients and out-of-pocket purchasers, DexCom reports that sales still increased 60% to $116.2 million in the first quarter. That performance comes on top of a 55% increase in sales to $402 million last year.

That growth is impressive, but it may just be the beginning. An estimated 500,000 people under age 14 are living with type 1 diabetes, and the number of people with type 1 is growing 3% annually. Since DexCom's penetration is measured in the tens of thousands of patients, it's arguably only scratching the surface of its addressable market.

Looking ahead
DexCom's weakest quarter has historically been the first quarter, and according to management, this year's results were in line with its expectations. As such, the C-suite reiterated prior guidance for revenue of at least $540 million this year.

If the company can hit that target, it should help put DexCom on the path to profitability. However, headwinds that could delay profitability include an increase in investments to boost capacity and spending related to R&D. For example, the company inked a collaboration deal with Verily last year to develop next-generation, smaller, and less-burdensome sensors and transmitters.

Technological innovation that improves the patient's experience will help drive customer retention and, thus, sensor sales, especially as the installed base of devices grows. However, an even bigger impact on future revenue could come from a labeling change to DexCom's devices by the FDA.

As it stands today, a confirmatory finger stick is required by the label. However, DexCom believes it has a good shot at removing that requirement, and the FDA has agreed to put the matter in front of an advisory committee in July. Assuming the advisory committee agrees with the company, an eventual label change could clear the way to Medicare reimbursement. That would be a big win, because a significant number of elderly diabetics forego buying the device because of its cost.

Additionally, the majority of DexCom's sales are generated within the U.S., and efforts to win reimbursement in other major markets overseas, such as Germany and France, are progressing. If those markets open up, international sales could climb far beyond their current $19 million. 

Overall, DexCom's sales pace demonstrates that its products resonate with consumers, and the more global payers that sign on to reimburse its products, the better it will be for investors. 

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