Dexcom’s strength in innovation puts the company on firm footing.

Business Strategy & Outlook

Dexcom enjoys a well-established track record for introducing the most precise sensors for use in its continuous glucose monitors. On the strength of its technology, Dexcom has captured an impressive slice of this CGM market, but a recent wave of innovation in the diabetes device market has intensified competitive pressure. Nonetheless, Dexcom has done a credible job of adapting and fending off competition from Abbott and Medtronic. Dexcom has finally begun to make progress in penetrating the Type 2 market, in addition to long dominating the Type 1 market, where CGM penetration has been estimated around 35%. The establishing reimbursement for Type 2 patients can be challenging, but payers have been steadily joining the bandwagon. Dexcom should benefit as these the reimbursement pieces fall into place.

Both Abbott and Medtronic have introduced meaningful innovation in this realm that the offers patients’ new alternatives. Abbott’s FreeStyle Libre Flash is significantly more user-friendly and is aggressively priced. The product has made substantial inroads with the Type 2 population. Medtronic’s next-gen 780g insulin pump automates much of the insulin delivery and comes with its own integrated CGM. These competitive features could peel some Dexcom users away on the margins. However, one has been impressed with how Dexcom was able to incorporate some of the most attractive Libre features–no-stick calibration, longer sensor life–in its G6 product. The new G7 CGM builds on those strengths. The Dexcom’s strength in innovation puts the company on firm footing. First, the precision of its CGM remains materially better than competitive products. Second, Dexcom’s next-gen, one-piece G7 should be significantly lower-cost, which offers flexibility for improving cost structure. The firm has also moved more aggressively into the pharmacy channel to enhance patient access and take advantage of greater volume upside. Finally, Dexcom’s alliances with Tandem, Insulate, Livongo (now part of Teledoc), and Eli Lilly provide opportunities for the firm to remain tightly woven into most new diabetes technologies.

Financial Strengths

Dexcom has been cash flow positive for since 2014 and more recently moved into positive earnings territory. While revenue has grown very quickly, research and development expenses and selling, general, and administrative costs have grown significantly as well, sometimes outpacing revenue growth, during the early phases of commercialization. However, the firm turned the corner in 2019, and it will post meaningful profits through the explicit forecast period. Historically, Dexcom has funded its operating losses through additional capital raises over the years or through convertible debt. As of December 2020, Dexcom had two lots of convertible senior notes, which mature in 2023 and 2025. The debt is partially intended to support Dexcom’s efforts to expand, including building out the company’s manufacturing footprint. The $850 million in convertible debt due in 2023 are already in the money at the initial conversion price of $41.07 per share. Most recently, the firm issued $1.21 billion more in convertible debt due in 2025, partially to redeem convertible debt due in 2022, and these notes have an initial conversion rate that is equivalent to $150.11 per share. Dexcom also issued 1.8 million shares in 2018 to raise funds to pay for a hefty collaborate R&D fee.

Bulls Say

Dexcom’s next-gen G7 product should be significantly less expensive, offer a thinner profile, and faster warm-up time than G6.

Medicare’s decision to reimburse for the G6 is a favorable development for Dexcom, as private payers often use Medicare as the benchmark for reimbursement policies.

Dexcom’s initiative with Verily offers the potential to apply tech expertise in data analytics with data intensive health management for type 2 diabetic patients. This partnership could put Dexcom a step ahead of rivals.

Company Description

Dexcom designs and commercializes continuous glucose monitoring systems for diabetics. CGM systems serve as an alternative to the traditional blood glucose meter process, and the company is evolving its CGM systems to include the disposable sensor and the durable receiver.

(Source: Morningstar)

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