Betting the ranch

A few quick observations before we get into some analysis.

1. Not unexpectedly the battle between Dexcom (NASDAQ: DXCM) and Abbott (NYSE: ABT) is going to be a major story here. The early betting line here is that Abbott is the favorite and will eat Dexcom’s lunch. Perhaps in response to this sentiment Dexcom reported preliminary results which per a press release;

“DexCom, Inc. (Nasdaq: DXCM), the leader in continuous glucose monitoring (“CGM”), today reported that it achieved preliminary, unaudited revenue of approximately $218 million for the fourth quarter ended December 31, 2017, an increase of 27% over the fourth quarter of 2016. For fiscal 2017, total preliminary, unaudited revenue is expected to be approximately $715 million, an increase of 25% over 2016.”

2. We’re seriously thinking about sponsoring a reward for any speaker who can get 50% of the audience to stop looking at their phone or device and actually listen to what is being said.

3. Along with that we are beginning to wonder when emerging markets become mature markets. This is a theme we hear every year and one would think at some point these emerging markets will emerge and become mature markets.

Now onto the Medtronic (NYSE: MDT) presentation which was interesting on several fronts most notably because the company is betting the ranch on diabetes. Several times during the prepared remarks and again in the breakout the company stated they see double digit increases coming for this franchise. Which seems like a pretty aggressive target given that the insulin pump market is barley growing at mid single rates and Medtronic already effectively owns this market.

The company also noted they will soon join Dexcom and Abbott in the stand alone market. A market which is growing yet a market where the company is well behind. These facts got us wondering just where this double digit growth would come from.

Well this being the wacky world Medtronic should send a thank you note plus some flowers to the people at Johnson and Johnson (NYSE: JNJ) for closing down Animas, and another thank you bouquet to the folks at Tandem (NASDAQ: TNDM) for imploding. The fact is without these two events there is no way the franchise would come even close to double digit growth. Let’s look at the numbers;

By most estimates Animas has an installed user base of about 94,000 patients and Tandem has about 50,000 or so. Using Animas alone we expect that Medtronic will pick up 80% of these patients or about 75,200 patients. Should Tandem implode and the same math applies that’s another 40,000 which is why the company feels very good about the statements they made today. Baring a major meltdown the Medtronic insulin pump unit is poised for some very serious growth. Not because they did anything that spectacular but as we keep saying because everyone else screwed up.

The stand alone CGM story is a different animal altogether and as the company noted during the breakout price will be their primary weapon to gain share. Given how aggressive Abbott has been already and the statements made by Medtronic today the coming price war in CGM is going to be brutal. As we have noted many times Dexcom can handle the price war but our worst fears are coming true and this is looking more and more like a race to the bottom. A race no one will win in the short term and will force change on EVERY player not just Dexcom.

While we will have more on this later as Abbott presents this afternoon and Dexcom tomorrow, we believe this is a SHORT TERM issue not a long term issue. Simply put at current levels we see Dexcom shares undervalued and investors with a two year or longer investment horizon being wise to add to their positions. It won’t be a straight line up but it would be unwise to believe that Abbott or Medtronic will eat Dexcom’s lunch and it could easily go the other way.

One last thing since it is semi-related here but shares of Insulet (NASDAQ: PODD) had a major up move increasing almost 14% today. Yes, the coverage decision by Medicare is a positive but we see this upward move as overdone. The company still has some issues they must deal with and while we do see better times ahead it’s premature to declare victory just because they are likely to be Medtronic’s lone competition.

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