CGM Update – What happens when the razors last longer thananticipated
One of the best things about the blood glucose monitoring business is that it follows the classic razor/razor blade business model. Patients are given the meter for free while companies make their money on the continual sale of test strips. Since test strips can be used only once there is no chance for the consumer to extend the life of the test strip. Even better for the companies in the business test strips are not interchangeable between brands. That is to say a patient using an OneTouch Ultra cannot use test strips designed for the FreeStyle. Even better there are no generic test strips.
The same cannot be said for the current crop of continuous glucose monitoring systems. Diabetic Investor has followed CGM closely and has found that patients using CGM are leaving their sensors in for 5 or more days. In one case a patient used a sensor for 15 straight days. Strange as it may seem according to patients who leave the sensor in for longer periods of time the accuracy of readings appear to improve the longer the sensor stays inserted. Even the manufacturers of CGM are telling patients that sensors can be worn for longer than three days. When Diabetic Investor spoke with Medtronic’s (NYSE:MDT) customer service department the representative stated that she was aware of patients wearing the sensor for 5 days or longer with no problems.
When these devices were approved by the FDA sensor life was listed at three days. Most analysts when building their revenue models for Medtronic or Dexcom (NASDAQ:DXCM) based them on a three day replacement cycle.
Stranger still is the fact that unlike the Pods for the OmniPod insulin management system which will automatically shutdown after three days, neither the Medtronic or Dexcom sensors has this feature built in. In essence Medtronic and Dexcom by the design of the sensors are hurting their own revenue streams. It would have been understandable had they built in such a feature as all the clinical trial data was based on three day usage and the product was submitted and approved by the FDA based on this data.
So besides the already known issues with CGM we can now throw revenue models out the window as well. The fact that sensors are being used longer than 3 days hurts Dexcom harder than Medtronic as they have a 7 day indication before the FDA. It has been anticipated that once the 7 day sensor was approved the company would charge a higher price than the current sensor, although the company has stated that the per day cost for the 7 day sensor would be less than their current sensor. Even if this is true revenue models for the 7 day sensor will be next to impossible to calculate. It stands to reason that if the current crop of sensors work accurately for 5 or more days, the 7 day sensor could work accurately for 14 or more days.
Since CGM came onto the market analysts have been struggling to come up with accurate revenue models. Something made more difficult when the companies in the market positioned their products as following the razor/razor business model. As it turns out the reality of the market is vastly different than originally anticipated. While Medtronic has the resources to work through the realties of the market, Dexcom is in a difficult situation. The company is already dealing with manufacturing issues which has limited their ability to sell systems and keep their existing customers supplied. Even if corrected, the company must deal with the realities of extended sensor life.
Watching all this is Abbott (NYSE:ABT) who’s Navigator is still sitting at the FDA awaiting approval. While not yet on the market Diabetic Investor is aware that Navigator sensors have the same sensor life issues as Dexcom and Medtronic.
The bottom line for the entire CGM market is that the original hype surrounding the market is not matching the true realities of the market. While Abbott and Medtronic can weather the storm Dexcom could soon be struggling just to stay afloat. Given they have already gone to the capital markets once with a secondary offering which has failed miserably it’s unlikely they could tap the markets a second time. With all the issues facing the company it’s equally doubtful another company would come along and buy the company. Stranger things have happened in the diabetes sector and Diabetic Investor is a firm believer in the greater fool theory however given the realities here the only fools could be investors who believe Dexcom shares will one day recover to previous levels.
David Kliff
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