Dexcom – More Problems

Dexcom – More Problems

Yesterday at the JP Morgan conference Dexcom (NASDAQ:DXCM) announced that fourth quarter revenues would come in well below Street estimates. The company stated that revenues for the quarter would come in at $835,000, while the Street was expecting revenues of $1 to $1.2 million. Also coming in below estimates were starter kits sales which came in at 840 for the quarter below Street estimates of 1,000 to 1,200. It appears the manufacturing issues which the company disclosed during their third quarter call have not yet been solved which has caused supply constraints. The company stated that this issue should be resolved midway through the first quarter of 2007.

On the positive side it appears the company is on track to receive FDA approval for their 7 day sensor.

However Diabetic Investor is not overly optimistic that Dexcom’s future will be much brighter, even if they solve their manufacturing issues and receive reimbursement. The main problems have little to do with the value of the data provided by the device or the lack of reimbursement. The real problem for Dexcom isn’t how patients are using the device, more accurately its lack of usage that’s hurting the company. Now that the device has been on the market for almost a year we’re getting a clearer picture of not just what type of patient is using the device but how often they are using it. As expected the vast majority of customers are insulin pump and multiple daily injections patients, no surprises here.

The real issue here is sensor usage. When Dexcom first came on the scene they positioned themselves in the classic razor/razor blade business model. Patients would purchase Starter Kits sold at or near cost and the bulk of revenue would come from the continuing sale of sensors. A model that until recently worked very well in the conventional blood glucose monitoring market. Unfortunately for Dexcom things have not followed the model. As Diabetic Investor accurately predicted sensor usage drops off dramatically after the patient has 30 to 45 days worth of data. Patients use this database of information to make adjustments to their therapy regimen and then use the device only occasionally to make sure their adjustments are working as intended. For those of you who are adjusting your previous revenue models you should figure a patient will use approximately 36 sensors annually. (15 during what we call the data gathering stage (45 days/ 3 day sensor life) and 2 per month during what we call the confirmation stage.) We doubt usage would increase much with reimbursement or the introduction of a seven day sensor. In some respects the introduction of a seven days senor could actually hurt usage numbers as patients would likely pick one week per month as their confirmation week. When modeling for the seven day sensor we recommend 17 sensors. (7 during the data gathering stage and 10 for the confirmation stage.)

It should also be noted that reimbursement won’t solve another problem with the device, the hassle of using it. When patients first get the device they are like kids on Christmas morning playing with their new toy. However this joyful experience quickly fads as they begin the routine of changing the device every three days and dealing with all the data.
This is made even worse by the fact that patients on the device still need a conventional meter to calibrate the device and confirm high and low readings. Many patients are also unhappy when a sensor fails as they have to recalibrate a new sensor and use their conventional meter until the new sensor is ready.

Even those patients Diabetic Investor has spoken with who say the like the device, aren’t using it on a regular basis. The main reason being is they really don’t need all the data and the data can cause more problems then solutions. Because the data is not real time and the device does not measure the speed or duration of glucose change patients can become confused. For example the monitor might indicate a level of 100 which is in the normal range followed by readings of 120 and 140. At first glance it appears to the patient they are headed higher and an adjustment should be made. Based on this the patient delivers more insulin to avoid the expected higher glucose levels. What the device doesn’t measure or only tells the patient when it’s too late, is that the 140 reading was the plateau and about to move lower. By administering extra insulin to avoid the expected higher readings the patient now must worry about a hypoglycemic event. Even if the patient confirmed the 140 reading with a conventional meter this does not solve the problem.

Lost on Dexcom and many in the investment community is that even the most dedicated patients have other things to do then micro-manage their diabetes. This doesn’t even take into account all the calls made to physicians by these patients who are worried they might be doing something wrong because of the data they gather. Even if the device worked perfectly it does not measure food intake, stress levels and patient activity all factors which influence glucose levels. Glucose readings are just one piece of a very complex puzzle.

Solving manufacturing issues and gaining reimbursement would be step in the right direction for Dexcom but won’t take care of the more important underlying problems with continuous glucose monitoring. Perhaps one day technology will advance to the point when sensors will be smart enough to measure more than glucose. Unfortunately for Dexcom and the others in this category that day is not today and appears to be a long ways off. The bottom line here is continuous monitoring does have a future but the early hype and excitement which at one point drove Dexcom’s shares above $24 per share was premature. Reality is beginning to set in and from where Diabetic Investor sits we haven’t hit bottom. Even at these lower levels Dexcom shares are over-valued.

David Kliff
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224-715-3761 Mobile