Dexcom on Fire
While much of the nation is in the midst of a heat wave, shares of Dexcom (NASDAQ:DXCM) have also caught fire. Over the last 13 full days and including today’s action shares have risen nearly 34%. This dramatic rise in Dexcom’s prospects appears directly linked to Terry Gregg taking the helm. While there is no question Mr. Gregg is a valuable asset with a wealth of experience in the diabetes market, what else has changed? Shareholders who are jumping in based on Mr. Gregg’s ability to turn things around could be in for a rude awakening over the near term.
The continuous glucose monitoring market remains a developing market with many hurdles to overcome. As it stands today the vast majority of CGM users are also insulin pump patients. Diabetic Investor has consistently maintained that the combination of a CGM and insulin pump is a powerful treatment system. Due to the nature of insulin pump therapy which requires frequent glucose monitoring a CGM unit can make insulin pump therapy even more effective. CGM can also play a role for patients who are not hypoglycemic aware.
However, beyond these markets it’s difficult to see CGM playing a major role for patients on multiple daily injection therapy or for patients on insulin and oral medication combinations. It is even more difficult to imagine a scenario where CGM would play any role at all for the largest market of all, non-insulin patients.
Diabetic Investor believes that too many analysts see the CGM market developing into what the conventional blood glucose monitoring market has become. The reality here is the CGM market does not fall into the razor/razor blade model set by the conventional BGM market. Before Dexcom received approval for their 7 day sensor, the two FDA approved CGM systems where approved with a 3 day sensor life. Dexcom and Medtronic (NYSE:MDT) built their sensors with no shut down capabilities to expire after the 3 day approved life. The early adopters of CGM technology quickly found that sensors work well beyond 3 days with some users pushing sensor life to 14 days or more. Diabetic Investor suspects that the new 7 day sensor from Dexcom, will also last well beyond its approved life span. Like the 3 day sensor before it Dexcom did not build the 7 day sensor to expire after 7 days of usage. The simple fact is as long as the razor stays sharp there is no reason to replace it. The fact that neither Dexcom nor Medtronic designed their sensors to expire after a specific period of time destroys any chance the market has into becoming a razor/razor blade business model.
Even if the systems were fully reimbursed, another issue with the CGM market, there is no need to replace a working sensor.
Investors and the Street apparently believe that CGM technology will do something that companies like Johnson and Johnson (NYSE:JNJ), Roche, Bayer (NYSE:BAY) and Abbott (NYSE:ABT) have been unable to do, make glucose monitoring as common as brushing teeth. While it is possible as the technology advances that CGM systems will no longer require calibration, be approved with a replacement indication and become more patient friendly. The fact remains that the majority of patients do not understand the value or practical application of all this information. This is one reason growth in the conventional glucose monitoring market has stagnated. Today the Big Four are in a battle for market share with the 4.5 million insulin using patients.
The real question for Dexcom investors is which path Mr. Gregg will take to make the company a more attractive acquisition candidate. Dexcom fits nicely with either JNJ or Roche and their respective insulin pump franchises. It’s also possible that with his vast insulin pump experience Mr. Gregg could acquire an smaller insulin pump company and build his own semi-closed loop delivery system. If it where not for the fact that Abbott already has an agreement with Insulet (NASDAQ:PODD) Diabetic Investor would see Insulet’s OmniPod system as the perfect fit with Dexcom.
The bottom line for Dexcom investors is they were not fools for having faith in Mr. Gregg; they just may have been a bit premature in their beliefs of how long it will take him to get the company where it needs to be.