This afternoon Dexcom (NASDAQ:DXCM) reported third quarter earnings and announced they have completed the much anticipated deal for their hospital product. Once again Diabetic Investor hit the nail on the head with our accurate call that Edwards Lifesciences (NYSE:EW) would be Dexcom’s partner.
According to a jointly issued press release Edwards will pay Dexcom an upfront licensing and collaboration fee of $13 million in cash. Edwards will also pay up to $24 million over the next three years in product development costs and regulatory approval milestones. Edwards believes that the R&D component of these payments will be approximately $7 million in 2009. Additionally, Dexcom will receive either a profit-sharing payment of 10% or royalty of up to 6% of commercial sales. Edwards will be responsible for global sales and marketing, which is expected to begin in 2010, and Dexcom will be responsible for initial manufacturing.
This deal with Edwards came just in time as sales in the diabetes market remain flat as the company reported third quarter product revenue of $1.9 million the same amount reported in the second quarter and just slightly above the $1.8 million reported for the first quarter. With just under $30 million in cash, the $13 million upfront cash payment from Edwards will prevent the company from trying to raise additional capital during difficult market conditions.
Diabetic Investor believes the Edwards deal is critical for Dexcom’s long term survival as the individual diabetes market is proving to be difficult. While the reimbursement environment has improved with several key wins these favorable decisions have been narrow in scope and has created more requirements for Dexcom. Although wider reimbursement is a positive, in the short term it has caused sales to slow as patients who would normally pay cash for the system have held off making purchases as they see if their insurer will ultimately pay.
Besides reimbursement issues the individual diabetes market has the additional problem of product acceptance beyond insulin pump patients. Other than Dexcom, Medtronic (NYSE:MDT) and Abbott (NYSE:ABT) also have CGM systems on the market. Although Diabetic Investor does not see the Navigator as a threat to Dexcom, with their huge installed user base and connectivity with their existing insulin pumps Medtronic has a major advantage over Dexcom in the insulin pump market. Dexcom is working to remedy this strategic disadvantage with their deals with Insulet (NASDAQ:PODD) and Animas, a unit of Johnson and Johnson (NYSE:JNJ), however these integrated systems are still in the development stage.
Although there is a growing body of evidence demonstrating the positive impact CGM has on patient outcomes, CGM technology is still a mystery to many patients and physicians. For the individual patient market to expand beyond insulin pump patients, physicians need to see clear evidence that CGM technology is appropriate for patients on multiple daily injection therapy or other non-insulin therapy options.
This is what makes the hospital market so attractive, besides a better reimbursement environment there is already a large body of evidence demonstrating the benefits of tight glycemic control in a hospital setting, especially in the intensive care unit (ICU). Should Dexcom and Edwards be successful they stand to reap a major share of the hospitals that are broadly adopting the Portland Protocol. While Diabetic Investor sees the Edwards deal as a positive, investors should not be fooled into believing the hospital market is an immediate remedy to the issues facing CGM. Just as the individual diabetes market has been difficult to crack, the hospital market will be just as tough as there are several players looking to enter the market along with Dexcom and Edwards.
All in all, Dexcom is moving along as Diabetic Investor thought they would when Terry Gregg took charge. The key today for the company is to survive long enough so that the benefit of CGM technology becomes clear. This is not unlike the early days of insulin pump therapy when sales took off after the results of the landmark DCCT trial, which demonstrated the benefits of tight glycemic control, became public. The evidence is building with each new study that’s released and it won’t long before physicians understand the benefits of limiting glycemic variability.
In the end, Dexcom will follow the path of Mr. Gregg’s old employer MiniMed, who ultimately became part of Medtronic. The road ahead won’t be easy but Dexcom is making the right moves.