Dexcom Reports – Proof that the diabetes device world is really wacky

Dexcom Reports – Proof that the diabetes device world is really wacky

File this one under will wonders never cease; besides reporting earnings this afternoon Dexcom (NASDAQ:DXCM) announced yet another partnership with an insulin pump company only this time the pump company is Roche. According to the press release that accompanied this announcement;

“Roche Diagnostics U.S., with its business unit Roche Diabetes Care, a leader in blood glucose monitoring and insulin delivery systems, and DexCom, Inc. (NASDAQ:DXCM), a leader in continuous glucose monitoring systems, announced today that they have signed a research and development agreement. The goal of this agreement is to integrate DexCom’s next generation continuous glucose monitoring (CGM) system with the next generation of Accu-Chek® insulin delivery systems targeted at the U.S. market. In the future, users of an Accu-Chek insulin pump in the U.S. will not only be able to view their blood glucose data and insulin information on their wireless handheld, but also continuous glucose monitoring readings and trends. This would enable the user to make therapy adjustments from the palm of his hand while operating the pump.”

Diabetic Investor had been hearing rumors that Roche wanted to re-enter the insulin pump market but largely dismissed the rumors given how poorly Roche’s insulin pump unit has been doing and the lack of a cohesive strategy.  Even with this agreement Diabetic Investor remains skeptical that Roche can effectively compete in the already over-crowded insulin pump space.

On the flip side this is one sweet deal for Dexcom as the company is receiving an up-front payment of $3 million plus Roche will cover the research, development and regulatory costs of this new system which they expect to file with the FDA at the end of 2013. The company will also receive a payment of $100 for every system Roche sells. Additionally Roche entered into an exclusive agreement where they will be selling the current Dexcom SEVEN PLUS® CGM system for real time professional use in the U.S. Again according to the press release; “The agreement allows Roche Diabetes Care to sell the DexCom SEVEN PLUS system directly to healthcare providers, who will use it with patients to promote a better understanding of individual glucose patterns and trends.”

Looking more specifically at how the company is performing, things continue to go well but we are beginning to see the first signs of headwinds that could impede future growth. While the company sold a record 5200 starter kits during the quarter, they did lower guidance for the fourth quarter noting tougher economic conditions and higher patient co-payments. Although the reimbursement environment for CGM systems have improved over the years due to the continued rise in health care costs insurers continue to shift a greater portion of the cost to the patient through higher co-payments.

While there were several questions about the new generation 4 sensor Diabetic Investor believes it would be a mistake to believe that the new sensor will be a sales catalyst. The simple fact for Dexcom is that they will need to spend more money on sales and marketing if they want to see greater adoption with patients following multiple daily injection (MDI) therapy.  With the new Roche agreement the company has now aligned themselves with three insulin pump companies, however when you add the respective market shares of these three companies it still does not come within shouting distance of insulin pump market leader Medtronic (NYSE:MDT) who has an easier time selling their CGM unit due to their large installed pump user base. Simply put for Dexcom to continue to grow its imperative they more deeply penetrate the MDI market.

As they noted during the call competition is coming and they won’t see much in the way of international growth until the reimbursement environment improves overseas. The company did correctly outline the many issues facing possible competitors and agrees with the company that it will be sometime, if ever, before they face a serious threat, or at least a competitor like they face with Medtronic.

Overall Diabetic Investor continues to see value in the company as they have a solid and experienced management team that has been there and done that. Frankly this talented team has seen this movie before and knows what needs to be done to guide the company through these headwinds.  While the story isn’t exactly the same as the last time this team was assembled, the ending should be. The bottom line here is that Dexcom continues to build value and investors will be rewarded handsomely when this value is recognized. The path is setting up very nicely and it’s not a question of if this will happen but when this will happen.