Finally some good news for Dexcom

Finally some good news for Dexcom

This morning Dexcom (NASDAQ:DXCM) said the Centers for Medicare and Medicaid issued a positive preliminary decision on Friday for the company to develop Healthcare Common Procedure Coding System (HCPCS) codes for their continuous glucose monitoring device. The codes describe specific health care items and procedures and are necessary for processing health insurance claims. The company must still go through a public meeting on May 1 and if successful expects results to be published in late October or early November. If issued the code would go into effect January 1, 2008.

This is the first bite of good news for Dexcom, as the company has suffered a series of issues that has negatively impacted its stock price. Not unexpectedly shares are up over 8% on today’s announcement.

The news will also help the company as they attempt to find a strategic partner or buyer for the company. While HCPCS codes would be a positive development for Dexcom, having the codes does not guarantee insurers will actually reimburse patients for the device. As Diabetic Investor has been saying for some time we expect insurers to follow a path similar to what they did with insulin pumps. In the early days of insulin pump therapy reimbursement was difficult to come by. Not unlike what is currently going on with CGM reimbursement today, in the early days with insulin pumps the insurers made patients jump through several hoops to achieve reimbursement. Once there were published studies that proved the benefits of insulin pump therapy, insurers made reimbursement more commonplace. It should be noted that today, even with all the data that shows the benefits of insulin pump therapy, there are still insurers who require patients using insulin pumps to receive a letter of medical necessity from their physician and submit detailed glucose logs.

Diabetic Investor suspects that CGM reimbursement will come in stages starting with insulin pump patients, then moving to patients on multiple daily injection therapy and finally all patients with diabetes. We further believe that while reimbursement will help the market it will not transform the market into a multi billion dollar market. Furthermore, we do not see reimbursement for CGM hurting the conventional blood glucose monitor market. The reality of the CGM market is that even under perfect conditions this is a niche market. There just aren’t enough patients who would use the device on a regular basis.

Just as there too many insulin pump companies chasing to few insulin pump patients, the CGM market is also becoming overcrowded. Besides Dexcom, Medtronic (NYSE:MDT) has an approved device and is already marketing their second generation sensor. Getting set to enter the market is Abbott (NYSE:ABT) who’s Navigator device should receive FDA approval sometime this month. There are also a host of smaller companies developing their versions of a CGM system.

Many believe that lack of reimbursement is the only obstacle standing in the way of wide spread adoption of CGM. This is a foolish and dangerous belief. CGM systems are still in their infancy and more work is needed to make the devices reliable and patient friendly. Additionally, no one has been able to solve the data-overload problem or more accurately answer the question just who will pay for data analysis. Finally, even with reliable, easy to use systems that come with solid data analysis the market size remains small.

Looked at realistically it is true there are nearly 15 million patients in the United States and yes diabetes is growing at epidemic rates. Of the 15 million diagnosed patients we can eliminate the 11 million who do not use insulin. Next you can eliminate another 2.5 million patients on an insulin plus orals treatment regimen. That leaves the 1.2 million patients on MDI therapy and 300,000 insulin pump patients. The highest adoption rate will come in the insulin pump market where Diabetic Investor estimates with reimbursement 40% of insulin pump patients will use a CGM, or 120,000 patients. We further estimate that approximately 10% of MDI patients will adopt CGM or another 120,000 patients. Based on currently available data and interviews with patients currently using CGM we estimate that each patient will use 24 sensors each year. Based on a sensor price of $35 each patient will generate $840 per year in sensor revenue. By our estimate that means the potential market size for sensor revenue is less than $202 million per year.

For everyone out there who believes Diabetic Investor is under-estimating the market size we point to the insulin pump market as our guide. Insulin pump therapy is widely regarded as one of the better treatment regimens, reimbursement is not a problem and the technology has improved dramatically over the years. Still there are only 300,000 insulin pump patients in the United States.

There is no question of the benefits of CGM technology for sub-segments of the market. Technology is improving and one day we will have reimbursement. However, this will not solve the underlying issues associated with CGM.

The news that Dexcom may receive HCPCS codes is a positive first step, yet it is just one step in a very long journey.

David Kliff
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