How much is Dexcom’s IP worth?
As expected shares of Dexcom (NASDAQ:DXCM) have fallen since their recent earnings announcement. Closing at $7.94 yesterday the company now has a market cap of less than $225 million. Diabetic Investor believes it’s only a matter of time before someone comes in and buys the company. The real question is at what price.
Figuring out who the buyer will be is actually easier than calculating what price they will pay. The three top candidates are Johnson and Johnson (NYSE:JNJ), Roche and Bayer (NYSE:BAY). Both JNJ and Roche have insulin pump franchises making these two players stronger options than Bayer. While it is possible that another company currently outside the diabetes world could come in and make a play, Diabetic Investor considers this option remote. Dexcom’s system for hospitals is not far enough along to attract the interest of medical device companies who primarily sell systems to hospitals. For better or worse the company is squarely positioned in the diabetes sector.
It’s no secret that the future of the insulin pump market is being able to develop a closed loop insulin delivery system. A critical component to this system is a functioning continuous glucose monitor. Medtronic (NYSE:MDT), the 800 pound gorilla in the insulin pump market, has already publicly stated that they plan on having a semi-closed loop system ready by 2008. Although Abbott (NYSE:ABT) has yet to receive approval for the Navigator, when the system is approved it can attached to their Aviator insulin pump. Abbott also has an agreement with Insulet, the makers of the OmniPod, to combine the Navigator with the OmniPod. JNJ claims to be working on their own closed loop system but Diabetic Investor believes the technology they acquired from Animas has not lived up to expectations. Roche for their part has been all over the map with continuous monitoring but after pay over a billion dollars for Disetronic, they may be forced to make a deal if for no other reason than to slow down their arch rival JNJ.
Now comes the hard part, while Dexcom is currently one of only two CGM systems available the true value of the company does not come from its rather small installed base of patients. The real value is the strength of their intellectual property portfolio is. For all the talk about advanced technology and the benefits of a closed loop insulin delivery system, this means nothing if the company’s IP won’t stand a legal challenge. Abbott is already suing Dexcom over this issue and Medtronic is well known for vigorously defending their IP. Medtronic has effectively put Smiths Medicals Deltec unit out of business after they successfully challenged Deltec on their use of the bolus calculator. The Cozmo insulin pump was once considered an up and comer until the settlement with Medtronic. The terms of the settlement are one reason Smiths has been unable to unload this once valuable business unit.
While Diabetic Investor is no expert when it comes to the strength of Dexcom’s IP, sources tell us that the portfolio is strong enough to withstand legal challenges. As evidenced by Abbott’s lawsuit, strength of IP does not stop legal actions. Should Dexcom become part of JNJ or Roche both companies have the resources to fight it out in court and we don’t view Abbott’s legal actions against Dexcom as an obstacle to the company being sold. Which brings us back to our original question just how much is Dexcom’s IP worth.
Based on previous acquisitions by both JNJ and Roche, they a have history of overpaying; Roche with Disteronic and JNJ with Animas. Given that the insulin pump market is becoming increasingly competitive neither company can afford to wait much longer on developing a closed loop system. Diabetic Investor is most intrigued by the possible combination of the Abbott Navigator and the OmniPod. The OmniPod is already innovative technology with its wireless approach and it is not difficult to imagine a pod that delivers insulin from one end and has a glucose sensor on the other. A system such as this would take away a compliant of many current CGM/pump patients, the fact that they need to wear both an infusion set and sensor at the same time. Have an all in system that uses OmniPod’s automatic insertion technology would be quite attractive. This system would also get around another major issue with CGM, the lack of an automatic shut down. As Diabetic Investor has been reporting patients currently on CGM are using the sensor well beyond three days which hurts sensor sales. By combining CGM and a Pod, this is not an issue.
JNJ and Roche are well aware of this and understand that if they fail to develop a closed loop system their investments in the insulin pump market could become worthless. Given this set of circumstances our question over the value of Dexcom’s IP may be mute. Sadly for shareholders of Dexcom any deal won’t help those investors who bought the company back when shares where trading in the $20 and above range. Without a deal there is little hope that Dexcom can survive over the long term and something is better than nothing. Now it’s only a matter of time and who will blink first, JNJ or Roche.