No longer a kid

No longer a kid

Looking at the results released yesterday by Dexcom and reading through the transcript of the call two things struck us – first there were no surprises (which is great especially in the diabetes device space) and second although not a full blown adult just yet the company is maturing, which leads to a third thought (hey it’s Friday) while Dexcom and Abbott are maturing all the CGM wannabes aren’t even out of the crib yet.

What this means is the CGM market is growing and the penetration we are seeing today is just the tip of the iceberg – meaning that Dexcom and Abbott with their advanced technology, manufacturing skill and brand identity will garner the lion’s share of the market leaving all the CGM wannabes fighting over scrapes.

So why then when the future looks as bright as ever is the stock taking it in the shorts today, that’s simple;

1. The stock has been on an incredible run and to some is beginning to look “pricey”.

2. The company acknowledged a common problem as any market matures although volume is increasing revenue per patient is decreasing.

3. Given their tremendous growth the company also noted they will run into tough comps in the back half of the year something we anticipated but something the street doesn’t like to hear.

4. Abbott announced a deal with Novo Nordisk and just as the sun rises in the east and sets in the west anytime Abbott announces anything shares of Dexcom suffer a temporary setback.

5. The street bias to a growth story and while we see tremendous growth coming the street tends to focus on the near term rather than the long term.

Just using history as a guide investors have always done well buying into the company when shares dip. Need we remind everyone that it wasn’t that long ago when the street thought the company was on death’s doorstep with many analysts claiming the Abbott was about to eat Dexcom for lunch. Diabetic Investor on the other hand noted that yes Abbott would be a serious competitor, but this market was large enough and growing fast enough that the two companies could peacefully co-exist and do quite nicely. Wonder who got that one right?

Frankly we are even more bullish on Dexcom than before and think the future is brighter than ever. Here’s why;

1. CGM usage with intensively managed patients is still vastly under-penetrated. Dexcom has a very bright future here given their deals with Novo Nordisk, Lilly, Tandem and Insulet. Tyler may not work exclusively with a Dexcom sensor, but he’ll work with Dexcom more than Abbott. Keep in mind Abbott’s lone pump partner is Bigfoot and they aren’t even on the market yet.

2. Think of what would happen (and we’d recommend sitting down for this one) if Medtronic shifted gears and worked out a deal with the company. A deal that would allow the Dexcom sensor to work with a Medtronic Insulin pump. This isn’t as far-fetched as many believe. Medtronic knows they a huge problem on their hands and while they say they are working on a new and improved sensor Dexcom offers an instant solution to their problem. Given how badly things are going in Northridge don’t discount the possibility of this happening.

3. CGM adoption with less intensively managed patients is miniscule and this market isn’t big its enormous. CGM will become the standard for glucose measurement it will just be used differently with less intensively managed patients, but it will be used.

Look at the math let’s say there are 7 million intensively managed patients (US alone) of which 80% will use a CGM, that’s 5.6 million patients. That leaves another 20 million less intensively managed patients of which we see 40% using a CGM which is another 8 million patients. For grins and giggles assume that Dexcom and Abbott spilt this 50/50 – talk about a happy dance and this is just here in the US.

4. Yet it gets even better as no one not yet anyway has talked about CGM being used as weight loss tool or other applications. Yes, right now CGM is primarily a diabetes device but that is going to change, and this will blow the doors off the market opportunity. Listen we know that thinking is a lost art among many in the analyst community but there is a reason Dexcom and Apple are getting pretty chummy.

What the analysts have never understood about the deep dive all the high-tech cash rich companies is they see diabetes/CGM as a platform play. Apple and Google (Dexcom works with them too) view diabetes/CGM as the low hanging fruit. Turn CGM into a weight loss or cardiovascular tool and it becomes a serious revenue generator.

And we should mention that Amazon feels the same.

Listen it’s understandable that analysts who tend to focus on the next quarter don’t look at the market as we do. Yet we have no doubts whatsoever that the future is very bright for Dexcom.