What about Dexcom?

What about Dexcom?

Yesterday’s announcement by UnitedHealthCare that they would no longer cover insulin pumps from any company other than Medtronic (NYSE: MDT) is having a major impact in the insulin pump world. It should come as no surprise that shares of Tandem (NASDAQ: TNDM) and Insulet (NASDAQ: PODD) both directly impacted by United’s decision got hammered yesterday. Shares of Dexcom (NASDAQ: DXCM) were also adversely impacted as many believe this decision will hurt future sales as Tandem’s t:slim and the Animas Vibe (Animas is a unit of Johnson and Johnson (NYSE: JNJ)) work with the Dexcom sensor.

While this reaction for Tandem and Insulet are understandable we see the reaction for Dexcom as overdone; here’s why,

First it’s not like patients using either the t:slim or Vibe will all of a sudden switch to a Medtronic pump. It is our understanding that United’s decision impacts only patients either new to pump therapy or those who’s pumps are out of warranty and may be upgrading to a new pump.

Second, it’s a major misconception that the majority of Dexcom customers are insulin pump patients. Yes, pump patients make up substantial portion of their customer base however Dexcom also has major presence with patients following multiple daily injection (MDI) therapy.

Third, this also ignores the fact that the Dexcom sensor by all accounts is superior to the Medtronic sensor. While Medtronic has been improving their sensor nearly every expert agrees the Dexcom sensor is still superior. It’s also known that many Medtronic patients are using the Dexcom sensor.

Fourth, let’s not forget about Dexcom’s partnership with Google. As we have noted in the past should this partnership yield a low cost disposable sensor this product could forever change the entire glucose monitoring market. Many falsely assume that non-insulin using patients will not use such a product, we strongly disagree with this belief. There is growing consensus that HbA1c, the current gold standard for measuring control does not tell the whole story, that it is also important to measure glycemic variability.

Again as we have stated preciously glycemic variability is the next major biomarker for diabetes and there is no better way to measure glycemic variability than a CGM. Additionally, given the size of the non-insulin market Dexcom does not have to capture a high percentage of the market to be successful. By most estimates there are approximately 5 million insulin using patients in America, which means there are 25 million or so non-insulin using patients. Think of what it would mean to Dexcom if they captured just 5% of this market.

There is no doubt United’s decision could impact Dexcom especially if Medtronic continues to be aggressive with payors. Nor do we doubt that the impact on Dexcom was not factored into Medtronic decision to be aggressive with United. Medtronic is not just protecting their legacy franchise but also doing what they can to blunt Dexcom’s growth.

The wild card here is what JNJ does. The recent success of the Vibe is directly linked to the fact it works with the Dexcom sensor. While JNJ likely isn’t in the mood to acquire another insulin pump company they just might be interested in going after Dexcom. With Tandem bleeding cash and Insulet not yet having a system that works with the Dexcom sensor, JNJ could make a play for Dexcom. This would not only help their Animas franchise but also their LifeScan franchise.

Just as Medtronic is trying to lock payors into their insulin pump, JNJ has been following this strategy with their LifeScan franchise. JNJ knows that payors want lower prices for BGM and is happy to oblige provided payors make LifeScan there exclusive glucose monitor. JNJ understands what they lose in price will be offset by the increase in volume, as we have said many times when it comes to BGM scale is critical. They also know that by locking payors into their brand this just makes life a nightmare for Abbott (NYSE: ABT) and Roche. Medtronic is trying to create this same nightmare for Insulet, Tandem and Animas.

Yet JNJ also sees that the conventional BGM market doesn’t have much a future. Usage is decreasing, prices continue to decline and it’s just a matter of time before payors stop reimbursing for non-insulin using patients. Additionally, they see the rise of interconnected diabetes management (IDM). However, the Achilles Heel of IDM is the fact that patients must test their glucose if IDM stands any chance at all.

Think for a moment what it would mean if patients could simply slap on a Band-Aid like sensor which does not require any calibration. A disposable sensor which sends readings to a patient’s smartphone which has a way cool whiz band app which transforms all this data into patient relevant patient’s actionable information. Information which can easily be shared with the patient’s physicians. This is the essence of the Dexcom Google partnership and why JNJ just might make a play for Dexcom.

There is no question that United’s decision is a major blow to Tandem, Insulet and somewhat to Animas. There is also no doubt that should Medtronic continue to try and lock up payors, these companies will have some very difficult decisions to make. However, we don’t see this decision adversely impacting Dexcom over the longer term. CGM is not just a valuable tool for insulin pump patients, it’s a valuable tool for ALL patient’s even those who do not use insulin. Dexcom and Google see this and it would be a major mistake to underestimate what these two companies can do together.

As Momma Kliff used to say; don’t make decisions on what’s directly in front of you, there is something called the future. Mom was very smart as is Dexcom and Google as they want to be part of the future while everyone is living in the past.