When and who?

When and who?

Recently Diabetic Investor has received several inquiries regarding Dexcom (NASDAQ: DXCM) all of which center around a simple question; When will someone come along and buy them. We aren’t surprised by all this interest for as we have said many times Dexcom is the posterchild for how a diabetes device company should be run.

As we begin trading today Dexcom starts the day with a market cap of nearly $8 billion and its stock is trading within striking distance of its 52 week high. Shares are up over 12% on a year to date basis and by every account the company has a very bright future.

Given this set of circumstances we see only a few possible suitors for the company, the most obvious of course is Google. The two companies already have a partnership and it’s well known that Google is committed to diabetes. Google is also one of the few companies who has the resources to acquire Dexcom. Yet Google isn’t the only player in Silicon Valley who could make a run at the company.

As we have been noting Apple has become increasingly public about their move into healthcare. It is also well known that Apple has been sniffing around the diabetes space for some time. Like Google they don’t need to be in diabetes, they want to be in diabetes. Also like Google they have ample resources to pull off a deal.

Yet we would not count out our friends in New Brunswick, Johnson and Johnson (NYSE: JNJ). The simple fact is JNJ has reached the crossroads when it comes to diabetes. Simply put its time to go big or go home. The company is watching its legacy conventional glucose monitoring unit shrink and has been very public about building a diabetes echo system. The battle internally at JNJ is one of return on investment, will acquiring Dexcom pay off.

JNJ sees where the diabetes market is headed but cannot yet get completely away from the past. Like so many legacy companies in diabetes they are burdened by the past.

The way we see it when it comes to continuous glucose monitoring it’s a game of musical chairs and the most valuable chair belongs to Dexcom. This is the company that everyone would like to dance with. Medtronic (NYSE: MDT) also has a chair but they aren’t looking for a dance partner. Abbott (NYSE: ABT) also has a chair but we’re not sure if they are willing to dance. The Libre may not be a true CGM but with some modifications it could be. Roche, yes Roche too has a CGM but this being Roche it will never see the light of day.

The simple fact is when it comes to CGM Dexcom is the bell of the ball.

The reality is CGM is the most important link in the interconnected diabetes management chain. As we have stated many times it is no longer a question of if CGM will become the standard for glucose monitoring but when it will become the standard. We further believe that CGM is for ALL patients with diabetes and not just those who practice intensive insulin therapy. A view which is gaining traction given the disposable Band-Aid like sensor that Dexcom/Google are working on. A system which will not only be very patient friendly but priced on par with existing conventional finger stick monitors.

What so many miss about the future of the CGM market is how these systems will be used by different patient groups. They view CGM through the prism of patients following intensive insulin therapy. They link CGM to the quest to develop an artificial pancreas. They fail to understand how CGM can be more impactful for patients NOT following intensive insulin management. They are letting the past failures of conventional BGM get in the way of how CGM will be used in the future.

Since we can remember we have been stating that the reason the majority of patients did not monitor their glucose levels regularly had nothing to do with the so-called “pain” of finger sticks. The reason these patients didn’t test was because they did not understand what these numbers mean and how to use them to more effectively manage their diabetes. For non-intensively managed patients there was no action step taken after the test, no matter what number came up they would continue on their prescribed therapy regimen. These patients lacked the ability to take immediate action so why test at all.

Yet in the future all this is about to change thanks to IDM, disposable easy to use low cost CGM and outcomes based reimbursement. And it won’t be patients who will drive this move towards CGM but their physicians, health insurance providers and employers. In the future the data generated by these patient friendly low cost disposable sensors will analyzed not by the patient rather by the SYSTEM/SOFTWARE/APP connected to the sensor. A system which will share this analysis with the patient’s physician who will have a vested interest in patient outcomes because they will be paid based on outcomes.

These patients won’t necessarily wear these sensors all the time but given the huge size of this patient population volume will trump turnover. By most estimates there are less than 5 million patients practicing intensive insulin management in the US, this is the low hanging fruit of the CGM market. The non-intensive segment stands at over 24 million patients and continues to grow at epidemic rates. Let’s assume for a moment that 10% of this population use the disposable sensor just 4 times per year; that’s almost 10 million sensors sold each year.

We actually believe market penetration will be higher as all this data will create what we call intervention moments. Armed with this data a physician will be able to see whether a patients existing therapy regimen is working. They will not have to wait for the next A1C test. They can intervene more quickly so that a little problem does not become a big problem. Even better they won’t have a lot of heavy lifting to do as all the data analysis will be done by the system. Basically all the physician has to do is communicate with the patient, something that will also likely be done through the system.

Throw in the artificial intelligence combined with predictive analytics we can envision a day when all this will be done virtually. As we have been stating the role of the physician in diabetes management is changing to a more consultative role.

The weak link in the IDM chain has always been getting glucose data from the masses. Without these data points the entire chain falls apart. Disposable CGM solves this problem. In the future a patient will simple slap on this Band-Aid like sensor, a sensor which will last for 14 to 21 days, a sensor which won’t require calibration and sends readings to the patient’s smartphone which then can and will be shared with the patient’s diabetes team.

The problem is most people see CGM as it is today and not what it will be like 5 years today. Perhaps we should rephrase that statement and say most people outside of Silicon Valley see CGM that way. The people in the Valley are all about the future, seeing things as they should be not as they are today. They are not encumbered by the past, they have no legacy franchises to protect, they not only have the money to make this future possible they have what we like to call the vision thing in abundance.

With each passing day it’s becoming clearer that these legacy diabetes franchises are in serious danger of getting run over by the freight train traveling from the Valley. Either they get on board this train or get out of the way, there is no third option. Failure to act and act quickly will only result in disaster.