Dexcom Stock: How Much Growth is Left?
“I never realized that I loved hiking,” says a moderately attractive woman named Abby who breaks into tears over the thought of her newly found hobby. This woman has clearly never encountered a tick in her life, but if she did, the tick probably wouldn’t find her blood to be that tasty. You see, Nancy has diabetes, and for whatever reason, she couldn’t go hiking before she found out about Dexcom (DXCM). For diabetics like Abby, Dexcom’s device allows for an unprecedented look into blood sugar (glucose) levels, the bane of every diabetic. In the below chart you can see three dots – the typical intermittent testing with finger pricks – while the solid line shows the Dexcom device continuously measuring blood sugar.
The last time we looked at Dexcom was two years ago in a piece titled A Large-Cap Diabetes Stock That’s Growing Like Mad. In both our tech stock report and tech stock catalog, we’ve listed Dexcom as a “like” noting that – as of several years ago – they appeared to have plenty of growth and opportunity ahead. We also said we “may look to open a position on a dip.” Well, that dip is here.
Let’s start by looking at what the total addressable market (TAM) for continuous glucose monitoring (CGM) looks like, and how much of that has been captured so far by Dexcom and their competitors.
People who need intensive insulin therapy (IIT) are those whose insulin regimen includes mealtime insulin via injection. In the United States, this population includes all Type 1 diabetics (1.6 million) and about 7.4% of Type 2 diabetics (2.4 million) for a total of 4 million U.S. IIT patients. Around 25% of them are already using a CGM solution as seen below (along with breakdowns for Type 1 IIT and Type 2 IIT).
Note that the above estimates account for all providers of CGM medical devices (more on this in a bit). A firm called SVB Leerink did a survey that expects the Type 1 market will be fully penetrated at 74% (Dexcom pegs this number at 80%), while Type 2 IIT penetration is expected to peak at 55%. Assuming this is correct, then the actual market penetration for CGM looks like this:
- Type 1 IIT: 57% penetrated
- Type 2 IIT: 27% penetrated
- U.S. IIT: 41.5% penetrated
All things being equal, if Dexcom has realized 41.5% of their IIT potential in the United States with 2021 revenues of $2.45 billion (upwards of 80% from the sale of disposable sensors), then we can estimate the remaining potential at around $3.45 billion giving them a $5.9 billion a year business with gross margins in the high 60s. But Dexcom also sees potential for their technology to be used by the 30 million non-intensive diabetics in the U.S. who aren’t classified in the IIT category.
Critics say the CGM platform is overkill for the vast majority of diabetes patients who don’t need insulin injections, and that the price point does not justify the questionable benefits. Studies being conducted by the device manufacturers say otherwise (surprise, surprise), so it’s difficult to say how much success Dexcom will see going down this avenue for expansion. Perhaps a better place to look for new growth is outside the United States, a country which Dexcom derives around three-quarters of their revenues from currently.
Healthline estimates the yearly cost of using Dexcom at around $500 a month without insurance. That price point needs to be considered when estimating just how many people in emerging markets might be able to afford this platform. This is why Dexcom has identified a “core market” that consists of countries with people who can afford first-world luxuries like CGM (countries seen below in green circles).
The above countries add another 6 million IIT patients to capture, and expanding further across all countries, another 13 million patients could be added. None of these opportunities represent blue ocean TAM since Dexcom will need to displace traditional monitoring methods. There are also other sharks swimming about in the CGM seas, one of which we’re holding in our dividend growth stock portfolio – Medtronic (MDT).
The CGM Competition
The two horses in the lead right now are Dexcom and Abbot with the latter competing on price at around $160 a month vs. the $500 a month Dexcom charges. Abbott is the largest player in the CGM market with a 30% market share as of 2020, followed by Dexcom with 20%. That’s according to an article by MedTech Insight which talks about how both these firms are squaring off in court after “a 2014 royalties deal that included an agreement not to file suit against each other for some time” expired. From MassDevice on the 2014 outcome:
DexCom said it received a limited license to the patents Abbott alleged in the infringement cases, and granted Abbott a limited license to certain patents filed before Jan. 1, 2005. The companies also agreed not to sue each other for patent infringement “based on certain of their respective continuous glucose monitoring products” or to challenge any patent or patent application until March 31, 2021.
Both companies are now asking the courts to block their competitor from selling products that infringe on their intellectual property and seeking damages to boot. That litigation shows how both firms believe their only threat needs to be taken out so they can dominate the space in a similar manner to how Illumina dominates next-generation sequencing with an 80% market share and 80% of revenues coming from high-margin consumables.
As investors in Medtronic, it’s worth noting they’re also a player in continuous glucose monitoring, but not a formidable one. Diabetes revenues represented 7.4% of Medtronic’s 2021 revenues and actually declined in growth by 3% year-over-year. Whoever oversees that division should have a “come to Jesus” with the division leads and quickly figure out why they’re getting their asses handed to them.
Glucose Monitoring and Insulin Administration
Our recent piece on conglomerates talked about how valuable it is for a company to manage their divisions like a portfolio of businesses. A prime example of that would be Johnson & Johnson’s decision to exit glucose monitoring in 2018 when they sold their diabetes division to a private equity firm. If you’re a business that sells old-school glucose monitoring solutions like Roche’s Accu-Chek product line, you can be certain the sales of those high-margin lancets will be dropping over time. Skating to where the puck will be requires investors to think about what solutions might disrupt continuous glucose monitoring.
Dexcom has wisely been integrating their application with insulin devices which means an artificial pancreas won’t necessarily be disruptive to a monitoring application. In fact, there’s a $17 billion firm called Insulet (PODD) which has seen remarkable revenue growth with their insulin delivery system that acts as an artificial pancreas by delivering insulin when needed.
In May, rumors were swirling that the companies were looking to merge, and Dexcom went against the grain and publicly denied any M&A events were ongoing. Still, their investor deck makes it a point to highlight the two companies integrating their devices and it does seem like a match made in heaven. Both firms have gross margins in the high 60s, and both sell disposable devices which provide recurring revenue streams.
A Cure for Diabetes
Perhaps the biggest threat to Dexcom might be a cure for diabetes. For example, a private firm called ViaCyte (backed by JNJ) is working with immune-evasive cell replacement therapy which is designed to enable patients to produce their own insulin. Earlier this year, they announced the “first-in-human transplant of gene-edited, stem cell-derived pancreatic cells for the treatment of diabetes designed to eliminate the need for immune suppression.”
Just weeks ago, ViaCyte was acquired by Vertex which is also developing a stem cell therapy for type 1 diabetes called VX-880. To date, three patients have been dosed in the Phase 1/2 study with VX-880. Vertex is also working with CRISPR Therapeutics to successfully cure patients with sickle cell diseases and beta thalassemia, something we covered in our recent piece on Intellia Therapeutics Stock vs CRISPR Therapeutics Stock.
Would We Buy Dexcom Stock?
A cure for diabetes isn’t around the corner. If it does arrive courtesy of gene editing, it’s likely to be expensive and available only to those with sufficient means. We don’t believe any potential cure for diabetes would be much of a threat to Dexcom over the next decade, the optimal time horizon for holding a stock (at least). We really like the consumable nature of the Dexcom solution, but also dislike investing in a company that targets only one disease with 75% of revenues coming from a single country. With global diabetes spending at $760 billion, we could make an exception to that rule, but we’re not going long Dexcom for the same reason we’re not investing in Intuitive Surgical.
Our investments in SYK and MDT mean that about 3.5% of our total assets under management are exposed to medical devices. An investment in ISRG would also increase our tech portfolio exposure to life sciences which already sits at 15%, more than double our target weighting of 8%.Credit: Nanalyze
The same reasoning above applies to Dexcom. Since we’re overweight life sciences stocks, this would be a firm we’d consider if we exited one of our existing life sciences positions for whatever reason. Until then, Dexcom remains in our report and stock catalog as a like. For those investors who may look to purchase Dexcom stock at today’s discounted prices, here’s how their valuation compares to some names from our tech stock catalog to which we’ve also added two major device makers.
|Asset||Simple Valuation Ratio|
|Intuitive Surgical (ISRG)||13|
|iRhythm Technologies (IRTC)||12|
With over 80% of their revenue coming from disposables, Dexcom is the sort of business we dream about owning – if you can look past their heavy U.S. exposure that is. While their TAM estimates may be overly aggressive, there’s enough upside left for the company to continue growing over the next decade, especially if they get aggressive on international expansion and/or decide to get into bed with an insulin delivery system provider and start upselling existing platform users. That said, our heavy exposure to life sciences means Dexcom won’t be a firm we’ll be getting serious with anytime soon.
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