Dexcom, Inc.

  • Dexcom, Inc. (“Dexcom,” “DXCM,” or “the Company”) manufactures continuous glucose monitoring systems (“CGMs”) for diabetic patients. It competes with Abbott’s FreeStyle Libre in the stand-alone CGM space. Dexcom’s G-Series has until now been considered the gold standard, with the Libre a cheaper, user-friendly alternative. However, Abbott is set to release the Libre 2 in the U.S. imminently – in a matter of weeks or months, we believe – and will close most, if not all, of the technological gaps which separate it from Dexcom’s G-Series. CGM commoditization will promote heavy price competition – and Abbott, as the low-cost manufacturer by a factor of 4, can put heavy pressure on Dexcom profits with little downside to its own margins. The Street believes that the down-market Libre is not a serious threat to Dexcom’s market, but the Libre has taken >70% incremental share of the U.S. Type 1 (“T1”) market and >95% incremental share of the U.S. Type 2 (“T2”) market since first being released in the U.S. – even before the release of the more advanced Libre 2. We believe that the G6’s target U.S. T1 market offers just 1-2 years of remaining patient growth, severely restricting Dexcom’s patient base until the release of the T2-oriented G7 in late 2020-21 at earliest. Importantly, we also find evidence that Dexcom’s recent sales growth acceleration was driven by an effective price increase and stockpiling of cheaper legacy G-Series models – and is not an indication of recent patient growth (which management conveniently stopped disclosing).
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  • Abbott Set To Close Technological Gap Between Libre And Dexcom G-Series: Until now, Dexcom’s alarm-equipped, accurate G-Series has been considered the gold standard of stand-alone CGMs, with Abbott’s Libre (new in the U.S. as of 2018) a low-cost, easy-to-use alternative. Abbott, however, is set to release the Libre 2, which includes a similar high/low glucose alarm and is sufficiently accurate to serve the needs of most, if not all, diabetics. Priced at an ~80% discount to the G6, the Libre is the far more sensible option for T2 diabetics, and even T1 diabetics – a surprisingly price-sensitive population, per our proprietary survey – will be drawn to the cheap yet advanced Libre 2. Whereas Dexcom was once a technologically-superior first mover, it is now fighting with near-equals for mass-market adoption.
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  • Dexcom Has Few Avenues To Near-Term Patient Growth: U.S. T2 patients did not adopt CGMs in material size until the release of the far cheaper Libre 1. Abbott is now taking >95% incremental share of U.S. T2 patients, suggesting that T2 patients may have never been part of the G-Series TAM. Dexcom will effectively be locked out of the T2 market until it releases a cheaper, down-market CGM similar to the Libre (late 2020-21 at earliest, per management, after having failed to meet its initial target of 2018). Libre is also taking >70% incremental share of U.S. T1 patients, even before the technologically-comparable Libre 2 hits the market. With the U.S. T1 market already ~50% penetrated (with a likely ceiling of 70-80%), Dexcom has limited room for patient growth through the next 1-3 years as T1 patient adoption decelerates, as it competes against the cheap yet technologically-comparable Libre 2 in its core T1 market, and as it fails to make significant headway in the T2 market – by far the largest source of CGM patient growth through FY19-21 and beyond.
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  • Abbott’s Economies Of Scale As A Large Medical Device Player Could Overwhelm Dexcom Amidst Industry Pricing Pressure: The leveling of the technological playing field between Abbott’s and Dexcom’s CGMs will likely bring downward price pressure to the space, particularly given the Libre’s current ~80% discount to the G6. Abbott is the low-cost CGM manufacturer by a factor of 4, and could overwhelm the one-product Dexcom in an aggressive price war. If Dexcom is forced to price its current CGM lineup on par with the Libre, Abbott could wipe out Dexcom’s gross profit in its entirety given Dexcom’s while taking only a 100 bps hit to its own gross margin, per our estimates. Dexcom’s vast scale disadvantage could also potentially prevent it from ever producing a cheaper T2-targeted CGM profitably.
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  • Investors Misinterpreting Recent Growth Acceleration As Growth In Patient Base: Bulls believe that recent sales growth acceleration to >50% yoy has been driven largely by patient base expansion. However, the decoupling of transmitter sales growth from sensor sales growth suggests that the growth acceleration is a consequence of A) recent effective sensor price hikes and B) stockpiling of cheaper legacy G-Series sensors ahead of the release of the more expensive G6. Management no longer discloses patient base growth as of February 2019, hiding any recent slowdowns in patient base growth from investors’ view.
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  • A Risky One-Product Company Valued As A Growth Story: DXCM is valued at a 57% premium to peers on its seemingly exciting growth story despite exposure to competition / TAM saturation. Even bullish sell-side analysts see only ~5% upside, and smart money seems to be wary of DXCM’s growth prospects. We see 45-60% near-term downside in DXCM shares on disappointing sales growth and a multiple rerating, and even more potential future downside on longer-term price pressure.
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