Morningstar | Dexcom Sees a Mix of Factors Weighing on Profitability; No Change to Our FVE
While Dexcom’s strong first-quarter results slightly exceeded our expectations on the top line, this was offset by slightly falling short of our estimates on the bottom line. We’re leaving our fair value estimate unchanged, as Dexcom seems to be on track to hit our full-year projections. Robust adoption of the new G6 continuous glucose monitor fueled 52% quarterly revenue growth, with even stronger growth from international markets. However, gross margin fell by 430 basis points year over year. This was driven by a combination of factors, with roughly half the decline due to Dexcom expanding manufacturing capacity, and the other half stemming from the shift to distribution through the pharmacy channel as well as greater contribution from international geographies, which are less profitable than the U.S. Although we think Dexcom’s technology offers significant differentiation and the firm remains the leader in accurately reading blood glucose levels, we’re not confident that Dexcom enjoys intangible assets that would allow it to earn economic profits for a decade, especially now that competitors have ramped up their offerings.We’re not particularly concerned with the dampened gross margin this quarter. We view 200 basis points of margin compression as a near-term event that will resolve itself once Dexcom increases the scale of manufacturing to more efficiently use the new capacity. For the pharmacy channel, we  understand the trade-off where margins are slightly lower, but greater access can translate into high volume growth. We like this strategy and believe it is necessary in order for Dexcom to compete with Abbott’s Freestyle Libre, which is widely available through pharmacy and mass merchandisers. Finally, Dexcom is set to roll out a new transmitter that is 50% less expensive in the second half of this year. This should more than offset the margin loss through the pharmacy. We continue to expect gross margin to exit 2019 around 65%.
DexCom is a medical device company primarily focused on the design, development and commercialization of continuous glucose monitoring systems for use by people with diabetes and by healthcare providers. The company's products include: DecCom G6?, which allows the company's transmitter to run an algorithm to generate a glucose value and to communicate to a patient's mobile device; DexCom G4? PLATINUM, which is used to adjust therapy and to educate and motivate patients to modify their behavior after viewing the effects that specific foods, exercise, stress and medications have on their glucose levels; and DexCom Share?, which transmits glucose information to the mobile devices of designated recipients.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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