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Morningstar | Dexcom Sees Strong Adoption of G6, but Hits Headwinds on Price Due to Payer and Channel Mix

Dexcom posted strong third-quarter results that were generally consistent with our expectations, and we’re standing pat on our fair value estimate of $74 per share. The roll out of G6 continues to fuel double-digit revenue growth (up 45% in constant currency year over year), and the firm also saw good news in Medicare’s decision to cover G6 as a therapeutic device for patients who need intensive insulin management. We also look forward to seeing Dexcom turn meaningful profit next year. Nonetheless, we remain reluctant, at this point, to award Dexcom with a narrow moat, as its main continuous glucose monitor competitors are also seeing successful commercialization of new technology, which we think puts competitive pressure on Dexcom.

Dexcom does face a near-term headwind in the form of reduced revenue per patient, as the mix of its customers shifts. While we expect these factors to ease by this time next year, it could get worse before it gets better. In particular, international sales and Medicare sales--which result in lower revenue per patient--are likely to continue to grow into larger proportions of Dexcom’s total sales base. Additionally, the firm’s strategy to expand access through the pharmacy channel also means Dexcom likely needed to concede on price when negotiating with payers. Management is confident that the greater volume realized through pharmacies will more than offset the price concession. We anticipate this new channel will help Dexcom capture more Type I diabetics (its core patient segment), but are more skeptical of the firm’s potential among Type IIs thanks to Abbott’s Freestyle Libre, which is substantially lower priced and has long been available at retail pharmacies.

We applaud the firm’s efforts to collaborate with virtually all entities that are also involved in therapies for diabetics, including Insulet, Tandem, Eli Lilly, and Novo Nordisk. With all the opportunities for innovation in this market (from algorithms to diabetes management apps for patients on smartphones), we think these alliances give Dexcom the best chance to be associated with whatever new solutions are widely adopted.