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Morningstar | Dexcom Sees Stronger-Than-Expected Sales in 2Q, but Expenses Also Exceeded Our Estimates

Dexcom reported second-quarter results that substantially exceeded our expectations on the top line, but trailed on our estimates for operating margin. At first blush, we expect to moderately raise our fair value estimate, as faster revenue growth is partially offset by slightly higher manufacturing and operational costs than we’d anticipated. Considering the strong double-digit growth we’ve seen from Abbott’s Flash Libre glucose monitor and Dexcom’s G6, the diabetic population is hungry for meaningful, user-friendly innovation, in our opinion. We also anticipate a robust adoption of Medtronic’s impending no-fingerstick sensor, which is likely to launch sometime in calendar 2019. We think this current wave of innovation in glucose monitors should expand the entire market. While the prospect of increasing continuous glucose monitor penetration among both Type 1 and Type 2 could be the tide that lifts all boats, we remain unconvinced that Dexcom has dug an economic moat, especially considering Abbott’s significantly lower price and Medtronic’s pump integration, algorithms, and utilization of Sugar I.Q. and Watson to further tailor algorithms to individual patients.

We remain somewhat skeptical about rising profitability at Dexcom and its ability to earn economic profits, especially now that the firm is facing stronger and more direct competition from larger companies. Although using sensors for longer than the recommended window appears to be common with earlier generations for Dexcom’s CGMs, management maintains the hard-shutoff on the new G6 sensor will prevent that kind of work-around and, ultimately, contribute to improved margins. We’re keeping an eye on sales growth of sensors and product mix to monitor the degree to which this dynamic may lead to more attractive profit levels.