Dexcom: "Shoot first, ask questions later" opens CGM buying window

What happened

Dexcom posted 2Q24 results below expectations, and the stock is trading ~35% lower in premarket

At first glance, the raw results are strong: on YoY basis, revenues are up 17%, operational income is up 25%, and EPS is up 24%, with EPS slightly exceeding expectations. 

However, revenues slightly missed expectations, and the significant setback came from the company revising its 2024 revenue guidance downward by $150 to $300mn—a 4% to 8% miss!

Dexcom now expects sales to increase 11% to 13%, reaching $4bn to $4.05bn, falling short of the Street's forecast of $4.3bn. Third-quarter guidance is also disappointing, with expected revenues of $975mn to $1bn, an organic increase of just 1% to 3%. Analysts had anticipated a more robust $1.15bn.

Impact on our Investment Case

Expanding sales against competitors is key to growth in MedTech. Amid GLP-1 concerns, any disruption to Dexcom's quarterly double-digit growth is magnified.

The current worry is Abbott gaining market share, while distribution squeezes margins and sales force expansion struggles.

GLP-1 drugs here are not to blame (yet).

The first question on everyone's mind was: are GLP-1 drugs affecting the Continuous Glucose Monitoring (CGM) market?

Diabetes is a massive market, costing the U.S. $430bn annually.

Dexcom's primary market is autoimmune Type 1 diabetes, where GLP-1 drugs are not typically prescribed. Even when they are, they cannot fully compensate for pancreatic self-destruction and do not eliminate the need for glycemic control via CGM.

For obesity-driven Type 2 diabetes, CGM usage among those initiating GLP-1 therapy has increased since 2018. Patients are 2 to 4 times more likely to start using CGM after beginning GLP-1 therapy, depending on insulin use. However, this remains a small segment with high growth potential; only an estimated 4mn of the 530mn people worldwide with Type 2 diabetes use CGM. On top of that in the U.S., 24% of Type 2 diabetes patients are undiagnosed, highlighting the market's underpenetration.

Dexcom aims for $10bn in sales by 2026 ($4bn in 2024), so the impact of GLP-1 on reducing the number of Type 2 diabetes patients is unlikely to be a significant obstacle.

As for today's impact, Dexcom distributes its devices through two channels: the Pharma Channel and the Durable Medical Equipment Channel (DME). The Pharma Channel can be used as a proxy for the pressure on CGM sales by Ozempic and other GLP-1 drugs. This channel has seen a 7% increase in sales over the last quarter for Dexcom, indicating that the revenue guidance downgrade is not due to direct competition with GLP-1 drugs.

So, where is the $150-300mn guided-down revenue missing?

Three main areas are under scrutiny, each accounting for about $100mn: 

• Current Competition with Abbott: Dexcom has lost market share to Abbott. Abbott, a medical device distributor, outperformed Dexcom in the DME. This channel is traditionally the one involving higher revenue per patient, and that was also compounded by the shift of some patients from DME to the pharmacy channel (resulting in lower revenue per patient). Abbott's diabetes care division saw significant growth both in the U.S. (+27% at $650mn) and globally (+10% at $1 bn) in Q2. This competition contributed to an estimated $100mn revenue slowdown for Dexcom, especially given the historical importance of "sales force expansion" in MedTech.

• Slow International Expansion and sales force reorganization: Dexcom's growth outside the U.S. has been sluggish. They have struggled to gain traction in Europe, and are limited to patients using basal insulin, a cap on their market uptake. On top of that, they changed roles and positions, which led to a significant disruption. So, structural change affected new patient acquisition this quarter, too.

• Pressure from Pharmacy Benefit Managers (PBMs): PBMs are pressuring Dexcom with coverage demands and aggressive rebates. What should be a positive development—coverage ahead of expectations, meaning bigger order volume—has led to lower revenue growth due to increased rebates. Rebates for the Dexcom G7 came faster than anticipated (3 times than for the G6). While management expected quicker approval and adoption, it occurred even sooner, resulting in a lower price point for early adopters.

Dexcom is still not cheap but has cards to play

Dexcom typically achieves double-digit QoQ growth, commanding a strong premium in the MedTech sector, trading at 44x EV to EBITDA compared to the 10-year average of 15.5x. Even after today's drop, it remains at a premium.

Is the premium still justified? We believe it is.

• Clinical evidence presented at the American Diabetes Association's 84th Scientific Sessions demonstrated the benefits of Dexcom CGM for type 2 diabetes patients not on insulin.
• Dexcom will launch Direct-to-Watch in the U.S. and several international markets, allowing G7 customers to use an Apple Watch as their primary display for glucose readings. 
• The company also expanded access to Dexcom ONE in France for type 2 diabetes patients using basal insulin, enhancing the market for real-time CGM.
• The integration of Dexcom G7 with Insulet's Omnipod 5 Automated Insulin Delivery System and Tandem Diabetes Care's Mobi insulin pump with Control-IQ technology advanced pump connectivity solidifies Dexcom sensor as best-in-class.
• The upcoming launch of Dexcom's Stelo in August, the company's first over-the-counter CGM in the U.S. could unlock further growth.
• With now 350 sales reps (previous 250), the potential for sales expansion after restructuring is substantial.
• Last but not least, the management believes in the company and has started a shares buyback program for $750mn.

Our Takeaway

Despite current challenges, Dexcom is well-positioned for growth with new product launches and new markets. Robust clinical evidence supporting Dexcom CGM for type 2 diabetes patients positions the company for recovery and potential market expansion. 

At atonra, Dexcom is a long-term conviction, and we remain committed to keeping it among our top positions.