1 Justification for Offloading DexCom Shares, and 1 Motivation for Acquiring
1 Justification for Offloading DexCom Shares, and 1 Motivation for Acquiring
DexCom's shares, represented by the ticker symbol DXCM, have taken a hit, plummeting by a substantial 37% this year. This disappointment stems from the company's second-quarter financials, which didn't meet investor expectations, causing a significant plunge in its stock value overnight. Although many of the challenges faced by DexCom can be classified as temporary setbacks, such as rebate-related issues, there are more fundamental concerns for its long-term growth prospects.
On the positive side, DexCom presents intriguing opportunities that could lead to impressive returns for patient investors. To evaluate if the bullish case outweighs the bearish one, let's examine one argument against investing in DexCom and one in favor.
Motivation to sell: advancements in diabetes treatments
DexCom's primary focus is on creating continuous glucose monitoring (CGM) systems to assist diabetes patients in monitoring their blood glucose levels, thereby improving their health outcomes. This technology has contributed to the company's success, driven by increasing CGM adoption, resulting in growing revenue and earnings.
However, there are several advanced diabetes treatments in development, and some existing ones, which could potentially shrink DexCom's target market in the long run. Famous biotech companies like Vertex Pharmaceuticals and CRISPR Therapeutics are working on potential cures for type 1 diabetes. If these biotechs succeed in developing curative therapies for type 1 diabetes, they could significantly impact DexCom's financial performance.
While type 1 diabetes affects only around 5% of diabetes patients in the U.S., all of them require insulin due to their inability to produce their own. Most CGM systems, including DexCom's G6, are primarily designed for insulin-treated individuals, excluding a portion of type 2 diabetes patients. Therefore, DexCom's customer base is predominantly composed of patients with type 1 diabetes, where CGM has become a standard of care.
Moreover, existing weight loss treatments could potentially reduce the number of type 2 diabetes patients in the future. For instance, a late-stage study involving tirzepatide, the active component in Zepbound, demonstrated a striking 94% reduction in the risk of developing type 2 diabetes for overweight or obese patients with prediabetes. While this development is undoubtedly beneficial for patients, it could lead to a decrease in DexCom's target market over the next decade, resulting in lower financial returns for the company.
Motivation to invest: expanding its target market
Anticipating these potential challenges, DexCom has expanded its focus beyond its traditional customer base of diabetes patients. In March, the U.S. Food and Drug Administration approved Stelo, a CGM product developed by DexCom for individuals not on insulin therapy. This segment comprises a significant number of type 2 diabetes patients and even prediabetes patients.
The U.S. Centers for Disease Control and Prevention estimates that approximately 33% of U.S. adults suffer from prediabetes. Many of these individuals may not be eligible for medications like Zepbound due to their healthy weight. DexCom's Stelo offers these patients an alternative solution to make healthier choices and potentially reverse their prediabetes.
Moreover, DexCom recently unveiled a proprietary generative artificial intelligence (AI) platform, which it plans to integrate into its devices. Stelo will be the first device to feature this GenAI feature, which helps patients make better choices by analyzing their data and lifestyle patterns, and offering suitable recommendations. This innovation could attract a large number of patients to DexCom.
Is DexCom stock a buy?
DexCom has an extensive potential market ready for exploration. The company had an installed base of just 1.7 million customers as of 2022. In the U.S. alone, it estimates more than 25 million people with type 2 diabetes have yet to progress to insulin therapy and are not at high risk of hypoglycemia. With its focus on these patients, DexCom could help slow the progression of diabetes. Despite the advances in type 1 diabetes treatments or those that delay the onset of type 2 diabetes, they have limited impact on these 25 million patients.
Expanding its market presence in developing countries, tapping into prediabetes patients as CGM awareness grows, and making inroads in similar populations can all contribute to DexCom's financial success for an extended period. Even if advancements in diabetes treatments lead to a significant reduction in DexCom's worldwide opportunity, it's not yet a guaranteed outcome. Therefore, in my opinion, DexCom's long-term prospects remain appealing.
Despite its historical price premium, DexCom continues to trade at a forward price-to-earnings ratio of 44, higher than the average for the healthcare industry (17). However, DexCom will continue to be a volatile stock, as it has been in the past. Nevertheless, it maintains the potential to deliver market-beating returns, as evidenced by its track record.
Despite potential threats from advanced diabetes treatments and weight loss treatments that could shrink its target market, DexCom is strategically expanding its focus to include individuals not on insulin therapy and prediabetes patients with its Stelo product. This expansion could attract a significant number of patients to DexCom and offset potential losses from shrinking markets. Investors considering DexCom's stock might find its long-term prospects appealing due to its extensive potential market and the company's plan to penetrate developing countries and tap into prediabetes patients as CGM awareness grows.
In light of these expansion strategies and the company's track record of delivering market-beating returns, even with its historically high forward price-to-earnings ratio, one could argue that DexCom stock is a worthwhile investment opportunity for patient investors willing to accept the stock's volatility.