Wednesday, August 18, 2021

More Analysts on Wall Street are Starting to Believe Dexcom's Stock is Now Fully Valued

So, on August 18, 2021, the crowd-sourced content service for financial markets known as SeekingAlpha.com, which often contains archived investor presentations and earnings transcripts from publicly-held companies, issued not one but TWO (2) slight warnings about Dexcom stock. Links to those two articles are listed below:

https://seekingalpha.com/article/4450293-dexcom-too-expensive-considering-the-prospects 

AND 

https://seekingalpha.com/article/4450338-dexcom-future-sales-moderate-expectations 

Dexcom was the first mover into the market for continuous glucose monitors (CGMs), at least in the U.S. But Dexcom is hardly the only company operating in the CGM space. Dexcom has also delivered rapid growth, increasing revenue by 43% in 2019.

So far, investors have done well investing in Dexcom. Its stock price has increased by 459% over the last 5 years.  Also over the past 5 years, Dexcom's revenue has grown by an average of 37.5%, and at the end of 2019, the company earned a net profit for the first time. Dexcom management expects the company to grow at a CAGR of 15-20% until 2025 inclusive, and the EBITDA margin target is 30%. But the rate of revenue growth is starting to slow down, so the consensus is that Dexcom management's expectations do not appear very conservative and might be a little on the bullish side. In the opinion of a growing number of analysts, the current targets for Dexcom is optimistic, especially concerning the company's market capitalization. More Wall Street analysts have therefore become neutral on Dexcom rather than optimistic.

A key reason Wall Street is now spooked about Dexcom's share price is due to the company's lofty stock market valuation and looming competitive threats. Dexcom's most competent rival, Abbott which makes the Freestyle Libre system, is arguably only just starting to build a presence in the United States, whereas Dexcom was a bit slower to sell elsewhere in the world where Freestyle Libre is now the undisputed global CGM king. But the U.S. is a tiny part of the global market, and there, Abbott is the undisputed king.

While Dexcom can indeed still expand globally, its challenge is that non-U.S. margins might be lower because it already faces an entrenched competitor in Abbott. Abbott's newer Freestyle Libre model (the Libre 3) which is anticipated to attain FDA approval soon, and the company knows it has no U.S. presence, so it is pricing its products very aggressively, with sensors selling for about 1/3 less than Dexcom's now sell for. Of course, current Libre current models lack some key features many users consider requirements (alarms and sharing capabilities), but the Libre 3 will have all of those things too. Outside the U.S., Dexcom could be forced to do what Abbott is now doing in the U.S.: competing by cutting prices to gain sales, eating into the company's profit margin.

The short story is that Wall Street analysts believe that Dexcom's stock is already fully-valued, hence there's not much room for the company stock to increase in value from where it stands right now. They also believe that some investors who have pushed Dexcom's stock to such lofty levels don't truly understand diabetes or the market for CGM's and are therefore not making completely informed decisions.

Insurers will generally not reimburse CGM's unless people with diabetes are using insulin. That is a reality, and while arguments can be made to expand CGM's to the vast Type 2 market, the reality is CGM's/sensors cost a lot of money and the benefit to payers for Type 2 patients is simply not there unless the patients are using insulin. The reason insurers might cover CGM's for some patients using insulin is that even in people with decades of experience using insulin may find themselves experiencing very dangerous lows and extreme highs, both of which can quickly become fatal. Those can come on with no warning until a person suddenly becomes unconscious.

As my readers already know, CGM's can detect the speedy rise or fall in blood sugars before they cause symptoms, allowing a person to self-treat them accordingly. Since all people with Type 1 diabetes must use insulin, insurers usually cover CGM's for them. This keeps Type 1's from making frequent expensive trips to the ER in ambulances and helps to save the insurers money.

But, as mentioned earlier, people with Type 2 diabetes often can manage their diabetes without insulin by cutting down on the amount of carbohydrates they eat or by taking a host of oral diabetes drugs or use a combination of drugs to treat their diabetes. The drugs are much simpler than insulin for patients to use safely and are far less likely to cause dangerous highs and lows that can put people's lives in danger. Hence, payers really don't see a compelling reason to cover CGM's for Type 2's unless they use insulin.

Dexcom CEO Kevin Sayer recently made a beg (or plea?) for peer-reviewed scientific studies to "prove" that CGM's are a good use of money on the large Type 2 patient audience, but insurers are balking knowing how much it will cost them, and how little economic benefit it will actually deliver to their own bottom lines. 

When asked about coverage for non insulin-using Type 2 patients, Kevin Sayer told MedTechDive journalist Ricky Zipp (see the interview at https://www.medtechdive.com/news/dexcom-ceo-on-the-type-2-population-the-super-bowl-ad-and-pandemic-momentu/602755/):

"A lot of the pushback is based on cost [to which I respond: 'Gee, you think?']. These patients are very expensive within their own individual health systems, as far as the cost of treating the comorbidities that go along with late-stage Type 2 diabetes in particular. So, adding a sensor cost to that can be questioned. People want to see more evidence. I think we need more clinical studies. It'd be nice if we had reimbursement. But I think just getting the word out and getting more usage is going to be very important too."

However, as one of the SeekingAlpha authors argue, the argument for gaining widespread coverage for non insulin using Type 2 patients really is not there with commercial healthcare insurance company payers. 

Still, both Dexcom and Abbott are each spending big bucks on expensive TV advertising promoting the benefits primarily to the Type 2 universe with ads. This year, Dexcom featured a super-expensive Super Bowl ad featuring Nick Jonas which generated some controversy (see Esquire's coverage of that at https://www.esquire.com/sports/a35441322/nick-jonas-super-bowl-commercial-dexcom-controversy/).

So, that explains what's happening with the costly advertising push from both Dexcom and Abbott. Their ad messages are clearly geared towards the Type 2 universe, rather than the Type 1 universe. Type 1's are considered by both companies as an existing revenue source (although for Abbott, given its non-existent market presence in the U.S., the Type 1 market is a "conversion opportunity", but it has a lot of work to do, and the company may be waiting until it can introduce Libre 3 in the U.S. market). They don't need to be pulled-in on the product value proposition. However, Abbott remains a virtual unknown. It would seem to need more help in persuading Type 1's that its products are even useful, and the current ads are more about telling people with Type 2 about the impact that food has on their blood sugar numbers than how its product compares to Dexcom. 

But insurance company payers say Type 2 patients can get the exact same information with old-fashioned fingerstick tests, which costs them about $30 vs $300. Good luck with that, Dexcom! I don't see it happening with its current strategy.

When one realizes that the ads do not really even target Type 1's, but Type 2's, then the advertiser intent...and the advertising messages make marginally more sense. The ads are intended to stimulate a "pull" demand from Type 2 patients to ask for the devices, but if commercial healthcare insurance company payers won't even cover the devices, much of it will be money pissed away. The hard work is persuading insurance companies that the cost is even worth spending on Type 2 patients not using insulin, and there, I think Dexcom and Abbott still haven't done the required work needed to secure coverage for non insulin using Type 2's.

For Abbott, a lower price-point may help the company make inroads.

Maybe.

I also think that Dexcom presumes too much about supposed patient loyalty to its products. Dexcom sensors are expensive (although truth be told, Dexcom now says that 80% of patients on commercial healthcare insurance are now covered, see it in the company's recent investor transcript at https://www.fool.com/earnings/call-transcripts/2021/07/29/dexcom-inc-dxcm-q2-2021-earnings-call-transcript/ for details). As for customer service, the reviews are mixed, but aren't overwhelmingly positive, although it is a difficult job to do well at. But even with that coverage, I have my doubts. 

At this year's ADA Scientific Sessions, Abbott was bragging about how it's product is priced (in the U.S.) about "a third of the cost of other CGM's" (see the quote at https://www.zacks.com/stock/news/1756244/abbott-abt-reports-late-breaking-data-on-freestyle-libre), which is a very big deal for a consumer struggling with a high-deductible insurance plan who is essentially paying for the products out-of-pocket until they satisfy their deductible. 

That may explain why Dexcom is working so hard to make it easier for patients to get their product covered even before the truly competitive rival Abbott Freestyle Libre 3 model hits the U.S. market, likely in 2022. If only Lilly and Novo Nordisk had bothered doing the same for insulin a number of years ago, we would not have 25% of patients rationing insulin today.

In any event, both companies have their work cut out for them. At least one major investment bank, Credit Suisse, seems to believe that the market is likely to shift in favor of Abbott. For example, at this year's ADA Scientific Sessions, Abbott's Libre compared very favorably with Dexcom in terms of HbA1c reductions and acute diabetes complications, they are also bullish on the company's collaboration with Bigfoot Biomedical, and the thinking is that the company's lower price-point might better enable it to persuade payer coverage for non insulin using Type 2's compared to Dexcom, whose product is more expensive.

Watch this competitive space, because the competition is just beginning!

1 comment:

justbetsy said...

CGMs are hard to get for type 2's who ARE insulin dependent. Finger sticks don't help when I am dropping below 40 or going above 400 in my sleep. The CGM can talk to my pump and prevent a disaster. But Dexcom et al are being disingenuous at promoting "no finger sticks". Calibration is still needed, and finger sticks are the only way to check out of range numbers.