DexCom Inc.
/ (DXCM-NASDAQ)/ Equity Research / DXCM | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / N/A
Date of Last Change / 08/17/2005
Current Price (02/03/15) / $61.22
Target Price / $64.00
SUMMARY
Dexcom remains a loss-making entity despite increasing revenues primarily due to surging operating expenses. Nevertheless, in the third quarter of 2014, the company’s losses remained flat on a year-over-year basis. Revenues surged 60.8% to $69 million on a solid 60% rise in product revenues and also topped the Zacks Consensus Estimate of $61 million. The growing installed base of customers using the G4 Platinum system continues to drive product revenues and margins. DexCom has a robust product pipeline which contributes to the growth trajectory of this company. However, the market for blood glucose monitoring devices is highly competitive, subject to rapid change and significantly affected by new product introductions, which remains a potent headwind. Thus, we reaffirm our Neutral recommendation on DexCom with a target price of $64.00./ Equity Research / DXCM | Page 1
SUMMARY DATA
52-Week High / $62.7852-Week Low / $29.68
One-Year Return (%) / 57.54
Beta / 0.45
Average Daily Volume (sh) / 681,818
Shares Outstanding (mil) / 77
Market Capitalization ($mil) / $4,687
Short Interest Ratio (days) / 5.07
Institutional Ownership (%) / 96
Insider Ownership (%) / 7
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 49.8
Earnings Per Share (%) / N/A
Dividend (%) / N/A
P/E using TTM EPS / N/A
P/E using 2015 Estimate / 3061
P/E using 2016 Estimate / 145.8
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Growth
Industry / Med Instruments
Zacks Industry Rank * / 94 out of 267
OVERVIEW
San Diego, CA-based DexCom, Inc. is a medical device company focused on the design, development and commercialization of continuous glucose monitoring systems. These are for ambulatory use by people with diabetes and by healthcare providers for the treatment of diabetic and non-diabetic patients.
A key element of DexCom’s monitoring system technology is the continuous measure of patient's blood glucose level and transmission of that information to a small cell phone-sized receiver in real time. DexCom’s monitoring systems aim to provide real-time continuous blood glucose values, trend data and alerts to assist patients in managing their blood glucose levels.
The company’s first product, STS Continuous Glucose Monitoring System, was designed for up to three days of continuous use. This product was removed from the market when DexCom received U.S. Food and Drug Administration (FDA) approval for its second generation continuous glucose monitoring system, the DexCom SEVEN, named for its design for up to seven days of continuous use. DexCom discontinued sales of SEVEN in the U.S. following the launch of its third generation continuous glucose monitoring system, the SEVEN PLUS, which received approval for up to seven days of continuous use.
In Oct 2012, DexCom had gained approval for its continuous glucose monitoring system, G4 Platinum, and began commercialization of the product in the fourth quarter of 2012. In Feb 2014, the Dexcom G4 Platinum system received FDA approval for pediatric indication in the U.S., while the device was cleared for professional use in Jun 2014.
The company reported total revenues of $160 million in 2013, up 60.2% year over year. Total revenues for the nine months ended Sep 30, 2014 stood at $174.9 million, up 61.5% year over year. During this period, product revenues shot up 63.3% year over year to $172.8 million.
REASONS TO BUY
We believe the glucose monitoring market represents significant commercial opportunity for DexCom. The diabetes market is large and growing. Prevalence of the disease has increased as a result of the ageing population, inappropriate diet and increasingly sedentary lifestyles. The International Diabetes Federation (IDF) estimates that by 2035, the worldwide incidence of people suffering from diabetes will reach 592 million. An important component of effective diabetes management is frequent monitoring of blood glucose levels. Traditional glucose testing methods can be inconvenient, painful and difficult to use and provide limited information. In contrast, DexCom’s product has a comparative advantage in terms of both convenience to the patient and quality of data generated relative to traditional diagnostic tests. With only a small part of the patient population being able to use continuous glucose monitoring systems, the scope for market penetration and expansion is huge.
DexCom’s FDA-cleared CGM system – the DexCom G4 Platinum is significantly boosting the company’s top line. The inbuilt features of the G4 Platinum make it the most innovative system for continuous glucose monitoring in the market. In 2014, DexCom received several clearances from the FDA for its G4 CGM system. The FDA approved a new algorithm designed for DexCom’s G4 Platinum Continuous Glucose Monitoring system in Nov 2014, while the remote mobile communications device – DexCom Share – was cleared by the FDA in Oct 2014. We believe that the company is making significant advances toward extending CGM to mobile devices. More recently, in Jan 2015, the FDA cleared DexCom’s G4 Platinum Continuous Glucose Monitoring System with the Share System. We believe DexCom will generate significant top-line growth on the back of strong performance by G4 Platinum. Notably, the company’s average year-over-year quarterly revenue growth has been 65% since the launch of G4 PLATINUM. Pipeline products such as pediatric and professional indications for the G4 Platinum along with the Gen5 and Gen6 systems are expected to drive future revenue growth for DexCom.
DexCom has collaborative agreements with several companies, which should not only bring in cash in the form of milestone payments and royalties, but should also help expand its product use. DexCom has agreements with companies like Tandem Diabetes Care, Animas Corporation (a subsidiary of Johnson & Johnson) and Edward Lifesciences for the development and commercialization of products utilizing its technologies. In Aug 2014, DexCom entered into a data integration relationship with Asante Solutions to integrate insulin data from the Asante Snap Insulin Pump into its mobile app platform to facilitate simplified diabetes management. Asante Snap Insulin Pump is the second insulin delivery device to be integrated into the Dexcom mobile app, the first being Insulet Corporation’s OmniPod System. We believe that DexCom is making noteworthy progress with its mobile app platform which should make significant contributions to its top line, going forward.
Dexcom continues to focus on international markets. The company is eyeing the sizeable markets of India, China and Japan. Given the demographic trends and lifestyle in countries outside the U.S. and Europe, we believe that DexCom has a sizeable international market opportunity. The BRIC nations are particularly important because of the alarming rise of diabetes in these countries. Statistics suggest that more than half of the diabetic population in developing nations remain undiagnosed. Thus, the company can bolster its sales by expanding into overseas territory, where the momentum is expected to continue in the future.
REASONS TO SELL
The market for blood glucose monitoring devices is highly competitive, subject to rapid change and significantly affected by new product introductions. DexCom competes directly with Roche Diabetes Care – a division of Roche Diagnostics; LifeScan, Inc. – a division of Johnson& Johnson; the MediSense and TheraSense divisions of Abbott Laboratories; and Bayer Corporation; in selling its G4 Platinum system. Each of these companies manufactures and markets products for the single-point finger stick device market and collectively account for substantially all of the worldwide sales of self-monitored glucose testing systems, currently. Apart from DexCom, Medtronic and Abbott have received approval from the FDA for their continuous glucose monitors. Though Abbott has discontinued selling its CGM system in the U.S., the company is conducting clinical studies on a new glucose monitoring platform and may launch the same in Europe. Moreover, companies like Roche Diagnostics are developing invasive and non-invasive glucose testing devices and technologies that have the potential to compete with DexCom’s devices. The entry of additional products in the blood glucose monitoring market would make it challenging for the company to protect or grow market share.
DexCom’s glucose monitoring device may be more invasive than other self-monitored glucose testing systems. Moreover, patients may not realize the benefits of continuous glucose monitoring and may be unwilling to change their current treatment regimen. Physicians also tend to hesitate to switch patients to new products. Reluctance on the part of physicians and patients to adopt DexCom’s products may make it challenging for the company to expand market share.
Reimbursement risk is somewhat high due to efforts to control healthcare expenses. Unless payers, both government and private insurers, provide sufficient coverage and reimbursement, commercial success will be limited in scope.
With an increasing demand for its offerings, DexCom might face supply constraints in the near-term. Moreover, DexCom relies on third parties for an assured steady supply of inputs. Thus, capacity constraint for the production of its offerings might dampen the company’s growth rate.
DexCom has been incurring operating losses since its inception and has an accumulated deficit of $499.1 million as of Sep 30, 2014. The company had available cash, cash equivalents and short-term marketable securities totaling $74.9 million, excluding $1 million of restricted cash, and working capital of $82.8 million as of Sep 30, 2014. We feel that the company’s working capital resources may not be sufficient to fund its operations over the long term which could have an adverse impact on its ability to meet its intended business goals.
RECENT NEWS
Preliminary Q4 Results
DexCom anticipates fourth-quarter product revenues to surge an impressive 64% on a year-over-year basis to $84 million.
For 2014, revenues are estimated to soar 64% year over year to $257 million. According to DexCom’s estimates, the company’s patient base in the U.S. grew by more than 50% in 2014.
For 2015, DexCom expects product revenues in the range of $340–$360 million.
Third Quarter 2014 Highlights
DexCom reported a loss of $0.08 per share in the third quarter of 2014, wider than the Zacks Consensus Estimate of a loss of $0.05. However, losses during the quarter remained flat on a year-over-year basis.
DexCom’s total revenue surged 60.8% to $69 million, topping the Zacks Consensus Estimate of $61 million. The upside was driven by an impressive 60% rise in product revenues to $68 million and a $0.7 million increase in development grant and other revenues to $1.1 million.
Gross margin expanded 450 basis points year over year to 69.5%, primarily on the back of increased revenues and greater sales of the high-margin G4 Platinum system.
Both selling, general and administrative (SG&A) and research and development (R&D) expenses rose 56% and 56.8% year over year, respectively, owing to higher cost of sales, increased marketing expenses, additional payroll and consulting costs, and other key expenses for commercial infrastructure.
Despite the increase in both R&D and SG&A expenses, operating loss narrowed to $5 million from the year-ago level of $5.8 million, riding on strong revenue growth and higher gross margin base.
DexCom had cash and cash equivalents of $63.2 million as of Sep 31, 2014, higher than $49.5 million as of Jun 30, 2014. Total long-term debt went down to $5.2 million from $5.8 million as of Jun 30, 2014.
VALUATION
Over the last one year, DexCom shares are up 88.2% compared to a 12% increase for the S&P 500. DexCom’s price-to-book value ratio in the last quarter was 39.2x, compared to 5.7x for the industry and 5.3x for the S&P 500.
Over the last five years, the company’s shares have traded in a range of 4.8x to 39.2x of its book value. Currently, DexCom’s valuations are trading inline with the high-endof its historical range, indicating chance of a downside. However, 5 year EPS growth rate of 32.5% is significantly higher than the peer group average of 18.0%, which reflects a robust product pipeline.
Given the mixed signals, we maintain our Neutral recommendation and set a price target of $64.00.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of DXCM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1120companies covered: Outperform- 15.6%, Neutral- 77.0%, Underperform – 6.7%. Data is as of midnight on the business day immediately prior to this publication.
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