ABT - DexCom: Growth Should Accelerate From Here

2023-05-24 05:45:47 ET

Summary

• The introduction of the G7 sensor has been well received, with positive user feedback and an increase in subscribers, including new prescribers who were not previously using DexCom products.
• DXCM has benefited from the early initiation of Basal Medicare coverage, allowing them to tap into pent-up network demand.
• DXCM has raised its sales guidance range for FY23, reflecting the positive impact of CMS's early finalization of basal coverage.

Description

Previously , I expected the introduction of innovative products like the next-generation G7 sensor should help DexCom ( DXCM ) keep its dominant market share and position. Importantly, I anticipate strong growth in the CGM market due to the rising prevalence of diabetes and the rising uptake of CGM technology among both insulin intensive type 1 (T1) patients and, increasingly, the IIT2 and NIT T2 groups. DXCM has invested in expanding its scale with the aim of cutting costs and improving its ability to cater to patients worldwide, which should with T2 adoption specifically due to convenience. Looking at the 1Q23 results, DXCM reported strong results with sales growth of 18% to $742 million and revised guidance upwards – which I see as a reflection of the stronger quarter and the earlier than expected basal approval. With the company off to a good start this year and more to come in terms of coverage, international expansion, and basal, I am maintaining my buy rating on DXCM stock.

G7 Launch, Basal Medicare

Positive user feedback and a steady increase in G7 subscribers indicate that the launch was a success. In particular, management highlighted that about 1,000 prescribers who were not previously adopters of DXCM products are now prescribing G7. With the introduction of Medicare coverage and advances in DME reimbursement, I anticipate an increase in new subscribers. More importantly, management noted that G7 today has greater pharmacy coverage than its competitors. The other indicator of interest and potential demand is that DXCM's Super Bowl commercial received three times as many impressions as their previous ad. While this does not mean sales are going to 3x, it tells us that DXCM product is gaining more awareness – which is important in driving new subscribers. Considering that DXCM is introducing G7 to eight new international markets, I anticipate that its adoption will continue to gain steam in the near future. Management is also on the ball in terms of ramping up inventory to support their G7 aspirations, so there shouldn't be any problems meeting these demands. In addition, Basal Medicare coverage has begun earlier than expected, which should prove beneficial to DXCM by allowing them to begin releasing pent-up network demand. I don't see this having a dilutive effect on margins because management has noted that Medicare pricing is very favorable to them.

Raised guidance

Because of the positive impact of CMS's early finalization of basal coverage, DXCM has increased its sales guidance range for FY23 from $3.35-$3.49 billion to $3.4-$3.515 billion. However, growth cadence is expected to be weighted toward 2H23, which means growth is expected to accelerate through the quarters as DXCM continues to see uptake in GY7 launch and the easing of pent-up demand for basal patients. I also expect margins to improve from here as DXCM will not have lesser R&D spend for G7.

Competition

A key focus for the quarter was also DXCM growth relative to its competitor Abbott ( ABT ). DXCM's US sales increased by 17%, while ABT's US Libre increased by 50% in 1Q23. The bear case here is that DXCM growth is being impacted by channel mix headwinds, resulting in volume growth outpacing revenue growth. On the other hand, ABT is experiencing robust growth in the US. Since Libre 3 has been out for a while and provides comprehensive service, I believe its success is inevitable. However, I think the bears are missing out on the G7 launch's acceleration of growth. The G7 rollout and the improvement in pharmacy coverage ahead of schedule are two examples of factors that will have a positive impact on DXCM performance in 2Q and beyond, despite having had little impact on the 1Q numbers. I am optimistic that growth will accelerate because management has stated that all major PBMs will cover G7 by the end of 2Q23. Finally, I'd like to point out that this is not a winner-take-all market; if ABT were to actually grow faster than DXCM, that wouldn't necessarily be a bad thing for DXCM. There's room for everyone to prosper in this market.

Summary

In conclusion, DXCM has shown positive performance and growth prospects in 1Q23. The launch of the G7 sensor has been successful, with strong user feedback and an increase in subscribers, including new prescribers who were previously not adopters of DXCM products. The introduction of Medicare coverage and favorable DME reimbursement for the G7 sensor are expected to drive further growth in subscriber numbers. Additionally, the early initiation of Basal Medicare coverage provides an opportunity for DXCM to release pent-up network demand. All in all, I maintain a positive outlook and reiterate my buy rating on DXCM.

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