DXCM - DexCom: Multiple Catalyst In FY 2023

Summary

• The CGM market is expected to grow due to the rising prevalence of diabetes and the adoption of CGM technology among insulin-intensive patients.
• DexCom's 4Q22 sales were $815 million, with positive volume growth across the board and strong gross and operating margins.
• I expect DXCM's revenue to exceed top-line growth expectations for 2023 due to several factors, including the launch of G7 in the US, potential Medicare coverage expansion, and greater access.

Description

Overall, 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. The introduction of innovative products like the next-generation G7 sensor should help DexCom ( DXCM ) keep its dominant market share and position. DXCM has invested in expanding its scale with the aim of cutting costs and improving its ability to cater to patients worldwide. I believe this move will also enable the company to explore new opportunities, such as collaborating with pharmacies. In my opinion, this will further expand availability over time, perhaps allowing for new types of insurance to cover services like basal T2 in the years following Medicare's expansion in FY23.

4Q22 Review

During 4Q22, DXCM's sales totaled $815 million, which was higher than consensus estimates at the time of the preliminary announcement. This figure represents a y/y increase of 20% and an increase of 6% from the previous quarter. Revenues in the US increased by 17% y/y to $606 million, while revenues from international markets grew by 27% y/y to $209 million on an organic basis. Positive volume growth has been observed across the board, with sales outside the US outpacing those within.

The gross margin for the quarter was 66.7%, which was stronger than the consensus estimate of 64.2%. However, it was 100bps lower than in the fourth quarter of 2021, with foreign exchange rates having an 80bps impact during the quarter. The operating margin for the quarter was 21.1%, which exceeded the consensus estimate of 19.1%. I believe this is indicative of DXCM's ongoing efforts to manage costs effectively.

CMS Basal coverage

According to management, the coverage by the Centers for Medicare and Medicaid Services [CMS] for basal insulin infusion sets will benefit around 3 million people in the US. This represents a significant expansion of the addressable market for reimbursed products, almost doubling its size. Although management expects the CMS reimbursement to be finalized in mid-2023, I believe they may be underestimating the potential impact of this development. If reimbursement were finalized earlier, it could have a greater impact on DXCM's sales in fiscal year 2023.

In terms of contribution to total sales, Basal is projected to make up approximately 1% in FY23, similar to the expected contribution from IIT2. This new CMS coverage may also pave the way for commercial reimbursement in the future. With this development, I think DXCM is in a favorable position to capture a significant portion of the market.

Bridge program

DXCM has implemented a bridge program for early adopters and is making steady progress toward its goal of G7 coverage. On the call, it was discussed that the goal of G7 coverage could be met in 90 days, and that DXCM is ahead of schedule in the pharmacy. Importantly, the resulting headwind of $15 million is significantly less than the $30 million that was anticipated. It's also interesting to note that most G7 users are just getting started with DXCM.

Furthermore, DXCM was able to achieve its multi-year goal of having approximately 75% of commercial scripts go through the pharmacy, marking a strong end to the year. Given this strong momentum, I believe that this number could potentially increase to around 80% in the future.

Upcoming catalysts

I believe that there is potential for DXCM's revenue to exceed the top-line growth expectations for fiscal year 2023. This could be due to several factors, including the launch of G7 in the US, the potential expansion of Medicare coverage for basal products, and the expansion of access to markets outside the US. Management has expressed a strong interest in catering to the basal population, and they anticipate that this segment will contribute around 1% of the company's total revenue in 2023.

I think that DXCM's focus on the basal population will lead to greater market penetration, driven by the company's demonstrated clinical efficacy. Consequently, I expect revenue contributions to increase more significantly in fiscal year 2024.

Guidance

During the conference call, DXCM's management restated its revenue guidance for 2023, which is expected to be between $3.35 to $3.49 billion. This would result in a year-over-year growth rate of around 17.5% at the midpoint. The revenue guidance also includes a projected hit of $15 million to the first quarter of 2023 due to the implementation of the bridging program. The program was designed to make early access to G7 more affordable for patients while DXCM continues to work on expanding coverage. As noted earlier, the $15 million estimate is lower than the previously anticipated range of $20 to $30 million for the first quarter. This is due to the progress made in contracting, which is currently ahead of schedule. I anticipate that the bridging program will continue to have an impact in the second quarter, and DXCM has projected that there will be broad commercial pharmacy reimbursement by mid-2023.

DXCM has provided its margin outlook for FY23, which includes a gross margin of 62% to 63%, an operating margin of 16.5%, and an adjusted EBITDA margin of 26%. The gross margin is expected to contract primarily due to the G7 launch. However, it is projected to expand sequentially in the second half of the year as production volumes increase, while the bridging program is expected to negatively impact margins in the first half. DXCM expects the product costs of G7 to be less than G6 costs once the product is scaled. Looking further ahead, DXCM retains visibility into a gross margin of 65%. For FY23, the company is expected to achieve an additional 150-250bps of operating leverage.

Summary

In conclusion, the CGM market is set to experience strong growth, driven by the increasing prevalence of diabetes and the uptake of CGM technology among insulin intensive type 1 and type 2 patients. I believe DXCM is well-positioned to take advantage of this growth, having introduced innovative products like the G7 sensor and expanded its scale to cater to patients worldwide. The CMS cover of basal insulin infusion is also expected to significantly expand the addressable market for reimbursed products, with the potential to increase DXCM's revenue contribution in the coming years. Overall, with upcoming catalysts like the G7 launch and expansion of Medicare coverage, I expect good revenue growth for FY23 and beyond.

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