DexCom: I Expect Growth To Continue At This Strong Rate, Buy

Investment action

I recommended a buy rating for DexCom (NASDAQ:DXCM) when I wrote about it the last time, as I anticipated 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. Based on my current outlook and analysis of DXCM, I recommend a buy rating. I expect DXCM to achieve FY23 guided revenue, and growth should persist at this strong pace for the near term as well, driven by the strong growth momentum and multiple drivers. The valuation might seem high at an absolute level, but when compared to peers via multiple factors, I believe DXCM deserves to trade at this premium.

Basic Recap

DexCom, Inc. operates as a medical device company focused on the design and development of continuous glucose monitoring systems for people with diabetes.

Review

DXCM posted good results for 2Q23, with positive guidance revisions fueled by strong top-line performance. Strong results in the United States and a fantastic quarter outside of the United States helped 2Q23's revenues come in at $871 million. EPS came in at $0.34, beating expectations by $0.12. Management increased its revenue forecast from $3.4 to 3.515 billion to a new range of $3.5 to $3.55 billion.

In the United States, sales increased by 21% to $617 million thanks to the popularity of Basal and a surge in new clients during the second quarter. Half of DXCM's new G7 users are first-time customers, and half of them are switchers, just as we saw in the first quarter of this year. The fact that DXCM gained 8k new prescribing physicians for G7 in the United States gives me hope that the company will continue to expand and seize a larger share of the Type 2 Basal market. This quarter, I believe DXCM's value proposition shined again as it continues to drive G7 reimbursement wins; all major PBMs now cover DXCM, which is far faster than I had anticipated. This practically means that the number of covered lives in the G7 is rapidly approaching the already impressive G6 levels. I also think there is a lot of room for expansion here because prices are low, both absolutely and in comparison to competitors. On the call, management mentioned that customers using the pharmacy channel spend less than $20 per month on out-of-pocket costs, whereas customers using other channels spend more than $70 per month. If we assume the pricing gap will close within 10 years, that implies a >10% pricing growth CAGR.

Moreover, given that Medicare coverage officially kicked in for people with T2 diabetes using basal insulin only, as well as certain non-insulin-using individuals that experience hypoglycemia, this is a huge step up in coverage. Management stated on the call that this has the potential to cover 6–7 million people in the US, nearly half of whom are of Medicare age. As the initial customer response has been very good with early prescribing adoption, I am confident that DXCM can continue to drive coverage. To put things in perspective, even though the additional coverage was only in place for a portion of the quarter, the second quarter was DXCM's greatest Medicare new patient quarter.

Overall, this is a very strong quarter. I expect the share price to react positively to this earnings result, which should support valuation in the near term.

Valuation

I believe DXCM can continue to grow as management guided for FY23. Given the strong momentum in growth and multiple drivers, I expect growth to persist for FY24 and FY25 as well, reaching a figure of $5.1 billion in FY25. This strong growth, when compared to other healthcare equipment suppliers (~17% 1-year forward growth), should support the DXCM valuation premium (the industry trades at a median of 4.7x forward revenue). Furthermore, DXCM has a much better margin profile than peers on all levels (Gross, EBITDA, EBIT, and Net). Assuming DXCM continues to trade at 13x forward revenue, I arrive at a price target of $173.

Risk and Final thoughts

An inherent risk with DXCM business is that its R&D pipeline could be negatively impacted by FDA delays or clinical failures, which is a risk that DXCM is unable to escape from.

I maintain my recommendation for a buy rating on DXCM based on its impressive performance in 2Q23. 2Q23 results exceeded expectations, with robust revenues and positive guidance revisions. DXCM's expansion in the United States and increasing adoption of its G7 product demonstrate its ability to capture a larger share of the market, particularly in the Type 2 Basal segment. The recent Medicare coverage for basal insulin users and non-insulin users adds a significant potential customer base. With strong growth momentum and multiple drivers in place, I expect DXCM's growth to continue in the near term.