DexCom: Q1'22 Earnings Strong Enough To Maintain Valuation But Not To Increase It
Summary
- DexCom reported its Q1'22 earnings on Thursday - $629m of revenues, up 25% year-on-year, but net income of $41m, down 250 basis points.
- DexCom is a high growth startup transitioning into a market incumbent in a lucrative market and management deserves huge praise for its achievements.
- But in 2021 its share price of >$646 probably ran too far ahead of its top and bottom line earnings - it is not too surprising the share price fell.
- At $408 presently, and a market cap of $40bn, the market clearly expects further growth, and soon.
- That may be too difficult for Dexcom to deliver in the short term - or even in the next 2 years - but progress with type 2 diabetics and insulin pumps ought to keep investors very interested.
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Investment Thesis
DexCom (NASDAQ:DXCM) released its Q1'22 earnings on Thursday, reporting revenues of $629m for the quarter, reflecting year-on-year growth of 25%, and its 11th straight quarter of >$100m revenue growth overall.
The integrated continuous glucose monitoring ("iCGM") device manufacturer's share price is down 3% over the past year, although over a 5-year period it is +436%, which is not untypical for a company that has experienced a period of supercharged growth - its market cap now stands at $40bn - but is now dealing with more demanding expectations from analysts, the market, and its shareholders.
Dexcom has seen its revenues grow from $100m in 2012, to $2.5bn in FY21, as the company has emerged as a top 3 iCGM manufacturer and distributor, alongside Abbott (ABT) and its Freestyle Libre device, and Medtronic (MDT) and its Guardian Sensor and MiniMed pump.
Unlike Abbott - market cap of $200bn - and Medtronic - market cap of $140bn - DexCom's G6 device is its only commercial product. Whilst its rivals are giants in the field of medical devices, DexCom's fate rests solely on its ability to compete successfully for market share in automated monitoring of diabetics' blood sugar levels, and automated delivery of insulin as an when required, to guard against hypo, or hyper-glycemic episodes.
In this post I will review DexCom's most recent quarterly earnings performance, highlighting areas of opportunity and weakness, and speculate about which way the company's valuation will trend across the rest of 2022, and longer-term.
Q122 Earnings Overview - International Growth Outpaces Domestic As G7 Soft-Launches in UK - Profitability Remains A Concern
As mentioned above, DexCom's revenues keep growing at a rate that ought to satisfy investors, but in a field that is amongst the most promising for any kind of health monitoring device, that is expanding from its more niche Type 1 diabetic market - which numbers ~1.8m Americans (according to Dexcom's 2021 10K statement), with 60k individuals diagnosed each year - into Type 2 diabetes, a market of 5-6m Americans who must use insulin to manage their conditions, with a range of new, technology enabled features coming into play - the expectations are set almost impossibly high.
DexCom's international revenue is also becoming an increasingly important source of income and growth - in the US, revenues grew by 18% year-on-year in Q122, to $451.2m, whilst overseas, growth was 43%, to $177.6m, or ~28% of all revenues.
In fact, DexCom's next-generation device, G7 - which is 60% smaller than the G6, and has an upgraded CLARITY app helping empower users to discover more about managing their conditions - has received its CE mark in Europe, and has undergone a soft launch in the UK, and as Dexcom CEO Kevin Sayer told analysts on its Q1'22 earnings call:
Our plan is to extend the G7 launch to a steady cadence of additional international markets over the remainder of 2022 with a growing impact to our overall sensor mix in the second half of the year.
In the US, the G7 sensor, receiver, and app is still under review for 510K clearance, with Sayer commenting "we are in the traditional back and forth that comes with these processes", and adding that he believed approval would be granted in the second half of this year. Meanwhile, a cheaper, stripped down version of its CGM, DexCom One, has been launched in Spain.
It ought to be very interesting to monitor the progress of DexCom One, since Abbott's Freestyle Libre - whose price point significantly undercuts DexCom's - ~$2,300 per annum for the Freestyle Libre, versus $3,800 for the G6 - is making sales of ~$1bn per quarter, making it the market leader by some distance.
As CGM technology becomes more commonplace, pricing will become an increasingly important point of comparison. Of course, pricing is further complicated by reimbursement deals with health insurers - the G6 is available from Medicare, for example, for "intensive insulin therapy", but if DexCom is to successfully expand into the Type 2 market, it will need to cut the right deals with insurance providers. Interestingly, Sayer suggested this may be easier with DexCom One:
We expect this dual product strategy to significantly expand the number of people with reimbursed access to our CGM technology, broadening our growth opportunity in these countries as well as additional countries where we plan to bring DexCom ONE in the future.
DexCom also wants to enter the hospital setting, and received breakthrough device designation from the FDA for a CGM system in Q122 - opening up another potentially lucrative market.
All of this expansion, marketing, and growth is costing DexCom's bottom line however. In Q122, net operating income came in at just $41.3m, or ~7% of revenues - down 250 basis points versus Q121.
As a growth company, analysts have tended to ignore DexCom's profitability and focus on the growth story, which is entirely correct - the company did not deliver any profits until 2019 - but since then, operating income in FY20 and FY21 respectively was $299.5m, and $265.8m, and management will be expected to keep improving, with the share price likely to be punished otherwise.
FY22 Guidance And Valuation
DexCom has guided for revenues of $2.82 - $2.94bn in FY22 - up ~18% on the $2.45bn earned in FY21, and as already mentioned, it is entirely natural for a growth company's revenue to eventually plateau since it cannot keep growing exponentially forever.
The non-GAAP operating margin is forecast to be 16%, which implies operating profit of ~$460m, reflecting a substantial improvement on FY21, although it should be noted these are non-GAAP estimates - no "apples to apples" GAAP guidance has been issued.
Still, if we take that figure we can calculate earnings per share of ~$4.7, which is a favorable comparison to the non-GAAP EPS of $2.66 reported in FY21, and the $3.1 reported in 2020. It gives us a price to earnings (P/E) ratio of 86x, however, which is frankly unattractive.
The key question for investors to answer is whereabouts DexCom is on its trajectory from high growth startup to established incumbent. In one, sense, there are only 2 major competitors DexCom must face up against in Abbott and Medtronic, and as mighty as these 2 companies may be, Medtronic has made a hash of its Guardian / MiniMed iCGM combo, as I discussed in a recent note on the company, leaving it way behind the curve.
That makes Abbott and Freestyle Libre the only comparable player in a gigantic market that can be mined for 2-3 x times the current patient population if these 2 companies play their cards right, which is an exciting prospect for shareholders to contemplate - "Jam Tomorrow" has never looked so good!
With that said, however, DexCom's price to sales ratio of ~14x is probably where investors would like its PE ratio to be, and looking at it that way, is there genuine encouragement for DexCom's share price to go higher and higher when investment fundamentals suggest investors and the market are demanding extraordinarily high levels of top line and bottom line growth?
Conclusion - An Extraordinary Product Deserves An Extraordinary Price But The Days of $650 Per Share Look Some Way Off
Most investors will probably be familiar with the investment thesis that in the short term the market acts as a voting machine, whilst in the long term it acts as a weighing machine.
That sentiment could certainly be applied to DexCom and its share price. The hysteria that greeted a succession of blowout earnings quarters between 2019 and 2021, when CGMs were shiny and new has given way to more pragmatic analysis of where the value is for shareholders.
Unquestionably the diabetes market has been crying out for change from the days of finger sticks and self-administered injections, and DexCom created a solution to that problem, making the absolute most of its first mover advantage.
To illustrate the scale of that achievement, we can look at the failure of Medtronic - a medical device giant whose resources are limitless compared to DexCom's - and also consider the size of DexCom's first mover advantage in a market where barriers to entry are high.
But new market entrants will arrive as patents expire and the technology is democratized, and that may put DexCom in a more perilous position, especially if it is not generating sufficient cash flow to invest in R&D, or to attract new shareholders with a dividend, for example, or a share buyback program.
To my mind, the real proving ground for DexCom will be how it is able to incorporate the automated insulin pump - developed by the likes of Tandem Diabetes (TNDM) or Insulet (PODD) - into its CGMs, to create the perfect iCGM, or "artificial pancreas" as it is sometimes known. That fully integrated system will surely become the standard of care for millions of users, provided it is proven to be safe and effective.
Furthermore, the ability to develop products and services to suit the Type 2 diabetic - and secure reimbursement for them - will be critical in terms of how much more revenue DexCom can generate going forward.
These are complex issues and I would pay close attention to how they are developed by DexCom, Abbott, Medtronic and their partners over the next 12-24 months - whoever is most successful will be the true winner in this field, although there is certainly room for 3 major market incumbents.
The enthusiasm that greets breakthroughs in these fields is the only way that I can currently see for DexCom to drive its share price back to the heights of e.g. November 2021, when its stock hit its all-time high price of $647.
Based on most pragmatic measures, the sales and profitability ratios become almost absurdly high based on revenue generation alone otherwise. Unless there is the promise of something new and big - another "voting machine" scenario - investors may have to be content with a trading range of $375 - $450 for the foreseeable future in my view.
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This article was written by
Edmund Ingham is a biotech consultant. He has been covering biotech, healthcare, and pharma for over 5 years, and has put together detailed reports of over 1,000 companies. He leads the investing group Haggerston BioHealth.
The group is for both novice and experienced biotech investors. It provides catalysts to look out for and buy and sell ratings. It also provides product sales and forecasts for all the Big Pharmas, forecasting, integrated financial statements, discounted cash flow analysis and market by market analysis. Learn more.Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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