NEW YORK, March 21, 2019 /PRNewswire/ -- Report entitled "Sugar High" outlines how DXCM may face 45%-60% intermediate downside risk to approximately $65 to $85 per share due to the market's significant misunderstanding of the true addressable market of Dexcom's G6 continuous glucose monitor (CGM), Abbot's current dominance even before the launch of the functionally equivalent Libre 2 and the impending growth wall Dexcom will hit in 2020 as a result of its lack of Type 2 targeted product.
- A "First-Mover" Story Brought To A Halt By Competition And Market Saturation: Dexcom's G-Series has until now been recognized as the gold standard CGM. As effectively the only wearable stand-alone CGM on the market through the mid-2010s, the G-Series saw rapid uptake among early-adopting Type 1 ("T1") diabetics with relatively intensive medical needs. Now, however, the U.S. T1 market is ~50% penetrated (and likely capped at 70-80%), with only the most price-sensitive patients yet to adopt. Meanwhile, in its first year on the market in 2018, Abbott's down-market Libre CGM – priced at an ~80% discount to the G-Series – took >95% of U.S. Type 2 ("T2") incremental market share and >70% of U.S. T1 market share. The market believes that Dexcom can continue to grow into the relatively-untapped T2 market – but, with the G6 demonstrably pricing out nearly all T2 diabetics, and with the now-competitive T1 market rapidly approaching a point of saturation, Dexcom will likely have little room to grow either segment of its patient base by as soon as later this year. Dexcom patient growth will remain slower than expected until it releases a down-market CGM similar to the Libre – which, per management, will come at the very earliest in late 2020 / early 2021.
- Rapid Technological Advancement Among Experienced Peers Compounds Competitive Threat: We believe that Abbott is prepared to release the Libre 2 within a matter of weeks or months, at most. By including a high/low glucose alarm and satisfying an academically-accepted accuracy threshold, the Libre 2 will wipe out most, if not all, of the existing technological advantages of Dexcom's G-Series – yet we believe it will likely be priced at an ~80% discount to the G6. As a $100B+ market cap medical technology giant, Abbott has a powerful scale advantage over Dexcom and is a lower-cost manufacturer by a factor of 4, leaving Dexcom unable to match Abbott's pricing without erasing 100% of its gross profit by Spruce Point's estimates. At the same time, Spruce Point's proprietary survey suggests that Dexcom users are more price-sensitive than the market believes: ~80% of surveyed Dexcom users would be willing to switch to the Libre 2 once it is commercialized in the U.S. This will further threaten Dexcom's continued patient base growth, in addition to brining significant downward pricing pressure to the CGM space.
- The Market Mistakes Recent Sales Growth For An Indicator Of Patient Growth: Dexcom bulls gained confidence in the growth story when sales growth accelerated to >40% through much of FY18, which the market took as a sign of strong patient base growth. However, product-level sales reveal a divergence between sensor sales growth and transmitter sales growth since Q2 FY18. Spruce Point believes that this is due the fact that many former G5 users who adopted the G6 starting in Q2 FY18 must now purchase CGM sensors more frequently than they did in the past, artificially inflating sensor sales growth. Spruce Point's proprietary survey also finds evidence that many G4 and G5 users stockpiled legacy sensors ahead of the release of the more expensive G6. Accelerated sales growth in FY18 was therefore driven by factors beyond patient base growth – and management conveniently stopped disclosing the size of its patient base at year-end FY18, hiding potentially underwhelming patient growth from investors.
- A Risky One-Product Company Valued As A Growth Story: DXCM is valued at a 57% premium to peers on its seemingly exciting growth story despite exposure to aggressive competition and near-term TAM saturation. Even bullish sell-side analysts see only ~5% upside, and we find evidence that the smart money is wary of DXCM's near-term growth prospects. We see 45-60% near-term downside in DXCM shares on disappointing sales growth and a multiple rerating, and even more potential future downside on longer-term price pressure.
Spruce Point Capital has a short position in DexCom, Inc (DXCM) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
Spruce Point Capital Management
Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
SOURCE Spruce Point Capital Management, LLC