Dexcom Earnings: Favorable Reimbursement Developments Brighten Prospects for G7

Dexcom DXCM delivered a strong start to 2023 with first-quarter organic revenue growth of 19% year over year. Considering the firm is on track with our full-year estimates and our projections remain bounded by management’s increased revenue outlook for 2023, we’re holding steady on our fair value estimate. Now that Dexcom has navigated heightened competition from Abbott and Medtronic, and has managed to stay in the black through the pandemic, we can see an argument for awarding Dexcom a narrow moat. We plan to revisit our thinking on this shortly.

Though first-quarter gross margin was consistent with our full-year projection, other quarterly operating expenses were significantly higher than our estimate for 2023. Nonetheless, we think near-term activities boosted SG&A expenses, and these should ease as the year unfolds. These elements included Super Bowl ad spending and the cost of the new manufacturing facility in Malaysia, which has yet to begin producing product. With the Malaysia plant expected to begin manufacturing over the summer, and the smaller G7 form factor that should be cheaper to make, we anticipate gross margin should improve over the next couple of years (although gross margin is likely to fall as the new plant begins operation due to higher levels of scrap product).

Importantly, Medicare just established reimbursement for G7 among type 1 and all type 2 diabetes patients who are using insulin. Not only did this coverage decision arrive several months earlier than expected, it also significantly expands coverage to encompass an estimated 3 million type 2 diabetes patients in the U.S. who are only using slow-acting insulin to control blood glucose outside of meal times. While reimbursement had already been in place for type 2 patients with more severe disease that required multiple injections including bolus dosing at meal times, this decision suggests Medicare saw health benefits extending CGM use to patients with less severe disease.