DexCom (DXCM 0.93%) has been an amazing stock for a long time. This is a premier company that is responsible for major advances in diabetes healthcare. DexCom has a system for continuous glucose monitoring (CGM) of people with diabetes. Instead of a needle stick, the DexCom system tracks your blood sugar levels automatically. This was a major advance in healthcare, and DexCom shareholders have been richly rewarded over time.
Not surprisingly, Big Pharma noticed the market opportunity and has been trying to muscle in. So DexCom no longer has a monopoly in this space; it's more like a duopoly with Abbott Laboratories (ABT 0.12%). Of course, having a competitor in your space means your profit margins might get squeezed a little. Monopolies are sweet for investors, but duopolies are pretty cool, too.
The major danger for DexCom shareholders, however, is quite simple: if a cure for diabetes is found, this stock could implode. So should you avoid the stock? Not at all. Just be aware of the risk and plan accordingly.
NASDAQ: DXCM
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One-trick ponies can be both risky and rewarding
Healthcare stocks that concentrate on a single disease can be tricky because if the disease is actually vanquished, the company has eliminated its market opportunity. Nonetheless, that's what healthcare companies are always trying to do -- and while they don't often reach such levels of success, the strides they do make help humanity.
That's a major reason I invest in the healthcare space. I feel like I'm helping and profiting simultaneously. If my investment turns out badly (which happens sometimes), in my mind, I write it off as a charitable contribution to humanity, and I try again.
When Novavax (NVAX 0.15%) started pursuing a vaccine for COVID-19, and I owned the shares, I made a lot of money in that stock. If you owned any stocks fighting COVID, you know what I'm talking about. COVID-fighter stocks shot a lot higher in 2020 and part of 2021. Novavax is similar to DexCom in that it's pretty much a one-trick pony, and as the threat of COVID-19 mutates into a harmless bug, the stock will get whacked.
In fact, that's what we've seen happen. The stock has cratered because Mr. Market assumes COVID-19 is no longer a serious threat. I disagree with this assessment. I have not one but two COVID-19 fighters in my portfolio. I have added Vir Bio (VIR 5.25%) as well. If COVID-19 has been vanquished, my finances will take a hit. That's fine. I want COVID-19 to be vanquished. I'm not hoping to be enriched as people die.
Diabetes is similar. For DexCom investors, that's the main question to keep in mind. Are we about to find a cure for diabetes? Any positive phase 2 data from a diabetes trial and DexCom stock will take a small hit. Any positive phase 3 data from a diabetes competitor, and this stock will get whacked.
As it stands now, DexCom is helping people who are struggling with diabetes. If a cure for diabetes is found, this business model is going to have to morph into something quite different.
Firsthand knowledge of a product can help
The diabetes market is massive and getting bigger all the time. If you are fighting the illness or have a loved one that is fighting the illness, chances are high that you are highly educated on the diabetes situation -- and that can be highly beneficial to an investor. Chances are, you keep researching diabetes and talking to other people about diabetes because you are battling it.
People like me who analyze stocks for a living know a little bit about a lot of medical issues. But people fighting diabetes are incredibly knowledgeable about their own disease. So if you are using DexCom's products and find them worthwhile, you may want to consider buying the stock as well. It may be a source of profits in the future while you and your loved ones are fighting this disease.
Remember to be patient and think long-term
Understand that other biotechs will also be talking up their treatments -- and maybe one day even a cure -- for diabetes. When this happens, it might spook Wall Street and send DexCom shares down. The volatility can frighten one out of a stock. But remember, the chances are high that diabetes will still be a threat to humanity in 2030.
So keep your eye on the ball and remember that these fights against major diseases take decades. Do not get scared off your one-trick pony. In the meantime, your financial engagement with the biotech companies fighting your disease may turn out to be beneficial for you and your family.
Diversify
When a new, possible cure comes along, you might consider opening a small position in that new treatments. For instance, Vertex Pharmaceuticals (VRTX 1.20%) thinks it has a "functional cure" for diabetes. You might open a small position there, just in case the scientists are right and the cure works.
What's nice about your DexCom investment, from a healthcare standpoint, is that as long as diabetes is an ugly threat to humanity, this stock should rock a lot higher. And if and when a cure is found, your finances might take a hit. But your own healthcare will improve!
