Shares of the medical-device maker DexCom (DXCM -0.41%) are down by 37% this year. The diabetes-focused healthcare company disappointed investors with its second-quarter results, leading to a massive drop in its stock price overnight. Though the issues DexCom has faced this year can mainly be classified as "short-term headwinds" -- including rebate-related issues -- there are more serious problems for the company's long-term prospects.
On the other hand, DexCom has attractive opportunities that could allow it to deliver market-beating returns to patient investors. Is the bull case stronger than the bear one? Let's consider one argument against investing in DexCom and one in favor.
Reason to sell: diabetes therapies in development
DexCom develops continuous glucose monitoring (CGM) systems to help people with diabetes track their blood glucose levels. This technology improves patients' health outcomes. That's why DexCom has been successful, at least so far. The increased adoption of CGM has led to growing revenue and earnings:
DXCM Revenue (Quarterly) data by YCharts.
However, there are several therapies in development -- and some existing ones -- that might decrease the company's target market in the long run. Several biotech companies are working on potential cures for type 1 diabetes; this list includes Vertex Pharmaceuticals and CRISPR Therapeutics. That's great news for patients, but if these biotechs succeed in their quest to create curative therapies for type 1 diabetes, it could have a massive impact on DexCom's results.
While only about 5% of people with diabetes in the U.S. have the type 1 variety, all of them require insulin since they don't produce their own. Being insulin-treated is one of the requirements for typical CGM devices like DexCom's G6, and not all of those with type 2 diabetes meet this condition. So DexCom's patient population is disproportionately made up of patients with type 1 diabetes, where CGM has established itself as a standard of care.
What's more, there's a chance that existing weight loss treatments could reduce even the number of patients with type 2 diabetes. In a late-stage study, tirzepatide, the active ingredient in Zepbound, cut the risk of developing type 2 diabetes by 94% in overweight or obese patients with prediabetes. Again, that's good news for the patients, but it could shrink DexCom's target market over the next decade, resulting in lower revenue and earnings for the device maker.
Reason to buy: expanding its addressable market
Perhaps anticipating these potential challenges, DexCom has worked on going beyond its typical target market of people with diabetes. In March, the U.S. Food and Drug Administration cleared Stelo, a CGM option developed by DexCom for people not using insulin therapy. That includes many patients with type 2 diabetes and even those with pre-diabetes. There's a vast market here. According to the U.S. Centers for Disease Control and Prevention, roughly 33% of adults in the country have pre-diabetes.
Many of them (up to one-third according to one study) are of healthy weight, so they might not be eligible for medicines like Zepbound. DexCom's Stelo provides an option for these patients to make healthier choices and perhaps reverse their pre-diabetes.
The company recently announced a proprietary generative artificial intelligence (AI) platform it will integrate into its devices, with Stelo being first on that list. This GenAI feature will help patients make better decisions by analyzing data and lifestyle patterns and making appropriate recommendations. DexCom could attract many patients with this innovation.
Is DexCom stock a buy?
There remains a vast addressable market for DexCom. The company had an installed base of just 1.7 million customers as of 2022. But in the U.S. alone, it estimates more than 25 million people with type 2 diabetes have yet to progress to insulin therapy and are not at high risk of hypoglycemia. DexCom sees an opportunity to target these patients to help slow the progression of diabetes. Medicines that cure type 1 diabetes, or those that delay the onset of the type 2 variety, can do little to help these 25 million patients.
Making headway in this market, in similar populations in other countries, and with prediabetes patients as CGM awareness continues to grow could all allow DexCom's financial results to remain strong for a while. That's true even if therapies in development end up decreasing its worldwide opportunity significantly, which still isn't a sure thing. So, in my view, DexCom's prospects remain attractive.
The stock has historically looked expensive. Its current forward price-to-earnings ratio is 44, while the average for the healthcare industry is 17. DexCom will continue to be a volatile stock, just as it has been in the past. But it can also continue to deliver market-beating returns, just as it has done in the past.
