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.
Contact
Sean
Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management, LLC