Friday the 13th: Part Dexcom
Lots of investors were betting against Dexcom, and they all got a nasty Friday the 13th surprise when the stock surged 26% last week. On Friday Dexcom (NSDQ: DXCM) reported reimbursement approval for its glucose monitoring device from the Center for Medicare and Medicaid Services for use of the company’s G5 Continuous Glucose Monitoring Device.
Dexcom, with its short interest (the percent of investors betting the stock would fall) hitting 10% of its float in mid-December, had been a tremendously successful short in the months leading up to the jolt. After hitting a high of $88 in October, the stock had wilted to $58 after a less-than-stellar third quarter and disappointing estimates for the fourth quarter.
Dexcom’s tremendously choppy chart illustrates the high risks associated with being long a stock with no earnings and being short a stock whose product has the potential to serve a massive market.
I’ve looked at Dexcom from the both the long and the short side and am happy with my decision to steer clear of it for my Profit Catalyst Alert service. Sometimes the best investment decision an investor can make is to step aside.
From the bears I’d heard about the potential for competing products from healthcare Goliaths Medtronic and Abbott Laboratories. Both had glucose monitoring products that were rumored to be as effective as Dexcom’s, and came from companies with much bigger bank accounts to fund product launches.
Also the valuation appeared insane. At its peak, Dexcom traded for 244 times an expected 36 cents per share in 2018 earnings. The assumptions behind earning that meager 36 cents struck me as optimistic; revenue growth of 76% over the next two years and an increase in profit margins despite a huge drop in them the past year.
But the bulls had some compelling points. People with diabetes have few convenient options for monitoring their sugar levels on a daily basis. Most suffering from the disease prick their fingers throughout the day to measure glucose levels and decide if insulin is needed or how to adjust food intake to re-calibrate glucose levels.
Dexcom’s first iteration of its G5 Continuous Glucose Monitoring Device allowed patients to continuously monitor glucose levels through a small sensor implanted under the skin. This reader sent data continuously to a receiver or a compatible device like a smart phone.
Although patients were encouraged to still use the finger prick method to decide when to make dosing decisions, the security of constant monitoring led to widespread adoption. But Dexcom had a bigger trick in its pocket.
In December 2016 the FDA officially awarded Dexcom’s product a “non-adjunctive” indication which means the data collected from the device could be used to make treatment decisions without finger pricking. By itself this is huge news—when the FDA first implied it would approve this indication last July Dexcom’s stock jumped to its highest levels.
Yet even after that wonderful news the stock faltered. You see, the stock market is a hungry beast and without an ever-increasing base of earnings, an expensive stock often needs a constant supply of positive news to support high prices.
The stock’s first crack came in September when Medtronic got FDA approval for its competing MiniMed system. Then despite beating revenue estimates by $2 million in early November, the stock began a steeper slide.
The bears were likely resting on their laurels at year end. Some had covered in December as the short interest shrunk by almost one million shares. Insurance approval from Medicare and Medicaid sets the gold standard for commercial insurance and was expected but not for another year. Who would make a bet that a sleepy government agency would move faster than expected?
Of course my job as an analyst is to expect the unexpected, or at least to make a measure of how risky a stock is based on potential outcomes. While I’m intrigued by the Dexcom story, I still think the risk is high for both the bulls and bears. But that doesn’t mean I’m ignoring the stock for my Profit Catalyst Alert service. Observing how a certain kind of stock trades on fundamental developments helps an analyst find profitable future plays.