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Reaffirming DexCom at Neutral

Zacks Equity Research

We remain Neutral on DexCom (DXCM), a prominent player in the continuous glucose monitoring market. Its fourth-quarter fiscal 2011 loss per share of 18 cents was a penny higher than the Zacks Consensus Estimate. Losses widened year over year despite solid double-digit growth in the top line.

Revenues zoomed 43% year over year to $22.4 million, beating the Zacks Consensus Estimate. Product sales spiked 54% to $20.9 million in the quarter.

DexCom is focused on the development and commercialization of continuous glucose monitoring systems for ambulatory use by people with diabetes and by healthcare providers for the treatment of diabetic and non-diabetic patients.

The diabetes market is large and growing. An important component of effective diabetes management is frequent monitoring of blood glucose levels. DexCom’s product has a comparative advantage in terms of both patient convenience and quality of data generated vis-à-vis traditional diagnostic tests.

We believe DexCom is poised to gain a major share of the glucose monitoring market driven by sustained product development initiatives, collaborations, favorable reimbursement and increased need for continuous glucose monitoring. Increased awareness and acceptance of the need for continuous glucose monitoring and more favorable reimbursement coverage should help drive sales for DexCom’s products.

Other potential catalysts include the FDA approval and launch of new products under the company’s collaborative agreements with several companies including Insulet Corporation. DexCom plans to file a Premarket Approval (“PMA”) for the Gen4 sensor system at the end of the first quarter or early second quarter of 2012.

In addition to upgrading and enhancing the functions of existing products, DexCom has also been active on the collaboration front, through which it is looking to leverage its technology with its collaborator’s product offerings.

We also feel that the company’s recent move to buy healthcare IT company SweetSpot Diabetes may allow it to better compete with Medtronic (MDT) through better data management systems.  

However, competition in the glucose monitoring market is fierce and DexCom faces stiff challenges from much larger players such as Johnson & Johnson (JNJ), Medtronic and Abbott Labs (ABT). Moreover, the company has incurred losses since inception and is exposed to a strict regulatory environment. Our recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).

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