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Shares of San-Diego, CA-based DexCom, Inc. (DXCM - Analyst Report) tumbled after it revealed the warning letter issued by the U.S. Food and Drug Administration (FDA) regarding administrative deficiencies in its Medical Device Reports (MDR). Although the FDA had sent the warning letter on Mar 14, the company disclosed it only early last week.

Since the revelation of the warning letter, DexCom’s shares dropped 5.7% to close at $41.95 yesterday.

FDA’s Charges

The federal watchdog agency conducted an inspection of DexCom’s San-Diego facility in Nov 2013 after which it determined that the company was not in compliance with the MDR regulations that were recently updated in Jul 2013.

The FDA warning letter held that the glucose monitoring company failed to report at least 4 incidences of low blood sugar (i.e. hypoglycemia) requiring medical treatment that were not correctly detected by the firm’s blood glucose monitoring device.

The company also failed to report one instance which reasonably suggests that DexCom’s blood glucose monitor malfunctioned and shocked a patient.

The referenced medical interventions to treat hypoglycemia are considered medical interventions necessary to prevent permanent impairment of a body function or permanent damage to a body structure. According to the letter, DexCom failed to submit an MDR for each referenced event. However, the FDA did not impose any sanctions in the warning letter.

DexCom’s Claims

Dexcom disclosed the FDA warning letter, saying only that the letter flagged "deficiencies in filing MDRs involving the company's continuous glucose monitoring system."

Before the end of Apr 2014, Dexcom expects to submit all materials necessary to maintain compliance with the FDA’s reporting obligations, in an effort to resolve any remaining deficiencies and have the warning letter repealed in due course.    

According to Dexcom, the warning is not likely to affect its current operations or its ability to manufacture and sell its G4 Platinum systems and sensors. Neither is it expected to impact any of its pending or future bids for approval from the FDA.

Our Stance

Though the last two weeks have been witness to a downtrend in DexCom’s share price, we believe it is well-positioned for future earnings growth.

DexCom reported strong top and bottom-line results for the fourth quarter of 2013, topping the Zacks Consensus Estimates on both fronts. Following the earnings release on Feb 20, shares of this medical device company depicted an uptrend.

Moreover, over the past two months, the company has seen 9 positive estimate revisions for the current year causing the Zacks Consensus Estimate to improve 30.8% to its current level of a loss of 9 cents per share from a loss of 13 cents for 2014. Furthermore, long-term growth for the stock is currently pegged at an impressive 32.5% compared to the industry average of 17.3%.

DexCom currently retains a Zacks Rank #2 (Buy). Other players in the medical instruments industry that are also performing well include Cynosure, Inc. (CYNO - Snapshot Report), Delcath Systems, Inc. and Syneron Medical Ltd. (ELOS - Snapshot Report). All the three stocks sport a Zacks Rank #1 (Strong Buy).
 

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