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We reiterate our Neutral recommendation on DexCom Inc. (DXCM - Analyst Report).

Its second-quarter 2012 loss per share of 21 cents exceeded the Zacks Consensus Estimate of a loss of 20 cents per share. Net loss widened 99.4% year over year to $14.7 million, despite healthy revenue growth.

San Diego, California-based DexCom is a medical device company focused on the design, 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.

DexCom is well placed in the industry that it serves. The comparison of the exponential rise of diabetes in recent years to the fraction of population using continuous glucose monitors implies that the market for the company’s offerings remains considerably underpenetrated.

Further, the company can gain significant operating leverage from expansion of its footprint into new geographies as statistics suggest that the market in developing countries present a sizeable market opportunity.

However, we note that competition in the glucose monitoring market is intense and DexCom faces stiff challenges from much larger players such as Johnson & Johnson (JNJ - Analyst Report), Medtronic (MDT - Analyst Report) and Abbott Labs (ABT - Analyst Report). We believe that the company’s move to buy healthcare IT company SweetSpot Diabetes may allow it to compete more effectively with Medtronic through better data management systems.

DexCom is still in its early stage of operations and has incurred losses since inception in 1999. It is exposed to an increasingly strict regulatory environment. Also worth mentioning in this context is the high reimbursement risk which the company faces in the domestic market. 

We still believe that DexCom is poised to gain a major share of the glucose monitoring market, driven by sustained product development initiatives, collaborations and increased need for continuous glucose monitoring. Our Neutral recommendation on the stock is backed by a short-term Zacks #3 Rank (Hold).

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