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DexCom (DXCM - Analyst Report), a player in the glucose monitoring market, reported third quarter 2012 loss per share of 25 cents, higher than the Zacks Consensus Estimate of a loss of 22 cents per share and the year-ago loss of 20 cents a share. Net loss for the quarter soared 30% year over year to $17.3 million.

Revenues

Revenues surged 26.5% year over year to $23.1 million in the third quarter, marginally beating the Zacks Consensus Estimate of $23 million.

Product sales increased almost 27% to $21.1 million while development grant and other revenues improved 25.6% to $2 million in the reported quarter.

Margins and Expenses

Gross margin dipped to 36.4% in the third quarter from 44.7% a year ago. Operating expenses increased 19.8% year over year to $25.7 million due to higher R&D spending and selling, general and administrative expenses, which grew 28.6% and 14.4%, respectively, in the reported quarter. Research and development expenditure shot up on account of incremental clinical trials costs while selling, general and administrative expenses increased due to additional marketing initiatives.

Balance Sheet

DexCom exited the third quarter with cash and short-term marketable securities of $53.4 million, down 45.1% on a year-over-year basis.

Our Take

DexCom is well placed in the industry that it serves. Given the burgeoning diabetes population in the U.S., its G4 Platinum presents considerable market opportunity. Successful commercialization of G4 in the U.S. could just be the catalyst that the company needs to gain share in the market it serves.

Increased awareness and acceptance of the need for continuous glucose monitoring and international expansion should help drive sales of DexCom’s products. The company expects to introduce its products in India by year end. It also plans to expand its footprint in China and Japan next year.

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.

Competition in the glucose monitoring market is fierce. DexCom competes with Roche Diabetes Care, a division of Roche (RHHBY - Analyst Report) and LifeScan under Johnson & Johnson (JNJ - Analyst Report) for its Seven Plus offering. Additionally, Medtronic (MDT - Analyst Report) and Abbott (ABT - Analyst Report) have gained FDA approval for continuous glucose monitoring systems.

We believe that the company’s move to buy healthcare IT company SweetSpot Diabetes Care, may allow it to compete more effectively through better data management systems.

Despite increasing revenues, DexCom remains a loss making entity and its efforts are made more difficult by a stringent regulatory environment. We currently have a long-term 'Neutral' recommendation on the stock, supported by a short-term Zacks #3 Rank (Hold).

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