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Still Neutral on DexCom

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Following the third quarter earnings release, we are maintaining our long-term ‘Neutral’ recommendation on DexCom (DXCM - Free Report) , a provider of continuous glucose monitoring systems, with a target price of $13.00.

Even though the company’s international expansion and pipeline development remains on track, it remains a loss-making entity which operates in a highly competitive landscape. DexCom missed the bottom-line consensus for the fifth consecutive time in the third quarter of 2012. Its loss per share of 25 cents was higher than the Zacks Consensus Estimate of a loss of 22 cents per share as well as the year-ago loss of 20 cents a share.

During the conference call, DexCom issued a ballpark estimate of $89 million for full year 2012 revenues compared with the current Zacks Consensus Estimate of $95 million for the 2012 revenues. The company also asserted that it will continue to develop its GEN5 system. The joint development of Edwards Lifesciences’ (EW - Free Report) next-generation in-hospital glucose monitoring system is almost complete and the company expects CE Mark approval in Europe before the end of 2012.

Overseas territories contributed 10% to the company’s product revenues in the most recent quarter. We expect international revenues to strengthen as DexCom ventures into new territories. The company recently gained approval in Australia, while it anticipates approval in Canada and India. DexCom also plans to gain a foothold in other Asian countries like China and Japan. The comparison of the exponential rise of diabetes in developing countries to the fraction of the population using continuous glucose monitors implies that the market for DexCom’s products remains largely underpenetrated in these geographies.

Last month, the U.S. Food and Drug Administration (FDA) cleared DexCom’s new continuous glucose monitoring system, the DexCom G4 Platinum. The company received the CE Mark for its G4 system in June 2012 and already markets the product in the European Union as well as certain Latin American and Asian nations where the CE Mark is recognized. The commercialization of G4 in the U.S. could just be the catalyst that the company needs to gain share.

On the flip side, DexCom faces aggressive competition from large players with deeper pockets. The company competes with Roche Diabetes Care, a division of Roche (RHHBY - Free Report) and LifeScan under Johnson & Johnson (JNJ - Free Report) for its Seven Plus offering. Additionally, Medtronic (MDT - Free Report) and Abbott (ABT - Free Report) have gained FDA approval for continuous glucose monitoring systems.

Moreover, reluctance on the part of physicians and patients to adopt DexCom’s products may make it challenging for the company to expand share. This is mainly because the company’s glucose monitoring device is more invasive than other self-monitored glucose testing systems. Additionally, manufacturing constraints might hamper the supply continuum of the company.

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. The stock carries a short-term Zacks #3 Rank (Hold).

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