G7 Clearance Still a Mystery for Dexcom

Dexcom recently reported its Q322 financial results which ended Sept. 30, 2022. In the conference call discussing the quarter, Kevin Sayer, chairman, president, and CEO of Dexcom, highlighted strategic initiatives including the international roll-out of the G7 device in the United Kingdom, Ireland, Germany, Austria, and Hong Kong.

The company announced the inclusion of Dexcom ONE on the NHS England, Wales, Scotland, and Northern Ireland drug tariffs, which will significantly expand reimbursed access to real-time continuous glucose monitoring (CGM) in these markets. Additionally, the company discussed the execution of its accelerated share repurchase program, purchasing over 550 million of outstanding shares. “This allowed us to reduce the dilution associated with our 2023 convertible notes while buying back our shares at what we viewed as an attractive price point,” said Jereme Sylvain, the company’s CFO, in the conference call.

“In the third quarter, Dexcom executed on a number of key initiatives, which included the launch of G7 in five countries,” Sayer said. “With the international roll-out of G7, strong momentum in our US business, and ongoing efforts to broaden global access, we are well positioned for a strong conclusion to the year.”

Sylvain dove into the financial highlights from the quarter. Compared to Q321, revenue grew 18% to $769.6 million on a reported basis and 20% on an organic basis. Specifically in the United States, the company saw a revenue growth of 17%. Internationally, there was a growth of 22% on a reported basis and 28% on an organic basis. The company put this growth down to increased volume in conjunction with strong new customer additions which continues to be a primary driver of revenue growth as awareness of real-time CGM increases.

Gross profits totaled $494.2 million (64.2%) of revenue for Q322, compared to $446.9 million (68.7%) in Q321. Dexcom saw a GAAP operating income of $147.5 million (19.2%) of revenue, which is an increase of 100 basis points compared to Q321. The Non-GAAP operating income was reported as $160.8 million (20.9%) of revenue, a 190 basis points increase compared to that of the same quarter of 2021.

“We drove leverage in every category of spend this quarter, while simultaneously offsetting inflationary pressures,” Sylvian said. “Our focus will continue to be on generating leverage in nonvariable expenses while reinvesting those savings into our global commercial infrastructure.”

GAAP net income for Q322 was $101.2 million ($0.24 per diluted share), compared to GAAP net income of $87.3 million ($0.24) in Q321. Non-GAAP net income was reported as $111.9 million ($0.28 per share), compared to a non-GAAP net income of $89.3 ($0.22) in Q321, according to Sylvain. He continued by noting, “We remain in a great financial position, closing the quarter with approximately $2.4 billion worth of cash and cash equivalents. We reached a new high watermark in terms of free cash flow this quarter, generating over $180 million of free cash. This provides us the flexibility to support our ongoing growth opportunity while also assessing any strategic uses of capital on an ongoing basis.”

Dexcom announced it is updating its full-year 2022 revenue guidance to a range of $2.88 billion to $2.91 billion. The company is also reducing its gross profit margin guidance to approximately 64%, down 1% from previous projections. Remaining the same are both the operating margin and adjusted EBITDA margin guidance at 16% and 25%, respectively.

“This guidance factors in another sizable uptick in currency headwinds relative to expectations we shared a quarter ago,” Sylvain said. “We now expect approximately $55 million of foreign currency headwinds for the full year relative to our prior estimate of around $40 million. This currency impact is the primary reason we found it prudent to reduce our gross margin guidance for 2022. However, we reiterated our operating margin guidance as we expect to offset the additional foreign exchange pressure through ongoing operating expense leverage. We have been able to navigate through a shifting economic environment well to date, but we are certainly not immune to macro pressure. Leading economic indicators continue to point to additional uncertainty in the coming quarters.”

The company, despite positive numbers, is still waiting on FDA approval for its G7 CGM, which already has CE Mark. During an earnings call earlier this year, Sayer noted that the 510(k) submission remains under review with the FDA. The company originally submitted for clearance in late 2021. At the time of the call, Sayer said that the company expects FDA clearance and limited launch before the end of 2022, with a large commercial launch in the US in Q123. As of now, the FDA timeline for G7 is on schedule and the company anticipates approval before the end of the year. However, it’s currently unclear as to if these expectations will come to fruition with only two months left in 2022.

In an analysis report from BTIG by Marie Thibault and Sam Eber, they expect that company shares will move higher following the Q3 results, the on-track G7 timeline, and a “bullish commentary on accelerating adoption.”

“In our view, this was a particularly upbeat earnings call, with DXCM able to point to exciting catalysts coming on line in 2023: G7 in the US, Medicare expansion into the basal-only population, Dexcom ONE set to gain traction, cash pay opportunities in the US, and underlying strength in volume growth,” the analyst’s wrote. “We also applaud the record FCF this quarter and DXCM's strong cash balance.”

In light of the Q322 results, they recommend buying stock and are raising PT from $110 to $126 based on 12.5x our 12-24-month sales estimate.