Today the pitch that’s been catching my eye is from Mitchell Clark for his Biotech Breakthrough Stock Report — we haven’t covered this newsletter before, but we have certainly covered teaser spiels from Mitchell Clark’s wide variety of Lombardi-published newsletters in the past (before he was a biotech expert this week, he was a bible scholar teasing energy stocks for his America’s Redemption newsletter).
And it’s a pitch about diabetes, which we don’t see that often these days — despite the fact that it’s among the most expensive diseases/conditions in medicine and, therefore, would be expected to generate a lot of profit for the companies whose products can help these patients. So let’s delve into it, shall we?
The tease is that Clark says he has identified the “Little-Known Public Company Battling World’s Biggest Plague” … and that he’ll tell you all about if if you subscribe to his newsletter ($195 for the first year, auto-renews for $295 after that). I don’t feel like paying that, but I’m curious about the company… and our loyal Gumshoe readers are asking… so let’s dig into the clues and see if we can name that stock for you.
Here’s how he opens:
“Last year, 5.1 million people died from this disease.
“The World Health Organization says that number will rise to nearly 7.7 million by 2024.
“The worst part is that there is no cure.
“It’s not Ebola. It’s not AIDS.
“Incredibly, 382 million people worldwide have this disease.
“And an estimated 175 million don’t even know they have it.
“You may have it. Or a friend or a loved one may have it without even knowing.
“This disease can lead to blindness, heart attacks, and death.
“In fact, it’s the seventh leading cause of death in America….
“While there is no cure, there is one American company that has developed a solution to help slow the blindness and the heart attacks this disease causes…
“… a small, little-known public company almost nobody has heard of until now.”
Sounds pretty compelling, right? Small companies that are addressing huge markets but are largely unknown?
That’s the bread and butter of the newsletter business — most of the publishers know that if they repeatedly make recommendations to buy big, established, boring stocks their readers have already heard of, like Johnson and Johnson (JNJ) or Novo Nordisk (NVO), people will cancel in droves (assuming you enticed them to subscribe in the first place without having a secret, small, unknown idea to share) — many subscribers want to think they’re getting something cool and sexy that no one else knows about.
And, yes, all that chatter above is about diabetes — so what’s this “solution to help slow the blindness and the heart attacks” that Clark is hinting at? More clues:
“… it’s the measurement of sugar in the blood’s system that is critical.
“Diabetics need to measure their blood sugar regularly (as often as 4 times a day) to ensure there isn’t too much sugar in their blood.
“But there’s a big problem that has plagued diabetics for years when it comes to measuring their sugar levels.
“Testing your blood sugar physically hurts.Are you getting our free Daily Update
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“Imagine having to jab a needle into the tip of your thumb or finger, multiple times a day.”
OK, so it looks like we’re being teased at some company that sells something related to glucose monitoring — which, for those who aren’t diabetic or aren’t familiar with the business of diabetes, is a huge industry… the pin sticks and the glucose monitoring devices and especially the tester strips have been cash cows for a lot of these companies, though that is probably moderating now that Medicare has imposed some competitive bidding and lower reimbursements in what was already becoming a pretty competitive monitor/strip marketplace.
And, yes, noninvasive, no-finger-prick glucose monitoring devices have been a priority for decades… so is one really available now? Is that what’s being teased? Well… it sounds like that’s a “sort of…” and it depends on what you mean by “no finger pricks” and “noninvasive.” Let’s get the rest of our clues from Clark so we can narrow it down:
“Introducing the ‘Patch’ for Diabetics
“The company I’m introducing you to today has developed a non-invasive, non-needle alternative for measuring blood sugar levels.
“The name of the company’s device is scientific, so it’s a long and complicated name.
“I just call it ‘the patch’ because it looks like the patch that some people use to quit smoking.
“About the size of a silver dollar, but paper thin, diabetics just need to stick it on their body, like a nicotine patch.
“But instead of delivering nicotine, this “patch” measures blood sugar levels…right through a person’s skin. 24 hours a day, seven days a week.
“If the diabetic person’s blood sugar goes too high or too low, the “patch” sounds an alarm. It also records all the information so the patient or doctor can look it over later.
“It’s really quite remarkable; so much better than having to prick your fingers four times a day.
“In fact, since it works around the clock, it can detect spikes or drops in blood sugar that the diabetic person wouldn’t notice by testing only four times a day.”
OK, so that’s pretty close to being the “promised land” — a noninvasive, continuous glucose monitor that doesn’t require finger pricks and is the size of a nicotine patch. So those are our product clues … how about some clues about the company?
“The company was just recognized as one of the 50 most innovative companies by Fast Company magazine.
“The company is well-capitalized with $60 million in cash and marketable securities and long-term debt of only $3 million….
“In the first six months of 2013, the company did $63 million in sales. In the first six months of 2014, sales reached $105 million.
“With the FDA just having approved a remote monitoring version of the company’s blood testing device…
“…that means the blood sugar levels of a person can be sent via wireless connection to a smartphone…
“I don’t think it will be long before this company hits $1 billion in annual sales….
“I expect the stock to triple again over the next few months as its diabetic ‘patch’ goes mainstream.”
And Clark includes a two-year stock chart for us, showing the shares moving from around $13 in late 2012 to about $43 now… which gave us a nice point of confirmation after we hauled the tarp off the ol’ Thinkolator and started it up on this chilly New England morning. The stock being teased is: DexCom (DXCM)
And yes, DexCom’s main line of business is devices and systems for continuous glucose monitoring. Their current model is the DexCom G4 Platinum, and it does indeed reduce the number of finger sticks and provide continuous wireless monitoring (and yes, they did just get FDA approval for the DexCom Share accessory that can transmit that data to the iPhones of caregivers or family members).
These devices are not completely noninvasive, nor is DexCom the only company to sell one — they require a small adhesive patch on the skin, but that patch includes a half-inch long sensor that’s inserted under the skin with a needle, and all of the approved continuous glucose monitoring devices also require at least a couple finger sticks a day to calibrate the device’s readings … they are not accurate enough to use on their own, at least not yet, but they do apparently do a better job of tracking trends and alerting to possible problems than the irregular “every several hours” finger-stick blood tests. That patch is covered with a little snap-on transmitter which transmits the readings to a larger, pager-sized device (do people even know what pagers are anymore?) that has to stay within 10-30 feet or so of the sensor.
So why doesn’t every diabetic have one of these things now? DexCom’s first product was approved by the FDA in 2006, and competitors have been available for almost as long — though interestingly, Abbott pulled their device (the Freestyle Navigator) out of the U.S. market several years ago. Part of the problem with CGM has been the high cost, and the fact that these devices and the disposable monitor/implant/patch things are not covered by Medicare (though they keep fighting to get them covered, I have no idea whether or not it will happen — most things that senior citizens want do eventually get passed, since they’re the only ones who vote reliably, but nothing is getting passed these days).
I can’t claim to be a real expert on this stuff, but it looks like the finger sticks are so cheap (monitor around $20, strips maybe as much as $25-50/month if a substantial number are needed) that maybe it’s a tough sell if it’s not covered by insurance or by Medicare — particularly if your diabetes is well-managed already, and the only real advantage is sticking your finger twice instead of five or six times. The devices reportedly cost up to $1,000 or so and replacement sensors would be at least $100 a month. I’m sure there are plenty of customers, and some insurance probably covers these for some patients (there are a wide variety of patients who have diabetes, of course, and presumably some cases require much tighter management of glucose and insulin levels than others).
When it comes to products, my primary worry would be that the business should end up going to the integrated devices that combine an insulin pump and glucose monitoring — Medtronic (MDT) appears to be in front on that with their Minimed 530g that was approved about a year ago as the first integrated pump/monitor, though DexCom is going to cooperate with pump maker Tandem (TNDM) by integrating the G4 sensor into Tandem’s t:slim pump to make a competing integrated device (and there may well be other similar devices out there).
So the market seems to be in some flux, these are high-cost devices (both up-front and recurring costs) that are covered by some insurance plans and not by others, and for some diabetes patients and not for others, and the rate of change has been pretty fast — though it seems like Medtronic and DexCom are the two biggest players in the continuous glucose monitoring space right now, with DexCom boasting of better accuracy and Medtronic boasting of a much, much larger sales force and an already-approved integrated pump/monitor device.
On the financial side, I guess DexCom looks fine — they’re far smaller than Medtronic, obviously, but do have a substantial $3 billion market cap and have had great stock performance this year (unlike TNDM, by the way, which is a far smaller company in the more-competitive insulin pump business). And though Clark was off by a hair on his numbers (perhaps in a vain attempt to throw off the Mighty, Mighty Thinkolator) they did have $105.9 million in revenue in the first half of this year and $65.4 million in the first half of 2013, and they do have $61 million in cash and short term investments on the books (and yes, they did make a Fast Company list, though that was in 2013).
They are not profitable, and I always get a little squinty when a company has been selling a product for seven years and still isn’t making a profit, but neither are they really in a “cash burn” situation — they do keep spending more and more on R&D and SG&A each year, keeping pace with rising revenues and eating up operating profits, but gross margins have improved a little bit over time (that’s the actual profitability of to making the product, not including selling and R&D costs)… they also sell a little bit of stock every year and some of their losses are from non-cash costs (like depreciation and stock-based compensation), so they’re fairly close to breaking even. I don’t know if they will break even, since they seem pretty clearly to need to spend more on SG&A (sales force, etc) to increase sales, and they can’t stop R&D or they’ll get lapped by competitors, but they are growing revenues pretty nicely so there is some potential.
Analysts see them making seven cents a share next year, and 43 cents a share in 2016 — none of the past analyst quarterly estimates have been particularly accurate, but they have actually averaged out to being close to the target over the last four quarters put together… so if you think that’s a reasonable estimate, then you’re paying about 100X 2016 earnings for a company that is expected to grow earnings by 30% or so annually. They report next week, on November 6, so be careful — DXCM valuation is very much based on assessing their future growth, so the stock could easily make a big move in either direction based on what management says in that earnings call, the shares fell about 10% after the May call and jumped up about 15-20% after the August call. I’d guess that if the stock were to triple in a short period of time, as Clark says he expects, that would have to be because they were bought by someone at a big premium — and yes, they’ve been rumored as a takeover candidate before (and have some deep-pocketed partners who could conceivably be interested, like Johnson & Johnson), but that would just be a wild card possibility (DexCom’s CEO, Terrance Gregg, ran Minimed, another diabetes monitoring/device company and got it sold to Medtronic back in 2001, but he’s also been selling shares like all the other insiders over the last year).
Several folks have asked me about that “Bionic Pancreas” story that ran over the Summer, about the goal of a better integrated and managed system for diabetes hormone management, so that gives some idea of where science may be going — better integration, more computing power… though it looks like their initial testing of these “prototype” artificial pancreas systems (really, a couple pumps and a glucose monitor and an iPhone to integrate them) does use the DexCom sensors. And further into the future, there’s plenty of interest in actual noninvasive patches (ie, they don’t have a needle/wire that goes under the skin like current sensors all do), including from Sano Intelligence, a little startup that got a lot of attention (and has already had one of its employees poached by Apple)… and there are other completely non-invasive technologies that appear to be “not ready for prime time,” like the sometimes-touted Symphony from Echo Therapeutics (ECTE), which has not been promising enough to get Echo any financing (they appear to be circling the drain at this point, shutting down all operations to conserve cash, despite the fact that their proposed product looks cool).
So there you have it — it would take many years of 30% revenue growth to get DexCom to $1 billion in sales, but they do have good current revenue growth and competitive products, and they are not currently in financial distress and the market is big, so you can do lots of “blue sky” thinking on this one if you’d like to. Let us know if you’d like the look of DXCM in your portfolio, or if you have other thoughts on the intersection of diabetes and investing… just use our friendly little comment box below.