Today's diabetes market highlights the importance that individual stock selection still has in successful investing. While it may very well be generally true that overall sector movements explain a lot of an individual stock's performance, that has not been the case in this market. While the overall tone and tenor has been pretty negative, select names like Novo Nordisk (NYSE:NVO) and DexCom (Nasdaq:DXCM) have done quite well indeed.
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A Strong End to DexCom's Year
It has not all been smooth sailing for DexCom (the stock took a spanking late in 2010), but the company continues to build its emerging continuous glucose monitoring business. For the fourth quarter, total revenue increased 49%, while product revenue more than doubled from the year-ago level and rose 26% sequentially. DexCom also saw an encouraging jump in the sale of its start kits, to the tune of 24% sequential growth.
As the company increases its sales, it is beginning to see some operating leverage. Gross profit on product sales increased nearly five times (again, on a doubling of revenue) in the fourth quarter, when compared to the prior year. At the same time, the company has kept a lid on SG&A spending while still investing significant resources into R&D. All told, the company produced an operating loss more or less in line with the prior year's level.
The Look Ahead - Challenges and Opportunities
Going up against major companies in the continuous glucose monitoring field like Abbott Labs (NYSE:ABT) (which offers the Freestyle Navigator) and Medtronic (NYSE:MDT) (which sells the Guardian RT) has forced DexCom to look to partnerships to improve its chances of success, and there will likely be some activity on that frond this year.
Johnson & Johnson (NYSE:JNJ) has already applied for European approval of an insulin pump that integrates DexCom's CGM, and a U.S. filing could occur in the middle of this year. Likewise, a filing for an integrated device with Insulet (Nasdaq:PODD) could go into the FDA in the second half of the year. At the same time, the company continues to work on its own next-generation products, as well as a hospital-based product with Edwards Lifesciences (NYSE:EW) called the GlucoClear.
That is not to suggest it's all smooth sailing, though. Economic conditions and employment still matter, as the company is pointing to sequentially flat revenue due in part to the impact of the calendar year on potential customer's insurance deductibles. Elsewhere, a New England Journal of Medicine article cast doubt on the survival benefit of in-hospital intensive insulin therapy (a target market of the GlucoClear), and the aforementioned Abbott and Medtronic continue to push development of their own integrated devices and advanced sensors (Abbott is also working with Insulet on an integrated device).
The Market Rewards the Choosy
While the overall sluggish economy has crimped growth at the major players, the FDA has been an increasingly significant factor as well. MannKind (Nasdaq:MNKD) and Biodel (Nasdaq:BIOD) both suffered significant setbacks in the form of FDA rejection letters, and investors largely seem to believe that it will be increasingly difficult to secure approval for new medications and devices in the diabetes field. (For more, see MannKind And The FDA - Here We Go Again.)
That should work in the favor of companies like DexCom, Insulet and Novo Nordisk - companies that all have relatively new and effective products on the market for diabetes. Though these companies will need future FDA approvals to continue their growth trajectory, it is a bit less of a near-term risk than for them than many of its rivals.
The Bottom Line
In the meantime, investors should keep an eye on DexCom and Novo Nordisk in the hopes of a pullback; the valuations on both look stretched today, but both offer relatively rare growth in what is still a challenging healthcare market. (For more, see Measuring The Medicine Makers.)
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