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Why are CGMs vital for the health of stocks like Dexcom and Medtronic?

Diabetes is a global health crisis, and, as the population ages, it is set to worsen. Dexcom and Medtronic will play a vital role in helping manage blood sugar levels with their innovative continuous glucose monitoring (CGM) devices.

– Dexcom and Medtronic have both received good news related to their continuous glucose monitors this year.

- Demand for the devices is only set to grow as people live longer.

- The iShares US Medical Devices ETF holds both Dexcom and Medtronic and is up 12% over the past six months.

The number of people in the UK living with type 2 diabetes surpassed the five million mark for the first time in April, according to the charity Diabetes UK. The growing prevalence of the disease in the UK and elsewhere is being driven in part by a rise in obesity, particularly in ageing populations. Many more people are prediabetic, while others are going about their daily lives undiagnosed.

Governments have pledged to tackle obesity through sugar taxes and limits on junk food advertising. But inflation and rising food prices are pushing people towards unhealthy food options—in short, it’s often more expensive to eat healthily, as a study published in February in the Journal of Strategic Marketing concluded.

There’s also the issue of access to diabetes treatment. In the US, three of the diabetes market top players slashed their insulin prices earlier this year. Eli Lilly [LLY], Novo Nordisk [NVO] and Sanofi [SAN.PA] bowed to pressure and set a $35 price cap for Medicare recipients. This will help to make insulin more affordable and accessible, but it won’t get to the heart of the problem.

There’s a need for innovative treatments that help people to manage diabetes better. In addition, there is ample scope for the development of preventative solutions.

 

The rise of CGMs

Insulin pens are the main treatment for diabetes. Continuous glucose monitoring devices (CGMs) don’t receive as much recognition, but are becoming increasingly important in helping people to manage, and in some cases prevent, the disease.

Essentially, a CGM is a wearable device that relies on a sensor under the skin to measure glucose levels in real-time. This information can then be sent to a smartphone and can also be connected to an insulin pump, which automatically adjusts blood glucose levels based on the sensor’s readings.

Last month, Medtronic [MDT] ​​got the regulatory nod from the US Food and Drug Administration for its MiniMed 780G insulin pump. The device will be the first on the market to use gesture-sensing technology to detect meals and correct sugar levels accordingly.

The agency has also lifted all restrictions imposed on the company back in December 2021 around product safety concerns.

Dexcom [DXCM] is another major player in the CGM market. Last month, the US announced it would refund the cost of CGMs to all Medicare patients who need insulin to manage their diabetes.

Teri Lawver, executive vice president and chief commercial officer at Dexcom, described the decision as a “landmark” for Dexcom and those living with the disease.

 

Dexcom and Medtronic see strong demand for CGMs

Medtronic reported in February that diabetics revenue fell 2% in its third quarter (Q3) of 2023, while overall revenue was flat. The company put this down to a lack of new product approvals. However, outside the US, the diabetes business grew 18% and GCM sales were up 34%, boosted by strong demand for its MiniMed 780G system, which has been approved in Europe since 2020.

Medtronic CEO Geoffrey Martha said on the earnings call that the company was focused on “restoring strong growth of our important diabetes franchise over the coming years”.

Dexcom saw revenue climb 19% in Q1 2023, as it reported on 27 April. While sales have slowed to a range of 17–19% in recent quarters, from an earlier range of 27–31%, demand for its CGM devices is strong.

“Momentum for global CGM adoption remains very high, and we continue to see a growing appreciation for the differentiated experience that Dexcom provides. It has been an exciting start to 2023,” said Dexcom president and CEO Kevin Sayer on the earnings call.

The company’s latest model, the G7, received approval for Medicare coverage for people with type 1 diabetes in February. This was extended to people with type 2 diabetes in March, with coverage starting in April.

 

The need for CGMs will continue to grow

While Dexcom and Medtronic also face competition in the CGM market from Abbott Laboratories [ABT], there should be room for all three in the long term.

Diabetes is one of the fastest-growing diseases, according to the latest edition of the International Diabetes Federation Atlas. The report predicts that by 2030, 643 million adults will be living with it, and that this number will hit 783 million by 2045.

“Demographic shifts toward an older population, and the ongoing public health problem of obesity, suggest that there is a large market opportunity for companies that can deliver innovative solutions for not just diabetes treatment, but also prevention,” wrote Global X ETF senior healthcare analyst Arelis Agosto in April.

 

Future devices could prevent diabetes onset

As populations continue to grow and age, the CGM market is likely to expand. The focus for the likes of Dexcom and Medtronic will be to invest in solutions that prevent diabetes, especially type 2 cases.

“Fuelled by recent innovation and ongoing adoption of insulin pump technology, pump manufacturers continue to grow their footprint,” wrote Agosto.

For example, in the future, artificial intelligence (AI) could be harnessed to detect prediabetes in people at risk. Early detection could push individuals to make lifestyle choices to prevent diabetes before it starts.

 

The iShares US Medical Devices ETF

92.6% of the portfolio of the Global X Telemedicine and Digital Health ETF [EDOC] is in health care. Dexcom is the fund’s fifth-biggest holding, with a weighting of 5.21% as of 27 April. The fund is down 8.42% over the past year, but up 2.76% over the past six months.

The VanEck Bionic Engineering ETF [CYBO.L] offers investors exposure to companies making a range of devices designed to improve the delivery of healthcare and the quality of life. Medtronic is its top holding, with a weighting of 10.56%, while Dexcom is the fourth-biggest, having been allocated 9.93% of the portfolio. The fund is up 12.46% since its launch last December. 

The iShares US Medical Devices ETF [IHI] offers exposure to Abbott Laboratories, its second-largest holding at a weighting of 14.09%; Medtronic, the third-biggest at 8.90%; and Dexcom, the ninth-biggest at 4.15%. The fund is largely flat over the past year and up 16.52% in the past six months.

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