- William Blair analysts have selected Dexcom and Hologic as their top medtech and diagnostic stock picks for 2024.
- The analysts said Dexcom is on the cusp of a six-fold expansion of its total addressable market, positioning the company to accelerate sales and earnings growth through 2025. William Blair identified the growing demand for GLP-1 drugs as a potential threat to the continuous glucose monitor (CGM) maker.
- Hologic’s selection as the top diagnostic stock pick for 2024 is built on a belief it has “materially improved prospects post-pandemic,” in part because COVID-19 helped to nearly double the install base of Panther molecular diagnostics systems.
The selection of Dexcom as the top medtech pick reflects the expanding opportunity for its CGMs. As use of CGMs expands beyond patients on intensive insulin, the number of people in the U.S. eligible for treatment with the devices will grow from 4 million to 30 million, according to the analysts.
Dexcom is beginning to penetrate the basal insulin opportunity. The analysts estimate the opportunity will nearly double the U.S. market and is less than 20% penetrated. Dexcom is “on the steep part of the adoption curve,” the analysts wrote, with trends reminiscent of its earlier move into the intensive insulin therapy space.
That expanding market underpins the prediction that Dexcom’s sales will have a 26%-plus compound annual growth rate through 2025 in William Blair’s “bull case.” Dexcom unlocked a new opportunity this week by connecting its G7 CGM to Tandem Diabetes Care’s t:slim X2 insulin pump. Dexcom said the new Tandem connection is the first automated insulin delivery system integrated with its G7 CGM.
The analysts identified four key risks and concerns for Dexcom: growth is highly dependent on new patients in an increasingly penetrated and competitive market; competition from Abbott and Medtronic; regulatory and reimbursement hurdles; and the potential for GLP-1 drugs to reduce the number of people who use insulin.
William Blair’s team published a similar analysis of Hologic. The analysts called Hologic “a clean story with a durable and predictable financial model,” adding that “it is set up well to deliver at least 5% to 7% top-line growth with expanding margins over the next several years.”
Hologic’s more than $2.7 billion in cash and equivalents “allows for significant optionality for value creation, with the first priority being targeted tuck-in M&A,” the analysts wrote, but the “lack of meaningful inorganic growth opportunities” is a key risk and concern. Other concerns include a potential inability to capitalize on growth of the Panther install base and the prospect of lower hospital budgets.
The analysts’ medtech and diagnostic picks for 2023 both underperformed the S&P 500, which grew 13% in the year after they selected their favored stocks, according to the report. Shares in Dexcom, the analysts' medtech pick for 2023, fell 1.3%, in large part because of a steep, steady decline between July and October. The fall covers a period in which GLP-1 diabetes and weight loss medicines made the news.
In diagnostics, the analysts chose QuidelOrtho as their top pick for 2023, only to see its share price fall 27% over the following 12 months.
For the medtech industry overall, the analysts expect procedure volume growth to normalize next year, after the COVID-19 pandemic pressured hospitals for several years. They also noted that early signs of improvement in supply chains and inflation have allowed some companies to return to more regular manufacturing capabilities and gross margin improvement.
For diagnostics, they wrote that the Food and Drug Administration’s proposed rule for lab developed tests, which would increase regulation over that part of the industry, will be an ongoing topic next year. The analysts said a “key point of contention for the proposal will revolve around what authority the agency ultimately has to implement such a rule and believe the proposal may spark interest from lawmakers to revisit regulation of LDTs via proposed laws such as VALID.”