DexCom Shares Warrant Caution
DexCom, Inc. (DXCM) reported a second-quarter net loss of $0.48 per share compared with a net loss of $0.40 per share in the comparable period last year. We are pleased with top line product revenue growth and are encouraged by the recently announced contract with Blue Cross of California for limited reimbursement of continuous glucose-monitoring (CGM) to patients in California and across the Anthem Blue Cross network.
We remain mindful of the recent approval of Abbott Labs' (ABT) CGM system by the Food and Drug Administration; however, we regard any progress on the reimbursement front towards comprehensive CGM coverage as positive for all players. Our Hold remains intact at current levels.
We have valued DXCM on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the medical device sector. We remained cautious with regards to the potential impact of Abbott?s FreeStyle Navigator Continuous Glucose Monitoring System to the growth of DXCM sales over the long term. Our $7 price target is derived using a multiple of 30x FY09 EPS forecast of $0.30 discounted at 28 percent.
Dr. Pepper Snapple Looks Sweet
Dr. Pepper Snapple Group (DPS) continues to execute well in a difficult soft drink environment. Last year, the company reported 21.4 percent net sales growth, primarily due to acquisitions and 3 percent organic net sales growth. In addition, cost and productivity initiatives are more than offsetting cost pressures from higher raw material prices.
The company enjoys an attractive product mix with emphasis on flavored carbonated soft drinks (CSDs) and non-CSD beverages, such as ready-to-drink tea, juice, and juice drinks. Also, the company does not significantly participate in colas, which have declined in CSD volume share. The management has a sound business strategy; with the stock at the low-end of the expected valuation range, the Buy rating is maintained.
Dr. Pepper Snapple Group does not have a trading history. However, the parent company, Cadbury Schweppes Plc (CBY)?has traded in a P/E range of 10 to 26 over the last five years. In addition, Pepsi Bottling Group (PBG) has traded in P/E multiple range of 12 to 27. Initially, we expect Dr Pepper Snapple Group to trade at a P/E multiple between 10 and 27. The target price is $31.25, which is a 16 P/E multiple on trailing 12 month earnings.
Aetna Costs Outpacing Increases
Health insurer Aetna Inc. (AET) reported 2Q08 net income of $480.5M (up 6.5% year-over-year), or adjusted EPS of $0.94, compared with net income and EPS of $451.3M and $0.85 in 2Q07.
We are encouraged by increases in total revenue, which were driven by the strong medical membership growth (+646,000 members during 1H08) and a 17% year-over-year increase in premiums. However, the medical loss ratio of the commercial risk group increased 70 bps, on a sequential basis, suggesting medical cost trends are currently outpacing premium rate increases. We retain a Hold rating at current levels.
Aetna?s solid cash position provides the company with significant flexibility to either improve earnings through continued share repurchases or to pursue further strategic acquisitions. The company?s cash position should be enhanced through the payment of the remaining balance of a tax refund for the settlement of its tax returns pertaining to the years 1991 through 2001 ($666M of the $740M paid in 2004).
In addition, the company?s acquisition of ActiveHealth should strengthen its competitive position among national employers. New initiatives under which Aetna will provide products and services and individual health insurance for AARP members ages 50-64, under a seven-year agreement, bode well for membership growth.
Array BioPharma Needs More Data
We are encouraged by Array BioPharma Inc.?s (ARRY) recent progress in a number of collaborations. However, we are disappointed with recent negative phase II clinical trial results from its key lead candidate AZD6624.
We would like to see more data on the early-stage pipeline before we recommend investors purchase shares of Array. We maintain our Hold rating with a $9.5 price target.
The future of Array as an independent fully integrated biopharmaceutical company is dependent on its ability to discover and advance drug candidates, using its proprietary R&D programs. Array?s current focus is on cancer and inflammatory indications. The company?s goal is to have 10 drug candidates in clinical development by year end of 2008.
Although the company has a deep proprietary pipeline, these are at early to middle stage. The leading candidate, the ARRY-886 MEK inhibitor program, just entered into phase II clinical trial. Although phase I data and pre-clinical data regarding the MEK inhibitor candidate look encouraging, this data is at too early a stage to proclaim ARRY-886 viable for commercialization.
We are concerned about the company s cash position. At the end of June 30, 2008, Array had $126 million in cash, cash equivalents and marketable securities and $35 million in long-term debt.
