Continuous Glucose Monitoring (CGM) Deep Analysis: Ketone Sensor, Type 2 Non-Insulin Market, and Primary Care Physician/Endocrinologist Survey Results Analysis

Max Kruszeski+1 312 364 8718mkruszeski@williamblair.com Medical Technology Russell Yuen+1 312 364 8354ryuen@williamblair.com CGM Deep Dive: Analysis of Ketone Sensor, Type 2 Non-Insulin Market and Abbott LaboratoriesABT (NYSE)$127.63Stock Rating:Outperform DexCom, Inc.DXCM (NASDAQ)Stock Rating: Outperform primary care physicians (PCPs) and 12 endocrinologists (endos). Below is a high-levelsummary of our note and readthroughs for DexCom and Abbott. Key takeaways: •CGM share seems stable despite recent noise: Respondents indicated that CGMchurn rates for DexCom and Abbott have been in line with one another, suggestingneither company is materially winning competitive switches. On a go-forward basis, ourrespondents indicated nearly a 50%/50% split for future CGM scripts, reinforcing our viewthat both companies should be winners from market growth. These are net positives for •Ketone sensor has puts and takes: The American Diabetes Association (ADA) has calledhyperglycemic events like diabetic ketoacidosis (DKA) a “crisis,” with data pointing to $6.8 billion in hospitalization spend being attributed to 30% of Type 1 (T1) diabetes hospitalizations. On the flip side, DKA accounts for just 1% of all diabetes hospitalizations(including T2D), with a 0.4% mortality rate and events weighted to certain individuals.Further confounding this, CGM and closed-loop pumps have already been shown to reduceDKA events. When coupled with mixed survey feedback, we think material share shifts to a •Type 2 NI is a big growth driver: Survey respondents expect T2 non-insulin CGM use toincrease to about 50% penetration over the next three years (from 25%-30% today). PCPs expect their recommendation of CGM to increase by 2.5 timesif broad-based coverage is established—this is into a U.S. population of over 20 million patients—and both Abbott andDexCom will benefit from this. Our math suggests that even assuming 75% of the adoptioncurve of T2 basal and a lower level of utilization, this would still result in a $4 billion marketby 2030. Company-specific takeaways: ForDexCom, results should give some confidence thatthe company is not losing material share despite recent noise regarding quality issues. For Abbott, we find puts and takes to a ketone sensor, but it is still a positive for Abbott to go onthe offensive. ForbothAbbott and DexCom, T2 NI growth can drive the next leg of durablegrowth as the TAM meaningfully expands. Our scenario analysis suggests this can be a $4 billion market opportunity by 2030. Please refer to important disclosures on pages 22 – 24. Analyst certification is on page 22.William Blair or an affiliate does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect the objectivity ofthis report. This report is not intended to provide personal investment advice. The opinions and recommendations Survey key takeaways: •Type 2 non-insulin patients (T2 NI) remain a significantly underpenetrated opportunitywith 25%-30% of patients visiting endos and PCPs on CGMs and with both groups expecting penetration to increase to roughly 50% in the next three years (weestimate the market is actually midsingle digits penetrated, so our survey captured a heavy CGM group). By our math, the 20%delta represents 4 million to 5 million incremental T2 NI patients or a 15% and 28% CAGR for endos and PCPs through the nextthree years. Further, a quarter of PCPs currently recommend a CGM to over 80% of their newly diagnosed T2 NI patients and athird of PCPs estimate that they’d prescribe CGM to over 80% of their T2 NI patients should CMS coverage come online in the •In the next three years, both endos and PCPs estimate roughly 50/50 market share split between Abbott and DexCom. Endos favored Abbott’s Freestyle Libre ecosystem slightly above the 50/50 mark, while PCPs were split at about 47% each with the remainder coming from other CGM players. Respondents cited pump connectivity and data sharing as the biggest benefitsof DexCom’s CGM over Abbott’s sensor, and viewed cost and wear time as benefits of Abbott’s CGM over DexCom’s. We view this as a positive for both names, and it supports our thesis that both Abbott and DexCom can be material winners of continued CGM growth.•CGM preference remains sticky among users.More than half of doctors (in both groups) indicated that less than 30% of their CGM users switched to a competitive CGM. So, despite recent noise around DexCom attrition, our survey suggests Abbott andDexCom attrition rates are in line with each other, supporting the idea that quality and reliability have not materially impactedthe business. This is in line with Abbott’s recent commentary indicating that it has not seen material share shift through the thirdquarter. More specifically, the average attrition rate when asked what percentage of users has switched from G6/G7 to Libre (and •Ketones