A bright light amid the darkness

A bright light amid the darkness

One can’t help but feel just a little down these days looking at the market. After a very rough day yesterday and with a dismal jobs report this morning optimism is in short supply. That is of course, unless you’re an investor in Home Diagnostics (NASDSQ: HDIX). While the market has been sinking HDI’s stock price has been soaring over the past three months.

Entering June shares were trading just under $8 per share. Based on yesterday’s closing price of $10.76 the stock is up almost 40% and within a whisker of its 52 week high of $10.99. While there are several factors that have contributed to this recent run Diabetic Investor believes HDI’s success speaks volumes to what’s going on in the broader blood glucose monitoring market.

Being a value player HDI cannot compete with the Big Four- LifeScan- Roche – Bayer and Abbott (NYSE:ABT) in the formulary world. Nor can they spend millions on television advertising or co-op dollars. Concentrating on co-branding their products for companies like Walgreens (NYSE:WAG) CVS/Caremark (NYSE:CVS) and Rite-Aid (NYSE:RAD) the company needs their partners to actively promote their store brands.

With co-payments rising for branded products and $4 per gallon gas prices it appears HDI is the beneficiary of tough economic times. This also confirms something Diabetic Investor has been saying, life for the Big Four will only get more difficult as margins are being squeezed. While some would argue that the HDI selection of monitors is not as broad as the Big Four or that there products are somehow inferior to the branded products, the reality is the consumer who uses their products doesn’t care.

In the real world the majority of patients could care less about fancy features, what they crave is simplicity. This is major reason why Bayer has been so successful promoting their no-coding monitors. As Diabetic Investor has pointed out no-coding is becoming standard throughout the industry and soon coding will be a thing of the past.

In the real world patients don’t care about glucose trends or the fact that they can download their readings to a computer. What patients want is a monitor that is simple to use and delivers an accurate reading.

For some time Diabetic Investor has stated that if there not careful the Big Four could be in serious trouble if they don’t stop this fascination with fancy features that only a handful of patients even care about. For reasons we just can’t understand the Big Four is fascinated with the Super User, that tiny percentage of the market who monitors their glucose levels regularly, tracks all their data and understands what to do with all this data.

The bottom line is the majority of patients simply want a monitor that works at the lowest cost possible. With co-payments rising beyond the retail cost of HDI test strips and retailers more actively promoting their store brands consumers are quickly awakening to the fact that they can get what they need for less money out of their pockets.

This trend places the Big Four in a very uncomfortable position as they must develop a coherent identity for their products. So far LifeScan and Bayer have been the most successful here with Roche and Abbott trailing badly. And let’s not forget about privately held AgaMatrix who is also making inroads against the Big Four. For their part AgaMatrix is a bigger threat to LifeScan as based on all available data the company’s products are acknowledged as extremely accurate and very easy to use.

In the Super User category accuracy counts as does the ability to download data, here too AgaMatrix has hit a homerun with their Zero-Click software which is by far the easiest software to use.

While Diabetic Investor does not believe any of the Big Four, other than Abbott, are in serious danger at the moment the times are changing. Now fully transformed to a consumer market where price is as important as performance players like HDI and AgaMatrix have the edge. It’s only a matter of time before insurers jump on this bandwagon, a move that would send shockwaves throughout the industry.

Imagine what it would do to the Big Four should someone like Medco (NYSE:MHS) who already has a relationship with AgaMatrix, (AgaMatrix makes the Liberty Medical monitor), decides to adopt the AgaMatrix as THE Medco monitor. Or think of what it might do should retailers begin to take away valuable shelf space from the Big Four and more actively promote their store brands to every diabetes patient who walks through their store.

Diabetic Investor actually wrote about this scenario many years ago when HDI was still a privately held company and AgaMatrix was just a dream. This change in market dynamics may not have been as rapid as we once thought. However as John Naisbatt, the author of Megatrends noted; “Change occurs when there is a confluence of both changing values and economic necessity, not before.”  That time just might be here.