HDI Files S-1 – Once Again DI had it first

HDI Files S-1 – Once Again DI had it first

“A more important event in the BGM market is the news that Home Diagnostics, Inc. will be going public. Diabetic Investor has learned that the company will file an S-1 in the next few weeks. Although there is still the possibility that the company could be acquired prior to going public, it’s likely the company will follow the playbook written by Inverness Medical and copied by Therasense. Go public, become a nuisance to the bigger players in the field and then get acquired.” – March 14th, 2006 Diabetic Investor Email Alert

Once again Diabetic Investor is on target.

Although we have not read the S-1 in great detail a couple items did catch our attention, in particular the section that outlined some problems with the company’s internal accounting systems. According to the S-1, “In connection with the filing of this registration statement, we performed a review of our accounting policies and practices and identified certain errors in the application of generally accepted accounting principles. These errors related to the accounting for a warrant put option, revenue recognition in relation to accounting for sales returns and the timing of the recognition of sales and certain other matters. These errors resulted in the restatement of our previously issued financial statements.” While the company identifies several specific steps they are taking to correct their accounting problems, they also acknowledge so far there are no written procedures in place.

We were also surprised by the company’s rapid sales increase over the past two years, especially when compared to the early years of this decade. This is stark contrast to the major players in the category who have seen low double digit or high single digit increases. The company attributes this growth to the introduction of their TrueTrack system back in 2003. This may explain part of the increase however, Diabetic Investor believes that more aggressive pricing and favorable terms played a large role in the increase. It is not unusual for a company that’s preparing to go public to do whatever they can to enhance their numbers.

The bottom line for HDI’s future success remains the same as it was before this announcement, will payors embrace their low-cost co-branded strategy? Even after the offering the company will lack the resources to compete with the big four- LifeScan, Roche, Abbott and Bayer. In addition they will also have to compete with newcomer AgaMatrix, whose deal with Liberty Medical has already begun pay big dividends. AgaMatrix has several exciting products in their pipeline plus a low cost manufacturing and distribution model. Both HDI and AgaMatrix are pursuing managed care providers with a lower cost alternative to the big four.

Diabetic Investor will have a more detailed report after we have thoroughly reviewed the S-1. One thing is for certain the BGM market is getting more interesting by the day.

David Kliff
Diabetic Investor
847-634-4646 fax
224-715-3761 mobile