This morning blood glucose monitoring company Home Diagnostics, Inc. made its debut on the NASDAQ trading under the symbol HDIX. The initial public offering was priced at $12 and the stock is currently trading slightly higher. The $12 per share initial price was lower than analysts had estimated and could be viewed as a sign of just how difficult the BGM market has become.

Diabetic Investor has received several inquires from investors curious how we see the stock trading. At one point Diabetic Investor felt that HDI had a very bright future as they were the only player in the co-branded/ private label BGM market. Although the cash paying segment of the BGM market is small, about 10% of the market, it can be highly profitable as HDI uses the retailer as their primary sales force and does not have to support a large and costly sales force. While it is possible for Walgreens or CVS to replace HDI, the task isn’t as easy as some would think. But the true value in HDI was the fact it was privately held and did not have to worry about the added scrutiny and demands of public ownership. Once able to fly below the radar HDI now must deal with regular disclosure of their performance.

Because the majority of HDI’s business is here in the United States, a market which is basically treading water growing at below 10% annually, for the company to grow it would have to steal market share from large and well funded competitors. During a recent Johnson and Johnson (NYSE:JNJ) presentation, Eric Milledge Company Group Chairman stated that JNJ’s LifeScan unit was number 1 in the US holding 36% of the market, Roche was number 2 at 26% followed by Abbott (NYSE:ABT) at 21% and Bayer (NYSE:BAY) 13%. With the US market anemic growth rate Mr. Milledge made it clear that LifeScan’s future growth lies outside the US, in particular in the developing nations around the globe. This does bode well for HDI.

Some have speculated that the IPO is merely an interim step as the company will eventually be acquired, either by an established player looking to acquire market share or by a new player looking for an entry point into the BGM market. These speculators use Therasense, now owned by Abbott, as their model. Yet there is a huge difference between Therasense and HDI, in that at the time Therasense had an innovative product and a growing following. Realizing that insulin using patients are the most frequent testers of their glucose levels, Therasense focused their efforts squarely on this market. While their technology was quickly copied the company was able to gain valuable market share making itself a valuable asset for an existing player. Additionally Therasense also had a host of projects under development, including the Navigator continuous glucose monitor that is currently awaiting FDA approval.

Unfortunately for HDI they have basically me too technology, their main advantage had been price. Back when the US market was growing at 15%+ annually, the major players paid little attention to the value segment of the market which provided HDI an opportunity to gain share. Today competition has intensified as all the major players now have a meter targeted at the value segment.

Also dampening takeover expectations is the emergence of privately AgaMatrix. AgaMatrix has teamed up with PolyMedica’s (NASDAQ:PLMD) Liberty Medical unit to provide meters and test strips under the trusted Liberty brand name. With nearly 1 million loyal customers and a well motivated sales force the AgaMatrix meter is enjoying solid sales. Armed with the capital from the PolyMedica deal it wouldn’t surprise Diabetic Investor if AgaMatrix set their sights on HDI’s core private label/ co-branded business. Like Therasense, AgaMatrix has state of the art technology combined with ultra low cost manufacturing.

Still with the epidemic growth rate of diabetes there are those who believe this $6 billion plus market is large enough to support multiple players even though the top four players control almost 90% of the market. These believers point to the fat margins in the BGM market and use Therasense as their model for an exit strategy. In a market that Diabetic Investor once called a battle between Coke and Pepsi, Therasense proved people also like 7up and Dr. Pepper. The question for HDI is; are there enough patients who like Grape Nehi and Orange Crush?

David Kliff
Diabetic Investor
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224-715-3761 mobile