HDI Reports – A Mixed Bag

HDI Reports – A Mixed Bag

In many respects the results announced this morning by Home Diagnostics (NASDAQ:HDIX) reflect the changing dynamics in the overall blood glucose monitoring market. With pricing pressure intensifying and the current economic slowdown the value proposition is becoming just as important as advanced technology. Managed care, pharmacy benefit providers and retailers are focusing less on technology and more on cost. The reality is when these companies look at the various product offerings they see products that are basically the same. They further understand that for the majority of patients advanced features mean very little and what patients really want is a monitor that is easy to use. In sum, the BGM market has fully transformed from a medical device market model to consumer product market model.

For HDI these changing market dynamics help the score two impressive new customer wins, Medco (NYSE:MHS) and Wal Mart (NYSE:WMT).  This places the company with the world’s largest retailer and largest pharmacy benefit manager. The Medco is deal is particularly intriguing as HDI will now become the company’s private label no-coding meter for the Liberty Medical unit, the leader in mail-order. With over 4 million patients the deal with Medco could provide HDI with the volume needed to help control production costs.

The two deals could also signal trouble for two of HDI’s competitors, privately held AgaMatrix and Abbott (NYSE:ABT). Currently AgaMatrix provides the private label monitor for Medco’s Liberty unit, while Abbott provides Wal Mart with their private label product. Both Medco and Wal Mart know they are sitting in the catbirds seat with their huge customer base, a patient base that is critical when overall market growth continues to slow. Wal Mart and Medco know that they control their customer and that the only thing that really matters is price. Using this leverage they can basically force their vendors to lower their price or take their business elsewhere. It’s not as if they don’t have companies eager to get their shot at this huge customer base.

Even with these impressive wins the company’s results reflect just how difficult it is to grow revenues in this environment as the company issued lower guidance for the fourth quarter. As HDI begins to play on the Big Boys turf they must compete not just on pricing but product promotion as well.  Free monitors, discounts and promotions all eat into margins. What HDI is hoping for is that these high customer acquisition costs will be offset over the long term as these new customers continue to use the company’s products. The same thing both AgaMatrix and Abbott hoped for when they signed their respective deals. The question for HDI is can they continue to satisfy their new customers demands for ever greater price concessions or will they be subject to same fate as AgaMatrix and Abbott.

In another sign that HDI is looking for further inroads against the Big Four came from their announcement that the company has initiated a search for a new President and Chief Executive Officer. According to George Holley, Chairman of the Board for Home Diagnostics, the search committee will look for an executive with a sales and marketing background. Going forward the company correctly understands that importance sales and marketing will play if they are to compete with the Big Four. The bottom line is when it comes to BGM, technology is no longer the driving force to gain market share.

As Diabetic Investor has made clear the key to the BGM market is having a well thought out strategy and the resources, both human and financial, to execute that strategy. Based on what the company outlined today it’s clear they are developing a solid strategy, the key now is execution.