Home Diagnostics (NASDAQ:HDIX) third
quarter results can best be described by stating what one hand gives the other
takes away. Strong growth in international, retail and mail order channel sales
were offset by weak distribution channel sales, added all together and the
company experienced a 3% decrease when compared to last year’s results. Not too
bad when you look at the performance of the major players in the industry.
Based on the comments made by the company
it’s obvious they understand where the market is going and how the changing
dynamics of the market are actually benefiting their value proposition. They
see that the key to continued growth is to more deeply penetrate patients on
insulin therapy. Following on this strategy the company also understand that
while they offer a lower cost option than their branded competitors the quality
of their product must be perceived as equal to their branded competitors.
Many years ago Diabetic Investor predicted that
as the BGM market moved more towards a commodity market model it would only be
a matter of time before price would be the over-riding factor when it came to product
selection. We reasoned that just as other markets that have made this
transition where non-branded products we’re originally perceived as cheap
knock-offs of the branded option gained greater acceptance as consumer not only
recognized that product quality was equal to the name brand products in terms
of quality but cost less too. This is exactly what’s happening in the BGM
The fact is HDI stands a good chance to
gain ground on the weaker of the major players as in some cases they actually
have a better product option than the branded companies. The company has the
additional advantage where their retail and mail order partners are now more
actively promoting their store branded products provided by HDI. Realizing they
cannot effectively compete with the big boys in the managed care arena, the
company is doing a nice good of chipping away and gaining market share.
Not long ago Diabetic Investor mentioned how
the dynamics of the market have shifted to such a point where distributors,
retailers and mail order houses actually were in control of the market. Clear
evidence came when Abbott basically capitulated to Cardinal’s demand for lower
prices rather than risk losing even greater share. Once insurance companies wise
up and realize that there is a lower cost, high quality product option available
the real fun will begin.
Diabetic Investor can see the day coming in
the not too distant future where insurance companies will follow what Walgreens
(NYSE:WAG) is doing in their reformatted stores. While the retailer continues
to provide all the major brands as well as their own brand (made by HDI) they
are only featuring one name brand and their own store brand. This is not unlike
the strategy that has been effectively employed by Wal Mart (NYSE:WMT) who’s
notorious for placing their store branded option right next to the name brand
at much lower cost than the name brand.
With their bloated infrastructure costs,
even after all the recent cutbacks, the major brands are facing a very serious
problem. Should insurers begin following Walgreens and Wal Mart example they
could easily demand even greater price concessions by moving towards a
brand/co-branded model. This is the reason market leader LifeScan, a unit of
Johnson and Johnson (NYSE:JNJ), has made monitor accuracy the cornerstone of
their new marketing efforts. The company
believes that they can differentiate themselves from the other branded
offerings and secure their place as the branded option reimbursed by insurers.
The fact is insurers could do exactly what
Liberty Medical, a unit of Medco (NYSE:MHS), has been doing for years. Using
their huge patient base and customer control as a club they would beat up the
majors on price. The majors knew that if they didn’t meet Liberty’s price
demands the company would just switch the patient to the Liberty branded product.
Simply put Liberty knew they were controlling the consumer and the majors
couldn’t afford to lose the market share.
Diabetic Investor has never understood why
insurers haven’t been more aggressive in the past however with healthcare
reform on its way the tide is about to turn. Think of what this means to
companies like Roche, Bayer and Abbott (NYSE:ABT) who see LifeScan firmly in
the number one spot and realizing that companies like HDI are poised to become
the value option offered by insurers. What choice do they have when insurers come
to them and basically say either you meet our price demands or we’ll replace
you with an HDI product.
The reality of the situation is that HDI is
actually in a better position than Roche, Bayer and Abbott as those companies
are currently structured. This is also the reason why Diabetic Investor
believes it’s not a matter of if further industry consolidation lies ahead but
when and who. It wouldn’t surprise Diabetic Investor at all if one of these
companies recognized that their very survival depended on having a value option
and actually acquired HDI.
The bottom line here is the last nail in
the coffin for the major brands will come as insurers jump on the value option
bandwagon. While slow to come to the table the hammer here is likely to be
healthcare reform. The reality is market
dynamics while negative for the major brands are strongly in HDI’s favor.