PolyMedica Full Year Results and Outlook

PolyMedica Full Year Results and Outlook

PolyMedica (NASDAQ:PLMD) has undergone several interesting changes over the past few years. With their announcement of their fiscal 2007 results today and outlook for fiscal 2008 it’s clear the company is entering a new and challenging phase. Several dynamics are at work here as the market continues to evolve.

First there is the impact of competitive bidding. Diabetic Investor believes PolyMedica is well positioned for competitive bidding. The company indicated today that they planned to bid “conservatively” which is in line with our expectations. While there is a great deal of speculation on the potential impact of competitive bidding it is too early in the process to see this as negative or positive. As with most government initiatives competitive bidding is a work in progress and the dynamics here will surly change over time. Until the rules become clearer and we get taste for how companies will bid Diabetic Investor does not anticipate a material impact for the company over the near term. Our instincts are telling us that with their huge patient base, customer control, brand equity and solid focus on controlling costs in the long run competitive bidding will end up being a positive for the company.

It’s also clear as PolyMedica is set to pass the one millionth patient mark; the law of large numbers is coming into play here. Just as MiniMed was able to gather the low hanging fruit in the early days of the insulin pump market and gained an early edge on what was then smaller competitors, PolyMedica is facing a similar dynamic in the Medicare market. While they are still the market leader by an almost 3 to 1 margin in terms of patients, their competition has improved. The Medicare market at one time was a highly fragmented market and PolyMedica was the only company large enough to establish brand equity and demand pricing concessions from their vendors. With their largest competitor CCS Medical getting ready to go public we are now getting a clearer picture of how well the competition is doing.

CCS going public is also providing the Street with a comparator. PolyMedica has always done an exceptional job of giving the Street a wealth of information and today was no different. However, in the past with CCS being privately held this meant the Street had to speculate over how well the company was performing against the competition as there was no publicly traded company to compare them with. The CCS S-1 has provided some valuable information; using a roll up strategy CCS has been able to amass a patient base of 376,000. While not yet profitable the company’s revenue per patient is impressive.

With the added capital from the public offering CCS also threatens PolyMedica in another area, acquisition targets. While PolyMedica has competed 12 acquisitions over the past year, the supply of potential targets is diminishing. Byram Healthcare Centers, Inc. is the largest privately held company and by Diabetic Investor estimates occupies the number three spot behind PolyMedica and CCS. Beyond Byram however the quality of potential targets is thin at best. A potential bidding war for Byram could develop should PolyMedica or CCS make a play for the company.

As their competition intensifies the company is wisely looking outside the Medicare area for growth. Using their size the company can leverage their knowledge of the diabetes market into several new markets. One effort likely to receive strong consideration is disease management. At one time Diabetic Investor did not believe the company was ready to enter this arena as the revenue potential was unclear. With the explosive growth of the number of patients with diabetes and pre-diabetes interest in controlling the huge cost of diabetes is gaining renewed attention. With their huge patient base and strong brand identity PolyMedica is well positioned to be a major player here. As Diabetic Investor pointed out in a previous email alert no one company has yet to achieve the size, scale and reach to make patient education profitable. All that could change should PolyMedica decide to enter this area.

Looking towards the future PolyMedica faces many challenges but Diabetic Investor is confident the company is up to the challenge and will continue to prosper

David Kliff
Diabetic Investor
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