PolyMedica (NASDAQ:PLMD) is a company that has undergone several changes since Diabetic Investor began covering the company over eight years ago. Based on today’s conference call it appears the company may be entering the final phase of change from an independently owned company to becoming part of a larger company. The company announced today they have entered into a pharmacy fulfillment agreement with Medco Health Solutions (NYSE:MHS). Given the amount of questions on this agreement during the question and answer portion of today’s call Diabetic Investor is not alone in our thought process.
For some time Diabetic Investor has stated that PolyMedica could only go so far in its present form and with their expertise in the diabetes sector would make an attractive target for a pharmacy benefit manager or retailer looking to expand their presence in the growing diabetes market. When CVS (NYSE:CVS) announced they were acquiring Caremark (NYSE:CMX) for $21.2 billion, we stated that this could push other PBM’s into action as they try and compete with the new CVS/Caremark combination.
Lost in the all talk over the Medco agreement was the fact that the company is struggling at the moment. While the company continues to add new customers and has completed six acquisitions during their second quarter the move into the Medicare Prescription Drug Program (Part D) has been more difficult than anticipated. Diabetic Investor was also surprised by the company’s announcement they planned on re-entering the insulin and insulin pump market. The insulin pump market in particular poses some potentially costly obstacles and overall isn’t largest enough or growing fast enough to add significant revenue to PolyMedica’s bottom line.
PolyMedica’s bigger concern has to be in their core business of providing glucose testing supplies to Medicare eligible patients. This highly profitable area is coming under attack on two fronts; the prospect of the government moving towards competitive bidding and a disturbing belief over the value of regular glucose monitoring for type 2 patients on oral medications. According to the company they don’t believe competitive bidding will become a reality in the near term, stating that the earliest possible date would be the fall of 2007, if at all. Diabetic Investor does not share the company’s assessment of competitive bidding believing it’s not a question of whether competitive bidding will become a reality but when it will become a reality.
One reason we feel this way is related to the renewed debate over the value of regular glucose monitoring for type 2 patients on oral medications. As we have pointed out previously the MCAC meeting in late August was just the latest public forum where these views were expressed. A growing number of researchers and decision makers are taking the position that type 2 patients who use oral medications to control their diabetes see little benefit from regular glucose monitoring in terms of producing better overall outcomes. Or put another way regular glucose monitoring does not lead to better patient compliance and therefore the outcomes for patients that do not test regular are no different than those who test on a regular basis. Perhaps this is the reason why the company is re-entering the insulin and insulin pump markets, as insulin using patients and pump patients in particular test their glucose levels on a regular basis and account for the majority of test strips used.
No matter what the outcome of today’s election the government must still deal with the escalating cost of healthcare. The government already spends over a billion dollars each year on testing supplies and in an attempt to control costs could easily change their reimbursement policy to cover only insulin using patients. Any move towards this type of reimbursement could have devastating consequences for PolyMedica as the majority of their patients are type 2.
Diabetic Investor also found the company’s comments on their relationship with AgaMatrix very interesting. AgaMatrix is currently the lead supplier for the company’s co-branded glucose monitor. However the company indicated other glucose monitoring companies are interested in getting their share of this expanding market. When the PolyMedica/AgaMatrix deal was announced Diabetic Investor knew it was a win win situation for both companies. The deal gave AgaMatrix the capital they needed, while providing PolyMedica with a low cost monitor and test strips that allowed the company to make more money from their largest segment of revenue. The deal also helped PolyMedica in their negotiations with the major BGM companies who either lowered their costs or faced losing valuable market share. Based on the comments made today and knowledge of what’s happening in the field Diabetic Investor believes the AgaMatrix monitors are doing quite well which has forced the major BGM companies hands. With the BGM market becoming increasingly competitive and the major BGM players seeking market share wherever they can get it don’t be surprised if PolyMedica inks another deal, only this time with a major player.
Several years ago Diabetic Investor predicted that as the BGM market moved towards a consumer product commodity style market where price is the major factor that the major players with their huge and costly infrastructures would have a decision to make. Either they could lower their own cost, move into the co-branded private label area or both. As Diabetic Investor pointed out after the CVS/Caremark deal was announced this deal could accelerate this process and based on PolyMedica’s comments today it has. Don’t be surprised if Abbott (NYSE:ABT) is the company that takes the plunge. The company already provides the private label glucose monitor for Wal Mart (NYSE:WMT) and since their acquisition of Therasense has taken a growth at all cost approach to gain market share. The company has been overly aggressive with their pricing and after initially gaining share growth has stalled. Abbott could use PolyMedica’s market clout to reinvigorate their growth and has shown from past deals they are willing to sacrifice margin to do it.
There is no question that PolyMedica is sitting pretty when it comes to their co-branded/private label monitor business. Even if the government moves towards competitive bidding it is doubtful any other company would have the ability to compete with PolyMedica. Something the people at Medco are surly aware of.
When it’s all said and done it may not matter what the government does as by the time this comes to pass PolyMedica should be just a small part of a larger company.