This possibly may be a David and Goliath story in the making.
The goliath is Johnson & Johnson (JNJ), one of the most diversified global healthcare companies and leader in pharmaceuticals, medical devices, and personal-care consumer products.
The “David” is tiny Decision Diagnostics (DECN), whose subsidiary, Pharma Tech Solutions, has a product that may potentially disrupt J&J’s near-dominance in glucose monitoring in diabetics, a huge and growing market.
The product, called Genstrip, was approved by the Food and Drug Administration on Nov. 30, 2012; it’s an alternative after-market diagnostic that’s substantially equivalent to one of J&J’s lucrative products in its medical device and diagnostic unit – a glucose monitoring system meter and diagnostic, called LifeScan Ultra, of which J&J has sold nearly $5 billion worldwide in almost a decade in the growing glucose monitoring market.
Genstrip is already in the market and initial sales are reported to be brisk. If the product proves to be effective and successful, one of the large pharmaceutical companies may license the product, which would then be more broadly distributed.
With J&J’s more than 20 operating units making and marketing its therapeutic products worldwide, the company has been able to establish its leadership in every segment of the markets it’s involved with. The area J&J is best known for – its pharmaceuticals, including products for the treatment of cardiovascular, oncology and immunology as well contraceptives – accounts for some 37% of total revenues. But J&J’s largest unit is its medical device and diagnostic operations, generating about 40% of the company’s total sales.
One of this unit’s most important products is LifeScan Ultra, which is used for monitoring devices. LifeScan Ultra, which has been on the market for approximately a decade, has become a ubiquitous brand. A big part of sales consists of the test strips, a single-use diagnostic that are used in the UltraScan meters at two to eight times a day, retails in the U.S. for about $1.25 per strip.
Right now, J&J is a price and market leader in the single-use strips. These strips are necessary for diabetics to monitor their glucose levels. These strips are necessary for diabetics to monitor their glucose levels and until recently, each manufacturer of glucose monitoring systems claimed a "strip monopoly" for their own systems. J&J has filed a patent-infringement suit against Decision Diagnostics but the FDA hasn't issued a restraining order to stop it from selling its Genstrip strips.
The business of glucose monitoring is growing at a fast rate of 25% annually, and experts estimate that by 2017, the market will exceed $30 billion worldwide. Some of the companies that compete in these segment of health care incolde Bayer AG (BAYRY), Roche Holdings (RAHBY), and Abbott Laboratories (ABT).
Some 13 million diabetics and pre-diabetics worldwide do some kind of self-testing to determine their glucose levels, and about 6.2 million people around the world use or have used J&J’s LifeScan Ultra meters which have been the most popular among diabetics since 2004, according to analysts. Of those who tested their own glucose at home on a daily basis, about three to four million used J&J’s Ultra meters.
"Currently there are no alternative testing strips available for diabetics who use J&J’s LifeScan Ultra meters or any major glucose monitoring system platform for that matter,” says Keith Berman, CEO of Decision Diagnostics (DECN), when asked about J&J's lawsuit. Decision Diagnostics distribute at-home diagnostics and testing products for the chronically ill. Berman says J&J has "ignored the market's message" and has "employed a fleet of lawyers to bring suits against Decision Diagnostics."
Genstrip, Decision Diagnostics’ primary product, can potentially take a significant bite into J&J’s glucose monitoring business. Right now, J&J sells each year about 4 billion worth of the LifeScan Ultra metes and test strips, s Genstrip would e a big win for tiny Decision Diagnostics even if they just capture a small share of the market.
The significant attraction to companies producing glucose monitoring devices is that the business model is a classic razor-and-blade concept as an overwhelming portion of sales by these companies consists of the recurring test strips. Often companies give away the razor (the meter) for the recurring blade (strip) business.
Decision Diagnostics could eventually gain a foothold in the high-margin market controlled by J&J and three other pharmaceutical giants. With Genstrip‘s approval, the product may attract other Big Pharma companies to either license it it or acquire all of Decision Diagnostics.
Decision Diagnostic’s stock, currently over the counter at just 16 cents a share, will surely bump up and boost the company’s market cap as it starts to see a large increase in revenues due to Genstrip.
