This is why I invest my time/money with this company. Thank you Leirum for your posts and insight!
inShare0Icon_alert_keyOn October 1, 2013 Decision Diagnostics Corporation (OTCBB: DECN) announced in a press release that they have scheduled bulk shipments of their first proprietary product, the Shasta GenStrip™ glucose test strip that is compatible with Johnson & Johnson’s Lifescan Ultra glucose monitoring devices.
Decision Diagnostics has primarily been a prescription and non-prescription diagnostics and home testing products distributor up until now. The company primarily sold distributed brand name lines of diabetic, wound care and post surgical medical products. Now with the launch of their first proprietary product, Decision Diagnostics is positioned to significantly grow their revenues and earnings over the next few years.
Decision Diagnostics’ revenues from its distribution business peaked in 2010 with $18.9 million and has fallen each year since, booking $12.1 million in 2011 and $6.1 million in 2012. The distribution business continually suffered from squeezed margins by competitive pricing and it became increasing difficult for Decision Diagnostics to be profitable in the distribution business. Management decided over the last few years to cut unprofitable and low margin lines from their business reducing the overall revenues of the company, while not impacting the bottom line substantially. For the management team the distribution business was a means to an end. Decision’s management used the distribution business to offset the development costs of their proprietary products. Management focused product development along two fronts, home diagnostic products and information technology (IT).
Decision Diagnostics’ IT product is centered around smart phone technology to provide physicians with up to date point of care, patient information. The company is prosecuting a patent covering 104 processes and methods. Decision Diagnostics completed development of this product set, and it intends to proactively protect its intellectual property in this market. The Remote Medical IT market was expected to be able to reduce overall health cost and improve patient care, but the rollout has been delayed due to lack of guidance in regards to this technology in the Affordable Care Act. This technology is now just beginning to emerge in as a cost saving tool for private insurers
The Shasta Genstrip is Decision Diagnostics’ first proprietary product to go to market. The Genstrip is a blood glucose monitoring test strip for in-home use, which can be used with existing Lifescan Ultra meters from Johnson & Johnson. Decision Diagnostics management has stated that they expect the price of the GenStrip products to be nearly half of the name brand competitors with similar performance. In April 2013, Decision Diagnostics announced a second version of GenStrip primarily for the Medicare market. This product will help serve the Medicare market that changed substantially when Medicare implemented rules from the Affordable Care Act, effectively lowering payment rates for diabetic related products by almost 70%, which in turn shifted the mature mail order pharmacy niche toward traditional walk-in pharmacies who can now compete for the Medicare business. This Medicare change has thrown many distributors into turmoil as this payment change cuts into distributors’ margins. The unintended consequences of these Medicare cuts have decimated many in the mail order pharmacies who no longer have a viable business model. Decision Diagnostics management believes the dual market focus of the easy to produce and lesser expensive GenStrip will alleviate much of the margin pressure on distributors and increase demand for the product line.
Decision Diagnostics filed the SE 510-K application in December of 2010. The U.S. FDA approved the 510-K for Genstrip and finally cleared Genstrip for marketing in the U. S. on November 30, 2012. Decision Diagnostics had nearly 2 years of market study and planning for the product while awaiting clearance. In an interview from November 28, 2012, the company’s CEO, Keith Berman said, “We used this time to familiarize the market with the upcoming product through the company’s normal and historical distribution channels. We secured a supplier contract with Wal-Mart Stores in an incredible 35 days.” During this time it became clear to the company that initial interest in Genstrip was greater than the manufacturing capacity and management decided to stop taking early pre-orders for the product until the manufacturing capacity issue was resolved. The rollout has been further complicated by several legal actions brought by Johnson & Johnson.
There currently are several lawsuits and counter suits going on between Johnson & Johnson and Decision Diagnostics regarding Genstrip. Decision Diagnostics’ FORM 10-Q dated June 30, 2013 has the following summary of the legal issues:
The closing of the processes with the FDA, Genstrip’s FDA clearance, and its initial sales drew the attention of the platform manufacturer, the Johnson and Johnson, Inc. (“J&J”). In September 2011, J&J through its Lifescan Scotland Ltd. Subsidiary and later its Lifescan, Inc. subsidiary, brought suit against the company and others for patent infringement causes of action related to the clearance and launch of Genstrip. In December 2012, ten days after the company received notice of the FDA clearance, J&J and its Lifescan, Inc. subsidiary brought suit against the company and others for issues of trademark infringement and trade dress. Both of these suits, have complicated the company’s ability to launch Genstrip into the large and growing diabetic market, and to brand the product. At various times the company has been temporarily enjoined from selling the Genstrip product, or manufacturing the Genstrip product.
At various times J&J through its Lifescan subsidiary have contacted the company’s customers using information gained from the litigation (and thought to be under seal) and the customers of our customers through the mails using long threatening letters to impede Genstrip sales. All Genstrip distribution activities have been affected at various times.
In May 2013 the United States Circuit Court restored the company’s ability to sell Genstrip. In July 2013 the U.S. District Court agreed to hear a contempt charge against J&J’s Lifescan subsidiary for the threatening letter writing activities using (supposed) customer lists though to be under seal.
In April 2013, as a part of its defense in the September 2011 suit, the company filed with the USPTO the Institution of Inter Partes Review under 37 C.F.R. § 42.108, requesting that the USPTO review the claims in J&J’s Patent 7,250,105, the Patent that is J&J’s foundation in the September 2011 suit. On August 15, 2013 the company received notice from the U.S. Patent and Trademark Office (“USPTO”) that a four judge panel determined, in Case IPR2013-00247, (J&J) Patent 7,250,105, that “…(the company’s subsidiary) Pharmatech has demonstrated that there is a reasonable likelihood of its proving unpatentability of claims 1-3 of the [7,250,]105 patent by a preponderance of the evidence.” The J&J Patent 7,250,105 is the primary patent being litigated in the September 2011 suit..
With the legal issues now moving ahead it may take a few years before everything is resolved. However, recent court rulings have gone in the direction of Decision Diagnostics. Forbes put out an article on September 11, 2013 titled “J&J Seeks Court Aid To Protect Its Glucose Monitoring Test” that discusses these legal issues. The conclusion of the article is interesting in that the author of the article suggests, “An easy solution on this issue would be for J&J to resort to its active M&A strategy. With Decision’s low market capitalization, it wouldn’t be improbable to expect that J&J may just opt to gobble up Decision Diagnostics to add to its growing list of acquisitions.” Should something of this nature occur, Johnson and Johnson would alleviate the legal costs and have a new cost effective product line for the Medicare sector in Genstrip
There are still risks ahead for Decision Diagnostics. The most obvious risk is the company could loose their legal challenges with J&J, and be enjoined for selling GenStrip, although recent rulings in Decision’s favor gives the appearance that this prospect is abating. Also, Decision Diagnostics is a small company without much cash on the balance sheet. The company has been in negotiations for a commercial line of credit for the funding of Genstrip sales and for the increased manufacturing of GenStrip, but no final announcement with financing details has been released. Management mentioned this line of credit in an October 3rd press release indicating that the closing may be imminent. The credit line will allow Decision Diagnostics to address their weak balance sheet and to fulfill existing and future orders. Another risk is being a small company, Decision Diagnostics will have to have the ability to grow the company if demand for their products is as strong as management believes, but this ultimately is a good problem to have.
GenStrip could change the landscape of the glucose monitoring market, especially in the Medicare market, with its favorable price points. Decision Diagnostics has been long waiting to ship orders for large box quantities of GenStrip to their distributors, and now it looks like their patience is being rewarded. The global market for diabetic diagnostic products was estimated to be $11.3 billion in 2010 and experts believe the market will grow to $32 billion by 2017. Just a 1% sliver of this market in 2017 will be worth $320 million in revenues to a company with products capable of market penetration. Decision Diagnostics’ management feels that even with small market penetration of their lower priced Genstrip, they will positively impact many diabetics’ lives that struggle financially. With legal issues moving forward, manufacturing expanded, and Medicare pay issues providing further product demand, Decision Diagnostics, after a long process, has reached the point shipping product and reaping their rewards.
