D. Medical taps ROW for growth; visibility with NASDAQ listing

As Canadian companies are increasingly looking south to raise the capital they need to fund their growth, biotuesdays.com decided to take a close look at one of the most recent foreign healthcare company IPO’s on NASDAQ.  D. Medical Industries (NASDAQ: DMED; TASE: DMDC) completed its U.S. IPO in early August.  This has given the medical devices company greater visibility beyond its Israeli roots even as it continues to strategically target sales of its insulin pumps in the developing world rather than the developed world.

“The market for insulin pumps in the developed world is large and well-served,” CEO Efri Argaman says in an exclusive interview with biotuesdays.com, pointing to the Big Four in the U.S. and EU: Medtronic (NYSE: MDT), J&J’s (NYSE:JNJ) Animas, Roche (NASDAQ:RHHBY) Diagnostics and relative newcomer Insulet (NASDAQ:PODD).

“On the other hand, the developing world is largely underserved” and markets outside of the U.S. are “ripe for penetration,” he adds.  “The common thread in everything we do is our goal of developing superior performance delivery solutions to the huge mass of people who need it at an affordable price.”

Among other things, 70% of the current cases of diabetes occur in low- and middle-income countries, and the economic burden in these countries is high.  The International Diabetes Federation figures worldwide incidence of the disease will climb 54% by 2030, with the biggest increases occurring in countries outside of North America and Europe.

In terms of market potential, for example, Mr. Argaman says “India has a Germany inside it.”  There are about 50 million diabetics in India, of which 10% are insulin-dependent Type 1 patients, he explains.  Of those five million people, about 10% are in the middle-class and can afford insuling pump therapy.  “Potentially, you have 500,000 paying patients, which is the same size as the potential market in Germany.”

D. Medical’s claim to fame is a mechanical, spring-based proprietary delivery technology to move insulin into patients instead of the industry standard motor-and-gear train.  That gives the company a significant cost-of-goods advantage that it plans to utilize in emerging markets.  The spring mechanism also makes its first generation Adi insulin pump the smallest and lightest on the market, providing maximum discreetness for patients.

The pump generates the drive energy required to deliver insulin by loading the reservoir cartridge, which results in compression of the spring.  The insulin pump is controlled by a pressure-sensing technology, which monitors the pressure both inside the reservoir cartridge and in the infusion line.  A micro controller-triggered mechanism then calculates, delivers and controls accurate dosages of insulin through a series of valves and sensors.  In addition to a one-piece cartridge and tubing assembly, which prevents leakage, all of Adi’s moving parts are in a disposable unit, which is replaced every three days.

Insulin pumps are attached to a patient’s body at all times and mimic the biological function of the pancreas by providing a constant drip of insulin.  By comparison, diabetics require six to 12 insulin injections daily.  Pumps also allow patients to perform their day-to-day activities with limited interruptions and, clinically, help diabetics achieve better glucose control with less insulin.  And better glucose control reduces the risk of cardiovascular, kidney, nerve and eye disease.

D. Medical began sales and marketing of the Adi pump, which has received both European CE Mark and FDA clearance, in late 2009 through distributors in select markets in Europe.  It also began sales of its universal Infusion set, which features a unique detachment detection mechanism, in the fourth quarter of 2009 through its distributors in Europe.

In addition to the Adi pump and infusion sets, D. Medical has begun the process to ready a small, thin insulin pump for commercial sales in Europe by the end of the first half of 2011.  The new pump, which can be worn as a patch, has European CE Mark approval. Also, in earlier stages of development, is an insulin pump combined with a continuous glucose monitor on the same patch.

Last week, D. Medical hit an important 2010 milestone by teaming up with Illinois-based United Plastics Group to manufacture its line of insulin pumps and universal infusion sets in China in a move the company believes will reduce per unit production costs and substantially boost production volumes.  “We are already starting to harvest the fruits of our IPO in the U.S.,” which raised $10.5 million (U.S.), Mr. Argaman says.

Lower production costs, he argues, will provide governments and third-party payors, especially in Mexico and the BRIC countries of Brazil, Russia, India and China, its five rollout targets in the developing world, with cost-effective insulin pump therapy.  Citing its 2011 patch pump, for example, he pegs D. Medical’s estimated cost-of- goods at $6 per unit, which would fall to $4 with economies of scale, several times lower than the cost-of -goods for a competing patch pump.

D. Medical already has distribution agreements in place in China and Mexico, and is identifying partners and negotiating distribution agreements in Brazil, Russia and India.

Mr. Argaman says the company believes it can successfully penetrate the U.S. market in 2011 with its universal infusion sets, pending FDA approval, and with a strategic partner, because they are the only ones that have a detachment detection mechanism, they will be priced similar to existing products and are compatible with competing insulin pumps.

For the time being, though, D. Medical isn’t planning to take on the Big Four with its insulin pumps in the U.S. For one thing, the competition has hundreds of sales reps already on the gorund selling the Medtronic, Roche, Animas and Insulet devices.   And secondly, under U.S. reimbursement, third-party payors typically pick up 80% of the $4,000 to $6,000 cost of an insulin pump every four years.  So, there is little incentive for a patient to choose a lower priced pump, largely negating D. Medical’s price advantage.

All of which explains the company’s strategy of targeting the emerging world where the competition can’t follow it because of higher production costs, stemming from their motor-and-gear train systems.

“For a small company like us to grow into a saturated market, where price advantage is not a factor yet, it doesn’t make any sense,” Mr. Agaman points out.  “We have some thoughts about whom we should partner with and when we should do it, but as a matter of strategy about how we approach the U.S., it would not be our first priority.”

Still, he notes that multinationals in the insulin market, including insulin manufacturers, are beginning to gravitate to pumps from injector pens and says “I think we have a very intriguing offering for these players.”