Anyone not in the habit of following penny stocks would normally be forgiven for failing to notice that Decision Diagnostics (DECN) spiked this month, more than quadrupling its value since the end of August. With a market cap only recently clearing $17 million, it’s a pretty tiny company. One of the sort of microcaps that are prone to wild fluctuations in value that keep all but those investors with the steeliest of nerves from delving into penny stocks.
However, Decision Diagnostics has an angle to its story that makes it far more intriguing than a typical microcap pop. Decision Diagnostics has been engaged in a protracted legal battle with Johnson & Johnson (JNJ) over the former’s GenStrip and whether it violated the latter’s patents. Yes, that Johnson & Johnson. As in the company with the 7th highest market cap on the planet, Johnson & Johnson. As in a company that’s 14,000 times more valuable than Decision Diagnostics, Johnson & Johnson. This is the sort of story we hear all the time. Johnson & Johnson quickly crushes the smaller competitor challenging their profitability, like one might swat a mosquito flitting around one’s ear.
Only this time, Decision Diagnostics has bucked the trend. On September 12th, the company’s stock soared when a four-person panel of US Patent and Trademark Office judges stated their belief that Decision was likely going to win their battle with Johnson & Johnson.
Diabetes diagnostics a multi-billion dollar industry
Diabetes diagnostics is a rapidly growing market, with the nearly 26 million Americans suffering from the disease (some 8.3 percent of the population) the third largest population in the world but still dwarfed by the 90 Chinese and 61 million Indians who are diabetic. Worldwide, the World Health Organization estimates that some 350 million people have diabetes. This translates to an estimates $51 billion market for diabetes diagnostics by 2015.
In this atmosphere, Johnson & Johnson subsidiary LifeScan could be seen as an important piece of Johnson & Johnson's very large pie. LifeScan Ultra devices are a one-touch glucose monitoring device for diabetics that allows them a fast, simple way to test blood sugar levels. One needs only prick their finger, palm, or forearm and apply the small blood droplet to a test strip to get a reading in just five seconds.
Decision Diagnostics’ GenStrips are an alternative to the strips produced by LifeScan. Produced and marketed by Decision Diagnostics subsidiary PharmaTech and distributed by another subsidiary, Shasta Technologies, they’re available at half the cost of LifeScan’s testing strips. Which is precisely why Johnson & Johnson filed suit against Decision late in 2011 and successfully secured an injunction preventing Decision from selling GenStrips. The results were devastating, leaving the tiny Decision Diagnostics in dire financial straits while they fought a pitched legal battle with a much larger, much better-funded adversary.
Penny stock David takes on megacap Goliath
Normally, a generic product challenging the market share of a similar product from a company as big as Johnson & Johnson would have the lifespan of a mayfly, but 2013 has brought several developments that are changing the narrative.
First, Decision Diagnostics filed a counter suit against LifeScan on August 1st alleging that the company’s advertising that claimed LifeScan’s strips were superior to GenStrips was false. And the funny thing is, this appears to be true. Despite costing half as much, GenStrips demonstrated higher accuracy more consistently in FDA trials.
Then, on August 15th Decision successfully appealed the injunction against selling GenStrips, letting them begin to market them to consumers.
However, the big announcement, the one that’s prompted the recent two-week run that has shares up over 200 percent, was the one from the US Patent and Trademark Office on September 12th. The Judges told Decision Diagnostics that "upon consideration of the petition and patent owner preliminary response, we conclude that Pharmatech (a unit of Decision) has established a reasonable likelihood that it would prevail with respect to claims."
The future hinges on one big decision
If the judges from the US Patent and Trademark Office are right in their predictions about the case, it could mean that Decision’s stock is on the verge of more than doubling again as it would see a rapid return of valuable revenue streams. That said, while it might be tempting to assume the pending court verdict is a done deal, one should remember that it’s not. If the final judgment is in favor of Johnson & Johnson it would be a disaster for Decision Diagnostics. Either way, Decision’s efforts to fight Johnson & Johnson paint the sort of picture of the underdog fighting a corporate giant that’s easy to romanticize.
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