Interview with Medical Nutrition USA CEO Frank Newman

| About: Medical Nutrition (MDNU)

The Wall Street Transcript recently interviewed Frank E. Newman, Chairman and CEO of Medical Nutrition USA (MDNU). Key excerpts follow:

TWST: May we start with a short overview of your company and your products?

Mr. Newman: Medical Nutrition USA is a rapidly growing nutritional company focused primarily on the nursing home and dialysis markets. We use proprietary technology to develop unique and highly effective, concentrated, liquid, shelf-stable nutrition-medicines that are superior to currently available alternatives. Most alternatives are powder-based formulations requiring mixing and dissolving before use. Our products are shelf-stable, concentrated, ready-to-use liquids and have changed the marketplace significantly because they are much easier to consume and require much smaller servings to deliver superior benefits.

For example, one of our principal products, Pro-Stat, a hydrolyzed liquid protein, delivers 15 grams of protein in one liquid ounce. A similar amount of conventional powder protein would need to be mixed with approximately 24 ounces of water. Not only does Pro-Stat deliver more protein in one ounce than 24 ounces of reconstituted powder, but Pro-Stat is also hydrolyzed, or pre-digested, resulting in more rapid absorption and onset of action. These differences result in huge benefits for the frail and elderly nursing home population — many of whom don't have great appetites and don't have healthy metabolisms. Pro-Stat provides the supplementation they need in a form that they can easily consume, and it goes to work rapidly. This has proven to be a significant advantage.

We reach our markets through a force of field-based area managers who call on individual nursing homes on our behalf. Almost all of our business is channeled through distributors that service the institutional market such as McKesson, MedLine and AmerisourceBergen. Our principal outreach to end-users is in the form of advertising as well as continuing education programs and clinical advisory support.

TWST: What does the competition landscape look like?

Mr. Newman: We compete with some very large companies: Novartis; Ross Products, a division of Abbott Labs; and Hormel Health Labs among them. These are the 600-pound gorillas in this market. That said, we have been successful by innovating and taking advantage of current science to provide more effective solutions than those already on the market. In fact, all our growth has come at the expense of one or more of those large competitors.

TWST: What are your priorities for the next 12 to 24 months?

Mr. Newman: In the first half of this year we increased the size of our sales force by 45% and priced our products more aggressively in order to increase the rate at which we are penetrating the institutional market. We are very pleased with the quality of the people we've been able to attract and expect to see results toward the end of this year and more fully next year. We also will begin distribution in Canada next year. The third leg of the growth strategy is to expand into the retail market.

TWST: What could derail the plans? What are some of the hurdles to success?

Mr. Newman: In the institutional market, the principal barrier to entry has been to demonstrate efficacy, through clinical trials and positive outcomes in clinical use. We've been successful in doing that. In fact, we have a new clinical trial to be released next year that compares the efficacy of our protein to whey protein. Whey protein has been the standard for years and this trial's results demonstrate the superiority of our formulation. We think that will resonate strongly with the market we serve.

Results of clinical trials performed previously on Pro-Stat have shown a 96% greater healing rate in pressure ulcers using our product compared to standard care. Again, this had a very positive effect on the recognition our Pro-Stat products receive in the market and on their sales. We will continue to publish results of additional trials and expect to see similar benefits.

TWST: How does the balance sheet look to you? Do you expect any major changes in the very near term?

Mr. Newman: I see no major changes. We have a very clean balance sheet. We have no debt and about $10 million in cash. We have been cash flow positive for a number of years, and we foresee no material changes in that. There is always the possibility of an acquisition — something truly synergistic that would leverage the sales force by adding complementary products. That might entice us to use some of our cash and we remain vigilant for that kind of opportunity. Absent that, I suspect the balance sheet will continue to look as it does now in terms of strength.

TWST: When reviewing your results, what should investors focus on?

Mr. Newman: I think we are primarily a growth story. Look at the steps we've taken to accelerate our market share penetration on the institutional side. Add to that our plans to penetrate the retail market, all of which we expect will drive significant top-line growth. At this stage in our development, growing the revenue line is most important to us. We are adequately profitable and, clearly, if we retarded our sales growth strategy, we could probably be more profitable. But we think at this point it is more important to secure market position. Profits will flow from that.