Kinetic Concepts Likely to Lose Its Patents, and Its Value - Barron's

Despite technology that has revolutionized how hospitals treat chronic skin lesions, Barron's says Kinetic Concepts' (KCI) shares are dead money due to the likelihood of its inability to enforce its patents.

KCI produced $1.4 billion in revenue last year largely on the heels of its negative-pressure VACs that suction wounds, preventing bacteria from gathering, reducing swelling and promoting cell growth. Negative-pressure treatments are already used on 1/3 of chronic wounds in the U.S. and about 20% worldwide. KCI bills Medicare $1,700/month for each VAC system. With gross margins at near 50%, KCI's projected 2008 EPS of $3.30 means its shares trade at just 15x earnings, vs. 20x for similar companies, as investors fret the sustainability of its business.

Last year a federal judge ruled two rivals didn't infringe on its patents, subsequent to which British med-supply giant Smith & Nephew (SNN) bought one of them; it plans a Jan. 2008 launch of a VAC competitor. Another rival has produced a similar, cheaper product. It contends KCI's patents aren't valid due to pre-existing public-domain research, information which a previous head of KCI research has told courts the company was aware of. The U.S. Patent and Trademark Office has opened a re-examination into whether the Wake Forest patent bought by KCI should be invalidated as 'prior art.'

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