Despite technology that has revolutionized how hospitals treat chronic skin lesions, Barron's says Kinetic Concepts' (NYSE: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 (NYSE: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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