Kinetic Concepts makes products for advanced wound care and other therapeutic applications. The U.S. is its largest geographic market, responsible for 72% of sales through the first half of 2007. The company also operates in 17 international markets, including Canada, Singapore, South Africa, and most of Europe.
KCI’s therapeutic categories include advanced products for wound care and tissue repair, which accounted for 79% of first half 2007 revenues. The company’s proprietary Vacuum Assisted Closure (NYSE:VAC) technology uses negative pressure wound therapy [NPWT] to treat and promote healing in acute and chronic wounds caused by severe trauma, failed surgical closures, amputations, and serious pressure ulcers. VAC systems consist of a pump that provides a controlled level of negative pressure to the wound, foam dressings, occlusive drapes and specialized canisters that collect body fluids, filter odors, and facilitate the safe disposal of medical waste.
The remainder of first-half revenues was generated from KCI’s Therapeutic Surfaces operations. Prone therapy systems are designed to alleviate pulmonary and post cardiac arrest complications associated with immobility. Bariatric care products are used to support obese patients weighing up to 1,000 pounds. These products include specialty beds and patient lift/transfer systems.
KCI also makes therapeutic surfaces such as beds and overlays that help relieve pressure and/or provide pulsating therapy to patients suffering from pressure sores, burns, and post-operative skin grafts.
The company’s VAC systems provide clear benefits over competing wound care alternatives such as traditional gauze dressings. They reduce skin pressure and shear, help provide moisture control, facilitate blood and lymphatic flow to the skin, and require less changing. Largely due to these competitive advantages, demand has been rising.
Annualized revenue growth has averaged 35% over the past four years. However, growth slowed in recent years due to increased penetration, competition, and lower reimbursement rates due to changes in Medicare Part B. Nonetheless,VAC revenue growth rates actually improved in each of the past four quarters. They were up 24% year-over-year in Q2 to $317.3 million. Total Q2 revenues climbed 20% to $396.7 million. The pro forma operating profit margin expanded for the first time since Q2 2006, improving 114 basis points from the prior year to 22.72%. Net income jumped 24.5% to $58.1 million or 81 cents per share. KCI’s aggressive R&D spending should help it maintain a competitive edge in NPWT.
Recent FDA approvals for the ActiVAC and InfoVAC systems have made KCI the only provider of NPWT products approved for all care settings, including the fast-growing homecare market. Investment efforts have also focused on exploring expansion of VAC technology to other applications such as tissue engineering and regeneration.
In addition, KCI recently entered into an exclusive licensing agreement with NovaBay Pharmaceuticals. KCI plans to commercialize that company’s NeutroPhase topical solution technology as a disinfecting agent, and utilize it with its VAC instillation therapies.
We believe KCI’s prospects are extremely promising. In particular, there is plenty of opportunity for further growth in Asian markets where the company currently has a minimal level of penetration.