Healing Growth for Kinetic Concepts

Wound-care specialist Kinetic Concepts (NYSE: KCI  ) hasn't been getting a lot of breaks lately. It faces competition from a company that Kinetic Concepts believes is violating its patents. And the Centers for Medicare and Medicaid Services did Kinetic Concepts no favors by giving this competitor equivalent reimbursement status, even though Kinetic Concepts has clinical evidence of efficacy that its competitor does not.

Still, life and business go on. Revenue grew 18% in the fourth quarter, and improved margin performance led to nearly 37% growth in operating income. For the year as a whole, free cash flow jumped 52%, and the company produced about $144 million.

Growth in vacuum-assisted wound healing, the company's principal business, was still quite strong. Worldwide V.A.C. (Vacuum Assisted Closure) revenue was up 25%, while worldwide surface revenue (largely special beds and mattress overlays) fell 2% vs. the year-ago period.

Wound care is still a big market that's largely thought to be underpenetrated. On the optimistic side, as much as 80% of the market may remain to go after, but capturing it won't be easy. The biggest opportunity for Kinetic Concepts is probably the home care market, and that will take time and marketing dollars to develop. What's more, the company will need to continue to invest research-and-development dollars into clinical trials aimed at demonstrating the benefits (both clinical and financial) of aggressive wound care in terms of both clinical patient outcomes and cost savings.

I suspect that with work left to be done on sales and reimbursement and the patent litigation up in the air, a lot of wait-and-see investors are standing on the sidelines. And I understand that if a cheaper rival came in and tried to violate Intuitive Surgical's (Nasdaq: ISRG  ) patents, worries would ensue. Heck, that's even true of large companies such as BostonScientific (NYSE: BSX  ) and the patent battle between Boston's partner, Angiotech (Nasdaq: ANPI  ) , and would-be paclitaxel-coated-stent rival Conor Medsystems (Nasdaq: CONR  ) .

Risks aside, I still have Kinetic Concepts high up on my watch list. You just don't find growing med-tech companies trading this cheap all that often -- and when you do, it's generally because there's some worry, such as the patent/reimbursement issue. An adverse decision in patent litigation wouldn't be fatal, but it would still be bad news, so this is probably a stock best left for more risk-tolerant types.

For more Foolishness in the med-tech world:

Intuitive Surgical is aMotley Fool Rule Breakersrecommendation. For more coverage of stocks on the cutting edge, check out Rule Breakers with a free, 30-day trial.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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