I realize that this probably violates some rule or precept of marketing, but the fact is that this quarter's financial results from med-tech company Kinetic Concepts (NYSE:KCI) just don't matter all that much. The giant elephant in the room is the ultimate decision from a jury regarding the company's patent infringement suit against BlueSky. Putting aside the issue of appeals, if Kinetic wins, it is in good shape; if it loses, it's in for some tough sledding.
Revenue rose 12% this quarter and that's part of the problem. Revenue growth of 12% isn't what gets medical technology investors all fired up -- giant Medtronic (NYSE:MDT) can usually produce about that level of growth. What's more, the company is finding itself forced to spend more money on SG&A (for legal matters and marketing) and R&D, and that's leading to sluggish operating income growth.
The challenge for Kinetic is twofold. First, it has to win this patent suit. While it's true that Kinetic has clinical data that BlueSky lacks and Kinetic is generally accepted to be superior, a cut-rate competitor will definitely hurt Kinetic's ability to secure decent pricing terms (particularly since the "experts" who decide Medicare reimbursement think that the devices are equivalent). So even if BlueSky can't win much market share, it could really hurt the market by compressing pricing.
Second, Kinetic has to invest in expanding the market for vacuum assisted wound closure, its principal business. There is ample opportunity in the home-care market, but it will take time and money to maximize it -- time and money that may or may not be worth spending if BlueSky wins and pricing starts to fall.
If Kinetic wins (shares have been stronger of late, as dispatches and analyst reports from the trial continue to suggest that the company has a strong case), it's obviously a boon to the company and its stock. If it loses . well, I wouldn't say the story is over, but I really wouldn't want to own shares that day.
If this sort of binary outcome makes you too nervous, consider other med-tech ideas like Aspect Medical (NASDAQ:ASPM) or St. Jude (NYSE:STJ). Or if you're willing to try the high risk/high volatility/high growth game, take a look at Intuitive Surgical (NASDAQ:ISRG). I happen to still like Kinetic Concepts, but it's hard to get past the fact that so much is riding on one single decision outside of the company's control.
For more thoughts on med-tech:
Aspect Medical and Intuitive Surgical are both Rule Breakers selections. Check out the newsletter with a free30-day all-access pass.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
