Life is often tough for small-cap medical technology companies. Research and development is costly, marketing can be time-consuming, and building customer acceptance is often a marathon-like endeavor. That's just the way it is, and such is the case for cardiac monitoring company and Motley Fool Hidden Gems recommendation CardioDynamics
Sales for the fourth quarter climbed 31%, but higher expenses sucked away the gains, and the company posted a slight pre-tax loss. Although increases in R&D and marketing expenses weren't out of line, lower gross margins and much higher costs because of Sarbanes-Oxley compliance thumped the bottom line.
System placements (monitors plus modules) for the company's core impedance cardiography technology were OK-- up 19% from last year and basically flat sequentially. Management presently feels that sales are being slowed by the inexperience of the company's relatively new sales force and issues pertaining to reimbursement among end users.
Nevertheless, a company in this stage of development needs to do better with system placements to keep momentum moving forward. As Rich Duprey has pointed out, growth and visibility in the medical community has been a bit more of a challenge than management hoped it would be.
System usage is also problematic, since the company had only 6% growth in sensor sales (the disposable component of the device). Although the company has compelling clinical data to support its BioZ product (and more studies are on the way), it's not yet translating into solid ongoing usage in the hands of customers.
Although CardioDynamics faces only minimal direct competition for its impedance cardiography devices, Fools should realize that it faces what is sometimes an even more intractable foe -- inertia. Simply put, real-life doctors aren't generally like the cowboys (and cowgirls) seen on TV. Many are, in fact, stubborn and very resistant to adopting new technologies or techniques. In my days as a medical device analyst, it seemed as though some doctors took the approach that if a procedure or device wasn't around in the time of Galen, it wasn't needed now.
Consequently, CardioDynamics' sales force has to work hard to educate doctors about the benefits of the system, how to use the system, and how to get reimbursed for using the system. And this hand-holding takes time.
While this stock is not terribly expensive for a med-tech stock (trading a bit above five times trailing sales), the company's guidance for high-teen-to-low-20s revenue growth will likely disappoint some investors. What's more, the company will absolutely need to see higher usage rates from customers if this story is to play out favorably for shareholders.
An investment in CardioDynamics will be an exercise in patience. Investors must accept the fact that it will take time to build the market and that the technology, no matter how good it is, does not "sell itself." But with a decent balance sheet and a very good product, investors who can handle the risks that come with a small-cap, med-tech play should probably hang on for now. Rome wasn't built in a day, and the company, for now at least, deserves at least a bit more time to prove that there really is a demand for the BioZ.
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Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.