Zacks_Analysts' Blog : Kinetic Concepts to Outperform - Analyst Blog

We recently upgraded our recommendation on Kinetic Concepts Inc. (KCI) to Outperform with a target price of $71.00. The upgrade is supported by its strong first quarter of fiscal 2011 results. The quarter witnessed balanced sales growth across all the segments and successful business expansion in the international market.

Kinetic delivered strong results in the first quarter of fiscal 2011 outshining the Zacks Consensus Estimate on both revenues and EPS fronts. Adjusted EPS in the quarter came in at $1.11, well ahead of the Zacks Consensus Estimate of $1.02 and the year-ago quarter’ $0.91. Revenues increased 3% year over year to $501.2 million and exceeded the Zacks Consensus Estimate of $494 million.

Moreover, during the quarter, Kinetic released itself from paying royalties to Wake Forest. As a result, the company raised its adjusted EPS guidance for fiscal 2011 to $4.96-$5.08 (growth of 16%-18%) as against the previous guidance of $4.45-$4.61.

In the reported quarter, Kinetic witnessed stable growth within its Active Healing Solutions (AHS) business on the back of strong product pipeline. Banking on the successful launch of ABThera and Prevena, the company is focusing on the surgical wound management market. Moreover Kinetic’s latest Negative Pressure Wound Therapy (NPWT) product, V.A.C. Via. is expected to record strong growth across US and Europe in the coming quarters.

Moreover, in LifeCell business, Kinetic’s robust performance was on the back of the success of Strattice and Alloderm in the area of challenging hernia repairs. In addition, it is encouraging to note that, after a few disappointing quarters, Kinetic’s Therapeutic Support Systems (TSS) witnessed a sequential increase in sales during the first quarter led by improved Critical Care segment.

Kinetic continues to penetrate the existing and newer geographic markets with the expansion of its product offerings. In the APAC region, AHS business witnessed a robust 70% increase in sales during the quarter primarily driven by significant growth in large and under penetrated market of Japan with its core NPWT product V.A.C. Therapy. The company expects to record more than $25 million in revenue during 2011 from Japan. The company also launched the NPWT products commercially in China and India.

Moreover, during the quarter, the company witnessed LifeCell growth by 150% year over year in Europe with solid performance by UK, Germany and southern countries. 

There are concerns related to the patent litigation with Smith & Nephew (SNN), in a challenging economic environment and competitive landscape. If any of the key patent claims go against Kinetic, the company s market share in the V.A.C. therapy would be reduced.