May 2015 has been an incredibly busy month of ASX announcements for specialised healthcare company Medical Developments International Ltd (ASX: MVP) and this company should definitely be on your watch list.
Medical Developments produces a range of products and it is best known for its short-term pain management drug methoxyflurane. It is marketed as Penthrox in a portable inhaler which some people may know as "the green whistle". It has been used for decades by hospitals, ambulance services and the defence force throughout Australia for emergency pain relief. Their other main revenue source comes from a range of leading asthma inhalation devices.
Medical Developments is aiming for the widespread growth of Penthrox outside Australia and there is a good chance of it succeeding.
ASX Announcements:
1 May – Trading Update
Medical Developments advises that sales for the nine months ended 31 March, 2015 are $8.3 million, up 24% on prior year. Sales of Penthrox are 35% higher and sales of respiratory devices are 53% higher than the same period last year. EBITDA up 300%. All banking facilities are expected to be repaid by the end of FY15.
6 May – Penthrox approved in Europe
The Medicine and Healthcare products Regulatory Agency ("MHRA") approved Penthrox for sale in the UK with the support of France, Belgium and Ireland authorities. Medical Developments CEO Mr John Sharman estimates that these markets could be worth around $100 million per annum.
8 May – Near term planning for the globalisation of Penthrox
Medical Developments will use the Mutual Recognition Process (MRP) to approve Penthrox in other European Union countries targeting the largest markets of Germany, Italy and Spain. The MRP process usually takes around seven months.
Elsewhere in the world applications to approve Penthrox for sale have been lodged or is in the process of being lodged in Russia, Saudi Arabia, Israel, Singapore, Hong Kong, Malaysia, Mexico, Taiwan and Iran. Regulatory approvals for these markets are expected over the course of the next 12 months.
Once they have achieved approval to sell Penthrox in these target European countries the focus will shift to executing the regulatory strategy in the USA. This will include an additional Phase III Pivotal trial to facilitate approval to sell Penthrox in the USA.
12 May – Chairman sells 7 million shares
The Chairman of Medical Developments, Mr David Williams, sold 7 million shares to mainly institutional investors to increase liquidity. Mr Williams still holds 23.7 million shares which comprises 40.5% of the entire company. AMP released a notice the following day declaring they are now a substantial holder with control of 3m shares for 5.2% of the business.
A bright future for Medical Developments:
Essential product – Penthrox is carried in almost every paramedics' bag around Australia and is readily accessible to provide emergency pain relief. With no similar competing products it is likely that Penthrox can become a commonplace device for emergency service personnel internationally as well.
Monopoly – Medical Developments is now the only supplier in the world of medical Penthrox. The drug methoxyflurane has been used in Australia and New Zealand for decades. It was also produced and used in the US until 1999 when Abbott Laboratories stopped production. In 2005 the Food and Drug Administration (FDA) withdrew Penthrox from sale in the US and noted that new clinical studies are required before it could be reintroduced to the market.
Benefits over other pain relief medications – Penthrox has numerous benefits over nitrous oxide and morphine; it does not affect vital signs, it is non-addictive unlike opioid options and it does not require specific storage and use protocols, there is no risk of overdose, it is effectively self-administered with minimal supervision, the unit is compact and being single use avoids cross contamination.
Opening up new uses for Penthrox – Medical Developments has numerous clinical studies either completed or in progress with an aim of expanding the use of Penthrox beyond emergency care only. A primary endpoint is to get Penthrox approved for pain relief during minor procedures such as the colonoscopy and biopsy that take place in hospitals or clinics. Many of these trials are expected to be completed by the end of this year.
Increased production and reduced costs – Medical Developments and the CSIRO recently finished a joint development program which started in 2012 resulting in a higher output and lower cost production process for methoxyflurane. The CSIRO commented that the new process will allow methoxyflurane production to grow tenfold to meet the expected international demand.
Financials and Valuation:
Medical Developments is trading around $2.40 which is slightly below its all-time high of $2.79 achieved only a few days ago and has a market capitalisation of $140m.
ASX:MVP price chart – Source: Commsec
2014 was disappointing for the business with revenue dropping 20% and net profit down 62% compared to the prior year. The drop in revenue was blamed on several challenges within the respiratory division including the cancellation of a significant contract with GlaxoSmithKline. Net profit was also dampened by significant investment in the regulatory, sales, marketing and research and development teams.
On these depressed metrics earnings in FY2014 came in at just 1.5 cents per share compared with 4.1 cents in FY2013 and Medical Developments is currently priced on a trailing price-to-earnings (P/E) ratio of 160.
The good news is that the worst appears to be behind the business with the first half of FY2015 showing significantly improved results. Revenue increased 22% as Penthrox sales increased 39%. Gross profit increased from 65% to 72%. Forecast cash flow from operations is likely to be around $3m.
Medical Developments was debt free until 2013 when a $3m banking facility was created to support the investment required for global expansion. Management recently noted: "The capital expenditure on clinical studies required to build our regulatory dossier has largely been completed and is not expected to be a material cash investment in FY15". All banking facilities are expected to be paid off in full by the end of FY2015, which will consume the majority of the operating cash flow in FY2015.
With capital expenditure reducing and no debt repayments after FY2015 the business will start producing healthy free cash flows in FY2016 and beyond which could be used to resume the dividend program.
Risks:
The company trades at a premium price with expectation that the international expansion of Penthrox will be successful. If the uptake of the product overseas suffers any significant setbacks it is likely that the stock will be sold off heavily. After gaining approval for the use of Penthrox in Europe and several other countries around the world the regulatory risk is reduced and the focus is now on the sales and marketing teams. This needs to be closely monitored by investors in the coming years.
The risk of competitors appears to be low for the foreseeable future. Medical Developments has a huge amount of clinical data to support their applications for approval with the various drug regulators in each country. The improved production method developed with the CSIRO is another competitive advantage.
Medical Developments is a thinly traded stock which supports Mr Williams' claim that his recent 7m share sell-off was to increase liquidity. Any further disposal of shares by management could be cause for concern, however Mr Williams still owns more than 40% of the company and he has successfully guided the company as Chairman for almost 10 years and will likely do so into the future.
Should you buy?
Medical Developments is not a high risk pure-play on one drug or device like many smaller healthcare and biotechnology companies. It already has a successful and expanding domestic and international business in the Penthrox and asthma device markets.
The current share price contains expectation that the international expansion of Penthrox will be successful, making it a higher risk stock than established companies and if you choose to invest it should be considered part of your speculative portfolio. If Penthrox can achieve similar market penetration internationally then the stock price today could still be an attractive entry point.
Although this is a higher risk stock it is definitely a long-term investment. Expansion of Penthrox in the international markets will take years to come to fruition and investors should be ready for volatile prices during this time and gradually building a position could be wise. For more conservative investors it may be best to watch the company and its success in the international markets before making an investment.
