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Medical Developments International still flying under the radar

A few months ago I wrote about Medical Developments International (ASX: MVP) because it is a company with good margins, good management and good prospects. At the time, it was available for a reasonable price (just under $1.20 per share). The company’s main two products are pain-relief drug Penthrox, and the Space Chamber Plus asthma spacers (although it offers quite a range of medical equipment).

Shares are now trading at $1.50, having recently traded as high as $1.68. Under CEO John Sharman, Medical Developments has embarked on a program of aggressive investment. The company reported that it spent $4.5 million on R&D in FY2013, compared to NPAT of just $2.3 million. Based on that profit figure, the company currently trades on a whopping P/E ratio of around 37 (this ratio would be a lot lower, but for the aggressive growth initiatives).

So where is the R&D money going? To summarise, the company is spending money on trials as part of its attempt to sell Penthrox in the UK, and increase the number of uses for Penthrox in existing markets. The company is also improving the manufacturing process for methoxyflurane (the drug in Penthrox) and continues to develop new products. It appears to be making steady progress on these fronts.

As well as the R&D spending, the company has recently suffered a considerable jump in staff costs. This is partly due to the launch of the Space Chamber Plus asthma spacers in the UK. The company is paying marketing representatives to convince general medical practitioners to prescribe the Space Chambers, because when that happens government reimbursement is available. The asthma spacers are less profitable than Penthrox but margins are likely to improve with volume. UK sales should make an impact in FY2014 (or the strategy isn’t working).

While the company reported good sales of the asthma devices, the Preliminary Annual Report conveyed one bit of bad news: sales of Penthrox to two Australian ambulance customers declined due to a change in the way those front line services are using the product. This resulted in a 7% decline in Penthrox sales in Australia. The company attributes the decline in sales to cost-cutting in the ambulance services.

This checks out: there have been various cuts to ambulance services and public health in recent years, since the Liberals formed the various state governments. Most recently, the NSW government decided they would squeeze the NSW Ambulance Service. The bottom line is that despite a rise in sales of Penthrox to non-ambulance customers, the company has reported a reduction in revenue from Penthrox sales of $356,000 for FY2013.

Foolish takeaway

Revenue from Penthrox could well drop further in FY2014. It is not clear whether the full impact of reduced demand from those two customers is reflected in the FY2013 figures. The company also took on about $1.4 million of debt during the year but paid a 2c final dividend. I would have preferred if it had simply kept the cash.

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Motley Fool contributor Claude Walker owns shares in Medical Developments. Find him on Twitter @claudedwalker.

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