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Medical Developments International Ltd profit soars: Should you buy?

Medical Developments International Ltd (ASX: MVP), which develops and supplies specialised healthcare products to Australian and international markets, reported a 72% increase in net profit of $731,000 on $5.5 million of revenue for the six months to December 31, 2014.

Cash flow from operations increased 330% on the back of an 18% increase in revenues over the prior corresponding period (pcp). This was used to pay off $2.1 million of debt, reducing net debt by 57% to $1.6 million.

No interim dividend was declared by the board.

Chairman David Williams’ personal holding in the company is now over 50%, ensuring the interests of management and investors are aligned.

Products

Medical Developments’ main products include asthma respiratory devices and the short-term pain management drug Penthrox. Many people will recognise Penthrox in its final form as the “green whistle”, a standard item in the equipment bag of paramedics. Penthrox is non-addictive and does not require secure storage, giving a distinct advantage over similar opioid drugs such as morphine.

Whilst the company has numerous other products, Penthrox and asthma products are the main drivers for future growth and generated 65% of total revenue, up from 57% in the pcp.

A joint venture project with CSIRO that should revolutionise the manufacturing process and dramatically reduce the cost base is expected to be completed during the 2015 financial year.

Global ambition

Australia and New Zealand are currently the main markets for Medical Developments but this is quickly changing. Management is now focusing on expanding its product suite internationally. It appears to be working. International revenue now counts for 19% of total revenue, up from 12% in the pcp.

Last month approval was given for the company to sell Penthrox into Britain, France, Belgium and Ireland. The Australian Business Review reported that “in financial 2014, Penthrox achieved sales of around $6 million in Australia. The British market alone represents three times that amount.”

Applications to sell Penthrox have been submitted to Israel, Singapore, Saudi Arabia and Russia, whilst the company is in the final stages of the application process in Hungary, Mexico, Malaysia and Hong Kong.

Asthma devices are already being distributed and sold throughout Australia, New Zealand, Europe and North America. Management expect the second half of the year to show ongoing improvement in sales.

Outlook

Over the past three months the share price has soared from $1.15 to the current price around $2.00. Penthrox will need to become an integral part of pain management in international markets to justify Medical Developments’ sky-high price earnings ratio over 80. Any setbacks in approvals or poor traction in sales could see the share price hammered.

I recommend investors monitor the success of the international expansion over the next year before buying in at the current price.

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Motley Fool contributor Mitch Sonogan owns shares in Medical Developments International Ltd.

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