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Will the Medical Developments share price recover?

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The Medical Developments International Ltd (ASX: MVP) share price has fallen hard since COVID-19 put the world at a standstill.

Between 19 February and 22 March, the Medical Developments share price took a sharp nosedive, falling from $11.26 to $3.92 – a 65% loss in the space of a month. Today, the Medical Developments share price has recovered some ground and finished the day up 2% to $5.90.

Despite recent gains, Medical Developments shares are still a long way off their all-time highs of $11.78, so shareholders may be wondering if the company will ever reach that level again.

What happened to Medical Developments in 2020?

The Australian-based healthcare company has had a bad run of luck. While it is easy to attribute the dramatic fall in the Medical Developments share price to COVID-19, that’s not the full story.

Sure, the company has been savaged by profit plunges in its FY20 report, released 2 weeks ago. However, a shock CEO exit and poor management decisions have led Medical Developments on a downhill run.

First and foremost, since the onset of coronavirus, sales from its flagship product Penthrox declined due to the state-wide lockdown laws, which saw decreased levels of sporting and outdoor activities. Furthermore, the company’s emergency services market experienced softening demand for the ‘green whistle’. This resulted in an 8% decline for FY20.

Unsurprisingly, its respiratory sales grew 61% underpinned by a record amount of equipment purchased relating to COVID-19.

Net profit after tax decreased by 63% to $0.37 million, compared to FY19’s $1.03 million.

The surprise resignation of long-term CEO John Sharman sent shareholders heading for the hills in early March. After 10 years of being at the helm of the company, John Sharman chose to pursue other business interests. Chair David Williams advised that the board would search for a leader that can spearhead its growth in the United States and Europe.

More recently, Medical Developments announced that it had reached an agreement with the Mundipharma network in Europe to take back the distribution rights for its own pain relief drug, Penthrox. Purchasing back the EU rights will cost the company 3 million euros and also include a 5% royalty payment on sales.

Across the Atlantic, Penthrox is still yet to be approved for sale in the United States. The company has a potential meeting with the Food and Drug Administration (FDA) towards the end of the year, with Phase II and Phase III trials still to be undertaken. FDA approval is expected to be around late 2024.

Will the Medical Developments share price recover?

Before the fateful crash in the Medical Developments share price, the business had a price-to-earnings (P/E) ratio of 520. Today, the company’s P/E ratio is almost twice as much, sitting at 986. Investors have clearly priced in a lot of good things for the healthcare company, despite its recent misfortunes.

At a current market capitalisation of $390 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.69 million, it may be a while before the share price recovers anywhere near its all-time high.

Should you invest?

I think that a lot has to go right for Medical Developments to be a success. Sales have grown in some overseas countries, but the United States remains the biggest healthcare market.

In my opinion, I would prefer to look for a leaner business that is well-run and not wasting precious cashflow resources on re-purchasing rights that were once-sold off, especially in the current climate.

In light of this, I will be staying away and keeping my eye out for other opportunities.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Medical Developments International Limited. The Motley Fool Australia has recommended Medical Developments International Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Aaron Teboneras