Kinetic Concepts, Inc. (NASDAQ: KCI) is a medical technology company that makes V.A.C.® Therapy, a bedside instrument that uses sub-atmospheric, or "negative" pressure, to promote wound healing. This platform constitutes 80% of the company's sales and makes KCI the second largest in the advanced wound care market (by market share).
KCI also has the largest market share in the therapeutic support and regenerative medicine markets. The company's therapeutic support systems are designed to address pulmonary complications associated with immobility, to reduce skin breakdown in hospitalized patients, and assist caregivers in the handling of obese patients
KCI has increased its market share in wound care through both geographic and market expansion. Advanced wound care sales rose after KCI obtained Medicare reimbursement for V.A.C. Therapy for home use in addition to acute hospital care. In addition, KCI has several wound care pipeline products for treating severe and surgical wounds due in 2010. Currently based mostly in North America, KCI has announced plans to expand its products into the Eastern European and Asian markets.
Systems in Pipeline In 2010, KCI plans to release its next line of Negative Pressure Wound Therapy (NPWT) products. The Futura system is marketed for low acuity wounds that require some, but not all of the functions of the current V.A.C.® Therapy, while the VING system is marketed for wounds that require additional therapy in addition to V.A.C.®. Also in 2010, KCI plans to release the TE-Wound and TE-Ortho for soft and hard tissue regeneration, respectively.
KCI's wound care TSSs include the KinAir and TheraPulse systems, which provide pressure reduction and relief, pulsation, alternating pressure, and continuous turning at a minimum of 20 degrees. KCI's bariatric TSSs are designed for obese patients who weigh up to 850 pounds. These systems, including the BariAir, AirMaxxis, and BariMaxx, come with patient lifts and transfer systems that ease the necessity to assist these patients. KCI's critical care TSSs, including the Kinetic Therapy and Prone Therapy products are designed for Intensive Care Unite (ICU) patients. These systems help prevent pulmonary complications in ICU patients and rotate them properly as needed for therapy. KCI has plans to expand its TSS systems geographically into Canada and the European Union for its bariatric line and Eastern Europe for all product lines.
The Centers for Medicare and Medicaid Services (CMS) has rules to establish a Competitive Bidding Medical Reimbursement program for a class of medical devices that includes KCI's products. These rules split geographic regions into ten competitive bidding areas (CBAs), in which medical device companies must bid separately for coverage. The rules aim to decrease the tendency of single suppliers to gain nation-wide reimbursement, and enable smaller suppliers to competitively bid the price down in their regions of focus.
The demand for KCI's products is highly dependent on reimbursement from third party payers such as medicare. If reimbursement prices are lowered by this new policy, either KCI's margins will be decreased or demand for their products will decrease by pushing more of the price burden onto patients.
Much of KCI's strategy for increasing revenue revolves around expanding the market for its products to areas such as Eastern Europe and Asia. Such an expansion poses both marketing and regulatory risks for KCI. Successful marketing of its products to these new areas, requires overcoming cultural barriers as well as geographic barriers and challenges of setting up new sales forces. In addition, KCI's products must be approved by the regulatory agencies of each country before they are marketed. Whether KCI is able to successfully expand into these regions and attain market share affects its valuation.
KCI has several new V.A.C.® products in its pipeline that are due for release in the coming years. In order to be cleared for marketing, these products must receive clearance from the Food and Drug Administration (FDA) that they are safe and effective enough to use in clinical care. If approval is granted, KCI will face further hurdles in establishing its new products in markets that are currently not covered by its sales force (surgical wound repair and non-acute wounds). KCI's ability to get its new products approved for marketing and establish these products in their new markets impacts its valuation and its revenue because V.A.C products represent a majority of the company's revenue.
KCI's V.A.C.® Therapy systems compete with wound care dressings, skin substitutes, and other medical devices that promote wound healing. The entire wound care market is estimated to be around $13 billion. Key competitors to KCI include Johnson & Johnson (JNJ), Hill-Rom, Covidien Ltd. (COV), Smith & Nephew SNATS (SNN), and ConvaTec.