The Snack Food of Health Care
01/23/2013 10:45 am EST
The disposable medical equipment sector is set to boom now that Obamacare has just brought millions more Americans into the health-care system...and this company is well-positioned to profit, notes Benjamin Shepherd of Personal Finance.
There's only a year to go before Obamacare's individual mandate kicks in and produces the single largest one-day expansion of insured patients in America since the introduction of Medicare.
Accordingly, debate has picked up over just how profitable that expansion will be for the health-care industry. Most of that debate is centered around $415 billion in Medicare reimbursement cuts on everything from hospital and nursing home stays to doctors' fees and the cost of medical devices.
I've long argued that most of the health-care industry will benefit from the coming massive increase in utilization, thanks to Obamacare and demographic shifts. However, there's one corner of the market that will definitely profit but isn't getting much attention: the makers of consumable medical supplies, such as syringes, catheters, gauze, and the like. These products are used once and then disposed.
When initially admitted to a hospital, the first procedure a patient will undergo is called "establishing access." That means using a needle to insert a small catheter into a vein, then attaching a heplock through which intravenous (IV) fluids and medications can be administered while preventing blood from flowing out. While in place, a new needle stick isn't required each time a medication is given.
While a relief for the patient, those access points are a common source of hospital-acquired infections because of air pockets that typically form in them, allowing bacteria and other pathogens to flourish.
While steps are taken to prevent them, those infections are extremely common. According to the Centers for Disease Control and Prevention, an estimated 250,000 such infections occur per year. They're also expensive, each costing an average $31,000 to treat.
In 2010, the Centers for Medicare and Medicaid Services stopped reimbursing hospitals for the cost of treating those infections; hospitals are eager to avoid bearing that expense.
ICU Medical (ICUI) has developed a line of catheters and connectors that are designed to minimize dead space and the need for flushing. They're also needleless, reducing the chance that health-care workers will accidently stick themselves when administering medications or periodically changing out the catheter sets. They allow for the creation of a closed system of vascular access to prevent the introduction of harmful pathogens.
The Neutron connector also halves the odds of occlusions-blood flowing back into the catheter set-which can increase the risk of infection and require that new access be established.
While ICU Medical's devices have become a gold standard for the industry, so far few competitors have been able to match it. That said, the company holds only a tiny market share due to the relatively higher cost of its products in an era of medical cost-cutting.
Despite that hurdle, ICU Medical has become increasingly competitive, achieving an average 9% revenue growth per year, as it realizes economies of scale and hospitals become increasingly willing to pay a few more cents on the front end to potentially save thousands of dollars on the back end.
Earnings per share have been growing commensurately with revenues, thanks to the company's high margins; gross margins run in excess of 50%, while operating margins typically fall in the high teens.
The company has also pushed into the oncology space, using its technology to create the only needle-free closed system transfer equipment available on the market. This innovation is advantageous for the patient, because it reduces risk of infection. It's also good for health-care workers, because it reduces the chance of exposure to cancer-fighting drugs that contain radioactive isotopes and extremely dangerous chemicals. Contact with those drugs increases the risk of sterility in health care workers and can lead to miscarriages and birth defects.
ICU Medical also recently introduced its NanoClave line of connectors for use in neonatal and pediatric patients. ICU Medical rates a buy.