TMFHelical (98.97)

Investing in Incontinence

December 04, 2007 – Comments (7)

Special Situation - Rocheseter Medical Corp (ROCM)

Bolstering Baby Boomer Bladders

Rochester Medical is a stock that Peter Lynch would love.  A company that no one would talk about at a cocktail party.  Rochester Medical Corporation (RMC) develops, manufactures, and markets urinary continence and urine drainage care products for the extended care and acute care markets in the United States and internationally.

It looks like a cheap microcap (140M) stock - with a P/E of 4.32, but it isn't.  A large chunk of cash in 2007 came from lawsuits settled with Bard, Premier, and Novation.  The recently filed 10k shows net income of 34.05 M including ~31 M form settlements.  Back out the settlements (but note that a lawsuit with Tyco is still pending) and you have earnings of just over 4M and a P/E of ~ 35.  And while this is high, note that sales increased at > 50% from 2007 over 2006 and earings in 2006 were only ~2M (so ~100% increase).  Gross margins improved from 35% in 2005 to 40% in 2006 and 52% in 2007.  Nice!

There are two factors that could drive this stock forward.  The first is that the settled lawsuits centered around anti-competitive business practices i.e. fraudulent attempts to keep customers from switching to ROCMs products.  If these practices are being halted, then the market should open up nicely for more aggressive growth and market share gain.

Second is the products, which is why ROCM should gain market share.  ROCM makes catheters coated with antibacterials, to prevent infection (a large problem).  They have some patent coverage in this area.  [The lawsuits were derived from competitors implying that ROCM product created superbugs].  These 'coated catheters' are more expensive but also more profitable.  The infection protection alone could justify the added cost, but, pile on that recent changes in medicare reimbursement policy denies reimbursement for expenses derived from 'Preventable Complications' (listen to the interview).  This will almost certainly include infections derived from urinary catheters - and ROCM has the product solution.

I mentioned top line growth and gross margins, but there are added operating costs.  ROCM is building out its sales force to meet demand, so expect these expenses to rise significantly to attempt to take advantage of this market opportunity.  And while some analysts might frown at rapidly expanding SG&A, give a listen to the conference call to hear one questioner all but get upset that the company wasn't being aggressive enough with sales staff expansion (17:33 to 24:22 min, the whole call is under half an hour).

I'm not a PayDirt subscriber, but I bet they would love this.

I'm inclined to make this a contest entry in the 2008 Biotech stock picking contest, but not sure even I can make the case that this is 'Biotech' (and my definition is pretty broad). I'm going bullish on this one for CAPS anyway. I mean how can you not love investing in incontenance (OK, that's gonna be the new blog title)

Ralph (Zz)