Somanetics ( ) (14.02, $169mm), the tiny manufacturer of a non-invasive patient monitoring system that measures oxygen levels in the brain and other vital organs, made news this week when it filed suit against an even tinier want-to-be competitor, CAS Medical (CASM). I have been amazed at how cheaply SMTS has been trading. Could this patent infringement suit serve as a potential catalyst?
SMTS, which I own in a portfolio I manage as well as in my Top 20 Model Portfolio, is a neat little company. It sells the INVOS system (In Vivo Optical Spectroscopy), which consists of a monitor (razor) and sensors (blades). The primary markets are for cardiac surgery as well as neonatal and pediatric surgeries, none of which are elective. It fits a theme that I have been pursuing (MedTech companies with high recurring revenue), and I first got involved after they reported in June. The stock has fallen about 15% since then despite an overall strong market, so I have been checking my assumptions.
One of the things that caught my attention is how much published research supports this technology, especially in the initial focus area of adult cardiac surgeries. Additionally, I view the company as very aligned with the potential changes in our healthcare system. Use of INVOS makes a lot of sense from a cost-benefit view, as it prevents catastrophes such as strokes, the need for ventilation and costly extended hospital stays.
The company has placed over 2700 systems in 750 hospitals in the U.S. and another 1200 world-wide (where it partners with Edwards Lifesciences (EW) in Japan and Covidien (COV) in Europe). While you might think that the business has been bad, sales (all organic) grew 14% over the past year. Not surprisingly, new system placements have stalled, as capital equipment purchases have been slow across the entire hospital universe. In the past quarter, overall sales fell 7% from a year ago, but the consumables grew. System sales in North America plunged 76%, while sensors units increased over 11%, signifying continued use by existing customers but delays in new implementations. The company traditionally gets over 2/3 of its sales from sensors. It adjusted its outlook for the year slightly lower. If it hits its guidance, it will still grow sales by 5% this year despite the tough environment.
