Update on Medical Developments: negative profit guidance, as expected (ASX:MVP)

Claude Walker in Companies , Medical Developments (ASX:MVP) 13 June 2013 0 comments

Medical Developments (MVP) recently updated the market as to its operations and expected profits for FY13. As expected, net profit is expected to be down on 2012, by up to 15%. The market immediately reacted to this, and what followed was two days of savage selling... to a low of $1.06. Since then, the share price come back up to about $1.30, albeit on low volume.

I myself was just a little bit too greedy, and was hoping the selling would push prices down to $1. My low order was not filled. However, there will probably be plenty more opportunities to buy MVP at a good price. With the market a little jittery, poor results, or better yet the announcement that the dividend will be reduced or suspended, could potentially result in further selling.

It makes little sense for me to summarize the update in detail, but I will point out that they obviously only mentioned areas in which they had some progress to report. For example, Japanese distribution of Penthrox was not mentioned. As much for myself as anybody else, I'll record some of the predictions they made (rather than the progress).

- Management expects to see the effect of marketing spend in FY14.
- MVP expects to complete two Penthrox trials in August 2013, and submit an application for marketing authorisation in October 2013.
- They expect to be able to further penetrate the NZ market for Penthrox (time frame not given).
- They expect to receive approval to sell their their Asthma Space Chambers in the USA by October 2013 and to launch the range there by the end of 2013, or "shortly thereafter."

So this gives us something to measure them against. Meanwhile, it's also worth noting that they reported some respectable achievements regarding their manufacturing process. To me, the announcement further signifies that reinvestment in the business proceeds at a cracking pace. This means that NPAT (and free cash flow) will almost certainly be subdued right into 2014, as well as this year. Currently, I'd say that we won't really see the benefits to the bottom line until 2015. My reasoning is as follows. MVP will be selling Asthma Space Chambers into the UK for all of FY2014, but during that time, they'll still be funding Penthrox trials and regulatory approval for Europe and the UK. (I hope) They will also be funding the product launch for the Asthma Space Chambers in the USA. These will be reasonably expensive activities, and the investment will not generate profits immediately. It's difficult to predict how much will be spent on developing on the new manufacturing process for Penthrox, and this is a key risk, in my view. It's also worth noting that, given their international expansion plans, the weaker Australian dollar works against them for the time being.

By FY 2015, any or all of the following might be occurring:
- Sales of Penthrox to the UK
- Sales of Penthrox to Japan
- Sales of Space Chambers to the USA
- Reduced cost of manufacturing Penthrox
- (Increased) sales of Penthrox into other jurisdictions

Any one of these occurring will have a positive impact on the company, and the impact on Gross Profits (and NPAT) of all of these occurring would be quite extreme, especially increased sales of Penthrox plus an improved margin. Before the company started ramping up marketing and R&D spend, free cash flow was over $1.4 million a half. Were the company to achieve increased sales, increased margins, and then reduce marketing and R&D spend, then the free cash flow would really jump.