Utah Medical Products: An Attractive, But Speculative, Prospect

seekingalpha03-22

Utah Medical Products is a company that specializes in the production and sale of medical devices, particularly dedicated to women's health.The company's financial performance has been stable, with ...

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However, there are certain aspects of the medical industry that I find appealing. One of these is the medical device market. Once a product is approved, so long as it is deemed safe and useful, upside potential for the company that owns the said product can be rather material. For this reason, shares of the companies in this space often trade at rather lofty multiples. But every so often, you can find a player that is trading at more reasonable levels that would appeal to value investors like myself. One firm that is, admittedly, not without its other risks, is Utah Medical Products, Inc. (NASDAQ:UTMD). For those who don't mind some litigation risk, this is an attractive opportunity that can offer some nice upside in the years to come. Because of that, I have decided to rate the business a soft 'buy'. A look at Utah Medical Products As its name suggests, Utah Medical Products is a company that's focused on the production and sale of medical products. Overwhelmingly, its emphasis is on devices within the medical space. But just saying this and moving on would leave a lot of context out of the picture that would be valuable in understanding the company and its prospects in the long run. It would be best to dig deeper into the specific offerings that it provides. First and foremost, the business has an emphasis on the labor and delivery/obstetrics space. It does this through the sale of electronic fetal monitoring accessories. These accessories include, but are not limited to, intrauterine pressure catheter systems, adjunct tocodynamometer belts, and more. The goal of these technologies is to make it easy to monitor a fetus to reduce the risk of something in a pregnancy going terribly wrong. The company does sell other products as well. Under this same category would be labor and delivery tools such as its BT-Cath, which is a uterine balloon tamponade catheter that can be used for controlling severe postpartum hemorrhages. Its CVX-Ripe catheter uses two adjacent silicone balloons in order to improve the favorability of the cervix for patients at term gestation. The company also has a finger cover with a prong on it that is designed for the purpose of rupturing maternal membranes with less patient pain and anxiety than what would be typical. This is known as the AROM-Cot. The firm does have other products under this umbrella. But we should also talk about some of its other offerings. For instance, under the neonatal intensive care category, Utah Medical Products makes for sale an infant respiratory hood that can be used to administer oxygen to newborn children. This particular offering is known as the Disposa-Hood, and it is only one of the many offerings under this category of products. Under the GESCO brand, the company has made available for sale biocompatible silicone catheters, in addition to other types of catheters such as those made of thermosensitive polyurethane. Management has been responsible for the creation of other types of products as well, including those under the gynecology, urology, and electrosurgery markets. The most significant of these is the Filshie Clip System that I will touch on in a little bit. Under the blood pressure monitoring category, the firm has made a variety of pressure monitoring accessories, components, and more, such as flush devices, transducers, fluid administration sets, and more. To be perfectly honest, I have only touched on a small number of all that the firm has made available to customers. An entire long article could be dedicated to digging into each of these products. But for more, I would just check out their website or their most recent annual report. Author - SEC EDGAR Data Historically speaking, the financial performance of the business has been interesting. Revenue has remained stuck in a fairly narrow range. After rising from $49.05 million in 2021 to $52.28 million in 2022, sales pulled back slightly to $50.22 million last year. The pain the company experienced in 2023 was driven more or less entirely because the company's largest biopharma OEM customer bought less of the firm's offerings than it did the year prior. This was a US-based customer, with domestic sales down 12% while international sales grew by 8%. Had it not been for this customer to drastically reduce its purchases, revenue would have risen to $53.15 million. Author - SEC EDGAR Data On the bottom line, the picture for the business has, in some respects, gotten better over time. But in other respects, it has mirrored the path that revenue has taken. Net profits have consistently risen year after year, climbing from $14.79 million to $16.64 million. Operating cash flow, as the first chart in this article illustrates, has actually consistently fallen over the three-year window we are paying attention to. But on an adjusted basis, it looks very similar to the path that revenue has taken. The same can also be said of EBITDA. What strikes me as most interesting, however, is just how robust the company's margins are. It's not every day you find a firm with a net profit margin of 33.1%. The adjusted operating cash flow margin is an astounding 46.2%, while the EBITDA margin stands at 53%. Strong margins in relation to revenue also translate to some rather impressive results relative to the firm's balance sheet. Using data from 2023, we calculate a return on equity of 13% for the business. If we substitute in adjusted operating cash flow instead, this metric rises to 18.1%. These aren't home run numbers compared to the profit margins. But they are attractive in my book. The company's equity is actually quite high relative to its overall financial condition. The firm boasts cash and cash equivalents of about $92.87 million. If we strip this out from its market capitalization, we end up with an enterprise value of around $161.56 million. This means that, if we assume that book value is equivalent to market value, investors are paying only 25.9% above book value, or $33.25 million, to buy the business. Author - SEC EDGAR Data What makes this particularly appealing is the composition of assets as well. Only $18.64 million is in the form of intangible assets. Inventories, which would typically be written down in the event of a liquidation event, are worth $9.58 million, while the miscellaneous 'other current assets' are worth only $0.43 million. The rest of the firm's assets are in the form of cash and cash equivalents, accounts and other receivables, and property and equipment. The business has no debt, and its overall liabilities stand at only $7.15 million. This gives the business plenty of security should it face any troubles in the future. And what's more is that this represents an improvement over where the company was even two years earlier. In 2021, cash and cash equivalents totaled only $60.97 million. And the firm's book value of equity was a more modest $107.14 million. And yet, from the end of 2021 through the present day, shares are down about 30%. Author - SEC EDGAR Data Historically speaking, companies that fail to achieve growth do tend to be punished by the market. But when you look at the chart above, you can see how shares are currently priced. Relative to earnings and adjusted operating cash flow, the stock is not exactly cheap. But because of the massive amount of cash and cash equivalents, and the absence of debt on its books, I would argue that the EV to EBITDA multiple is a much more valuable way to look at the company. In this respect, shares look very cheap on an absolute basis. I also, in the table below, compared it to five similar firms. And when it came to each of the three valuation metrics, only one of the five companies ended up being cheaper than our prospect.   Company Price / Earnings Price / Operating Cash Flow EV / EBITDA   Utah Medical Products, Inc. 15.3 11.0 6.1    Sanara MedTech Inc. (SMTI)  67.1 250.0 33.2    Xtant Medical Holdings, Inc. (XTNT)  106.7 58.6 26.9    OraSure Technologies, Inc. (OSUR)  9.0 3.4 3.2    Avanos Medical, Inc. (AVNS)  27.0 28.2 15.8    Bioventus Inc. (BVS)  30.1 23.5 15.3   Click to enlarge So yes, while it might be common to see some sort of discount, the size of this discount seems unrealistic. I would make the case that a lot of the pain that the firm's investors are currently going through has to do with one of its most important products. This is the Filshie Clip System. This is a contraceptive device that utilizes silicone-lined titanium clips that are literally clamped onto a woman's fallopian tubes in order to prevent the risk of pregnancy for as long as the system is in place. It is a fairly simple and minimally invasive procedure that has historically been incredibly successful. The company actually bought the exclusive rights to distribute this system from CooperSurgical, a subsidiary of The Cooper Companies, Inc. (COO), back in 2019 for $21 million. Today, this particular product accounts for roughly 24% of the company's overall revenue. However, the product is now under attack. According to management, for the first 25 years that the product was sold, it never faced a serious lawsuit. But in 2021, that changed. Today, there are several lawsuits pertaining to the product, though I do not see any evidence that a formal class action suit has developed at this time. The allegation is that the product in question can become displaced and can migrate to other parts of the body. This can result in pain and discomfort, as well as other serious conditions, sometimes even requiring surgery in order to correct. According to one analysis conducted, the efficacy of the device is incredibly high. Titanium clips in general have a failure rate of only between 1 and 2 per every 1,000 in any given year. Over time, however, migration of the clips is estimated to be substantially higher. Another study conducted on the topic estimated eventual migration of around 25%. This was based on an analysis of 24,000 Canadian women that received the procedure in 2009. While this sounds disastrous, that same study did go on to say that only between 0.1% and 0.6% of the patients affected went on to experience symptoms or extrusion of the clip from certain parts of the body. National Library of Medicine It's unclear to what extent these lawsuits might impact the company. It's possible that, besides resulting in some legal fees, they could be a nothingburger. At the same time, they could also be very painful. This makes for a speculative scenario. But as I said already, the company does have plenty of cash on hand with which to pay should something go awry. One author that has followed this closely is Zach Bristow. In an article that he published in late September of last year, he pointed out that, of the 17 lawsuits originally filed, 12 were still open at that time. That represented 63 separate claimants. From what I can tell, we have had one meaningful update since then. On March 14th, a judge for the US District Court in Rhode Island made a ruling on certain claims against and by the company. It's truly unclear what the outcome would be when it comes to these particular legal matters. Investors would be wise to watch the situation unfold. If the business can get through these issues relatively unscathed, then the upside in the long run should be quite positive. I say this because the market in which it operates is quite vast. Even if we stick to the global contraceptive devices market, and ignore everything else, the firm is looking at a multi-billion dollar opportunity. In 2022, that market was worth an estimated $28.3 billion. By 2030, it's expected to grow to $45.31 billion. The much larger Femtech market that largely consists of Femcare products, is substantially larger. It was worth around $45.75 billion in 2022. And by 2031, it's expected to climb to $139.51 billion. That's a 13.1% annualized growth rate from 2023 through the end of that forecast period. Takeaway  As things stand, Utah Medical Products makes for an interesting prospect. For the most part, the company looks incredibly healthy. Even though it's not really growing at this time, that's because of a single customer. Margins are robust and shares look cheap. The company has no debt and it enjoys a massive amount of cash. There is, admittedly, a big unknown regarding its legal issues. But if the enterprise can get through that without too much of a problem, the upside for it in the long run should be very appealing. Until the legal situation is settled, I think that a 'buy' rating makes the most sense. This is with the understanding of the risks involved should things go wrong. 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