Académique Documents
Professionnel Documents
Culture Documents
18 April 2005
• Last week we upgraded shares of KCI, adding it to JPMorgan's Medical Supplies & Devices
Focus List in light of the stock’s 2005 weakness, our comfort with Michael Weinstein
ongoing fundamentals, and our outlook for the company’s growth (1-212) 622-6635
prospects in 2005 and beyond. mike.weinstein@jpmorgan.com
• One of the concerns that has been weighing on KCI’s stock has Taylor Harris
(1-212) 622-6433
been the upcoming patent case with upstart BlueSky Medical. In a taylor.c.harris@jpmorgan.com
case brought by KCI, BlueSky is challenging the validity of KCI’s
Arjun Krishnan
V.A.C. patents; and in recent weeks we hired outside patent counsel (1-212) 622-6590
to aid us in conducting our own thorough review. arjun.krishnan@jpmorgan.com
• Today, with the help of our counsel, we provide you the results of Kimberly Weeks
that analysis, explaining why based on this work we assign a high (1-212) 622-2326
kimberly.weeks@jpmorgan.com
probability to KCI prevailing in this case and a very low probability
to BlueSky being able to completely invalidate KCI's patents.
• The outcome of this case likely awaits a court trial in September.
However, an upcoming Markman hearing should provide valuable
insights into how the judge construes key claims in the patents, and
assuming a positive outcome, could provide new lift to KCI shares.
• Our 12-month (April 2006) price target of $75/share values KCI at
just 27-28x a potentially conservative 2006 EPS estimate of $2.70.
We view this as reasonable for a company expected to grow
revenues 23-25% in 2005 and 20% in 2006 with EPS growth
projected at ~30% and 25-30%, respectively.
Kinetic Concepts, Inc
Ticker KCI EPS 2004A 2005E 2006E 2007E
Price(04/15/05) $57.55 1Q (Mar) $0.34 $0.46
52-Wk.Range $41.40-78.37 2Q (Jun) $0.39 $0.51
Mkt.Cap(MM) $4,178.1 3Q (Sep) $0.46 $0.57
Price Tgt(12 mo) $75.00 4Q (Dec) $0.47 $0.60
Fiscal Year Dec FY $1.66 $2.15 $2.70 $3.26
Shares O/S 72.60 P/E FY 34.7 26.8 21.3 17.7
Sales FY (MM) $992.6 $1,224.7 $1,467.4 $1,682.3
See page 19 for analyst certification and important disclosures, including investment banking
relationships. JPMorgan does and seeks to do business with companies covered in its research reports.
As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. Customers of JPMorgan in the United States can receive independent, third-party
research on the company or companies covered in this report, at no cost to them, where such research
is available. Customers can access this independent research at www.morganmarkets.com or can call
1-800-477-0406 toll free to request a copy of this research.
Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
Executive Summary
The first few months of 2005 have proven bumpy ones for KCI shareholders. After
an impressive 2004 (KCI outperformed the S&P by 145%), the stock is off more than
25% to start the year amidst a series of investor concerns and the recent distribution
of KCI stock by its private investors. We touched on many of these concerns a week
ago, when we upgraded KCI to JPMorgan’s Focus List. In today’s report, we focus
on the intellectual property arena.
Our initial confidence in KCI’s IP position dates back to the company’s 1Q04
initial public offering. Our confidence at the time stemmed from: (1) the due
diligence of the company’s private investors and board members dating back several
years (well in advance of the company coming public); (2) the scope of KCI’s IP
position, including 18 issued patents in the U.S. and 12 pending; (3) the fact that in
Europe, the key patent surrounding V.A.C. technology has been substantially upheld;
and (4) the fact that the largest wound care companies in the world had looked at the
IP, specifically elected not to challenge it, and in conversations with us and others
stated that they see no way into the vacuum-assisted wound closure market except
through KCI.
Yet, the company’s patent position today finds itself under challenge, not by the
established players in wound care, but by a small upstart. BlueSky Medical, the
challenger in this story, is well below the vast majority of clinicians’ radar screens.
Moreover, their technology in our view is not really a challenge to KCI, nor for that
matter is their distribution network. The threat isn't BlueSky, but rather the
possibility that should BlueSky win its case and be able to enter the market, what that
might mean for other potential players? Specifically, would a Smith & Nephew or
J&J rethink its view on the market and its ability to participate should BlueSky
prevail? It is this fear that has, in part, weighed on the stock of late, as investors
have struggled with how to get their arms around the situation.
It was this fear that led us more than a month ago to contact outside patent
counsel with the goal of analyzing the BlueSky case. We, along with our patent
counsel, have spent the past few weeks examining the court documents and the
potential prior art references in this case. It is based on this work that we assign a
high probability to KCI prevailing in its case against BlueSky and a very low
probability of BlueSky being able to completely invalidate KCI's patents. A
brief summary of the relevant issues and our opinions, which we will expand on in
later sections, is as follows:
4. The Central Issue. We believe the central issue in this case will come
down to whether V.A.C. truly represents a new method in the treatment of
wounds – one worthy of being patented. BlueSky is arguing that the use of
negative pressure predated KCI's patents and in this case points to several
sources of prior art, including what they call “the Kremlin papers” - a series
of papers coming out of Russia in the 1980s. KCI, on the other hand, argues
that while suction has been used for decades in operating rooms, and while
using negative pressure to remove fluid and to clean other material out of
wounds is also not a new concept, the application of negative pressure for
the actual healing of a wound WAS a new concept, and that this was the
basis of KCI’s key intellectual property.
a. The Kremlin Papers are only modestly relevant as prior art. For
starters, the system that they describe bears little similarity to
V.A.C. beyond the application of negative pressure – for example,
there's no dressing, nor is the system secured to the body, nor does
the system itself control the application of the therapy in
alternating intervals. Additionally, the primary application of the
vacuum pressure is for the purpose of getting excess fluid and
debris out of wounds, not the process of bringing those wounds to
closure.
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
6. What are the odds? While we have not found any published sources on
outcomes of similar cases, our patent counsel estimates that 75-80% of such
cases ― where the validity question boils down to the issue of “non-
obviousness” ― are resolved in favor of the plaintiff, in this case KCI. We
would take that as a baseline probability, and after having examined the
merits of the case, we believe KCI’s odds of success are indeed much
higher.
7. The next milestone – the Markman hearing. While the final result of this
case likely won’t be learned for several months, there is an upcoming
Markman hearing that could lend some insights into probabilities of success
for KCI. The Markman hearing is intended for claims construction, where
the judge will decide on the interpretation of the key disputed terms from
KCI’s patents. Should the construction of several key terms (e.g. related to
the adhesion or intermittent treatment steps) be favorable to KCI, Street
confidence in the trial’s ultimate outcome should improve.
4
Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
Given this is the defense’s argument, the onus in KCI vs. BlueSky rests much
more with BlueSky than it does KCI. The court begins with the assumption that all
allowed and issued patents are valid. Deference is given to the judgment of the patent
examiners who granted the patents in the first place. It is, therefore, the burden of the
defense in this case, as it would be in others, to prove that issued are in fact invalid.
A patent can be shown to be invalid in three distinct ways: those being (a) lack of
“utility,” (b) lack of “novelty” or (c) “obviousness.” It is rare for a defendant to put
forth lack of utility as the reason for patent invalidity, presumably because that would
imply a lack of utility for its product as well, so we will focus on the “novelty” and
“obviousness” issues.
To prove lack of “novelty”, BlueSky would have to demonstrate that a skilled artisan
could have taken a single piece of prior art (e.g. one individual paper, or patent, or
prototype) in combination with his own knowledge of the particular art and be in
possession of the claimed invention. This prior art reference must pre-date the patent
application by a year and must embody all of the critical elements of the claimed
invention. In other words, BlueSky can’t aggregate a number of different pieces
of prior art and use that combined body of evidence to say that a particular
V.A.C. claim wasn’t novel. This will become relevant for us as it relates to claims
that embody multiple elements, such as Claim 13 from the ‘643 patent, which
teaches both the adhesion and intermittent treatment components of the system. For
this claim to be struck down on the grounds of lack of novelty, BlueSky would have
to show that a single document spoke to both of these elements.
On the other hand, the “obviousness” test is that a patent can be declared invalid if
either: (a) there are two distinct prior art sources that, in combination, embody all the
elements of a patent claim, and it would have been "obvious" to a practitioner in the
field to combine these two concepts; or (b) a prior art source in combination with
“ordinary skill” would have made the invention "obvious." So then the question of
“obviousness” comes down to an interpretation of “ordinary skill.” In this case, the
question is whether wound care physicians were practicing the essence of what
KCI’s patents teach prior to the early 1990s.
Worth noting, our patent counsel estimates that 75-80% of cases that revolve around
a question of “obviousness” – as we think this one will – are ruled in favor of the
plaintiff. Moreover, we think BlueSky will need to succeed in invalidating
essentially all of the patent claims being asserted in this case (not just one or
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
two), in order to be able to practice in the space using their current product. So
even if some of the claims around the V.A.C. dressings from the ‘880 patent are
limited (as they were in Europe), or even if selected claims from the ‘643 patent are
struck down, BlueSky and others may still be unable to practice in the space. In
short, the hurdle to be cleared by the defendant (BlueSky) in an invalidity case is
quite high.
To begin with, the abstract on the front of the ‘643 patent describes the invention
with the following language: “A method of treating tissue damage comprises
applying a negative pressure to a wound sufficient in time and magnitude to promote
tissue migration and thus facilitate closure of the wound” (italics added). So tissue
migration and wound closure – not just fluid removal – are the apparent goals
of V.A.C. therapy as described at the outset of the ‘643 patent.
In order to accomplish these goals, one needs to use a hydrophobic (i.e. “porous, not
fluid-retaining") sponge or foam, of the type described in the '880 patent. Packed
gauze or other traditional materials were intended to provide compression to the
wound and therefore tended to accentuate pressure in the surrounding tissue, whereas
an open-cell structure designed to allow for the removal of fluid via suction does
exactly the opposite, in accordance with the teachings of the ’643 patent. Following
the initial patent work on the V.A.C. system, KCI has characterized other
mechanisms of action through which V.A.C. is believed to work. For example, it is
believed that the mechanical stress applied by the sponge on the cells in the wound
bed actually stimulates a bioresponse in the form of mitosis and granulation tissue
formation. Still, the mechanism of action taught in KCI’s ‘643 and ‘880 patents
certainly seems to go beyond the simple use of suction for the purpose of fluid
removal. And in some cases, KCI's patents teach concepts that were actually
counter to standard practice at the time. The question, therefore, becomes one
of prior art and a comparison of that art to the specific claims in the V.A.C.
patents.
6
Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
The first few paragraphs of Chariker-Jeter admittedly don't read too favorably for
KCI: “…we have devised a closed suction wound drainage system that 1) is effective
in collecting drainage from the most difficult sites, 2) obviates skin damage, 3)
improves wound granulation and contraction, and 4) minimizes the dressing and
nursing requirements and dramatically reduces the cost associated with wound
management and containment.” However, as the paper progresses, we learn that
what Chariker-Jeter means by “improv[ing] wound granulation,” which is a large
part of the mechanism of V.A.C. action taught in the '643 patent, is actually that they
wanted to limit the formation of granulation tissue and therefore increase the
rate of epithelialization. This is in stark contrast to what is being talked about
by Wake Forest, the source of the ‘643 patent, and KCI. As the paper continues,
it asserts that the system “…decreases the degree of fibroplasias, i.e. granulation
tissue. The result is to increase the rate of reepithelialization.”
1
Chariker, M.E. et al. “Effective Management of Incisional and Cutaneous Fistulae with
Closed Suction Wound Drainage,” Contemporary Surgery, vol. 34, June. 1989, pp. 59-63.
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
As we said, the Chariker-Jeter technique, as potential prior art goes, is the closest
reference to the V.A.C. technique that we have seen. And yet, there are critical
differences with V.A.C., such as the stimulation of granulation tissue mentioned
above, but also the use of an adhesive, the application of treatment in
alternating intervals, and the use of a porous dressing, as opposed to the moist
gauze used by Chariker-Jeter. Are these differences enough for V.A.C. to have
been considered a novel invention? The ‘643 patent examiner thought so, and we see
very little reason to think that a judge or jury, with the appropriate deference being
given to the original examiner, will disagree.
So if the patent examiner knew about the Chariker-Jeter method and didn’t view it as
enough to block the issuance of the primary V.A.C. method patent, then the
question becomes whether there was anything that the patent examiner didn’t
know about that would have changed his opinion? BlueSky will argue that
that’s where the “Kremlin Papers” fit in.
The key findings from the Kremlin Papers, along with our interpretation of the
significance in the current litigation, are detailed below.
So, in addition to the fact that KP#1 is really talking only about using suction for the
traditional purpose of removing debris, it actually teaches techniques that are
opposite to the claims in the ‘643 patent. For example, the system is not affixed to
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
the wound through an adhesive step (instead, it is moved along the wound area). And
moreover, it is intended to prepare a wound for normal suturing, whereas '643
cautions against suturing prior to the formation of underlying granulation tissue.
The reason that the Davydov paper is perhaps more relevant that the others is that
although it describes a process designed primarily to remove pus and dead tissue, it
does note other wound healing benefits that are part of the V.A.C. therapy. The paper
reads, “Necrolitic, antiedemic, and anti-inflammatory effects were noted when
vacuum therapy was used. The duration of the first phase of the wound process (the
hydration phase) decreased. Granulation and the beginning of the cuticularization are
observed by days 6-7.” In other words, the authors note that the technique appeared
to help relieve pressure and to speed the formation of granulation therapy, compared
to the control group in the study.
Although some of the key V.A.C. benefits are noted by Davydov, when it comes to
examining the actual claims in the ‘643 patent, the Davydov papers do not
provide direct references to key components of the V.A.C. system. For example,
no “screen means” or dressing is employed, there is no "securing" or adhesive step,
nor is the system left continuously attached to the patient with the system itself
providing “alternating intervals” of treatment. These are critical components for
Claim 13 of the ‘643 patent, in particular.
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
V.A.C. system except for the fact that it involves the application of negative
pressure. The Davydov device incorporates no dressing, is not “secured” to the
patient, and relies on a nurse to apply the therapy for a set amount of time each day,
as opposed to having the device itself control the treatment intervals. These two
papers go into more detail on studies using this apparatus in heavily draining
wounds, with particular attention focused on the positive benefit of reduction of
bacterial count.
Independent Claim 13
Claim 13 is directed to a “method of treating a wound” and includes the steps of
“securing an appliance for applying reduced pressure to [a] wound” and “providing
reduced pressure to said appliance in alternating intervals of application and non-
application.”
The Davydov papers (KP#2,4,5) do not teach a “securing” step in the sense of
using some sort of adhesive to fix the suction apparatus to the wound. And in
terms of the "alternating intervals” step, what the Davydov papers describe is a
process of having a practitioner apply the therapy periodically by placing the device
over the wound and then removing it when done (e.g. 1x/day for 2-3 hours per
session). So in our opinion the only possible way that a jury could overturn Claim 13
would be by deciding that the “alternating interval” step was taught by the Davydov
papers and that it would have been “obvious” to someone with ordinary skill to
combine that technique with the concept of securing the apparatus to the wound area.
However, in our view, it is likely that the “alternating interval” language of the
‘643 patent will be interpreted as being different from that taught in the
Davydov papers. The ‘643 patent specifically describes treatment of a wound being
“carried out by securing a negative pressure appliance to the treatment site …, and
then maintaining a substantially continuous or cyclical reduced pressure within the
appliance until the wound has reached a desired improved condition.” Col. 12, lines
42-47 (emphasis added). Similarly, the ‘643 patent states, "Supplying reduced
pressure to the appliance in an intermittent cyclic manner has also been demonstrated
to be useful for treating wounds. Intermittent or cyclic supply of reduced pressure to
an appliance may be achieved by manual or automatic control of the vacuum
system.” This cyclical reduced pressure, or treatment in alternating intervals, is
therefore to be maintained while the negative pressure appliance is secured to
the treatment site, according to the ‘643 patent, and the supply and non-supply
of reduced pressure can be controlled automatically by the V.A.C. system.
As for the “securing” step, KCI will seek to define "securing” in a rather broad
fashion, encompassing attaching a reduced pressure appliance to the skin, other than
by suction alone. We think that KCI will succeed in this definition, as we think they
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
"alternating intervals" or "alternating KCI "controlled cycles occurring while the appliance is secured to the patient"
periods"
BlueSky "Changing application for non-application reciprocally for periods of time between these two events."
Source: Markman Briefs.
We will gain more clarity on the constructions of these key terms at the upcoming
Markman hearing. A construction of the “providing” step favorable to KCI at the
Markman Hearing may go a long way in confirming the validity of Claims 13
with respect to The Kremlin Papers.
Shares of KCI currently trade at 20-21x our 2006 estimates, a level we view as
highly attractive given KCI’s growth profile in comparison to mid-cap medical
technology peers and also in comparison to valuation levels for the universe of more
established medtech peers with high-teens to 20% EPS growth prospects. Over the
next year, as KCI continues to prove the sustainability of the V.A.C. opportunity, we
expect KCI to be able to support its trading multiple and to grow earnings at the high
end of our coverage universe. Our $75 price target for April 2006 values KCI at 27-
28x our current 2006E EPS estimate of $2.70 and implies over 30% upside potential
from current levels, a return that we think will allow KCI to outperform relative to
other stocks in our coverage universe. We reiterate our Overweight rating on KCI.
Risks to our Overweight rating include (1) Any reductions in the reimbursement for
V.A.C. therapy. Although we have seen little evidence that a reduction is a
possibility, should Medicare or any of the third-party payors reduce payment for
V.A.C., earnings would be negatively affected. (2) Any material change in KCI’s
12
Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
Rental Revenue 361.6 453.1 582.8 726.8 875.8 1,045.0 1,199.4 1,352.4 28.6% 24.7% 20.5% 19.3% 14.8% 12.8%
Sales Revenue 94.3 126.3 181.0 265.9 349.0 422.4 497.9 579.9 43.3% 46.9% 31.3% 21.1% 17.9% 16.5%
Rental Expense 220.5 276.1 356.1 457.3 544.6 642.7 731.6 818.2 29.0% 28.4% 19.1% 18.0% 13.8% 11.8%
Cost of Goods 33.0 51.8 64.1 70.8 93.4 113.2 132.7 153.7 23.7% 10.4% 31.9% 21.2% 17.2% 15.8%
Gross Profit 202.5 252.4 343.6 464.6 586.8 711.5 838.0 975.4 36.1% 35.2% 26.3% 21.3% 17.8% 16.4%
Sales, General and Admin. 99.4 122.8 170.6 223.5 281.1 333.1 383.0 434.2 38.9% 31.0% 25.8% 18.5% 15.0% 13.4%
Research & Development 15.4 18.8 23.1 31.3 43.0 54.3 66.4 79.8 22.9% 35.5% 37.2% 26.4% 22.3% 20.3%
Operating Income 87.7 284.1 154.9 207.3 262.8 324.1 388.6 461.3 -45.5% 33.8% 26.8% 23.4% 19.9% 18.7%
Interest Income 0.3 0.5 1.1 1.1 2.4 3.1 4.6 6.8
Interest Expense (45.1) (40.9) (52.1) (32.9) (25.8) (19.4) (13.6) (5.6)
FX Currency Gain (Loss) (1.6) 4.0 7.6 5.4 2.0 - - -
Pretax Income 41.2 247.6 111.4 177.8 241.4 307.9 379.6 462.5
Tax Expense 17.3 96.0 41.8 63.2 83.5 106.2 130.9 159.6
Net Income 23.9 151.6 69.6 114.5 157.9 201.7 248.6 303.0
Earnings per Share $0.32 $1.95 $0.93 $0.69 $2.15 $2.70 $3.28 $3.94
EPS Ex-Unusuals $0.33 $0.58 $1.04 $1.66 $2.15 $2.70 $3.28 $3.94 79.5% 59.5% 29.1% 25.9% 21.5% 20.1%
Diluted Shares 74.0 77.7 64.5 71.0 73.5 74.6 75.7 76.9
MARGIN ANALYSIS
Rental Exp/Sales 61.0% 60.9% 61.1% 62.9% 62.2% 61.5% 61.0% 60.5%
COGS/Sales 34.9% 41.0% 35.4% 26.6% 26.8% 26.8% 26.7% 26.5%
Gross Margin 44.4% 43.5% 45.0% 46.8% 47.9% 48.5% 49.2% 50.1%
Sales and marketing 21.8% 21.2% 22.3% 22.5% 22.9% 22.7% 22.5% 22.3%
R&D 3.4% 3.2% 3.0% 3.2% 3.5% 3.7% 3.9% 4.1%
Operating Margin (ex charges) 19.2% 19.1% 19.7% 20.9% 21.5% 22.1% 22.8% 23.7%
Pretax Margin 9.0% 42.7% 14.6% 17.9% 19.7% 21.0% 22.3% 23.8%
Tax Rate 42.0% 38.8% 37.5% 35.6% 34.6% 34.5% 34.5% 34.5%
Net Margin 5.2% 26.1% 7.9% 4.9% 12.9% 13.7% 14.6% 15.6%
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
Rental Revenue 198.0 165.9 19% 209.0 175.6 19% 225.7 188.6 20% 243.1 196.7 24% 875.8 726.8 21%
Sales Revenue 76.6 58.9 30% 82.4 61.4 34% 90.8 68.5 32% 99.2 77.0 29% 349.0 265.9 31%
Rental Expense 125.0 105.4 19% 131.0 109.6 20% 138.1 115.1 20% 150.5 127.2 18% 544.6 457.3 19%
Cost of Goods 21.0 16.8 25% 21.7 16.6 31% 24.3 18.8 29% 26.4 18.6 42% 93.4 70.8 32%
Gross Profit 128.7 102.7 25% 138.7 110.9 25% 154.0 123.3 25% 165.4 127.8 29% 586.8 464.6 26%
Sales, General and Admin. 62.3 48.5 28% 65.8 52.9 24% 72.8 59.1 23% 80.1 62.9 27% 281.1 223.5 26%
Research & Development 9.3 7.1 31% 9.9 7.2 38% 11.4 7.5 51% 12.3 9.5 30% 43.0 31.3 37%
One-time Charges - - - 2.5 - - - - - 2.5
Operating Income 57.0 47.0 21% 62.9 48.2 30% 69.8 56.7 23% 73.0 55.4 32% 262.8 207.3 27%
Operating Income (ex-unusuals) 57.0 47.0 21% 62.9 50.8 24% 69.8 56.7 23% 73.0 55.4 32% 262.8 209.8 25%
Interest Income 0.5 0.4 35% 0.6 0.2 280% 0.6 0.2 180% 0.7 0.4 79% 2.4 1.1 112%
Interest Expense (6.9) (10.2) -32% (6.6) (8.0) -17% (6.3) (7.6) -17% (5.9) (7.2) -17% (25.8) (32.9) -22%
One-time charges - 0.0 - (3.1) - 0.0 - 0.0 - (3.1)
FX Currency Gain (Loss) 0.5 (0.5) 0.5 0.2 0.5 2.0 0.5 3.7 2.0 5.4
Pretax Income 51.1 36.7 39% 57.4 37.6 53% 64.6 51.3 26% 68.3 52.2 n/m 241.4 177.8 36%
Pretax Income (ex-unusuals) 51.1 36.7 39% 57.4 43.1 33% 64.6 51.3 68.3 52.2 241.4 183.3
Tax Expense (recurring) 17.7 13.2 34% 19.9 15.5 22.4 18.5 23.6 18.1 83.5 65.3
Tax Expense (reported) 17.7 13.2 34% 19.9 13.5 47% 22.4 18.5 21% 23.6 18.1 31% 83.5 63.2 32%
Net Income 33.4 23.5 42% 37.5 24.0 56% 42.3 32.8 29% 44.6 34.2 n/m 157.9 114.5 38%
Net Income ex-unusuals 33.4 23.5 42% 37.5 27.6 36% 42.3 32.8 29% 44.6 34.2 31% 157.9 118.1 34%
Earnings per Share $0.46 ($0.62) $0.51 $0.34 52% $0.57 $0.46 26% $0.60 $0.47 28% $2.15 $0.69 212%
EPS ex-charges $0.46 $0.34 33% $0.51 $0.39 32% $0.57 $0.46 26% $0.60 $0.47 28% $2.15 $1.66 29%
Diluted Shares 73.1 68.3 7% 73.3 71.3 3% 73.6 71.8 2% 74.1 72.6 2% 73.5 71.0 4%
Source: JPMorgan estimates and company reports.
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
Therapeutic surfaces/other
Rental 150.8 149.5 39.8 37.4 37.2 37.8 152.2 39.4 37.4 37.9 39.3 154.0 157.9 161.0 164.2
Sales 29.2 30.6 8.6 6.2 7.1 7.7 29.5 7.5 7.1 7.2 7.5 29.3 30.1 30.7 31.3
Total Therapeutic surfaces/other 180.0 180.0 48.4 43.6 44.3 45.4 181.7 46.9 44.5 45.2 46.8 183.3 187.9 191.7 195.5
growth -4% 0% 8% 1% -2% -3% 1% -3% 2% 2% 3% 1% 3% 2% 2%
Total USA Rental 366.3 461.1 129.7 138.9 148.6 152.1 569.2 155.6 164.9 176.9 189.4 686.7 822.1 940.2 1,047.1
Total USA Sales 81.6 118.8 40.2 40.8 44.5 49.6 175.1 50.7 53.7 57.6 61.7 223.8 267.9 306.3 341.2
Total USA 449.1 579.9 169.9 179.6 193.0 201.7 744.3 206.4 218.6 234.5 251.1 910.5 1,089.9 1,246.5 1,388.3
growth 27% 29% 34% 31% 28% 23% 28% 21% 22% 21% 24% 22% 20% 14% 11%
International
V.A.C.
Rental 21.2 41.3 13.4 15.4 18.6 21.2 68.5 19.9 22.4 26.7 30.0 99.1 128.6 164.0 209.1
Sales 23.0 40.6 13.3 15.0 18.2 21.3 67.9 19.9 22.9 27.3 31.2 101.3 133.9 170.7 217.6
Total V.A.C. 44.3 81.9 26.7 30.4 36.8 42.5 136.4 39.8 45.3 54.0 61.1 200.3 262.5 334.6 426.6
growth 86% 85% 69% 60% 69% 68% 66% 49% 49% 47% 44% 47% 31% 28% 28%
Therapeutic surfaces/other
Rental 65.3 80.3 22.8 21.3 21.5 23.4 89.1 22.5 21.7 22.0 23.8 90.0 94.3 95.3 96.2
Sales 21.6 21.7 5.3 5.6 5.8 6.1 22.9 6.0 5.8 5.9 6.3 23.9 20.7 20.9 21.1
Total Therapeutic surfaces/other 87.0 102.0 28.2 26.9 27.4 29.5 112.0 28.5 27.4 27.9 30.1 113.9 115.1 116.2 117.4
growth 11% 17% 20% 4% 9% 7% 10% 1% 2% 2% 2% 2% 1% 1% 1%
Total OUS Rental 86.8 121.679 36.2 36.7 40.1 44.6 157.6 42.4 44.1 48.8 53.8 189.1 222.9 259.3 305.3
Total OUS Sales 44.8 62.275 18.7 20.6 24.0 27.4 90.8 25.9 28.7 33.1 37.5 125.2 154.6 191.6 238.7
Total International 131.2 184.0 54.9 57.3 64.1 72.0 248.3 68.3 72.8 81.9 91.3 314.3 377.5 455.8 559.0
growth 29% 40% 39% 28% 37% 36% 35% 24% 27% 28% 27% 27% 20% 21% 23%
Total Revenue 580.4 763.8 224.8 237.0 257.2 273.7 992.6 274.6 291.4 316.5 342.3 1,224.7 1,467.4 1,702.3 1,947.3
growth 27% 32% 35% 30% 30% 26% 30% 22% 23% 23% 25% 23% 20% 16% 14%
Source: JPMorgan estimates and company reports.
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
18
Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com
• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or
debt securities for Kinetic Concepts, Inc within the past 12 months.
• Client of the Firm: Kinetic Concepts, Inc is or was in the past 12 months a client of JPMSI; during the past 12
months, JPMSI provided to the company investment banking services, non-investment banking securities-
related service and non-securities-related services.
• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for
investment banking services from Kinetic Concepts, Inc.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation
for investment banking services in the next three months from Kinetic Concepts, Inc.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products
or services other than investment banking from Kinetic Concepts, Inc. An affiliate of JPMSI has received
compensation in the past 12 months for products or services other than investment banking from Kinetic
Concepts, Inc.
120
105
90 OW OW $75
75
Price($)
60
45
30
15
0
Feb May Sep Dec Apr
04 04 04 04 05
Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
Initiated coverage Apr 05, 2004. This chart shows JPMorgan's continuing coverage of this stock; the current analyst may
or may not have covered it over the entire period. As of Aug. 30, 2002, the firm discontinued price targets in all
markets where they were used. They were reinstated at JPMSI as of May 19th, 2003, for Focus List (FL) and selected Latin
stocks. For non-JPMSI covered stocks, price targets are required for regional FL stocks and may be set for other stocks
at analysts' discretion.
JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Ratings prior to Sept. 25, 2002: B = Buy, LTB = Long-Term Buy, MP = Market Performer, MU = Market Underperformer.
Explanation of Ratings: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months,
we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage
universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total
return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve
months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s
team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the
cover of each publication. Each analyst’s coverage list, showing full coverage universe, is available on the analyst’s page
19
Michael Weinstein North America Equity Research
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mike.weinstein@jpmorgan.com
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Prior to September 25, 2002, our rating system was: Buy — we expect the stock to outperform the market by a minimum of
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mike.weinstein@jpmorgan.com
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Michael Weinstein North America Equity Research
(1-212) 622-6635 18 April 2005
mike.weinstein@jpmorgan.com