Recently Pat McKeough responded to a Member of his Inner Circle who wanted his advice on a healthcare company that specializes in wound treatment.
Covalon Technologies generates its revenue through development and distribution contracts, licensing agreements and product sales for advance-care wound treatment and infection-prevention products.Covalon’s revenue and earnings rose sharply in the latest quarter, notes Pat, and they could enjoy a sudden rise in market share with a manufacturing breakthrough. But the company must spend heavily on sales and marketing to compete against traditional wound care products that are well-established in hospitals and other institutions.
Q: Pat: May I have your views on Covalon Technologies. Thank you
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A: COVALON TECHNOLOGIES LTD. (symbol COV on the Toronto Venture Exchange; www.covalon.com), develops advanced-care products for the treatment of a wide range of wounds; it also manufactures infection-prevention products such as MediClear PreOp. It’s a breathable, transparent, self-adhesive, silicone barrier film that conforms to the contours of the body.
Covalon generates its revenue through development and distribution contracts, licensing agreements and product sales.
The stock jumped in early-May 2018 following the company’s announcement it had won a series of competitive contracts in the Middle East. Those deals have an estimated value of $100 million over three years.
The agreements call for the delivery of products across ten categories. That includes Covalon’s IV Clear, ColActive Plus, and CovaWound product lines. A major client is the Executive Board of Health Ministers’ Council for Gulf Cooperation Council States (SGH), although private organizations in Saudi Arabia and other regional markets are also represented.
Growth stocks: Revenues and earnings up sharply in the latest quarter
In the three months ended June 30, 2018, the company’s revenue rose 34.4%, to $7.9 million from $5.9 million a year earlier. It made $2.5 million, or $0.10 a share, up sharply from a profit of $366,796, or $0.03.
Covalon will need to spend considerable amounts on sales and marketing to sell its wound-care products in markets that are still dominated by existing methods of wound care. Those traditional plasters, dressing and bandages are already in place and familiar to hospitals and other institutions. The company must also deal with competition from major industry leaders such as Johnson & Johnson, 3M Healthcare and Smith & Nephew.
However, the industry has a low level of concentration, meaning no single global company dominates the market. That suggests small companies can experience a sudden rise in market share if they are able to develop medical manufacturing breakthroughs—and bring them to market.
Inner Circle recommendation: Covalon Technologies is okay to hold, but only for highly aggressive investors willing to accept considerable risk.
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