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Deltex's progress worth monitoring

The medical equipment supplier is carving out a useful niche and seeing revenues grow fast
May 3, 2012

Deltex Medical has been labouring away for years slowly building up a market for its range of equipment that monitors how well patients are recovering from major surgery. In global terms, the company's sales count as a rounding error on the income statement of giants such as Stryker or Smith & Nephew, but medical devices is a competitive industry and companies that can establish a first-to-market advantage in an affluent country can prosper – and that's what Deltex is doing in the UK.

IC TIP: Buy at 28p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • First to market in the UK
  • Probe sales growing quickly
  • Foothold in the US
  • Potential takeover target
Bear points
  • Sales slowdown in Middle East
  • Fund-raising likely

The key development for Deltex was the decision by the National Institute for Clinical Excellence (NICE) to recommend its CardioQ-ODM machine for use by National Health Service trusts. It monitors patients during and after surgery and helps regulate the amount of fluid given to them. Using monitors to keep patients stable has a clear medical benefit but, as a thorough study by NICE demonstrated, better monitoring can also reduce the cost of care significantly. NICE reckons that Deltex's machine can save around £1,100 per patient. That works out at £1bn a year across the NHS's provision of critical care. In austere times, those levels of savings cannot be ignored by hard-pressed hospital administrators. In fact, hospitals can be financially penalised if they fail to implement an effective monitoring procedure. The other positive for Deltex is that NICE has, so far, not recommended any of the five alternatives that compete with CardioQ-ODM.

DELTEX MEDICAL (DEMG)

ORD PRICE:28pMARKET VALUE:£41.9m
TOUCH:27-28p12M HIGH:29pLOW: 15p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:1pNET DEBT:73%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20095.6-2.13-1.9nil
20106.3-1.51-1.1nil
20116.3-1.52-1.0nil
2012*7.1-0.80-0.5nil
2013*8.6-0.30-0.2nil
% change+21

Normal market size: 12,000

Market makers: 10

Beta: 0.6

*Edison Investment Research forecasts

The challenge for Deltex is to gain traction at a time when healthcare spending is under pressure. Its dependence on the UK also makes it vulnerable to the NHS's spending cycle. So Deltex's bosses are seeking new markets. They are doing this primarily by offering to lease machines rather than to sell them. They are also focusing on generating recurring revenues through selling surgical probes (the parts of their monitoring machines that are disposable). That looks sensible because last year sales of surgical probes grew 20 per cent, twice as fast as sales of monitoring machines.

The growth of probe sales is a major reason why Deltex's sales growth accelerated to 40 per cent in the first three months of this year. That pace could be maintained either if NHS trusts increase their spending to cut costs in the medium term, or elective surgery in the US returns to normal patterns after dropping off sharply last year. Despite a squeeze in the US, that market could still prove lucrative for Deltex as the company has a partnership with an alliance of 2,500 hospitals to help them improve their efficiency.