Late Monday, Kinetic Concepts (KCI) reported that the US District Court for the Western District of Texas decided the patent claims licensed by KCI from Wake Forest University were invalid, effectively reversing the jury verdict from March. While this is somewhat surprising, we've long held that KCI would continue seeing more competition for its top product set, V.A.C., from companies such as Smith & Nephew (SN.). We've seen the effects of increasing V.A.C. competition on KCI's results for the past couple of years, which has primarily decelerated growth. If this decision stands, that competition may continue unabated. While we've been relatively cautious about the benefits KCI could receive from the jury's verdict last spring, this decision may cause us to re-evaluate our fair value estimates for KCI and Smith & Nephew. We'll dig in further and could make adjustments to our cash-flow assumptions for the next couple of years. However, since our valuations are based on long-term cash-flow assumptions, which already adjust for the changing competitive landscape in the V.A.C. product set, we don't expect to make big valuation adjustments, if at all.
Read Morningstar’s full research report on Smith & Nephew.
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