American companies start in a variety of ways. Exactech (EXAC) started around a kitchen table in Gainesville, Florida, when Bill Petty, an orthopedic surgeon, his wife Betty and friend Gary Miller, a biomedical engineer, came to that classic American conclusion: There has to be a better way!
Medical and surgical care product companies require commitment top to bottom and seem to prosper very well with healthcare professionals at the helm. Too, innovation comes quickest when the decision train is as short as possible and contains highly trained leaders with intimate technical knowledge of the field. Exactech exemplifies this description.
Incorporated in 1985, the company sold its first product, a cemented hip system in 1987. By 1992, the company recorded its first international sale. A strategic alliance in 1994 expanded international distribution. A comprehensive knee system was introduced in the same year. Exactech went public in 1996 and was listed on the Nasdaq.
Rapid expansion required enhanced production facilities. A new factory building came on line in 1998 and the product line began to expand exponentially with newer implant designs and associated instrumentation. By 2000, the company was recognized by Forbes in its list of 200 of the fastest growing small companies in the U.S., and by 2001, they were included in the top 100 fastest growing. By 2002, the company had outgrown their factory space and broke ground for a vastly expanded production facility.
In 2005, the company celebrated its twentieth anniversary and launched a record number of new products including the Equinoxe Reverse total shoulder system. By 2006, sales exceeded 100 million dollars. Continuing to grow the company acquired a major spinal instrument start up and expanded the product line into the rapidly growing spinal surgery area. By 2010, they expanded vertically with the acquisition of another spinal implant maker. The company initiated direct activities in France and Japan. Each deliberate move has expanded the company's penetration and share of the estimated 41 billion dollar a year orthopedic implant market.
By 2012, annual sales exceeded 220 million dollars. Growth of sales in 2012 of 11% was more than twice the growth level of the nearest old line implant company. Although precise figures are hard to come by it would suggest that Exactech might be garnering market share in a highly competitive environment. A very good sign by any measure.
Guidance for 2013 anticipates gross revenues of 236-242MM, a 5-8% increase over the previous year. In 2013, net income is expected to exceed $14M with EPS in the range of $1.06. The current market value of the company now exceeds $244M
The company has organized itself to meet the needs of the market both in the U.S. and the rest of the world. Within the U.S. is a network of independent sales agencies and direct sales representatives, overseen by regional directors. Outside the U.S., there are over 40 independent distributors and what Exactech describes as wholly owned global offices. Direct operations are carried out among others in the UK, Japan, Germany, the PRC as well as Canada. Institutions hold 53% of the stock. Only one firm holds more than a million shares. Several big time firms, Northern Trust (NTRS), BlackRock (BLK) and Gabelli (GAB) hold modest amounts of the stock. The current P/E is 20.3 and the stock is reasonably active with the 50-day average daily turnover of 27,000+shares.
Within the United States there are, as of the last report 253 sales representatives with annual sales exceeding a half million dollars. Information within their published material suggests Exactech is very careful in the choice of sales reps. The company, through its medical leadership, knows there is a special relationship between surgeon and sales representatives, one involving service and trust. Personality is a crucial trait. Too, the company appears to offer much more than the usual informational services to practicing orthopedists. For a surgeon, being able to obtain advice and information in a timely and personalized manner is a very strong selling point and tends to cement the relationship between surgeon and supplier. Long-term loyalty is golden.
Exactech is doing a lot of things, and doing them right. They continue to innovate in design and fabrication. They are currently utilizing EBM technology (AMAVF.OB) to create a customized porous bone ingrowth surface on their titanium acetabular implants. This methodology is a true breakthrough with enormous portent for the future of implant fabrication. Exactech continues to court the leading edge.
Hip implants have been commoditized. If surgery is well performed it is difficult, if not impossible, to differentiate the clinical result of one implant compared to the other. Competition among suppliers is based more on service and support rather than intangible benefits of one design over the other. Careful R&D with objective testing avoids issues such as the metal on metal problem with systemic toxicities and local breakdown, or corrosion in another design due to inadvertent metal on metal contact. Exactech, with careful development and testing, has so far avoided such complications. However, despite all the care and control, problems can occur. The fact that you've had no problems doesn't mean there isn't one coming down the hall right this minute. An old saying among doctors is, "Doctor, if you haven't had any serious complications, you probably haven't done much surgery."
With a mature, experienced management, a solid balance sheet, an impressive track record, and an up to date comprehensive product line up, Exactech warrants consideration for inclusion in a moderate risk growth portfolio. The only cloud on the horizon is Obamacare. The number of imponderables is, well, imponderable. Being quick on the feet will be management's challenge. Changes will come quickly and delayed response may be fatal. All firms will face the same O'care issues, and how this situation alters the competitive environment is totally unpredictable. One thing for sure: things will never be the same, either for the companies, or the investors. Best advice, "Caveat Quisque."