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Medtronic Inc. (NYSE:MDT), Stryker Corp (NYSE:SYK), and Zimmer Holdings (NYSE:ZMH) have seen their growth rates drop from years prior, and they can either wait on organic growth mechanisms to take shape or they can dip into their balance sheets and write a check for growth via M&A. These behemoths of the medical device/surgical implant business have been labeled the key benefactors of the growing aging demographic worldwide. Medtronic and Styker have made a few acquisitions in the last few months ($100 - $400 million in size) in hopes of giving their sales forces new products to engage their clients and to re-grow their growth stories. Medtronic acquired ATS Medical for $350 million in mid-August and a week later bought Osteotech (OSTE) for $123 million. Stryker bought private company, Gaymar Industries for $150 million in August. These acquisitions were valued around 2-4x sales and all of them had flat revenue growth and were unprofitable (breaking even at best).

I invested in Bacterin International (BIHI.OB) when it was still a private company, and then invested in it again when they went public a couple months ago. Let me also state that the purpose of writing this article isn’t to get people to run out and buy the stock at its current price. The stock is fairly valued (fairly valued = Wall Street gibberish for “probably overvalued”) at the current level, but fairly valued stocks can turn into undervalued stocks pretty quick with a couple quarters of growth. As an experienced investor, I know there is a big distinction between giving guidance and actually achieving those results; however, guidance does give a certain insight into the expectations of the company. Bacterin International issued “financial targets” in their 8k filing when they went public in June and if they achieve those targets, it will likely place Bacterin in the top 1% of growth stories:

The company raised over $9 million when it went public. A bulk of the proceeds is being deployed to launch a nationwide direct sales force to sell Bacterin’s growing list of products (OsteoSponge, OsteoSelect, OsteoLock, and OsteoSponge SC). Bacterin had 21 sales reps at the end of July and expects to have 52 reps by October. The company’s core product, OsteoSponge, is a bone scaffold that orthopedic surgeons use to re-grow bone (bone void filler). The surgeons take this de-mineralized bone scaffold, inject it with adult stem cells, and this triggers the bone to re-grow where the surgeon wants it. There are other companies out there that offer bone scaffolds but the secret sauce is de-mineralizing the bone scaffold down to a certain calcium level so the scaffold literally feels like a sponge. This is what Bacterin’s patents cover and the “spongy” nature of the scaffold seems to stimulate quicker bone growth while also staying in place for the surgeon. OsteoSponge addresses a ~$6 billion market where Medtronics product Infuse (a $700-900 million annual product) is under scrutiny, and surgeons are looking for a replacement product that has better handling and equal performance. Bacterin is in the process of completing a head to head trial (OsteoSponge vs Infuse) and expects 2 year data to be announced in the coming weeks/months. If OsteoSponge shows equal performance to infuse at a fraction of the cost, I would expect this to be a major catalyst into 2011.

Bacterin is also selling into the market, OsteoSelect (a putty version), which was approved for sale in Q4 2009 and was immediately sold out. The company quickly increased production of OsteoSelect in Q1/Q2 2010 to meet order volumes. OsteoLock is a product used in spinal surgeries that is starting to gain traction among surgeons. You can view the whole list of Bacterin products on their website.

An even bigger catalyst for 2011 and beyond is Bacterin’s OsteoSponge SC product that began trials a few months ago. This two year trial would allow Bacterin to claim cartilage re-generation. Preliminary results are expected in the next 6-9 months. The ability to re grow cartilage is the holy grail of products, so positive results could increase the multiple on the stock tremendously. A product approval showing effective re-growth of cartilage would likely be a billion dollar product.

Bacterin operates another business entity that applies a patented anti-microbial coating on medical devices. These coatings protect patients from hospital originated infections that research shows effects 5-15% of patients. I won’t get into this too much, but this business could be a large catalyst in 2011-2012 as the company continues to get FDA approvals and makes alliances with medical device companies. Please view their most recent FDA approval and collaboration agreement with RyMed.

As I’ve outlined above, M&A has been heating up in the industry where Bacterin operates in. Most of the acquisitions have been for no growth companies that were breaking even at best, and were acquired for 2-4x revenues. Bacterin is looking to grow 200% in 2010 and 200% in 2011. Bacterin is currently at an inflection point with positive net income likely in Q4 2010. They have what they believe to be superior products addressing large markets, and potential game changing products in the pipeline. The stock looks expensive right now, but if the company proves out their expected growth curve over the next couple of quarters, I would expect the current valuation to look cheap. I’m guessing Medtronic, Stryker, Zimmer Holdings, and others are watching Bacterin’s progress closely.

Bacterin stock is very illiquid since none of the investors in it can really sell until the S1 registration statement is filed (by end of Sept) and goes effective (probably in Nov- Jan timeframe). A buying opportunity will likely occur once some shares are freed up to trade. If anyone’s interested in hearing the story, Bacterin is presenting at their very first investor conference, the Rodman & Renshaw Conference in New York City on September 15th.

Disclosure: LONG BIHI.OB

Source: Bacterin International: A Takeout Target in 2011