The world of spinal care continues to be divided among the slow-growing giants like Johnson & Johnson (NYSE:JNJ), Medtronic (NYSE:MDT), and Stryker (NYSE:SYK) and the much faster-growing up-and-comers like NuVasive (NASDAQ:NUVA) and Globus Medical (NYSE:GMED). With Globus maintaining a focus on continuous product development and new launches and the expansion of its sales effort, the growth prospects continue to look good, particularly as some industry headwinds appear to be abating.
Valuation for med-tech has gotten trickier as the stocks have been quite strong over the last year or so. Globus isn't so appealing from the viewpoint of intrinsic value (discounted cash flow), but the stock doesn't seem overpriced from the perspective of sales and EBITDA multiples.
A Solid Performance To Close 2013
While the large orthopedic companies saw spine product growth in the neighborhood of flat to up in mid-single digits, both NuVasive and Globus Medical delivered mid-teens growth. Globus released its revenue results early, and the final results were in line with that guidance as sales rose more than 14% (about 2% ahead of the initial expectations for the quarter). Sales in the Innovative Fusion segment were up more than 15%, while Disruptive Technology saw growth of a little less than 14%.
Margins were mixed, but solid overall. Gross margin fell about four points, with the medical device tax likely the single biggest discrete factor. Operating income rose 25%, and operating margin rose about two and a half points, as SG&A growth was just 2%. Given the company's recent sales force hiring expansion, though, I wouldn't expect that to be the new normal and SG&A spending will probably track closer to sales growth.
New Products And Easing Headwinds
There do not appear to be any near-term obstacles to solid ongoing growth from Globus. The company is gaining share in the market in part by out-innovating its larger rivals, and new products like the LATIS implant and Secure-C disc should continue that process.
Globus (as well as NuVasive) should also benefit from improving overall market conditions. Pricing has been relatively stable and while payers are still pushing back on certain procedures, it isn't really impacting Globus's addressable market all that much.
Another meaningful improvement is an ongoing shift against physician-owned distributorships (or PODs). These organizations built a lot of momentum by offering lower costs to hospitals, but the inherent potential for conflicts of interest has led to a backlash and the Office of the Inspector General labeling them as "inherently suspect". Large health care systems are responding, with companies like HCA deciding not to deal with PODs except under very specific circumstances. As these PODs lose influence in the market, it should improve the pricing and competitive environment for Globus.
Excelsius Is An Interesting Call Option
Globus has done well with its "second to market" strategy, and Globus is taking that in an interesting direction with its recent acquisition of Excelsius. I still have not seen the company confirm the price tag for the deal, but policies on materiality would suggest less than $50 million upfront and possibly in the neighborhood of $30 million.
Excelsius is developing a surgical robotics system to assist doctors with spinal procedures (and perhaps brain and other musculoskeletal procedures as well). Management believes that the system will be more maneuverable and convenient than the Mazor (NASDAQ:MZOR) Renaissance system, which attaches directly to the patient's bed. System ASPs will most likely be $750,000 or higher, with a disposable component (Mazor's per-procedure revenue is around $1,500).
The Excelsius system should offer a number of benefits to spine surgeons, including 3D-imaging, less fluoroscopy, less trauma, more precise movements and placement, and fewer adverse events. Multiple studies of the Mazor Renaissance have shown that it meaningfully increases the accuracy of implant placements in minimally invasive procedures - from around 90% in freehand procedures to upwards of 98% in robot-assisted procedures. With that, clinicians have also noted less blood loss, shorter stays, and fewer side effects (including nerve damage).
It's important to note that the Excelsius system is not the Mazor system and the functional performance of the Renaissance does not transfer to Globus. My point, though, is to suggest that there are benefits to robot-assisted spine surgery. The biggest question is going to be market adoption. Mazor is a small company, but it has not achieved all that many system placements and readers may remember that MAKO Surgical had challenges driving adoption of its RIO system despite clinical advantages to using the system.
Assuming that Excelsius does result in an approved product (likely 2015/2016), Globus will have its work cut out making it into a commercial success. Even so, I like the move - it is not consuming a large portion of the company's resources and it's a good call option for a technology that could result in share growth in the minimally-invasive spine surgery space.
The Bottom Line
I believe that Globus is doing the right things to grow, including prioritizing continuous product development and sales force expansion. Just as a large part of the NuVasive growth story today is predicated on OUS expansion, I believe Globus too can ultimately hope to benefit from a larger contribution from overseas sales. All told, I look for Globus to achieve around 10% revenue growth and similar low-teens FCF growth over the long term.
Discounting that cash flow back doesn't drive an especially attractive fair value today (in the very high teens), but growth med-tech stocks are not beholden to that methodology. Looking at sales and EBITDA multiples suggests more potential - averaging out a 4x multiple on revenue (low for growth med-tech, but not out of line for growth orthopedics) and a 14x multiple on EBITDA (reasonable relative to its likely three-year EBITDA growth rate) results in a target of $25.
Buying good growth opportunities at a reasonable valuation isn't always possible, but I think Globus is a decent prospect today. Certainly there are reasons to worry that med-tech valuations (and stock market valuations overall) are getting high, but for those who wish to stay invested in the space, Globus is worth a look.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.