Procedure volumes aren’t yet back to normal in spinal surgery, but the market continues to reward innovation and Globus Medical (NYSE:GMED) is reaping the benefits, as the company started to separate itself from the pack again in the third quarter. Further down the road, Excelsius still holds meaningful growth potential, as do the company’s efforts in trauma and robot-assisted joint reconstruction.
Globus has declined about 5% since my last update, but that’s still better than the market’s performance and the performance of the broader medical device sector (down about 15%), not to mention other ortho competitors like NuVasive (NUVA), Stryker (SYK), and Zimmer Biomet (ZBH). Valuation is more debatable without a more sustained recovery in procedure volumes, but I still see Globus as a long-term innovation-driven winner in the ortho space.
Spine procedures have been relatively weak though 2022, still trending toward the low 90%’s as a percentage of pre-pandemic volumes, but Globus started to show some separation in the third quarter with above-peer results and growth ahead of the market (pending Medtronic’s (MDT) upcoming report).
Revenue rose about 11% as reported, or closer to 13% in organic terms, just beating expectations. Growth was far stronger in the small international business (up 32% cc), up nearly 10% growth in the U.S. was nevertheless a meaningful upturn against a fairly challenging comp (up 9% in the year-ago quarter). Musculoskeletal revenue rose about 10%, with U.S. spine up 9% and Trauma up 83%, while Enabling Technology revenue rose 19%; the former beating expectations by a small margin and the latter missing by about 2%.
Gross margin fell 30bp yoy and rose 20bp qoq to 74.2%, beating by about 20bp. Operating income (adjusted) rose 6%, in line with expectations, with margin down 110bp to 24.9%.
Measuring overall growth in the spine space is difficult without seeing Medtronic’s results (given that their U.S. share is around 31% to 33%), but it looks as though overall growth among the large players (those with 10%-plus share) was in the low-to-mid single-digits, with Stryker (SYK) up 2%, Globus up 9%, NuVasive up 13% (U.S. spinal hardware), and Johnson & Johnson (JNJ) down 3%.
Management attributed their outperformance to better rep recruitment and retention and good implant pull-through. To that point, it’s clear that robotics and navigation remain differentiating technologies in the space that actively drive better procedure volumes/content. With Excelsius3D (an imaging system) now available, I expect Globus to continue to gain implant share – likely at the expense of companies like Johnson & Johnson and Stryker.
It's also worth noting, though, that hospital capital budgets are still under some pressure, with hospitals needing to catch up on some “core” spending that was preempted by the pandemic. I believe that could explain some of the softer sequential performance here.
Globus has always taken a “fast follower” approach with its core spinal implant business, and I don’t expect that to change. This strategy does reduce development risk somewhat (responding to what surgeons actually want), and with the company’s strong position in robotics and imaging, they can pull growth even if they’re not first to market.
Looking at the spine market, it’s clear that offering total procedural solutions (imaging, navigation, implants, et al) is a meaningful competitive advantage now. There was definitely increased interest in augmented reality (or AR) at the recent North American Spine Society meeting, and this is likely to be an important technology going forward. Management has a new XR headset for Excelsius, and I expect the company will continue to refine its capabilities with the Excelsius platform.
As far as competition goes, Stryker doesn’t have a firm timeline for its entry into surgical robotics yet, but has said its going forward with the Mako platform (instead of Cardan). In the meantime, it has the Q Guidance system – a navigation system that offers multiple tracking options and could help stimulate better results here (again, likely at the expense of companies without imaging/nav/robotics capabilities.
In trauma, management said a short time ago that they were about “75% of the way there” to having a full trauma portfolio, and I expect further development to fill out the portfolio. I had thought this would be completed before the end of this year, but it seems like the timeline has slipped some. Either way, trauma is a meaningful market (around $6B/year) and one that hasn’t seen all that much innovation.
The biggest upcoming change for Globus will be the company’s entry into large joint reconstruction (hips and knees). Management is building the business around a robotic approach, and the timeline for that has slipped, with a launch now expected in the second half of 2023. Meanwhile, the company continues to develop implants to complement the robot. As a reminder, the Mako robot has been a significant disruptor in the market (to Stryker’s favor), and Globus could become a more significant player more quickly than expected – surgeons have their preferences (and hospitals tend to honor them), but if Globus can make the case for better outcomes, surgeons will use their implants.
I would be surprised if Globus engaged in large-scale M&A, but the company is always looking for technology/performance-driven tuck-in opportunities. I could possibly see the company looking into innovative extremity implants, but I think the preference would be for tuck-in deals to complement/augment spine (an artificial cervical disc would be welcome), robotics/imaging, and/or major joints.
I’m expecting close to 10% annualized revenue growth from Globus over the next five years as spine procedures recover, Globus continues to gain share, and as platforms like Excelsius continue to grow. I also expect good growth from trauma and view the entry into major joints as a wild card. Longer term, I believe 9% revenue growth is possible, and I continue to believe that the company can get to 20% adjusted free cash flow margins over the next five years and into the low-to-mid-20%’s over time beyond that.
Valuation is still challenging. Discounted cash flow suggests a prospective long-term annualized return in the high single-digits, which is okay but not spectacular. Using my growth and margin-driven EV/revenue approach, a 6x multiple supports a fair value in the high $70’s, while a 7x multiple would get me into the $80’s. Multiples have fallen in the spine care space as growth has slowed, as multiples across med-tech have contracted significantly relative to a couple of years ago, and I’m less inclined to use more heroic multiples at this point.
I think Globus is an okay investment prospect today. Valuation isn’t quite what I’d like it to be, but there does seem to be momentum in the business and investors typically pay up for that. Another pullback would make this an easier call, but I think investors can still consider adding these shares to their portfolios.
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