HealthpointCapital Initiates Research Coverage of Exactech, Inc. and Regeneration Technologies
BY EDITOR, MAY 5, 2003
Last week we published our sales and earnings forecast as well as an analysis of future prospects for two companies, Exactech and Regeneration Technologies. We've posted the summary of our analysis for each company on First Call (the Thompson Financial Service for Institutional Investors), on our website (www.HealthpointCapital.com) and through our own proprietary, industry distribution database.
As an orthopedic research, advisory and private equity firm, publishing sales and earnings forecasts and independent analysis of orthopedic companies is part of our charter.
Our forecasts will be posted on First Call. By sharing our forecasts freely with the industry, we get to live in the same kind of fish bowl that many of our clients do and that, we think, will also make our research crisp, robust if not occasionally controversial.
Over the course of 2003, we are planning to launch coverage of all the public orthopedic companies. For more information, visit our website at HealthpointCapital.com" class="graylink">www.HealthpointCapital.com.
Exactech, Inc. Forecasting $72 million in sales, up 22% for 2003. Earnings, on smaller margins, will rise at a slower rate, reaching $0.56 on a per share basis, up 17%. We forecast 2004 sales will rise another 17% on the strength of rising tissue and hip sales to $84 million. We expect margins will continue to moderate thereby resulting in a 13% rise in earnings to $0.63 per share.
Regeneration Technologies, Inc.: Forecasting $85 million in sales, up 24% for 2003. Earnings, on expanding margins, are expected to reach $0.24 on a per share basis versus the prior year's ($0.50) loss. We forecast 2004 sales will rise another 18% to over $100 million. We expect margins will continue to expand thereby supporting a 33% increase in earnings to $0.32 on a per share basis.
For Week Three of earnings season, three strong rebounds and two positive earnings surprises punctuate our report. We bullet-point DJ Ortho, Osteotech, CryoLife, Kyphon, Orthologic, Wright Medical and Encore Medical. Let the games begin.
DJ Ortho: For some time we've been writing that DJ was poised for a rebound and this quarter, as they blew through the street's consensus earnings estimate of essentially break-even, management put an exclamation point on that fact.
- Even though sales for the first quarter rose only 6% (to $47.1 million) gross margins popped nearly 120 basis points going to 54.8% of sales from 53.6% in the same quarter a year earlier.
- As a result earnings rose 14% for the quarter to $0.09 on a per share basis and completely eclipsed consensus Wall Street expectations.
- Cash flow was also strong and management announced that it had prepaid $20 million of debt.
- Management also announced that Broadlane Inc., the buying service that supports over 490 acute-care hospitals, more than 1,500 sub-acute facilities and thousands of physician practices including Kaiser Permanente, Tenet Healthcare and others, had awarded its supply contact to DJ Ortho.
Osteotech: Nobody should bet against Osteotech right now. Something is going on over there in south Jersey.
- Sales hit $22.5 million in the first quarter, up 22% from the immediately preceeding quarter.
- Earnings, however, more than doubled coming in at $0.07 versus $0.03 for the same period last year.
- Management is standing firm with its guidance for the current year - sales of $93-97 million and EPS in the range of $0.46- 0.50. This, by way of comparison, would be up nearly 12% from last year's levels and earnings would have increased dramatically from last year's $(0.08) loss.
- Pacing items remain the rate at which DePuy (JNJ subsidiary) rolls out Osteotech's allograft products and the speed with which management can increase its metal implant business.
- Only two analysts were on Osteotech's conference call.
CryoLife: We spent a fair amount of time at CryoLife's booth at the recent AANS (American Association of Neurological Surgeons) conference and we think a kind of belligerent optimism is taking hold. Of course, manning a CryoLife booth these days is a little like being the Maytag repair man...but we think the worst is over and the mood is one of determined recovery. Certainly the first quarter report points in that direction.
- Orthopedic revenues, hurt by last year's FDA ordered recall, remain a mere fraction of previous levels - $150,000 versus last year's $5.9 million. But the company's BioGlue - and allograft heart valves sales were strong.
- BioGlue, which management hopefully expects will someday be used in the spine (we obviously have our doubts), posted very strong sales in vascular applications rising 33% to $6.5 million.
- In the quarter management put on a seminar on how to manage a company in the midst of a revenue decline. Truly, excellent management, in our view. Earnings, which should have only improved modestly from the 4th quarter's $(5.7) million loss actually came in at a mere $(0.4) million loss.
- Cash flow, as a result, was positive in the quarter.
- Furthermore, management announced the settlement of some of its lawsuits and we wouldn't bet against the eventual dismissal or negotiated settlement of the remaining suits.
- The FDA still has the company on a very tight leash. Which, we expect, will hurt growth prospects for a while. Still, impressive quarter and we look forward to seeing how the rest of the year unfolds.
Kyphon: Kyphon is pioneering two of the most intriguing and promising arenas in orthopedics, MIS spinal surgery and osteoporotic vertebral repair. The results, we think, were clear in the quarter's sales and earnings results - both of which were strong.
- Sales rose 72% to $25.1 million and net income (yes, income) was $541,000 or $0.01 on a per share basis. Last year, the net loss was $1.7 million or $0.58 per share. Nice improvement.
- In fact, the numbers were even stronger than initial indications. Included in the numbers was the write-off for purchased R&D following the company's purchase of Sanatis GmbH that was completed about a month ago. It amounted to $636,000. More than reported earnings.
- Cash is now $69.3 million and, for the first time since going public in 2002, sales this year will likely exceed cash balances.
- Management is guiding to $114 million in sales for the year.
- Where's the competition? In the case of Interpore Cross's AOM subsidiary, they're re-working their marketing plan and have hired new sales talent. Still looking for traction, in other words. The gap between Kyphon and anyone else is huge and growing.
- We expect the market for MIS spine and osteoporotic vertebral fracture repair could eventually be larger than the current spinal fusion market and Kyphon is clearly the lead dog.
OrthoLogic: Reported a 19% increase in electro-magnetic bone growth stimulation products to $8.7 million, from $7.3 million in the same period last year. Gross profit reached 86 % of sales, same as the prior year. Such gross profits are funding OLGC's other bone growth simulation project, Chrysalin.
- The Company reported $142,000 in net income or $0.00 EPS which was in line with consensus estimates and reflected the significant costs of Chrysalin's clinical trials.
- We estimate that sales of OrthoLogic's electromagnetic products for nonunion stimulation grew by 28% and spinal stimulation grew by 10% over the same period a year ago.
- OLGC is making excellent progress to eventual Chrysalin FDA approval and has identified a majority of the 25-30 clinical sites for the Phase IIII fresh fracture trial as well as half the sites that will participate in the Phase I/II spinal fusion trail.
- The cost of running two clinical trials simultaneously during the 1Q:03 was $1.5 million and management expects the costs will rise to between $7.0 million and $7.5 million for 2003.
Wright Medical: Beats street's first quarter EPS by $0.02 on a 13% increase in sales to $58.6 million. Key factor: strong sales of its LINEAGE ceramic-on-ceramic hip.
- WMGI reported $0.14 EPS, up 7%, with the exclusion of $4.8 million in in-process research and development charges related to its $8.4 million (cash - not counting future royalty payments) acquisition of the ADCON assets from Gliatech.
- Strong sales of its much anticipated LINEAGE ceramic-on-ceramic hip which was launched during the middle of the 1Q:03 drove a 28% increase in hip revenues. We estimate this is nearly double the rate of the aggregate hip market.
- Bio-orthopedics increased 25% over the 1Q:02 which helped to offset a lack luster growth in knee revenues of 2%. Management is blaming distributor turnover on the stagnant growth.
- Management upped guidance for 2003 to revenues in the range of $229 million to $234 million and operating income in the range of $28 million to $30 million excluding the 1Q:03 $4.8 million charge related to the ADCON asset acquisition. In the current quarter, HealthpointCapital estimates another $58 million in sales, up 16% from the prior year.
- We estimate earnings for the second quarter will total $0.13 per diluted share. This represents a $0.02 increase in earnings per share over the same period a year prior and that excludes the effects of a one time, $1.1 million, benefit or $0.04 per share.
Encore Medical: 37% jump in sales for the First Quarter to $26.4 million. Sales growth driven primarily by revenues from Chattanooga Group division, which was purchased in the last year and now represents 55% of total revenues.
- Encore's Surgical Group division reported truly anemic revenue growth as sales inched up 3% over the 1Q:02.
- Even so, we believe Encore has one of the strongest pipelines of any orthopedic company with a ceramic-on-ceramic hip and a mobile bearing knee in the works. So, hope of higher revenue growth in the future remains in tact.
- ENMC added 20 new sales professionals during the quarter to jump-start orthopedic implant revenue growth in future quarters.
- Ken Davidson, CEO of Encore Medical reiterated his intentions of making a European acquisition purely for infrastructure purposes rather than for a specific product line.
- ENMC carrying approximately $43 million in debt a portion of which carries a 15.75% interest. Interest expense for the quarter was, at $1.9 million,, fully 7% of revenues. Management stated it will prepay $6 million of its loan before August of this year without any need for additional equity or other assistance from its largest shareholder, Galen Associates.
