What's an Orthopedic Implant Manufacturer worth?
BY EDITOR, JUNE 23, 2003
The most valuable orthopedic company in world according to Wall Street is Stryker (SYK:NYSE) at $13.9 billion. With sales this year expected to top $3.5 billion and earnings to clear $2.15 per share, Wall Street is willing to pay 32x earnings and 4x sales to own this company's stock. The least valuable orthopedic company according to Wall Street is Tutogen (TTG:AMEX) at $49 million. Tutogen's sales are expected to reach $30 million this year and the company, which earned $0.05 per share last year, should do better in 2003. Tutogen's largest customer is also its largest shareholder. It is Centerpulse. And, Centerpulse just added to its Tutogen investment. What does Centerpulse see that Wall Street doesn't?
Speaking of Centerpulse, one year ago, Wall Street put Centerpulse's value at $1.3 billion. Today two companies are fighting to buy it for $3.2 billion – or more. During this past year, Centerpulse's sales from continuing operations rose 14% from $881 million to $944 million (we're using a 0.761 dollar to Swiss Franc exchange rate) and its litigation was settled. Today, Smith & Nephew and Zimmer are willing, indeed eager, to pay 3.4x revenues and 14.3x EBITDA from continuing operations for Centerpulse. The day before Zimmer's counter offer, Wall Street pegged Centerpulse's value at $2.3 billion – the day before Smith & Nephew's offer, CEP stood at $2.2 billion. Now Wall Street thinks its worth at least $3.2 billion. The logical question is; what did Smith & Nephew and Zimmer see that Wall Street didn't?
Since the 2002 AAOS meeting there have been seven (not counting the pending Centerpulse deal) spine company acquisitions. Total price paid is $1.3 billion. In the aggregate, these companies were generating about $141 million in revenues and losing money. Buyers from the trade paid about 9.3x sales. Wall Street is presently valuing the two public spine companies (Interpore and Kyphon) at 4-6x sales. Both are profitable and in Interpore's case the street is pricing the stock at 11x 2003 estimated EBITDA. What's the trade seeing that Wall Street isn't?
Some years back, a successful stock broker asked me if I knew the difference between a speculator and an investor. A speculator, he said, was someone who bought a stock at a $1, sold for $2 a year later and was delighted. An investor bought a stock for $1, held for 20 years, and sold for $116. In his view, the key to successful investing was to simply look for good 30-year investments. As we said, he was (and is) very successful.
Here's the math as we see it for Orthopedic Investors (whether the trade or Wall Street) over the coming decade: (hint: tHere's a $85 billion jackpot waiting for those who can buy and hold).
Today's Orthopedic Industry Revenues: $15 billion
Today's Orthopedic Industry Valuation: $50 billion
Price-to-sales: 3.3x
HealthpointCapital's estimate of Orthopedic Revenues in 2012: $67 billion
Price-to-sales: 2.2x
HealthpointCapital's estimate of the Orthopedic Valuation in 2012:
$150 billion
HealthpointCapital's estimate of the amount of NEW equity to fund growth: $15 billion
Summary:
2012 Orthopedic Value: $150 billion
2002 Orthopedic Value: 50 billion
minus New Equity Required: (15) billion
equals: Profit to Ortho Investors: $85 billion
It could take ten years to realize that kind of profit. But, for an increasing number of cash rich orthopedic companies, today's valuations, when viewed against the size of this coming decade's returns, are a bargain. The trade is, we think, making investment decisions.
Will Centerpulse EVER be sold?
Let's see. Zimmer delayed its official offer two days, fromJune 17th to the 19th. The official offer, when it finally came, had the same financial terms as the offer on May 20. Ok. Smith & Nephew responds with, “we need time to evaluate the offer.” Is Zimmer's offer news to them? How much are they paying those bankers?
The Swiss takeover rules, which (we know) are driving both sides batty, set the final day for offers as August 27. We suspect that the last offer on the table could have a strategic advantage. After all, if I was a Centerpulse shareholder, I'd wait to see the last possible offer before I made a decision. But, with these new delays, the parties we are thinking about the most are the Centerpulse employees who heroically pulled this company back from the brink last year. They have created a truly valuable and enviable company. The continuing uncertainties regarding their firm have to be tough. For their sake, the bidders should corral the bankers, truncate the posturing and shorten, not lengthen, these timelines.
