Wright Medical – Best Company in Orthopedics?
BY JOHN CHOPACK, FEBRUARY 23, 2004
For the just completed quarter and year, Wright Medical (NASDAQ:WMGI) reported, we believe, the best quarter and year in orthopedics.
First, Wright's seven year investment in the Investigational Device Exemption (IDE) ceramic-on-ceramic clinical hip trial delivered huge dividends in 2003. On the growing popularity of Wright's LINEAGE Ceramic-on-Ceramic product line, hip implant revenues skyrocketed 37.1% in 2003 to $78.1 million. Even more impressively, domestic hip growth reached 63% during the 4Q:03. Management has attributed the strong hip sales to its newly introduced ceramic-on-ceramic hip as well as its CONSERVE Total Hip System with Big Femoral Head Technology (BFH).
To put this in perspective, Wright's 2003 hip implant growth rate was more than twice the industry's 17% rate of revenue growth during 2003. By our calculations WMGI increased its hip market share by 20% during 2003. Wright's rate of market share increase comes off a low base, less than 3%. Although 2003 was an exceptional year for Wright's hip product line, the anniversary of its ceramic-on-ceramic hip FDA approval combined with increased ceramic hip competition is likely to result in slower overall hip growth during 2004.
Most analysts and investors have understandably focused on Wright's hip sales but, we believe, 4Q:03 could open some eyes into the breadth and depth of WMGI operational and financial performance. First, product sales in 2003 were strong across all categories: Bio-orthopedic revenues increased by 33%, Extremities by 31% and Knees by 17%. While both Bio-orthopedic and Extremity sales were strong throughout 2003, Knee revenues had been growing significantly slower than the market. However, WMGI's 17% increase in Knee revenues during the 4Q:03 is actually 1% faster than the estimated market growth of 16%.
Management has indicated that the problems associated with its knee product line are behind them and are expecting to grow knee revenues by 7-10% in coming quarters.
From an operational stand point, WMGI was able to reduce its Selling, General & Administration expense (SG&A) as a percentage of sales from 52% during the 4Q:02 to 48% during the 4Q:03. This represented the first time that Wright broke the 50% of sales level for SG&A. Wright is slowly approaching its peers which maintain SG&A as a percentage of sales between 35-40%. Management is confident it can continue to decrease its SG&A as a percentage of sales during 2004 by approximately 1-1.5% from its 51.3% during 2003.
Looking towards 2004, Management anticipates revenues to total between $280 million and $287 million and earnings per diluted share (EPS) of $0.66 to $0.72. Keep in mind that Wright exceeded its 2003 revenue guidance by $20 million or 8%. If it were to accomplish the same feat in 2004, revenues could exceed $300 million.
Is Wright Medical the best company in Orthopedics? Operationally, Wright is as efficient as any other implant manufacturer in the industry. Its product pipeline is as large as a company four times it's size. Wright's mastery of such critical future technologies as alternate bearing surfaces and biologics makes it, if not the best firm in orthopedics then, certainly, a thing of beauty to customers, employees and shareholders.
