Regeneration Technologies - Sales Rebound, Profit Margins Narrow'Lots of Activity Beneath the Surface
BY ROBIN R. YOUNG CFA, MAY 3, 2004
Regeneration Technologies (RTI) is like the proverbial duck on the water, calm on the surface, but paddling like crazy beneath. For the first quarter ended March 31/2004, Regeneration reported a 19% increase in sales to $23.4 million, which was about a million dollars better than the street expected. And, most gratifyingly, the growth came from a rebound in sales to its largest customer, Sofamor Danek (subs. Medtronic). For the previous three quarters, shortfalls from Sofamor Danek have defined the company's financial performance. Gross profit margins in the quarter, however, took a significant hit and brought overall earnings to $1.4 million (6% of sales) or $0.05 per share.
Sales to Sofamor Danek now account for two thirds of total sales. Brian Hutchison's efforts to manage the Sofamor Danek relationship made important gains in the quarter. But, given the history of three consecutive negative quarterly surprises, this quarter is probably being viewed on Wall Street as only a step in the right direction.
More interesting, however, is what is happening beneath the financial surface.
To begin with, there is a projected 100% increase in R&D spending for 2004, a doubling of PhDs on staff and an increase in R&D headcount from 17 to 30.
On the product development side, RTI is targeting a new class of super allografts that could challenge autograft in terms of speed of healing. At AAOS RTI described the prospect of developing a cocktail of growth factors derived from a wider variety of tissues than bone. By creating the optimal combination of naturally occurring growth factors from donated tissues, RTI hopes to be in a position to challenge autograft's efficacy.
Furthermore, RTI is developing the ability to create Bioactive Matrices that can be 'mineralized' and formed under pressure into common implant shapes. This was demonstrated two months ago with a pressure-formed prosthetic hip stem made entirely from allograft bone.
Also on the project calendar are wound healing bioactive matrices - which were described to us as a kind of super charged Regranex®. Finally, RTI is tackling cartilage growth.
It is possible, though not necessarily likely, that some or all these products would qualify under the current FDA guidelines for homologous use.
As we said, like the proverbial duck on the water.
