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Symmetry Medical to go Public BY JOHN MCCORMICK, JUNE 7, 2004

For an industry that only has a little over 20 publicly traded companies, orthopedic devices is doing well this year with its third major equity offering. This time Warsaw, Indiana based Symmetry Medical has filed its registration statement with the SEC to sell shares, be listed on the New York Stock Exchange and recapitalize its balance sheet.

Symmetry is a longtime suppler to the orthopedic medical device industry that clearly sees the industry's strengths and intends to capitalize on the industry's substantial growth for years to come. 2003 pro forma revenues were $158.4 million as a result of the Company's recent combination with Mettis (UK) Limited. A 1Q:04 revenue breakdown by product category is shown on Table 1 below. We also note that Symmetry sells to medical device companies in other areas and to, a limited extent, the aerospace and other industries.

Table 1. Symmetry Revenue Breakdown by Product Category

What distinguishes this offering from the other public companies in orthopedics is the fundamental nature of Symmetry's business. As opposed to the Zimmers and Strykers of the world, Symmetry is a supplier to the industry itself not a manufacturer that markets directly to hospitals and doctors. Just like an auto components supplier that sells to Ford and General Motors, Symmetry is selling to its A-list neighbors down the street in Warsaw such as Zimmer, DePuy and Biomet and others such as Stryker, Synthes and Kyocera. Symmetry's economics are therefore fundamentally different from the OEM's and it does not enjoy the same pricing power, innovation, and growth and profitability. Table 2 below highlights the differences between Symmetry (a supplier) and Stryker (an example OEM).

Table 2. Symmetry Revenue Breakdown

We leave it to the reader to judge how this company should be valued by the public markets in the coming weeks, but we note that the Symmetry's economics and a major orthopedic OEM's economics are fundamentally different. Let's address this:

CapX and Gross Margins - Low Bang for the Buck

Using the percentage of revenue basis shown above, if Symmetry spends $1 on capital expenditures, that dollar renders about $4 in gross profits. Compare this to Stryker which gets more than $21 for its $1 dollar of capital expenditures. Using that argument, each dollar of Stryker's capital expenditures is more than five times as powerful as Symmetry's. A dollar of an investor's (or lender's) money spent on property, plant and equipment simply does not have the same return mechanics for an OEM supplier. Why is this? This type of high capital expenditure requirement (and comparatively low return result) is typical of OEM suppliers in a variety of industries where the supplier lacks the kind of branding, intellectual property and pricing power of the OEM. Here, even in the high gross margin orthopedics industry, the comparatively 'high CapX/low gross margin' phenomenon does effect the supplier. We note the Company has been spending to expand capacity and we may see a lower level of capital expenditures in 2004.

Intellectual Property

As shown in Table 2 above, Symmetry spends less of its revenues on R&D than Stryker (or for the industry as a whole which averages over 5%) and has fewer patents on an absolute and relative basis. We have previously discussed in our literature how long term revenue growth and competitive advantage is attributable to robust R&D spending over the long run. We have noted how the allograft industry (effectively an OEM 'supplier' to the likes of Zimmer and Medtronic) has had low R&D expenditures and accompanying growth issues. Said another way, there is no comparison between the value of Stryker's proprietary bone growth factor, osteogenic protein-1 ('OP-1'), to Symmetry's surgical tools and kit trays. Investors should not expect the same long term growth out of a company that is spending less on R&D than the industry.

In addition, we ask the question, who is Symmetry's R&D for? It is for the OEM customers who have their own R&D agenda and typically have no contractual requirement to purchase the products that that Symmetry develops for their medical devices.

Voting Stock Controlled by one Principal Shareholder

The registration statement states that "upon completion of this offering, Olympus Growth Fund III L.P. and its affiliates... will own in excess of 50% of our outstanding shares of voting stock." The public investors will not control Symmetry and will not be able to vote out the board. Anyone who believes in control premiums may wish to think twice when applying a valuation multiple to Symmetry that is similar to Zimmer, Stryker or Biomet which are owned by the public widely. The majority shareholder in Symmetry is a middle market buyout fund not the investing public. That is not to say that JP Morgan, which held 47% of dj Orthopedics' stock (a significant, but not controlling voting interest), had much of an influence on valuation recently (by virtue of their prior level ownership or by even selling their shares). We simply note that the public does not have the final say in Symmetry's long run affairs.

Revenue Concentration

Not unlike selling turbine components to General Electric, Symmetry sells implants, instruments and trays to the major orthopedic OEMs which is dominated by the industry's "big seven". Revenue concentration at Symmetry is significant. Although the company has over 500 customers worldwide, 4 customers dominate 54% of revenues and 10 customers represent 71% of revenues. This differs substantially from the revenue characteristics seen at companies like Zimmer and dj Orthopedics which sell to hospitals and doctors broadly (despite recent GPO contract awards). Revenue concentration risk is the first risk item clearly spelled out in Symmetry's registration statement. Other public companies in the orthopedic industry (the exception being allograft suppliers) are not as exposed.

Revenue Growth

Revenue growth at Symmetry for the first quarter of 2004 was approximately 14%. This was calculated in the registration statement on a pro forma basis to reflect the Mettis acquisition. Symmetry's 14% growth was less than the industry's overall growth in the first quarter as shown in Table 3 below.

Table 3. Symmetry Revenue Growth Compared to Industry Leaders

When compared to the broader economy, by almost any measure, Symmetry shows robust revenue growth. When viewed in the context of the industry (actually, its own customers), however, the Company's revenue growth falls short. The numbers in table 3 above show that Symmetry is growing at about 2/3 the rate of its customers.

Conclusions

We applaud the fact that another orthopedic medical device manufacturer is going public and that the company is showing revenue growth that is attractive and robust, especially when considered in light of how other OEM suppliers have performed through recent years. We simply view it as prudent to exercise caution if one is seeking to value Symmetry on the same basis as other orthopedic medical device manufacturers. Such a crude approach needs to be thoughtfully considered in light of the company's revenue concentration, lower profitability, lower revenue growth and comparatively lesser intellectual property portfolio.