Wright Medical Reports a 22% Increase in Revenues and a 34% Increase in Earnings; Stock is Off as Much as 16% on Wednesday
BY JOHN CHOPACK, AUGUST 2, 2004
In a common trend this earnings season, Wright Medical reported in our opinion one of the best second quarters of 2004 in the orthopedic sector and investors congratulated the Company by dumping shares. Wright Medical is one of four large joint orthopedic companies including Stryker, Exactech and Zimmer, who reported strong quarters but still sold off. Why?
In Wright's case, management indicated that two of its potential forthcoming product approvals are likely to be delayed. Both the Conserve Plus (a total resurfacing hip prosthesis) and Adcon (orthobiologic adhesion prevention product), slated for FDA approval this year, are now not expected to be approved until the beginning and end of 2005, respectively. While it is unclear what exactly is causing the delay of the Conserve Plus besides traditional FDA delays, the Adcon product is being delayed due to a request of additional data.
Additionally, analysts pointed to a lower than expected gross margin, which totaled 71.7% during the 2Q:04 down from 72.0% the year before, as a potential reason for concern. However, management calmly explained that higher than expected international sales was the reason for the lower gross margin as international average selling prices are much lower than in the U.S.
Analysts also expected management to substantially increase its guidance for FY2004. However, in typically conservative Wright Medical fashion, they merely tightened guidance by increasing the lower end of the range.
These points, combined with Wright's lofty valuation compared to competitors (WMGI P/E 48.3 versus Ortho P/E 38.3), triggered downgrades from several analysts including J.P. Morgan and Morgan Keegan. We believe that by examining the fundamentals, it is clear to see that Wright is still on track.
Sales increased to $75.6 million during the 2Q:04, which was a 22% increase (19% constant currency) over the 2Q:03. Leading the way was hips which totaled $25.3 million; an increase of 26% on a constant currency basis over the 2Q:03 and now represents approximately 33% of total revenues. Hips are now the largest segment of Wright Medical's business on a percentage of overall revenues. Driving hip sales higher continues to be further penetration of the Company's alternate bearing surfaces, including its LINEAGE Ceramic-on-Ceramic product and its Conserve with BFH Technology (a large head metal-on-metal system). We estimate that these two alternate bearing surfaces represent greater than 50% of all acetabular liners sold.
Biologics continues to be a strong growth driver of overall revenue growth, increasing by 25% in the U.S., 52% internationally and 30% Worldwide on a constant currency basis. Continued strong sales of the Company's allograft and calcium sulfate bone graft products drove the revenue growth. Adcon gel technology, which is available overseas, was a key to the growth outside the U.S.
Extremity and knee sales increased 16% and 14% as reported, respectively. Extremity sales continue to be driven by the Evolve Radial Head and further penetration of the Company's foot and ankle product line. Knee sales have significantly turned around since last year when management reorganized its distribution to address the situation.
As stated earlier, management tightened its guidance for FY2004. It is now guiding for revenues to total $294 to $297 which is a 19% increase over 2003. Management also upped the lower-end of its earnings outlook, which it now expects to total between $0.72 and $0.75 per diluted share for 2004. This represents a 24% and a 29% increase, respectively.
It is hard to believe that investors can find an investment that has the potential to increase revenues by approximately 20% and earnings by approximately 30% in a year. Another note - since taking the Company public Wright Medical has met or exceeded its guidance for quarter.
