Are Allograft Implant Revenues Stabilizing?
BY ROBIN R. YOUNG CFA, NOVEMBER 8, 2004
For the five public allograft companies, sales for the first nine months of 2004 are running at around $234 million ($323 million annualized). Sales growth is slightly up - about 6%. Which is good news. Last year, public company allograft sales were flat and the year before they'd declined 1%. This may, in fact be better than most observers realize. Which is not to say that the industry has turned a corner. Growth is still well under the orthopedic industry average. But it may be telling us that the recent slide has stabilized.
Including the private and non-profit sectors of the allograft industry, we estimate that revenues were approximately $530 million for the first nine months, essentially flat with last year's levels.
* Allograft only
LifeCell reported the best year-over-year revenue growth with Regeneration Technologies reporting the second best at 13%. RTI's revenues reached $22.8 million, up from $20.2 million for the same period in 2003. Isotis, which has not yet reported its September results, had had the second best year-over-year growth rate among the public allograft companies with a 10% first half growth rate.
Fueling RTI's relatively solid growth rate was a 49% increase in cardiovascular tissue shipments and a 13% increase in spinal implant allografts. RTI's cardiovascular growth came, we expect, at the expense of CryoLife, who reported a 14% decline in allograft shipments for the quarter.
CryoLife, whose allograft sales have been declining steadily since 2002, reported yet another pullback in the third quarter. Cardiovascular allograft shipments, in fact, were off 22% from the prior year's abysmal levels. Cryolife at one point held an 80% share in the allograft heart valve market and is now down to, we estimate, about a 30% share.
Helping CryoLife emerge from the hole it has created are reviving sales of orthopedic allograft products. CryoLife's orthopedic tissue sales rose to $843,000 in the September quarter, up a whopping 81% from last year's levels. Still, when compared with RTI's nearly $23 million of orthopedic allograft products or MTF foundation's $50 million in the same period, CryoLife has a long, long way to go.
Osteotech's revenues declined again in the third quarter reaching $22.1 million. But OSTE's sales mix moved in a new and interesting direction. International sales rose 41% and the company's new private label strategy delivered a 204% growth in that product sector and were it not for a 10% decline in domestic Grafton sales, Osteotech would have reported an increase.
* Allograft sales only
As the table illustrates above, reported public company allograft sales have grown 18% over five years, using our estimated 2004 revenues. Excluding LifeCell, the growth has been 5% over these same five years. To put it bluntly, this is a fraction of the general Orthopedic industry revenue growth rates (averaging 16% per year over the past five years).
Part of LifeCell's success, we believe, has been to find new indications (complex hernia repair, for example) with a new, well differentiated allograft product.
The average gross margin for allograft companies remains around 43% with LifeCell posting the best gross margin in the industry at 67% and CroLife, in effect buying its way back into the market as well as paying for past indiscretions, posting a negative gross margin on its processed tissues.
* Allograft sales only
Perhaps the most interesting surprise is Tutogen. With a 10% return on assets and a 16% return on equity, this company's numbers belie its low market cap.
