04/28/2017

Globus Medical Inc.: Focus Intrinsic Value Buy Idea

Overview: Globus Medical is a medical device company focused on developing products to treat patients with spine disorders. The company has over 150 products addressing a broad array of spinal pathologies, anatomies and surgical approaches that assist surgeons in effectively treating their patients. GMED operates in two segments, each with 50% of sales: Innovative Fusion products treat a wide variety of spinal disorders for the entire spine, used in a variety of surgical approaches; Disruptive Technology products allow for minimally invasive surgical techniques, as well as new treatment alternatives, regenerative biologics, and interventional pain management solutions. 90% of GMED’s sales are in the U.S., with the international sales spread out in 43 countries.

New Product Launches: GMED consistently launches new products, continuing to invest in the development of new technologies for the treatment of patients with spine disorders. Since its inception in 2003, the company has averaged 12 new product launches per year. In 2016, however, 15 products have already been launched, including 7 in Q3 2016. The company’s next areas of new product introductions are in trauma and robotics. The trauma products have been filed with the FDA for U.S. marketing approval, and expect to launch in 2017 to help treat patients who have experienced orthopedic traumas. The robotics product, a next generation surgical robotic positioning platform, is likely to be filed with the FDA in Q4 2016 with a possible 2017 launch. GMED management is confident that the new trauma and robotics products, if approved, could represent 15% of total sales, and will be a significant driver toward its total company sales target of $1 billion by the year 2020.

Stable Profitability: GMED’s EBITDA margins have historically been range-bound between 33% – 37%, within management’s long-term margin target. In fact, the company’s EBITDA margins rank among the top three in its industry peer group. Even with 7.5% of its sales allocated for R&D, the company continues to earn 35% EBITDA margin y-t-d. GMED plans to increase spending on recruitment, which will likely temper margins a bit. However, new hires, coupled with increased geographic penetration and new product launches should strengthen the company’s margin profile in the long term.

Strong Balance Sheet: GMED carries no debt on its balance sheet, as operations are funded with its own cash generation ability. Furthermore, another use of the company’s free cash flow has historically been to acquire companies. The most recent acquisition closed on September 1, 2016, in which GMED acquired the Alphatec Holdings’ international operations for $80 million in cash. The Alphatec acquisition includes 19 countries, including the important market of Japan, which GMED did not have any sales exposure. The company plans to aggressively penetrate Japan during 2017, although the marketing approval process in Japan is usually lengthy, in order to compete directly with some of its bigger peers. We continue to expect GMED to utilize its strong balance sheet to continue organic and acquisitive growth.

Catalyst: We believe that GMED will be able to overcome issues with sales force recruitment that has hurt performance over much of 2016. In Q2 2016, the company missed consensus sales expectations, citing slower growth as a result of sales force attrition. In Q3 2016, GMED realized it was more difficult-than-expected for potential new hires to commit. The company has made the appropriate changes to its incentive plans for new recruits and believes that the problem it faced with sales force new hires has bottomed. Moreover, 2016 sales guidance calls for total sales to grow 2.8% to $560 million, including the Alphatec’s international business, and 2017 sales growth of 11.6% to $625 million. GMED’s focus is on rapid new product introductions and worldwide sales force expansion in order to reach those sales targets. With aggressive new product launches and new international territories to introduce existing GMED products from the Alphatec acquisition, we believe that management’s focus on sales force recruits will pay off.