Wright Medical Still Walking A Tightrope, But Growth Should Pick Up

Wright Medical (WMGI) has long been a challenging med-tech investment story. On the positive side, the company has been a share gainer in shoulders, still holds a strong portfolio (and market position) in foot/ankle, and is leveraged to an underpenetrated market that should support high single-digit revenue growth for some time to come. On the other hand, sales execution has been inconsistent at best, and the company is seeing renewed competitive vigor from rivals like Integra (IART) and Stryker (SYK).

On balance, I still think there’s upside in these shares from here, but management must execute on a consistent and reliable basis to build real long-term value for shareholders, and the jury is still out on whether they’re up to the task.

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Wright Medical Still Walking A Tightrope, But Growth Should Pick Up

Integra's Transformation Starting To Show Results

Mid-cap med-tech Integra LifeSciences (NASDAQ:IART) has been an odd stock over the years as the company has shifted its focus many times and struggled to generate the sort of revenue growth and margin leverage that the market typically demands from smaller med-techs. With that, the shares have lagged the broader medical device sector over the last decade, as well as larger names like Stryker (NYSE:SYK).

It looks like Integra has hit on a better mix in recent years, though, as revenue growth and margins have improved. While Integra isn't leveraged to the most attractive growth markets, the acquisition of Johnson & Johnson's (NYSE:JNJ) Codman neurosurgery business will improve margins and meaningfully improve the company's overseas sales and distribution capabilities. Although the high teens FCF growth I expect from Integra isn't enough to support an attractive fair value, the company's improving margin outlook argues for a richer multiple and some upside in the shares.

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Integra's Transformation Starting To Show Results

Back To The Future With Wright Medical

As a shareholder, I'm pleased to see that Wright Medical (NASDAQ:WMGI) shares have done well since my last update after third quarter earnings. Management continues to do a good job running this business and there may well be legitimate underappreciated opportunities to outperform on the top line (new product introductions, share gains) and bottom line (better expense leverage) in the next few years.

Even so, it looks as though the Street is moving back to a "what if they get bought out?" sort of mentality, as the shares do seem to be factoring in quite a bit of growth and margin improvement from here. I don't like to bet against good management teams and good product stories, so I'm still content to hold tight with my position in Wright Medical, but I'd be a little more cautious about buying in on the assumption that a big M&A payday is right around the corner.

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Back To The Future With Wright Medical

Wright Medical Checking The Boxes

Investors often seem to get bored with the actual execution of business plans, and I think that's at least partly responsible for the ongoing weakness in Wright Medical (NASDAQ:WMGI) shares. It's also been a weak stretch since early August for many of the company's peers, with Integra (NASDAQ:IART) and Zimmer Biomet (NYSE:ZBH) down as well, and Stryker (NYSE:SYK) just barely up.

Wright Medical continues to have a strong position in one of the fastest-growing segments of medical devices, and the company's Augment biologic has significant growth potential from here. The company has also largely tied up its hip implant litigation and at a cost that was within the prior bounds established by management.

Management has also been delivering successfully against its merger synergy targets, and I believe the company is on track for strong growth over the next ten years as new products drive more adoption of upper and lower extremity procedures. With a fair value in the mid-$20s, Wright Medical shares still offer worthwhile upside.

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Wright Medical Checking The Boxes

Consistent Excellence Continues To Drive Stryker Higher

Institutional investors don't like surprises (at least the negative ones), and they adore above-average growth. That puts Stryker (NYSE:SYK) right in their sweet spot, and it goes a long way toward explaining why the shares often trade at a premium. These shares are up another 15% from the time of my last update, and the company's growth rate continues to impress. While Stryker does not look undervalued today, it seldom does, and ongoing high-end execution should be able to at least maintain the valuation multiples.

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Consistent Excellence Continues To Drive Stryker Higher

NuVasive Has Restored Its Growth Cred And Has Been Well-Rewarded

While I did say that I thought NuVasive (NASDAQ:NUVA) was undervalued when I last wrote about this growing spinal care specialist, I didn't think a 40%-plus run in six months was on its way. But with ongoing share growth, margin improvements, incremental M&A, and clear signs that the company's comprehensive strategy is working in the market, investors have gotten back on board in a big way.

I don't want to be a wet blanket, but I do wonder if the excitement has gotten a little overheated. My expectations for 2020 have gone up close to 10% (and are still below management's targets) and the company could be set up to gain even more share in the deformity market and in the degenerative market with a move toward bundled payments. Still, I'm hesitant to stretch my valuation assumptions beyond what has historically worked for growth med-tech.

There's a pretty clear pattern with this stock - investors get excited, there's a notable pullback, a flattish period, another run, and then another pullback. The shares are still up almost 300% over the last five years, though, so that's volatility that I think many investors can learn to live with. I want a better risk/reward trade-off before I put my own money here, but NuVasive is definitely making hay today by exploiting a lack of innovation at entrenched rivals like Johnson & Johnson (NYSE:JNJ) and Medtronic (NYSE:MDT).

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NuVasive Has Restored Its Growth Cred And Has Been Well-Rewarded

Despite A Setback From Its OUS Distributors, K2M Continues To Leverage Innovation To Grow

K2M (NASDAQ:KTWO) is up about about 15% from when I last wrote about the company, but it hasn't been a smooth path. The shares were hammered in early May when the company lowered guidance due to business setbacks with two distributors that make up more than half of its international sales. Despite this blow, K2M has shown in the meantime that its innovative portfolio of products for complex/deformity, minimally invasive, and degenerative spine surgery can drive worthwhile growth in the U.S. market.

I continue to believe that K2M can and will grab share from Medtronic (NYSE:MDT) and Johnson & Johnson (NYSE:JNJ) in the complex/deformity market segment on the basis of innovation, and that the company will have success in pulling through into the minimally invasive and degenerative markets. I'm looking for low double-digit revenue growth over the next decade and for FCF margins to ultimately reach the low-to-mid teens. Factoring in the near-term setback to revenue growth (and its impact on margins and cash flow) and dilution from a recent convertible bond offering, my fair value drops to around $20, making K2M an okay idea for new money and at least deserving of a spot on the watchlists of investors interested in growth med-tech.

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Despite A Setback From Its OUS Distributors, K2M Continues To Leverage Innovation To Grow

Lexicon Checks A Key Box

There are times when it feels like the companies I own/follow conspire to make sure I can't take days off. That was the case on Friday, when Lexicon Pharmaceuticals (NASDAQ:LXRX) announced the first top-line Phase III results for its key drug sotagliflozin in Type 1 diabetes. The results were positive, taking the stock up almost 20%, but they don't answer all of the remaining questions on this drug.

I continue to believe that Lexicon is meaningfully undervalued, with about 50% upside to my new fair value. Lexicon still needs to fully prove out the efficacy and safety of sotagliflozin in Type 1 diabetes and Sanofi (NYSE:SNY) needs to do its part with the Type 2 indication. What's more, investors would do well to remember that the FDA can be very demanding and unpredictable when it comes to new treatments for diabetes. That said, I think the risk-reward here is still interesting and worthwhile.

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Lexicon Checks A Key Box

Seeking Alpha: K2M Gaining On Entrenched Rivals In An Overlooked Space

All of the smaller players that have done well in spine care - NuVasive (NASDAQ:NUVA), Globus (NYSE:GMED), LDR Holding (NASDAQ:LDRH), and K2M (NASDAQ:KTWO) - have done so largely on the basis of being more nimble and more innovative than entrenched competitors like Johnson & Johnson (NYSE:JNJ) and Medtronic (NYSE:MDT). Although the market hasn't been showing a lot of love to the riskier small med-tech names of late, K2M looks like a name for more aggressive investors to investigate.

K2M has established itself as a viable rival in the complex spinal deformity market (scoliosis, trauma and tumor) and has had some success already in transferring its innovative technologies to the minimally invasive (or MIS) and degenerative spine care markets. Although this company needs to work on its margins and may not generate the sort of eye-popping revenue growth that some growth investors demand, I believe the shares look undervalued on the assumption of long-term growth in the low double-digits.

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K2M Gaining On Entrenched Rivals In An Overlooked Space

Seeking Alpha: Conmed's Renewed Quest For Growth

Turnaround stories can pay handsomely in the med-tech space, and CONMED (NASDAQ:CNMD) has certainly been doing a lot of the right things since activist investors catalyzed a major shake-up in 2014. Not only has the board of directors changed, but the company brought on former Stryker (NYSE:SYK) executive, Curt Hartman as CEO and has named several new executive vice presidents.

More importantly to me, the company has not tried to take any shortcuts or resort to flashy serial M&A to mask the turnaround process. Hartman has instead focused on establishing a better sales and commercialization infrastructure and driving better execution there, as well as longer-term improvements in product development. That's not to say there hasn't been M&A - the SurgiQuest deal was the first notable transaction in a long time and it seems like a very interesting business to own.

The problem I have is which valuation metrics to follow and just how much credit to give for these self-improvement efforts. Like many smaller med-techs, CONMED doesn't look appealing on FCF unless the company can drive GAAP operating margins into the high teens - something that is not impossible, but not easy either. The value proposition is better in EV/revenue terms, but it's going to be hard for CONMED to make real progress unless it can establish itself as more than a peripheral player in its core markets.

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Conmed's Renewed Quest For Growth

Seeking Alpha: Globus Medical Looks Like An Undervalued Innovator

It has been a while since I've written on Globus Medical (NYSE:GMED). I wasn't thrilled with the valuation back in February of 2014, but I'm surprised the shares are down over that time given reasonable progress with the business. I'm also surprised that the shares are trading at the valuation that they are - 2016 may not be shaping up as an exciting year in terms of revenue growth, and there are risks with the expansions into robotics and trauma, but the shares look undervalued for a company set to generate high-single-digit revenue growth with strong operating margins, good cash flow, and double-digit returns on invested capital.

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Globus Medical Looks Like An Undervalued Innovator

Seeking Alpha: NuVasive - Same Opportunities, Same Concerns

Not a lot has really changed for NuVasive (NASDAQ:NUVA). The third-largest spine company in the U.S. by market share, NuVasive continues to take share from larger players on the back of innovative products that offer meaningful advantages in terms of patient outcomes and surgeon convenience. On the other hand, concerns remain about the company's weaker share and lower profits outside the U.S., the company's position in biologics, and the real prospects for meaningful margin improvement in the coming years.

While LDR Holding (NASDAQ:LDRH) looks like a higher risk/reward option, NuVasive and Globus Medical (NYSE:GMED) seem similarly priced in a market that has turned more hostile toward growth med-tech. I don't necessarily think that NuVasive will hit its margin targets (or at least not quickly), but I do believe the company has a solid plan for growing its spine business and using opportunistic M&A to supplement internal innovation. It's not uncommon for the market to run hot and cold on growth med-tech, and I don't know how long this apparent cold cycle will last, but NuVasive is at least worth a spot on a watch list.

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NuVasive - Same Opportunities, Same Concerns

Seeking Alpha: With Wright Medical, It Seems Like Something Always A Little Wrong

That's an admittedly grim opening to an article on Wright Medical (NASDAQ:WMGI), but it does feel like this company has been operating under one cloud or another for quite some time. Prior to the hiring of CEO Bob Palmisano, the company was weighed down with an uncompetitive large joints business and an inefficient sales approach. Then there was a protracted wrangling with the FDA over the Augment biological product. Then there was the acquisition/merger with Tornier that, while promising long-term, wasn't the high-premium buyout that some investors had been counting on. Now there is the risk of product liability payouts, potentially dilutive cash-raising moves, and the regular worries associated with competition and the vagaries of the market.

Maybe there always is something to worry about with Wright Medical, but that's true for most companies and it doesn't stand in the way of my thinking that the shares remain undervalued. It will take some pretty strong performance to justify a fair value in the $20s, but I think this company has the technologies, products, and market foci to generate that growth and make this a worthwhile stock over the long term.

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With Wright Medical, It Seems Like Something Always A Little Wrong

Seeking Alpha: Stryker Continues To Reap The Benefits Of A Strong Model

In a generally lackluster big-cap med-tech market, Stryker (NYSE:SYK) has stood out as a comparatively strong performer. Given the company's broad-based business mix, as well as its willingness to deploy capital into M&A to improve the business, I believe investors can reasonably expect this company to continue to be a solid operational story within the space. Stryker's positive qualities are seldom forgotten, though, and while I wouldn't call the shares overvalued, I don't see them as undervalued either.

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Stryker Continues To Reap The Benefits Of A Strong Model

Seeking Alpha: Wright Medical Has To Execute Against A Promising Backdrop

It's been a busy few months for Wright Medical (NASDAQ:WMGI). The company completed its merger with Tornier, creating a new entity with a strong share in the fast-growing orthopedic extremities sub-sector. Wright Medical also managed to secure FDA approval for its long-awaited Augment biological, a product that could be game changer with multi-hundred million dollar sales potential.

Now comes the harder, and decidedly less glamorous, part - execution. Wright Medical will have to deal with Johnson & Johnson (NYSE:JNJ), Stryker (NYSE:SYK), and Zimmer Biomet (NYSE:ZBH) on a daily basis, while also integrating the sales forces and ensuring a smooth transition into a blended entity. The high-single digit market growth of upper and lower extremities makes this a potentially strong multi-year growth story, but Wall Street won't be forgiving if the sales growth and cost synergies don't materialize.

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Wright Medical Has To Execute Against A Promising Backdrop

Seeking Alpha: Lexicon Pharmaceuticals Produces Another Positive Surprise

This has been quite the year for Lexicon Pharmaceuticals (NASDAQ:LXRX), as long-suffering shareholders have finally seen the stock do well on the back of optimism about the company's oral treatment (telotristat etiprate) for the GI effects of carcinoid syndrome and its progress into Phase III testing of its SGLT-1/SGLT-2 inhibitor sotagliflozin for Type 1 diabetes. Now the company has achieved a more surprising success, with Friday's announcement of a partnership with diabetes giant Sanofi (NYSE:SNY) to develop and commercialize sotagliflozin for both Type 1 and Type 2 diabetes.

Lexicon investors (or at least most of them) had pretty much written off the chance of a major partnership more than a year ago, as the company had been shopping the drug to partners for about two years without reaching any sort of agreement. Now, though, the $1 billion-plus potential of sotagliflozin in Type 2 diabetes is at least back on the table as a point of discussion.

There are still plenty of unknowns here to confound valuation. What sort of pricing will the company get for telotristat etiprate? Will it become the go-to choice for patients getting inadequate relief from somatostatin analogs? Does Sanofi have the marketing muscle to drive meaningful market share with a drug that will be quite late to market? Will sotagliflozin show any distinctive efficacy or safety aspects in large-scale studies (good or bad) that will impact its market potential? Will the company choose to rejuvenate its internal drug development programs? These are all important questions, but I would nevertheless argue that Lexicon remains meaningfully undervalued today.

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Lexicon Pharmaceuticals Produces Another Positive Surprise

Seeking Alpha: LDR Holding Corp. Seems To Be In The Right Place At The Right Time

The spinal surgery/spinal care market has been marked in recent years by a few trends that run counter to how many investors historically see the med-tech market. First, size hasn't proven to be such an insurmountable competitive advantage, as up-and-comers like NuVasive (NASDAQ:NUVA), LDR Holding (NASDAQ:LDRH), and Globus (NYSE:GMED) have gained share at the expense of larger rivals like Johnson & Johnson (NYSE:JNJ) and Medtronic (NYSE:MDT). Second, and apologies for the obvious pun, it seems to be one of the few areas of medicine where insurers have found some backbone and pushed back on pricing.

The subject of this article, LDR Holding, strikes me as an appealing growth story in med-tech by virtue of its commitment to doing things differently in the spinal space. Not only does the company have a strong product in the fast-growing cervical disc replacement market, but the company is also advancing technology in the lumbar area that features less hardware and less collateral damage to the patient. LDR Holding still has a difficult climb on its way to the top, including not only competition with the likes of JNJ and Medtronic, but also surgeon inertia, and the valuation is not obviously cheap, but the balance between growth and valuation is at least promising enough to look closer.

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LDR Holding Corp. Seems To Be In The Right Place At The Right Time

Seeking Alpha: After Some Turbulence, NuVasive Appears To Be On A Better Flightpath

I've liked NuVasive (NASDAQ:NUVA) for some time now, and the company's share price performance (up 12% from my last article in March, and up 48% since this article in the summer of 2014) has given me no cause for regrets. While the company has seen plenty of turmoil, including major departures of "C-suite" executives, the basic plan of driving increased market share, increased overseas sales, and better margins seems very much intact.

I continue to believe that NuVasive has a strong future. Minimally invasive procedures should continue to gain share within the large spinal procedure market, and I see little evidence that NUVA is losing its edge in terms of innovation and product development. The company does have the significant challenge of striking the right balance between growth-supportive spending and improved margins, but I think it has a credible plan to achieve both. M&A remains a big wildcard, both in terms of who/what NuVasive may buy and who may try to buy NuVasive.

A relative outperformer in a tough market, NuVasive doesn't leap out to me as a cheap stock today, but then again high-quality med-tech growth seldom sells cheaply. A mid-$50s fair value still looks reasonable on an EV/revenue basis, but the volatility of these shares may argue for a wider-than-average margin of safety for new buyers.

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After Some Turbulence, NuVasive Appears To Be On A Better Flightpath

Seeking Alpha: Stryker Seems Next In Line For A Big Deal

It's hard to find much to complain about with Stryker (NYSE:SYK). The shares aren't cheap, but then they weren't back in January and they've managed to tack on another 10%, making them one of the better performers in the group this year. I suppose I could complain that the company's solid revenue growth isn't unlocking a lot of margin leverage, but then this is a pretty efficiently run company from the off.

Looking ahead, I'm still not wild about the valuation, but I do acknowledge that Stryker has dry powder that it can deploy toward accretive M&A. I would be in no rush to sell Stryker if I owned it, but I generally like to see some discount to DCF-based or EV/rev-based fair value to make a new purchase, and I just don't see that here in Stryker's valuation.

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Stryker Seems Next In Line For A Big Deal

Seeking Alpha: Entellus Medical's Valuation Doesn't Leave A Lot Of Breathing Room

Entellus Medical (NASDAQ:ENTL) checks a few attractive boxes within the med-tech space - namely, a less invasive procedure that can be performed in a physician's office instead of a hospital. Entellus offers an appealing solution to the balloon sinus dilation (or balloon sinuplasty) market, with a system that is smaller, more flexible, and less complex than rival systems. That said, key questions remain as to the true market potential for office-based balloon sinuplasty and the willingness of ENT specialists to adopt this technique (and Entellus's tools).

I have some issues with this as an investment idea, though. First, there's still ample controversy regarding the proper role of balloon sinuplasty within the treatment of chronic sinusitis. Second, Entellus is a small player competing with some very large rivals. Third, even if Entellus dominates the office market, I don't see enough revenue or profit potential to make the valuation truly compelling at this price.

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Entellus Medical's Valuation Doesn't Leave A Lot Of Breathing Room