Wright Medical Group N.V. (WMGI)

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Wright Medical Group, Inc. (WMGI)

March 13, 2013 10:15 am ET


Robert J. Palmisano - Chief Executive Officer, President and Director

Julie D. Tracy - Chief Communications Officer and Senior Vice President


Matthew Taylor - Barclays Capital, Research Division


Matthew Taylor - Barclays Capital, Research Division

Thanks for joining us. Really pleased to be joined by Wright Medical and CEO, Bob Palmisano. We also have Julie Tracy, who's the head of IR. And we're going to have a fireside chat today. So just to open up, if you're not familiar with the company, Wright Medical is an orthopedic manufacturer. They have 2 primary businesses, one in Extremities that they've been really focused on growing with a great Foot and Ankle business, and they also have their bread-and-butter, which is a large joint recon business. And they've been really focused on improving the growth rates and the cash flow and shifting the mix of businesses to improve the profile.

Question-and-Answer Session

Matthew Taylor - Barclays Capital, Research Division

Bob, maybe you want to start there and talk a little bit about what you've been doing in order to juice the growth a little bit and give some comments in terms of what to expect for 2013.

Robert J. Palmisano

Sure. Thanks, Matt. Thanks for inviting us down to Miami Beach. I've been CEO about 16 months now at Wright Medical. We're a company that, as Matt said, is in 2 different kinds of businesses, the large joint business, as well as the extremity business. When joining Wright 16 months ago, we were in the throes of a Deferred Prosecution Agreement that was very onerous and demanded an awful lot of attention from management, which we gave it because it was necessary, and we were -- we successfully exited the Deferred Prosecution Agreement last October, but currently in the -- the follow-on to that Corporate Integrity Agreement. All that is going well. We take, obviously, compliance very seriously. However, as a result of the compliance issues that the DPA was set to resolve, our large joint business over a period of time has suffered and had -- we had alienated a lot of physicians. We had to terminate certain distributors. And so the business in whole was really on pretty much of a downward trajectory, although spending was still at a pretty high level in terms of supporting that business in the fall of 2011 when I joined. Currently, we're just about, I think, at the end of a trough in the Ortho Recon business, and we think that business should level out and actually tick up later this year. We continue to invest in that business, but by doing fewer projects with much more scope to them

[Audio Gap]

than previously when we did a lot of small projects that didn't seem to bear much fruit. So turning now to the Extremities business. We decided shortly again after I joined is this is an area of focus, an area of opportunity. We decided to devote a major part of our efforts and our resources in terms of growing this business. A year ago, fourth quarter of 2011, we were going at about 7%. We took a lot of steps in 2012. We made investments in R&D and launched several new products. We made a lot of investments in medical education. In 2011, we had trained 600 physicians. In 2012, we trained 2,000 physicians. Thirdly and very, very importantly is we decided to revamp our distribution system to have mostly a direct sales organization, which is quite unique in orthopedics. We were able to gain control, if you will, over our distribution system, and that has paid dividends. Fourthly is we decided to increase our cash flow quite -- work on cash flow quite significantly and reduce our inventory levels and -- which had the benefit of identifying about $100 million in cash flow -- cash that we could generate over a period of time. And secondly, in terms of freeing up our sales organization from spending about 40% of their time managing inventory and logistics into selling. So where we are today at the end of fourth quarter of 2012 is that our growth rate accelerated to about 20%. Our sales force productivity has increased significantly going from $600,000 per rep to $700,000 per rep. We have set a goal of being north of $1 million in 2014. And I think that right now, our R&D projects are on stream and it's an all-go situation. Also we announced last November the acquisition of a biologics company called BioMimetic. We closed that transaction a couple of weeks ago. This is a pre-approval -- we bought this company preapproved. With that, it's in the process of -- the final process, we believe, of being approved by the FDA of the PMA being approved, although who knows with the FDA. So we're -- but all things seem good there. So we have a business that has gone from about a low-growth business into a very high-growth business with potential to even accelerate faster. We have control over our distribution system. And we sit here in the first quarter of this year, and I think that our Extremities business is doing well. Our Ortho Recon business, I think, has seen the worst and should be able to tick up by the end of the year.

Matthew Taylor - Barclays Capital, Research Division

Great. It's a good overview. Let's start with BioMimetic since that's a recent deal. Can you talk a little bit about how you think that can help your growth and how that fits into the portfolio and maybe remind us in terms of margin...

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