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FDA Ruling on Artificial Disc Boosts Globus Medical

Posted
10/10/2012 1:29:00 PM
By: Investor's Business Daily
Referenced Stocks:GMED;JNJ;MDT;NUVA;SYK

It didn't take long forGlobus Medical ( GMED ) to make some noise on Wall Street.

Less than two months after the designer and marketer of spinal devices had its initial public offering, its stock price spiked, thanks to good news on the regulatory front.

The good news came Sept. 28 when the Food and Drug Administration granted Globus premarket approval for the company's Secure-C Cervical Artificial Disc.

The Secure-C is a motion-preserving alternative treatment of neck and arm pain conditions involving disc abnormalities.

According to a company press release, clinical data from a 380-patient study showed that Secure-C is statistically superior to certain other treatments in terms of overall success, subsequent surgery at the index level, device-related adverse events and patient satisfaction at 24 months.

Globus' stock price shot up 7% on the news. It continued to rise the next two sessions, peaking at 19.93 on Oct. 2, before falling back the next couple of days. Shares are still up more than 40% since they debuted at 12 on Aug. 3.

Earlier Than Expected

In a note, analyst William Plovanic of Canaccord Genuity said the FDA approval came "on the early side" of his original expectation.

He says the Secure-C is one of four cervical discs in the FDA review process. The others are made by LDR,NuVasive ( NUVA ) and Spinal Motion.

"The (Globus) approval is a welcome event considering the application has been in the FDA review process for over two years and now includes data out to more than five years," Plovanic noted. "We expect to gain additional clarity into the product, and Globus' strategy, on Globus' third-quarter conference call, as well as at upcoming industry trade shows."

Globus is expected to report Q3 earnings during the second or third week of November.

Meanwhile, the Secure-C will be showcased at two upcoming spine industry conferences: the Congress of Neurological Surgeons in Chicago, scheduled for Oct. 6-10; and the North American Spine Society meeting in Dallas on Oct. 24-27.

The Secure-C's impact on Globus' financial results won't be known until the company offers more clarity on commercialization timelines, experts say.

For now, Globus has fared pretty well with its current lineup. The company has launched more than 100 products since it was founded in 2003. It operates in two main categories: traditional spinal fusion and disruptive technology.

Globus recorded its first sales in 2007, ending the year with $123 million in revenue. The company logged 40%-or-better sales growth each of the next two years. It grew the top line 13% in 2010 and 15% in 2011.

"Globus has done a credible job of penetrating this market and stealing share from much larger, established competitors," Morningstar analyst Debbie Wang noted in a report prior to Globus' IPO.

"This has translated into 28% compound annual revenue growth since 2007," she added, "though we note that top-line growth has slowed considerably -- albeit to the midteens -- over the last couple of years, which is related to the pullback in the entire spine market."

The global spine market is estimated at about $10 billion a year. It is particularly lucrative in the U.S., where as many as 80% of Americans are said to suffer from some kind of back pain. The U.S. accounts for more than 90% of overall sales, though the percentage from international markets is slowly growing.

The traditional fusion market is growing in the mid- to high-single-digit range, Wang says. In contrast, more advanced disruptive technologies are growing in the 30% to 50% range.

Wang calls Globus "a small fish in a large spinal pond" that includes a number of much bigger players.

The two biggest players areMedtronic ( MDT ), which holds an estimated 33% share of the market; andJohnson & Johnson ( JNJ ), which controls about 24% of the market thanks to its recent purchase of Synthes.

The rest of the market is carved up amongStryker ( SYK ), NuVasive andZimmer (ZMH), Wang says.

Market Share

"We peg Globus' share at about 4% of the spinal market," she noted. "We think there is plenty of room for the firm to steal share from Medtronic and J&J, primarily driven by Globus' experienced sales force and its robust pipeline of improved devices."

Canaccord's Plovanic calls Globus "the most profitable public pure-play spine company," with GAAP operating margins in the 30% vicinity and EBITDA margins of approximately 35%.

He also gives the company high marks for its product development strategy.

"Continuous new product flow and distribution expansion are the hallmarks of successful medtech companies, and Globus has continued to execute on this strategy since inception," he noted.

Globus' rapid product development strategy has also helped the company counter industry head winds such as pricing pressure, Plovanic added. "(And) distribution expansion has offset payer push-back impact on volume growth rates, allowing Globus to keep growing while others have stalled."

Analysts polled by Thomson Reuters expect Globus to post 2012 earnings of 81 cents a share. They see profit ticking up only 4% to 84 cents in 2013, then rising in double digits each of the next two years.