A Solid Orthopedic Implants Manufacturer

The orthopedic implants market is a growing segment with increasing demand for extremities, spine, and orthobiologics. Large companies like Depuy/Synthes from Johnson & Johnson, Medtronic, Zimmer, and Stryker are majority players in the market. However, the sector offers opportunities for small and mid-sized players with cost-efficient operations and competitive pricing. New Jersey-based Integra LifeSciences (NASDAQ: IART  ) is a mid-sized company that offers a wide range of products, devices, and instruments for orthopedic and neurosurgery.

Background
Integra, a $1.07 billion medical technology company, is a leading provider of surgical instruments to hospitals, surgery centers, and clinics in the U.S. The company primarily develops, manufactures, and markets surgical implants and medical instruments for neurosurgery, orthopedic extremity, spine, and reconstructive surgery. The company has a patented technology to develop soft tissue products.

Integra offers products in three core businesses including regenerative products (soft tissue products), medical devices, and instruments that can be used in neurosurgery, orthopedic, and general surgery. It develops soft tissue products based on its proprietary collagen matrix and de-mineralized bone matrix technologies. The tissue-engineered products are approved by the FDA to use in neurosurgery, orthopedic, and general surgery.

Key target market
Neurosurgery: Around 100 million people in the U.S. and nearly 2 billion worldwide suffer from brain or nervous system disorders. These include depression, anxiety, epilepsy, Alzheimer's, Parkinson's, and other related disorders. The market growth is driven by increasing neurological disorders and technological advancement. The market is largely captured by J&J, Medtronic, and Stryker. Integra offers a variety of products used in neurosurgery. Of these, systems are used to measure various brain parameters, devices to access brain and clean excess liquid from the brain; tissue repair through ultrasonic surgery systems, and dural grafts to repair the brain's internal structure.

Orthobiologics: Orthobiologics is a growing segment within the orthopedic market. The U.S. orthobiologics market is expected to grow at a compounded annual growth rate of 15% to reach $6 billion in 2016. The growth is primarily driven by increasing elderly population, higher obesity, rising sports injuries and road accidents, and increasing patients' awareness toward novel products. Technological advances such as nanotechnology will support growth in the industry. Besides large players, medium-sized companies like Wright Medical, NuVasive  (NYSE: NVO  ) , and Integra have some presence due to their innovative products and technologies. Integra develops products for bone repair made from its owned de-mineralized bone matrix technology.

Spine: Around 10 million adults in the U.S. suffer from chronic back pain each year. The majority have pain due to compression of nerves either in the spine or legs. In most cases, patients are treated with painkillers, physical therapy, steroid injections, or are suggested to change their lifestyle. However, lately the spine market isn't doing all that well in the U.S.

Integra's competitive landscape
In spine surgery, Integra competes with NuVasive, the fourth-largest player in spine segment globally. The company offers a comprehensive range of spine products (more than 80 unique products) used for spine surgery. Its Maximum Access Surgery, or MAS, platform is used for lateral spine fusion. The company has a strong cash balance of $272.7 million, which will comfortably see it through growth and R&D in the near future. However, the company is facing multiple Medicare-related lawsuits, and analysts are not sure how it can hit a 20% growth in operating margins as predicted by management.

In the instruments segment, Integra competes with V. Mueller, a division of CareFusion (NYSE: CFN  ) , having a wide range of surgical products, including surgical clippers and surgical instruments. In in the fourth quarter, which ended June 30, CareFusion reported revenue of $903 million, down by 6% at constant currency, due to 12% decline in sales of medical systems. The decline is partly offset by 7% increased sales of procedural solutions. Adjusted net income during the quarter was $121 million, up by 9% and adjusted EPS was $0.55, up by 10%. In the coming year, the company expects to meet analyst estimates of $2.36 EPS and a revenue growth of between 1%-4%.

Integra's performance
Integra generates revenue from its core businesses, represented by five segments. Around 80% of revenues come from the U.S. market, and neurosurgery and spine accounts for a majority of it. In the recent quarter that ended June 30, total revenues were $205.5 million, a decrease by $4.7 million compared to last year, due to decreased sales of spine and instruments in the U.S. It represents 21% of total revenues compared to neurosurgery (20%), instruments (19%), and extremities (16%). Outside the U.S., the company reported sales of $47.3 million, 23% of total revenues.

The lower sales in this growing segment effects the company's operating performance as well. In the second quarter of 2013, adjusted EBITDA was $33.5 million, down by 17% due to decreased sales coupled with higher SG&A and R&D costs. Declined sales and higher operating expenses drove down its bottom line. Adjusted net income was $16.8 million, or $0.60 per diluted share, compared to $21.1 million, or $0.74 per diluted share in the same quarter a year ago. Integra generated cash flow of $2.9 million from operations and invested $13.6 million in capital expenditures during the quarter.

Investment highlights
Integra continues to strengthen its product portfolio while focusing on its diversified business. Firstly, the company maintains its top line growth through extremities reconstruction products, as the orthopedic market is driven by soft tissue repair and reconstruction of bone in lower extremities (knee, foot and leg) and upper extremities (hand, wrist, elbow and shoulder). Then, the instrument business has the capacity to generate more cash for the company. Finally, neurosurgery products should have stable growth for the company as the market has some selective procedures. Integra is a solid value company, in my opinion.

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