If you're a science fiction fan, you know about cyborgs -- a combination of organic and inorganic parts that supposedly creates a stronger whole. Well, that's basically the formula med-tech company Integra Lifesciences (NASDAQ:IART) has been following as well: building growth by bolting acquisitions onto an existing framework of neurological, reconstructive, and surgical businesses.
Alas, those cyborgs in the pulp novels seldom live happily ever after, and I'm not entirely convinced that Integra will, either. While reported revenue growth was a gaudy 43%, organic growth seemed closer to 10%. I say "seemed" because management no longer wants to talk about organic growth, claiming that acquisitions sometimes cannibalize or enhance existing sales in a way that makes that metric misleading. Uh, OK. If you say so..
Because of the costs of both deals and stock-compensation expenses, assessing profitability is no easier. The whole stock-option-expense conundrum makes it difficult to know which set of numbers to use, so I'll briefly provide both. Gross margins were lower on an as-reported basis, and a bit higher on an adjusted basis. That's even truer for operating income -- income grew 8% by normal accounting, and 71% under the more favorable treatment.
I won't argue that Integra is building value through its acquisitions, but it strikes me as a diminishing type of value. If internal growth can't get the job done (and thus far, it hasn't), the company will be forced to find ever-larger deals. That gets both expensive and dilutive over time, and increases the risk of simply buying the wrong company or product at some point.
There are a lot of quality med-tech options out there. You can go big with an orthopedics company like Zimmer (NYSE:ZMH), midsize with a company like CYTYC (NASDAQ:CYTC), or small with companies like Aspect Medical (NASDAQ:ASPM) or Intuitive Surgical (NASDAQ:ISRG). With a decent variety of choices out there, I just don't see the reason to throw in with Integra today.
For more Foolishness on the medical device industry:
- Zimmer Provides Quarterly Information, And More
- Aspect Gives Investors Nightmares
- Integra Adds Another Piece
Integra Lifesciences is a Motley Fool Stock Advisor selection. Intuitive Surgical is a Rule Breakers pick. Whatever your investing style, the Fool has a newsletter for you.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
