Scorecard for the First Nine Months of 2015

“Management is not satisfied with its medical device results. JNJ’s goal is to get Medical Device sales back to growing in line to above market growth. However, recent results have fallen short. On the 2Q earnings call, CEO Alex Gorsky commented that he was not satisfied with the division’s growth and we believe that he is committed to improving its results. We sense the company will look to improve the Medical Device division’s performance though internal product development and M&A. With respect to internal development, JNJ plans to launch ~30 new products over the next two years.”

Glenn Novarro, RBC Capital Markets

“We believe that IART (Integra LifeSciences) is evolving into a more focused, faster-growing and more profitable company. New product launches including IART’s reverse shoulder, total ankle and DFU (diabetic foot ulcer) product should help accelerate growth for the next several years”

Larry Biegelsen, Senior Analyst Wells Fargo

“Orthopaedic sales are still Stryker’s bread and butter but now make up just 42% of the total. This segment (Orthopaedics) is a tale of two geographies. In the U.S. sales were up 9%. Europe ‘had a terrific quarter.’ But tougher macroeconomic issues in China and Brazil weighed on the segment.”

Joanne Wuensch, BMO Capital Markets

“We expect SYK (Stryker) to deliver strong mid-single digit organic sales growth in 2015 and 2016 due to (1) solid growth across its divisions; (2) contribution from recent acquisitions; and (3) improving end markets.”

Craig Bijou, Senior Analyst, Wells Fargo

“There are several reasons that we like the Biomet acquisition (by Zimmer). First, we have been disappointed with the speed of innovation and business development from ZBH in several smaller orthopedic markets such as extremities, spine, dental and sports medicine. Biomet provides ZBH with market-leading shoulder product portfolio and access to the faster-growing sports medicine market, and expands ZBH’s scale in spine/dental, which has been needed to drive improved segment profitability. Additionally, ZBH management’s updated year 1-3 synergy expectations appear reasonable. The combined companies should be able to deliver consistent double-digit earnings growth, above peers.”

Glenn Novarro, RBC Capital Markets

“Big picture, it appears that the company’s end-markets are stable, with management citing modestly negative price trends, consistent with prior expectations. It also looks like the early integration efforts are off to a good start, as mirrored in the earlier-than-expected cost savings.”

Joanne Wuensch, BMO Capital Markets

“Potential upside drivers include better-than-expected growth in the recon market and better-than-expected cost synergies from the Biomet acquisition.”

Mike Matson, Needham and Company, LLC

“Globus reported significant top and bottom beat. We believe that GMED (Globus Medical) is a way to play the improvement of the overall spine market. Its comprehensive product portfolio allows it to compete with the market leaders but its smaller size appeals to surgeons.”

Craig Bijou, Senior Analyst, Wells Fargo

KTWO’s (K2M) U.S. growth was driven by strong sales in Complex Spine and MIS, with Complex Spine being the largest contributor to y/y growth in Q3. .U.S Complex Spine growth was driven by EVERST deformity platform based Caspian systems and MESA 2 system sales. U.S. Degenerative growth was driven by sales of biologics and initial sales of Cascadia 3-D laminar titanium product. Pricing in the U.S. was down low to mid-single digits. We believe KTWO’s differentiated focus on higher-growth complex spine and minimally invasive spine segments positions the company well to capitalize on the improving $10 billion global spine market.”

Larry Biegelsen, Senior Analyst, Wells Fargo

“KTWO continued to gain share in the spine market during 3Q15 with growth driven by a combination of new products and expanding distribution. KTWO also continued to drive its operating margin higher primarily with SG&A leverage. Potential upside drivers include K2M’s new product launches including MESA 2, NILE, CAPRI and CASDADIA and faster-than-expected sales force productivity growth.”

Mike Matson, Needham and Company

“When LDRH announced preliminary revenue on October 8 it missed consensus by $1mm due to seasonality in the U.S. and international markets. LDRH said that much of the seasonality was outside the U.S. but all products were affect by it to some extent, including Mobi-C. We believe LDRH is one of the most attractive assets in an improving spine market due to its focus on cervical spine and the potential of Mobi-C to capitalize on the emerging cervical disc replacement market.”

Craig Bijou, Senior Analyst, Wells Fargo

“While we gleaned little insight into the q/q momentum, we are comforted by increasing clinical evidence, which could increase coverage. What remains in question is the rate of revenue slow down, and if certain measures will slow it down or re-accelerate it? It might take another quarter or two to assess the 3Q event. Even if the company hunts toward its long-term revenue growth rate of 15%, it is still attractive growth.”

Joanne Wuensch, BMO Capital Markets

“Mazor announced in early October that it sold 3 systems in Q3 compared to 5 systems in the prior year’s quarter all in the U.S. Two of the systems were sold into New York metropolitan teaching hospitals, which is notable for two reasons: (1) the sales mark the first entry into the large New York market and (2) Mazor continues to place systems in teaching hospital which we believe will increase awareness among surgeons. While we are encouraged by the potential clinical benefit of Mazor’s technology, we remain cautious due to: (1) the lack of visibility of potential catalysis to drive systems sales and (2) a full valuation.”

Craig Bijou, Senior Analyst, Wells Fargo

“Based on conversations with leading spine surgeons, we continue to believe that the market leaders (MDT and JNJ/Synthes) are not innovating, creating an opportunity for smaller, more nimble spine companies to take significant U.S. market share in the years to come.”

Glenn Novarro, RBC Capital Markets

“We expect NUVA to drive above average top and bottom line growth the next several years due to (1) an improving spine market, (2) disruptions at competitors, and (3) operating margin expansion.”

Larry Biegelsen, Senior Analyst, Wells Fargo

“Domestic revenue growth was stronger than we expected given strong lumbar and cervical growth while international growth was weaker than expected given slower growth in Europe and a tough comp in Latin America. Margin performance was strong with non-GAAP operating margin up 460 bps y/y driven by both SG&A and R&D leverage”

Mike Matson, Needham and Company

“In a sea of red, NUVA delivered. Impressively, operating margins continued to march north and surpassing our 14.5% estimate. Management announced the U.S. approval of AttraX Putty (a product we had left for dead long ago), which should be another contributor in 2016. M&A continues to still be in focus, particularly for international expansion. Overall, we view this as a very good quarter, as NUVA re-orients from a revenue beat to an EPS beat story, while launching new products, taking share in the cervical and lumbar markets, and refocusing its international presence—all while expanding operating margins meaningfully.”

Joanne Wuensch, BMO Capital Markets

“ConMed’s turnaround is delayed but not derailed. ConMed’s 3Q15 revenue and EPS missed consensus and management lowered its 2015 revenue and EPS guidance. The revenue shortfall was primarily the result of weaker-than-expected sales in General Surgery and CNMD’s export markets. Management is taking steps to address both of these areas and we expect to see improvement in coming quarters. While the pace of the turnaround is slower than we had hoped, we note that CNMD has improved its revenue growth by ~300 bps over the first 9 months of 2015 when compared to the same period in 2014. We expect further improvement during 2016 and we still see potential for revenue growth to reach or even exceed the mid-single digits”

Mike Matson, Needham and Company

WMGI revenue was better than expected (up 16% ex-FX), while Tornier’s was slightly worse than expected (up 4% ex-FX). The good news is that each was strong where it is supposed to be: WMGI’s Foot and Ankle sales were up 23% ex-FX, including U.S. sales up 24% driven by its Infinity total ankle system (U.S. total ankle replacement procedures were up 54%). Tornier’s Upper Extremities Joints and Trauma franchise delivered 13% y/y, with U.S. sales up 15%—driven by the Aequalis Ascend family of replacement products. While early in the launch, interest in Augment is high, physician education is under way as are efforts with hospital value analysis committees, pricing is holding, and the availability of PMA data is “a real plus.”

Joanne Wuensch, BMO Capital Markets

Core businesses remain strong, and we remain believers in the Wright Medical/Tornier combination. With the U.S. approval of Augment, we remain confident that new WMGI will deliver mid-teens revenue growth once the dis-synergies are behind the company. We expect the revenue dis-synergies to be mostly behind the company by the end of 2016, setting it up to deliver mid-teens revenue growth in 2017–2018. We continue to argue for a premium valuation.

Glenn Novarro, RBC Capital Markets