Now That Globus Is Public

Welcome to the fish bowl. In the first eight days since putting itself up for public scrutiny Globus Medical, Inc.’ value has risen 13% or $110 million. Globus, says Wall Street, is worth $1.2 billion, which makes this company the most valuable public pure spine company in the world. Here’s the short list:

¹ Q1 2012 plus the last three quarters of 2011 for GMED, does not include tax expense for Q1 and Q2 2011 for NUVA, includes non-recurring expenses for Q3 and Q4 for ATEC.  

Source:  RRY Publications LLC

To put more perspective on Globus’ performance, here are two more data points:

• The last broad line spinal implant company to go public was Alphatec. In that company’s first week as a public company, Wall Street pulled it down approximately 19% from $9.00 per share to $7.29 per share. In that underwriting, Alphatec’s owners had expected to sell these shares for prices between $13-$15, but in the face of meager demand management agreed to re-price to an $11-$12 range only to have to drop that price to $9 per share in order to clear the market. Unfortunately, not even that number held. Today, Alphatec’s stock is trading at $1.58 per share although, by virtue of increasing the number of shares outstanding 170% from 33 million in 2006 to 89 million in 2012, ATEC’s market value is $140 million. Alphatec’s value today is underwater 53% from the $300 million its owners had expected to receive from the public market six years ago.

• Sofamor Danek, the company that became the largest supplier of spinal implants in the 1980s and has stayed at the top ever since, sold to Medtronic, Inc. in 1998 for $3.6 billion.

When viewed against those two historic extremes of spinal implant companies, nine-year old Globus’s accomplishment are particularly impressive.

What’s Next?

If Globus’ past is any indication, what happens next is that growth accelerates. NuVasive and Alphatec both benefited in the marketplace from the exposure of Wall Street. There is a certain glow that comes from being in the public stock arena and surgeons do take notice. Booth traffic will pick up. Sales reps find that access improves. 

We expect that there could a massive sales distributor/person recruitment effect from this IPO. The underwriting has been successful and that aura of success will attract distributors who want to jump on a bandwagon that, most people expect, will result in an acceleration of product development—either organic or by acquisition. Furthermore, if distributors get a sense that Globus could start buying other spinal implant firms, it will be better to get on board now than to have to fight for a place post-deal some day.

Furthermore, Globus has the ability to, in effect, print money in the form of publically traded stock. People who print dollar bills go to jail. But companies who print stock certificates get on the cover of Business Week. At $13.50 per share and with 500 million Class A common shares authorized (437 million still unissued); Globus has a theoretical $5.9 billion in dry powder.

So, while sales people in the field will see the wind pick up at the their backs, senior management, with their new financing tool, will have the capability to make product, technology or even corporate purchases at levels that could push Globus to challenge Medtronic or DePuy Synthes Spine in terms of sales force size or scope of product lines.

The other aspect which distinguishes Globus is the company’s profitability. 

For the first three months of this year, Globus reported $28 million in operating profit on sales of more than $97 million. Globus earns approximately 29 cents on every sales dollar. To Wall Street those kinds of numbers translate into a measure of management’s operating abilities—which in their minds are eminently transferable to other companies. So if Globus goes on a shopping spree and overlays these perceived management skills on other, poorer performing spinal implant companies, Wall Street will likely cheer. In the view of Wall Street, Globus can buy sales with a premium priced security; apply its managerial expertise to squeeze new profits out of those sales and in the process drive a rising rate of earnings growth.

Fully Exposed

But of course, CEO David Paul and his team are now in the fish bowl. Until the 11th of September, he and his team have a bit of a respite during the Securities and Exchange Commission’s 40 calendar day “quiet period” following an initial public offering. For now, Wall Street’s chattering crowd is not allowed to make comment. After that, however, the opinions will come tumbling in from analysts, traders, hedge fund cowboys and mutual fund managers. 

The analysts that will almost certainly be writing about Globus are:

Source:  RRY Publications LLC

Only one of these analysts is considered a “Star” analyst for the other comparable spinal implant companies—NuVasive or Alphatec—and that is Bill Plovanic. The other star analysts for spinal implant companies are:

• Glenn Novarro with RBC Capital Markets

• Christopher Pasquale with JP Morgan

• Raj Denhoy with Jefferies & Co.

• Spencer Nam with Thinkequity

• Joanne Wuensch with BMO Capital Markets

• JT Haresco with JMP Securities

• Jeff Johnson with Robert W. Baird & Co.

Star analysts are those who’ve demonstrated over the course of the previous two fiscal years and four quarters to have issued the most accurate earnings estimates for the companies that they cover.

Will any of these other spinal implant company star analysts write about Globus? Absolutely. How could they not? In spine, two public companies now dominate—NuVasive and Globus.

Globus starts with seven analysts writing research reports and issuing sales and earnings forecasts. That’s about one third the number that cover NuVasive (23 analysts) and about the same number as follow Alphatec and twice as many as follow TranS1. Before the end of this year, we would expect that the number of analysts covering Globus will rival NuVasive.

What will these analysts say? Here’s our guess:

1. More than half will put a “buy” rating on Globus’ stock

2. The average one year target price will be around $19.00

3. And the key points will likely be:

   a. Higher-than-average sales growth (20% for Globus, 16% for NuVasive—off of a higher base, 1% for Alphatec).   

   b. Very high comparable profit margins currently, but a growing risk that those margins will moderate in the face of overall spinal implant pricing pressure.

   c. Avenues for new growth (M&A, International expansion, new technologies)/

   d. Differences between NuVasive’s direct sales approach and Globus’ higher dependence on distributors.

   e. M&A discussion and the role that Globus might play in a consolidation of spinal implant industry.

Final Thoughts

As we documented a couple years ago, NuVasive has traded in a premium space virtually by itself since it came public in 2004. The orthopedic equity markets have pretty neatly divided implant and instrument suppliers into three categories in terms of valuation—under performers, average performers and one premium performer—NuVasive. Globus, we think, is different. Certainly the company has joined NuVasive in the higher valuation category. Sixteen orthopedic companies (out of 21) are less expensive than NuVasive or Globus in terms of P/E ratios or Price-to-Sales ratios or P/E to Growth Rate ratios. 

But there is, we think, something else in the character of Globus Medical that may well make this company one of the most dynamic companies in orthopedics generally. Now that David Paul & Co. are public with a strong underlying security, the door is opened to some potentially interesting strategic moves. We, like most observers, are fascinated to see what might come next.