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Recently, Teleflex Incorporated (TFX - Snapshot Report), a global leader in medical devices used in critical care and surgery, was awarded two new three-year group purchasing agreements with Premier healthcare alliance for its portfolio of endotracheal tubes. The agreements are effective from January 1, 2013 and are binding through December 31, 2015.

Product categories included in the group purchasing agreement are the well-regarded Rusch and Sheridan endotracheal tubes, including the ISIS HVT endotracheal tubes and related products. Teleflex already has a group purchasing agreement for its portfolio of respiratory products with Premier which is effective from November 2012 and is binding through three years.

The group purchasing agreements will pool buyers for Teleflex as the company will gain access to Premier’s alliance of 2,700 hospitals. Per the agreements, Teleflex’s offerings will be made available to buyers at exclusive member rates. As a result, the group purchasing agreements are expected to decrease the overhead costs for prospective buyers.

Our Take

The group purchasing agreements will allow Limerick, Pennsylvania-based Teleflex to achieve supply continuum and improve sales volume. The company’s focus on profitable and consistent growth is expected to yield results, helped by demographic trends and barriers to entry in the industry.

The recent divestiture of its OEM Orthopedic division is expected to aid the company’s strategy of new product introduction and investment in innovative technologies. This will accelerate Teleflex’s top-line in the years ahead.

However, Teleflex may be unable to wend increasing costs owing to higher input prices to the vendors under the group purchasing agreements. The company is already facing rebate in output price in certain European nations due to introduction of group purchasing organizations.

Additionally, larger players like Covidien (COV - Analyst Report), C.R. Bard (BCR - Analyst Report) and CareFusion (CFN - Analyst Report), which operate in similar business segments, present a tough competitive landscape for Teleflex. The demand for Teleflex’s offerings is heavily influenced by healthcare reimbursement systems in the domestic as well as the international market.

We currently have a long-term Neutral recommendation on Teleflex. The stock currently carries a Zacks #2 Rank, which translates into a short-term Buy rating.

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