Reiterate Wright Medical at Neutral

On Feb 27, 2013, we retained Wright Medical Group (WMGI - Analyst Report) at Neutral after the company beat Zacks Consensus Estimates for earnings and revenue for fourth quarter 2012.

Why the Retention?

Wright Medical released its results for the fourth quarter on Feb 21. The company posted adjusted earnings of 1 cent per share, beating the Zacks Consensus Estimate of a loss of 1 cent a share. Revenues in the reported quarter dropped 3% year over year to $123.5 million, beating the Zacks Consensus Estimate of $121 million.

Over the past 30 days, the Zacks Consensus Estimate for 2013 has moved down by 5 cents to 4 cents while for 2014 it has dropped by 4 cents to 31 cents during the same timeframe.

On March 1, Wright Medical revealed it completed the takeover of BioMimetic Therapeutics. The deal will mesh BioMimetic’s line-up of biologic offerings with Wright’s range of orthopedic products and its strong sales set up. As per the terms, the deal has a possible value of about $380 million for BioMimetic shareholders.

Including the effect of the acquisition of BioMimetic, the sales forecast for 2013 is in a band of $485 million to $495 million. The deal adversely affects earnings per share by about 32 cents to 34 cents resulting in loss per share in the range of 26 cents to 34 cents (including stock based compensation expense) for 2013. Free cash flow is expected in the range of nil to $5 million.

Orthopedics is one of the largest medical device market segments worldwide. Current lukewarm demand is exacerbated by sustained pricing pressure. In particular, the reconstructive market fundamentals (pricing and volume) have languished in the recent past but are showing signs of recovery. The joint replacement market has been hit by patient deferral of elective procedures, leading to weak demand for hip and knee implants.

Pricing compressions on hips, knees and spine products, which have impaired the performances of several orthopedic companies, remain a key concern at the macro level. We note Wright Medical’s inadequacy to post sales growth in recent times.

Our views on the company are moderated by intense competition from larger players and pricing pressure. Wright Medical competes with much bigger names such as Zimmer Holdings (ZMH - Analyst Report).

Other Stocks to Consider

Wright Medical carries a Zacks Rank #3 (Hold). CareFusion Corporation (CFN - Snapshot Report) and Covidien plc (COV - Analyst Report) carry a Zacks Rank #2 (Buy) and are expected to do well.