What Globus’ IPO Means

On what is essentially Globus Medical, Inc.’s ninth birthday, this company of 672 employees, 39 major product lines and $331 million in annual sales will “go public.” For some companies this process of opening up for public scrutiny and valuation is a natural and expected rite of passage as they grow to a particular size or complexity. For other companies going “public” can be a profoundly disruptive event particularly if its corporate culture and DNA is more inner-directed and, well, private.

Globus Medical, as a company, has a particularly well defined corporate culture and, if we were to put words to it we would say that it is engineering-based, thoughtful, focused but with a bias to taking on tasks internally. Globus is a company that listens more than it speaks. Going public will be interesting.

How is Founder and CEO David Paul handling all this? No doubt with solid determination. Our advice? Stay true to your instincts and don’t let yourself be pulled into the circus of analyst calls and investor meetings. Hold one meeting per year. The Annual meeting. Anyone who wants to know about the company can attend. Seriously.

Pulling Back the Curtain

One of the requirements for selling shares of any company to the general public is that it must provide a full and complete picture of its business to the general public. The first such look is in a filing with the Securities and Exchange Commission (SEC) called an S-1 filing. There are six basic areas of disclosure in that filing:

1. Sales and earnings performance

These are not trivial disclosures. Which is why “going public” is really not for everyone.

Here, then, is a tour of Globus’ S-1.

Sales, as we mentioned earlier, were $331 million last year and what is most interesting in these numbers is how fast Globus’ “disruptive technology” product category is growing. Standard fusion products grew pretty much in line with the industry at 4% last year. But “disruptive technologies” jumped 47% and pulled overall sales growth to 15%—that’s very good in today’s tough spinal implant market, particularly for new technologies.

Change 2010 / 2011

2010

2011

Globus Medical Annual Revenues

%

Change

    Innovative Fusion

$215, 565

$224, 356

$8, 791

4%

    DisruptiveTechnology

72, 630

107, 122

34, 492

47%

TOTAL Sales

$288, 195

$331, 478

$43, 283

15%

    United States

$277, 974

$311, 024

$33, 050

12%

    International

10, 221

20, 454

10, 233

100%

TOTAL Sales

$288, 195

$331, 478

$43, 283

15%

$ in 000s
Source:  Globus Medical, Inc. S-1

Disruptive technologies at Globus refers to MIS techniques and instruments, motion preserving implants like dynamic stabilization products, total disc replacement and interspinous process spacer products, and advanced biomaterials technologies. The fact that Globus is booking that kind of growth from these technologies is both notable and a welcome bright spot for innovation in spine.

Globus is also more profitable than, we suppose, observers might have thought given management’s reputation for pinching pennies. Gross profit margins last year were 79% of sales. By comparison gross profit margins at other spine companies are, as follows: NuVasive, Inc.: 79%; Alphatec Holdings, Inc.:59%; Zimmer Holdings, Inc.:75%; and Stryker Corporation: 66%. Gross profits, however, have been declining as a percent of sales at Globus—falling from 84% of sales in 2009 to 79% last year. All spinal implant companies have been experiencing pricing pressures so this is not surprising.

The acid test for profitability is operating profit margin and here Globus really excels. Last year Globus made 29 cents in profit for every sales dollar. That’s excellent and puts Globus in the upper ranks of all orthopedic companies. Again, here is how that compares. NuVasive: 7%; Alphatec: (7%); Zimmer: 25%; and Stryker: 24%.

Last year, Globus reported $76 million in operating cash flows and $143 million in cash.

Maybe pinching pennies is a good thing.

What Kind of Investment Will Globus Be?

Spine and growth are two words that institutional investors do not typically use in the same sentence these days. But 15% sales growth and an underlying “disruptive technology” growth rate that is 2 or 3x higher makes Globus look like a growth stock. Will Wall Street make an exception to its “spine is yesterday’s news” attitude? It could be tough—but—the financial report in this S-1 is impressive.

Globus, we think, joins NuVasive as a high profile spinal implant company with both better than average growth rates and, in terms of Globus, stellar profit margins. Having two strong spinal implant firms in the public eye will go a long way to rehabilitate the reputation of spinal implant industry. A Globus IPO raises the value and visibility of several private spinal implant companies.

What’s not to like about a 15% sales growth rate and nearly 30% operating margins?

Globus’s Strategic Plan

How does Globus plan to maintain, if not increase, its growth rate? Courtesy of the S-1 filing, here’s the answer:

1. Keep doing what got them to $331 million in sales in the first place. “We plan to continue to develop innovative fusion products and disruptive technology products.”

Litigation and Related Party Transactions

Yes, Virginia, Globus has engaged in litigation. All current and past significant cases are summarized in the S-1. None were surprising. Interestingly, perhaps, the companies with whom Globus is litigating are also among the largest firms in the spine industry—Synthes (soon to be combined with DePuy Spine), Medtronic and NuVasive.

One interesting related party transaction was disclosed in the filing and it is one of those items that, as a private company, is not unusual and often is one of the perks of having founded and successfully built a private company. In the public domain, however, this is disclosed and effectively folded into the overall company.

Since 2004, Globus has bought products from an outside manufacturer which was owned by a group comprised of Globus’ CEO, President and VP of Operations. Between 2009 and 2011, Globus purchased, in the aggregate, $43.3 million of products from this supplier.

Control Stays With David Paul, CEO and founder, and His Team

Once the IPO is effective and Globus’ stock is trading, CEO and Founder David Paul plus other members of management, some directors and stockholders will have most of the voting power of the outstanding common stock. Assuming Globus lands on the New York Stock Exchange, which is most likely where it will be, it will be considered to be a “controlled company.” That means that it will not be bound by certain corporate governance requirements, including the requirement that a majority of the directors to be independent and that the compensation and nominating and corporate governance committees consist entirely of independent directors.

Management

David Paul is CEO and founder and he will remain in those positions following the IPO. David Demski is Globus’ President and Chief Operating Officer and David Davidar is VP of Operations. All three have been with Globus since 2003. The other senior managers, however, are comparative newbies. Richard Baron, CFO, joined the firm three months ago in January 2012. Brett Murphy, VP of Sales joined the firm in February 2011. Ole Stocklund, VP of International joined in 2010.

What Will Globus Be Worth?

With underwriters like Goldman Sachs, Piper Jaffray and Bank of America, this underwriting will, no doubt, happen on time and at a very decent price.

Having said that, however, what is the market currently paying for the typical high performing spinal implant sales dollar or earnings dollar? Since there is really only one comparable (NuVasive) the answer to that question is pretty straight forward. As of last week, investors were paying about $1.33 per $1.00 of sales and $33.68 per $1.00 of after tax earnings for NuVasive. Now, investors were also forecasting that NuVasive’s sales would rise 14% this year to $616 million and that earnings would decline this year by 13%.

If we applied the NuVasive multiples to Globus, the value of the firm would be about $440 million if you use trailing sales, probably $510 million if you use future sales. On an earnings basis, the NuVasive multiple would push Globus’s value to $2 billion—which doesn’t make sense, really. The average orthopedic company is currently getting $17.67 per $1 in earnings from the market so applying that ratio to Globus gets a valuation number of $1.1 billion—which is probably must closer to the mark.

We would also note that Globus is a really exceptionally profitable company and buyers, in today’s nervous market, are looking for companies like this. So, our back of the envelope valuation numbers may be light.

To read the S-1 filing yourself, go to this web address.

Conclusion

Will Globus thrive in the fishbowl? It should. While there are lots of good reasons to sell stock to public and institutional investors, at the end of the day the reason to go public is about what’s best for the business, not the “public” demands and requirements. If we had a vote, and we don’t, we’d suggest that Globus take the money and keep managing exactly as they have—quietly and outside the glare of Wall Street.