Wright Medical’s Slow Turnaround in 2Q12

On August 1st, Wright Medical Group, Inc. reported $123.3 million in revenue for the second quarter. While that number was down 5% on a constant currency basis over the previous year’s quarter, the underlying story is all about the company’s plan to turn around a business that has been beset with regulatory and sales problems.

BMO Capital Market analyst Joanne Wuensch wrote that with two quarters into a massive turnaround, “We are beginning to see signs that the plan is in place with increased confidence in management’s ability to execute on the restructuring, focus the company on extremities, and increase cash flow.”

Robert Palmisano, president and CEO, said the company made significant progress during the quarter on implementing changes to transform Wright’s business and deliver significant shareholder return. “Although we are early in the execution phase of our plan, we are very encouraged by the initial results on our key measures with global foot and ankle constant currency growth of 13% and outstanding free cash flow generation for the first half of the year.”

“In addition to significant foot and ankle sales growth, the conversion of a major portion of our foot and ankle distributor territories to direct sales representation is ahead of schedule, and we are pleased with our execution to date. We believe this increase in U.S. direct foot and ankle sales representation, coupled with our large and growing product portfolio and our increased investment in medical education, will enable us to continue improving our foot and ankle growth rate throughout 2012 and to exit the year at well above market growth rates.”

Palmisano said U.S. sales were negatively affected by previously announced distributor transitions that occurred in the third quarter of 2011, challenges associated with implementing enhancements to the Company’s compliance processes, and the impact of the previously announced agreement with Kinetic Concepts Inc. (KCI).

Sales

($ in millions)

% Change* 

Total Reported Sales

$123.3

down 5%

Ortho Recon

$71.3

down 9%

     Hips

$40.1

down 10%

     Knees

$30.2

down 8%

     Other

$1.0

down 18%

Extremities

$51.9

1.0%

     Foot & Ankle

$28.8

13.0%

     Upper

$6.3

down 8%

     Biologics

$15.4

down 13%

     Other

$1.3

down 14%

*Constant currency.
Source: Wright Medical Group

Sales Rep Conversions

Also commenting on Wright’s turnabout, Mizuho Securities analyst Mike Matson said the company has converted around 85 foot and ankle sales reps to direct reps and now has 150 direct reps and 50 indirect reps. He expects the newly direct reps to focus more on the company’s products pushing productivity (revenue per rep) much higher than before.

Surgeon Training Expansion

With previously reported problems of the company’s deferred prosecution agreement with the Department of Justice now seemingly under control, the company is now also resuming relationships with surgeons and increasing training programs. Wright increased spending on medical education during the quarter and trained 470 physicians during the second quarter and 770 in the first half of the year. The company expects to exceed its goal to train 1, 200 surgeons for the year.

While the company beat consensus by over $1.5 million for the quarter, they lowered anticipated full year 2012 net sales by $4 million to be in the range of $476 million to $485 million. Wright also beat consensus earnings by a nickel for the quarter and raised the low end of year-end earnings-per-share by $0.04.

Hips, Reconstructive Sales and Free Cash

Wuensch noted other items of interest from Palmisano’s call with analysts on August 1st.

Regarding modular hip stems the company said it had no indication that there is an increased risk of adverse events due to taper junction fretting and corrosion, or fractures of the Profemur cobalt chrome modular necks based on product complaint data to date. In addition, the company said it was important to note that Stryker’s recalled products use a different material and a different design than Wright’s products. Therefore, it would be inappropriate to assume the reasons for Stryker’s recall would be [applicable] to Wright’s products.

Reconstruction product sales will likely still take a hit from revenue dissynergies associated with some distributor terminations, although management reiterated that the amount remains within its $10 million initial estimate.

Importantly, said Wuensch, management increased 2012 guidance for free cash flow (a key metric in the company’s turnaround) to a range of $40 million-$45 million from $25 million-$30 million.

So the turnaround at Wright continues. With much larger competitors bulging with cash and consolidation all around in orthopedics, the company’s thriving foot and ankle business may be a tempting target.