Orthofix Comes Clean

Orthofix International N.V. is once again up-to-date with its financial reporting. On May 18, 2015, the company reported sales for the first quarter of the year. The report comes after a year’s worth of radio silence while the company was restating previous quarterly reports.

First Quarter 2015

Total net sales in the quarter were $89.8 million, a decrease of 10.3% compared to first quarter 2014. On a constant currency basis, net sales decreased by 7.4% as the impact of foreign currency decreased net sales by $2.9 million in the quarter.

Company CEO Brad Mason told OTW that in the last two years the company has been focused on strengthening the foundation of being a highly respected company. “To achieve this, we’ve had to examine every aspect of our business and be honest with ourselves about our strengths and weaknesses.” With the restatement now behind them, he said Orthofix is now a “public” company again.

“We have a lot of heavy lifting ahead of us, but the bulk of the disruption is in the rear view mirror, giving us the opportunity to now focus all of our attention on driving the business. Our concentration this year is on our key objectives of optimizing our sales channels through expansion and training, strengthening our business infrastructure to support future growth and investing in our core technologies for long-term success. These objectives will drive us to achieve our vision and be of great value to all of our stakeholders, ” said Mason.

Business Unit Performance

BioStim net sales were $37.7 million, up 1.5% from the same period in the prior year. The increase, according to the company, was primarily due to volume growth driven by “enhancements to the sales organization, which included adding additional sales representatives exclusively dedicated to the Physio-Stim product line.”

Biologics net sales were up 7.3% to $14.0 million, driven by an expanded sales distribution network and, “continued market acceptance” of the company’s next generation cell-based bone growth tissue technology, Trinity Elite.

Extremity Fixation sales of $21.8 million were down 19.4%. Management said this was primarily due to the foreign currency exchange, the rebuilding of the Brazilian sales channels, and the timing of cash collections from customers. If normalized for currency and cash collections, Extremity Fixation net sales were flat.

Spine Fixation sales of $16.3 million declined 28.6%. The decrease was attributed to timing of cash collections from international customers and the “disruption of domestic sales channel resulting from the restructuring of the business.” When normalized for cash collections, Spine Fixation net sales decreased 16.1% during the quarter. Mason told analysts that the spine business has continued to decline year-over-year, “but has had sequential monthly growth year to date, indicating we are beginning to reverse this decline.”

Quarter Highlights

In addition to completing its restatement in the quarter, Mason also cited several operational accomplishments, including continued progress expanding sales channels, accelerating new product introductions and remained on schedule and budget with project Bluecore and entering into an agreement that provide an 18-month option to acquire eNeura, a pioneer in the use of portable, non-invasive Transcranial Magnetic Stimulation (TMS) devices for the treatment of migraine headache.

2015 Objectives

Mason said the company has three main objectives for the remainder of 2015.

First, continue to optimize sales channels by increasing the number of field-based education and training personnel who support an expanded sales force, assisting with new product introductions and helping to drive growth.

Second, Mason says the company wants to improve its infrastructure by continuing with the multi-year “Bluecore” project. The goal of the project is to improve the reliability and efficiency of operating systems, processes and reporting as well as drive down overhead expenses. “In addition to re-implementing our Oracle ERP platform worldwide, we expect to improve supply chain management, simplify finance and accounting procedures and move to less manual processes with fewer redundancies throughout the company. Bluecore remains on schedule and on budget.”

Finally, Mason is looking to invest in core technologies. For the Spine and Extremity Fixation business units, the company is streamlining a new product development processes from concept through post market release. These changes, said Mason, are yielding better productivity while maintaining or slightly reducing current level of spending.

For the BioStim business, the strategy is to increase investment in pre-clinical and clinical research to broaden the therapeutic indications. The company is working on a number of projects to leverage its core competency in pulsed electromagnetic field, or PEMF, technologies. The company recently received FDA approval for two Investigational Device Exemption clinical trials, one for studying the treatment of odontoid fractures and one for osteoarthritis of the knee.

Jefferies LLC analyst Raj Denhoy said the company’s turnaround efforts will take time and higher spending will weigh on margins near term, but longer term should position the company for sustainably better growth and profitability.