Globus Medical: A Look At Catalysts That Will Drive Shareholder Returns

Executive summary

It is a fact that Globus Medical (GMED) maintains strong positive cash flows and yet it does not pay dividends. Rather than putting investors off, this should encourage them to find out more about this company that has successfully grown its revenues from quarter to quarter while maintaining almost flat company expenses. This article will show that it takes more than paying dividends to make any company worth your investment as Globus has a lot of catalysts that will drive shareholder returns in the future.

Getting to know Globus Medical

Globus is a company that operates in the Medical Devices industry with its focus on design, development and commercialization of various products geared toward helping spine disorder patients in their recovery journey. It was established in 2003 with headquarters in Audubon, Pennsylvania.

The company's products come in handy during thoracolumbar, interbody fusion, sacral and cervical procedures. It has been helpful in improving the rate of successful treatments of patients diagnosed with deformative, traumatic and degenerative conditions, including tumors.

Product offerings

The products offered by the company falls under two segments: Innovative Fusion and Disruptive Technologies segments. While the former services a broad range of spinal fusion surgical procedure needs, the latter offers services that improve the already existing procedures for such surgical procedures.

Now, with the Disruptive Technologies products, the company's management has proven its expertise when it comes to identifying a prospective market, even with its attendant risks. This is based on the fact that with these products meaning a shift in the known spine disorder treatments, physicians and patients are sure to go for it due to its attendant benefits but it was not going to happen with the flash of an eye. However, knowing that the technology improves surgical results, attracts minimal costs and limits patient's recovery period and hospital stay, the company's management expects increased demands for the applications in the nearest future.

Catalysts to drive growth

Revenue growth: In the last few quarters, Globus has continued to grow its revenue. Revenue for fourth quarter of fiscal 2012 came in at $100.5 million and increased to $105.0 million in first quarter of fiscal 2013 and $107.0 million in the second quarter of 2013.

Almost flat SG&A expenses: It is a common sight to see most companies' expenses increase as revenue increases. This is not the case with Globus as its company expenses remained almost flat even with the increase in revenue.

Flat cost of revenue: In the first quarter of fiscal 2013, the company reported $23.49 million as total cost of revenue and $23.50 million for second quarter of fiscal 2013. This shows that bringing in revenue is not expensive for the company.

Improving gross profit: With the company maintaining flat company expenses and cost of revenue, the gross profit will continue to improve.

Strong balance sheet: I know of several companies that pay dividends and yet have negative cash flow. Globus has a strong balance sheet with no debt in the last two fiscal periods. As at fiscal year 2012 ended December 31, 2012, the company had more approximately $212 million in cash.

Significant growth in the disruptive technology segment: The Innovative Fusion segment makes up a good percentage of the company's revenue at approximately 62%. The tide is beginning to turn as the fiscal year 2012 recorded a 38% increase in demand for products in the DT segment while the IF segment recorded 6%. This confirms management's expectations of increase in demand for DI products.

Proposed expansion: The company currently derives most of its revenue from its U.S. customers with only 8.3% coming from international markets. The company's management has set plans in motion to further expand its footprint in the international scene in order to fuel revenue and income growth in the coming quarters.

Several new products in the pipeline: With the 32% growth recorded in the DT impacted by increase in product offerings, the company is fueling this growth further with new products that are in different stages of development.

Statement Of Operations (In $ Millions)

Selling/General/Admin. Expenses, Total

Apart from the aforementioned, there are other areas the company needs to work on in order to further enhance the company's growth. Although it has other products in the pipeline, if it fails to develop products that are different from what is already obtainable in the market, in terms of design and functions, it might not make much difference. With slightly different and more functional products, the company will be able to capture a fair share of the market it operates in.

Also, if Globus develops and launches better products than its competitors, it will go a long way to drive the pricing of the products upwards as the demand grows more than supplies. With this, the company will be able to grow both its top line and bottom line.

Competition

Globus operates in a highly competitive industry with a handful of small and large corporations in play. The big players include Zimmer Holdings (ZMH), Medtronic (MDT), a division of Johnson & Johnson (JNJ) and Stryker (SYK). Its comparable peer in terms of market capitalization and area of specialization is NuVasive Inc. (NUVA). NuVasive has consistently strung three quarters together in terms of top line growth, only missing on the bottom line in the second quarter of fiscal 2013. With its expansion into the international market, the company is steadily working its way toward outgrowing the market it operates in.

It is not the best of times for Johnson & Johnson as the case of its recalled defective artificial hips continue to be in the news. Just recently, the large corporation is expected to spend over $3 billion as settlement for claims concerning its metal-on-metal hip implants, with each individual getting over $300,000 as claims.

On the other hand, Medtronic has given the indication that it does not want to miss out on the benefits accruing from the projected growth in the health-services industry. With the company's acquisition of Cardiocom, provider of monitoring services designed for patients with chronic diseases, Medtronic's expansion into the health-services industry will help it connect directly with its target audience. With the ever increasing number of aged individuals in the U.S., the company's investors are in for higher returns from this new business model.

Headwinds

Listed below are some of factors that could hurt Globus Medical's profitability. They are:

Reliance on third-party salesLimited customersContinued increase in price competitionUncertainty of gaining reimbursements from Centers for Medicare & Medicaid Services.Inability to gain clearance or approval of any of its pipeline products.Prolonged timeline of gaining approval for newly developed products.

Added bonus

For companies that sell products instead of services, delving into international waters usually means more expenses. However, with the currently decreasing cost per volume shipping costs, Globus will experience reasonable reduction in the cost of shipping its products for international sales. This decrease in shipping costs is necessitated by fierce competition among shipping companies which resulted in supplies being higher than demand and we all know what that means.

Conclusion

With Globus management opting to invest its free cash flows into research and development instead of paying dividends, investors can be sure of higher returns in the long term when management decides to pay dividends. With the planned expansion that is sure to result in continually growing revenues, earnings and profit margin, I believe the company will end up paying significant dividends against the minuscule amount paid by some companies in the name of dividends.

With the company known to increase its gross margins proportionally with sales, even as expenses and cost of revenue remain almost flat, there is no need reiterating the fact that Globus makes a good buy in long-term value. This is especially if you consider that you won't be paying for these massive catalysts you will enjoy in the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

View the original article here

Globus Medical: A Look At Catalysts That Will Drive Shareholder Returns

Executive summary

It is a fact that Globus Medical (GMED) maintains strong positive cash flows and yet it does not pay dividends. Rather than putting investors off, this should encourage them to find out more about this company that has successfully grown its revenues from quarter to quarter while maintaining almost flat company expenses. This article will show that it takes more than paying dividends to make any company worth your investment as Globus has a lot of catalysts that will drive shareholder returns in the future.

Getting to know Globus Medical

Globus is a company that operates in the Medical Devices industry with its focus on design, development and commercialization of various products geared toward helping spine disorder patients in their recovery journey. It was established in 2003 with headquarters in Audubon, Pennsylvania.

The company's products come in handy during thoracolumbar, interbody fusion, sacral and cervical procedures. It has been helpful in improving the rate of successful treatments of patients diagnosed with deformative, traumatic and degenerative conditions, including tumors.

Product offerings

The products offered by the company falls under two segments: Innovative Fusion and Disruptive Technologies segments. While the former services a broad range of spinal fusion surgical procedure needs, the latter offers services that improve the already existing procedures for such surgical procedures.

Now, with the Disruptive Technologies products, the company's management has proven its expertise when it comes to identifying a prospective market, even with its attendant risks. This is based on the fact that with these products meaning a shift in the known spine disorder treatments, physicians and patients are sure to go for it due to its attendant benefits but it was not going to happen with the flash of an eye. However, knowing that the technology improves surgical results, attracts minimal costs and limits patient's recovery period and hospital stay, the company's management expects increased demands for the applications in the nearest future.

Catalysts to drive growth

Revenue growth: In the last few quarters, Globus has continued to grow its revenue. Revenue for fourth quarter of fiscal 2012 came in at $100.5 million and increased to $105.0 million in first quarter of fiscal 2013 and $107.0 million in the second quarter of 2013.

Almost flat SG&A expenses: It is a common sight to see most companies' expenses increase as revenue increases. This is not the case with Globus as its company expenses remained almost flat even with the increase in revenue.

Flat cost of revenue: In the first quarter of fiscal 2013, the company reported $23.49 million as total cost of revenue and $23.50 million for second quarter of fiscal 2013. This shows that bringing in revenue is not expensive for the company.

Improving gross profit: With the company maintaining flat company expenses and cost of revenue, the gross profit will continue to improve.

Strong balance sheet: I know of several companies that pay dividends and yet have negative cash flow. Globus has a strong balance sheet with no debt in the last two fiscal periods. As at fiscal year 2012 ended December 31, 2012, the company had more approximately $212 million in cash.

Significant growth in the disruptive technology segment: The Innovative Fusion segment makes up a good percentage of the company's revenue at approximately 62%. The tide is beginning to turn as the fiscal year 2012 recorded a 38% increase in demand for products in the DT segment while the IF segment recorded 6%. This confirms management's expectations of increase in demand for DI products.

Proposed expansion: The company currently derives most of its revenue from its U.S. customers with only 8.3% coming from international markets. The company's management has set plans in motion to further expand its footprint in the international scene in order to fuel revenue and income growth in the coming quarters.

Several new products in the pipeline: With the 32% growth recorded in the DT impacted by increase in product offerings, the company is fueling this growth further with new products that are in different stages of development.

Statement Of Operations (In $ Millions)

Selling/General/Admin. Expenses, Total

Apart from the aforementioned, there are other areas the company needs to work on in order to further enhance the company's growth. Although it has other products in the pipeline, if it fails to develop products that are different from what is already obtainable in the market, in terms of design and functions, it might not make much difference. With slightly different and more functional products, the company will be able to capture a fair share of the market it operates in.

Also, if Globus develops and launches better products than its competitors, it will go a long way to drive the pricing of the products upwards as the demand grows more than supplies. With this, the company will be able to grow both its top line and bottom line.

Competition

Globus operates in a highly competitive industry with a handful of small and large corporations in play. The big players include Zimmer Holdings (ZMH), Medtronic (MDT), a division of Johnson & Johnson (JNJ) and Stryker (SYK). Its comparable peer in terms of market capitalization and area of specialization is NuVasive Inc. (NUVA). NuVasive has consistently strung three quarters together in terms of top line growth, only missing on the bottom line in the second quarter of fiscal 2013. With its expansion into the international market, the company is steadily working its way toward outgrowing the market it operates in.

It is not the best of times for Johnson & Johnson as the case of its recalled defective artificial hips continue to be in the news. Just recently, the large corporation is expected to spend over $3 billion as settlement for claims concerning its metal-on-metal hip implants, with each individual getting over $300,000 as claims.

On the other hand, Medtronic has given the indication that it does not want to miss out on the benefits accruing from the projected growth in the health-services industry. With the company's acquisition of Cardiocom, provider of monitoring services designed for patients with chronic diseases, Medtronic's expansion into the health-services industry will help it connect directly with its target audience. With the ever increasing number of aged individuals in the U.S., the company's investors are in for higher returns from this new business model.

Headwinds

Listed below are some of factors that could hurt Globus Medical's profitability. They are:

Reliance on third-party salesLimited customersContinued increase in price competitionUncertainty of gaining reimbursements from Centers for Medicare & Medicaid Services.Inability to gain clearance or approval of any of its pipeline products.Prolonged timeline of gaining approval for newly developed products.

Added bonus

For companies that sell products instead of services, delving into international waters usually means more expenses. However, with the currently decreasing cost per volume shipping costs, Globus will experience reasonable reduction in the cost of shipping its products for international sales. This decrease in shipping costs is necessitated by fierce competition among shipping companies which resulted in supplies being higher than demand and we all know what that means.

Conclusion

With Globus management opting to invest its free cash flows into research and development instead of paying dividends, investors can be sure of higher returns in the long term when management decides to pay dividends. With the planned expansion that is sure to result in continually growing revenues, earnings and profit margin, I believe the company will end up paying significant dividends against the minuscule amount paid by some companies in the name of dividends.

With the company known to increase its gross margins proportionally with sales, even as expenses and cost of revenue remain almost flat, there is no need reiterating the fact that Globus makes a good buy in long-term value. This is especially if you consider that you won't be paying for these massive catalysts you will enjoy in the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Halozyme: Drug Delivery Specialist With Multiple Near-Term Catalysts

Halozyme Therapeutics (HALO) (Q2 2013 conference call transcript, a source for many of the projected catalyst time frames outlined below) develops enzyme-based (hyaluronidase) products for a wide variety of conditions, which include diabetes, cancer, autoimmune disorders and cosmetic medicine (cellulite).

CLINICAL AND REGULATORY CATALYSTS:

Below is a summary of the Company's clinical development pipeline which includes collaborations with Roche (RHHBY.OB), Pfizer (PFE) and Baxter (BAX) in addition to an FDA approved product, HYLENEX (human recombinant formulation of hyaluronidase), which improves the absorption and dispersion of drugs injected under the skin (subcutaneously) (e.g. insulin) on a temporary basis (approximately 24 hours) with plans to increase sales through a recently initiated post-marketing study in Type 1 diabetes using insulin pumps.

1.) Herceptin-SC (trastuzumab) and MabThera-SC (rituximab) (novel subcutenous injected rHuPH20 formulations) are currently pending European Medicines Agency (EMA) decisions in the form of line extension applications for new formulations of approved anti-cancer drugs. In late June, partner Roche received a positive CHMP opinion for EU approval of Herceptin-SC with final EU approval expected approximately two months later by late August-early September.

Partner Roche filed a MabThera-SC line extension application in December 2012 with the next CHMP meeting scheduled for September 16-19 and a meeting update to follow on Friday 9/20/13. The May Pharmacovigilance Risk Assessment Committee (PRAC) meeting minutes posted in June (page 40-41) indicated that both line extension applications are acceptable with Herceptin-SC subsequently receiving a positive CHMP opinion in late June.

In addition, Roche has two ongoing Phase III clinical trials to evaluate patient preference and support pending European marketing efforts upon final approval for both Herceptin-SC (ClinicalTrials.gov ID NCT01810393) and MabThera-SC (ClinicalTrials.gov ID NCT01724021) compared to the standard, longer IV infusion delivery route for these products.

2.) HyQvia (novel subcutaneous injection formulation of immune globulin) received a Complete Response Letter (CRL) in August 2012 for a Biologics License Application (BLA) seeking approval as a novel formulation of immune globulin for subcutaneous injection due to elevated anti-rHuPH20 antibody titers and partner Baxter expects to submit additional data to the FDA by year-end 2013 to support potential FDA approval by mid-2014 to H2 2014 (Baxter Q2 2013 conference call transcript). In May, HyQvia received EU approval with the initial product launch ongoing.

3.) HTI-501 (recombinant human cathepsin L) (lysosomal proteinase) is currently being evaluated in a Phase II clinical trial and in late June HALO presented interim Phase II results from 12 of planned 34 evaluable patients in a fully enrolled Phase I/II clinical trial for the treatment of cellulite with the last patients dosed in July and final follow-up results through six-months post-treatment expected in early 2014.

4.) ClinicalTrials.gov ID NCT01839487 is the identifier for a Phase II clinical trial with results expected during Q3 2015 in a study evaluating PEGPH20 (PEGylated form of rHuPH20) in combination with nab-paclitaxel and gemcitabine for the first-line treatment of metastatic pancreatic cancer.

HALO will present more complete Phase IB data at the EU Cancer Congress on 9/30/13 following initial results presented at ASCO 2013 (42% overall response rate) and the Company is also developing a companion diagnostic with a planned start of a Phase II pancreatic cancer trial by Southwest Oncology Group by the end of Q3 2013.

5.) ClinicalTrials.gov ID NCT01848990 is the identifier for a fully enrolled Phase IV post-marketing clinical trial evaluating HYLENEX (rHuPH20 hyaluronidase human injection) in combination with rapid-acting analog insulin in Type I diabetics using insulin pumps with results expected in early 2014. HYLENEX is FDA approved to facilitate subcutaneous fluid administration for a variety of indications (e.g. hydration and to increase dispersion of other drugs as illustrated in the pipeline above).

6.) In December 2012, HALO announced an agreement with Pfizer to develop and commercialize biologic agents using Halozyme's Enhanze (hyaluronidase-based) drug delivery technology in up to six targets. Pfizer paid HALO an initial cash payment of $8 million for the initial two targets along with the right to add four more targets (additional fees apply) and the deal also includes potential regulatory and sales-based milestone payments of up to $507 million plus royalties.

FINANCIAL STATS (Q2 2013 results press release):

- On August 12 & 14, director Kathryn Falberg purchased a total of 100,000 shares of HALO on the open market at an average price of $6.82 increasing her stake to 280,000 shares (SEC filing link) while CEO Gregory Frost exercised options into 20,000 shares of common stock which increased his large ownership stake to approximately 3.6 million shares (SEC filing link).

- On 8/14/13, Swiss BB Biotech reported a 5.1% ownership stake (5.75 million shares) in HALO (SEC filing link).

- HALO currently has a high percentage of insider and institutional investors which account for nearly 70% ownership of outstanding common stock and includes major holders such as Randal Kirk / Third Security (combined ownership stake of 23.3 million shares which equates to a 20.6% ownership stake) and Baker Brothers (6.5 million shares).

- Randal Kirk is a billionaire biotech entrepreneur who recently netted over $1 billion on the highly successful IPO for Intrexon (XON) (Forbes overview article) and he also serves on the Board of Directors for HALO.

- As of 6/30/13, HALO reported $76 million (M) in cash and equivalents with $11.4M in cash used to fund operations during Q2 2013.

- During 2Q13, HALO reported revenue of $14.5M vs. $7.8M in the year-ago period.

- As of 8/5/13, HALO reported approximately 113M shares of common stock outstanding with $29.7M in total debt as of 6/30/13 ($26.1M classified as long-term debt which reflects a term loan from Oxford Finance and Silicon Valley Bank with a maturity date of 12/1/16).

- HALO has provided guidance for potential to be cash flow positive in 2014 (PR link) based upon key partner product launches that include HyQvia, Herceptin-SC and MabThera-SC in Europe with adequate cash to fund operations into late 2014 based upon the current cash and burn rate with an expected decrease over time as additional revenue offsets R&D expenses for the Company's three wholly owned programs (HTI-501 for cellulite, Hylenex for use w/ insulin pumps and PEGPH20 for pancreatic cancer).

TRADE SUMMARY & OUTLOOK:

With final European approval for Herceptin-SC due any day now and a very likely (90%) positive CHMP opinion for MabThera-SC in the near-term; I expect shares of HALO to fill the gap-down in the chart if positive news comes in as expected in the coming weeks with the potential to reach low double digits during H2 2013 ($10-12 target) as additional catalysts approach and the Company continues narrowing the cash burn with a goal of becoming cash flow positive by next year.

I believe the decision by ViroPharma (VPHM) to discontinue development of Cinryze-SC will have no impact on other programs as discussed by HALO on the most recent quarterly conference call and the enzyme-related antibodies have never been linked to any side effects with no clinical impact observed to date for an issue that was known in summer 2012 and being addressed by Baxter as part of plans to resubmit a BLA for HyQvia which is already being marketed in Europe following approval earlier this year.

In addition, HALO spiked by approximately $2 earlier this year on both Phase 1b pancreatic cancer data for PEGPH20 and again in late June on the positive CHMP opinion for Herceptin-SC so there is potential for another $1-2 upside each for upcoming Phase 1b data being presented on 9/30 and an expected positive CHMP opinion for MabThera-SC.

Other recent bullish developments include a recent open market insider/director buy for nearly $700,000 and bullish trading in the September $7.50 and October/December $10 call options so in the short-term, I expect the positive uptrend in the six-month chart below to continue with an upper $7-lower $8 short-term swing / run-up target with key risks being potential for an overall market correction and unexpected bad news on any of the upcoming regulatory or clinical trial catalysts which would have the potential for downside risk that is similar to the upside targets outlined earlier.

(click to enlarge)

Disclosure: I am long HALO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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