Dear Mr. Berko: Please tell me about Wright Medical Group. Because of its development of artificial cartilage, my stockbroker is recommending that I buy 1,000 shares on margin. I owned stock in the company at $31 in 2008 and took a huge loss. Unless you approve, I'm reluctant to invest in Wright again.
- CB, Kankakee, Ill.
Dear CB: Wall Street's outlook for the health care equipment and device market over the coming years is very positive. Analysts expect the equipment and device sub-industry to increase revenues by 12 to 14 percent over the next few years. And this industry is nearly impervious to recession, particularly equipment used in nonelective procedures. It's also driven by a fecund pipeline of new products, acquisitions and expansion into emerging markets. Meanwhile, the Food and Drug Administration has reduced the turnaround time for new medical devices by nearly half, and former President Barack Obama's medical device tax (2.3 percent), which took effect in 2013 with the goal of raising $30 billion in 10 years, has been suspended. There are many positive long-term fundamentals at work in this industry, too. We have a strong global demand for quality care and an aging population, and rising outlays for research and development will lead to a steady flow of new diagnostic and new therapeutic products that will grow profits. And proof of the pudding is a 15.3 percent year-to-date growth in the S&P Health Care Equipment Select Industry Index, versus a 2.3 percent return in the S&P Composite 1500. All of this should benefit device-makers like Wright Medical Group, but not necessarily Wright itself, as it is a poorly managed medical device company. According to the Street, Wright Medical, which has been a bummer and a laggard for seven years, has a 71 percent chance of a turnaround, but I think that's too generous.
Wright Medical Group (WMGI-$27) is a Tennessee-based global medical device company that specializes in extremities and biologic products. After a 2015 merger with Tornier (a Dutch medical device company), WMGI moved its headquarters to Holland, which is also the birth country of world-famous R.H. van Rijn!
The minor excitement surrounding WMGI this year may have been its $435 million August acquisition of Cartiva, a Georgia company that makes a product to replace joint cartilage. The material is strong enough to withstand forces on a joint and soft enough that it doesn't destroy surrounding tissue. Cartiva's cartilage substitute, which gained FDA approval in 2016, is sufficiently porous and behaves like a sponge, releasing fluid when it's compressed and recovering by reabsorbing it. Cartiva's first commercial product, about the size of a pencil eraser, is made from 60 percent water and 40 percent polyvinyl alcohol - the material used in making soft contact lenses - and is used to eliminate big toe arthritis. Cartiva's cartilage is inserted into a hole drilled in the metatarsal (preferably with anesthesia) behind the big toe, cushioning the joint. And neither glue nor screws are required, as the implant is a nearly perfect fit. So far, 97 percent of the patients have experienced significantly reduced pain. So, wonder of wonders, it works! And holy moly, it works well! Alternatives for the thumb, the knee and the shoulder are being tested by physicians in Europe. U.S. approval for the bigger stuff is still years away. Surgeons in Europe who have put these implants in patients report faster recoveries with the implants than with traditional surgeries, so patients can either delay or eliminate joint fusion or replacements.
WMGI reported $745 million in revenues in 2017 but hasn't made a profit since 2011. I'm told that during those past seven years, WMGI's management team (all of whom could use an industrial-sized enema) lost $1.5 billion, with book value falling by 50 percent and free cash flow remaining in negative territory. The balance sheet looks as if it's been hit by a hurricane. WMGI has fine products, but slothful management and a feckless board of directors have proved to be intolerably inept in the past and may also prove to be intolerably inept in the future.
I think WMGI's current price reflects a good portion of its future potential. Don't buy 1,000 shares on margin. Buy 500 shares, and forget the margin. Then spend Sundays in the amen corner of your church.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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Published: Tue, Oct 30, 2018
