Operationally, it’s hard for me to pick any nits with respect to Globus Medical‘s (GMED) ongoing performance. I think Globus is a good case study on the value of ongoing innovation and really understanding what can drive value with customers – Globus has arguably been the pioneer in robotics for spine surgery, and it has had a noticeable effect on sales momentum and market share, leaving former “robotics skeptics” like NuVasive (NUVA) scrambling to catch up.
I was neutral on Globus at the time of my last write-up mostly because of valuation. Valuation is still a challenge, but one I’m more willing to look beyond given sustained momentum in the business and management’s willingness to invest in growth.
Ongoing Share Gains And Some Margin Outperformance
Globus reported positive results for the fourth quarter, with a modest revenue beat magnified into a more substantial operating income beat on better than expected operating leverage.
Revenue rose 7%, beating by more than 2%. Musculoskeletal segment revenue rose 4%, slightly better than expected, as the U.S. spine business (up 3%) was impacted by the Omicron variant leading to deferrals in non-essential cases. Trauma and ortho both continued to grow well off of small bases. Enabling Technologies, largely the robotics business, was up 40% and drove the revenue beat. Unfortunately, management gives very little detail about this business (field placements, utilization, et al).
Gross margin rose 140bp to 75.3%, beating by 10bp. Operating income declined 1%, with margin down two points to 26.2%, but operating income was 10% higher than the Street expected, and operating margin was close to two points higher than expected.
Don’t Read Much Into “Soft” Guidance
If there was an immediate negative takeaway from the Globus fourth quarter report, it was with guidance. Management guided to a little over $1B in revenue, up around 7% year-over-year, but that was almost 3% below where the Street was at before earnings.
Management noted some concerns about Q1 impact from Omicron, as well as some potential risks to revenue from supply chain constraints. I think all of those are viable risk factors, but I also note that management at Globus has an established track record of conservative starts to annual guidance, with beat-and-raise quarters then following.
Building The Business For More Growth
I continue to be impressed at not only Globus’s performance but how management’s vision of where the market was heading really enabled that growth.
At the time (2014), Globus’s acquisition of Excelsius and its commitment to robotics in spine care was controversial at best. Stryker (SYK) had acquired MAKO not too long before, but the value of robotics in orthopedics was controversial, and though Medtronic (MDT) was working with Mazor (which it later acquired in 2018), surgeons and other spine care companies were openly dismissive of the value of robotics in spine care.
Time has proven Globus right. Not only has robotics proved to be more helpful than initially expected, the company has also enhanced the utility of the system, adding features and capabilities like interbodies and discs and expanding into cranial care. As surgeons have become more comfortable with the system and its benefits, it has generated meaningful pull-through for Globus – Globus was the only spine company (at least among the bigger players) to show meaningful growth despite the pandemic, and the roughly 200bp of share growth seems to have come in large part through robotics pull-through.
More is on the way. While the launch of the Excelsius3D has been impacted by pandemic-related delays (and, possibly, some supply chain challenges), this imaging system is likely to launch around midyear. Combining O-arm and C-arm capabilities, this looks like an attractive entrant into the $1.4B imaging market and a meaningful incremental opportunity for Globus over the coming years, particularly as I expect increased integration and functionality with robotics and navigation in future years.
Outside of core spine, Globus is also pushing on in trauma and ortho. The trauma business is small today, hampered at least in part by a limited product/tool line-up, but management expects to have a full product range by year-end and that should help grow share in a sizable market ($4B-plus) where there has been little innovation from leaders like Johnson & Johnson (JNJ).
Ortho is more controversial given the slower growth of the market, not to mention Globus’s stated intention of using M&A to help build the business. Still, the robotics side of the business is still appealing, as rivals to Stryker’s MAKO really aren’t yet established, giving Globus a window of opportunity with its own recon robot (coming in early 2023).
Nothing seems to have come from mid-November rumors that Globus and NuVasive were discussing a merger, and that’s likely for the best. NuVasive would have added some meaningful product/market exposures (including biologics and monitoring) and some attractive newer technologies like LessRay (lower-radiation imaging) and Pulse (integrated planning, monitoring, and navigation), but spine company integrations are challenging, especially with two very different corporate cultures, and while expanding the international business and improving NuVasive’s margins could have generated attractive synergies, it would have been a high-risk transaction.
On its own steam, I still think Globus can generate high single-digit long-term revenue growth, and maybe more if the imaging, trauma, and ortho opportunities really pan out. I still see long-term FCF margins reaching the mid-20%s, with near-term adjusted EBITDA margins in the mid-30%s.
The Bottom Line
Valuation is still a little more challenging here, though a 7x to 8x multiple on FY’22 revenue still produces a respectable near-term fair value range ($75 to $85) and isn’t out of line for growth med-tech. Likewise, a company that continues to gain share and has visibility on margin improvement should trade at a premium.
Another shot to buy Globus in the mid-$60s would make for an easier call, but as an innovation-driven share gainer in spine, with growth opportunities on the way in trauma and ortho, I think this is a case where taking on the risk of a high valuation is warranted.