The senior management team at Audubon, Pa.-based Globus collectively owns about 47% of Branch Medical, president & COO Dave Demski told analysts yesterday during a conference call. Asked about concerns that the deal might more beneficial to management than shareholders, Demski said the BMG acquisition is a long-term margin improvement play.
"As we own it, we have the opportunity to follow more of our purchasing in that direction," Demski said during the call to discuss the company’s 4th-quarter results.
Branch Medical put up earning before interest, taxes, debt & amortization of $9 million on $23 million in sales last year, EBITDA that will eventually flow to Globus shareholders, Demski noted. BMG makes about 25% of Globus Medical’s metal implants, a number that could rise to roughly 50%, he added.
“So for roughly $50 million, we are picking up $9 million immediately of EBITDA. We think that we are going to double the amount we purchase from them over the next 2 to 3 years. So if we continue to operate at that same level of efficiency – and there is no reason that we shouldn’t – we see that EBITDA benefit rising to about $18 million over the next 4 or 5 years. So I think that’s a very compelling investment for Globus to make to improve our bottom line," Demski said.
Leerink Partners analyst Richard Newitter said the deal, expected to close next month, "has potential to yield meaningful cost benefits going forward."
"Some investment will be required in 2015 (~$15M spend) to prepare the entity to take on an even higher % of GMED’s supply needs (goal of 50% over time)," Newitter wrote today in a note to investors, reiterating Leerink’s "outperform" rating and raising its price target from $28 to $29.
Q4 earnings top The Street by 4¢
Globus also posted 4th-quarter earnings that beat expectations on Wall Street by 4¢, saying profits rose 31.7% to $27.6 million, or 29¢ per share, on sales growth of 11.8% to $128.8 million for the 3 months ended Dec. 31, 2014.
Adjusted to exclude 1-time items, earnings per share reached 30¢, topping the 26¢ forecast on The Street.
Full-year profits rose 34.8% to $92.5 million, or 97¢ per share, on sales of $474.4 million, Globus said. Adjusted EPS were $1.01.
Globus said it expects to report earnings of $1.01 per share on sales of about $510 million this year.
GMED shares were down 2.8% to $24.31 apiece as of about 1 p.m. Eastern today.