Globus Medical, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Globus Medical is a medical device company focused on the design, development, and commercialization of musculoskeletal implants and surgical instrumentation, including robotic technologies. They aim to improve the quality of life of patients with musculoskeletal disorders.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Globus Medical operates primarily within the musculoskeletal sector, offering a range of products used in spine, trauma, and joint replacement surgeries. Their core business involves designing and manufacturing implants, instruments, biologics, and enabling technologies that cater to the needs of surgeons.

  • Revenues: Globus derives revenue primarily through product sales to hospitals and healthcare facilities, rather than providing services directly to the patients. They are also a global organization that generates revenue from foreign markets.
  • Product Categories: The company has multiple product categories including implants (used in spinal, trauma, or joint replacement procedures), instruments (used by surgeons to perform surgical procedures), biologics (used to promote bone and tissue healing) and enabling technologies (robotic systems, navigation).
  • Trends in the Industry: The medical device industry is characterized by a continuous cycle of innovation, consolidation, and regulatory approvals. Companies that can develop clinically effective products in a timely manner have the ability to sustain growth. However, the high costs of R&D can hinder growth as well.
  • Margins: Historically, Gross Margins have been in the low to mid 70%’s but in the recent quarterly reports they have shown higher margins than usual of ~75.5%.
  • Competitive Landscape: The competitive environment for medical devices is intense, featuring large players like Johnson & Johnson, Medtronic and Stryker, and smaller specialized players. The need for innovation and the pace of change in technologies are high in this industry.
  • What Makes GMED Different: What differentiates Globus from other large players is their vertically integrated nature that allows them to create both their own surgical instruments and implants. This allows for better margin control on their core products and also provides the opportunity to incorporate feedback between different steps of product and manufacturing processes.
  • This vertical integration is highlighted in their merger agreement with NuVasive, where it is stated that by combining the two companies “the combined company will have a broader and deeper pipeline of innovations and will be vertically integrated across product development, manufacturing and sales”.
  • Financials:
    • The company’s financials are quite complex as they are involved in a major merger with NuVasive which has changed their reporting structure. However, after excluding the impact of the merger, we can get to know more about the financial status of the business. The company’s revenue is on a slight downtrend from past couple of quarters where it was around ~$270m to the current of ~$244m. The income numbers look mixed, where operating and gross profits remain strong at mid 70% range, net income has been fluctuating between a 10% gain and a loss. A significant trend in their profitability numbers is that the company has had multiple large “other” operating expenses which have reduced the overall net income, this is the result of several nonrecurring expenses as a result of restructuring and mergers. However, this has also been present throughout last 2 years. From a balance sheet perspective the company has enough current assets to cover the current liabilities but the company has large amount of intangible assets which have increased greatly as a result of the merger. Finally, the cash flow from the operations has decreased slightly and investment cash flow has gone negative which is also a result of recent large acquisitions. Overall the financial numbers remain solid but there is a slight warning from current trends.

Moat Assessment: 2 / 5

While Globus Medical possesses some strengths that could be considered moats, their durability is questionable in the face of competitive dynamics and technological changes.

  • Intangible Assets (Brands and Patents):
    • Globus has a track record of innovation in design and materials and has several patents to show for.
  • While brand recognition plays a role, the medical device industry is highly technical and is dictated by physicians and experts, not so much by the general public. Hence, the company’s brand may hold limited power against competitors.
    • Switching Costs:
      • Switching costs are high for hospitals as there is a requirement to retrain doctors and surgeons on new equipment.
  • However, as mentioned above many of the products are easily commoditized by other players, which can lower switching costs.
    • Network Effects
      • This is absent in their core operations, however, the company’s recent development of robotic technologies has a potential to provide networking effects between hospitals and their surgeons
    • Cost Advantage
      • The company has certain cost efficiencies because of vertical integration as they produce and sell both surgical instruments and implants.
  • However, these cost advantages might not be fully unique as other players might choose to vertically integrate if necessary to compete. Justification for Rating Given their proprietary tech like robotic technologies which have a potential for large moat and their vertically integrated approach that can improve efficiencies, the company has some moat components, therefore giving a moat rating of 2 out of 5.

Risks to the Moat and Business Resilience

  • Technological Disruption: The medical device industry is particularly vulnerable to technological disruption. Innovative new technologies or alternative treatments can severely affect existing player’s competitive advantages. As technologies advance, current offerings can quickly become obsolete or commoditized.
  • Pricing Pressures: As governments and payers strive to control healthcare costs, companies face intense pressure to reduce prices and that can greatly affect profit margins. The commoditization of products will make differentiation difficult, which will reduce margins even further.
  • Regulatory Hurdles: The industry is heavily regulated and that creates challenges to get FDA approval for products. Regulatory changes could also hurt margins or restrict product development.
  • Competition: Companies like Johnson and Johnson, Medtronic, Stryker have immense resource that allow them to develop new technologies and produce a vast variety of products, making it difficult for smaller companies like Globus to compete effectively.
  • Merger risks: Integrating the large NuVasive acquisition may be difficult, which can lead to a reduction in margins and slower sales. A successful implementation of the acquisition is vital for the company’s future.
  • Integration Risk: As stated in their 10-K, it will be difficult to combine the companies and operate them seamlessly, thus giving rise to many financial, organizational and administrative problems.
  • Also, their restructuring expenses, specifically, and other nonrecurring expenses such as transaction-related and integration expenses are quite large and can negatively affect net profits.

Business Resilience The business resilience is measured by the company’s ability to withstand disruption or bad periods in their industry. As explained in their recent earning calls, the company’s backlog remains strong. The company has also diversified their product portfolio so that a downturn in one product sector will not drastically affect overall revenues. However, their ability to withstand a big economic downturn is questionable given their mixed financials. Because of this, the business resilience is given a 3 out of 5.

Understandability: 3 / 5

The core business of Globus Medical—designing, manufacturing, and selling medical devices—is not particularly difficult to understand, especially when looked through a product centric view. However, the financial details are quite complex with all the one-off items, that also makes it difficult to project future cash flow. Also, their merger with NuVasive, also adds a layer of complexity. Given this, the understandability is given a 3.

Balance Sheet Health: 3 / 5

  • Current Ratio: The company’s current ratio is just over 1 which shows that they are able to cover the immediate liabilities with immediate assets
  • Long-Term Debt the company has a substantial amount of long term debt that is around half of their equity, and a third of their market cap. This will become a concern as interest rates continue to increase.
  • Intangible Assets: The company’s balance sheet has a significant portion of intangible assets primarily as goodwill. This is a result of large acquisitions and could be at a risk of write off in the future.

Given the above factors, the balance sheet seems to be in middle position and is not considered healthy enough to withstand a recessionary environment and large fluctuations in interest rates.

Recent Concerns & Management’s Stance

  • NuVasive Merger: The largest recent event for Globus was their merger with NuVasive which created a leading medical device company, and this merger still has a significant bearing on the financial state of the company. The integration is expected to take several years, therefore posing risk to the performance of the company.
  • Short-term Earnings: The company has been having a difficult time in managing short-term expectations, particularly with the rise in operating expenses which is affecting net profit. The company also missed on the recent earnings projections.
  • Inflation: Like other manufacturers, the company is also being affected by global inflation. The rise in material and labour costs has affected their gross margin, and although they are looking to increase the prices, this might affect sales going forward.
  • Management has addressed these concerns by mentioning that they are working towards a leaner and more efficient organization so as to minimize unnecessary spending. Management has also started to move towards newer markets and new product lines to boost sales and overall earnings.

Conclusion

Globus Medical has a solid position in the growing musculoskeletal market with some aspects of a moat, a moderate level of business understandability and a concerning balance sheet health. The merger with NuVasive will likely provide them with long-term upside, but the company’s short-term profitability might see a significant impact from rising costs and integration issues. As of now, the company has a moat rating of 2 out of 5 and a balance sheet health rating of 3 out of 5.