Orthofix Reaches the Big 3-0 in Style

Turning 30 doesn't scare the folks at Orthofix, in fact for them, it's reason to celebrate. Stop staring at the recent glowing revenue reports and you'll see the shiny, new North American Operations and Education Center, an impressive birthday present for any company, we'd say!

Orthofix International, N.V. (NASDAQ: OFIX) is an international medical device company that creates and manufactures a wide range of minimally invasive surgical and non-surgical products. The main areas of focus are in the spine, orthopedic and sports medicine markets. Orthofix's self-described goal is to "address the lifelong bone and joint health needs of patients of all ages–helping them achieve a more active and mobile lifestyle." 

To that end, the company has enjoyed consistent growth over its three decades, which can be attributed primarily to the internal R&D department as well as key acquisitions.

How about a quick look back at where it all began?

A "Dynamic" History

It was in 1980, Verona, Italy. Orthopedic researcher, Giovanni De Bastiani of the University of Verona had been working for several years on the concept of "dynamization.” Or, as we say in Italiano “Dinamicansio.” But when applied to orthopedics, dynamization refers to Bastiani’s modular system of external fixators for fracture alignment that would allow for micromovement. That micromovement was necessary, according to Bastiani, to stimulate the bone to heal more rapidly and effectively. From there, Orthofix Srl was born.  To this day, external fixation have been one of the core strengths of Orthofix and laid a foundation for 30 years of innovative designs and global manufacture of orthopedic medical devices.

In the last few decades, acquisitions became the company's main avenue for growth. Here's a timeline of the companies Orthofix was able to bring into the fold:

1992 - Novamedix Ltd: Deep vein thrombosis prevention product, the A-V Impulse System. (Sold in 2010 to Covidien)

1993 - Orthosonics: Ultrasound technology for joint replacement revisions

1995 - American Medical Electronics Inc. (AME): established Orthofix's U.S. presence with a strong sales and distribution network and also created a new focus for the business: bone growth stimulators and substitutes

2004 - BREG Inc: a privately held sports medicine company out of California that specialized in pain management devices and a line of orthopedic bracing devices

2006 - Blackstone Medical, Inc.: Orthofix's largest acquisition, specializing in spinal implants along with cutting-edge biologics.

"With this last acquisition, " explains Dan Yarbrough, Vice President of Investor Relations, "We created a new spinal implants division which confirmed our commitment to this specialty and, along with our leadership position in the spine stimulation business, established Orthofix as a major participant in the spine industry."

Jerry Benjamin has served on Orthofix’s board of directors for over 20 years and is the only member left from the original board. "As I have found over my long career, it is the people that make a company successful. We have been blessed with a succession of very talented and committed management teams that during their tenure brought the company through each step of its growth phase."

He says a critical component of Orthofix's story is how the company has changed its structure and management to respond to the new challenges and to ensure continued growth. "Over its history, Orthofix has had three CEO’s, who have each made a tremendous contribution to the company at each stage of its development."

Many times it seems luck was on Orthofix's side. Benjamin describes a turning point in the company's growth that happened by chance. "In the mid-90s, " recounts Benjamin, "it was becoming increasingly clear that Orthofix needed to take control of its U.S. sales and marketing if it was to continue to grow. A small Texas company focused on the stimulation market was identified as having a good sales and marketing organization that would satisfy the needs for Orthofix in the U.S. market…. We did not place any value on the stimulation business and the initial plan was that the stimulation business would be divested after the acquisition."

But post-acquisition Orthofix’s new head of U.S. operations spotted heretofore hidden potential in the stimulation business. "The rest is history as the stimulation business helped propel Orthofix's share price from the low single-digits to over $30 per share over the next 10 years, " says Benjamin.

Benjamin also points to a special environment created by the management team. "When Orthofix was initially set up in 1987, the management team chose to all sit in the same office together so that they could have open and close communication." He says this practice continued until the trio's retirement. "To me, this symbolized the very strong commitment to open communication and the sharing of the responsibilities in managing the company. I have sat on the board of over 40 companies and no other management team has ever operated in this way."

From Fixation to Biologics

(New spine products/Orthofix)Within Orthofix's product portfolio, there are several products that stand out. Cervical-Stim Bone Growth Stimulator, developed in-house, for instance is still the only FDA-approved stimulator for the cervical spine. Here are a few others:

• The ISKD-only FDA-approved internal bone lengthener

• The Eight-Plate Guided Growth System for the correction of pediatric joint deformities, like bowed-legs and knock-knees

• Contours Volar Plating System for wrist fractures.

Orthofix partnered with Texas Scottish Rite Hospital for Children in Dallas for the licensing, training and clinical advancement of the TrueLok Ring Fixation System. This bone reconstruction system is used for foot and ankle deformity correction and has become a flagship product for the orthopedic division.

Collaborating with the Musculoskeletal Transplant Foundation, Orthofix has moved into biologics to deliver an advanced stem cell-based biologic technology for bone healing. Called Trinity Evolution, it features a viable stem cell-based allograft with essential properties to generate bone growth in spinal and orthopedic procedures.

"We launched several new products in 2009 that are helping drive growth in our spinal implants business, " says Alan Milinazzo, President and Chief Executive Officer, "including our Firebird pedicle screw system, our Pillar SA interbody device, and Trinity Evolution, which is our adult stem cell-based bone growth allograft.

"We are launching new products in two of the faster growing sub-segments within the spinal implants industry. A deformity correction module based on the Firebird platform will for the first time give us the ability to offer surgeon customers a device to treat spinal deformities, such as scoliosis. This year we are also launching a new family of pedicle screws designed to be used in minimally invasive spine procedures."

Good Revenue News

Revenue Breakdown - FY 2009

Sales Growth

Here are some highlights from Orthofix's 2Q10 earnings:

• Adjusted total revenue up 6% cc year-over-year, excluding vascular sale

• Total spine revenue up 11%

• Total orthopedics up 11%

• Gross margin up 160 bps on an adjusted basis from 2Q09, to 76.1%

• Operating margin up 220 bps on an adjusted basis from 2Q09, to 14.8%

• Adjusted EPS up 29% from 2Q09, to $0.54

• Cash flow from operations more than doubled year-over-year to $12.2 million; EBITDA up 23% to $28.9 million

• Full year EPS guidance increased by $0.10, new range $2.48 to 2.52

• June 30, 2010 leverage down to 1.9X from 2.6X at year-end 2009

Michael Mainelli, the newest board member says he was initially attracted to the company because of its ethics and integrity, but it's growth prospects aren't too shabby either. "I am excited about our future. We have top-notch distribution platforms in key markets to provide excellent service to our customers. Moreover, we still have significant growth opportunities in relatively untapped and attractive European and Asian markets including Germany, UK, and Japan. Equally important, we have an excellent global management team that is very capable of executing the growth plans of the company."

Here are four observations PearlDiver has regarding Orthofix:

1. Ranks number 11 among the top orthopedic manufacturers worldwide with revenues raising from $365.4 million in 2006 to $519.7 million in 2008

2. Spine company market share estimated to rise from 3.4% to 3.6% by 2012

3. Spine implant and related biologics industry revenue forecast: from $243 million in 2007 to $357 million by 2012

4. Spinal implant market ranking: 6th largest supplier

And for the Next 30?

On August 12, a traditional ribbon-cutting served as both an anniversary celebration and the unveiling of the new North American Operations and Education Center in Lewisville, Texas. The 144, 000 square foot facility boasts lots of bells and whistles for surgeons. The Orthofix Institute for Research, Training and Education features state-of-the-art facilities including a 7-station simulated operating room wet lab, 18-station dry lab and 50-seat lecture room, offering realistic surgical training opportunities.

An expanded R&D machine shop for the Spinal Implants Division means custom device and instrumentation requests can be addressed, while the Spinal Implants Division is now able to be housed in one locale, along with will the Spine Stimulation and North American Orthopedics Divisions.

With the opening of our new facility in Texas, " says Benjamin, "we have now fully integrated our spine, biologics and orthopedics businesses and are poised to take full advantage of the synergies that will bring with it.

Milinazzo adds the icing to this birthday cake."I really want to say happy birthday to our employees, who are primarily responsible for the success we have achieved over the last 30 years. They embody the innovation, the focus, and the loyalty that our customers see and appreciate every day."