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Wright Medical Remains Neutral

Zacks Equity Research

We maintain our Neutral recommendation on Wright Medical Group (WMGI). The company reported second quarter and adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 8 cents, beating the Zacks Consensus Estimate of 3 cents.

The company reported net income of $0.7 million (or 2 cents per share) in the quarter, compared with $6.1 million (or 16 cents per share) in the prior year quarter. Net income includes after tax impact of $3.4 million associated with non-cash stock based compensation, $2.1 million related to deferred prosecution agreement (:DPA), distributor conversion charges of $0.8 million as well as restructuring charges of $0.7 million.      

Net sales for the quarter were $123.3 million, down 7% year over year in reported terms (down 5% on a constant currency basis), surpassing the Zacks Consensus Estimate of $122 million.

Revenues from the domestic market totaled $69.2 million (56.1% of total sales), down 8.1% year over year. Domestic sales were negatively impacted by earlier announced distributor transformation, which occurred in the third quarter of 2011 and issues connected with the enhancement of Wright Medical’s compliance systems. International revenues declined 5.4% to $54.1 million (43.9% of sales).

OrthoRecon comprised 58% of sales in the reported quarter with Hips contributing 33%, Knees 24% and Other 1%. Extremities constituted 42% of revenues with Foot and Ankle contributing 23%, Upper Extremity 5%, Biologics 13% and Other 1%.   

OrthoRecon sales dipped 9% year over year in constant currency in the second quarter. Among its components, Hips fell 10% while Knees and Other declined 8% and 18% respectively.

Sales of Extremities segment clambered just 1% year over year in constant currency in the second quarter. Among its constituents, Foot and Ankle rose 13%, Upper Extremity was down 8% while Biologics and Other decreased 13% and 14%, respectively.   

Wright’s focus on niche technologies lends some support amid economic cyclicality. Moving forward, revenue growth will be supported by new product launches. Moreover, new deals in extremities are expected to bolster growth in this segment. The company’s restructuring initiatives should also boost future profitability.

Our views on the company are moderated by intense competition from larger players and pricing pressure.  Wright Medical competes with much bigger names such as Zimmer Holdings (ZMH), Stryker (SYK) and Smith & Nephew (SNN). Moreover, the company remains exposed to procedure volume headwind. Our Neutral recommendation is supported by a short-term Zacks #3 Rank (Hold).

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