Yesterday, Wright Medical (WMGI) closed at $27.34, which is 8.68% lower than the previous close. The share price decline followed a note issued by RBC Capital analyst Brandon Henry that highlighted usage concerns with Cartiva. While the analyst continues to recommend Wright Medical as an “outperform” stock, the analyst reduced the company’s target price from $36 to $34. These issues seem to put to test Wright Medical’s optimism and overall business strategy for Cartiva.
Cartiva business strategy
In October 2018, Wright Medical announced the completion of the acquisition of Cartiva for a cash consideration of $435 million. This deal added Cartiva’s SCI (Synthetic Cartilage Implant) used to treat arthritis at the base of the great toe, further expanding Wright Medical’s lower extremities’ portfolio. To know more about this deal, please read Wright to Expand Lower Extremities Portfolio with Acquisition.
In the first-quarter earnings call, Wright Medical highlighted the progress of the Cartiva launch in the US by its lower extremity sales force from January 1, 2019. The company is targeting a market opportunity worth $400 million with the only PMA product indicated for treating great toe osteoarthritis, as an alternative to cheilectomy. Besides, Wright Medical also plans to launch this product in Australia and the UK in the second half of 2019, as well as extend the label of Cartiva SCI to the thumb. The CE Mark for Cartiva SCI in Europe has already enabled its usage to treat osteoarthritis of the thumb.
Wright Medical’s financial guidance
Lower-than-forecasted utilization trends for Cartiva may also have a detrimental impact on Wright Medical’s revenue and earnings performance in fiscal 2019.
In the first-quarter earnings call, the company has guided for fiscal 2019 revenues of $954 million to $966 million, which includes a $47 million contribution from Cartiva. The company has also guided for slower YoY revenue growth in the first half of 2019. Revenues are expected to trend towards the higher end of the guidance in the second half of 2019 due to the accelerated benefit from Cartiva.
According to Wright + Cartiva Transaction overview investor presentation, the deal was expected to increase Wright Medical’s pro forma 2019 revenue growth as well as pro forma 2019 adjusted EBITDA margins by around 1%. The deal was also expected to contribute around $20 million to Wright Medical’s adjusted EBITDA in fiscal 2019. Besides, the transaction was expected to be cash flow and EPS accretive for Wright Medical in 2019.