RTI Surgical: Medical Appliances to Stay in Demand

Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With an aging U.S. population, the medical appliances industry will witness a rise in demand for medical devices in the future. Also, the increasing automation after the invention of computers and mobile phones has led to an increase in obesity and obesity related diseases, as it drastically reduced the physical activity of the human body. This change in the lifestyle gave rise to a new set of diseases.

RTI Biologics (NASDAQ: RTIX) operates in the medical appliances industry and produces orthopaedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues. Recently, RTI Biologics took over Pioneer Surgical Technology to widen the range of its current product portfolio.

Effect of the acquisition of Pioneer on RTI Biologics

The acquisition of Pioneer enhances RTI’s existing implant product portfolio by adding metals and synthetics to its current portfolio of allograft and xenograft biologics. On an integrated basis, metals and synthetics make up 32% of total revenues while allograft and xenograft represent 68% of total revenues. The cardiothoracic segment of Pioneer is an addition to the RTI’s current product range. After the acquisition, RTI is now well equipped to provide global surgical implant solutions on a worldwide basis in the field of orthopaedics and biologics.

This acquisition will result in expanded direct distribution, with direct revenues as a percentage of total revenue rising from 39% to 47%. It also enables RTI to take advantage of the cross distribution opportunities. The enhanced distribution network will facilitate the upcoming launch of map3TM cellular allogeneic bone graft in terms of providing extra distribution capacity.

Pioneer will assist in increasing the international presence of RTI by providing a platform for new growth opportunities. Together, the two companies will now be able to offer implants in 47 countries. RTI will be able to benefit from Pioneer’s European distribution platforms in Germany and Netherlands.

Moreover, it will elevate RTI’s organic growth rate and offer revenue growth opportunities across various channels. The superior margins of Pioneer have resulted in an improved margin profile for the new company, RTI Surgical. The combined gross profit and EBITDA margins stood at 56% and 12%, respectively, as compared to 48% and 11% for RTI Biologics alone for the most recent quarter reported.

Integra LifeSciences Holdings (NASDAQ: IART) is a direct competitor of RTI Biologics. The company develops, manufactures, and markets surgical implants and medical instruments for neurosurgery, extremity reconstruction, orthopaedics, and general surgery.

Recently, Integra has been granted the European CE Mark for its Integra Smart Cervical Solution, a device for treating degenerative diseases of the cervical spine that requires stabilization and fusion of two or more cervical vertebrae. This new appliance provides a 100% synthetic bone replacement. The implant enables a no touch surgical procedure. The disposable inserter provides a safer way to execute the surgery. Entrance into the huge European market is a positive signal for Integra, which will work as a catalyst to boost the company’s revenues in the coming months.

In 2013, Integra launched its Hollywood VI intervertebral body fusion device, or IBD, system. The Hollywood VI IBD is mainly employed in transforaminal lumbar interbody fusion, a surgical process intended to aid in easing pain and nerve compression by fusing and stabilizing adjacent vertebrae in the lower back. IBDs assist in providing strength for spinal fusion after an infectious disc has been removed through operation. This product provides surgeons with supplementary solutions to better treat their patients and is expected to contribute to the top-line growth of Integra.

Earlier this year, Integra also introduced Compact Cranial Closure System, which provides titanium implants for non-loadbearing (non-facial) operative cranial neurosurgical procedures. It was also featured at the American Association of Neurological Surgeons annual meeting in May. Every year, Neurosurgical cranial fixation sets are employed in more than 200,000 cranial procedures in the U.S. for the treatments of head trauma injuries, biopsies and tumor removal. The high demand of this product will result in providing an up lift to the company’s revenues.

Conclusion

With the global medical devices industry forecasted to reach approximately $302 billion in 2017, growing at a rate of 6.1%, RTI Surgical has bright future prospects. The acquisition adds immensely in terms of implant portfolio and its direct distribution network. The company’s revenues and profits are expected to rise once the expected synergies materialize. The return will only take the form of price return as the company does not have a history of providing dividends. I would recommend buying this stock for medium term investors.

With its rigorous series of product launches, Integra is all set to move ahead of the market players. The company does not declare dividends and looks forward to providing return to its investors in the form of price appreciation. In my opinion, the stock has the potential to give higher return and should be bought and held for a few years.

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Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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