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VOL. 127 | NO. 149 | Wednesday, August 1, 2012

Shakeup Could Impact Wright’s Q2

By Aisling Maki

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Wright Medical Group Inc. over the last two years has seen its fair share of restructuring, and some analysts anticipate that realignment, coupled with sales dislocations and customer losses, will likely result in some short-term pain surrounding the company’s Q2 reported earnings.

The Arlington-based orthopedic medical device maker will release its second quarter earnings Wednesday, Aug. 1.

The company in May reported its adjusted net income for the first quarter of 2012 had declined 9 percent to $8.6 million from $9.4 million in Q1 2011, while diluted earnings per share, as adjusted, decreased 8 percent to $0.22 in Q1 from $0.24 in Q1 2011.

And its $126.7 million in net sales during Q1 represented a 6 percent decrease compared to Q1 2011, the result of previously announced distributor changes and challenges associated with enhancements to the company’s compliance processes.

“We didn’t really see the impact in Q1 as badly as they had originally anticipated,” said Greg Simpson, a senior medical device analyst at Memphis-based Wunderlich Securities Inc. “There are going to be some dislocations, if you will, on the sales side – specifically in orthopedics – as they make these changes. They didn’t really see it to the extent originally anticipated in Q1.”

Wright Medical’s shake-ups over the last two years include its board of directors entering into a deferred prosecution agreement with the federal government in September 2010 in an effort to avoid criminal prosecution.

This agreement followed negotiations with the federal government regarding Wright’s compliance program – put in place after the U.S. Justice Department claimed Wright had violated the federal kickback statute.

In April 2011, Wright Medical president and CEO Gary D. Henley resigned just prior to a board meeting called to discuss management’s oversight of the company’s ongoing compliance program.

And at the same time, Wright Medical announced the termination of Frank Bono, the company’s senior vice president and chief technology officer, for failing to exhibit appropriate regard for Wright’s ongoing compliance program.

“I think people feel good about the long-term direction the company is taking and the odds of success.”

–Greg Simpson
Senior medical device analyst, Wunderlich Securities Inc.

In September 2011, Wright Medical announced it would cut its workforce by 6 percent and that Robert J. Palmisano would serve as the company’s new president and CEO.

And in January, Bono filed a complaint in Shelby County Chancery Court against his former employer, saying he never engaged in conduct that could be injurious to Wright, whom he claims lacked the proper grounds to fire him.

Less than a month later, Wright Medical named Daniel Garen its new senior vice president and chief compliance officer.

Simpson said that although Wright’s repositioning strategy is expected to be successful in the long run, the expectation is that the impact of all those changes will be more apparent in the company’s Q2 earnings report, especially regarding its hip and knee business.

“I do think you’ll see more of a negative impact on the orthopedic side in the current quarter. … A lot of it is the internal moves that they’ve made,” he said.

He said orthopedics is a business expected to only generate single-digit growth, and that it’s “going to be a tougher market to compete in, a market that continues to move towards more commodity-like status.”

He added that Wright Medical’s odds of being successful are much more favorable in the foot and ankle market. In fact, Wright Medical in May reported its Q1 foot and ankle net sales grew 11 percent globally and 9 percent domestically.

Growth factors included new product launches, increased medical education programs, and strong performance in international business.

In terms of extremities, Simpson said Wright Medical has “a better competitive position and better product line. And if they’re successful in making that transition, they’ll still have the hip-and-knee business certainly. … It will be repositioned more as kind of a cash-cow business to fund the ongoing growth in the extremities business. That’s absolutely the right move from a strategic standpoint.”

Simpson said Palmisano – who in September will mark one year in his role as CEO of Wright Medical – appears to be leading his company in the right direction.

“People have huge confidence in him and I think rightfully so,” Simpson said.

“I think people feel good about the long-term direction the company is taking and the odds of success.”

Simpson said that if the company’s repositioning strategy proves successful,

“And they become an increasingly large player in extremities, then I also think the company overall will be very successful,” he said. “And will also become an increasingly attractive target for one of the bigger orthopedic players.”

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