Thursday after the close, Globus announced that it has acquired Transplant Technologies of Texas, Ltd (TTOT), which sells a variety of biologics products. Management has indicated an intention to expand its biologics presence, so we are not overly surprised to see this deal come across. This deal offers direct sourcing access to Globus, and we anticipate that the company’s large salesforce should be able to deliver pull-through revenue over time. Financial terms of the transaction were not disclosed, though we expect that the company will provide a bit more strategic color on its third-quarter conference call.
TTOT processes and sells a variety of allograft implants including spine implants, demineralized bone matrix, sponge allografts, and traditional bone allografts, which we believe will be most impactful to Globus’s portfolio. The company also sells sports medicine tendons, birth tissue allografts, and dermal allografts, though we do not view these areas to be as synergistic as the other products listed above. The company already has operations in Texas and relationships with distribution partners (the number of distribution centers and salesforce details were not included in the press release).
While Globus did mention that it plans to keep the company’s existing distribution partners, we believe that the real opportunity will be to filter TTOT’s product portfolio through the existing Globus sales infrastructure. Historically, the company has not had a broad offering in this segment, and management has indicated its intention to grow this segment either organically or through acquisition activity. We believe that there will be a pull-through opportunity for Globus with these biologics products, given that most procedures require both the implant and biologics component; therefore, we anticipate steady improvements in this segment in the coming quarters. Additionally, this acquisition may lift the company’s appeal to a strategic buyer looking to improve its spine franchise.
We are adjusting our model for the acquisition. We increased our 2014 sales estimate by $2 million, to $464.5 million (up 7%), but maintain our EPS estimate of $0.91. For 2015, we raised our revenue target by $12 million, but maintain our EPS estimate of $0.99.
While the stock has started to come back in recent weeks, we believe that third-quarter performance will be an important catalyst for the company and for investors to regain confidence in the stability and predictability of results. We view the acquisition of TTOT as strategically sound and believe that the company is making all of the right moves to compete effectively in this market. We believe that the company’s revenue performance this quarter will come in better than expected, based on our industry conversations on the market, and expectations look to be set reasonably; our long-term thesis remains intact.