Morningstar | Initiating Coverage of Integra Lifesciences With Narrow Moat and Stable Trend Ratings; FVE $58
We're initiating coverage of Integra Lifesciences with narrow moat and stable trend ratings. Our fair value estimate of $58 per share pegs valuation near 21 times and 16 times our estimates of 2019 adjusted earnings and EBITDA, respectively. This places shares in 3-star territory for now, but we'd highlight the wide distribution implied by our high uncertainty rating.The firm operates in three distinct areas; neurosurgery, wound care, and extremity orthopedics. We think the firm's neurosurgical and orthopedic segments support a firmwide narrow moat rating, given the high switching costs in these end markets and their estimated outsize contribution to total profits. After the $1 billion acquisition of Codman Neurosurgery from Johnson & Johnson at the end of 2017, Integra become a more formidable neurosurgical company, expanding its business by nearly 50%. We think the combination will help Integra remain a relevant vendor as healthcare providers continue to cull their list of preferred suppliers.
In wound care, we think Integra's offering remains a no-moat operation, since the industry consists of relatively fragmented competitors, difficult-to-identify product differentiation, and a lack of strong intellectual property protection. That said, management's growing investment in clinical studies may produce data that puts Integra a step a head of the competition. In an industry that hasn't been held to the same standards as pharmaceutical or traditional device development, outcomes data could support competitive differentiation in a world guided by value-based care. Integra has completed only a handful of sizable studies, but we think continued investment in this area could ultimately form the basis for a moat supported by intangibles. That said, we'd like to see additional data and evidence that these investments are yielding superior returns over the long run, and not just a new cost of doing business.
Integra LifeSciences Holdings is a medical devices company engaged in the development, manufacturing, and marketing of surgical implants and medical instruments. The company manufactures and sells its products in the following two reportable business segments: Codman Specialty Surgical, which includes technologies in dural repair, ultrasonic tissue ablation, intracranial cranial pressure monitoring, hydrocephalus management, and cranial stabilization systems; and Orthopedics and Tissue Technologies, which focus on addressing soft tissue, nerve, and tendon repairs as well as reconstruction in the hand, wrist, elbow, shoulder, ankle and foot.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
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