Corin – A bumpy turnaround story

Just when people started believing that its turnaround was finally happening, shares in Corin Group came under pressure again, falling 26 per cent in just over a month. Shares in the medical devices specialist, which had recovered from a low in early March of 55p to climb as high in mid-April as 72p, were then sent lower to 57.5p as investors took stock and bailed out.

Coincidentally, this price is where most analysts are comfortable with the story, with Corin trading on 10.8 times forecast 2011 earnings, a multiple that compares to just over 16 times for its peer group of companies. Broker Piper Jaffray’s price target using the industry multiple is 68p.

Value has crept into the turnaround story, which evidence suggests will be sustainable, although it won’t happen as soon as some might like. As one analyst put it, ‘It’s not a simple case of cost cutting.’ In fact, Corin, under new CEO Peter Huntley, is launching new products in hip and knee transplants that will take time to be digested in different markets around the world.

‘Our story is about incremental innovation, and we aim to generate double-digit sales growth with margin enhancement,’ says Huntley. ‘We’re getting the best growth from Australia, but we hope to get more growth from the UK and Europe.’

Corin is not held back by debt, having about £5 million on its books and has experienced 6 per cent sales growth in the first four months of 2010, even before the launch of a new hip system, according to Huntley.

A lack of ambition has never been a criticism of Corin’s people. But it has been a bumpy road for this small Cirencester-based manufacturer of orthopaedic devices for hip and ankle replacements. The shares have had some heady days, when they trebled in less than a year to more than 600p on the promise of sales in the giant US market through the medical devices giant Stryker.

Then Stryker lost its appetite for Corin’s hip replacement product, Cornmet, after a crackdown by regulatory authorities on dodgy junkets for doctors and worse than expected sales. Cornmet was a product that was set to revolutionise hip surgery, catering for ‘baby-boomers’ in their fifties who want to remain active. It is a metal-on-metal hip product that involves resurfacing of the femoral head (the top of the hip) rather than its entire replacement, which normally occurs in conventional surgery.

Even aside from Stryker’s problems, the product has encountered resistance because of fears that metal-on-metal products are dangerous, having the potential for cytotoxticity and carcenogicity (poison and cancer in layman’s terms).

Corin, however, is starting to make the right noises to an investor community that is anxious about developments within the company as well as those outside it. In March, Corin reported that it had swung back into profit in 2009, although the result benefited from inventory write-downs a year earlier.

Huntley, who joined the group in May 2008, says reliance on Cornmet is reducing all the time and that it will be new orthopaedic products that will drive profitability: ‘The new strategy is to broaden out the business, to become a
full-line hip and knee implant orthopaedic company.’

Corin’s experiences have taught it that the 5 per cent of the hip market that relates to its Cornmet product will only ever be that. The real money is in the remaining 95 per cent, which Huntley says is the group’s focus, as far as hips are concerned.

Having already introduced new hip stems MiniHip and Metafix, Corin will be rolling out a new hip cup called Trinity in 2010. Huntley says Corin intends also to ‘refurbish’ older hip products in its portfolio and has hired sales staff to sell to orthopaedic surgeons. Only next year will it revamp its knee portfolio, he says.

As one analyst points out, Corin isn’t suddenly going to double its growth next year. But it is starting to get its act together and investors should consider being a part of this British turnaround story.