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Corin's hip nerve hit again

Created:
9 June 2008
Written by:
Richard Hemming

Corin’s shares have more than halved in value after the hip replacement specialist revealed in mid-May that it doesn't expect to ship any more sets of hip resurfacing product Cormet to its US partner Stryker until December at the earliest.

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The company now estimates US revenues to be no more than £10m for this year, more than half the analysts' expectations prior to this news. The following year is also forecast by many to be poor, unless Stryker can successfully begin to convert trained surgeons into new customers.

Late last month, investors were briefly excited after the UK surgery business, Acrobot Navigation System, announced it had signed an agreement with Corin for an exclusive distribution of its computer-assisted Acrobot Navigation system for Cormet in the UK, Germany and Australia. These are Corin’s key markets and among the most competitive in the world for hip replacements. The system allows a surgeon to mechanically track the patient through the use of two tracking arms, one attached to the patient and the other to various surgical instruments used during the procedure.

Investors and analysts are waiting for Stryker’s second-quarter results in July to give an indication of Cormet sales before jumping in (or out).

LANDSBANKI

Hold. Following the disappointing trading update, the result of issues with Stryker's re-ordering, we aggressively downgraded our forecasts. We believe the business is worth between 279p and 334p based on peer multiples. But our DCF valuation suggests it’s worth 445p or £200m. Sales conferences in the past year had supported a belief Stryker was getting behind the Cormet product, but this hasn’t been shown in the sales figures. So, we don’t see much near-term incentive for positive share price performance ahead of Stryker's second quarter results and a potential trading update from Corin.

BREWIN DOLPHIN

Hold. Clearly this was a major setback both in terms of near term earnings impact and on the investment case. In our opinion it is too early to say whether the ultimate uptake of Cormet in the US will be of the magnitude previously envisaged or if product acceptance will remain at low levels. On a pure earnings basis, the shares are worth no more than 200p. If, as the bulls of the stock hope, Stryker steps in with a knock-out bid, the shares are worth about 380p. The key question however, is what Stryker’s incentive is to buy the company given the current uncertainties. We expect EPS of 12.2p for 2009.

IC View

FairlyPriced

Despite its price fall, at 234p, Corin’s 2009 earnings multiple of 19 times looks fair value. We believe Stryker has what it wants for now and discount takeover potential. Fairly priced.

Last IC view: Good value, 425p, 18 April 2008.

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