Teleflex Earnings: Palette Acquisition Solidifies Lead in Interventional Urology, Maintain Valuation

No-moat Teleflex TFX reported second-quarter results that were largely consistent with our expectations, and we’re maintaining our fair value estimate. We are encouraged to see the continuation of postpandemic rebound in the firm’s 5.9% year-over-year top-line growth (constant currency). The interventional business led quarterly growth with an increase of 9.6% in constant currency fueled by balloon pumps and right heart catheters. We think demand for intra-aortic balloon pumps should remain solid and could potentially increase into 2024 now that Johnson & Johnson (and its legacy Abiomed business) has issued a recall for all Impella products that are also used in high-risk percutaneous interventions and cardiogenic shock.

We’re of two minds on the pending $600 million acquisition of Palette Life Sciences. From a strategic standpoint, we believe it makes sense for Teleflex to further deepen its intangible assets in its interventional urology unit (currently 10% of sales). Teleflex can benefit if it sells a wider array of products, including Palette’s Barrigel to protect tissue from radiation, through its existing sales reps calling on urologists. Additionally, management expects the addition of Palette’s products to enhance margin. However, we remain uneasy about the price paid for this private firm and mindful of the firm’s track record of overpaying, which supports its Morningstar Poor Capital Allocation Rating. For privately held Palette, Teleflex is paying an estimated 10.7 times sales (excluding milestone payments). Not only is this at the higher end of medtech deals we’ve seen, it’s also considerably higher than the roughly 6.3 times sales Teleflex paid for NeoTract, which brought UroLift into the portfolio. Further, UroLift growth has decelerated significantly since 2020. While the pandemic was a major factor in 2021, UroLift growth continued to disappoint in 2022 and thus far in 2023. This leaves us cautious about Palette.