Thesis/Summary RTIX uses proprietary technology for sterilizing human/animal tissue and bone.

Their legacy business is supplying bone pastes and machined implants to Medtronic, Zimmer, Stryker, etc. That strategy worked fine up until 2007 when these companies had great volume growth, no pricing issues, etc. However, in 2008 this changed as there was inventory rationalization/hospital pushback. What were tailwinds became headwinds. In response to this dynamic the company decided they wanted more control over their business and a better return out of their IP. At that time they went through an investment cycle where they developed new products as well as their own direct sales force in certain product areas. They now operate in five businesses; sports medicine, spine, dental, surgical specialties and BGS (Bone Growth Substitutes). In spine they still function as a supplier and that market is depressed, so there could be a bounce back if the economy strengthens but expectations are low. In the other businesses they are either partially or fully direct. Historically, they really havent had the product depth to create SGA leverage, but that is changing in sports medicine. They are harvesting a R&D cycle there and now the direct sales reps have more products to offer. In surgical specialties they are benefiting from a new hernia product that was launched at the end of last year. They are using a direct sales force for this product and the launch is going well. Regarding the pipeline, it has potential as they have two new products that should come out in late 2012/2013. One is a stem-cell based bone growth product for a large, rapidly growing market. The other is an animal based product that will address the hernia market. The sell-side hasnt adjusted models much for these products and they could provide an extra $10-$15 million in sales in 2013 at a high GM's. This matters for a company with only a $180 million sales base. In summary, new products should drive accelerating top-line performance of 8-10% growth and earnings growth in excess of 20% over the next couple years. Earnings leverage will be driven by harvesting investments in R&D, SGA and a higher GM through a direct sales force and higher margin products. I think they can do $.20-$.25 in 2013 EPS (depending on whether you include the HC tax). A 1 PEG gets you a $5 stock. Currently, the stock trades a 1x EV/Sales so not a lot of downside in my opinion. Ideally, the stock would move in front of this product cycle and could be sold prior to any launch risk. I think it eventually gets bought as larger companies seek to use their balance sheets to develop new growth avenues. I see this as an ongoing theme in the healthcare space. Q2 Update RTIX reported Q2 and revenue/GM beat expectations driven by inventory efficiency, higher international sales in sports medicine and strength in BGS/Ortho. Guidance was adjusted by less than the beat which I believe is just conservatism, continued weakness in spine and FX (on the plus side there were no stocking orders in the quarter). The only real negative was a litigation charge and no raised guidance with respect to the direct business in the US. Overall, I believe the thesis is intact with rising revenues, strengthening GM and exciting new product introductions. Leverage is partially subdued as the company invests in R&D/SGA but my bet is it pays off in the next couple years. Working capital continues to improve (Days Inventory down 6 straight quarters). I believe revenue, margins and cash flow accelerate next year leading to multiple expansion.