On its 10th anniversary, Virginia-based spinal implant company K2M, Inc. announced that it had filed in January a “confidential” S-1 with the Securities Exchange Commission (SEC) which signals the company’s clear intent to “go public” or sell shares of its common stock to the general public.
Interestingly, the filing is “confidential.” Prior to 2012, all S-1 filings were available for public scrutiny. But K2M’s S-1 filing comes under a new provision of the JOBS Act passed in 2012 which allows small companies to submit draft registration statements for confidential review by the SEC. No public disclosure—outside of a simple press announcement.
If K2M successfully floats this offering there will be seven public spinal implant companies—making spine the orthopedic sector with the most public companies.
The other pure, public spine companies are, in order of 2013 revenues:
- NuVasive, Inc. ($683 million)
- Globus Medical, Inc. ($434 million)
- Alphatec Holdings, Inc. ($204 million)
- LDR Holding Corporation ($107 million)
- Baxano Surgical, Inc.($19 million)
- K2M, Inc. (unknown)
- Aurora Spine Corporation (unknown)
Valuation
Investors have put a very wide range of prices on spinal implant companies. At the low end of the range is Alphatec which investor’s judge is worth 1.08x sales. At the high end is Globus Medical which carries a price to sales valuation of 5.5x.
The following chart illustrates this range.
The little company at the top of the sales growth rate scale is Mazor Robotics Ltd. For 2013 Mazor’s sales jumped nearly 70% (from a low base) and investors—looking no doubt at MAKO Surgical Corp.’s buyout by Stryker Corporation—decided that Mazor was worth something in the neighborhood of $400 million (nice neighborhood).
LDR Spine, riding the momentum from its PMA (premarket application) approval for Mobi-C disc, is now valued at more than a half a billion dollars. Alphatec Spine, with twice the sales of LDR Spine, has less than half the valuation. Of course, we do expect that Alphatec’s 2013 sales growth rates will be higher than Wall Street’s analysts are expecting. According to a consensus of those analysts who cover Alphatec, sales this year are expected to rise just 4%. That seems extremely unlikely. Alphatec’s sales for the first nine months of 2013 increased 5.6%. Sales for the third quarter were up 7.2%. It would, as a result, hardly surprise us if Alphatec’s full year sales growth rate was almost double the Street’s consensus.
Each company’s valuation appears to reflect the unique characteristics of each firm—not necessarily an overall excitement about spinal implants or the market to treat back pain. In fact, on a macro basis, the market to treat back pain continues to experience reimbursement and regulatory headwinds which should give most investors pause.
This Class of Entrepreneurs
If any one thing distinguishes these spinal implant companies it is that almost all of these companies are still headed up by their founder and each CEO is a compelling entrepreneur in their own right.
- Alex Lukianov—Founder and CEO, NuVasive
- David Paul—Founder and CEO, Globus Medical
- Christophe Lavigne –Founder and CEO, LDR Holdings
- Ori Hadomi—Co-Founder and CEO, Mazor Robotics
The two companies with the lowest valuations are no longer being run by their founders.
K2M, which may soon join this group of public spinal implant companies, is similarly led by its co-founder, Eric Major.
A Little K2M Background
In 2003, John Kostuik, M.D., former president of NASS, SRS and chief of orthopedics at Johns Hopkins, was in his 69th year and contemplating life after academia when he sat down with one of his former fellows, Tom Errico, M.D., and said: “Tom, I’m looking for something to do.”
Dr. Errico thought about it, asked a few questions then strung together these five fateful words; “Maybe we should start a company.”
Physicians starting companies is not really a good idea. It’s like putting sharp objects in the hands of businessmen. Nine times out of ten they’ll hurt themselves. But Drs. Kostuik and Errico de-risked their notion by calling a friend—the former CEO of American OsteoMedix and sales executive for Interpore Cross, Aesculap, Inc. and Synthes Spine—Eric Major.
Major, like Kostuik, was also looking for something to do.
Eric Major had just sold his supplier of VCF products to Interpore Cross. So he knew a thing or two about starting, running and selling businesses. In those days spine was a hot area for investment. Lots of entrepreneurs were throwing up shingles offering spinal implant products for sale.
But Kostuik and Errico didn’t want to start a spine business like other guys. They had something else in mind. Eric Major (later with his brother Lane Major) liked what they heard.
Surgeon-Focused, Education-Centered
“I insisted that our company’s product development be surgeon focused. Right from the start Tom and I insisted that we have a large scientific board and that we put them to work. Our initial scientific board was 16 surgeons, half from academia and half from private practice. Later we grew it to 20 surgeons and we made them come to our offices four times a year and hold conference calls with us every two weeks!” remembers Dr. Kostuik.
“The other thing I insisted on was an educational forum. I’d always been an admirer and active participant in the AO spine educational programs and I felt that an educational forum combined with a strong data acquisition program was essential.”
With that, Kostuik and the two Majors (Eric and Lane) went to work under the banner, “K2M.”
That first year the scientific board swamped the employees—16 to 5. The first product was no surprise, a pedicle screw. It took ten months to get it through the FDA and ready for market. Ten million in seed money came from family, friends and a few surgeons. While it was a great start, there was one critical question remaining—what would be the company’s product platform?
Back to the Future
“I had always been involved in adult deformity.” – Dr. John Kostuik, former president of SRS.
In 2004, deformity was old news. Scoliosis? Is anyone still doing those surgeries? No, the action in 2004 was intervertebral body implants—cages or motion preserving implants like Charité and ProDisc. In 2003 and 2004, Synthes, DePuy, Stryker and virtually every private equity firm on Wall Street laid hundreds of millions of dollars on the table to pay for motion preserving implants to treat degenerative disc disease.
Deformity? Who does deformity?
So while innovation to treat spine disease was zigging to DDD (degenerative disc disease), the small team assembled by the Majors and Kostuik, zagged. Relying on their scientific advisory board, they realized that the issue wasn’t deformity, per se, it was the complexity of the surgery itself. And there had not been a significant new innovation in this area since Cotrel-Dubousset.
K2M became the company dedicated to making complex spine surgery less complicated, more consistently successful and less morbid.
Innovations for Complex Constructions
Between 2004 and 2010, K2M introduced a series of major innovations for spine surgeons who are tackling particularly complex constructions.
The first platform system from K2M was the Denali system which was a top-loading spinal system featuring off-axis screw height adjustment and offering a complete array of screws, rod connectors, and hooks, coupled with easy-to-use instrumentation.
One surgeon who’d used K2M’s products wrote this on an anonymous blog a year ago: “The system is incredible. I am a deformity surgeon and I ‘gave it a go’ to see what all the talk was about. I thought I would use it once and that it would be a joke. How wrong I was. It is incredibly powerful and fast. I can do monster reductions very quickly, far easier that the previous system that I used. I had to do a revision using my old system last week—what a nightmare. It reminded me what a frame-shift this pedicle screw is.”
Gil Tepper, M.D., who is the founder and president of the Spine Institute at Miracle Mile Medical Center in Los Angeles, characterizes K2M this way. “At K2M, spine surgeons from diverse backgrounds and interests collaborate extensively and work closely with engineers to facilitate innovations as well as improvements in the logistics and approach to various spinal surgical techniques. The collaboration involves didactic sessions and cadaver workshops. It’s truly cooperative patient and procedure centered and data driven.”
By 2010, K2M’s sales had grown to, we estimate, well over $100 million.
Welsh, Carson
“When we first started out we thought we would do a couple of innovative things and then get bought out.” – John Kostuik.
It didn’t quite happen that way. None of the major orthopedic companies bought K2M—although they did come knocking. No, the firm that finally convinced the Majors, Kostuik et al. to transfer majority ownership was Welsh, Carson (WCAS)—the largest private equity firm in medicine.
At a time when hospitals are demanding lower prices, Medicare (CMS) is cranky, the FDA is flailing around, several small spine technology firms have left the pitch and one of the most important new technology initiatives—motion preservation implants—was mugged in the alley, Welsh, Carson decided to invest in spine.
Either these guys were smart or they weren’t paying attention to the headlines. In fact, WCAS had built its business by laying shrewd bets on strong jockeys who knew how to ride a thoroughbred company to the finish line.
WCAS’s purchase of a majority share of K2M closed in July 2010.
A Very Fine Neighborhood
With Welsh, Carson on board, K2M has kicked in the afterburners. Since 2010, K2M has grown to 750 employees, built a portfolio of more than 55 products and opened up the international market.
What’s next? Obviously, an S-1 filing.
We can’t imagine why the SEC wouldn’t quickly approve this. And we look forward to reading how much progress the K2M and WCAS team have made since 2010. In terms of how K2M will stack up as a public company, if we were to guess, we’d expect it would be somewhere in the neighborhood of LDR, NuVasive and Globus.
Which is a very fine neighborhood, indeed.
