We caught up with new SeaSpine CEO Keith Valentine somewhere between Minneapolis and Chicago as he and CFO John Bostjancic were on their 7th presentation to institutional investors that day. It was the middle of the afternoon and the two long-time orthopedic and spine industry execs were literally in transit.
On July 1, 2015 SeaSpine Holdings Corporation became the newest member of the public spine company fraternity—symbol, appropriately enough, will be “SPNE.” It is being spun out of Integra LifeSciences Holdings Corporation in a tax-free transaction.
Honestly, the best part of the SeaSpine presentation is the guys making it.
Considering that sales last year were $138 million, down 5% from 2013, and that SeaSpine lost $24.5 million, this is a corporate fixer upper. But the structural foundation of this company is good and the neighborhood is excellent.
Kirt Stephenson, founder and chairman, couldn’t do much better than Keith Valentine and John Bostjancic and the team they’re assembling to do the necessary renovations.
The Foundation
The key to SeaSpine is that it is scalable.
A little digging into the SeaSpine numbers reveals some of what Valentine (who could pretty much go anywhere he chose after his career at NuVasive, Inc. and before that Sofamor Danek) found attractive.
Fifty percent of the company’s sales are from biologics. Those sales increased in 2014. Spine hardware sales declined and that pulled overall revenues down.
Biologics accounted for $67 million of SeaSpine’s 2014 sales which means that, in terms of market share, SeaSpine biologics is punching above its weight. In the bone graft market, SeaSpine holds an 8.6% share. In the demineralized bone market SeaSpine has a 12.3% share.
By contrast, SeaSpine’s spine hardware business holds barely a 1% share of the global spinal hardware business.
Right away, Valentine and his team want to leverage that biologic foot print with a couple of new technologies and a pipeline of MIS (minimally invasive surgery), adult deformity and degenerative disc disease (DDD) hardware products.
To put this in perspective, if SeaSpine had the same market share in hardware that they have in biologics, they’d be as large as NuVasive. And in every spine case, biologics and hardware go hand in hand.
SeaSpine also has its own biologics production capabilities—with plenty of excess capacity.
As CFO John Bostjancic pointed out during this presentation, SeaSpine’s infrastructure is in place for product and geographic expansion.
So, while SeaSpine may not have a lot of curb appeal, the foundation is solid and can support Valentine’s plans for a much larger company.
The Neighborhood – Spine and Biologics
Every spine surgery depends on a biologic product to create a successful outcome. No corner of the orthopedic industry has come to rely on biologics more than spine and neurosurgery. And the payer attitudes toward spine, while still cool, are much better than they were five or six years ago.
So spine and biologics are an excellent neighborhood to try to rehab a fixer-upper like SeaSpine.
Keith Valentine has been to this rodeo before. Several times. Young Valentine started in the spine business in 1992 at Danek. He’s seen and been part of every major procedural, implant and regulatory spinal/biologic cycle over the past 23 some years. He’s on a first name basis with every major spine and neurosurgeon. He’s helped to build two of the largest and most innovative spinal implant companies ever—Sofamor Danek (Medtronic Spine) and NuVasive.
In the last couple of years SeaSpine has introduced about two new products annually. Valentine told the institutional money managers on the road show that he wants to introduce eight new products in the next six to eight quarters. He’s just warming up. This is like stretching exercises for an Olympic sprinter.
For sure, he and Bostjancic want to manage expectations. But both NuVasive and Sofamor Danek were famous for a steady stream of new and strong product introductions. Within a couple of years, SeaSpine will be doing the same thing.
For SeaSpine’s distributors, it’ll be like drinking from a fire hose.
They should check with their colleagues at NuVasive or Globus Medical, Inc. to see what life is like when there’s a new product a month—or more.
But, and here is where Valentine dropped a key clue on the institutional investors on managing a fast growing spine company. None of that product rollout will be remotely possible unless there is a monetary investment in instruments and trays. We’re talking a seven, maybe eight figure investment.
The sales reps might be able to sell the new gizmo, but if there’s no new instrument tray and training and support for the surgeon, it’s an exercise in futility. And that rep will soon be casting their lot with another of the fast growing young spine companies like K2M, Inc. or LDR Holding Corporation.
Both Valentine and Bostjancic kept repeating a simple mantra on the road show—$47 million; $47 million in cold hard cash; $47 million to build instrument trays and make sure surgeons have the trays where they want them, when they want them and exactly how they want them. For the SeaSpine rep, that’s like a warm blankie.
Of course, SeaSpine is not known for its ability to innovate spinal implants, biologic products or instruments. The great innovations of the past five years in spine have come from NuVasive, LDR, K2M, Globus and other fast growing spine firms.
Valentine is pointing SeaSpine at the obvious growth markets for spine—MIS, adult deformity and the bread and butter space, DDD. He highlighted two new products for the fund managers—Accell bone matrix bone void fill and NanoMetalene—but R&D is where he and his team have work to do.
Of course, there are a fair number of very innovative small spine firms who are starving for capital…so perhaps there is a bolt-on or two in SeaSpine’s future.
SeaSpine’s Background
When Integra acquired SeaSpine in 2011, Integra CEO Stuart Essig said: “SeaSpine is an ideal strategic fit for Integra, as the combination brings together two well-respected innovators in the spinal fusion market. Integra has a track record of successfully executing on and integrating strategic transactions, and we expect to realize the benefits of this combination in both our top line growth and earnings per share over the long-term.”
Kirt Stephenson, president of SeaSpine echoed Essig’s optimism highlighting specifically: “Integra’s broad access to U.S. hospitals and GPO agreements across its selling organizations.” To Stephenson, Integra represented a new level of infrastructure and financial resources. As he said at the time, “Integra’s strong balance sheet provides stability and growth capital necessary for us to emerge as a leader in a rapidly consolidating market.”
Except the spine market didn’t consolidate.
When it joined Integra in 2011, SeaSpine was posting up about $50 million in annual sales. Integra paid 1.78x sales. Today, on average, public spine companies are trading for twice that.
Stephenson became Integra’s president of U.S. Spine and reported to Brian Larkin, president, Global Spine and Orthobiologics and Head of Strategic Development.
SeaSpine + Theken
Before buying SeaSpine, Integra bought Akron, Ohio-based Theken Spine, LLC (and Theken Disc, LLC and Therics, LLC) three years earlier in 2008. Theken cost $75 million and brought $34 million in incremental sales to Integra. Theken had been growing at a 20% annual rate so Integra paid a bit more for Theken (2.2x sales) than it would later for SeaSpine.
But, unlike SeaSpine, Theken’s management did not stay around very long.
At the time, Integra was hoping that Theken would bring several strategic benefits including a whole line of spinal implants, a very innovative portfolio of 3D printed implants and electronics and a base of established spine hardware distributors.
Theken was ten years old in 2008. Its main lines were cervical plates, pedicle screws, spacers, and degenerative/deformity and trauma devices.
Included in the purchase was Therics, a quirky research stage company that essentially 3D printed synthetic bone substitute products.
But the investment in Theken required something. It required, it turned out, SeaSpine and Kirt Stephenson. In short, to be an effective player in the spine market, Integra needed to build scale and upgrade its ability to develop new products and train its distribution network.
On day one SeaSpine doubled Theken’s distribution network and put the combined revenue based at a decent $90 to $100 million.
Wall Street’s Take
Wall Street believes in Keith Valentine and is trying to assess how much of a fixer upper SeaSpine really is. Our guess is that the smart money will bet on management, but valuation will also reflect the fact that SeaSpine is the 8th public spine company and one that has, to date, been distinctly unable to generate sales growth.
Wall Street invests in two things. Growth and cash flow.
But the pedigree of this team is superb. Investors have made a lot of money in the past betting on SeaSpine board member Stu Essig and new CEO Keith Valentine. We think they’ll be delighted for another bite of the apple.
As we said, the best part of the SeaSpine road show was the guys making the presentation.
Finally, one Wall Street analyst who seems to have consistently analyzed Integra and the spin off correctly, senior Wall Street analyst Larry Biegelsen at Wells Fargo, said that spinning off SeaSpine would be accretive to Integra’s growth and margins.
As he wrote in 2014 to his clients: “While we would have preferred to see an outright sale of IART’s [Integra] spine business, we think the spinoff gives IART the option to separate the business while limiting disruption. We have concerns that a spinoff could be riskier than an outright sale because public company costs will weigh on margins and the spine business would be a relatively small player in the spine market. Given that the spinoff is not expected to be completed for a year, we think it is still possible that IART could attract a potential buyer for the spine business, but we think that scenario is unlikely. Based on our estimates and assumptions, we believe that separating the businesses could accelerate growth at legacy IART by 1-2% and could add 100bps to operating margin.”
Final Note
We’ve been covering the spine industry since 1995. Lack of innovation has hurt spine companies and SeaSpine is a text book case of that. Spinning it off, landing Keith Valentine, and making biologics a center piece of the rehabilitation story sounds to us like the right formula for getting up to speed with the other innovative, strong spine growth companies.
