Tornier Wants to “Go Public”

Tornier, the French company whose name is synonymous with well-engineered shoulder implants, announced on  June 8th that it intended to sell roughly $205 million in common stock to the global investing “public.” The company has filed registration statements in the U.S. and, if the launch is successful (and it should be), Tornier’s common stock will start trading on the NASDAQ global market under the symbol TRNX.

Over the first 6 months of this year, 57 companies have braved the stock markets to “go public.” Of those, 23 or 40% are trading higher than their offering price and 34 or 60% are lower. The decision to file an IPO and the process to complete registration is a slow moving process. Considering the volatility of the public markets, both in the U.S. and in Europe, this can prove to be nerve-wracking for managers and underwriters alike. Of the last three orthopedic IPOs, two are underwater and one is 40% above its initial offering price.

The following table summarizes the last three orthopedic IPOs.

All three companies grew their business dramatically post IPO. In absolute dollar terms, Alphatec has grown its business the most—adding fully $130 million to revenues in the four years since IPO. As measured by percent change, MAKO jumped 1, 400%. Despite strong top line growth from both Alphatec and TranS1, moving the stock price into positive return territory is terrifically difficult.

Going public is not for the faint of heart.

Tornier’s Case for an IPO

Tornier’s IPO is clearly a bet on the emerging extremities market and the global market for orthopedics. At the time that the current owners (Warburg Pincus, Vertical Group and Split Rock partners) acquired the company from Alain Tornier in 2006, the investment rationale for the firm was to leverage Tornier’s reputation for extremity implant innovation, in particular its shoulder franchise, into a broader line of upper and lower extremity products. Over the ensuing four years, CEO Kohrs and his team:

• created a single, extremity specialist sales channel in the United States

• added new products to the line of shoulder joint implants and foot and ankle products

• entered the sports medicine and orthobiologics markets

• added to Tornier’s small line of hip and knee products

Management also raised R&D spending from $3.8 million on an annualized basis in 2006 to $18 million last year, a 374% rate of increase. To put that in perspective, in 2006 R&D was 4% of sales. In 2009 R&D was 9% of sales.

In its registration filings, Tornier’s management is making the case that all of these moves have increased the company’s addressable market from $2 billion in 2006 to approximately $7 billion in 2009.

The Tornier Product Offering – Today and Tomorrow

Through acquisition and a sizeable increase in licensing and R&D, Tornier’s product line has grown to into four major product categories:

• Upper extremity joint reconstruction and trauma repair products including joint replacement and bone fixation devices for the shoulder, hand, wrist and elbow. 59% of total sales

• Lower extremity joint reconstruction and trauma repair products including joint replacement and bone fixation devices for the foot and ankle. 10% of total sales

• Sports medicine and orthobiologics products including products to mechanically repair tissue-to-tissue or tissue-to-bone injuries, in the case of sports medicine, or to support or induce remodeling and regeneration of tendons, ligaments, bone and cartilage, in the case of orthobiologics. 6% of total sales

• Large joint (hip and knee) repair and reconstruction products including hip and knee joint replacement implants and ancillary products. 25% of total sales

Overall, Tornier’s reported sales for the first quarter of 2010 increased 22%. Of the four product categories, the fastest growing line is Tornier’s sports medicine/orthobiologics line which rose 201% from an admittedly low base ($3.4 million this quarter vs. $1.1 million for the same period a year earlier).

Strategically, Tornier’s goal is to provide surgeons with the most complete line of upper and lower extremity products and then augment these lines with a large, dedicated extremity-focused sales organization. In many ways, the company’s strategic orientation is embodied in its corporate tag line—“Specialists serving specialists.” 

Tornier’s other major strategic objective is, simply put, to be profitable. Since 2006, R&D and sales and marketing expenses have risen sharply. Of course, the payoff has been rapidly expanding product lines and a growing distribution force both inside the U.S. and internationally.  In its registration, the company referred to this spending as an “investment.”  Presumably, post IPO the company hopes to harvest the fruit of this investment and, for the first time since 2005, turn a profit.

The Extremity Market

One of the reasons we love IPOs is that the good old SEC requires companies to give their best estimates of market sizes and future growth rates.

Here is Tornier’s best estimate of its major markets as described in its S-1 filings. Enjoy.

Interestingly, the extremity market is, in Tornier’s judgment, the smallest of the major orthopedic markets. Specifically, “extremities” refers to implants and instruments used to replace shoulder, elbow, hand, and foot and ankle joints. Tornier is making the case that the smallest of the major markets has been under-served and underdeveloped by the major orthopaedic companies.

Tornier, which holds the #2 market share (as measured in revenues) markets the following product lines in extremities:

All in all, Tornier and its owners have created a very full plate to offer surgeons and, now, investors. Will the market understand and appreciate what CEO Kohrs and his team are offering? With an “A” list of underwriters, prospects look good.