When Integra LifeSciences Holding Corporation announced in early November that it was planning to spin off its spinal implant business (the 300 employee, $140 million in revenue SeaSpine, Inc.) we could only reflect on how different spine is from the rest of orthopedics.
The rest of orthopedics appears to be collapsing into a literal handful of companies. Synthes into DePuy. Biomet into Zimmer. MAKO, Small Bone Innovations, Berchtold and Patient Safety Technologies into Stryker. Tornier into Wright Medical.
But spine? New public spine companies seem to be popping up roughly every 18 months or so. Here’s a list:
In the last decade seven pure play spinal implant companies have tapped the public markets for a total of $893 million and, as a group, are now generating about $1.7 billion in annual revenues. Public investors think this group is worth about $5.9 billion or roughly 3.4x sales.
Now Integra’s SeaSpine may join the party (the exact form of the spin-off remains to be determined). Of course, as Baxano (formerly TranS1) is demonstrating, the party can lead to a massive morning after headache. Baxano’s market value is now down to about $1 million following its bankruptcy announcement. Since going public as TranS1 in October 2007, investors had pumped more than $123 million into the firm to, obviously, no avail. If you need help filing for bankruptcy chapter 7 at nvfirm.com you will find lots of help.
Unlike any other sector in orthopedics, spine is not consolidating and, in fact, with these kinds of cash balances and market values, this group has the wherewithal to continue to challenge the much larger and better capitalized integrated orthopedic companies: Stryker, DePuy, Zimmer and Medtronic for market share.
These newly public companies are no longer ankle biters. They’re players with access to the capital markets.
And here comes Kirt Stephenson’s SeaSpine—quite a bit larger and, presumably better capitalized, than the last time it was independent.
SeaSpine
SeaSpine was founded 12 years ago and in its ninth year was acquired by Integra LifeSciences for $89 million (cash). At the time, 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 and one of the most highly regarded spine industry executives 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 (and Theken Disc and Therics) three years earlier in 2008. Theken cost $75 million and brought $34 million in incremental sales to Integra. Theken has 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 need 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 $90-100 million.
SeaSpine’s Differentiation
SeaSpine, if it becomes a publically traded company, will be compared to K2M, LDR, Globus, NuVasive and the other innovative, effective young spine companies. How will SeaSpine try to differentiate its product offerings?
Here’s a sampling of their most distinctive implants and what SeaSpine is hoping to convey that is innovative about each one.
Wall Street’s Take and the Corporate Wardrobe Malfunction
Wall Street’s reaction was mixed.
Glenn Novarro from Royal Bank of Canada said: “Spine spin-off does not create much shareholder value in our view.” Novarro wrote that Integra’s decision to spin off spine would add, at best, ~$3-$5/share to Integra’s intrinsic value.
Larry Biegelsen from Wells Fargo, however, said that the spine spinoff would be accretive to Integra’s growth and margins. As he wrote 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”.
Finally Piper’s Matt Miksic noted that in the most recent quarter Integra’s spine revenues were off 11% in the third quarter and missed his estimates. Not a good beginning with analysts. According to Miksic, the sales trajectory for 2014 will be at the lower end of expectations and down, year-over-year by mid-single-digits.
One analyst noted that the spinoff announcement was not a surprise. Indeed, Integra’s CFO Glenn Coleman met with the team from Wells Fargo this past August 20 and told them that Integra was considering strategic alternatives for its spine business. “Strategic alternatives” is often the euphemism for sale or spinoff.
We picked up on that and made a short comment in our Power Rankings that Integra was thinking of spinning off spine.
We didn’t realize it, but we gotten in the middle of a corporate version of the wardrobe malfunction. Apparently, that comment from Coleman resulted in a bit too much exposure. Too much skin.
We heard from Integra about it and immediately ran an “Errata” saying that we’d read the corporate tea leaves incorrectly. Well…we were correct after all, but we don’t regret the “errata.” In our view, we engaged in a bit of tactful bit of covering up following Integra’s inadvertent wardrobe slip.
Final Note
We understand Wall Street’s ambivalence towards this proposed spinoff. But we think this may be exactly the right next step for SeaSpine. From watching corporate wheelings and dealings over the last quarter of a century, we’ve observed that spin offs usually perform better than analysts expect. So, we’re pretty bullish on this deal. In particular we think that Stephenson as Chairman (and a new CEO), SeaSpine should be able to hold its own in the arena with the likes of Lukianov, Paul, Major, Lavigne or King.
Stay tuned for sure.
