IPO Preview: K2M Group Holdings

May. 7.14 | About: K2M Group (KTWO)

Summary

Global medical device company focused on designing, developing and commercializing innovative and proprietary minimally invasive complex spine technologies and techniques.

Losses are increasing, and medical devices are notoriously difficult to introduce successfully.

Principal competitors include Medtronic Spine and Biologics, DePuy Synthes, Stryker, Globus Medical and NuVasive, which together represent a significant portion of the spine market.

Based in Leesburg, VA, K2M Group Holdings (NASDAQ:KTWO) scheduled a $150 million IPO on the Nasdaq with a market capitalization of $630 million at a price range midpoint of $17 for Thursday, May 8, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint managers: Piper Jaffray, Barclays, Wells Fargo Securities

Co-Managers: William Blair, Cowen & Company

End of lockup (180 days): Tuesday, November 4, 2014

End of 25-day quiet period: Monday, June 2, 2014

Summary
KTWO is a global medical device company focused on designing, developing and commercializing innovative and proprietary minimally invasive complex spine technologies and techniques.

Losses are increasing, and medical devices are notoriously difficult to introduce successfully, especially when principal competitors include Medtronic Spine and Biologics, DePuy Synthes, Stryker, Globus Medical and NuVasive, which together represent a significant portion of the spine market.

2011

2012

2013

Loss before tax credits

-$4,876

-$45,696

-$46,254

Loss % of revenue

-4%

-34%

-29%

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Valuation

Glossary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

K2M Group Holdings

$629

4.0

-13.7

1.9

4.6

24%

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Conclusion
The rating on KTWO is neutral to negative.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

KTWO is a global medical device company focused on designing, developing and commercializing innovative and proprietary complex spine technologies and techniques.

KTWO's complex spine products are used by spine surgeons to treat some of the most difficult and challenging spinal pathologies such as deformity (primarily scoliosis), trauma and tumor.

KTWO believes these procedures typically receive a higher rate of positive insurance coverage and often generate more revenue per procedure as compared to other spine surgery procedures.

Product development expertise
KTWO has applied its product development expertise in innovating complex spine technologies and techniques to the design, development and commercialization of an expanding number of proprietary minimally invasive surgery (MIS) products.

These proprietary MIS products are designed to allow for less invasive access to the spine and faster patient recovery times compared to traditional open access surgical approaches.

KTWO has also leveraged these core competencies in the design, development and commercialization of an increasing number of products for patients suffering from degenerative spinal conditions.

KTWO categorizes its revenue in the United States among revenue generated from treatment of complex spine pathologies, treatment using MIS approaches and the treatment of degenerative spinal conditions.

KTWO defines its complex spine procedures as those that involve the treatment of the most difficult and challenging spinal pathologies, such as deformity (primarily scoliosis), trauma and tumor.

Minimally invasive procedures
KTWO considers MIS procedures as those involving products designed to allow for less invasive access to the spine and faster patient recovery times as compared to traditional open access surgical approaches.

KTWO categorizes degenerative procedures as those involving products treating degenerative spinal conditions such as traditional spinal fusions.

Biomaterials revenue
KTWO reports revenue related to the sale of biomaterials as part of its complex spine, MIS and degenerative spine revenue categories.

KTWO expects its revenue to continue to be driven by aggregate sales growth in all categories.

KTWO's revenue classifications may evolve as it grows its business, continue to commercialize new products, adapt to surgeon preferences and surgical techniques and expand its sales globally.

Dividend Policy

KTWO intends to use a portion of the net proceeds from this offering to pay all accumulated and unpaid dividends on its Series A Preferred and its Series B Preferred. However, KTWO has no current plans to pay dividends on its common stock.

Intellectual Property

As of December 31, 2013, KTWO owned 103 issued U.S. patents, 60 issued foreign patents, 105 pending U.S. patent applications and 70 pending foreign patent applications.

As of December 31, 2013, KTWO also had 27 U.S. trademark registrations, 62 foreign trademark registrations, five pending U.S. applications to register trademarks and 28 foreign applications to register trademark registrations.

Competition

KTWO is aware of several companies that compete or are developing technologies in its current and future product areas.

As a result, KTWO expects competition to remain intense. KTWO believes that its principal competitors include Medtronic Spine and Biologics, DePuy Synthes, Stryker, Globus Medical and NuVasive, which together represent a significant portion of the spine market.

KTWO also competes with smaller spine market participants such as Alphatec Spine, Biomet, LDR Holding Corporation, Orthofix and Zimmer.

5% stockholders

WCAS 81.8%

FFC 8.5%

Use of proceeds

KTWO expects to net $136 million from its IPO. Proceeds are allocated as follows:

  • to retire all $39.2 million of the indebtedness outstanding under the Shareholder Notes,
  • to pay all $19.1 million of accumulated and unpaid dividends on its Series A Preferred and its Series B Preferred,
  • to repay all $23.5 million of the outstanding borrowings under its revolving credit facility and
  • for working capital and general corporate purposes. KTWO's use of proceeds from this offering for working capital and general corporate purposes is currently expected to include $6 million to expand its global distribution network by hiring qualified sales employees and purchasing inventory to support sales efforts and $10.5 million in connection with its expected relocation to a new leased headquarters facility in 2015.

Disclaimer: This KTWO IPO report is based on a reading and analysis of KTWO's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.