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Summary

  • Medical device company KTWO plans to raise $150.0 million in its upcoming IPO.
  • KTWO will offer 8.8 million shares at an expected price range of $16-$18 per share. We think it could price below range.
  • Given the sensitive of the spinal surgery market to new products, along with increasing losses and massive competition, we plan to avoid this IPO.

K2M Group Holdings Inc (NASDAQ:KTWO), a medical device company focused on developing and commercializing spine products, plans to raise $150.0 million in its upcoming IPO.

The Leesburg, Virginia-based firm will offer 8.8 million shares at an expected price range of $16-$18 per share.

If the IPO can find the midpoint of that range at $17 per share, KTWO will command a market value of $677 million.

KTWO filed on March 14, 2014.

Lead Underwriters: Barclays Capital Inc, Piper Jaffray & Co, Wells Fargo Securities LLC

Underwriters: Cowen and Company LLC, William Blair and Co LLC

Summary: Treating Tricky Spinal Pathologies

KTWO is a global medical device firm, seeking to develop and commercialize proprietary spine technologies and techniques. The firm's products are designed to treat more difficult spinal pathologies, which typically create more revenue per procedure and receive a higher rate of positive insurance coverage.

KTWO's products include implants, disposables and instruments; the firm has commercialized a total of 57 product lines, including 34 new product lines introduced since 2011. Some 60% of KTWO's revenues have been derived from products used in complex spine and minimally invasive surgeries.

(click to enlarge)

(A snapshot of products for complex spine treatments. Photo: http://k2m.com/products/overview/)

The firm markets its products through both a direct sales force and independent sales agencies and distributor partners.

Valuation

KTWO offers the following figures in its S-1 balance sheet for the year ended December 31, 2013:

Revenue: $157,584,000.00

Net Loss: ($37,913,000.00)

Total Assets: $296,936,000.00

Total Liabilities: $93,670,000.00

Stockholders' Equity: $94,185,000.00

Though KTWO has seen increasing revenues over the past several years, growing from $60.4 million in 2008 to $157.6 million in 2013, the firm has also seen worsening losses. For the years ended December 31, 2011, 2012 and 2013, KTWO posted net incomes (losses) of $13.3 million, ($32.7) million and ($37.9) million, respectively.

Competitors In A Highly Dynamic Surgery Market

KTWO competes in the rapidly changing spinal surgery market, and expects increasing competition as companies continue to seek out the large potential market for spinal surgery products.

Major competitors include DePuy Synthes, Medtronic (NYSE:MDT), Stryker (NYSE:SYK), NuVasive (NASDAQ:NUVA), and Globus Medical (NYSE:GMED). Some of these competitors have access to far greater financial resources than KTWO.

Management Highlights

Co-founder Eric D. Major has served as KTWO's President and CEO since January 2004. He previously co-founded and served as the President and CEO of American OsteoMedix Corp and served as President of the Minimally Invasive Division for Interpore Cross International.

He also worked in various marketing, strategic and product development capacities with spinal companies including Acromed Spine Inc. and Synthes Spine, Inc.

Conclusion For Investors- BEWARE

We plan to avoid this IPO and would not be surprised if it prices below the proposed range.

KTWO is bleeding huge money, and though its revenue gains have been consistent, they've hardly been spectacular.

KTWO faces massive competition, and while its strategy of focusing on the most difficult spinal procedures may help to alleviate some competition, the firm still doesn't stack up well against the likes of Medtronic and NuVasive.

The sensitivity of the spinal surgery market to new products is also worrying, given KTWO's limited focus.

We invite readers wishing to learn more about and/or join the discussion on current IPOs to click the +Follow button above the title of 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Very Fragile Outlook For K2M Group Holdings IPO