K2M Group Holdings, a manufacturer of medical devices
used in back surgeries, went public Thursday with an initial stock offering valued at $120 million.
The IPO is the latest development in the rapidly evolving spinal device market. At least two other spinal device firms have announced plans in the past eight months for a public offering, including Biomet, which was instead acquired in April by Zimmer for $13.35 billion in cash and stock, and LDR Holding Corp., which went public in October for $75 million.
K2M is a Leesburg, Va.-based manufacturer of products used in spinal surgeries for common degenerative back conditions as well as more complex cases such as spinal deformities such as scoliosis as well as tumors and trauma. Considered the largest privately held spinal device manufacturer, it was acquired by private equity firm Welsh, Carson, Anderson & Stowe in 2010.
Shares in the IPO were priced at $15—lower than the $16 to $18 range K2M had anticipated–and were trading on Nasdaq under the ticker symbol KTWO. Pricing was announced last Wednesday night.
K2M said in S-1 securities filings from January that revenue rose nearly 17% to $157.9 million in 2013 from $135.1 million in 2012 and more than doubled from $60.4 million in 2008. It reported a net loss of $37.9 million in 2013.
The proceeds from the IPO will be used to boost inventory and distribution and continue development of new products, said K2M President and CEO Eric Major. He expects the company to be profitable by 2017.
While other manufacturers of spinal devices have focused on developing and selling lucrative products used to treat degenerative spine conditions, K2M has said it specializes in products used in complex procedures, which have a “higher rate of positive insurance coverage and often generate more revenue per procedure as compared to traditional degenerative spine surgery procedures.”
About 60% of the company's revenues in the U.S. are derived from products used in complex spine and minimally invasive surgeries. The remaining 40% of sales come from devices used to treat more common degenerative spinal conditions. Devices used in complex and minimally invasive procedures make up about a quarter of the $10 billion global spinal device market.
Globus Medical, Johnson & Johnson's DePuy Synthes unit, Medtronic, Nuvasive and Stryker are major marketers of spinal devices. A number of smaller firms also sell spine surgery products, including Biomet, LDR, Orthofix and Zimmer.
“We expect competition to remain intense,” K2M said in its securities filings.
Even though the volume of spinal surgeries is expected to continue to grow in the U.S., devicemakers are under increased pressure to negotiate lower prices for what are considered some of the costliest medical devices sold to hospitals. More than 800,000 spinal surgeries will be performed each year in the U.S. by 2020 due in part to an aging population, earlier interventions and the introduction of new technologies, according to research firm GlobalData.
But hospitals are focused on offsetting declining reimbursements
and overall lower patient volumes by reducing the costs of supplies. Some hospitals have adopted new payment models that provide them with incentives to lower the costs of supplies and are also developing new strategies that help them negotiate lower prices and improve utilization. In addition, consolidation in the hospital industry means that many health systems are trimming the number of vendors they buy from.
“This in turn has resulted and will likely continue to result in greater pricing pressures or the exclusion of certain suppliers from certain market opportunities as group purchasing organizations, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions,” K2M said.
An IPO also may serve as a differentiator for the company as it sells to hospitals. The now public information about the company's compliance and finances “puts us in a position to talk to the C-suite at hospitals and compete head-to-head with other public companies,” Major said.
That includes the fact that K2M does not work with physician-owned distributorships. Commonly referred to as PODs, the distributor companies are often owned by surgeons and sell reduced-price spine devices directly to the hospitals where the surgeons work. This segment, which is estimated to have made up about 15% of market share at its peak in 2011, has come under scrutiny in the last year by the Justice Department. HHS' Office of the Inspector General and some large health systems have announced that they will no longer purchase devices from PODs.
Recent IPOs demonstrate that companies in the spinal device sector have matured and the IPO market is open for healthcare companies, said Joanne Wuensch, managing director of equity research for medical technology at BMO Capital Markets.
But the consolidation that is occurring within the same market is more likely being driven by changes in the hospital purchasing
environment. As hospitals seek to drive down prices, many manufacturers are increasingly trying to cross-sell across different categories to ensure their products remain part of a hospital's supply chain. This was evident with Johnson & Johnson's $19.7 billion acquisition of Synthes, Wuensch said. The deal closed in 2012.
“In many ways, it's trying to work as a partner (to the hospital) and give them as many products from one partner as possible,” she added. Follow Jaimy Lee on Twitter: @MHjlee