In all likelihood, K2M can now be shopped around to a large pharma conglomerate, or a consortium of investors. TSB wants to know what our readers think?
Monday, June 14, 2010
K2M and Smith & Nephew: Tee 'em High and Let 'em Fly!
After kicking the tires on this stellar company, it seems that Smith & Nephew would rather spend its money on sponsoring golf tournaments (St. Jude Classic) than buying a spinal implant company. For a company that has some mediocre total joints and a formidable IM Nailing platform for trauma (TriGen Nail), this would have been a golden opportunity to buy a company that would have given them instant credibility as a playa in spine. Unfortunately, the powers to be felt that it was too steep of a price to pay. So where does that leave K2M?
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The "style factor" of these two companies did not match up. Smith and N. are not an easy fit with just any company. As for K2M, they will be fine, if anything, they stand to grow in this horrible market if "me too" products. They have more engineers making tinker toys than Stryker and Biomet put together.
ReplyDeleteIn my mind, K2M has earned more credibility than most by attacking the deformity market instead of tip-toeing into the spine world with another screw system for degen. I agree with the prior post that they certainly are turning out new toys at a breakneck pace, let's see if they can continue to be innovative as they grow, or if they stagnate like so many others before them...
ReplyDeleteI agree that S &N is not an easy fit. But, I have heard from some of their "people" they want to be a major player is spine. K2M would have fit the bill as they have great technology. S&N should stop being cheap, you get what you pay for!
ReplyDeleteOne signifcant question about K2M is that its core user group was built from surgeon investors. For better or worse, K2M was one of the real pioneers of this model. Admittedly, they have been trying to move away from that model lately, but it is likely that a very good chuck of their revenue still comes from insiders. A look at their huge SAB is telling (its on their website) - probably 30M in revenue right there.
ReplyDeleteTherefore, one wonders how much of that user base would disappear after a S&N (or other) acquisition and their investment positions have been cashed out. I would bet that most would move on to the next opportunity.
It might have given S&N cold feet. If I was acquiring a spine company, I would subtract all investor revenue/profit off the top before making a valuation calculation. After doing that, there may not be much left.
Great point 1:35. Couldn't agree more.
ReplyDeleteTSB...you're leaving out one important detail about this transaction. One of the key concerns S&N had was that (as part of their due diligence) K2M refused to release certain emails it communicated with surgeons to S&N.
ReplyDeleteStellar? Perhaps. Honest and trustworthy? That's questionable.
Unfortunately what many of these companies have learned is that one of the first questions that a potential buyer or investor (if they are not a surgeon) asks is, what percentage of your revenue comes from investing surgeons? K2M is no different than some of the smaller early growth stage companies within our industry, the only difference being that Kostiuk recruited most of his fellows, residents and friends. In many respects it was brillant and far ahead of the norm at the time. Question: Would you be willing to invest in a company that had $10 million in revenue with $8 million attributed to investing surgeons? Probably not. Whether you agree with my assessment or not, K2M has a broader portfolio, therefore, making it a much more attractive company to springboard into spine and biologics. Maybe someone like a Merck would be interested? Yet, TSB finds it hard to believe that after the Abbott experience and the current cost cutting environment in healthcare, spine is becoming less attractive. But what would I know? I've only been doing this for 20 plus years and seen this industry come from a fledgling market to a market saturated with more versions of me too products that it reminds me of Basking Robbins. Party On!
ReplyDeleteIf an acquirer is concerned about the percentage of revenue from insider surgeons who might bail, then you structure the acquisition such that they are incentivized to keep the revenue coming for a year or two. Still, good point on whether or not it's a broad based customer base, or 15 big accounts and 30 small ones.
ReplyDeleteWhat do people think of K2M's technology in a me-too pedicle and screw world? that's what's important, because if it's better than anyone else, then the acquirer can leverage it's sales force to really take market share.
Not if price is becoming an issue. Let's be honest, how many different ways can we slice and dice a pedicle screw? Is an extra degree of angulation going to make a difference? Does the versatility of a system to offer 2 to 3 rod options all that important, when a surgeon has his or her own preference? Is the thickness of a cervical plate that is 1.9mm in thickness going to better effect fusion than a 2.0mm or 2.1mm thick plate? How many different versions of PLIF, ALIF's, CIF's or TLIF's can we have. No doubt that a larger footprint can help, yet, by time you get your product to the market there are five to ten companies hot on your trail. Example: Is an implant that articulates going to enhance fusion? Let's see the retrospective data before you make the claims. Anyone can say what they want if they are not held to substantiate those claims. So if you're going to hang your hat on deformity, then maybe it's a great portfolio, outside of that, it's just another brick in the wall. Besides, it doesn't take some analyst to report that pricing has become an issue, those of us in the industry knew that this was coming a long time ago.
ReplyDeleteTSB, what do you here about other potential acquirer's of K2M, or, them possibly going the IPO route?
ReplyDeleteDeal Done. Welsh Carson has signed a deal to become the major stock holder of K2M.
ReplyDelete