IPO Report: K2M Group Holdings (KTWO)

K2M Group Holdings ($KTWO) is a global medical device company focused on designing, developing and commercializing innovative and proprietary minimally invasive complex spine technologies and techniques. It is headquartered in Leesburg, VA.

Eight other companies are scheduled for the week of May 5, 2014. The complete IPO calendar is available at IPOpremium.

The manager and joint managers are Piper Jaffray, Barclays, and Wells Fargo Securities. The co-managers are William Blair and Cowen & Company.

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. SEC Filings

Overview

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.

Valuation

Glossary

Conclusion

The rating on KTWO is neutral to negative.

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 amongst 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. KTWOs’ 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 their sales efforts and $10.5 million in connection with its expected relocation to a new leased headquarters facility in 2015.