Quick Take

Spinal Elements Holdings (SPEL) has filed to raise $108 million in an IPO of its common stock, according to an S-1 registration statement.

The firm develops minimally invasive spine surgery medical devices.

SPEL is well positioned to take advantage of a growing industry but its IPO is highly priced, so I’ll watch it from the sidelines.

Company & Technology

Carlsbad, California-based Spinal Elements was founded to design spinal medical devices that require less invasive surgical techniques.

Management is headed by co-founder, president and CEO Jason Blain, who has been with the firm since and was previously manager of Product Development at NuVasive (NUVA).

The company’s primary offerings include:

  • Spinal fixation systems

  • Interbody implants

  • Surgical instruments

  • Biologics

Management says its existing portfolio ‘can address approximately 95% of the spine surgery procedures performed worldwide in 2018…’

Spinal Elements has received at least $57 million from investors including Kohlberg Funds

Customer Acquisition

The company sells its products primarily via ‘a network of over 200 independent distributors and over 400 surgeons across more than 500 hospitals and ambulatory surgery centers.’

Selling, G&A expenses as a percentage of total revenue have increased as revenues have fluctuated, likely due to the Covid-19 pandemic’s effects, as the figures below indicate:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

97.9%

2019

89.0%

2018

89.3%

Source: Company registration statement

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, swung to negative (0.1x) in the most recent reporting period, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

-0.1

2019

0.1

Source: Company registration statement

Market & Competition

According to a 2019 market research report by iData Research, the global market for minimally invasive spinal surgery is expected to see significant growth through 2025.

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The fastest growing market segment in the U.S. and Europe is forecast to be the spine endoscopy market though it represents the smallest market in terms of the number of procedures and unit sales numbers.

Below is a chart showing the relative sizes and historical and forecast growth rate trends for the MIS market:

The largest market for MIS procedures is expected to be the current baby boomer demographic of individuals over 60 years of age.

However, the market will continue to see a bifurcation of older surgeons preferring established methods while younger doctors are more willing to learn new methods.

Major competitive or other industry participants include:

  • Medtronic (MDT)

  • Johnson & Johnson (JNJ)

  • Stryker (SYK)

  • NuVasive (NUVA)

  • Globus Medical (GMED)

  • Zimmer Biomet (ZBH)

  • Alphatec (ATEC)

  • RTI Surgical

  • Orthofix Medical (OFIX)

  • SeaSpine Holdings (SPNE)

Financial Performance

Spinal Elements’s recent financial results can be summarized as follows:

  • Contracting topline revenue in the most recent period

  • Growing gross profit and gross margin

  • Uneven operating losses

  • Increasing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 42,694,000

-7.3%

2019

$ 95,916,000

5.7%

2018

$ 90,752,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 29,144,000

0.3%

2019

$ 63,115,000

7.7%

2018

$ 58,593,000

Gross Margin

Period

Gross Margin

Six Mos. Ended June 30, 2020

68.26%

2019

65.80%

2018

64.56%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ (15,270,000)

-35.8%

2019

$ (30,212,000)

-31.5%

2018

$ (35,981,000)

-39.6%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ (26,160,000)

2019

$ (51,420,000)

2018

$ (53,461,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ (9,668,000)

2019

$ (10,422,000)

2018

$ (14,876,000)

(Glossary Of Terms)

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Source: Company registration statement

As of June 30, 2020, Spinal Elements had $12.6 million in cash and $204.7 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was negative ($20.1 million).

IPO Details

Spinal Elements intends to raise $108 million in gross proceeds from an IPO of 7.7 million shares of its common stock, offered at a proposed midpoint price of $14.00 per share.

Existing shareholder Kohlberg Funds have indicated a non-binding interest to purchase six million shares in a concurrent private placement. This is a positive signal of investor support for the transaction.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $577.3 million, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 27.36%.

Management says it will use the net proceeds from the IPO as follows:

[i] repay approximately $168.1 million of our indebtedness, representing all amounts outstanding under the First Lien Credit Facilities and the Second Lien Notes as of October 6, 2020,

[ii] redeem, at a redemption price of approximately $3.4 million in the aggregate, all outstanding shares of Series A preferred stock,

[iii] repay all amounts outstanding under Series A Notes and Series C Notes, including accrued interest but excluding any Series A Notes and Series C Notes that have been tendered to us for exchange into shares of our common stock pursuant to the exchange offer that we have made to all of the holder of the Series A Notes and Series C Notes and

[iv] use any remaining net proceeds for working capital and for general corporate purposes.

Management’s presentation of the company roadshow is not available.

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Listed bookrunners of the IPO are Credit Suisse, Baird, Stifel, Truist Securities, BTIG, and Siebert Williams Shank.

Commentary

Spinal Elements is seeking public funding to pay off debt as it seeks to continue its development and commercialization efforts in the minimally invasive spinal surgery market.

The company’s financials show the effects of the Covid-19 pandemic on elective surgeries, as revenues have dropped in the first half of 2020.

I expect as the effect of the pandemic wanes, we will see a rebound of topline revenue as more surgeries are performed.

Selling, G&A expenses as a percentage of total revenue have risen, likely due to Covid-19 circumstances; its Selling, G&A efficiency rate has swung to slightly negative territory also.

The market opportunity for MIS products is expected to grow in the years ahead, fueled by increasing demand from older populations including the baby boom generation.

As to valuation, compared to competitor Alphatec, the IPO is markedly higher priced, with its EV/Revenue multiple 50% higher than ATEC’s.

While I favor SPEL’s minimally invasive approach and market positioning in a growing industry, I don’t like its assumed premium, so I’ll pass on it for now.

Expected IPO Pricing Date: October 14, 2020.

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Disclosure: I/we 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.



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