Revenues in the spine industry have been flat for several years now, with the largest players in the space reporting declines or low-single-digit growth.
Earlier this year Medtronic (NYSE:MDT) said its spine business posted $811 million in sales for its fiscal 4th quarter, flat on a constant currency basis; rival Johnson & Johnson (NYSE:JNJ) reported a 2% decline worldwide during the 2nd quarter, with the U.S. down 7% "impacted by continued softness in the market."
That’s why we were surprised when Eric Major, the co-founder, president & CEO of K2M, said that his privately held firm expects to post double-digit increases this year. Granted, its revenues make it 1 of the smaller players in spine – Major told us that revenues are in the $150 million to $200 million range – but that kind of growth in such a challenged market could fairly be called explosive.
MassDevice.com chatted with Major recently about the origins of K2M, its place as a private company in a field dominated by large, publicly traded players, and its plans for the future.
MassDevice.com: Can you give me a background of the founding of K2M?
Eric Major: K2M started as a concept in discussions in the summer of 2003. It was myself and some other individuals that recognized that in the marketplace there was perhaps an opportunity in responsiveness to the surgeon, specifically with the development of innovative technology around complex spine – dealing with these most difficult deformity cases – and so that concept was a discussion in 2003.
Dr. [John] Kostuik was at Johns Hopkins University at the time. I had previously sold a company that was in the osteoplasty space called American Osteomedics. So I had a management team from that merger. John is constantly a leader in the area of complex spine and there was another contingency of large patent portfolios.
We looked at some different opportunities with a patent portfolio combined with experience running spine companies and this particular interest in the area of complex spine. We got started in 2004 and got started building a portfolio for complex products. Our first product was called Denali and we launched our flagship product Mesa, really developing differentiated technology in the area of treating the most difficult spinal pathologies – scoliosis, trauma and tumor patients – and we started to grow the business and recognized that as we grew we needed a more robust portfolio.
So we started to build out the portfolio in 2007, we entered the minimally invasive arena, started to develop our Serengeti product and launched overseas in 2008. We went through a transaction in 2010 in which we had a large investor – Wells Carson [Anderson & Stowe], a private equity firm – and went through a transaction in August of 2010 and now coming off of that we are now growing rapidly in 27 countries today, entering a new country almost every quarter. Growing rapidly around the world and focused in our core competency area of the complex spine and in minimally invasive surgery and building out a portfolio to compete globally.
MassDevice.com: What was the initial financial backing prior to the 2010 transaction?
Eric Major: In the early days we started off with angel funding and then we had Ferrer Freeman, a venture capital firm, become very good partners with us. They invested in 2006. And then Welsh Carson made the investment in August 2010.
MassDevice.com: Can you share any values of the rounds?
Eric Major: You know, those were the early days of the company and today we are still a private business. I can talk about where we are as an organization today, but from a valuation perspective I can’t really talk about the values of each of those rounds, other than obviously increased volume on each round.
Today we have roughly 350 full time employees; when you include our salespeople around the world – some are direct, some are independent agents, some are distributors – when you include all those we’re about 700 people every day that get out of bed for K2M. We not only have offices in the U.S. but we also have offices in London, in Milan, in Munich and very strong offices and partners in Spain, Tokyo, Japan, and Sydney, Australia.
MassDevice.com: Can you give me a rough idea of your annual revenues?
Eric Major: This year we’re somewhere north of $150 million, we’ll call it between $150 million and $200 million in revenue.
MassDevice.com: Are you looking to expand into other orthopedic areas or are there still areas in spine you’re looking to penetrate?
Eric Major: That’s an interesting question. I don’t get that question very often and it’s an interesting strategic question.
When you look at the spine market globally, we hear a lot about the compression in the market and pricing pressures globally, but we have a patient population that’s expanding, you’ve got a population of patients that are becoming more and more active no matter what decade they’re in, as they continue to age their level and expectations of activity continues to expand.
And then with the expansion globally, we see opportunity in the spine market as still very favorable. Although the whole medtech market has been under pressure, if you look at the market it’s about a $9 billion market, and you look at the complex spine segment, that’s about a billion-dollar segment globally.
We’ve had these discussions broadly – do we look at other segments of orthopedics or neurosurgery? We really believe that our focus is to continue to drive with leading technology, specifically in the area of complex spine – develop the best technology in the world that is discernibly different for difficult deformity and scoliosis cases. And I think we’re there today with our solutions, like Mesa 4/5 and the Rail. We think the Rail has a significant impact in a positive way to support surgeons in their treatment of the most difficult cases.
So that billion-dollar segment of the market, we’re driving to be a market-share leader. We want to be a market-share leader in that sub-segment – that $1 billion segment of complex spine. And if you look at that, a big part of K2M’s business is complex spine. So the other $8 billion of the spine market, clearly that would always be a pull-through piece at K2M. We’ve built out a minimally invasive portfolio; as we continue to build our franchise we’re looking to treat these difficult pathologies through minimally invasive approaches. And so that combination allows us to really differentiate ourselves.
There’s a lot of runway in spine for a company like K2M. We’ve focused in spine. It’s what we do every day. For us to go into the reconstructive business, for us to go into sports medicine or other areas of neuro right now, we think it makes sense for us to stay focused in spine.
MassDevice.com: You’re competing with some big-name players in that market.
Eric Major: Our largest competitors are clearly Medtronic (NYSE:MDT), and Johnson & Johnson (NYSE:JNJ), especially with the rollup of Synthes. In the global market share, with the revenue numbers I just gave you, we’re still single digits, but because of the size business we are and our ability to be very responsive to the customer and move quickly and develop new products.
We’re launching anywhere from 10 to 12 new products or line extensions every year. It’s just been a very fast pace and I think we do a fantastic job of developing new, innovative technology. So our market share, while single digits today, we believe is expanding quickly. We are the largest privately owned spine company in the world.
MassDevice.com: The largest privately held in all of spine, not just your sub-sector of complex spine?
Eric Major: Yes, as far as all the numbers we can see and what everyone reports, we believe that in spine, we are the largest privately owned company in the world. Now the public companies are larger than us. We compare ourselves to the public companies because we don’t know the information on the privates. But against the public companies, we pull either the pure-play spine companies or the spine divisions of the larger companies, and we’ve been either the fastest or 1 of the fastest-growing on a quarter-on-quarter basis. We’ve been in the market now for 2½ years – it’s been a very quick path to our continued growth.
MassDevice.com: Welsh Carson’s portfolio is filled with a bunch of successful healthcare investments and buyouts. What’s you end game? Are you looking for a buyout?
Eric Major: The obvious answer for any company is to build a good business, continue to build a good business. You look at the Welsh Carson history and you look at those portfolio companies, part of us doing the transaction with Welsh is that we believe we picked a 5-star partner. When we went through that transaction in August of 2010, senior management did not change; I remained president & CEO and I remained on the board, but the board did change and we brought on a number of sophisticated members of the board. I really believe we position the company very well now, so that when those medtech markets open up, I think we are well-positioned for an [initial public offering]. I think that’s one of the obvious potential next steps for the organization. When something like that would happen is really unknown.
MassDevice.com: I noticed you’re saying "when" and not "if."
Eric Major: I believe that that’s the direction of the company. The question of "if," sure. We are not in a rush. That’s the beauty of having a private equity partner like Welsh Carson, a long-term holder that builds companies and builds businesses. When I say "when," I mean that could be in a year or it could be in 5 years. And there is the possibility of staying private, but for right now when the timing is right we’ll continue to look at that as possibility for the organization and right now we’re building the business. The markets are doing very well overall, the kind of general market we’re watching, but I think the space for medtech IPOs – some companies run for a IPO because they have to have the strategic capital to go to the next step, but we’re in a very interesting place to have deep pockets like Welsh Carson as our partner. We can pretty much look at any strategic move that a company can as we continue to build and put strategy around being a leader in the space.
MassDevice.com: So obviously with the other players you’re up against, there’s room for you to grab market share from them. J&J and Medtronic have stabilized and we’re looking at flat single digit growth in the short term. I wanted to get your take on the short term and longer term.
Eric Major: The market continues to grow in terms of the patient population. As we continue to grow and as all the spine companies continue to grow more global in nature, opportunities in new markets for patients who need spine care is expanding around the world. From that perspective there’s tremendous opportunity.
Now we’re really still innovating in spine. We’re still developing new products to treat patients who didn’t have the same level of treatment just a few years ago. So I think that aspect of innovation is still in spine. So that’s going to drive growth.
The other side is the pricing pressure, both domestically and globally, the economic issues globally. But I would concur with the general statement that there’s a stabilization, so we’re in a unique place. When you’re K2M with a partner like Welsh Carson, we can grow in the market because we’re taking market share as we expand and really focus specifically on spine. We don’t lose sight by focusing in recon or sports medicine and other areas. And by focusing completely in spine, we can really build that business. Generally in the market we continue to see pricing pressures. There’s a lot of continued uncertainty across the entire medtech space just to understand how the Affordable Care Act and other changes are going to affect our business, but I think generally we’re seeing some stabilization and continued growth. K2M, for example, is having a very strong year with double digit growth this year even in the face of a lot of other companies – even companies close to our size – reporting single-digit growth.
MassDevice.com: What are the top 3 concerns keeping you up at night?
Eric Major: I need to preface this by saying that I think there’s always going to be challenges in any business. Wherever you’re sitting at that time, people are going to be stating the issues and how you handle it. In other words, even during the heyday, we were saying there were issues in the sector.
So right now yes, there’s been a lot of discussion around medtech and in the microscope of today looking through the viewfinder, the things that we’re thinking about when managing the business on a regular basis, on a global regulatory basis.
The Affordable Care Act specifically, the medtech tax, starting there. The medtech tax is a real tax that has hit our industry and we’ve had to digest it. We accept it, we’ve rolled that into our operations and the real impact of the medtech tax for us has been that we’re still growing, we’re still building our business, but we’re not growing as fast and innovating as much and hiring as many people as we would be if we had those dollars in the business. So the medtech tax is a real hit to the entire medical technology industry, because it has slowed down our hiring. Everybody across the board is hiring less because of the medtech tax, that’s clear.
Secondly, the uncertainty in the regulatory environment. Just understanding the rules as we’re going into new countries and launching new products to ensure we’re meeting those because we as a organization and as a member of AdvaMed always want to make sure we’re meeting global requirements both from an [Foreign Corrupt Practices Act] compliance and regulatory standard. So it’s a big piece of the medtech industry that CEOs are ensuring and requiring a lot of time to ensure that we do it right on a regular basis. So that continued regulatory requirements are things that all the CEOs are managing on a regular basis.
And then 3rd, the economic uncertainty certainly has been something that we’re all trying to manage, and the way we do that is diversification, so by expanding globally and penetrating markets in A-Pac, EMEA, Latin America and the United States, it really allows us to diversify into those markets and frankly by doing that you get perspective from clinical studies and podium presentations and key opinion leaders around the world. I think it makes companies better, because you’re getting input from different perspectives and different patient populations around the world.
Those are the things that we are dealing with every single day to drive a business. So I’m trying to drive my top line and ensure that I have a strong EBITA and with the medtech tax coming in, a year and a half ago I might be hiring X number of employees and that gets hit significantly with the taxes.
So we’re still growing, we’re still hiring, but perhaps not at the same rate. But no matter where you are in time – fast forward 5 years from now, maybe the market is different – there are going to be other issues we ‘re dealing with. And the job of the CEO is to balance that with the environment you’re in at the time. Right now what we’re doing is developing a strategy at K2M that ensures that we’re meeting all the global requirements.
With the FDA, we see a slowdown of approvals, it’s more difficult to bring Class III products into the U.S. So we just have to manage a business that recognizes that and finds more new ways to innovate. And that’s what we’re trying to do every day here at K2M. In line with your earlier question, by being just a spine company I think it allows us as a management team to focus specifically on just the things we can do in spine as a global business to continue to grow and expand and do the right thing strategically. Ultimately, I think if we’re providing innovative new products for patients and if we can keep in mind quality products and innovation to bring new products to the physicians who are treating those patients, then the rest of the business will follow. But you’ve got to do those key things.
The takeaway with K2M is that we’re investing heavily in the space. We’re a hybrid sales force, with over 100 direct sales reps globally. We have offices around the world. We’re launching 10 products every year. While we’re private and we compete with a lot of public companies, because of our partnership with Welsh Carson and Freeman, we have the capital resources to continue to expand and do strategic things that perhaps other private companies are not able to do.
That’s put us in a really unique place and it’s why we’re been able to demonstrate growth, both on the top line and EBITA over the last couple of years. Yes, it’s been a tough economic environment and a tough environment around regulatory uncertainty, but I think what Welsh Carson brought us was a public company standard to the efficiency of our operations, but allowing us to continue with our entrepreneurial spirit of driving the business around responsiveness and innovation.