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

Carlsbad, California-based Spinal Elements was founded to design spinal medical devices and instruments that utilize 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.

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.

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.

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.

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:

spinalmkt

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)

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:

spinalpl

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).

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.

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.

Credit Suisse is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (8.3%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

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.

My opinion on the IPO is NEUTRAL due to excessive valuation.

Expected IPO Pricing Date: October 14, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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