Post-spin, Integra will operate two business units, Specialty Surgery Solutions and Orthopedics & Tissues Technologies. In 2014, those two units generated $555m and $236m in revenue respectively, representing the vast majority of Integra’s sales. The company will seek to grow both organically and via acquisition, targeting a long term revenue growth rate of 7+% per year and a much faster rate of EBITDA growth.
SeaSpine generated only ~$140m of revenue in 2014, with nearly all of it (~90%) coming domestically. Post-spin, the company will be actually be led by an outsider, Keith Valentine, whose previous experience included a stint as CEO at NuVasive, another spine focused medical device company. John Bostjancic, a former SVP at Integra will become the CFO. Here is how Integra describes SeaSpine’s operations:
The new SeaSpine will consist of a comprehensive portfolio of spinal hardware solutions, including unique interbody devices, minimally invasive surgery solutions, and deformity correction products, as well as IsoTis, a leading brand in orthobiologics, including a full range of osteoconductive and osteoinductive solutions utilizing unique demineralized bone, and synthetic matrices.
It will be broken into two units, Orthobiologics and Spinal Fusion Hardware, with sales being split about evenly between the two. Sounds fancy, but looking a bit closer at the company (there are plenty of presentations out there and of course the Form 10s) and its prospects reveals the true motivation behind the spin. Revenues have been declining in the spine business and looking ahead, the company only sees long term growth coming in at the low single digit percents for its various components. That isn’t going to get anyone too excited, especially considering its sizable operating losses. Despite generating ~60% gross margins, due to ramping up sales efforts, the company has posted operating losses of close to $20m per year for the past 3 years. The company does expect some expenses to come down slightly after the separation due to Integra’s cost allocation policies, but it will still be profusely bleeding money.
The market does seem sizable though and there is room for the company to grow, assuming the greater focus allows the company to grab more share. One positive sign is that the company is planning on releasing a large amount of new products next year, which might juice growth, but the associated losses due to ramping up sales efforts could hurt. Additionally, the company believes that it will be better able to focus its R&D efforts as a standalone entity. The company will be formed with a clean, debt free balance sheet, a line of credit and a $47m cash war chest which should give management a little breathing room.
The company lists a few ‘pure-plays’ as peers which can be used to get a feel for the industry and relative valuation including:
While I didn’t dig too deep to judge the veracity of the peer group, all five companies listed have higher gross margins than SeaSpine, with a range of 67-83%. Some, although certainly not all, even make some money! The TEV/LTM Revenue multiples for the peer set range from 1.1x-7.7x with an average of 4.28x and a median of 4.6x. There is potential for SeaSpine, but execution over the next year or so as it rolls out new products will be critical. On the flip side, Integra should naturally see a margin boost as it sheds a slower growing, loss-making unit.
Disclosure: Author holds no position in any stock mentioned.