Famous Private Equity Firm Bets on Spine

New York-based private equity firm, Kohlberg & Company, L.L.C., is investing in the spinal implant industry and selected privately held, Marietta, Georgia-based spine company, Amendia, Inc., as the platform to build on.

Founded by legendary private equity pioneer Jerome Kohlberg, this New York-based firm has more than $10 billion of transactions under its belt. Kohlberg’s MO is simple. Buy a controlling interest in a platform company. Beef up management. Then, through a combination of organic and M&A growth, shift that company into a higher value creation gear.

Other industries where Kohlberg has successfully turned Chevy’s into Corvettes include parking services (Central Parking Systems and SP+), automotive parts (Pittsburgh Glass Works) and sports (Bauer equipment—hockey, lacrosse, baseball and softball).

After 25 years and $10 billion, Kohlberg has a well-established industry investment pattern which is described on its website as follows:

“Kohlberg typically provides equity capital of $50 million to $300 million…and as necessary we have and can augment our equity scale capability with co-investment from Limited Partners in Kohlberg Funds. We seek to generate attractive rates of return for our investors by partnering with management teams to execute transformational business strategies.”

Among Kohlberg’s value creation strategies is an aggressive add-on acquisition program. Kohlberg funds an average of two add-on acquisitions per platform investment.

Now it’s spine’s turn to experience the Kohlberg investment approach.

Welcome to the 2016 Spine Industry

Eight years ago, when Amendia was founded, the spine industry was very different. There were only two pure play spinal implant companies in the public stock markets—NuVasive, Inc., which was reporting sales of about $250 million and had a $1.6 billion market cap, and Alphatec Spine, Inc., which had sales of $101 million and a $185 million market cap.

Today there are nine pure play public spine companies. DePuy bought Synthes Spine and Zimmer bought Biomet Spine. This year NuVasive is reporting about $930 million in annual sales and is valued at around $2.6 billion. Alphatec is putting up $190 million in sales and has a $24 million market value.

A lot has changed.

Ironically, while every other sector of orthopedics has consolidated, spine has fragmented. The 2016 spine market is a confederation of market sectors—cervical fixation, thoracolumbar fixation, minimally invasive surgery (MIS), interbody fusion, deformity, motion preservation and vertebral compression fractures.

Emerging growth companies in spine are finding success within this complex spinal implant market by focusing innovation at the segment level where they can more easily differentiate and find reimbursement support.

Traditional thoracolumbar fixation remains the largest single sector in spine—but just barely. Within a few years, MIS should be spine’s largest sector. It is the fastest growing sector. NuVasive, for example, innovated the lateral MIS approach and that fueled ten years of exceptional sales growth.

Degenerative disc disease and lumbar fusion, long the bread and butter of spine, remain under a reimbursement cloud and is steadily giving up market share to such innovative procedures and implants as MIS decompression. Probably the best studied example of this is Paradigm Spine, LLC’s Coflex which recently reported favorable five-year, head-to-head data against lumbar fusion.

Marrying biologics with instrumentation—Amendia’s positioning—is the basis for firms like SeaSpine Holdings Corporation, Xtant Medical Holdings, Inc. or RTI Surgical, Inc. Biologics and motion preservation are also gaining share.

The competitive environment in spine is substantially more intense in 2016 than it was eight years ago.

While Medtronic Spine remains the clear market leader with DePuy Synthes Companies solidly #2, the rest of the market has been carved up among a growing list of companies. The market, we think, can be divided into three basic groups of companies.

• Market Leaders – 55% Market Share: Medtronic Spine and DePuy Synthes. As the U.S. market for spinal implants, instruments and biologics changes at the hospital and payer level, there will always be a seat at the table for these two companies. If the market is a game of musical chairs, two of those chairs are reserved for ‘Medtronic Spine’ and ‘DePuy Synthes’.

• Mid-Stage Growth Companies – 26% Market Share: NuVasive, Stryker Spine and Globus Medical, Inc. These companies have been pulling share away from the market leaders for the last decade. They have complete product lines and compete head-to-head with the big guys. In the game of hospital musical chairs, they may compete as much against each other as they do against the two market leaders.

• Emerging Growth Companies – 19% Market Share: These are limited product offering companies that rely on innovation, engineering and differentiation to build market share within certain treatment niches. K2M, Inc. and LDR Holding Corporation, for example, have effectively built leadership positions in deformity and motion preservation, respectively. To a great extent, the pathway to success for emerging growth companies is paved with innovation, reimbursement carve outs whenever possible, and a version of the surgeon champion.

Over the last three years, the two largest spinal implant companies have lost market share while Globus Medical, K2M, LDR, NuVasive, Stryker Spine, Zimmer Spine and other small spine suppliers have consistently gained share.

Unfortunately, over this same period research and development spending in spine has declined as a percent of sales.

The reason, we think, product R&D has declined as a percent of sales is because innovation itself is changing. In U.S. healthcare today, the biggest drivers of innovation are logistical and process based changes at the hospital/ambulatory surgical center (ASC) level. Implant and instrument innovation continues to face cost and regulatory hurdles while other innovations like packaging which eliminates the need for repeat sterilizations or pre-operative treatments or better post-op care are coming to market faster and easier.

Amendia

Kohlberg’s platform with which to enter the spine industry is an eight-year-old, $100 million (revenue) spinal implant company named Amendia. Amendia has grown rapidly already and has built a reputation for successfully pairing biologics with instrumentation.

Amendia is also vertically integrated and has its own manufacturing capabilities.

In July 2015, the company acquired New Jersey-based Custom Spine, Inc. Thirteen-year-old Custom Spine brought new MIS, cervical and thoracolumbar implants including an innovative articulating interbody spacer to Amendia. With Custom Spine, Amendia was able to significantly improve its implant and instrumentation offerings to surgeons.

And now, it has Kohlberg’s cash and an expanded management team.

The Team

As part of the Kohlberg’s investment, Amendia’s senior management expanded to include Chris Fair (incoming Chief Operating Officer and board member), Larry Boyd, Ph.D. (Executive Vice President, Research & Development), and Scott Bruder, M.D., Ph.D. (Kohlberg’s strategic advisor and member of Amendia’s Board of Directors and Executive Committee).

Fair, who had been advising Amendia for years had previously worked at DePuy Spine, a Johnson & Johnson Company and led sales & marketing at St. Francis Medical prior to its acquisition by Kyphon, now Medtronic.

Bruder, had previously served as Chief Medical and Scientific Officer of Stryker, Chief Science and Technology Officer of Becton Dickinson (BD), and as a Worldwide Vice President at DePuy, alongside Fair

All three are joining Jeff Smith, Amendia Founder & CEO, Tim Lusby, Founder and President, and the entire Amendia team.

Before starting Amendia, Smith was Executive Vice President at Synovus Securities, Inc., which is affiliated with Synovus Financial Corp., a $30.0 billion financial institution. Before that he was a Senior Vice President at investment banker Morgan Keegan, Inc.

Before joining Smith to start Amendia, Lusby was President of NBD, Inc. and had started several medical service and medical device companies since 1992. Since 2002, he had been focused on spinal devices.

When we asked Chris Fair what the vision of the new team is, he said:

“We believe that there is a tremendous opportunity to bring a focus of spine professionalism to the community. We are seeing many spine companies shift away from customer centric ideals to more general corporate initiatives and we are hearing from the spine surgeon that they feel abandoned in what was always a healthy partnership between company and physician. We also feel that because Amendia is a vertically integrated business and has state of the art manufacturing, we have an advantage relative to speed and agility as well as the ability to greater control costs and margins. Lastly, our ability to attract great talent will be a major focus. Upon the close of the transaction, we added over 80 years of spine experience to the management team and we are just getting started. We are committed to bringing in experienced and talented personnel across the organization as well as provide great development opportunities for the existing team. There really has never been a better time to be part of Amendia as an organization.”

Kohlberg’s Timing

Kohlberg’s timing is interesting.

The industry today has changed significantly in the eight years since Amendia was founded. Is the spine industry today more attractive than in 2008? Depends on where you look.

For example, as compared to 2008, the spine industry today has, we believe, a surplus of excellent products in small companies. Given the spine market’s many nooks and crannies, wise application of capital, and management might unlock some serious value creation.

Will the team of Kohlberg and Amendia cobble together a group of innovative spinal implant, biologic, and instrumentation companies to create the next great supplier?

We can’t wait to find out.