K2M’s Third-Quarter Revenue Rises 6 Percent

The third quarter of 2017 was financially solid for K2M Group Holdings Inc.

But it wasn’t an exceptionally lucrative period for the company, thanks to Harvey, Irma, and Maria. The three hurricanes that struck the U.S. mainland and Puerto Rico in late summer cut into K2M’s profits as it forced the cancellations of untold numbers of surgical procedures. “Although we continued to see growth, our third quarter revenue performance was impacted by slower initial on-boarding of the new distribution team in the U.S., disruption of account activity and canceled procedures related to the hurricanes in Texas, Florida and Puerto Rico in early September,” K2M President and CEO Eric Major said.

Nevertheless, the company’s overall performance was decent. Overall revenue rose 6 percent to $62.7 million (5 percent on a constant currency basis), driven primarily by higher sales volume from new surgeon users in the United States. The increase, however, was partially offset by a decline in revenues from existing U.S. and U.K. customers and lower Japanese revenue.

“Third quarter deformity trends were strong in July and August and we experienced strong headwinds in September. U.S. sales growth in our degenerative procedure category continued to be fueled by our new product introductions including our industry-leading 3D-printed portfolio, offset partially by modestly weaker procedure volumes as compared to last year,” Major said.
 
U.S. revenue increased $2.5 million, or 5.4 percent year-over-year, to $48.5 million, and international revenue increased $800,000, or 6.4 percent year-over-year, to $14.2 million. Third quarter 2017 international revenue increased 5.2 percent year-over-year on a constant currency basis. Foreign currency exchange impacted third quarter international revenue by approximately $100,000, representing approximately 112 basis points of 2017 international growth year-over-year.

Net loss rose $600,000 to $8.5 million and adjusted EBITDA fell nearly $2 million to $900,000 for the three months ended Sept. 30.

By procedure category, U.S. revenue in the company’s complex spine, MIS and degenerative categories represented 41.4 percent, 15.9 percent, and 42.7 percent of U.S. revenue, respectively, for the third quarter. Domestic complex spine sales rose 3 percent to $20 million, while degenerative proceeds swelled 5 percent to $20.7 million and minimally invasive revenue jumped 14 percent to $7.7 million.

Gross profit for the third quarter of 2017 increased 6.1 percent to $42.2 million, compared to $39.8 million for the third quarter of 2016. Gross margin was 67.4 percent for the third quarter of 2017, compared to 67.1 percent for the prior year period. Gross profit includes amortization expense on investments in surgical instruments of $3.5 million, or 5.5 percent of sales compared to $3.5 million, or 5.8 percent of sales, for the comparable period last year.
 
Operating expenses for the third quarter of 2017 increased $3.7 million, or 8 percent, to $49.6 million, compared to $45.9 million for the third quarter of 2016. The increase in operating expenses was driven primarily by a $2.2 million increase in sales and marketing expenses, compared to the comparable period last year.
 
Loss from operations for the third quarter of 2017 increased $1.2 million to $7.3 million compared to a loss from operations of $6.1 million for the comparable period last year. Loss from operations included intangible amortization of $1.8 million and $2.6 million for the third quarters of 2017 and 2016, respectively. 
 
Total other expenses for the third quarter of 2017 decreased $800,000 to $1.1 million, compared to $1.9 million last year. The decrease in other expense, net, was primarily attributable to an increase of $1.2 million in unrealized gains from foreign currency remeasurement on intercompany payable balances, partially offset by an increase in interest expense of $400,000 from the Convertible Senior Notes issued in August 2016.   
 
Net loss for the third quarter of 2017 was $8.5 million, or 20 cents per diluted share, compared to a loss of $7.9 million, or 19 cents per diluted share, for the third quarter of 2016.

Third Quarter Product Introductions

• On July 6,  the company’s NILE Proximal Fixation Spinal System, a spinal system specifically designed for proximal construct augmentation, received 510(k) clearance from the U.S. Food and Drug Administration (FDA) and a CE Mark.
• On Sept. 14, K2M launched (worldwide) EVEREST Minimally Invasive (MI) XTower instrumentation—an enhancement to the EVEREST MI XT Spinal System.
• On Sept. 29, the company received 510(k) clearance from the FDA for its YUKON OCT Spinal System.

“We have made significant progress in 2017 toward our goal of introducing new and innovative spinal implant solutions,” Major said. “We have supplemented this organic growth activity with strategic acquisitions of intellectual property for expandable implants and a cervical vertebral body replacement device that is the first and only static corpectomy cage in the world to receive a cervical 510(k) clearance. We also announced an important strategic collaboration with Brainlab, one of the world’s leading imaging and navigation companies. We remain confident in our ability to drive above-market growth in the U.S., fueled by our continued focus on leading the spine market by introducing new and innovative spinal implant solutions to help surgeons care for patients around the world who suffer from debilitating spinal pathologies.”

Q3 Strategic Highlights

• On July 10, K2M announced the signing of a new, long-term, exclusive agreement with Mitsubishi Corporation subsidiary Japan Medicalnext Co., Ltd., a wholly-owned entity of MC Healthcare, Inc. and a prominent supplier of medical devices in Japan, for the distribution of K2M’s innovative spinal technologies.
• On Aug. 3, the company acquired the exclusive license to a portfolio of 17 issued and pending patents for expandable interbody technology. 

2017 Outlook

The company reaffirmed its fiscal year 2017 revenue guidance expectations, expecting total revenue on an as reported basis to range between $255 million and $257 million. The guidance represents growth of 8 percent to 9 percent year-over-year, compared to total revenue of $236.6 million in fiscal year 2016. Total revenue on a constant currency basis is expected to increase 8 percent to 9 percent year-over-year in 2017. K2M expects its U.S. business to grow approximately 8 percent to 9 percent year-over-year in 2017 and international sales to expand approximately 9 percent on a constant currency basis.
 
The company updated its fiscal year 2017 guidance expectations for net loss and adjusted EBITDA loss. Executives now expect a total net loss of approximately $37 million to $35 million, compared to prior expectations for net loss in a range of approximately $34 million to $31 million. Adjusted EBITDA should range between $1 million and $3 million, down from prior expectations of approximately $6 million to $10 million.
 
K2M Group Holdings Inc. develops complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. K2M’s Balance ACS is a platform of products, services, and research to help surgeons achieve three-dimensional spinal balance across the axial, coronal, and sagittal planes, with the goal of supporting the full continuum of care to facilitate quality patient outcomes. The company is based in Leesburg, Va.