K2M’s Second Quarter Sales Jump 10.9 Percent

The most recent completed quarter was certainly a fruitful one at K2M Group Holdings Inc.

Second-quarter sales at the Leesburg, Va.-based company are up 10.9 percent (to $65.7 million), or 11.6 percent on a constant currency basis. The increase in revenue was primarily driven by greater sales volume from primarily domestic new surgeon users and newer product offerings, offset primarily by customer declines and lower sales in certain international direct markets as compared to last year.

“Our second quarter product launches and strategic accomplishments reflect continued progress toward our strategic goals of introducing innovative spine surgery technologies, expanding our selling presence and improving our selling productivity which, together, help K2M to increase our share of the global spine market,” President and CEO Eric Major said. “Revenue growth in the second quarter was driven by double-digit growth in the U.S. and high single-digit constant currency growth outside the U.S. During the quarter, we also made progress toward achieving profitability, generating $600,000 in adjusted EBITDA, compared to an adjusted EBITDA loss of $300,000 last year. We have reaffirmed our full year financial outlook—including constant currency revenue growth of 12 percent to 15 percent year-over-year and adjusted EBITDA of $6 million to $10 million—and continue to expect improving results over the balance of 2017.”
 
U.S. revenue rose 12.2 percent to $50.8 million, and international revenue increased 6.6 percent to $14.9 million. Helping drive the solid increase in U.S. sales was a 9.7 percent increase in U.S. complex spine product proceeds, a 25.4 percent growth in U.S. minimally invasive surgery, and a 9.9 percent jump in U.S. degenerative device sales. 

Second quarter 2017 international revenue increased 9.3 percent year-over-year on a constant currency basis. Foreign currency exchange impacted second quarter international revenue by approximately $300,000, representing approximately 265 basis points of 2017 international growth year-over-year.

Gross profit for the second quarter increased 9 percent to $43.2 million, compared to $39.6 million for the same period last year. Gross margin was 65.7 percent compared to 66.9 percent for Q2 2016. Gross profit includes amortization expense on investments in surgical instruments of $3.6 million, or 5.5 percent of sales, for the three months ended June 30, compared to $3.4 million, or 5.8 percent of sales, for the comparable period last year.

Second-quarter net loss totaled $9.1 million, compared to a net loss of $11.1 million in the comparable period last year.

By procedure category, U.S. revenue in the company’s complex spine, MIS and degenerative categories represented 40.1 percent, 17.3 percent and 42.6 percent of U.S. revenue, respectively, for the three months ended June 30.
 
Operating expenses for the second quarter of 2017 increased $2.4 million, or 4.9 percent, to $51.3 million, compared to $48.9 million for the second 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 second quarter of 2017 improved $1.1 million, to $8.2 million, compared to a loss from operations of $9.3 million for the comparable period last year. Loss from operations included intangible amortization of $2.4 million and $2.6 million for the second quarters of 2017 and 2016, respectively. 
 
Total other expenses for the second quarter of 2017 decreased $800,000 to $900,000 million, compared to $1.7 million last year. The decrease in other expense, net, was primarily attributable to an increase of $1.8 million in unrealized gains from foreign currency remeasurement on intercompany payable balances, partially offset by an increase in interest expense of $1 million from the Convertible Senior Notes issued in August 2016.   
 
Recent Product Introductions

• On May 25, K2M launched the MESA 2 Cricket, an enhancement to the company’s MESA 2 Deformity Spinal System. The MESA 2 Cricket provides surgeons the ability to efficiently complete challenging correction maneuvers in all three anatomical planes, with the goal of achieving three-dimensional balance in patients with complex spinal deformities.
• On June 20, the company introduced the SAHARA AL Expandable Stabilization System, the first expandable offering within its interbody portfolio. SAHARA AL is the only lordotic expandable interbody device with integrated screw fixation on the market to help achieve spinal balance.
• On June 22, K2M announced that its MOJAVETM PL 3D Expandable Interbody System received 510(k) clearance from the U.S. Food and Drug Administration (FDA). MOJAVE PL 3D is a first-to-market, 3D-printed, expandable posterior-lumbar (PL) interbody system that features the company’s Lamellar 3D Titanium Technology.
• On July 6, K2M announced that its NILE Proximal Fixation Spinal System, a spinal system specifically designed for proximal construct augmentation, received 510(k) clearance from the FDA and a CE Mark. NILE Proximal Fixation addresses complex spinal deformity cases and consists of bands and connectors that may be used in conjunction with spinal rod constructs for attachment to the posterior vertebral structures at the proximal end of the construct. 

 
Recent Strategic Highlights:

• On April 6, K2M and LifeHealthcare Group Limited announced a new distribution agreement for K2M’s spinal technologies in Australia and New Zealand (ANZ). The K2M/LifeHealthcare distribution partnership dates back to 2010 and has yielded strong growth and a significant spine market position in ANZ. Looking to build on this success, K2M and LifeHealthcare entered into a new five-year agreement with the shared goal of establishing a number one spine market position in ANZ.
• On April 21, K2M received key product registrations in Japan from the Pharmaceuticals and Medical Devices Agency (PMDA), which are now under its control, including the MESA and EVEREST product lines.
• On July 10, 2017, the company 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 spinal technologies. Pursuant to the agreement, Japan Medicalnext is the exclusive distributor of K2M’s spine products in Japan. The terms of the agreement include a long-term partnership of up to seven years. With more than 250 employees—including 50 orthopedic sales professionals—in seven offices located throughout the country, Japan Medicalnext has significant experience in medical device distribution, including the Japanese spinal surgery market.

 
2017 Outlook
The company reaffirms its fiscal year 2017 guidance expectations. K2M expects total revenue on an as reported basis in the range of $263 million and $270 million, representing growth of 11 percent to 14 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 12 percent to 15 percent year-over-year in 2017.

The company continues to expect mid-teens growth in its U.S. business in 2017. K2M now expects mid-single-digit growth in its International business in 2017, compared to an expectation of low single-digit growth previously. Total net loss is expected to be approximately $34 million to $31 million, compared to a total net loss of $41.7 million in fiscal year 2016. Adjusted EBITDA is projected to range from $6 million to $10 million, compared to adjusted EBITDA of $600,000 in fiscal year 2016.
 
K2M Group Holdings Inc. designs, develops, and commercializes complex spine and minimally invasive spine technologies and techniques used by spine surgeons to treat some of the most complicated spinal pathologies. K2M has leveraged these core competencies into Balance ACS, 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.