October 24, 2015 - 5:36pm EST by
2015 2016
Price: 15.88 EPS 0 0
Shares Out. (in M): 11 P/E 0 0
Market Cap (in $M): 175 P/FCF 0 0
Net Debt (in $M): -47 EBIT 0 0
TEV (in $M): 128 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.


Seaspine (SPNE) is a microcap ($165 million) spine surgery medical products company
spun on July 1st, 2015 from $2 billion market cap surgery products company Integra
Life Holdings (IART). Integra Life Holdings shareholders that bother to look before
selling will see that Seaspine is a serial money-loser that won't turn profitable any time
soon. In fact, the poor historical results of the Seaspine assets and the projected losses
going forward was a major motivation for the spin. Integra Life Holdings wants the
losses off of their income statement. The spinoff is part of Integras restructuring plan
begun in 2012 to improve profitability. Naturally, there's selling pressure from the
spinoff of a relatively small value of a money-losing microcap from a much larger and
much more successful parent. As you might expect, Seaspine is selling for a low
enterprise valuation of about 0.9 times sales. Successful spine surgery competitors
trade at 3 times sales.
So you might say Seaspine is a turnaround situation. But really it's a startup. A startup
is just what the new CEO, Keith Valentine, who left spine-surgery competitor NuVasive
(NUVA) after 14 extraordinarily successful years, was seeking.
Valentine told OTW, “Helping to grow NuVasive from no revenues to a company that is quickly
approaching $1 billion in revenues has been an extraordinary experience and a privilege to serve so
many dedicated shareowners committed to changing spine surgery, and departing the company is a
personal decision for me. The challenging and dynamic nature of start-up businesses has a
tremendous appeal to me andwith the great learning opportunity and dynamic teams I've been
able to experience at Nuvasive—I’m now looking to fulfill long-held professional aspirations that will
focus on that start-up mentality with the goal of leading a company through the evolution of its
growth.” (
Spinning Seaspine isn't at all a surrender for parent Integra. In fact, the plan for
Seaspine is to aggressively invest in R&D, marketing, and distribution growth.
Profitability will be achieved through revenue growth rather than cost cutting. The
losses will likely get worse before they get better. A spinoff was necessary to pursue this
strategy as parent Integra's efforts to improve profitability couldn't tolerate increasing
losses. But Integra spun Seaspine debt-free and with $47 million in cash, obviously a
plan for success rather than dumping the money-losing garbage. This $47 million is
expected to fund the aggressive growth efforts through the five year plan.
That plan, articulated by CEO Valentine on the first conference call, is to stop the sales
decline in the first year, begin single-digit percentage growth in the second year, and
then mid teens percentage growth by the third year. This will be achieved by
aggressively introducing new products. Valentine explains on the first conference call
that Seaspine has failed to grow historically because of inadequate investment from
Integra who was using cash to pursue other growth opportunities (quite successfully in
fact). Seaspine had inadequate R&D spend and only introduced a couple of new
products a year. Valentine will spend more, and expects to increase new product
introductions to 8 to 10 per year. When new products are introduced, some of the $47
million in cash will be invested in the required instrument sets so hospitals and
distributors can actually offer the new products to surgeons. Valentine notes that
unavailable instrument sets, which require significant cash outlays, has been a problem
in the past. Finally, an article in Orthopedics this week notes that Valentine, as chief
operating office of NuVasive the last 8 years, knows personally every major spine
surgeon group in the country. Nuvasive grew from startup to a $2 billion market cap by
introducing numerous innovative products to the market. Spine surgery distributors are
already in talks with Valentine about signing on with Seaspine to sell the next
anticipated series of new products. So increased R&D to introduce more new products,
better financing of the equipment to install those new products, and improved
marketing to surgeons and distributers is the plan. In short, Valentine wants to repeat
the startup success and innovative product introduction that he did at NuVasive. He
believes Seaspine is the right opportunity to do it.
Med Device Online (MDO): You joined SeaSpine earlier this year after a very
successful tenure at NuVasive. Why did you make the switch?
Keith Valentine: Last year, I had a great dialogue with then-CEO Alex Lukianov,
whom I had worked with for nearly 14 years. He was aware that I wanted to take on a
new opportunity and that I was looking at a couple of smaller organizations in the
medical device space, including some that were spine-related. We discussed it for about
six months and then started putting some plans in place for a January 2015
announcement and an April departure.
Soon after that conversation with Alex, the SeaSpine opportunity was announced. I
threw my hat in the ring, and things really started heating up from a due
diligence perspective, as we got to know each other. That was in the first quarter of 2015.
The deeper I got into discovering what SeaSpine would be three different companies
from Integra LifeSciences that were brought together the more excited I became.
I've been in spine for over two decades; in 1992, I started at Danek, which became
Sofamor Danek, which was acquired by Medtronic. During my time in the space, I’ve
learned that it's important to have biologics as a bigger part of your portfolio. It gives
you an edge, not only with your distributors, but also with hospitals.
SeaSpine is a diverse business from a revenue perspective, with half of its revenues in
orthobiologics and the other half in spine implant hardware. So all these factors
combined to make it a great opportunity to innovate and build a unique spine portfolio.
New product opportunities
Seaspine's business is about 50% orthobiologics. The growth opportunity here is in part
to provide lower cost orthobiologics to substiture for more expensive cell-based
therapies. The $800 million cell-based therapy market is experiencing insurance
reimbursement pressure. Orthobiologic solutions to the same problems but at lower
cost is a growth opportunity. Seaspine has their own Orthobiologic manufacturing
facilities. Valentine believes the enhanced ability to innovate in this space gives
Seaspine and competitive advantage over pure spine surgery competitors who buy their
The remaining 50% of Seaspine business is providing interbody devices for spinal fusion
surgery business. In the near term, Seaspine is introducing a series of new interbody
devices using their proprietary nanometalline. This is technology under development
for ten years. It provides a proprietary sub-micron layer of titanium into the surface of
the traditional polymer material (PEEK material) used between vertebrae. PEEK has
the desired deformation characteristics to use between vertebrae. However, the human
body doesn't recognize the polymer material and attempts to encapsulate it. New bone
grows right up to the surface of titanium interbody devices, by contrast, but titanium
doesn't deform under load like the PEEK material. Nanometalline uses the softer PEEK
polymer material but coats it with a tiny layer of titanium so that bone will grow right
next to the interbody device. Seaspine has introduced three new Nanometalline devices
to date with two of the three this year.
Minimally-invasive surgery procedures is another area for innovation. Valentine
pioneered and took market share in this area as COO at Nuvasive and sees opportunity
to do more while at Seaspine.
Seaspine has lost money for years with only modest revenue growth as part of Integra.
In the last 18 months or so revenues have been falling. Orthobiologics are growing
modestly at about 1% a year while their spine hardware business has experienced
revenue drops (13% in the most recent quarter). Even so, a valuation of 0.9 times sales
for a business with normalized gross margins in the low to mid 60 percentile is very
cheap especially in view of the growth opportunities from Nanometalline and in the
orthobiologics business.
Another valuation data point is to look at the price at which Integra acquired the
Seaspine businesses.
First, Integra got into the spinal surgery market when they developed a collagen-based
bone graft substitute (now called Seaspine Mozaik). This led to three acquisitions to
build a spine surgery business.
1. In October 2007, Integra acquired publicly traded IsoTis for $7.25 a share or $51
million dollars. IsoTis's $12.6 million in debt was paid down at closing. IsoTis had $40
million in revenue. The acquisition price was 1.28 times revenues.
2. In August 2008, Integra acquired Theken who made spinal fusion hardware and a
synthetic bone graft substitute. The purchase price was $75 million plus an earnout
based on the next two years earnings. Theken had revenue of $34 million so the
purchase price was 2.2 times sales.
3. In May 2011, Integra acquired Seaspine, a maker of spinal fusion hardware for $89
million. This was 1.8 times their 2010 sales of $49 million.
Seaspine has about 11 million shares outstanding at $16 a share for a market cap of $176
million. Subtracting the $47 million in cash yields an enterprise value of $129 million.
Seaspine's midpoint of guidance for 2015 is revenue of $136 million ($133 to $139
million range).
The current enterprise value is 0.95 times sales. Note that this is considerably less than
all three ratios for the acquisitions. It's also 60% of what Integra paid in total for the
three acquisitions.
If Valentine achieves 15% revenue growth as planned, Seaspine's revenues 6 years out
will likely have doubled to $272 million and the stock would likely trade at a 3 times
revenue multiple like their successful competitors. That would be a market cap of $816
million and assuming some dilution to 12 million shares outstanding a stock price of
$68. No way Seaspine is worth $68 now but there's significant potential share
appreciation if Valentine is successful.
Management and investor incentives
CEO Valentine bought about $1 million of Seaspine stock in September near $15.
Integra Chairman of the board and Seaspine's lead director, Stuart Essig, bought the
exact same number of shares at the exact same price in some evidently coordinated
purchase plan. Coupled with shares acquired in the spinoff, Essig owns 5.9% of
Seaspine. A couple of other officers bought smaller share amounts. Seaspine has
incentive option plans for management as well. So there's significant insider ownership
and options incentives for both management and the lead director.
Other large shareholders include well know Roberto Mignone of Bridger Management
who purchased shares immediately after the spin and reported a 5.6% holding on July
9th. Also well-known Kevin Kotler of Broadfin Capital reported an 8.18% holding on
July 13th that was also obtained during the high volume initial trading. More recently
Arthur Cohen and Joseph Healey of Healthcor Management reported a 5.18% stake.
Fischer Investments also owns a significant stake but those shares were obtained in the
spinoff as Fischer owned parent Integra Life Holdings. There's definitely an interested
and return-motivated shareholder base.
Seaspine is a money losing but well-financed "startup" with a head start. Investors are
paying a pretty low price for the head start. The new CEO has a very strong track record
penetrating the spine surgery market with innovative new products. The task at
Seaspine is to do more of what he has historically done well. He left his job of 14 years
to take on this startup challenge in order to fulfill "long-held personal aspirations."
Investors might bet alongside Valentine by buying Seaspine shares.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Incentivized and historically successful management of a small spinoff

    show   sort by    
      Back to top