Orthopediatrics (KIDS), a developer of pediatric orthopedic implants and instruments, made a successful IPO debut last week. The deal priced at $13, within its expected range of $12-14. However, it opened at $18, which was well above where the IPO priced. Since the name is not well known, we wanted to provide some color on what they do.
Orthopediatrics says it's the only medical device company focused exclusively on products for the pediatric orthopedic market, which the company believes has been largely neglected by the orthopedic industry because it's seen as too small to invest heavily in. However, KIDS sees an opportunity here. The company explains that children are not just small adults. Their skeletal anatomy and physiology differs significantly from that of adults, which affects the way in which children with orthopedic conditions are managed surgically.
Historically, there have been a limited number of implants and instruments specifically designed for children. As a result, pediatric orthopedic surgeons often improvise with adult implants repurposed for use in children, resort to freehand techniques with adult instruments and use implants that can be difficult to remove after being temporarily implanted. These improvisations may lead to undue surgical trauma and morbidity.
KIDS currently markets 21 surgical systems that serve three of the largest categories within the pediatric orthopedic market: (i) trauma and deformity, (ii) complex spine and (iii) ACL reconstruction procedures. KIDS expects to expand to other markets over time, including active growing implants for early onset scoliosis and limb length discrepancies, other sports-related injuries, patient-specific templates for spine surgical procedures and other orthopedic trauma and deformity applications.
Its products are used by pediatric orthopedic surgeons, who, unlike orthopedic surgeons focused on treating adults, are, for the most part, generalists treating a wide range of congenital, developmental and traumatic orthopedic conditions. As a result, these surgeons generally represent a single call point for KIDS' broad range of products. Furthermore, KIDS believes its salesforce should benefit from customer concentration as it estimates that 62% of US pediatric procedures in 2015 were performed in only 268 hospitals.
KIDS believes its products are characterized by stable pricing, few reimbursement issues and attractive gross margins. Also, due to the high concentration of pediatric orthopedic surgeons in relatively few hospitals, KIDS believes it can accelerate its market penetration and strengthen its position as the category leader in pediatric orthopedics.
A bit of a headwind is that this market has not historically relied on age-specific implants and instruments. KIDS needs to overcome: 1) older surgeons' familiarity with repurposing adult implants for use in children and 2) KIDS' current lack of published long-term data supporting superior clinical outcomes by its products. However, KIDS believes its efforts in surgeon training, collaboration and marketing address these issues, particularly with younger surgeons.
Turning to the financials, KIDS is not yet profitable and is small but it has decent top line growth. In 2015, revenue grew 31% to $31.0 mln, then in 2016, revenue grew 20% to $37.3 mln. For 1H17, revenue grew 21.5% YoY to $21.6 mln. Gross margin in 1H17 came in at 75% vs 72% in 1H16. So it has decent gross margins but KIDS reports losses on an operating basis.
In sum, although the IPO opened sharply on its first day and there are some good things here, we caution this is a small company with a market cap of just over $225 mln. Also, while getting closer to profitability, KIDS is still reporting losses and is still quite small (2016 revenue below $40 mln). However, it has decent revenue growth and is the leader in this niche market that has been underserved by the big players.