With today being a bit of a slow news day, we wanted to
provide some color on a recent IPO that broke out to new highs over the past couple of
weeks: OrthoPediatrics (KIDS 26.50, -1.65, -5.86%).
The company is a developer of pediatric orthopedic implants and instruments. It made a successful IPO debut in October 2017. 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. It had been trading mostly sideways since then in the high teens to low $20s until it broke out over the past couple of weeks to around $28.
OrthoPediatrics says that it is 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 for heavy investment. However, KIDS sees an opportunity here. The company explains that children are not just small adults. A child’s skeletal anatomy and physiology differ significantly from that of an adult, which affects the way in which a child with an orthopedic condition is managed surgically.
Historically, only a limited number of implants and instruments have been designed specifically 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 25 surgical systems that serve three of the largest categories within the pediatric orthopedic market: 1) trauma & deformity, 2) scoliosis, and 3) sports medicine/other procedures. KIDS expects to expand to other markets over time.
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 that its salesforce should benefit from customer concentration as it estimates that 62% of U.S. pediatric procedures in 2015 were performed in only 268 hospitals.
KIDS says 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 toward surgeon training, collaboration, and marketing address these issues, particularly with younger surgeons.
KIDS is still small and not yet profitable, but it's growing nicely. In Q1, the company reported revenue of $12.1 mln, up 23.9% year/year. About 72% of Q1 revenue came from the U.S. with the rest generated from international sales. KIDS says it was pleased to see greater than anticipated Q1 revenue growth start the year off so solidly. While all of its product lines contributed to growth, strong domestic scoliosis sales continued to outpace the industry, further establishing KIDS' leading market position in pediatric orthopedics.
So why has the stock been moving up so much? An insider purchase by a director in late May could have acted as a catalyst. The stock jumped higher on the day it was announced on May 24. However, we are a bit surprised by how much it has moved since then. While the purchase size of 2,000 shares was significant, it was not that huge relative to the big move in the stock. It's possible that another catalyst is escaping our notice for now. Regardless, investors have been happy to see the stock move sharply higher. While today’s trading action has seen the stock slip by over 5%, the stock is still up 37% month to date.
In sum, there are some good things here. We caution that this is a small company with a market cap of around $360 mln. Also, while getting closer to profitability, KIDS is still reporting losses and is still quite small (2018 revenue is expected to be below $60 mln). However, it has good revenue growth and is the leader in this niche market that has been underserved by the big players.
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