Tornier Raises $115mm in IPO

Joining the ranks of 25 other orthopedic implant manufacturers who’ve “gone public, ” venerable French (now American) supplier of shoulder, ankle, wrist and other extremity implants, Tornier NV (TRNX) sold about a quarter of itself to the public on February 2, 2011, raising more than $100 million.

Mixed Week of Public Offerings

Interestingly, two other medical technology companies also tried to go public that same week—Epocrates, Inc.(EPOC) and BioHorizons, Inc. Two out of three made it. Tornier’s shares found buyers at the low end of the expected selling price range and actually sold off 5% that first day of trading. Epocrates sold at the top end of its range and buyers pushed the price of the stock up another 37% before the closing bell. But BioHorizons, the dental supplier owned by HealthpointCapital, failed to find enough buyers and management decided to pull the offering. The prior week, web-based blogging site Seeking Alpha had criticized both BioHorizons and Tornier saying, in the case of BioHorizons:

“BHZN (BioHorizons) is speculative, and has lost money for the past three years. 67% of IPO proceeds are to pay debt to BHZN’s largest shareholder, a red flag in view of the financial track record. Sales were flat from 2009 relative to 2008, and increased 20% for the nine months ended September 2010 versus the year earlier period. Gross margin is only 30%. $42mm (67%) to pay debt held by HealthpointCapital, the principal and largest stockholder, as of September 30, 2010.”

As for Tonier, Seeking Alpha called it ‘expensive”:

“Expensive leveraged buyout that’s not producing `results. Only 15% top line annual revenue growth since 2009. 19% loss on revenue for the nine months ended September 2010. Adjusting for IPO proceeds debt repayment the loss is still very high, 14% of revenue.”

Seeking Alpha notwithstanding, it’s clear that institutional stock buyers are starting to warm up to orthopedic equities. Mike Matson, senior analyst at Mizuho Securities, summarized the developing mood on Wall Street well with his recent comments—which we loosely characterize below:

• Second half of 2010 orthopedic industry sales were more solid and positive than the first half of the year. After a tough couple of years, the orthopedic industry is stabilizing, thus setting the stage for higher rates of unit sales growth in 2011. A slowly improving employment picture in the U.S. combined with increasing numbers of patients (courtesy of the Woodstock generation) are prompting most analysts to forecast that constant currency recon growth will improve in 2011.

• Higher sales growth rates in Tornier’s markets than large joint recon. Layered over the steadily improving large joint recon market is an even faster growing extremity/sports medicine/orthobiologics/trauma market. In Tornier’s SEC filings, management offered the following table (source: Millennium Research) to illustrate this basic point.

(1) Based on data provided by Millennium Research Group
(2) Based on management's experience and industry data. Hip and knee addressable market limited to selected international geographies
Source: Tornier S-1

• Valuations are at historically attractive levels. In the week that Tornier’s stock hit the market, the average orthopedic company in our universe was trading at at a mere 13x earnings while the broader S&P 500 Index was trading at 24x earnings.

• Global pricing might firm up now that Japanese cuts are due to lapse. In a recent note to investors, Matson noted that the biennial Japanese reimbursement cuts end this coming April. In his view, that should improve global pricing by about 40 basis points.

Tornier Begins Yet Another Chapter

It’s been a long road for Tornier. The firm was founded in the immediate aftermath of World War II by René Tornier in Saint-Ismier, France, and began corporate life by manufacturing dental surgical products. Over the course of the next 35 years, the company expanded into hip, knee and shoulder implants. Rene Tornier’s son, Alain Tornier, succeeded his father as president of the firm in 1976 and 30 later (2006) he sold control of the firm to a U.S.-based private equity group led by Warburg Pincus, Vertical Group and Split Rock Partners.

Doug Kors, formerly of Spine-Tech, Inc.and American Medical Holdings, Inc., became president and CEO of Tornier in 2006. Over the ensuing five years, Kors moved the company from France to Minnesota, increased R&D investment from $3.0 million in 2006 to $18.1 million in 2009 and grew both Tornier’s product portfolio and sales force significantly.

Tornier, in 2011, is a global supplier of surgical implants and instruments for injuries and disorders of the shoulder, elbow, wrist, hand, ankle and foot. In total, Tornier markets more than 70 product lines in approximately 35 countries.

Among the technological innovations attributed to Tornier are the porous orthopedic hip implant, the application of the Morse taper, and the reversed shoulder implant in the United States.

Products

Tornier’s principal products divide into four major categories:

1. Upper extremity joints and trauma. Upper extremity products include joint replacement and bone fixation devices for the shoulder, hand, wrist and elbow. Tornier’s global revenue from this category for 2009 was $125.5 million, or 62% of revenue, up 15% over the prior fiscal year. Key products are the Aequalis Shoulder Joint, Affiniti Shoulder Joint, Ascend Shoulder Joint and Aequalis Trauma Systems. Latitude Elbow, Pyrocarbon Radial Head and CoverLoc Wrist Plate.

2. Lower extremity joints and trauma. Lower extremity products include joint replacement and bone fixation devices for the foot and ankle. Tornier’s global revenue from lower extremity joints and trauma for 2009 was $20.4 million, 10% of revenue, which represents growth of 12% over the prior fiscal year. Key products are the Salto Talaris Ankle Joint, Salto Ankle Joint, Futura Foot Implants, Osteocure and Nexfix Fixation System.

3. Sports medicine and orthobiologics. Sports medicine and orthobiologics product category includes products used across several anatomic sites to mechanically repair tissue-to-tissue or tissue-to-bone injuries in the case of sports medicine, or, to support or induce remodeling and regeneration of tendons, ligaments, bone and cartilage, in the case of orthobiologics. Tornier’s revenue from sports medicine and orthobiologics for 2009, was $6.6 million, or 3.3% of overall revenue, which represents growth of 162% over the prior fiscal year. Key products are Piton Knotless Suture Anchor, ArthroTunneler, Insite Suture Anchors and Conexa.

4. Large joints and other. Tornier’s global revenue from large joints and other products for 2009, was $49.0 million, or 24% of overall revenue, which represents growth of 2% over the prior fiscal year. Key products are the Linea anatomic stem, Pleos Hip or Knee Navigation System, HLS Knee Implants and TBCem Bone Cement.

Tornier’s Long-Term Business Strategy

Long term, and this will be how Kors and his team will be judged by public investors, Tornier’s strategy is to:

1. Drive a “specialists serving specialists” strategy. Kors and his team have introduced into Tornier the concept of extremity specialists. That’s easier said than done—particularly since extremity products have historically been sold by large joint sales people. But, if successful, creating such a dedicated sales force should allow Tornier to more effectively bring to market technologically sophisticated implants and instruments. Fact is, the extremity market has been underserved both in terms of sales coverage and technology. So the specialist approach is an interesting approach which, if executed well, should deliver strong dividends to Tornier.

2. Devote significant resources to advancing the science and education

   of treating clinical problems in extremities. Again, Tornier’s core theory is that extremity treatment has been a bit of a backwater in orthopedics and that more scientifically and biologically sophisticated implants will result in better patient outcomes. Kors is treating this as an opportunity to create a series of training courses and techniques. Specifically, he has set up the Tornier Master's Courses in shoulder and ankle joint replacement, The Fellows and Chief Residents Courses, and a number of clinical concepts courses. Tornier is also setting up and maintaining a registry for surgeons to use to study outcomes of procedures in which Tornier’s extremity products are used.

3. Increase the pace with which new technologies are brought to the extremity surgeon. Kors is focusing his group specifically on joint replacement, as well as sports medicine and orthobiologics—all of which are particularly important to extremity surgeons. Since moving the firm to Minnesota, Kors et al., have significantly increased R&D spending and is putting roughly $20 million annually to new product development.

In the Fishbowl

Kors and the team at Tornier are now in the fish bowl and they have set out a logical and compelling set of objectives. Supporting them is probably the savviest group of orthopedic investors ever assembled. Bess Weatherman from Warburg Pincus was the principal strategic investor in Kyphon. Dave Stassen from Split Rock was, initially an investor, then CEO of Spine-Tech. Vertical Group has a long string of major wins. They have combined their talents behind Tornier. It will, however, be a more complex task than, say, Kyphon or Spine-Tech.

Extremities is the Balkans of orthopedics. It is highly fragmented and controlled by a vast array of local fiefdoms. So, we share the investor’s confidence while also are curious to see how these talented and now cash-rich managers tackle the unique problems inherent in the extremity implant and instrument market.