Tornier Files for IPO
BY JOHN MCCORMICK, JUNE 8, 2010
Despite recent market turmoil, fast-growing extremities implant leader Tornier made a confident statement about its business outlook by filing for a $205 million initial public offering (IPO) yesterday.
After a 16-month nuclear winter, healthcare IPOs came back with a vengeance in the second half of 2009. Most companies able to go public were profitable service oriented firms that the markets saw as having solid internal liquidity (cash flow) characteristics and strong external liquidity (unlikely to undertake further dilutive financings).
This year, some earlier stage companies, notably in pharma, have dipped their toes in the water and have been able to get out into the public markets.
Curiously absent, have been medical device companies. The one notable device company IPO to take place over the last two years was AGA Medical which makes vascular occluders. AGA has annualized revenues north of $200 million and normalized cash flow margins in the neighborhood of 18%. It is clear to us that the markets are still looking for revenue scale when it comes to device companies. Scale drives cash flow which, like we noted above, allows for internal liquidity. If scale reaches a critical mass, the company can raise enough capital to ensure that the problem of obtaining financing is solved so external liquidity is achieved.
Liquidity begets liquidity therefore and device companies of scale are considered scarce and valuable assets in this difficult market.
Along comes Tornier. Tornier is a well respected 70-year old global player in shoulder, elbow, wrist, hand, ankle and foot (extremities) along with niche products in hip and knee. The Company sells over 70 product lines in about 35 countries. Acquired by a Warburg Pincus in 2006, Tornier invested heavily in developing US sales channels, product innovation and select acquisitions, which (i) augmented its leading position in shoulder implants and (ii) added sports medicine, biologics and other implants to its arsenal.
During the investment phase, Tornier effectively incurred deliberate losses to develop sales infrastructure and enhance technologies. In 2008, for example, the Company incurred negative $2.2 million in normalized EBITDA (unlevered cash earnings). To do what? Achieve scale.
As Tornier continued to build scale - reaching over $200 million in revenues in 2009 - the normalized earnings have not only broken even (2009 was $10.6 million), but have continued to grow along with increasing scale (1Q:10 EBITDA now annualizes to $18.8 million). If one reads the fine print of the offering document just filed with the Securities and Exchange Commission, management incentive plans are closely tied to corporate profitability. This demand for internal liquidity coupled with use of IPO proceeds to pay down debt all points meeting market demands for financial flexibility and scale.
This all positions Tornier well away from the pack of small pre-profit pharma companies going public this year and puts it in a category of a more serious player. Even during this period of market volatility, we applaud the move and it will be fun and interesting to see how the capital markets ultimately price this deal.
