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Orthopedic and Dental Industry News Complete Archive »

Is Kyphon #2 Behind Sofamor Danek in terms of Spine Industry Market Power? BY ROBIN R. YOUNG CFA, AUGUST 16, 2004

On the heels of its first $50 million quarter, Rich Mott, Kyphon's CEO, predicted that his firm would post revenues between $210 and $212 million for the year ending this December. Three years ago, in 2001, Kyphon booked sales of $36 million, spent 75 cents of every sales dollar on selling and marketing ($28 million), and reported an $18 million annual loss. This year, Rich is confident enough to guide the street to a profit of about $19 million.

It was an unconventional move three years ago to allocate such a high percentage of sales dollars, in effect, to create a single product sales force in an orthopedic niche market. Losing $18 million on $36 million in sales is unusual among medical device companies. Particularly if the gross profit margin on those revenues is as high as 78%. Thirty six million in sales and nearly $28 million in gross profit. More typically, such a company would manage its selling and marketing expenses to record at least a 10% operating profit margin.

But with uncommon leadership at both the board and executive level, Kyphon chose another route. Kyphon's management decided to accelerate selling and marketing expenses to extraordinary levels in an attempt, we would characterize, to overwhelm the still nascent vertebral compression fracture market.

In effect, three years ago, Kyphon's board of directors decided to spend the company's entire gross profit on its sales force. The following year in 2002, Kyphon's board decided to increase its selling and marketing spending by another 56%; then another 56% in 2003. By the end of the current year, Kyphon's spending on selling and marketing will likely exceed $100 million. That is roughly 4x more than the revenues of Kyphon's nearest competitor!

The stock market has clearly rewarded that 3-year old decision and afforded Kyphon a $1billion market value. To put this in perspective, the only other firm with an arguably superior sales force in spine is Sofamor Danek. Kyphon has now, we believe, surpassed DePuy Spine and Synthes in terms of market power in the Spine industry. And it has done this with a single product platform. That is probably the most impressive part of the entire story. What happens when Kyphon begins to add 40 or 50 new products annually to its distribution system? Even faster revenue growth; even higher profit margins?

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