Now that Kleiner Device Labs (KDL) has received 501(k) clearance for their new KG™2 Surge™ Flow-Thru Interbody System (KG2), they’re preparing for something called the “Alpha Launch.”
For all of our Equifund members who have invested – or are planning on investing – the Alpha Launch marks a critical inflection point.
Here’s why…
The first successful surgery with the KG2 could fundamentally change the valuation of the company!
If you’re not familiar with how to value medical device companies, here is a wildly oversimplified overview of how it works.
Broadly speaking, all companies are worth the total profits generated over the entire lifespan of the company.
However, because we can’t know for certain how much that will be, the company uses forward looking assumptions about earnings… and then applies a “discount” to that number based on the various risk factors in the deal.
This is commonly known as the Discounted Cash Flow method (or “DCF”).
Now, this method is fine for large established companies who have stable cash flows…
But for early stage medical device companies – which usually operate at a loss for a while before generating any revenue – we have to base valuation models around key assumptions and risk-reducing milestones.
Key assumptions are things like:
- How big is the total addressable market?
- How much of the market can the company capture?
- What price points – and profit margins – can the company sell the products for?
- What is the exit strategy and potential for shareholder return (and how fast could it happen)?
This can give us an idea of how much the company could be worth sometime in the future…
However, because of the risk factors, there is room to negotiate the “correct” valuation of the company (and by extension, the share price).
In order to increase the valuation – or otherwise negotiate financing terms – the team needs to demonstrate to investors they have achieved certain risk-reducing milestones that would justify a higher price.
Major risks-reducing milestones fall roughly into four categories:
- Technology / IP: does it work how you say it will and can you protect it from being copied?
- Regulatory: will regulators let you sell it?
- Clinical: can you demonstrate it works in humans?
- Market: will someone want it and pay for it?
At the time of publishing, Kleiner Device Labs currently controls 30 patents (with 6-8 pending) in their broader portfolio.
The KG™ 1 Bone Graft Delivery Tool (KG1) – the philosophical predecessor to, and proof of concept for, the KG2 – has already been tested by Dr. Kleiner in his own practice with some impressive results.
As mentioned previously, they recently received 510(k) Clearance from the FDA. This means they now have permission to market the new KG2 device and run their upcoming Alpha Launch.
This Alpha Launch will provide critical data for the company as it seeks to develop and commercialize their patent portfolio.
First… it would give the company – and the industry – more confidence that the new KG2 delivers the real world results that it was designed to. This clinical data is the type of proof required to potentially lower the risk for potential acquirers and hopefully increase valuation.
Second… it will provide valuable feedback for the team in terms of product packaging. Currently, the single use tray looks like this.
If the Alpha Launch surgeons indicate they want different items in the package, this could potentially influence the total Cost of Goods Sold (COGS) and pricing.
Speaking of pricing…
Third… it will also give them validation on how much they can charge – a key assumption in financial metrics that influence valuation.
But before they can run the Alpha Launch, KDL still needs to advance through several important milestones.
1) Stockpile Inventory – Due to supply chain issues, it takes ~12-16 weeks to receive new inventory.
According to KDL management, the best case scenario is they’ll have all the inventory they need in the second week of January.
2) Supplier Agreements – This is an agreement between KDL and each of the hospitals (or ASCs) they plan on selling into.
Basically, this document sets the guidelines for how much they are willing to pay for the KG2…
And all 10 of the surgeons who are planning on participating in the upcoming Alpha Launch need to have this in place before they can officially buy the device and use it in the operating theatre.
3) Terms of Engagement (ToE) – A one-page agreement between KDL and a medical device rep to provide support for five (5) cases per surgeon.
Each physician in the Alpha Launch has a preferred medical device representative they like to work with.
KDL has to reach out to that rep to make sure they can carry the product, or if they have other agreements with competitors that would prevent them.
Assuming they’re able to participate, this contract sets expectations regarding compensation with the rep based on the initial testing.
If the surgeon decides they like the KG2 enough to continue using it, then the company advances to the final stage of the sales process.
4) Distribution Agreement – a master level agreement for ongoing sales and distribution of the product
As you may imagine, a Distribution Agreement represents a level of confirmation for the KDL team regarding their product roadmap…
For investors, as KDL advances through each of these risk-reducing milestones, it represents a potential increase in shareholder value…
And once the first surgery has been completed with the new KG2, there is more rationale to increase the valuation of the company.
Considering an Investment in Kleiner Device Labs?
If so, you’ll want to review their offering listed on the Equifund Crowd Funding Portal by going here.
While we can’t say when (or if) the KDL team will decide to increase their valuation…
They’ve indicated they plan on closing this round… get the financial audit they need to raise more than $1.07m under Reg-CF… and reopen their listing at a higher valuation.
If you have any questions for the team, be sure to use the Q&A forum at the bottom of their offering page.
Your early-stage experts,
Equifund.com
P.S. Alpha surgeons represent an initial group who will be the first to use a new device in live patient procedures.
The product’s functionality, in final form, and safety have already been proven in order to earn the FDA’s market clearance.
This means the KG2 is a finished product, and it is going into controlled first use.
KDL has hand-picked a small, yet diverse team of orthopedic spine & neurosurgeons, based on their proven surgical skills, interest in using the new KG2 system, and leadership in pioneering new techniques in the spine surgery community.
These surgeons also represent a cross section of surgical theaters, from hospitals to surgery centers.
Several of these surgeons participated in a cadaver testing laboratory exercise last April. This means they already have some familiarity with the device.
The first surgeries done by this group will document procedure processes and results, which will be presented to surgeons more broadly in the U.S., and will provide important proof points for the industry and the insurers who predominantly pay for the spinal fusion procedures for which the KG2 is specifically designed.
During this alpha period, KDL will be investing in building the inventory required for broader launch and putting in place other processes for selling, distributing, and supporting the KG2’s use on a much broader scale
If you’d like to learn more about Kleiner Device Labs – or otherwise make an investment – please visit their offering page on the Equifund Crowdfunding Portal.