Thursday, October 15, 2009

Has the Spine Market Overheated and Is It Ready to Cool Off?

Recently, one of our readers expressed curiosity about who is investing in the spinal implant industry. TSB thought it would be interesting to evaluate what has happened over the last few years. The questions that still needs to be answered are, has the market overheated, and is it ready to cool off?

It has been reported that since 2006 investments in companies with treatments for spinal disorders was $769 million, 44% of the deals or 36 spine companies raised $250 million over the past 18-24 months. Yet these totals were skewed by the $110 million that Globus raised in 2007. In 2009, there have been two major spine deals, SpineGuard SA raised $15 million in Series A, and Paradigm Spine raised $23 million in Series E-1. But has the pendulum swung?

It is evident that start-up and early-growth stage companies are having trouble raising capital, especially if they are looking to develop additional "me-too" products. This is evident when most of them are surviving on a line-of-credit, hoping to meet their banking covenants, or depending on investors to guarantee loans. The perception by the investment community is that many of these companies have unrealistic expectations, lack stability, have over inflated valuations and are led by poor executive management teams. Look at the companies that failed in 2009, Archus and IST lost more than $140 million dollars. Inion, Pegasus and Vertebron took honorable mention. Look at the early-growth stage companies that seem to be stuck in quick drying cement. Are investor willing to pump more capital into companies that have raised tens of millions of dollars over a four to six year period, only to find out that the venture is generating $2-4 million in revenue?

Many individuals in our industry do not understand how savvy investors are. They are not impressed by companies whose revenues are leveraged by surgeon investors, surgeon owned distributorships, or distributor bought surgeons. They want to know whether you have legitimate market share. They are looking for an investment opportunity that has staying power. Investors know that success comes from perspiration, not inspiration. Too many individuals are quite impressed with themselves, and that doesn't cut the mustard with investors. If your company is going to succeed it is going to take long hours. They will look for individuals that understand risk considering that every young company has twists and turns, in other words, do you have the capability of analyzing a situation, evaluating the probability of success, and implementing a game plan. Can you articulate an idea, and, are you detail oriented especially when it comes to the numbers. But the biggest denominator is whether or not you are compatible with the investor, remember most people don't get married unless they like one another.

So, where is the new frontier for investment capital? TSB believes that many investors are performing due diligence on many of these early-growth stage companies to determine whether there is anything worth their while to invest in. And it seems that no one is interested in more "me-too" products unless there is some "real" emerging technology in the IP portfolio. Let's be realistic, with the current state of our national healthcare reform debate, any smart investor is sitting on their capital. It seems that investors are looking at expanding bio-materials and stem cell technologies based on some of the recent acquisitions by NuVasive of Progentix Orthobiology VS and Osteocel from Osiris. The hardware market is overcrowded, overheated, and overhyped! Since TSB is not a commercial venue it doesn't behoove us to promote any specific VC, private equity fund or investment bank but there is money out there, the challenge is developing a product that will make a difference to the patient, is not looking for an indication and can generate revenue. TSB wants to know what our readers think?

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