$1.3mm - $29.5mm = A Negative ROI

The Spine Blogger received a call from an industry source this evening regarding the Vertebron/CardoMedical deal. Interestingly enough this is what was reported to us from someone close to this organization. Supposedly, Cardo offered Vertebron $29.5 million dollars. So if Vertebron generated $11mm in revenues that would be a multiple of 2.68 of revenue. Not bad, considering that last year our economy was in meltdown mode.

So why didn't the deal go down? Supposedly, one of the founders, a board member, refused to sign off on the deal! HELLO! We're talking $29.5 million, like in samolee's, like in banana's. So the outcome is that the company files for bankruptcy and the is sold in an auction. Now there's a stroke of genius. Today, the board is being sued by various parties. Now here is a case study for Wharton, Stanford, Kellogg, and the Harvard Business School.

You know, sometimes, just sometimes people are as dumb as a bag of rocks!

Vertebron Bankruptcy Sale Goes to the Highest Bidder! Was this a Surprise?

Late today, September 6th, 2009, it was announced that Cardo-Medical was successful in bidding on all the assets of the once gone, but never forgotten Vertebron, free and clear of all liens by the US Bankruptcy Court for the State of Connecticut. The purchase price was $1.3mm, now there's an exceptional multiple! Doris Blake of US Spine really hit the nail on the head when she said that Paul Sendro was instrumental in turning Vertebron around. Based on sales, TSB estimates that this is another example of a sale that resulted in a negative return on investment. Was this really a surprise, considering that this was a topic of discussion at the 2008 NASS Meeting in Toronto? The question really was, when, and how much was Cardo-Medical willing to pony up for such mediocre products? Now we know!

The Spine Blogger reached out to a few of his design colleagues to solicit their opinions on the Vertebron Low-Torque Pedicle Screw System (LTPSS). The consensus was that the Blocker, Rod, and Rod Persuader interface were not designed well, in addition, the company lost some of its early surgeon advocates due to their inability to modify some of the designs in a timely manner. Isn't this a reoccurring theme among most start-up/early growth stage companies? David Paul, where are you to teach these people some basics in responsiveness?

Is there a lesson to learn? Hopefully, no other start-up/early-growth stage company ever follows this business model, one that was predicated on stiffing its vendors, employees and investors. This was a company that was run on "truth or dare." Unlike the Three Wise Men of biblical lore in search of the Messiah, they were not men of integrity. They were seeking gold rather than the truth, never finding the guiding star that would take them to fame and fortune. Though their names were not Gaspar, Melchior, and Balthasar, they were better known as Affifi, Khalili, and Natarajan.

So today marks the beginning of a new era for Vertebron's products. Hopefully Dr. Brooks and COO Michael Kvitnitsky can make Beef Wellington out of chop meat. Good Luck!

Dynamic Stabilization, An Adjunct to Fusion? So What's The Difference?

Recently, OTW completed a three-part series on Dynamic Stabilization (DS) which was highlighted by the contribution of three esteemed leaders in the study of spine biomechanics, Drs. Panjabi, Goel and Patwardhan. Dr. Panjabi is respected as the "guru" of spine biomechanics, and was the visionary behind the Applied Spine Stabilimaxx NZ, while Drs. Goel and Patwardhan have provided bio-mechanical guidance and contribution to the development of other companies DS products.

The theme behind this series was to "better define" the design rationale behind the development of DS products and how it may benefit the patient. These scientists believe that somewhere in evolution of spine treatment there is a place for Dynamic Stabilization in the surgeons armamentarium. Yet, the question must be posed; "Is there really a middle road between total disc arthroplasty and fusion?" It is difficult to dispute the bio-mechanical findings that these scientist have developed over the many years of their lives studying the spine. Yet, today, the industry has many believers some genuinely sincere with academic intent, some who have drunk the kool-aid purely for financial reasons, and some that are skeptics. For those of us that are on the outside looking in, there are many questions regarding DS that need to be answered.

If the reader looks at the indictions of the five companies that are featured in this series, they may seem clear to the writer, yet, they are not patient specific. Yes, the indications are the same, "Adjunct to fusion in the treatment of chronic instabilities or deformities of the spine." To the reader, the terminology belongs to the state-of-the art, yet, it is nebulous and runs the gamut from "A to Z." Therefore, what are the appropriate indications, so that the surgeon and patient can optimally benefit from the implantation of these products? It seems that everyone involved in the development of these products spends more time on differentiating their individual design's features and benefits, rather than focusing on the patient's indications. If the leaders in DS haven't clearly defined, nor agree upon the theoretical aspect and optimal design, how can surgeons make the appropriate decision when they themselves agree to disagree?

Retrospective data tells us that surgeons that have used some of these products ultimately have had fusion (Dynesys) along with screw breakage (Dynesys and AST). In addition, inventors have experienced an evolution in the design and manufacturing process of their implants, witness by discussion centering on HA or Ceramic coated screws and dual shot peen vs grit blasting finishing. Eight to Nine years ago Total Disc Arthroplasty (TDA) was the future, I can still hear Tony Viscogliosi's hypnotic voice, then, the industry realized that there were far too many clinical variables on an individual patient basis, the industry moved in a different direction, interspinous process devices became in vogue, PEEK exploded on the scene resulting in the commoditization of interbody devices, facet replacement surfaced, today, the industry is selling Dynamic Stabilization as the new frontier. Yet, if all these devices are an adjunct or supplement to fusion why can't the industry agree on how to effectively use these products? Unlike the patient, the laboratory can be predictable, whereas, each individuals clinical diagnosis changes on a case by case basis. If Dr. Panjabi believes that structural preservation of the spine is important, how do we justify some of the other posterior designs, i.e. Impliant and Facet Solutions?

In closing, the Spine Blogger remembers sitting next to a surgeon at an emerging technology meeting, as the surgeon speaker was finishing his presentation, this prominent surgeon leaned over to me and said, "maybe if we resect as much of the anterior and posterior elements of the spine and replace them with hardware, we will truly eliminate pain!" Sometimes, the reader and the audience gets the feeling that we are still looking for the right indications. The Spine Blogger wants to know what its readers think?

Atlas Spine: Can They Carry The Weight of the Spine Industry on their Shoulders?

Atlas was the brother to Prometheus (Clay Baynham, M.D., the wise brother) and Epimetheus ( Matt Baynham, the indecisive brother). Maybe there was a sub-conscious reason why the company was named Atlas? Recently, the company launched a new pedicle screw system called the "Apelo" meaning to appeal or petition. The "Apelo" is a post system, that provides surgeons with 5.5mm, 6.5mm, 7.5mm and 8.5mm screw diameters with lengths starting at 25mm thru 60mm in 5mm increments, in addition the system has cross-connectors.

Atlas has been around for an estimated four to five years, and has Chet Sutterlin, M.D. as head of the Medical Advisory Board. Dr. Sutterlin has always brought a realistic approach to spine. Recently, the company enlisted Alan Olsen of Sofamor Danek fame to head up the companies search for additional capital. The word on the street is that Atlas has some interesting IP for anterior and posterior fixation. Though I have never seen it, I must take the word of our knowledgeable sources. The Spine Blogger would estimate that this company is generating $4-$6 million in revenues per annum. Like most early-growth stage companies, the Spine Blogger believes that Atlas is at a crossroads, in search of additional capital to take it to the next level. Their initial product the Verteview seemed to attract some attention, yet, by our analysis, this company needs cash to execute its strategic objective.

The Greek mythology character Atlas, was immortal and could not die, having to carry the weight of the world on its shoulders, the question is will Atlas be able to support itself? The Spine Blogger wants to know what its readers think?

AdvaMed: Another Lame Duck Organization

The WSJ reported that in an 11th hour scramble, the "Almighty AdvaMed" has petitioned Max Baucus, aka: "I've never seen an insurance company that I didn't like," to reduce the Medical Device Tax that was proposed over the next ten years to help fund the new healthcare program. AdvaMed requested that the tax be lowered from $40 billion to $15 billion. Supposedly, the Senate Finance Committee felt that the offer was too low. AdvaMed has already come out in defense of itself, stating that the counter offer was just a rumor.

As Medical Device Companies coalesce, the industry's rationale for not wanting to be a contributing party to a better healthcare plan is based on the tax cutting into their research and development. Some analyst have observed that unlike the pharmaceutical and hospital industries that came to the table this summer, as active participants in helping restructure some type of improved healthcare plan, the Medical Device Industry has not offered a viable concession.

Please take the time to read the article posted in "Orthopedics This Week" on September 18th, 2009, Robin Young makes a compelling argument on how this tax would benefit our industry. Unfortunately, our industry is led by the nose by an organization that has never lived up to its billing. Not only are these lobbyist late to the table, they do a poor job of negotiating on the industry's behalf.

How can anyone expect a lame duck organization to negotiate effectively when they don't have the legal power to enforce a Code of Ethics? Regardless, our industry is going to have to make some concessions. If not, we will be viewed as greedy, and we will be vilified. During the last ten years new devices have increased the cost of healthcare in this country. This is not a bad thing, considering how many patients have benefited from it. Yet, it always comes down to money. No one is willing to sacrifice at a time that the patient (healthcare) is on life support. Everyone complains how this will affect their ability to continue developing better products. Let's face it, there are many companies that haven't developed anything innovative in years.

The Spine Blogger's mantra is; "if you want to play, you have to pay!" Let's see what happens over the next week. This will determine how influential AdvaMed really is, or, are they really a lame duck organization. The Spine Blogger wants to know what its readers think?

If GE Can Do It, Why Can't We?

On Friday, October 2nd, 2009, the NY Times reported that GE and Wipro, the third largest Indian information company, had struck a deal that will play a significant role in reducing US healthcare cost.

Jeff Immelt, CEO of GE rationale behind the partnership was, that healthcare products and services developed in India "will be exported cheaply to the US cutting prices." There are two reasons for Mssr. Immelt's enthusiasm. GE can export development and manufacturing to a country that has been steadily climbing the economic ladder by offering "cheaper labor" in comparison to the US, and GE can take advantage of India's overall business development plan in spending more on healthcare for its own people.

Analyst's forecast that by the year 2012, India will have a $75 billion dollar healthcare industry, while the US will spend an estimated $4 trillion on healthcare. Mssr. Immelt's rationale was that this strategic initiative would simplify GE's operations while allowing it to take advantage of a new burgeoning market. Simplistically said, India is the new frontier.

But wait a minute! Stop right their! Before we go any further, is this a sign of what the spine industry should expect when it comes to the development and manufacturing of its own products? As reported in a previous blog, Stryker/Osteonics initiated this in the late 90's when Brown, Simpson, and Lipes decided to move manufacturing to Ireland for tax purposes. Then we had Medtronic move manufacturing to Puerto Rico. As recently as a few months ago, under the auspices of Steve McMillan, it was reported that Stryker decided on expanding into India. In his most recent press release, Tony Viscogliosi alluded to setting up shop in Malaysia in exchange for a Malaysian investor's capital. Today, the spine industry has had an influx of Korean companies finding their way across the Pacific Ocean that are attempting to make inroads into the U.S. Healthcare Market, manufacturing products at a cheaper cost. So what's the Spine Blogger's beef?

What ever happened to developing, manufacturing, and buying American? Whatever happened to all those phony "lapel flagpin" gray hair blue suits who talk about loving America? In all the years that I have been in this business, the margins have always been exceptional, indicative by the over 300 spine related companies in our industry, and the behavior of the Wall Street analysts. The European and Asians still see America as a land of opportunity, even if they have trouble negotiating and understanding the American distributors way of doing business. Yes, my foreign friends, you still have a lot to learn! But this article is not about Xenophobia, it's about questioning US companies commitment to export more and more manufacturing overseas resulting in less and less Americans having job opportunities. Even though "supply-side" economist Milton Friedman has passed away, the torch continues to be carried by those loyal to his economic theories. Friedman, originally a Keynesian, became a monetarist believing in a natural rate of unemployment, and argued that the government could not micromanage the economy. But he also had a condescending opinion of Americans. He believed in advocating manufacturing overseas and "dumping" product back into the US, since Americans are "addicted to consumption." As a footnote, Friedman was the original Gordon Gecko, advocating that Greed is as inherent to us, as our DNA.

But this blog is not about debating economic theories, its about where new frontiers are developing, and what will happen to the old wild wild West (the US) unless we some how find middle ground on how this effects those of us on this side of the pond, as my English brethren like to say. I am always leery of any analyst's commentary when they state that these types of business decisions will lead to big changes in the US healthcare system. If American companies are cutting cost the rationale behind it is to sustain or increase margins for shareholder value. IT IS NOT TO CUT THE COST OF HEALTHCARE DELIVERY, indicative of how much we are forecasted to spend by 2012. If the analyst's definition of cost cutting includes reading x-rays and scheduling nursing visits, isn't this taking away American jobs? Who is going to control the quality assurance aspect if we eventually take ALL manufacturing overseas? The FDA? They can't take care of their own house! The companies? Just go visit some of the medical device manufacturing that is done is Mexico, you will be in for a surprise. Eventually, this will lead to an dramatic shift in the way the industry is perceived, all at the expense of the patient. The Spine Blogger wants to know what its readers believe?

Whistle While You Work!

As the Federal Government works to resolve fraudulent practices in the spine industry, the Spine Blogger is wondering, where the mighty DOJ will strike again? On Thursday, October 1st, 2009 it was reported in various news outlets that six hospitals in Alabama and Indiana settled for $8 million dollars for overcharging Medicare every time they performed a Kyphoplasty procedure. No wonder Medtronic has been on the Grassley-Radar, not only has the "Evil Empire" been accused of buying surgeons (what a surprise in our industry) but they also were penalized for counseling hospitals to perform kyphoplasty procedures on an in-patient basis back in June.

Here's the $75 million dollar question; Have any of these GREEDY organizations learned to treat their employees respectfully, or, is it better to "screw" the little guy and have him or her come back and "screw you?" You know my granddaddy taught me an important lesson in life, "it takes less energy to be nice, than it does to be nasty." But here's the bigger question, "When is the DOJ and the FBI going to stop behaving like the PAPER LION, and start acting like the KING OF THE JUNGLE? Here is how we evolved to this point.

First companies started buying business by providing educational and research grants to teaching institutions in the late 80's. Some people see this as free market enterprise, unfortunately, many people in the industry view this as an inducement. Today, some companies subsidize fellowship programs, along with funding start-up practices for residents and fellows going into private practice. So, what are the odds that you can beat the house when you are selling?

Next, the industry decided to stretch the rules and opted to create consulting agreements. But let's face facts, unless a surgeon owns the IP, most products are developed in house, and are then taken to a surgeon-consultant for validation. In the beginning these consulting agreements were $2,500 per day plus expenses, today, they average $4,000 per day plus expenses. The outcome was companies like Blackstone Medical buying as much business as they could based on surgeon volume. Is this really an industry secret anymore? As the DOJ and FBI started to scrutinize this behavior, companies attempted to distance themselves only to come up with the next phase of buying physician business, the distributor. Legal eagles started educating the industry as how to beat the system.

As the industry evolved, more and more companies surfaced with surgeon investors some justifiably, some just looking for a windfall. Maybe its time that some of these smaller companies have their books audited by the DOJ. Without investing surgeon business, these companies would not stand a chance of surviving because the surgeons as well as the inventors keep holding on to the dream, that one day they will all hit the lottery.

So the next time you walk by Craig Patrick and Charles Bates, acknowledge them for their courage to stand up to a company that has exhibited that it is not possible to rehabilitate your habitual behavior, the inability to play by the rules. As I have stated before, until the DOJ and the FBI prosecute surgeons and distributors for their complicit behavior, the party goes on! The Spine Blogger wants to know what its readers think?