Small Bone Innovations (SBi) has raised $144 million from a worldwide group of investors in one of the largest private equity capital investments in orthopedics in the last 10 years. Maybe ever.
Anthony G. Viscogliosi, SBi’s Chairman & CEO, made the announcement on June 30.
Anthony ViscogliosiWhen Viscogliosi and his brothers, Marc and John, founded Spine Solutions in 1999 to commercialize the ProDisc™-L artificial lumbar disc, many credited the brothers with bringing spinal disc replacement into the mainstream of spinal surgery.
Now, with this $144 million infusion of capital into the small bone and trauma market, they may give the same kind of boost to the last frontier of joint replacements, the ankle. Convincing a highly sophisticated group of investors to pump that amount of capital into the orthopedics market while world economies are crashing may be the biggest news in orthopedics for some time.
$144 Million History
Orthopedics hasn’t seen this kind of private investor confidence since Globus Medical raised $110 million in 2007. The only larger private investment was CONMED’s $150 million effort in 2004. CONMED, however, is not purely an orthopedics company. Table 1 shows the 10 largest single private equity deals in orthopedics since 2000.
Table 1: Top 10 Private Equity Funds Raised Since 2000
|
Company |
$ Raised (millions) |
Date |
|
CONMED Corporation |
$150 |
November ’04 |
|
Small Bone Innovations |
$144 |
June ’09 |
|
Globus Medical |
$110 |
August ’07 |
|
Symmetry Medical |
$105 |
June ’03 |
|
Alphatec Holdings |
$84 |
March ’05 |
|
SpineWave |
$45 |
April ’07 |
|
ApaTech |
$45 |
June ’08 |
|
MAKO Surgical |
$40 |
October ’08 |
|
IST |
$39 |
August ’05 |
|
SpineWave |
$36.5 |
February ’06 |
Source: Viscogliosi Bros. LLC
Globe-Trotting for Investors
Viscogliosi’s investment group includes Goldman, Sachs & Co., Khazanah Nasional Berhad, the investment firm of the Government of Malaysia, Malaysian Technology Development Corporation (MTDC), an integrated Malaysian-based venture capital company, The Family Office of Bahrain, and certain other substantial investors. The Series D financing also included additional capital from existing investors Trevi Health Ventures, NGN Capital, 3i Group, and TGap Ventures.
We spoke to Tony Viscogliosi by phone as he was attending a trade show in Japan a few days ago.
He told us he literally trotted the globe to put this investor group together, and that it was an incredible honor to have been part of an effort to raise this level of funding during the most difficult economic environment in our lifetime. He added that pulling together these kinds of sophisticated investors was an explicit statement about Small Bone Innovations’ management team for producing outcomes at a time when investment capital has stayed on the sidelines.
“We’re at the top of the world, but feel challenged to do the right thing for our investors, surgeons, and most importantly, patients. That is the underlying substance to SBi, ” said Viscogliosi.
We wondered whether he saw a larger historical message here for the orthopedics industry.
Viscogliosi told us that he believes the size of the investment coupled with the sophistication of the investment groups meant three things for the industry:
- It establishes an expectation and belief in the long-term viability of orthopedics.
- It signifies a turning point of recognition by investors in the small bone sector of orthopedics.
- It recognizes ankle arthroplasty as a final frontier in joint replacement.
“The door is being opened wide, ” he said.
The Opportunity
What was the opportunity that investors saw here?
“Come rain or shine, orthopedic services have to be delivered, ” said Viscogliosi.
“Imagine the reality of seeing opportunity when global economies have collapsed and investors have withdrawn. This is the moment when value is recognized. As our mother taught us, in your darkest moment you’ll find your best opportunity.”
He observed that orthopedics has sustained growth in a world where people are worried about losing money. In orthopedics, investors are still looking at how much their investments will grow. He explained that investors know people will experience injuries throughout their life and more than 50% of those injuries will be in small bones. “Investors want in on that, ” noted Viscogliosi.
Viscogliosi believes that orthopedics addresses a big quality-of-life issue for the over-65 population, which is the fastest growing demographic group. Obesity, diabetes and arthritis are key diseases that must be addressed to solve this group’s health issues.
S.T.A.R. Ankle
As an example, SBi’s acquisition of the S.T.A.R. (Scandinavian Total Ankle Replacement) Ankle, “the last undiscovered joint replacement, ” addresses a big quality-of-life issue. Viscogliosi said there are over 10, 000 visits to the emergency room every day for ankle injuries. “Fusion is not acceptable for seniors and others, who still want to walk up and down stairs, remain active and keep healthy, he said.”
He said the S.T.A.R. is the only ankle replacement device that has gone through prospective, randomized IDE studies in a clinical setting. “The S.T.A.R. has been implanted in over 15, 000 people around the globe over the last 18 years, and the fourth-generation device has now been in use for 10 years. It has demonstrated a 12-year survival rate 95% of the time. That’s equivalent to hip and knee replacements, ” he added.
SBi acquired the S.T.A.R. Ankle in 2007 and received FDA approval in May this year to sell the product in the U.S.
How much of SBi do investors get for their $144 million?
Viscogliosi would not disclose details of the investment transaction but said investors got a “fair chunk” of the business with an “appropriate set of conditions to get a meaningful return.” The funds will be used to retire debt, fund the core business and finance the launch of the S.T.A.R. Ankle.
Global Reach
One of the investors, Malaysia’s Khazanah Nasional Berhad, was clearly looking for more than a financial return on its investment. As SBi announced the closing of the Series D funding, Khazanah put out its own press release announcing its $25 million investment in SBi.
The press release said that “With Khazanah’s investment, SBi has decided to set up its Asia Pacific hub in Kuala Lumpur to undertake activities such as biomaterial research, product development, surgeon education and distribution in the region. It is also currently exploring the possibility of establishing an Asia Pacific manufacturing base in Malaysia for its products.”
According to Khazanah, SBi’s presence in Malaysia is expected to create additional skilled knowledge workers in the areas of new technology and product development. “Malaysia’s nascent medical devices industry will be enriched by the introduction of SBi, ” continued the statement.
Viscogliosi told us that SBi is committed to work closely with Malaysia’s manufacturing infrastructure to identify and find the best opportunities under price and quality parameters that are in the best interest of the company. SBi currently has facilities in New York, New York; Morrisville, Pennsylvania; Bourg-en-Bresse, France; and Donaueschingen, Germany.
SBi and Market
How this $144 million bet and vote of confidence in small bones and ankles fares will depend on the skill of company management and the overall health of the market sector. For a view of the market we look to the PearlDiver market and company database.
PearlDiver Extremities Analyst Dev Joshi says the extremities market had revenues of approximately $920 million in 2008, and he expects revenues to hit $1.53 billion by 2012. He says privately held SBi had between $15 million and $20 million of that market in 2008. With the addition of the S.T.A.R. Ankle, he anticipates that the company’s revenue will grow approximately 30% over the next year.
Joshi’s Overview of Extremities (Chart 1) shows that approximately 31% of the market is foot and ankle. That’s a total estimated market opportunity in 2012 of $474 million for SBi. Wright Medical is the current leader with 36% of the foot and ankle market (Table 2). If SBi can challenge Wright in foot and ankles, it could capture around $170 of that market in three years.
Chart 1: Overview of Extremities
Source: PearlDiver Patient Records Database, January 2004 – June 2007
Table 2: Foot and Ankle Market
Source: Independent survey conducted with foot and ankle surgeons and members of “American College of Foot and Ankle Surgeons (ACFAS) and American Orthopedic Foot and Ankle Society (AOFAS).”(#1 in Foot and Ankle Products)
Now it’s time for SBi to execute. But as Tony Viscogliosi said, “This is the moment when value is recognized.”
Indeed, this is a historic moment in orthopedics. The summer of 2009 may well be remembered as the moment when investors left the sidelines and recognized their opportunity.
