Danek merges with Sofamor. Sulzer buys Spine-Tech. Synthes buys ProDisc. Certain transactions have the power to change an industry’s trajectory or focus.
When Memphis-based Danek merged with Sofamor in 1993 it signaled the start of a period of innovation, growth and wealth creation in spine care. When Sulzer Medica purchased Spine-Tech in 1998 it marked the start of an explosion of innovation and creativity in the intervertebral body space. When Synthes bought Spine Solutions (ProDisc) in 1993 it signaled both the beginning of a rush to create motion preservation implants as well as the beginning of the end of Spine as a “winner’s game”.
Looking back in five or ten years Baxter’s purchase of ApaTech for $330 million will be seen, we believe, as the seminal event that launched the biologics era in orthopedic surgery.
Biologics at a Crossroads
For a couple of decades now, all ortho CEOs and most surgeons would agree that biologics are the most exciting market basket of technologies on an ever lengthening horizon. No one would disagree that “biologics” (however they defined that term) had, on paper, the potential to be disruptive. Some biologic products in niche markets actually delivered on that promise—InFuse in spine surgery, for example. But, more often than not, the promise failed to materialize. Cartilage repair, for example, has left many start-up companies and technologies gasping for capital and legitimacy.
The business of processing allograft tissues has become a solid business with 1.2 million annual procedures generating nearly $2 billion in revenues. But the allograft industry is plagued with for-profits with no vision and non-profits with great vision but no access to the capital markets. Probably the most exciting new allograft product currently on the market is allograft stem cells in bone matrix and it is two non-profits (MTF and AlloSource) that are the suppliers and innovators.
Biologic products are at a crossroads. We are, I’m convinced, in the process of moving from structural biologic products to trophic biologic products. Trophic means biologically active. Living cells. Proteins.
Baxter is (quietly) building the biologics platform of the future. ApaTech was the missing plank.
Cartmell and ApaTech
Veteran pharmaceutical executive Simon Cartmell is ApaTech’s CEO. Seventeen years at Glaxo Wellcome and a couple years with private equity, led Cartmell to ApaTech. When he arrived, ApaTech was, in his words, a “single issue company” looking for a leader. Cartmell’s experience was in global supply chain management with a particular emphasis on integrating R&D with marketing.
Integrating R&D with marketing requires a lot of translating. Cartmell, by his own admission, is in corporate-speak terms multilingual.
Cartmell isn’t the first pharma CEO to get biologics. Paul Thomas spotted a diamond in the rough (very rough for those who recall LifeCell in the early 1990s) at LifeCell and eventually sold it to KCI for $1.7 billion in 2008.
When Cartmell took a look at ApaTech in 2003, he liked it so much, that he quit his day job with the money jockeys at 4D Biomedical (a venture firm) and gave ApaTech the leadership it needed. There were eight people at the company when he joined in 2003.
In Cartmell’s view the nascent biologics industry needed something more than just another synthetic, structural implant. It needed a biologically active, higher value-added (in terms of patient outcomes) biologic material that gave distributors a better, in Carnell’s terms, “quantum of profit margin.”
Actifuse
ApaTech’s Actifuse product, in Cartmell’s view, fit the bill. Silicon-based materials like Actifuse (which is a bioactive glass) have a well demonstrated ability to grow bone. Larry Hench and his colleagues at the University of Florida first documented this interesting phenomenon in the 1960s. Their work formed the basis, then, of further research at London’s Imperial College. The underlying mechanism of action is that when the glass is immersed inside the body it triggers an ion exchange with the surrounding tissues. Long story short, this ion exchange helps to form a porous, gel-like surface layer which has an amorphous calcium phosphate component whereby mineralization gradually creates a form of ceramic called hydroxyapatite.
With InFuse teaching two generations of surgeons about using biologics to improve bone growth and setting a most attractive price reference point, the foundation was in place.
Stryker Partnership
Stryker was ApaTech’s first U.S. distribution partner. Stryker, in Cartmell’s view, was a very high caliber partner with a particular tactical approach to the market that fit with Cartmell’s style. In the U.S., ApaTech and Stryker developed a hybrid distribution model where territory salesmen were supported by ApaTech’s biologic products experts. That, combined with a generous and flexible compensation program for Stryker’s sales people drove the numbers.
Under Cartmell, ApaTech never missed its sales or earnings forecast. “We were very disciplined with our cash, never missed a number and, as a result, built significant confidence with our investors, ” said Cartmell. In 2008, the company raised $45 million in new capital—much of it from existing investors—and bought out some of the older shareholders at a $70 million valuation. That capital allowed ApaTech to build new manufacturing facilities and increase its investment in people from 44 people in late 2008 to 160 people at the time of the Baxter acquisition.
Strong Compliance Culture
In addition, said Cartmell, ApaTech was clean. “Right from the beginning, we made sure that we wouldn’t fall victim to some of the ‘tricks of the trade’. We built a strong compliance culture because we wanted to ensure that our surgeon relationships were appropriate and fully compliant.”
By the time Baxter came calling, ApaTech had had seven acquisition offers. By the time Baxter came calling, ApaTech was bringing in $60 million in annual revenues and had doubled in size from 2008. By the time Baxter came calling, ApaTech had one of the strongest biologic product distribution systems in orthopedics with significant and market leading networks in both the U.S. and the EU.
So why Baxter and not Stryker?
A Bellwether Deal
The answer to that question, we believe, is why this transaction is such a bellwether deal for orthopedics.
Consider the following:
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Baxter has been running stem cell clinical studies longer than ANY orthopedic company has been offering allograft stem cell products
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Baxter has more expertise in all of the components of blood (like mesenchymal stem cells) than JNJ, Medtronic or any of the orthopedic companies. Baxter is a market leader in treating hemophilia and providing a full range of biologic blood products including immunoglobulin, pharmaceuticals and drug delivery products
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Baxter has fibrin sealants – ARTISS -
Baxter has PEG sealants – COSEAL and TISSEEL
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Baxter has FLOSEAL surgical hemostat and GELFOAM PLUS
In short, Baxter has the science and the surgical biologics technology platform to deliver the full range of biologics to the surgeon today…and will guide the surgeon to a future of trophic biologic products including stem cells.
Baxter speaks surgery from the biologic perspective.
Virtually every orthopedic company speaks surgery from a bio-mechanics perspective.
Last year Baxter reported more than $500 million in surgical biologic sales revenues. Baxter’s pipeline, which is heavy with trophic biologic products, could make it the dominant surgical biologics company. In every one of the 26 major surgical arenas Baxter will be a player.
Stryker can’t, for example, sell hip retractors to heart surgeons. But Baxter can sell sealants, hemostats, stem cells and delivery systems to orthopedic, cardiovascular, general surgeons—indeed all 26 major areas of medicine. What Baxter is demonstrating is that biologics, as a product platform, drives distribution and sales efficiencies. One product line sold to 26 major surgical sectors is more profitable than one product line sold to only orthopedics or, more narrowly, only for shoulder repair.
ApaTech and Baxter
What will Baxter do with ApaTech?
According to Cartmell, there will be no changes to the distribution system ApaTech built with Stryker in the U.S. and with independent reps in the EU. Baxter, said Cartmell, will build on the foundation he and his team have built at ApaTech. According to Cartmell, Baxter’s regenerative business will use Actifuse and the other products in ApaTech’s pipeline to create a scaffold for Baxter’s products.
Products that are in Baxter’s sales bag now as well as future products (advanced sealants, glues, stem cells, parathyroid hormones and other products) will likely find their way onto the Actifuse scaffold. A more biologically active Actifuse creates a more “trophic” implant.
Why did Baxter pay $330 million for ApaTech? Because Baxter thinks it can double biologics product sales to over $1 billion with ApaTech’s bioactive silicon products and do it over a broad range of medical specialties—not just orthopedics.
As Simon Cartmell said in closing, “We didn’t need to sell, but the combination of Baxter’s pipeline and our products made paying tomorrow’s price today supportable.”
