During the depth of the Great Recession of 2007-2008 as wallets closed and investment came to a standstill, Tony Viscogliosi circled the globe looking for money for his company, Small Bone Innovations, Inc. (SBi). On June 30, 2014, SBi’s ship came in as Stryker Corporation announced a definitive agreement to acquire the company for up to $375 million.
The crown jewel of SBi is the Scandinavian Total Ankle Replacement System (STAR), the only FDA, PMA (premarket application) approved, cementless, three-piece total ankle replacement system in the market.
The device, according to Viscogliosi, is the most published total ankle replacement product in the world. With 20 years of clinical history, four evolutions of generations of the STAR technology and more than 26, 000 implants and published long-term clinical results with 91% satisfaction and 92% survival rates at 9.1 years, it was time to put the technology into the hands of someone who could get it to as many patients as possible.
That someone was Stryker.
Innovation Acquisitions
Viscogliosi, the company’s founder and former chairman, president and CEO and partner in Viscogliosi Bros., LLC (VB), told OTW on the day of the announcement that this is a great success story of the importance of innovation excellence in acquisitions “when the world is looking right, we are looking left.”
He said the world is concentrated on the big deals right now. Zimmer Holdings, Inc. is working on acquiring Biomet, Inc., while Medtronic, Inc. is acquiring Covidien plc. “Stryker is smartly taking advantage of this dynamic and directing energy towards the keys to physician and patient benefit, which is technological innovation that drives hospitals and physicians to select their products.”
“So while a lot of media attention has been directed to acquisitions of scale, Stryker smartly continues to have a level of focus on innovation as a core component to evolve the basis of scale it already has. And it is clear now that innovation acquisitions will continue to play an increasing role in the competitive differentiation of big market leaders.”
Stryker Takes Foot and Ankle Lead
“The addition of the STAR Ankle strengthens our product offering in this fast growing business, and demonstrates our continued commitment to growth in this segment and more broadly in extremities, ” said David Floyd, Stryker’s group president, orthopaedics. “We are dedicated to providing our Foot & Ankle customers and their patients with a complete set of solutions for their clinical needs.”
The other SBi assets being purchased by Stryker include finger, wrist, and elbow products. Annual sales of the acquired products were approximately $48 million in 2013.
Needham analyst Mike Matson believes the acquisition gives Stryker a broad and more competitive extremities product portfolio and pushes it into the lead position in the foot and ankle market. He expects Stryker’s greater resources and larger sales force to accelerate growth of the STAR Ankle and SBi’s other products.
SBi has facilities in Morrisville, Pennsylvania; Péronnas, France; Donaueschingen, Germany’ and Kuala Lumpur, Malaysia and has sold and distributed its products in 41 countries.
Highest Exit Valuation, Many Suitors
With a purchase price of $375 million and $48 million in revenue, Viscogliosi says Stryker is paying 7.8 times revenues. “That’s the highest small bone extremity exit ever in valuation.” He added that the purchase price is also the highest extremity price point ever paid for a non-development stage company.
Bank of America analyst Bob Hopkins said the remaining pure play extremities companies trade at a large discount to the Stryker price, with Tornier, Inc. at 3.4 and Wright Medical Technology, Inc. at 4.2 times annual revenue. “In our view, the high price paid for SBi suggests several larger orthopedic companies had interest in SBi.”
Hopkins also observed that with this acquisition all the major orthopedic players now have a decent presence in extremities, except Smith & Nephew, plc.
“The road has been long and the road has been difficult, ” said Viscogliosi. “But with perseverance and tenacity to see the product through to its potential, we recognized that Stryker was the right company and now was the best time to sell the company.”
Viscogliosi said that over the course of the ten years since SBi was founded by VB in 2004, “the door has been knocked on many times by many competitors.” But with Stryker’s focus in clinical success, focus on proper education, focus on ethical marketing and focus on a full-range product portfolio for the physician and patients, Stryker seemed to be the most appropriate purchaser.
Perseverance and Grit
The long and difficult road and required perseverance needed are evidenced by the fact that while globetrotting in 2007-2008, the deal collapsed six times until it was done. But in June 2009, Viscogliosi was able to announce the company had raised $144 million from Khazanah Nasional Berhad, the investment firm of the Government of Malaysia, Malaysian Technology Development Corporation, an integrated Malaysian-based venture capital company, The Family Office of Bahrain, and certain other substantial investors.
It also took 11 renegotiations to finish the deal that brought the STAR system to SBi in 2008.
“No sales process is an easy one, but we got through it all, ” added Viscogliosi. “The most powerful advice I can give is that a leader has to have grit to get through every obstacle that’s placed in your way. And that’s exactly what we did and is the story of Viscogliosi Brothers. “
Funding for Superiority
He says competition is going to increase significantly and reimbursement is going to evolve substantially with scale and size. “Physicians, payers and hospital buyers will choose technologies which are clinically superior. This is in the sweet spot of the VB strategy.”
The VB business model, according to Viscogliosi, is to fund studies and technologies that demonstrate superiority in efficacy and comparative safety to the gold standard such that the gold standard evolves anew…as it has with the STAR total ankle joint replacement.
(RP) Regulatory Property
“This is an important transaction, ” says Viscogliosi, “because it validates the VB strategy of developing what we call ‘RP’ (regulatory property) instead of just ‘IP’ (intellectual property).” At VB, he says RP is superior to everything else. An FDA PMA is unchallengeable, while IP is always challenged.
“You can’t get the RP without the clinical evidence and the comparative effectiveness which our ankle demonstrated.” According to the FDA, he says the STAR ankle demonstrated superior efficacy and comparable fusion results to other devices.
The Ankle Has Its Day
“I believe that we are at the precipice in ankle orthopedic care equivalent to where the physician market was 30 years ago with hips and knees. Thirty years ago it was not uncommon to have a knee fusion or a hip fusion because of debilitating arthritic pain. Today, it’s never done and only as a salvage procedure.”
“Tomorrow, an ankle fusion will become the salvage procedure and total joint replacement will and is becoming the gold standard, especially with STAR.”
STAR is the only ankle that is clinically marketed ubiquitously everywhere in the world, says Viscogliosi. “No one outside the U.S. uses two part ankles because those ankles demonstrated 25 years ago to be inferior to three-part.” In fact, every two-part ankle that was ever commercially introduced was withdrawn from the market at the mid to long-term point because of clinical failure.”
He says Stryker is in a wonderful position to leverage all of that through their portfolio and through their sales and distribution channels. “Stryker has long recognized the value of PMA products and the value of ethically marketing products they way they are labelled.”
VBs Do It Again
This isn’t the first time the VB brothers have been successful in developing, building and selling a company off to the major orthopedic companies.
In 2004, the brothers sold Spine Next, SA to Abbott Laboratories, Inc. for $60 million. In 2005, they sold Spine Solutions, Inc. and the ProDisc total spine replacement system to Synthes, Inc. for $350 million. In 2013, Zimmer purchased the assets of Knee Creations for an undisclosed price.
Current companies in the VP portfolio include: Alliance Medical Corporation; Biorthex, Inc.; Cortek, Inc.; Paradigm Spine, LLC; Centinel Spine, Inc.; Spine Solutions, Inc. and Twin Medical Star.
The Next Musculoskeletal Opportunity
So what’s next for Tony and his brothers, Marc and John.
“We’ll tell you when we GOT there, ” he told us coyly.
Viscogliosi said VB sees a number of fantastic opportunities to serve the patient in ways the patient is not being served today in the musculoskeletal marketplace.
“What counts is to positively impact the healthcare of thousands of patients.” He says they will continue to do that by funding superior studies and technologies and then creating a successful business opportunity for a buyer to leverage it even further.
VB will provide the grit.
