Mid-October in one of McCormick Center’s cavernous halls sat Dan Goldberger in his Bacterin—soon to be named XTANT Medical Holdings, Inc.—booth at the North American Spine Society (NASS) Annual Meeting.
About 200 feet away was Brian Hutchison, CEO of RTI Surgical, Inc., in a booth roughly twice the size of Dan’s booth. Maybe 150 feet away was Keith Valentine, CEO of SeaSpine, Inc., in a booth four times larger than Dan’s.
Dan’s XTANT is putting up annual sales of around $75 million. Keith’s SeaSpine is about twice that at $130 million. And Brian’s RTI Surgical is about double that at $270 million.
Of the three companies, Brian’s is the most valuable at a market value of $270 million followed by Keith’s at $135 million and Dan’s at $35 million.
On a market value to sales basis (PSR), Dan’s at the bottom of the group. His PSR is 0.5x. The other two companies are at about 1.0x.
All three companies are hoping to use biologics to differentiate their catalog of product offerings. And all three companies are run by talented, accomplished CEOs. Only one, however, is run by a newcomer.
A newcomer with fresh perspectives.
Dan Goldberger
Goldberger, who is 57 years old, is the CEO of XTANT, formerly Bacterin, a Montana company that is bucking conventional wisdom in the $10 billion spinal implant industry.
The last company he led grew from $15 million in annual sales to more than $300 million in six years. Then he sold it to Versant for beaucoup dollars in 2013.
He recently told Wall Street that he thinks XTANT can put up $100-105 million in sales for 2016 and report EBITDA of between $7-9 million.
The year before he joined Bacterin the company reported $32 million in sales. If he delivers on his guidance, he’ll have tripled sales in just three years. And he will have done it with both organic growth and the merger with X-Spine.
It is also noteworthy that Goldberger’s first act after he joined Bacterin in 2013 was to reduce full time employment from 177 to 128. Sales still rose. The average revenue per employee rose 39% in his first year.
Goldberger, by the way, is a named inventor on more than 60 U.S. patents. His BS in Mechanical Engineering comes from the Massachusetts Institute of Technology. His MS in Mechanical Engineering is from Stanford University.
This is a smart guy.
Biologics as a Differentiation Strategy in Spine
A central strategy of XTANT, SeaSpine and RTI Surgical is to use biologics to differentiate themselves in spine.
Biologic products are integral to spinal fusion surgery. When a spine surgeon wants to provide a foundation and, potentially, a stimulating environment to grow new bone, a biologic material is required. If the surgeon goes the autograft route, then the OR team performs a second surgery to harvest bone from, typically, the iliac crest. This second surgery increases the cost of the primary procedure and raises several complications including increased post-operative pain and the risk of infection.
At least as common as harvesting the patient’s own bone, is using cadaveric bone (allograft) either as a material to blend with the patient’s own bone or as a substitute for it. Beyond simple allograft, surgeons can use more osteogenic materials like bone morphogenic proteins (BMP) or cellular allograft matrices.
Altogether, biologic materials like cadaveric bone materials or BMPs or cellular allografts are supplied by every spinal implant company including all of the industry’s largest suppliers—Medtronic plc, DePuy Synthes, Stryker Corporation, NuVasive, Inc. and Globus Medical, Inc..
In total, biologic products as adjunct to spinal surgery generates more than $3 billion a year in sales for these companies.
For most spine surgeons, biologic products are not highly differentiated from company to company—particularly cadaveric bone products. “Most docs think they’re all the same, ” said Stephen Hochschuler, M.D, co-founder and chairman of the board of the Texas Back Institute and one of the most prolific clinical study and podium presenters in the spine surgeon community. But, Dr. Hochschuler was quick to point out—it is an incorrect assumption. Biologic products have been improving consistently since demineralized bone was first introduced in the 1980s and there are many strong biologic products on the market.
Furthermore, biologic products like Medtronic’s InFuse, Cerapedics, Inc.’s i-Factor, Wright Medical’s Augment or the cellular allograft matrices like NuVasive’s Osteocel, Orthofix’s Trinity or DePuy’s ViviGen are highly differentiated.
Can a Biologics Company Turn Into a Spine Company?
Keith Valentine, who was one of the three key executives who built NuVasive into a $2.5 billion market cap spinal implant company, came to SeaSpine because it offered a biologics platform to build on.
In June, Valentine told us that 50% of SeaSpine’s sales come from biologic products. Those sales increased in 2014. By contrast, SeaSpine’s hardware sales declined and that pulled overall revenues down.
Biologics accounted for $67 million of SeaSpine’s 2014 sales which means that, in terms of market share, SeaSpine biologics was punching above its weight. In the bone graft market, SeaSpine holds an 8.6% share. In the demineralized bone market, SeaSpine has a 12.3% share.
By contrast, SeaSpine’s spine hardware business holds barely a 1% share of the global spinal hardware business.
Valentine’s central objective is to leverage that biologic footprint with a couple of new technologies and a pipeline of MIS (minimally invasive surgery), adult deformity and degenerative disc disease (DDD) hardware products.
To put this in perspective, if SeaSpine had the same market share in hardware that they have in biologics, they’d be as large as NuVasive.
And in every spine case, biologics and hardware go hand in hand.
Brian Hutchison, CEO of RTI Surgical made a similar argument when he acquired Pioneer Surgical Technology in June 2013. “The transaction will enhance RTI’s existing core competency in biologics processing with the addition of Pioneer’s core competency in metals and synthetics.”
At the time of the purchase, RTI’s biologic sales were 100%of their business. At the end of 2014, metal and synthetic spinal implants had become 33% of the business and biologics products were 63%. For the first nine months of 2015, metal and synthetics had grown to 35% of total revenue and biologics were 60%.
And yet…both RTI Surgical and SeaSpine are trading at about 1.0x sales and XTANT is trading at 0.5x sales. The average price-to-sales for the other suppliers of spinal implants is 3.23x.
Which comes first, biologics or hardware?
Based on the current valuations, Wall Street is still waiting for that break-out biologically driven spine company.
Goldberger at XTANT, Valentine at SeaSpine, and Hutchison at RTI each have a strategy to be that company.
The most successful biologic product in the history of spinal implant sales is Medtronic’s Infuse—which this year appears poised to generate approximately $550 million in sales.
Infuse is popular because it affirmatively grows bone and its body of clinical evidence is second to none. It is the biologic gold standard.
But did Infuse drive hardware sales for Medtronic spine?
Here’s the data:
On the surface, Medtronic’s spine hardware, biologics and Kyphon sales appear pretty steady over the past six years.
But when we look at year-to-year percent change, two basic trends pop out:
- Hardware/biologics/Kyphon are very loosely correlated. In a couple of clear examples, biologics moved in the opposite direction of hardware.
- Medtronic spine has been steadily improving on all three categories since 2012.
And one clear conclusion. Hardware dominates.
Orthopedics’ Bias to Innovation
Medtronic’s data shows that spine hardware is the main event and biologics, while absolutely necessary and valuable to spine surgery, are still an adjunct in the OR.
As Dr. Hochschuler characterized spine surgeon attitudes toward biologics: “Most docs tend to use the biologic that the metal carrier carries.”
XTANT’s Goldberger, as the new kid on the block, had some interesting insights into his new industry home.
Essentially, he told OTW, orthopedics has a bias to innovate.
“The barriers to entry in orthopedics are remarkably low and one result of that is that the pace of innovation is accelerated.”
“Part of the reason that low barriers exist is the relative lack of data which orthopedic physicians require to look at new products. In my previous companies we required significantly more human clinical data. Blockbuster products—really in any sector of medicine—excel because they have data.”
And that industry bias to innovation fits Goldberger well—albeit with more data.
Goldberger went on to say that the culture and DNA of XTANT—like the firms he led in the past—is rooted in innovation. “Our catalog of implants and biologic products versus other small spine companies is built on highly proprietary innovations versus ‘meat and potato’ plates and screws.”
The similarities between XTANT and his earlier firm are striking.
“When I went to Sound Surgical Technologies (SST) in 2007, I walked into a turnaround situation which had very similar challenges to those I encountered at Bacterin (now XTANT). Inventory was out of control. Innovation had languished. Distributors were frustrated. We transformed SST and, now, Bacterin, into growth and innovation engines.”
“Our innovative OsteoSponge DBM and 3Demin DBM Fibers, Boats and Strips, for example, are wildly successful. With the merger with X-Spine we’ve now teamed up with David Kirschman. M.D., and I’m optimistic that the two of us (with full tissue processing capabilities) will develop exciting combination (hardware and biologic) products.”
And remember, Goldberger holds 60 patents. “Personally, I’m a tinkerer and inventor.”
Orthopedics: Unique Distribution Model
His other key observation is that within the broader medical device market, orthopedic distribution is unique. “Distribution in orthopedics is very labor intensive. We’ve embraced that. So the other way we differentiate is with customer care. Right product. Right time. Easy to work with.”
Having said that however, Goldberger made a perhaps surprising comment in this era when some companies experiment with a ‘rep-less’ model.
“We DO see that physicians have strong preferences with regards to their instruments, implants and the reps who serve them. Spine hardware will absolutely be one of the drivers of our growth. At the margin, we believe surgeons will listen to innovative biologics, but when we talk instruments and implants it is usually a much more productive conversation.”
“We are taking our biologics to the X-Spine footprint. Those physicians are committed and passionate about their X-spine instruments and implants. Hardware is driving purchase decision making. One upside surprise to our merger with X-Spine is that the top seven of our ten biologics distributors do not have a hardware line.”
Growth
With high profile CEOs like Keith Valentine making the case for a strong biologics and spine hardware combination, with Brian Hutchison putting up his revenue numbers, Wall Street’s spotlight is tantalizingly close to this sector of the spine market.
Speaking for XTANT, Goldberger told OTW “We will continue to invest in tissue processing, expanding our capabilities and investing in more sophisticated capabilities in placental, live cell and other tissue forms. In five years (we like the Globus or NuVasive template of excellent products and breadth of offerings) we will have a broad catalog of highly innovative biologic, metal and combination products for the spine surgeon.”
Stay tuned, for sure.
