In mid-1989, Danek launched the system that Rich Ashman and Charlie Johnston pulled out of a cardboard box to show Alan Olsen in 1988. The system, named TSRH (for Ashman and Johnston’s employer, the Texas Scottish Rite Hospital) was a system of versatile crosslinks, specialized hooks and screws that attached to rods through locking bolts.
The year TSRH was introduced to U.S. spine surgeons, Danek’s sales nearly doubled to $14.6 million. Reported profit tripled to $1.9 million.
Cash operating profit, however, was just $99,741. On top of that, Danek spent $612,000 for manufacturing equipment (an investment, which meant that the spending didn’t show up on the P&L) and paid $100,000 on a Note that came due.
In 1989 Danek Group burned through $707,000—even though sales nearly doubled from $7.5 million to $14.6 million.
LD Beard, Alan Olsen, George Rapp, and Miles Igo had endured a fire which nearly ended the company, now they were struggling to stay solvent.
George Rapp, M.D., one of the original investors and partners with Miles Igo in Warsaw Orthopedics and also, at the time, Chief of Orthopedic Surgery at St. Vincent’s Hospital in Indianapolis made the phone call to a tiny Indiana based venture fund named CID, which stood for Corporation for Innovation and Development.
The fund had raised $10 million from a group of Indiana companies, notably Eli Lilly Corporation, Ball Corporation, Cummins Engine and others to fulfill a mandate to invest in local high technology.
Robert Compton
Dr. Rapp called CID and reached a young man named Robert Compton, who’d recently joined CID from First Chicago Venture Capital. Compton was also a former student of Bill Sahlman, the legendary Harvard Business School Professor of Entrepreneurship.
“Professor Sahlman is an extraordinary guy,” remembers Compton today. “He taught entrepreneurial finance and then followed his student’s career paths. Professor Sahlman has taught thousands of students who’ve started companies or become venture capitalists.”
Compton’s specialty was software. Not medicine and certainly not spine medical devices. But he was scrambling to find high technology deals in mid-1980s Indiana, so Compton agreed to meet Dr. Rapp and LD Beard. “I was impressed by both men,” recalls Compton. “Dr. Rapp is an experienced surgeon, with an appreciation for business. What struck me about LD Beard was what a good listener he was. LD has a quiet leadership style and I thought to myself, this is someone that I would work for. Super high integrity, clearly smart and a truly likable person”.
Compton then met with Alan Olsen, Danek’s founder and head of sales and Miles Igo, Danek’s fourth partner and head of manufacturing. One pattern that Compton saw was how well each person’s skill complemented the other person. Olsen was a really excellent salesman and had great rapport with surgeons. LD was the strong leader with well-honed management skills. Dr. Rapp brought medical expertise and Igo knew manufacturing.
A Million Dollars for…Hardware?
The Danek team asked for a million dollars—a lot for the small CID fund. Compton and his partners were thinking more like $500,000. And that, in turn, reinforced in Compton’s mind the need to pull in other investors—not only to support Danek’s funding needs, but also to get another set of eyes and smarts on this truly (in the late 1980s) unique business concept—selling spine surgery implants!
“I took the TSRH system out to Silicon Valley and showed it to one of the oldest and most successful venture firms in the valley.” One of Compton’s Harvard classmates was a junior partner there. “I went to Sandhill Road and through my friend, got a meeting with the senior partner.”
Sandhill Road is arguably the birthplace of venture capital for the integrated circuit based high-tech revolution. Microsoft, Amazon, Twitter, Facebook, Instagram, and thousands of other legendary high technology companies were funded by venture firms on Sandhill Road.
Compton was at the citadel of high tech to make the Danek pitch. He handed the senior partner of this Sandhill Road venture firm Danek’s system of metal rods, screws and hooks. To this day, Compton vividly remembers what happened next. “After about 10 minutes into my talk, he said, stop, stop. I could buy this stuff at a hardware store. And he tossed it back at me. I was crushed.”
His first meeting ended the trip. Sandhill Road venture firms shared information and Compton knew this particular “no” coming so swiftly and definitively, was the end of his trip.
When he got back to Indiana, Compton put in a call to Dane Miller, the founder of Biomet and one of the most savvy orthopedic executives in the industry. Dane told Compton that he knew Danek but, reflecting the common wisdom among the large orthopedics companies like Stryker, Zimmer or DePuy, he told Compton spine surgery was dangerous—not only for manufacturers, but certainly for investors.
“I came back to my office at CID and thought, you know, I’ve talked to a venture capitalist who doesn’t get it. I’ve talked to someone in the industry who says it’s too risky, but I haven’t talked to a customer. So, I came back to Indianapolis and scrubbed in with a really, really seasoned trauma surgeon who also did scoliosis surgery.”
That surgeon was Dr. Terry Trammell, who wrote a book about putting Indy 500 drivers back together after they’d crashed. He’s also done his spine fellowship with Dr. Edward Simmons in Buffalo, New York—the very same Ed Simmons who sent Alan Olsen down the path of moving Danek into the spinal implant business (see Danek Part II: From Cotrel to TSRH).
“I scrubbed in and watched him do a surgery. Afterwards we sat down for coffee. I asked him, ‘What do you think of spinal implant products? And what do you specifically think of the TSRH spinal implant system?’ He said, ‘Bob, this is gonna revolutionize spinal surgery.’”
“I went back to my partners at CID, and I said, the smartest guy in Silicon Valley turned me down, Dane Miller said it was scary, but the surgeon who is the person who is ultimately going to make the buying decision, thinks this is revolutionary.”
CID did the whole million dollars. And Bob Compton joined Danek’s board of directors.
Danek ended 1989 with effectively three days of cash in the bank ($80,682). And were able to pay for new equipment and set the stage to sell $25 million of products in 1990—the year Ron Pickard became Danek’s President and future CEO.
Ron Pickard Joins Danek
Forty-two year old Ron Pickard, who’d spent his entire 23-year career at Richards Medical (owned by Smith & Nephew by 1990) and had worked his way up the ranks, taking on virtually every job in production to become President of Orthopaedics, made the fateful decision in August 1990 to leave Richards and re-join his mentor, LD Beard at the emerging growth company, Danek Medical.
“I came to Danek because of LD Beard. LD and Alan Olsen had the vision of creating a company of substance. But they were struggling. LD and I had stayed in touch and at one point, LD and Alan and I met, and they said, ‘We don’t have the resources to put this together, would Richards be willing to do a license agreement and pick up the distribution of the Luque plate and screw?’”
“I put together a proposal and presented it to my boss at Smith & Nephew (the most recent owner of Richards Medical) that we do the license agreement with Warsaw Orthopedics (the predecessor firm to Danek) for the Luque System. Smith & Nephew turned it down saying, basically, that they were concerned about the liability associated with the spine. Which is understandable.”
“I went to LD and said, ‘Smith & Nephew has passed on it.’” And with that, Pickard decided to join Danek. “I was young at the time and didn’t live a very lavish lifestyle. I talked to my wife, and she said, ‘Well, if it fails, we’ll start over again.’”
Back at Smith & Nephew, Pickard’s decision to leave was a surprise. “When Ron left in late 1990, it sent ripples through the company” remembers Mike Sherman, a member of the engineering staff at Smith & Nephew. “Ron was born and raised at Richards.”
Ron Pickard, in many ways, represented the generation of Richard’s executives who’d grown up during the Harry Treace, Don Richards and LD Beard era. As one person said when he left; “Ron leaving was like taking the ‘R’ out of Richards.”
And it caused a number of employees at Smith & Nephew to consider joining Danek too. One of the first to follow Pickard was Richard Treharne, Ph.D., Smith & Nephew’s Technical Manager, who joined Danek in November 1990.
Pickard took a 40% pay cut to join Danek. As he soon discovered, however, Danek had cash issues. “My first paycheck at Danek bounced. My wife called me and said, ‘You remember that little old check you gave me?’ I said ‘yeah’. She said, ‘Well, the bank just called, and it isn’t any good.’”
Thirty-one year old Mark Merrill, Danek’s accountant at the time, moved money around to cover his new President’s inaugural paycheck. Danek was not Richards, where the senior executives were judged based on the P&L (Profit and Loss financial statement). At his new firm, Pickard realized, cash was king. The P&L didn’t pay the bills, the checking account did.
There is an old saying, start-up companies need to squeeze the nickel until the buffalo shits. Danek’s executives, by and large, were in Memphis, but manufacturing was in Warsaw, Indiana. To save money, all Memphis executives drove 11 hours to get to their production plant. Remembers Pickard, “I’d leave at 4 o’clock in the afternoon and drive all night and get there the next day. But you do what you gotta do.”
And yet, despite all that, Pickard, as he recalls these decades later; “I’ll be honest with you. I don’t think myself or anyone else at that little, tiny company…it never, ever crossed our mind that we might fail.”
Going Public
LD Beard, Alan Olsen, George Rapp and Miles Igo had long planned to explore the public markets for capital. They had a story. They were confident and each could point to a very successful track record at their respective prior companies. And, under LD, they’d been getting ready for a while.
“I told everyone early on,” remembers LD, “we’ll just pretend we’re a publicly owned company. Then if we want to sell to somebody, we’re prepared for it. Or if we want to go public, we’ll be prepared for it. The company was operated like that from 1985 forward.”
Before Pickard’s first month was done, he, LD and the entire senior management team and board decided to formally begin the process of going public. Two underwriters were selected; New York based Smith Barney, Harris Upham & Co. (lead underwriter) and Memphis based Morgan Keegan & Company.
LD Beard recruited a new chief financial officer, 53-year-old Gary Light, formerly the CFO for Mayflower Transit and before that partner at Arthur Anderson. In LD’s view, Gary was a financial wizard and, importantly, would reassure and impress the Wall Street crowd during the road show.
Then, as Pickard recalls, in late August 1990, “LD walked in my office and said, ‘What do you think?’ and I said, ‘I think we’re ready to launch the IPO.’ LD said, ‘No, I’m talking about the damn invasion.’ Iraq had invaded Kuwait and the U.S. was mobilizing to respond and Wall Street had essentially stopped public capital raising activities.
The Nine Month IPO Delay
“I think that delay definitely worked,” remembers Compton. “It didn’t feel like a good thing at the time, but that delay allowed Ron and LD to build out the team, the intellectual property and get more systems in place.”
“I was somewhat relieved.” Pickard recalls. “We had more breathing room and I was trying to put an organization together, hiring and recruiting people. Doing that initial public offering, well, that was my first time. The pause wasn’t a bad thing for me.”
With the extra time, Pickard put together a manual detailing how Danek should be organized, which jobs needed to be filled and job descriptions. LD and the board approved it. Sales were doubling yet again so cash, while still tight, was steadily flowing in.
Among the people Pickard hired during the IPO delay was a young 29-year-old engineer from Smith & Nephew who, as it turned out, was good friends with Rich Ashman, Charlie Johnston and Tony Herring, the engineering and spine surgeon team that developed the TSRH spinal system—Mike Sherman. Eventually, Sherman would file more than 120 spinal implant patents for products he invented or co-invented—the most ever for a Medtronic Spine employee at that time.
Sherman was previously working at Smith & Nephew in the R&D department (who’d been hired by Rick Treharne to lead the small, focused Illizarov business unit) and helping Alex Lukianov with the popular Illizarov system.
In December 1990, curious about what was going on, Sherman arranged to come by and see Alan Olsen and Ron Pickard. After exchanging pleasantries, Mike was dished off to John Pafford. “So, I walk into John’s office, and he says ‘Uh, this is my first day. Do you have a resume?’ I said, ‘no, I don’t have a resume.’ Because I wasn’t looking for a job,” remembers Mike.
“We had this great conversation. I didn’t know John, but he’d been in Memphis working for Wright Medical for ten years. John was impressive, he had started at Wright Medical as a drafter when he was in high school. He’d worked his way through college while he was at Wright Medical ultimately running the customs and special operation there. I went back to talk with Alan and Ron, and they said, ‘Do you have any questions?’ That was pretty much it and they offered me a job at Danek. I never asked them about benefits. It was a start-up. I was single. It never occurred to me that this was a risky move.”
Mike wasn’t due to start at Danek for another four weeks, but events were moving fast. “I rushed back to Smith & Nephew to resign. David Brumfield was my boss at the time. When I told him I was resigning, he told me he was resigning as well and that he’d have to resign to his boss, Michael DeMane, for the both of us. Of course, several years later, Michael DeMane would join the Sofamor Danek team as well.”
Also, that January, 35-year old Alex Lukianov gave his notice at Smith & Nephew and made the two-mile drive down Airways Boulevard to Danek.
The company was taking shape.
“The Spine Specialist”
Warsaw Orthopedics (renamed Danek Manufacturing) was, if nothing else, versatile. It could make soft goods. Grind metal. And, even, make replacement parts for outboard gas motors. Miles Igo, its President, could make just about anything.
But there was a price to pay for such versatility. One of Pickard’s initiatives at Danek, was to coin the tagline: “The Spine Specialist” which had the effect of focusing Danek’s manufacturing and product development strictly on spine.
“Ron brought a sharp, very sharp focus on spine,” which Danek’s culture at the time, young and increasingly dynamic, needed, remembers Compton.
The Harrington and Luque rods were antiquated. Sofamor’s Cotrel-Dubosset system (distributed by Stuart Medical), the Zielke anterior system (also sold by Stuart Medical), Danek’s Luque spine plate and screw system, TSRH spinal system, AcroMed’s Steffee spine plate and screw—all represented a revolution in spine care. The team at Danek felt the thrill of open field running. Everything seemed possible.
By early 1991, the Danek’s IPO was back on, but LD Beard had one more change in mind.
In April LD Beard said to his President and Chief Operating Officer Ron Pickard: “Look, I’m probably not going to be the person to take this company over the next number of years. If we’re going to go public those who are looking at this company need to be looking at the people who are actively involved in management. I think you should be Chief Executive Officer. You’re eventually going to be there anyway. It would be a more fair and honest presentation of management of the company, when you’re selling the company to shareholders, to represent it in that way.”
Pickard agreed, but: “It didn’t matter to me or to anyone else. It was something that LD wanted to do. So, I became President and Chief Executive Officer in April of ‛91, and we went public in May of ‛91.”
Ron Pickard, CEO and Gary Light, CFO did the IPO road show.
“Wall Street dramatically underestimated Ron.” Remember Compton. “There was a kind of a bias against Southern companies. He was so much smarter than all of them put together. Wall Street thought they knew him. They didn’t. Ron is brilliant. He was able to see way into the future and then make those remarkable decisions.”
On May 17, 1991, exactly seven years after the business almost went up in flames at the Warsaw manufacturing plant, Danek raised $27 million before underwriter and legal fees and started trading on NASDAQ at $15.00 share. The public owned 22% of the company, employees and founders of the company owned 55%, CID owned 16% and Eduardo Luque owned 7%. CID’s $1 million investment had grown to $20 million in less than two years.
Finally, remembers Pickard, “We were really strict about one thing. We never, ever talked about the stock market, never talked about the price of our stock. It was something that was never discussed. We always had the opinion that the stock price would take care of itself if we took care of our customers. I always said, ‘Our stock goes down when we meet or exceed expectations and goes up when we fail to meet expectations.’”
Buying Yves Cotrel’s Sofamor
By 1992, relations between Yves Cotrel’s Sofamor manufacturing operation in France and its U.S. distributor, Stuart Medical, were increasingly strained. More than once, sales meetings between the French supplier Sofamor and its owner and inventor of the Cotrel-Dubosset system, Yves Cotrel, would devolve into shouting matches with Abe Glasser or his sales force.
Shawn McGuinn, one of Stuart Medical’s sales executives remembers: “We were selling the DTT, Device for Transverse Traction, from Sofamor. It was a crosslink developed by Dr. Cotrel and Dr. Dubousset. The physicians in the United States thought it was wimpy. It didn’t do what it needed to do. Abe told Yves Cotrel and it became very controversial.”
Mike Sherman remembers when Cotrel would lecture at Texas Scottish Rite and surgeons would raise the issue about the flimsy construction of the DTT and Dr. Cotrel would say ‘It wasn’t designed to be a stabilizer. It was only meant to keep the rods spread apart.’
But, as Mike Sherman remembers, “At the end of the day surgeons needed a more stout cross link.”
Rich Ashman, Charlie Johnston and Tony Herring developed exactly that device. They even showed it to Cotrel but, again, he said ‘our crosslink is fine.’
Danek licensed the TSRH crosslink (branded the Danek Crosslink). That, along with Luque’s plate and screw, were Danek’s first significant spinal implant products.
At some point in 1992, word filtered to Alan Olsen and Ron Pickard that Sofamor was being shopped to potential corporate buyers. Piper, which was Sofamor’s investment banker and had the sales book, was speaking to all comers—except Danek. Despite numerous requests, the Piper bankers refused to let Danek into the bidding.
It all came to a head at the 7th annual meeting of the North American Spine Society in Boston in 1992. As Alan Olsen remembers, “The bankers for Sofamor, Piper Jaffray, wouldn’t give us the book. I said to Ron, ‘Well, let’s try and get ahold of Dr. Cotrel,’ because I had just spoken to him at a poster exhibit and found out he was on his way back to France tomorrow. So, Ron and I hustled right over to his hotel. And Ron gave his pitch.”
Pickard recalls that Zimmer was doing due diligence on Sofamor and was far enough along to be putting numbers to paper. “My pitch to Dr. Cotrel,” said Pickard, “was ‘You can certainly join Zimmer. They’re going to hire a product manager to run your company and you really won’t have much to say about it. Or it’s gonna be run by a product manager reporting to somebody else who’s reporting to somebody else who’s reporting to somebody else.’”
“’Or you can join Danek, and you’ll have a seat on the board. We’re a public company. We have a liquid currency, and you can have a continued involvement—a say in how the company is run.’ I think that pitch set well with him. As a result, we signed the necessary papers to get started.”
The Sofamor Deal Goes on Life Support – Twice
Merrill Lynch was the banker representing Danek and Piper Jaffray was representing Sofamor. Ron got a call late in the afternoon before a flight to France to complete the final stage of negotiation. Merrill Lynch, his banker, was calling. They wanted to drop out. For some unspoken reason, they could no longer represent Danek.
“Oh my gosh. I was livid,” remembers Pickard, “I actually yelled in the phone at this guy, the head of healthcare banking for Merrill Lynch. They were bailing out. After I hung up, I remembered Joe Lash with Kidder Peabody, which at the time was owned by GE Capital.”
“I’d met Joe a couple times and he and I always hit it off quite well. So, I ran Joe down that evening, and I told him the whole story. He said, ‘We will be there this evening’. We spent most of that night just going over where we were, where we’d been.”
When Pickard and LD Beard left for Paris the next day, they had new bankers and lawyers from Sherman and Sterling. The team spent three days outside of Brittany hammering out merger details.
The near-final documents were in Memphis by April 1993.
Then Dr. Cotrel called Pickard and said: “We can’t take your [Danek] stock.”
“What do you mean?” Pickard asked. What it boiled down to was that Dr. Cotrel’s uncle, who owned a small percent of Sofamor, would not accept Danek equity for his Sofamor equity. He wanted cash.
Pickard didn’t skip a beat. “It wasn’t anything we could not deal with. But, our attorneys, Sherman and Sterling, realized that this opened up a new, favorable accounting option for Danek. They told Pickard that Danek could treat the payment as Goodwill. They said, “We can create a tax situation where you can amortize Goodwill for the next six or seven years, which basically results in Danek paying no taxes.”
Sherman and Sterling more than paid for themselves with that insight.
“A few years later,” Pickard remembers, “the IRS showed up and said they were auditing us over the Sofamor transaction. They spent almost a year with IRS agents in the building. They left. I think, exactly 11 months after they arrived. Nothing was wrong. We did everything by the book. They closed the case.”
Whose Name Goes First?
It was nearly June when Dr. Cotrel called Pickard again and said, ‘I need to meet with you. Can you fly to New York?’ “Absolutely,” said Pickard. “We met at the Pierre Hotel in New York in Dr. Cotrel’s room. He had a little cup of coffee in his hands. His hands were shaking, and the coffee was splattering out of the cup. And I said: ‘what’s wrong, Dr. Cotrel?’ And he says: ‘I cannot do the deal.’ I said: ‘But we’ve already done the deal. I mean, it’s done.’
‘No, no, no, I can’t do the deal.’ And I said: ‘So what happened?’ And he said: ‘Your company is buying my company. I know that. But you will have your name first. And I, I, I cannot do that.’”
So, I said; ‘You’re telling me that we’re going to cancel this whole deal because putting Danek’s name first and Sofamor next is impossible.’ And Dr. Cotrel said: ‘Yes. I know you would never agree to anything else.’”
“I said: ‘Why don’t we call the company Sofamor Danek?’ And Dr. Cotrel literally stood up and hugged my neck. I felt strange sitting in this hotel room with a little old Frenchman hugging my neck.”
“I agreed to the name change and, on the way, back to Memphis, I thought to myself, you know, I just committed to something that I’m not sure how the board of director’s is gonna react.” In fact, it took about one second after Pickard described his meeting with Dr. Cotrel for the board to agree to the name change.
“I had no reason for any concern. It was a nonissue at the board. But it meant a tremendous amount to Dr. Cotrel and his entire family. It really solidified a relationship that lasted all the way up until he passed away.”
“Even today with his daughter Marie-Helene Plais, M.D., who was clearly the apple of his eye and very active in the management of the company. I’ve gotten a number of handwritten notes from Dr. Cotrel over the years expressing his support for me and everything the company wanted to do.” Danek purchased Sofamor in June 1993 for approximately 6 million shares or 25% of the combined company’s equity. Six years later, Sofamor Danek was sold to Medtronic $3.7 billion of which approximately $925 million went to the Cotrel family.
The End of Spine at Stuart Medical
Once Danek’s purchase of Sofamor was official, Stuart Medical’s rights to distribute Sofamor products transferred to the newly named Sofamor Danek, based in Memphis, Tennessee. That same year Abe Glasser sold Stuart Medical to a Pittsburgh investor Henry Hillman who folded Stuart Medical into North American Medical. Finally, in July 1999, Owens and Minor purchased Stuart Medical from the Henry Hillman Family for $155 million.
The Effect of Sofamor on Danek
In 1994, the first full year with Sofamor, combined company’s sales reached $162 million (of which the Cotrel Dubousset line of products accounted for 30%), reported net profit was $24 million and cash in the bank stood at $13 million.
Acquiring Sofamor brought distribution in 24 new countries to Danek. It added the CD Spine System which was designed primarily to treat thoracic and lumbar spinal deformities and fractures to Danek’s portfolio. Later came the Compact Cotrel-Dubousset system (CCD) which was sold to treat degenerative spine disc disease of the lumbar and sacral spine. Then came the CD Horizon™ system which introduced new types of hooks and screws and brought an increased level of versatility to surgeons.
Likewise, the TSRH system continued to evolve with the Variable Angle Screw, Central Post Hook, Lateral Offset Plate, Open Eyebolt, and Top Tightening components. All of which gave surgeons new capabilities including interchangeability of components which improved ease of use for spine surgeons.
This Danek team, as we will describe in upcoming articles, would come to define Modern Spine Surgery in several astonishing ways:·
- Bring to market the first surgical navigation system (Stealth Station)·
- Invent and bring to market the first minimally invasive pedicle screw instrumentation system (Sextant System developed by Mike Sherman and Kevin Foley, M.D., which was built off of the CD Horizon platform).·
- Bring through the FDA and ultimately to market the first bone morphogenic protein.And then, of course, there is the role Ron Pickard and the Danek senior management played in literally saving Modern Spine Surgery during pedicle screw litigation and the related FDA firestorm.
Next History of Modern Spine Surgery installment: A Louisiana lawsuit nearly ends the practice of Modern Spine Surgery.
