Tony Bihl is leaving the stage. He was BioVentus’s CEO, twice.
We join a long list of people who will miss him.
Smith & Nephew. Bioventus’s employees, current and former suppliers, and shareholders.
Essex Woodlands? Hard to say. They seem to be moving on.
Biologics, after all, isn’t the “hot space” it was more than a decade ago.
The other leader in the market for hyaluronic acid (HA) injections, Anika Therapeutics, has diversified into implants, instruments, and a really interesting HA + corticosteroid combo knee injection. And companies like Organogenesis are pioneering the use of amniotic fluids and tissues for knee repair and pain relief. And down the road LifeNet Health is showing how to innovate in the tough allograft business.
Among Tony’s feats of business legerdemain were his talents for infusing the financially engineered Bioventus with an entrepreneur’s unity of vision, purpose, and team building.
Two years ago, Bihl also exited the Bioventus stage and handed the company to Ken Reali.
Fourteen months later, Bihl returned to clean up Reali’s mess. Does Bihl’s latest successor, Robert Claypoole, know what he’s getting into?
Essex Woodland’s Engineering Project
About a dozen years ago, biologics—stem cells, advanced forms of HA (single injections, for example), amniotic tissue and fluid and the sense that bone morphogenic proteins had untapped potential—seemed destined to become the new wealth creation engine for musculoskeletal investors.
Smith & Nephew, which had funded an early, ambitious regenerative biologic product—Dermagraft—never lost its interest in the regenerative medicine space but couldn’t allocate the financial resources to be a player in 2010.
Enter Marty Sutter, founding partner and managing director of $2.5 billion Essex Woodland, one of the largest and oldest growth equity and venture capital firms in the U.S.
Marty believed in the economic future of regenerative medical products. If they could heal such musculoskeletal problems as arthritic joints and find a niche between INSAIDS and end-stage, expensive, arthroplasty surgeries—well, it could be—at most game changing—at least a massive return on investment.
He made Smith & Nephew an offer they couldn’t refuse—$258 million—$98 million in cash and a $160 million five-year note.
In return, this 154-year-old London-based company agreed to spin out its U.S. biologics team, HA and other clinical therapies business into a brand-new start-up named Bioventus. Smith & Nephew would own 49% and Essex Woodlands would own 51%.
Bioventus Is Born
Bioventus officially entered the world on January 4, 2012. Its first CEO was Mark Augusti. Its products were Exogen ultrasound bone healing system and Supartz hyaluronic acid injections (5 injection protocol). Its first full year’s sales were $232 million. The new company lost $26 million in that first year.
Of course, Essex planned to take Bioventus public. But first it bolted on a calcium-based bone graft product platform (OsteoAmp) and a bone morphogenic protein project with Pfizer—the supplier of Infuse to Medtronic Spine. The Pfizer deal didn’t last long.
In 2016, Bioventus tried to float a public stock offering—8.8 million shares for $180 million. It sank.
In February 2021, under new CEO Ken Reali, Bioventus tried again. This time it worked—8.5 million shares for $111 million. Stock symbol: BVS. Market value: $1 billion.
Between 2012 and 2022 sales more than doubled, rising from $232 million to $512 million—a 9.2% annual growth rate. Notably, BVS’s most profitable year, 2020, was Tony Bihl’s final year and one year before Ken Reali took the company public.
Sales in Tony Bihl’s 2020 year were $321 million, which were actually down from the prior year’s $340 million, but profits leaped from $7 million to $19 million.
In 2021, under Reali’s leadership, Bioventus committed an aggregate $628 million to buy Misonix, a provider of minimally invasive therapeutic ultrasonic products and Bioness, a supplier of devices for rehab and neuromodulation.
With those two acquisitions, Bioventus’s sales rose to $431 million in 2021, up more than 34% from 2020, but losses were a stunning $159 million.
Between 2021 and 2022, Bioventus lost nearly $300 million, and its market value fell from $1 billion to $330 million.
How did that happen?
A big reason was the bond market. Cheap money, which fueled an M&A boom throughout life sciences, ended abruptly.
But, most of all, CEO Ken Reali overreached. In retrospect, buying three companies in one year…and the last one, CartiHeal, possibly the most valuable of the three, was one deal too many and it nearly broke Bioventus.
The Lure of Knee Cartilage Repair
A 1994 article in the New England Journal of Medicine (NEJM), “Treatment of deep cartilage defects in the knee with autologous chondrocyte transplantation” by Brittberg M, Lindahl A, Nilsson A, Ohlsson C, Isaksson O, Peterson L., effectively launched cartilage repair in the United States.
One year later Boston-based Genzyme Corporation took the autologous chondrocyte transplantation (ACI) technology described in the NEJM article and created a cartilage repair product and process named Carticel.
Two years after that, the FDA granted Genzyme a license for Carticel. It was the first time the FDA had licensed/approved or cleared a living cell technology for commercial sale.
Jump ahead 25 years, and after more than 1 million annual cartilage treatment procedures in the U.S., including 430,000 debridement procedures and 220,000 microfracture surgeries (Source: SmartTRAK.net – Cartilage Replacement – U.S., January 3, 2019), cartilage repair remains more a hope than a standard of care.
Carticel along with another ACI treatment, MACI (autologous cultured chondrocytes on porcine collagen membrane), are the most popular cartilage repair technologies in the United States. Those treatments (along with a related technology for wound repair—Epicel) generate about $40-45 million in annual product sales.
Other cartilage repair products that were also developed include Zimmer’s DeNovo-NT, plug-type scaffolds for arthroscopic delivery like Dunlop Corp’s carbon fiber plug or Smith & Nephew’s True-Fit plug, Tigenex’s Chondromimetic implant and Histogenic’s NeoCart (collagen scaffold with autologous living cells).
Even so, within the overall market to treat deteriorating knees, cartilage repair product sales barely register.
In terms of dollars ($7 billion), knee replacement surgery is the principal treatment modality for patients suffering from end-stage osteoarthritis. Hospitals, physicians, suppliers, and payers understand that that is the bread and butter of the industry.
A quick perusal of American Academy of Orthopaedic Surgeons’ (AAOS) clinical practice guidelines for osteoarthritis (OA) of the knee finds a whole range of pre-knee replacement therapies including NSAIDs, cortisone shots, platelet rich plasma injections and osteotomies.
CartiHeal
CartiHeal’s Agili-C™, FDA approved, repairs cartilage better than the standard of care and anything that has come before. It is destined to become the most successful cartilage repair product yet, by far.
Bioventus first invested $2.5 million in CartiHeal in 2018. Johnson & Johnson, Elron, Accelmed, Access Medical Ventures, aMoon and Peregrine Ventures also, over the years, put money into CartiHeal.
Bioventus followed that first investment with another $15 million in 2020. Tony Bihl was Bioventus’s CEO for both of those decisions.
CartiHeal used the funds to pay for an ambitious, 250 patient FDA approved PMA clinical study. The product, Agili-C, is a treatment for a broad spectrum of cartilage defects, including mild to moderate osteoarthritis (OA) of the knee, osteochondral defects and focal cartilage lesions.
Its IDE (investigational device exemption) study was a multi-center, 2:1 randomized, open-label and controlled study. The primary endpoint was change from baseline to 24 months in the average Overall KOOS score (pain, symptoms, QOL, ADL and Sports).
The patients in the Agili-C study arm demonstrated clear superiority over standard of care. Sustained for 24 months. Here are the details.
- The baseline KOOS Overall score was similar in both groups: 41.2 in the Agili-C arm and 41.7 in the SSOC arm. At Month 24, the posterior mean for the treatment group improvement from baseline in the Agili-C arm was 42.7 compared to 21.4 for the SSOC arm.
- The degree of improvement for Agili-C compared to SSOC was similar for subjects with Mild-moderate Osteoarthritis (Kellgren-Lawrence Grades of 2 or 3) and for subjects with Large Lesions (total lesion areas larger than 3 cm2).
- The posterior probability of superiority of Agili-C relative to SSOC was also 1.000 for all 4 Secondary Confirmatory Endpoints: KOOS Pain, KOOS ADL and KOOS QOL and Responder Rate.
- The responder rate, which was a-priori defined as improvement of at least 30 points in Overall KOOS at 24 months compared to baseline, was 77.8% in the Agili-C arm compared to 33.6% in the SSOC arm.
CartiHeal’s Agili-C was approved by the FDA for commercial sale in March 2022.
Bioventus Buys CartiHeal
Bioventus had an option to buy CartiHeal once the FDA approved Agili-C.
On June 17, 2022, Reali exercised that option. The price tag was approximately $315 million with up to $135 million in milestone payments. And Bioventus had to pay CartiHeal’s $8 million of legal and M&A expenses.
Bioventus didn’t have $315 million in either cash or lines of credit. It needed to raise it.
Nir Altshuler, founder and CEO of CartiHeal, knew Bioventus didn’t have the money but, at his board’s insistence—and his board included key venture capital funds—he agreed to new terms. “I was sure,” Altshuler told OTW, “that Bioventus would be unable to meet the payment terms and we’d have our company back in six months.”
On June 27, John Nosenzo, Bioventus chief commercial officer resigned. No reason given. He wasn’t replaced.
On July 11, Bioventus borrowed $80 million from Wells Fargo to help pay the cash due for CartiHeal.
On July 15, Bioventus’s purchase of CartiHeal closed. Of the $315 million purchase price, $215 million was now deferred, to be paid in five tranches starting in 2023 and ending no later than 2027.
On August 29, Stavros G. Vizirgianakis, who’d joined Bioventus’s board as part of the Misonix deal, resigned.
Bioventus informed the SEC that it could not file its Quarterly Report for the period ending October 1, 2022, on time. Apparently, the company had received a revised invoice for rebate claims from a large private insurance payer which was tied to Bioventus’s Pain Treatment products. Even worse, it now appeared as though Bioventus would NOT be able to meet all of its financial obligations as they come due within one year.
On December 6, 2022, Bioventus announced a corporate restructuring.
CartiHeal Divorces Bioventus
For Altshuler and his board, the writing was on the wall. Bioventus did not have the financial capability to complete the acquisition of CartiHeal and Reali’s own position at the company was increasingly tenuous.
Between December 2022 and February 2023, the two companies negotiated their divorce agreement. On February 27, 2023, Bioventus unconsolidated CartiHeal, gave back all the shares it had received, wrote off the $100 million it had already paid and paid an extra $10 million.
With that, Bioventus eliminated $215 million in upcoming payment obligations which, if certain milestones had been met, could have ballooned to $350 million.
CartiHeal started recruiting a U.S. based sales force to sell its now FDA approved cartilage repair system.
On April 3, 2023, the Board of Directors fired Ken Reali. During his two years at Bioventus, Reali was paid about $17 million.
On April 4, 2023, Tony Bihl returned as Interim Chief Executive Officer.
On May 10, 2023, Bioventus sold its TheraSkin Product and the TheraGenesis Products for $35,000,000 plus $5 million deferred for 18 months and as much as $45 million in earn-out payments to LifeNet Health.
Smith & Nephew Buys CartiHeal for $180 Million Plus Milestones
Two days before Thanksgiving 2023, and nine months after CartiHeal divorced Bioventus, Smith & Nephew, BioVentus’s largest shareholder, announced that it had agreed to buy CartiHeal for $180 million and committed to pay a further $150 million contingent on financial performance. While that was about 26% less than Bioventus’s deal, CartiHeal’s shareholders (who include Johnson & Johnson, Elron, Accelmed, Access Medical Ventures, aMoon and Peregrine Ventures) may well ultimately receive, if milestone payments are made and including Bioventus’s payments, approximately $400 million.
“The acquisition of this disruptive technology supports our strategy to invest behind our successful Sports Medicine business,” said Deepak Nath, chief executive officer of smith & Nephew. “Agili-C’s superior clinical performance makes it highly complementary to our existing knee repair portfolio and with our proven commercial expertise in high-growth biologics, we are confident that we will drive further success with this compelling treatment option.”
Bihl Re-Retires and Bioventus Hires Robert Claypoole
This January 2024 Tony Bihl will re-retire.
And 52-year-old Robert Claypoole will become Bioventus’s latest CEO. Most recently he was executive vice president of Mölnlycke’s $1.2 billion Wound Care business. Claypoole had been at Mölnlycke for six years. Before that he was at Medtronic and Covidien where he managed the Obesity and Metabolic Health businesses and before that the Soft Tissue Repair and Hemostats business.
All told, Claypoole has been a senior executive and board member of numerous health care suppliers for about three decades.
Where does Bioventus go from here?
Certainly, Claypoole will need to continue Bihl’s efforts to rebuild Bioventus’s financial health. And Reali did significantly expand Bioventus’s product offerings in a number of valuable markets.
But Bioventus also needs to shed the legacy of its sterile, financially engineered birth.
Usually, the team that bonded in the trenches during a company’s formative years, creates a brand differentiation in the process—rooted in something authentic about the company, its products and people. It’s how customers come to know and understand a business.
If Claypoole can figure that out, then the BVS’s future is bright indeed.
