At JP Morgan, Stryker's Big Smile

As he strode to the podium in during last week’s JP Morgan investor conference in San Francisco, Stryker Corp. CEO Steve MacMillan was all smiles. Of course, most CEOs try hard to put on their happiest face at conferences like JP Morgan. But MacMillan—and Stryker—had particular reason to smile.

According to Mike Weinstein’s medtech team at JP Morgan, over the past two years, Stryker has been the second-best performing medical device stock, up 70% over that time. And 2007 was a particularly good year for the company; after divesting its slow-growing—and not particularly core--physical therapy business, the company seems likely to have recorded its seventh straight year of double digit sales growth (final 2007 numbers had not yet been reported by the time of the conference). MacMillan noted that only 14 companies in the Fortune 500 have achieved six straight years of double digit growth, and half of those are retail companies. Stryker’s 2007 year-end sales should reach $6 billion, double what it was five years ago.

Plus, in what was clearly the orthopedic industry’s biggest story of 2007—the settlement of the DOJ investigations into surgeon contracts—all orthopedics companies fared well, but Stryker may have come out smelling best. (See our take here.) Of all of the Big Ortho companies, it was the only one not to have had to pay under the settlement terms, a reward some say for playing a key role in the original investigation.

What next for Stryker? Apparently more of the same. MacMillan cited two priorities going forward: finding opportunities from some recent investments in the company’s sales force and in its R&D, spending on which increased nearly 20% in the past three years over the previous three years, and what he called “a disciplined assessment of potential future platforms.” What does that mean? Not clear. But at last year’s French Orthopedics meeting in February, the hot rumor was a reported acquisition of Smith & Nephew by Stryker. Nothing ever came of those rumors (At least nothing yet, and who knows?) But at JP Morgan, MacMillan himself seemed to suggest that Stryker wasn’t likely to pull off any big deal soon. He said that while Stryker is “opportunistically” looking for new technologies and new deals, the company “doesn’t need to do any deals.” Particularly big deals. Indeed, MacMillan, referring to his relatively recent assumption of the CEO post at Stryker, noted that some CEOs try to make an impact on a company right away by doing a major deal, only to find they’ve done a bad deal. It’s a temptation, he says, he’s strongly resisted and for now at least Stryker doesn’t seem to need.

For more from MacMillan, check out this interview from IN VIVO the Magazine.

Ortho Settlement Doesn't Settle Everything

Yesterday’s announcement that the U.S. Attorney and four of the nation’s biggest orthopedics companies agreed to a $311 million settlement of bribery accusations would seem to put this entire matter to bed.

Under the agreement, four companies—Biomet Inc., DePuy Inc., Smith & Nephew plc and Zimmer Holdings Inc.—paid varying portions of the settlement while all agreed to adopt corporate integrity agreements and to hire outside firms that will monitor their relationships with physicians.

(It’s worth noting that Stryker Orthopedics did not take part on the settlement. CEO Steve McMillan touched on the subject before the settlement in a recent IN VIVO magazine article. Medtronic Sofamar Danek also has had prominent role in this debate.)

But once the cloud cover over the industry clears, we may find an orthopedics industry facing a whole new set of daunting questions:

What of the clean up that’s already begun? Certainly, few industry executives would deny privately that there are more than a few skeletons in the closet of most orthopedics companies—arrangements entered into around consulting agreements or royalty payments that richly reward surgeons for minimal amounts of work. But the $311 million settlement aside, our bet is that most orthopedic industry executives are applauding the settlement and—particularly given that no heavier, industry-disrupting judgments were handed down—may even have welcomed the scrutiny that the case brought.

For one thing, many orthopedic companies have themselves been trying to clean up their act over the past several years, following guidelines such as those promulgated by industry trade association AdvaMed governing appropriate compensation in sales and marketing practices and consulting arrangements.

That’s good corporate citizenship, but also good business sense. Particularly as the industry has consolidated in recent years and become much more of an oligopoly, legacy consulting arrangements that don’t deliver real clinical and economic value to orthopedics companies have become both fiscally irresponsible and unnecessary. Were there times in the past when orthopedics companies set up less-than-robust consulting or royalty arrangements with surgeons just because the surgeons demanded arrangements similar to ones they believed other surgeons were getting? Sure. But as the industry has consolidated and competitive positions stabilized, the ortho giants have no longer felt the temptation to enter into these agreements. Adherence to the AdvaMed guidelines were one rationale for pushing against these kinds of practices; the federal investigation into these practices now gives ortho companies more and more plausible arguments to deny surgeons who come asking for lucrative deals.

Does this tilt or level the playing field for smaller companies? The US Attorney investigations focused on the largest orthopedics companies, a group who, in aggregate represent greater than 90% market share. What are the implications for smaller suppliers and start-up companies? Does the ban against aggressive sales training and consulting agreements eliminate questionable practices and level the playing field? Or does it do just the opposite, erecting huge barriers to entry around the market leaders and preventing others from using well-established tactics that get the attention of important customers? More to the point, particularly where things like the AdvaMed guidelines are concerned, what posture should non-market leaders take? Strict compliance with what are voluntary rules? Or an attitude of, “Let Big Ortho do what it has to; we’ll do what we have to?”

What of the historical and vital relationship with physicians?
Most of the scrutiny has focused on sales and marketing practices—product training programs at the Ritz or sales training done on championship golf courses—those kinds of things. But what rules do we want to adopt about surgeon/supplier relationships where it concerns new product development? Rigid firewalls in the area of technological innovation might cut down on some abuses but almost certainly would signal the end of meaningful new product development in a field where innovation comes largely, if not exclusively from collaborations and feedback from suppliers.

Already some surgeons are beginning to claim that rather than simply ending abuses, the current scrutiny is giving orthopedics and spine companies license to deny them fair compensation for new ideas and new product iterations. Many device industry executives argue that while the current wide-scale scrutiny (one which embraces physicians working with drug companies on clinical trials and the like) is entirely appropriate, some special consideration should be set aside for device companies when it comes to oversight on product company/surgeon relationships.

As noted, the settlement is most likely good news, particularly in that few believe it will call for fundamental changes in industry dynamics. But no one should breathe a sigh of relief until we see what impact, if any, the future oversight will have on surgeon relationships as they apply not to sales and marketing efforts, but to product development.

Ready, set....

Globus Medical Inc. is ready to run.

Earlier this week, the company settled its lawsuit with Synthes USA, reaching an agreement that absolved Globus of allegedly stealing trade secrets and key personnel from Synthes. As part of the deal, Globus agreed to pay Synthes $13.5 million in cash and to not hire any additional Synthes employees for one year.

Freed by the drag of that lawsuit, Globus today announced it raised a $110 million Series E investment in a round assembled by Clarus Ventures, which led a syndicate of private equity investors with a commitment north of $50 million. AIG SunAmerica is the only other identified investor although several private equity firms supposedly took part.

Not that the company had exactly been standing still. Started in 2003 by CEO David Paul and other executives who left Synthes, Globus Medical last year reported more than $80 million in revenue. The size of the settlement surprised some. (Healthpoint Capital's blog has some nice before and after takes here and here. But the Philadelphia Inquirer suggested at least one juror saw some holes in Globus' case.)

Hard to say for sure why the settlement happened, but it's easy to envision Globus executives opting to settle quickly with $110 million piled atop their board room table.

The massive deal signals two developments. The first involves Globus which currently resides on the second-tier of the spinal device market. Medtronic Sofamar Danek, Depuy Spine, Synthes USA, Stryker Corp and Zimmer Spine Inc./Zimmer Holdings Inc. still lead the way. But Globus is now positioned to make a move past other mid-tier players like Blackstone Medical Inc., NuVasive Inc., Alphatec Spine Inc and others. The capital infusion enables the company to plow through with sales of its fusion products while advancing its internally developed line of non-fusion implants and spinal spacers. For more on these areas go to MedTech Insight reports here and here.

The second interesting aspect of this financing of course involves Clarus Ventures, the firm founded by five former partners of MPM Capital who left in a very public split two years ago. This financing will likely be reported as a significant “venture capital” deal, probably the biggest since CardioNet secured its $110 million (which also wasn’t really a venture capital round.) But make no mistake, this is a private equity-style investment with private equity firms involved.

Private equity firms continue to survey the medical device industry, and orthopedics particularly, for opportunities. While the Globus deal clearly resides in a different neighborhood than the $10.9 billion acquisition of Biomet Inc. by Blackstone, KKR and others, it demonstrates how well-heeled venture firms--such as Clarus--can position themselves as private equity players, at least when when medical devices are involved. The $50 million-plus investment in Globus represents roughly 10% of the $500 million debut fund that Clarus closed on at the start of 2006, so it’s a big bet. It also may be the last device deal in this debut fund.

Clarus is clearly comfortable with big wagers as it demonstrated with its participation in the $80 million financing for Sientra, which is pushing for FDA approval of a silicon-based breast implant.

Check out our next issue of START-UP to hear more about the deal and Clarus.