A booming business opportunity: biomaterials will keep baby boomers active while creating opportunities for developers.
Pegasus Biologics, Inc. in Irene, CA opened its doors with four full-time professionals and now employs 56 full-timers, 10 contractors and 250 to 300 independent sales representatives who are selling three products for which the company already has secured FDA clearance.
"Our technology plat form crosses sectors, and we strategically hit one market at a time," explained France Dixon Helfer, founder and president of Pegasus Biologics, Inc. The company saw a great need in the orthopedic soft tissue damage market, so it made that market its first focus, then introduced a related product into the podiatric market and, finally, tackled diabetic wound care. Next on the agenda is a new shoulder/rotator cuff product that will debut in early 2008 for use in arthroscopy or open procedures, followed by custom repair products for the Achilles tendon and general ligament and tendon repairs.
It's an ambitious plan--and one that investors have applauded. Pegasus Biologics raised $1.65 million in Series A funding from angel investors in January 2005, closed a $10.2 million Series B round of financing in June that year and secured $20 million in Series C financing earlier this year.
In late June, the company also learned that its OrthADAPT Bioimplant, which has been used in more than 2,500 patients since its formal launch in 2006, had earned CE Mark certification, paving the way for the company to initiate international sales.
While small, innovative start-ups often plan to exit the market through acquisition, Pegasus Biologics plans to pursue a different path. "Our model is not to be acquired but to grow into a big, successful company based on our platform technologies," Helfer said. "Eventually I expect we'll acquire some specific products, such as fixation systems and anchoring devices, or we'll build strategic partnerships and alliances with for-profit research labs and other companies."
A Sector Experiencing Dynamic Growth
Pegasus Biologics--indeed, orthobiologic firms nationwide--are becoming the new darlings of venture capitalists today. "Technology in this area has advanced to a point that it now qualities for venture capital (VC)," said John Chopack Jr., a director at New York City-based HealthpointCapital, LLC, a private equity firm focused on the orthopedic and dental industries. He added that between 1998 and 2002, fewer than five VC deals were completed in this area each year. Since then, the sector's deal number has doubled to an average of 10 annually.
"Funding is available for good companies with sound management teams and smart technologies," Helfer noted.
Chopack estimated that at least 200 companies currently are developing orthopedic biomaterials--also commonly called orthobiologics--and that most are in very early stage development, still seeking FDA approvals and not yet generating significant revenues. Such companies are developing technologies including bone substitutes, bone growth factors, sealants/glues, re-engineered tissue and polymers that will enhance the healing process associated with surgery, trauma or disease.
Orthobiologics was a $2 billion market in 2006 and is expanding at a compounded annual growth rate of 13%, according to Millennium Research Group, meaning the market could reach $3.34 billion by 2011. Among the products most likely to spur this growth are cytokines (proteins that act as signaling compounds to stimulate healing), bone morphogenetic proteins (growth factors) and tissue engineering products.
"It's a pretty young sector," Chopack noted. "The whole orthopedics market is projected to reach $30 billion in 2007, so orthobiologics will represent just 7% to 10% of the overall market. However, the whole orthopedics market is going to move in this direction, toward cell-based therapeutics and other biotechnology solutions."
Why? "Historically, orthopedics was almost like carpentry," Chopack explained. "Surgeons replaced bone with plates, screws and rods. It was very archaic. At some point in the future, science and technology will allow for anatomic parts to be regenerated by injecting cells into the body or by inserting a cell-based therapeutic. This solution will last forever versus the 15-year life span of a metal implant."
Baby boomers in particular are demanding such solutions. "We baby boomers are much more active than our parents were in their 40s, 50s, 60s and 70s, and we'd rather avoid replacing a damaged tissue or a joint when a solid, augmented repair of the damaged structure will provide us with a good quality of life," Helfer said. "Until recently, orthopedic surgeons had to totally replace damaged ligaments, tendons or joints in the shoulder, knee or other parts of the body. Now, the trend is moving toward repair for soft tissue and hemiarthroplasty for joints--supporting the soft tissue structures to reinforce repairs. The mantra is, 'Repair, don't replace.'"
A Few Hurdles to Overcome
Of course, young sectors also come with their own special set of challenges. Regulatory approval and reimbursement naturally are of paramount concern. "The classic first line of problems is in obtaining FDA approval for a new product, particularly a Class III product that uses a completely novel approach," noted Alastair J.T. Clemow, PhD, president and CEO of Nexgen Spine, Inc. in Whippany, NJ, as well as a past president of the Society for Biomaterials and a member of the society's Orthopaedic Biomaterials Special Interest Group. "However, the regulations are becoming better defined now," he noted, and companies in this area must expect the FDA to demand greater clinical evidence of efficacy.
Reimbursement from Medicare and private insurers remains a major issue. "While Medtronic has developed a separate code for its Infuse Bone Graft product, almost everyone else must use the standard surgery line since there are no add-on codes for their products," Clemow explained. "Therefore, there is tremendous pressure not to use these products. Perhaps the greatest resistance is in spinal procedures, where bone growth factors are so expensive that hospitals are pushing back and, in many cases, refusing to allow their surgeons to use them. While there is no doubt that the recombinant proteins do work, at $5,000 the price is too steep when you can't get proper reimbursement. In time, as more companies develop lower-cost solutions in this area, the overall pricing will likely decline and use increase."
Clemow additionally noted that Stryker Biotech's OP-1 (osteogenic protein-1), which will stimulate the repair and regeneration of bone and joint tissue, and CeraPedics, Inc.'s proprietary small peptide P-15 bone substitute soon may offer surgeons less expensive alternatives.
As companies work to win regulatory and reimbursement approvals, they're collaborating with surgical societies much more so than they have in the past. "In recent years, companies and surgeons have come to appreciate what a symbiotic partnership this is," Clemow said. "Surgeons recognize that new technologies can help their patients, but to get reimbursed, they need to work with the companies to develop the clinical and economic data to obtain new codes."
Handling Workforce and Product Challenges
Workforce considerations are an issue as well. While finding qualified employees is a challenge for every firm, unique hurdles exist in the orthobiologics space. "Orthopedics companies traditionally are a mechanical engineer's domain, and it's difficult for professionals with this mindset to get their heads around biomaterials and how to convert new materials into a product that will meet a market need. Developing products in this sector requires a completely different way of thinking. It's no longer about metals. We know we're going to have to hire significant resources to bring these products to market," said Rob Ball, vice president of global research and development for Tornier, Inc. in Minneapolis, MN. Tornier--in cooperation with partner Tepha, Inc.--plans to launch a new orthobiological innovation by early 2009.
In fact, several experts agreed that a significant portion of the innovation in orthobiologics will come from small, entrepreneurial companies that will partner with or eventually be acquired by larger players in the field.
"Management of these companies is going to be an issue down the road," Chopack said. "People with experience in orthopedics usually don't have a lot of experience with biologics. Attracting and finding the right resumes to head a $30 to $50 million revenue-generating company will be a challenge." It will be harder to find CEOs than to find R&D stars.
Professionals also will need to approach their work differently, Ball warned. "Undoubtedly, orthopedic executives will need to shift the way they look at products and projects going forward," he said. "In the past, we expected a product to have a positive cash flow within 12 months. Now, we have a much larger cash investment at the front end with a much higher risk-benefit ratio on the back end. Our industry is becoming more like biotech."
Finally, the products themselves present some problems. Ball pointed out that packaging and delivering orthobiologics are not easy tasks. "It's not titanium in an irradiated package. Packaging is no longer a trivial consideration. It's becoming much more like pharmaceuticals in that the packaging can be part of the product. The way you deliver a product into the OR can be a big factor in whether the product actually gets used," Ball said.
Chopack additionally noted, "I think the biggest challenge for young orthobiologic companies versus the traditional orthopedics manufacturers is distribution." He cited the following example: Zimmer has been selling hips and knees for 15 to 20 years. The sales representatives have built relationships with their customers, and the customers are familiar with and understand the products and how they work. Orthobiologics are a more complicated sell because they are a more complicated product with regard to how they work and are placed within the body.
"These new companies will have to develop their own sales forces in-house in a more pharmaceutical style of selling to customers. There's no easy way to sell these products," Chopack said.
Once the product has been purchased, there's also the matter of making sure it is used correctly. "The success of any new product is technique dependent," Helfer said. "If you don't use it correctly, it can fail." Surgical training and patient compliance--not getting too active too soon (before the product has time to work to heal the ailment being treated)--are critical.
Helfer explained that the OrthADAPT Bioimplant is not like an artificial knee in which there's really only one way to place the product in the joint. With a traditional knee implant, it's clear that the femoral component would go here, the tibial component there. Pegasus Biologics' enzyme-resistant scaffolds are being implanted more creatively.
"Implantation can be open to interpretation," Helfer said. "We know of 70 different types of applications in close to 3,000 implants. Some were used in unique procedures we didn't think of. Therefore, we work closely with our surgeon advisory boards to develop essential guidelines, procedures and clinical protocols for how the product should be used to augment, repair or reconstruct soft tissue structures."
Clemow agreed that specific instructions and training are essential. "With any new technology, if you don't train surgeons properly, and they then use it in an inappropriate way or with an inappropriate technique, they will say the technology doesn't work. But the truth is that it didn't work in their hands. Bad news spreads fast in this industry," he said.
And, unfortunately, surgeons aren't always giving as much thought to bone regeneration products as would be ideal. "Unlike, say, total knee prostheses, which are obviously the major part of knee replacement surgery, bone regeneration products typically are used in conjunction with other devices such as ] fusion cages and the like. So there's not as much thought about how to use this smaller piece of the whole. As a result, it can be tough to get surgeons to go to specialized training courses and take the time to learn the intricacies of a new offering," Clemow said.
Experts agree that it's an energizing time to be working in orthobiologics. During the next three to five years, Chopack expects myriad firms to enter the space before an orthobiologics consolidation starts around 2012. And it's anyone's guess who tomorrow's biggest players will be.
"Orthobiologics still have a long way to go. There's a lot of opportunity here, and no one company dominates the market, so it's an exciting time," Chopack said. "The Holy Grail in orthopedics remains repairing cartilage. Whoever comes up with a solution will take over the market, and it will end the use of almost all of the metal products out there. But I think it will be decades before we're there."
Genzyme Biosurgery currently offers a product that allows for the repair of a small section of cartilage, but it is not yet capable of regenerating all of the cartilage in the knee, wrist or ankle. "The science they're showing is very intriguing," Chopack said. "They can regenerate cartilage, but from a clinical standpoint, they're not generating enough to be efficacious for all patients."
Companies are approaching this challenge from a variety of angles, Clemow added. "Stem cells, allografts, osteobiologics, growth factors and straight matrices are all being used. Right now it's not clear which approach will prove the most beneficial, but undoubtedly we will get there in 10 to 20 years," he said. "Within the next 10 years, I expect to see a lot more effective bone regeneration products that are more surgeon and user friendly and come in more forms--in putties, solids and granules. I also expect to see the prices stabilize, if not drop slightly.
"There's tremendous investment in orthopedic technologies right now," Clemow concluded. "It's perceived as a high-excitement, high-growth market, so it's a very exciting time to be in this industry."
So fasten your seatbelt and get ready to roar.
A New Joint Venture in Orthobiologics
Nearly as hot as the current orthobiologics market itself is an increasing trend for companies to partner in orthobiologic development to take advantage of natural synergies. A recent case in point: In late May, BioE, Inc. and Phillips Plastics Corp. entered into a new joint venture to develop and commercialize stem cell therapeutics for orthopedic applications.
To create this new converged technology, Phillips Plastics will customize structures that will enhance the growth of BioE's proprietary Multi-Lineage Progenitor Cell (MLPC), which is derived from post-birth human umbilical cord blood and obtained using the company's cell isolation platform, PrepaCyte. The companies have collaborated in their R&D efforts for the past 18 months, and in early development studies, the MLPC has differentiated into bone (osteoblasts) and cartilage (chondrocytes) progenitor cells, in addition to a variety of other cell and tissue precursors. Preclinical trials are imminent.
"These therapeutics could lead to treatments for osteoporosis and bone fractures of the hip, spine, wrist, arm and leg, for knee and hip replacements, as well as remedies for injured or deteriorated joints throughout the body," said Michael Haider, president and CEO of BioE, which is headquartered in St. Paul, MN.
Such remedies will be good news to the more than 75 million Americans each year who suffer from orthopedic conditions. "As the US population ages and individuals become more active throughout their lives, the use of orthobiologics will be a key part of many future orthopedic treatment paradigms," said Robert Cervenka, founder and CEO of Phillips Plastics in Prescott, WI.
Indeed, industry analysts estimate that the stem cell market for orthopedic applications--which currently grosses less than $100 million in annual sales--could surpass $3 billion within the next decade.
The regenerative medicine solutions BioE and Phillips Plastics are working on could provide an answer to the industry's conundrum of how to create cartilage more cost effectively. "The beauty of working with the MLPC stem cell is that it grows from a single cell into literally billions of cells while maintaining its stemness and purity. Single-cell cloning will allow for off-the-shelf therapeutics, which simply are not available yet in other forms. We're also able to achieve a purity and dosage with this functional cartilage that's not available in other products," noted Dan Collins, PhD, BioE's founder, executive vice president and chief scientific officer.
Single-cell cloning of the MLPC stem cell also has been studied extensively, which can significantly shorten regulatory approval timelines compared with other regenerative medicine pathways, Haider pointed out.
BioE and Phillips Plastics intend to add commercial partners soon. "We're actively searching out partners because the types of materials used and how cells are applied can be quite different, depending on the application," Collins explained. For instance, cells used for regeneration in a spinal fusion need to be delivered differently than those employed in a knee replacement. "Our partners will help direct the types of materials best suited for their applications," he said.
In the race to develop regenerative innovations that can be brought to market as expediently and quickly as possible, commercial partnerships may provide the momentum necessary to cross the finish line first.--S.L.B.
Stacey L. Bell
Stacey L. Bell is a freelance writer who specializes in business and marketing issues. She is based in Tampa, FL.
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|Title Annotation:||BIOMATERIALS UPDATE|
|Author:||Bell, Stacey L.|
|Publication:||Orthopedic Design & Technology|
|Date:||Jul 1, 2007|
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