Orthopedic startups attracting big money

The Warsaw area is well-known as the home of gigantic orthopedic implant companies and their suppliers.

But now a handful of startups have been able to raise nearly $25 million in equity investments despite the recession—putting a bit more fuel into a fairly stagnant entrepreneurial sector.

Nick Deeter, founder of OrthoPediatrics Corp., said Warsaw needs more startups.

The growth of orthopedic startups in Warsaw is key to the region’s future, as various pressures that have slowed the growth of existing products and new technology could sap Warsaw’s traditional industry dominance.

“The big companies aren’t growing more than 5 percent maximum right now and they keep laying people off,” said Nick Deeter, chairman of OrthoPediatrics Corp., which he founded six years ago. “For Warsaw to continue to be strong and viable within orthopedics, there has to be new innovation, new companies. That’s who’s going to provide the jobs in the future.”

Warsaw’s success is key to the state’s life sciences industry, which leaders in Indianapolis have tried to grow over the past decade as a high-value replacement for the state’s traditional strengths in automotive, steel and other forms of manufacturing.

Orthopedics companies around Warsaw employ 6,800 people and pay them an average of $69,000 per year, according to an analysis released in January by Indianapolis-based BioCrossroads, a life sciences development group. The Warsaw orthopedic companies also keep many of Indianapolis’ lawyers and accountants busy.

“These positions are coveted elsewhere,” said David Floyd, the former CEO of Warsaw-based DePuy Orthopaedics Inc., in the BioCrossroads report. “The state of Indiana and our country should go to great lengths to preserve and grow them.”

The trouble is, there haven’t been many research-based startups in Warsaw over the past 30 years. OrthoPediatrics has had the most success of any Warsaw-area maker of orthopedic implants since Biomet Inc. was founded 35 years ago. Deeter’s company has raised a total of $43 million, including a $20 million infusion in October from an unnamed individual investor in Chicago.

The firm, which sells implants designed for children to pediatric hospitals and hospital departments, reached $10 million in revenue last year and is on pace for $20 million this year. Deeter expects the company to double sales in each of the next two years, reaching more than $75 million in revenue by the end of 2014.

“We’ve been able to overcome a poor economy and threats of ObamaCare,” Deeter said, referring to President Obama’s 2010 health reform law. “We seem to have the luxury right now of demand for our products exceeding our ability to supply.”

Other Warsaw-area companies attracting investment capital include Iconacy Orthopedic Implants LLC, which raised $2 million last year, according to a securities filing.

Also last year, Nanovis LLC raised $225,000 and is on pace to reach a total of $1.5 million. Nanovis uses technology developed at Purdue University to alter the surfaces of orthopedic implants to reduce inflammation and infection.

Nanovis, whose CEO Matt Hedrick lives in Carmel, is also developing its own line of spine fusion implants with the special surfaces.

And from 2008 to 2010, Del Palma Orthopedics LLC raised $3 million to develop new orthopedic implants for patients’ feet, ankles, hands and wrists.

“They each have a differentiated technology or idea that’s meeting an unmet need in the marketplace,” said Brian More, who acts as chief financial officer for both Nanovis and Del Palma.

More also is CFO of Micropulse Inc., an orthopedic contract manufacturer in Columbia City, halfway between Warsaw and Fort Wayne. Micropulse began incubating startup orthopedic companies inside its office back in 2004 and to date has been the unofficial hub of orthopedic startups in the Warsaw area, including Nanovis and Del Palma.

Micropulse takes a 10 percent to 15 percent equity stake in the companies it houses, helps them raise money when they need it, and bids for (but isn’t guaranteed to win) the manufacturing work the startups need.

“We look at it as partnering with these companies. If they’re successful, then down the road Micropulse will be successful as a manufacturer,” More said. “There are some distinct advantages to being close together.”

The trouble is, outside of Micropulse, there are few options for fledgling companies looking for office and lab space.

Some new orthopedic companies have gotten their start at the Northeast Innovation Center in Fort Wayne, including OrthoPediatrics and Schwartz Medical. But there is no small-business incubator in Warsaw, which is a hindrance to startups and their growth.

OrthoPediatrics had to spend $2 million to acquire the building that now houses its 54 employees in Warsaw.

City leaders are clearly trying to fill that gap. Some candidates for the Kosciusko County Council have made a small-business incubator a key plank in their election platforms.

In March, the Kosciusko County Economic Development Corp. announced an “incubator without walls,” which provides online resources for startups.

And former orthopedic executives, including Biomet co-founder Dane Miller and ex-Zimmer honcho Terry Schlotterback, have been talking with Grace College about launching an incubator for small businesses.

The orthopedic business development group OrthoWorx also is pushing ahead plans for what it calls the Orthopedic Capital Clinic, which would combine an orthopedic specialty hospital with a not-for-profit institute for clinical research and surgeon training.

The group hopes that project, if brought to fruition, will stimulate more startup activity, said Executive Director Brad Bishop.

Having such resources certainly helps make companies more attractive to investors, noted Oscar Moralez, an Indianapolis investor who heads up StepStone Angels, a statewide network of wealthy individuals investing in promising private firms.

He worked with Schlotterback to launch a Warsaw chapter of StepStone Angels last summer, two years after his investment in OrthoPediatrics caused him to take a closer look at the area.

However, Moralez said he has not found a string of similar great deals in the Warsaw area, and the chapter there has focused its attention so far outside the region.

“I didn’t really do it because of the deal flow opportunities,” Moralez said, adding, “I haven’t seen more of a movement of deals coming out of the Warsaw area.”

Recession takes toll

The orthopedic industry was a growth powerhouse until the recession set in solidly at the end of 2008.

Worldwide sales of orthopedic implants grew more than 11 percent in 2007 and nearly 10 percent in 2008. And according to research by BioCrossroads, roughly one-third of the entire industry’s $33 billion in revenue can be claimed by Warsaw.

In addition to Biomet, those companies include Zimmer Holdings Inc., the largest orthopedic implant maker; DePuy Orthopaedics Inc.; a unit of New Jersey-based Johnson & Johnson; and suppliers Symmetry Medical Inc. and Paragon Medical Inc.

But since 2009, annual growth in orthopedic sales has hovered at 3 percent to 4 percent.

In the United States, many unemployed—and therefore uninsured—Americans have put off joint-repair surgeries, slowing sales of the artificial hips, knees and vertebrae that are the bread and butter of the industry.

Somewhat compensating for this slowdown have been sales of implants for hands and knees, as well as sports-medicine implants and biotech-based implants.

The slowdown in growth was really unprecedented for the industry, and led many investors to shun it.

“The realization that procedure volumes in the large-joint market are not recession-proof, as well as increased pricing pressures in hips and knees, has pushed many investors to the sidelines,” wrote Matthew O’Brien, an orthopedic analyst at William Blair & Co., in a 2011 report.

The same thing happened among investors in private startups, according to investors and entrepreneurs around Indiana.

Also looming over the industry has been the 2.3-percent medical-device tax included as part of President Obama’s 2010 health reform law. It takes effect next year and has driven some companies, such as OrthoPediatrics, to concentrate more of their efforts on sales in Europe, South America and countries such as Israel and South Africa.

One silver lining of these challenges has been that the smaller firms were able to scoop up some of the talented people who’ve been laid off or have left the large companies in Warsaw.

That availability of talent is why More, the Micropulse executive, is confident Warsaw will continue to remain globally competitive, whether through big companies or small.

“There’s a lot of really good manufacturing talent, engineering talent,” More said. “That’s what will keep it successful.”•