Deals Of The Week Presents Last Week's Deals

Not to go all eschatological on you, but this blogger owes the IVB readership a confession. Religious broadcaster Harold Camping's exhortations (and innumerable billboards and emails) announcing May 21, 2011 as the onset of the Rapture and the ensuing end-of-days offered this blogger an excuse to book out early to enjoy a last supper with friends and family. (At which there was much speculation about the soon-to-be revealed identities of the four horsemen.)

In the blogger's defense, the signs were all there. (And no, we aren't talking about cataclysmic earthquakes, the rise of either false prophets (Beck or Trump?) or the Mississippi River, or the sky-rocketing home prices in the Bay Area tied to LinkedIn's IPO.) How can you deny it's not the end of the world, when the Cleveland Indians are leading their division, Oprah's pulling the plug on her daily tv show, and reality stars like Jersey Shore's Snooki command speaking fees higher than Nobel prize winning writers?

Thus, in the hopes of cramming celebratory fun into the final hours of May 20 (we had until 11pm PT by dear Harold's calculations), DOTW seemed a wee bit, well, unnecessary.

In the face of Armageddon, who really cares about Shire's decision to diversify into regenerative medicine with its non earn-out purchase of Advanced BioHealing? (Dermagraft, after all, can't be used to treat the gnashing of teeth.) And, really, with the world absolutely ending on Oct. 21, it's not like Takeda needs Nycomed to bridge its 2012 Actos patent cliff. (Now if Nycomed sold an OTC product to repair the rending of hair, we might pay attention given its apocalyptic best-seller potential.)

Oh wait, it's Monday May 23-- and we're still here (and so is everyone else). Damn. That means we'll be writing this column until at least December 21, 2012, which REALLY, TRULY is the end of days. With apologies for our tardiness, it's time for another edition of...

Takeda/Nycomed: The Rapture may not have come to pass but Takeda/Nycomed did. On May 19, after a week of speculation and a press release warning journos not to get too hasty, Takeda announced its €9.6 billion ($13.6 billion) purchase of privately-held Nycomed. As IN VIVO Blog told you last week, the deal satisfies a number of strategic and financial imperatives for Japan's largest drugmaker, as it faces generic competition to best-selling diabetes drug Actos from 2012 and seeks to expand its footprint beyond Japan and the U.S. The deal doubles the Japanese firm's European sales, jump-starts its emerging markets presence and provide an immediate 30% revenue boost, increasing operating income by more than 40%, according to the company. Swiss-based Nycomed brings to Takeda not only the fruits of recently-launched chronic obstructive pulmonary disease drug Daxas, but also a more diversified product mix, including OTC and branded generics, regulatory expertise, and an entrepreneurial culture that Takeda President and CEO Yasuchika Hasegawa said he hoped could "vitalize" his firm. As such, the deal helps accelerate the 2011-2013 mid-range growth plan unveiled by Hasegawa earlier this month. The transaction – worth slightly more than initial reports suggested – values the Swiss-based Nycomed at about 3.4 times its 2010 revenues, excluding its U.S dermatology business, which is not part of the deal. The higher price tag means Takeda will take a ¥600-700 billion ($7.33 billion to $8.55 billion) loan to finance the deal, which is the largest yet in the Japanese firm's aggressive ongoing bid to expand its presence and pipeline through M&A. --Melanie Senior

Shire/Advanced BioHealing: Shire/Advanced BioHealing marks the return of the IPO as a stalking horse, a private M&A deal with NO earn-outs, and an ROI greater than 10x for certain investors. True venture like returns --it must be the end of days!! Just before its planned debut on the New York Stock Exchange, Advanced BioHealing instead agreed to a $750 million all cash offer from the specialty pharma Shire, which has a history of using acquisitions to jump quickly into new lines of business. With ABH, Shire dives into regenerative medicine, grabbing the commercial product Dermagraft, a patch that uses natural cells called fibroblasts to heal diabetic foot ulcers. (Dermagraft has a long and painful history, which you can read about in greater detail here.) The current deal builds on Shire's willingness to pay healthy premiums for companies that it sees as cornerstones to new lines of business. The most striking example is Shire's 2005 purchase of Transkaroytic Therapeutics for $1.6 billion, an acquisition that gave the pharma access to enzyme-replacement drugs for rare diseases and a technology platform for further growth. As part of Shire, ABH will be run as a semi-autonomous unit, with retention of top management one of the hoped for outcomes post-integration. The all-cash offer was a 25.6% premium to the amount ABH was expected to raise had it debuted at $15-a-share, the midpoint of its expected range. Since the IPO was reportedly oversubscribed and pricing was on the upswing, a public debut might have resulted in a larger return to investors -- eventually. Still, ABH's backers, which included Canaan Partners and Safeguard Scientific had to be more than satisfied with the terms-- and certainty of exit --offered by the Shire take-out. Canaan apparently reaped a 15x return on the deal, while Safeguard's ROI was a not too shabby 13x. -- Alex Lash and EL

Roche/Merck:The two current heavyweights in hepatitis C therapy got together May 17 with a plan to co-promote Merck’s newly approved protease inhibitor Victrelis , in what was widely viewed as an effort to squeeze upstart Vertex Pharmaceuticals out of the HCV market despite superior efficacy data for its protease inhibitor, Incivek. Boceprevir was approved by FDA on May 13; telaprevir's PDUFA date is today, May 23. Under the non-exclusive agreement, Roche reps will include boceprevir as part of their promotion to health care providers on the use of Pegasys in triple combination therapy for HCV. Pegasys, part of the current two-drug backbone of HCV therapy, commands about 80% of the peg-interferon market in HCV, far ahead of Merck’s competing product, PEG-Intron. Roche will not bundle boceprevir with Pegasys, however, and the deal does not preclude Merck from marketing its HCV drugs in a discounted bundle. (Nor does it preclude Roche from inking a deal with Vertex though analysts think that's unlikely.) The two peg-interferon products will continue to be marketed separately, both companies said, and Merck added that the collaboration will not affect the pharma’s economics for its new product. Merck and Roche, each of which has other HCV compounds in clinical development, also will test their compounds together in combination therapy trials.--Joseph Haas

Stryker/Orthovita: Yes, dear readers, a device deal, which means the rapture must be coming (even though Harold Camping's calculations this time around were off). In 2010 IN VIVO wondered if Orthovita, hit hard by scientific debate about the merits of vertebral compression fracture treatment and allegations of fraud, was giving up its grand dreams. Thanks to Stryker’s $316 million acquisition last week, its independent efforts at becoming the specialty spine player are over. But with a take-out price tag that included a 41% premium, did Orthovita's investors win? The deal allows Stryker to pair its existing hardware with Orthovita’s Vitoss bone graft and Cortoss bone filler. The former can be used along with Stryker’s spinal implants while the latter might serve as a hook to help sell Stryker’s new vertebral augmentation products, giving the med-tech giant another way to differentiate itself from Medtronic’s line of Kyphoplasty products, which use traditional bone cement polymethylmethacrylate (PMMA.)If Orthovita’s products live on, it's fair to say the company never recovered from a series of er, crushing (compressing?) blows. First, in 2009, New England Journal of Medicine published two studies suggesting vertebroplasty – the filling of fractured vertebra with cement (or Cortoss) – wasn’t an effective method of relieving pain from vertebral compression fractures. The studies were published just two months after the company received FDA approval for Cortoss. Then a Medicare fraud investigation by Department of Justice forced vertebral compression procedures to move from in-patient – where Orthovita’s Vitoss and other materials are currently used -- to outpatient settings. The shift caused problems with pricing and, analysts say, distracted Vitoss sales reps. In the end, economic pressures that have been a drag on the entire orthopedics sector also weighed heavily on Orthovita, which had high hopes that Cortoss sales would quickly ramp total sales to $300 million annually. -- Tom Salemi

ThermoFisher/Phadia: The European private equity firm, Cinven, is to exit ownership of the Swedish in vitro diagnostics company, Phadia, after four years by selling it to Thermo Fisher Scientific, reportedly more than trebling its investment in the process. US laboratory equipment manufacturer Thermo Fisher Scientific Inc. aims to strengthen its allergy and autoimmune disease diagnostics business by acquiring Phadia for a hefty €2.47 billion ($3.5 billion) in cash, announced May 19. (In case you are keeping track, Phadia was spun out of Pharmacia in 2004 when Pfizer acquired the parent company, and was acquired by Cinven in 2007 in a deal that valued the company at €1.285 billion.) Phadia markets complete blood test systems to support the clinical diagnosis and monitoring of allergy and autoimmune diseases and chalked up 2010 revenues totaling €367 million thanks to strong sales in Europe and emerging markets. Thermo Fisher is using a mixture of debt financing from Barclays Capital and cash to fund the Phadia acquisition, which is expected to complete in the fourth quarter, and be immediately accretive to Thermo Fisher's adjusted earnings per share. The deal completes a busy week for Thermo Fisher, which completed its $2.1 billion acquisition of Dionex on May 17 and one day later announced the $35 million purchase of UK player Sterilin.--John Davis

Image courtesy of flickrer WarmSleepy via a creative commons license.

DotW: Party Crashers

The IN VIVO Blog was in Washington, D.C. this week and stood, as giddy as school kids, at the fence to watch the White House glow in the mid-Atlantic night just across the North Lawn. As we ogled the staff coming and going through the checkpoints (Ron--I mean Rahm--is that you?), we pondered the question of access. Who's got it? How do we get it? What do we do with it once we have it? In this town, a lot of people spend a lot of time wondering. You know: Who's in, who's out, who, ahem, left their invitations in the car.

If you're going to party-crash, you might as well go for the most exclusive club imaginable. It's a hell of a lot better than crashing with one of the most exclusive clubs imaginable. In your car. Sticking out the window. If you know what we mean. Go ahead, be a Tiger.

We poke fun, perhaps too easily, but you can be sure every pharma corp-comm exec double-checked last weekend that Tiger Woods wasn't a spokesman. (He isn't, as far as we can tell.) Domestic troubles, car wrecks, and....erectile dysfunction! Have fun with that one, folks.

Pfizer knows what we're talking about. After all, it's had baseball player and steroid user Rafael Palmeiro touting Viagra, and Robert Jarvik, non-practicing doctor who didn't even row his own boat, pimping Lipitor. So it's no surprise that on the heels of Pfizer's latest mega-blunder, its $2.3 billion fine for illegal marketing practices, CEO Jeff Kindler stuffed a couple meas in his culpa for his "Kindler, Gentler" tour this week. He praised health care reform -- at least the Senate version -- and promised Pfizer would stop helping doctors improve their golf games. (He said nothing, however, about helping golfers improve their driving records.)

As our colleagues reminded us at the FDA/CMS Summit this week, so much of health care reform revolves around getting in so you don't get left out. That's why Pfizer and the pharma industry pledged this summer to kick in $80 billion toward the reform bill. When centers of power shift, all kinds of people start to scramble. Which, wouldn't you know, brings us to...

Pfizer/Protalix: There was no greater example this week of shifting power centers than Pfizer's Dec. 1 deal with Protalix. By buying global rights to the enzyme replacement therapy taliglucerase for the treatment of Gaucher disease, Pfizer becomes the latest big pharma to crash the orphan-drug club. Because Israeli firm Protalix uses a plant-cell expressed form of the missing enzyme glucocerebrosidase, analysts speculate Pfizer could sell it at a 20 to 25% discount to Genzyme's mammalian-cell expressed Cerezyme, currently the only drug approved to treat Gaucher's. (How's that for exclusive?) The deal pays Protalix $60 million upfront for worldwide rights except in Israel, with milestones up to $55 million. Pfizer and Protalix will split revenues and expenses 60/40. The deal also plays into two of the company’s strategies, first to expand into niche areas that address serious unmet medical needs and secondly, to move into biosimilars. Pfizer will fold the drug into its Established Products Business Unit, the operation charged with maximizing sales of Pfizer’s mature brands. That’s one hint Pfizer views taliglucerase as something of a biosimilar opportunity, despite the fact that it is a new drug. Protalix is currently finalizing a rolling NDA submission for taliglucerase to FDA. Having an experienced marketer like Pfizer move into Gaucher disease is bad news for Genzyme, which is facing manufacturing problems that have led to a supply shortage of Cerezyme. -- Jessica Merrill

AstraZeneca/Targacept: With one successful partnership under their belts, AZ and Targacept are trying again, with the Big Pharma paying $200 million upfront for global co-development and commercialization rights to TC-5214, an antidepressant that recently completed Phase IIb. Yes, that's $200 million upfront. In the past two years, only the Pfizer/Medivation alliance for Alzheimer’s disease candidate Dimebon has brought a bigger upfront payment for a neuropsychiatric drug -- $225 million. Beyond the upfront, the deal also could provide up to $1.04 billion for development, regulatory and sales milestones. In addition, Winston-Salem, N.C.-based Targacept would receive stepped up double-digit royalties on worldwide sales should ‘5214 reach the market. Despite elbowing its way into the $200-million-upfront party, Targacept saw its stock price fall more than 6 percent the day of the deal. In 2005, the two companies partnered on a compound for Alzheimer’s disease (AZD3480), and since then AstraZeneca has licensed the rights to two additional compounds under the deal, while switching ‘3480’s development path from Alzheimer’s to attention deficit/hyperactivity disorder. –- Joseph Haas

MedImmune/Trellis Biosciences: But wait, there's more! Through its biologics group MedImmune, AstraZeneca also made a play in the antibody space, licensing a pool of antibodies from Trellis Biosciences with the potential to fight respiratory syncytial virus, or RSV, which occurs most commonly in the elderly, the immunocompromised, and small children. Trellis could realize up to $338 million plus royalties under the deal, but didn't disclose specifics. MedImmune currently markets the only preventive therapy for RSV, Synagis (palivizumab). There is no approved therapy for treatment, but Trellis says its antibodies have shown ability to both prevent and fight the virus in animal models. Based in South San Francisco, Calif., Trellis uses its proprietary CellSpot high-throughput screening technology to identify and extract promising antibodies from human blood samples. For its RSV program, the company screened 20 million B cells from 30 donors who had recovered from RSV. CFO James Posada told "The Pink Sheet" DAILY that Trellis hopes to bring more antibodies through preclinical and license them to partners who would take over at the IND-enabling stage. -- JH

Chiesi/Phenomix: Speaking of exclusive clubs, Europe is rather posh, innit? What young American biotech doesn't want to leave its footprint on the Continent? Phenomix went abroad this week, sealing a deal with Chiesi Farmaceutici to commercialize the DPP-4 inhibitor dutogliptin for type-2 diabetes in Europe. Phenomix gets up to $28 million in near-term cash and the total value, which includes milestone payments, could reach $163 million. It comes more than a year after Phenomix partnered with Forest Laboratories to develop dutogliptin in North America. Dutogliptin is now part of a Phase 3 clinical development program that includes five studies of 3,000 patients. The first results are due for release in the second quarter of 2010, according to Forest. Chiesi, of Parma, Italy, will be responsible for product development, regulatory approval and commercialization in the territories covered by the deal. Phenomix, based in San Diego, Calif., will also receive an undisclosed cut of sales. Following the Chiesi deal, Phenomix is now in an “excellent cash position,” said CEO Laura Shawver. Previously, the company gained $75 million upfront from Forest and it has raised $141 million since its 2002 founding. -- Emily Hayes

Centocor/Xencor: Building on a strategy that brought to market therapeutic antibodies like Stelara for severe plaque psoriasis and Simponi for rheumatoid arthritis, Johnson & Johnson’s Centocor unit announced Nov. 30 a deal with antibody developer Xencor for the rights to Xencor’s XmAb and Xtend platforms. Centocor will use them to create antibodies that are more potent and last longer. Centocor has the right to develop and commercialize several optimized candidates, and in exchange, Xencor gets an undisclosed upfront fee, an annual maintenance fee and potential milestones and royalties on products commercialized under the collaboration. Looking back for comparables, we found what appears to be a less comprehensive deal Xencor signed with Merck in March. Merck paid Xencor $3 billion upfront to license Xtend for the development of antibodies towards an undisclosed drug target, as well as agreeing to clinical development milestones and royalties. Privately-held Xencor is still swinging solo, despite the fact that M&A activity has been hot in the space as drug makers look to enhance their pipelines with therapeutic antibodies that are more effective and longer-lasting than those already on the market, especially given the increasing threat of biosimilar drugs. -- JM

And finally, a tale of an outsider in the medical device space getting invited to the dance by one of the cool kids...

Stryker/Ascent Healthcare Solutions: For years, surgical product makers have called medical device reprocessing a threat and pointed to the potential safety hazards. Now one of their own is primed to take over the market. Orthopedic firm Stryker said this week it is paying $525 million in cash to acquire Ascent Healthcare Solutions, and in doing so will control about 65% of the fast-growing $175 million device reprocessing sector. Ascent develops processes to clean, sterilize and generally refurbish used disposable devices. It submits, in most cases, the processes for FDA clearance then resells the devices for about half price. Many of the targeted products, such as cardiac ablation catheters and surgical trocars, are labeled by the original equipment manufacturer for single-use only, so reprocessing can really cut into sales volumes for OEMs, who have also complained that they are vulnerable to lawsuits when reprocessed versions of their products cause adverse events. But the move by Stryker underscores that device reprocessing has become an accepted reality and a successful business model, particularly as hospitals look to cut costs in the current economic and reimbursement environment. And despite periodic graphic reports in the media of reprocessed devices gone wrong, increased government oversight has put the recycled products in the regulatory mainstream. Stryker says it envisions a $1.8 billion opportunity in reprocessed devices and plans to make a strong pitch to hospitals about the potential to slash supply chain costs.-- David Filmore

Hard Time For Biopharma CEOs (Part 2)

The indictment of former Stryker Biotech President Mark Philip should hammer home a message that the Food & Drug Administration and other federal health care enforcement authorities have been delivering for at least two years: senior management at FDA regulated companies can and will be held criminally liable for marketing practices that run afoul of regulators.

Before today, that message has been (mostly) words. Prosecutions of executives have been rare, and when they do occur they tend to focus on individual sales reps and their direct managers, rather than reaching into the C-suite.

There have been exceptions. Former Intermune CEO Scott Harkonen is facing jail time after being convicted of wire fraud in a case involving claims that the company inappropriately promoted Actimmune via a press release. For Big Pharma CEOs, though, it is easy enough to dismiss that precedent, since Harkonen was personally involved in the activities at issue in the case—a small biotech CEO necessarily leaves more fingerprints, as it were.

Then there is the case of several top Purdue executives, who paid criminal fines as part of a settlement of an investigation into the promotion Oxycontin. That prosecution involved the application of the so-called Park Doctrine, named for a Supreme Court ruling which allows the government to hold top executives accountable for violations of the Food Drug & Cosmetic Act even if they were personally unaware of the violation. That is, the law makes it a crime to introduce misbranded or tainted products into commerce—and a CEO can be guilty of that crime even if he or she had no knowledge that someone somewhere in the company was doing that. (We discussed the implications of that prosecution in The RPM Report; click here.)

Still, the Purdue case was a bit of an outlier, a prosecution motivated by concerns about abuse of Oxycontin in some rural communities, rather than by the more common themes of recent industry marketing cases. It was a classic war-on-drugs case—not part of the war on the drug industry and its marketing practices.

Much more common has been what happened in the recent Pfizer settlement. The case included a record-setting fine ($2.3 billion) and lots of tough talk about holding individuals responsible. But the prosecution in that case focused on only one sales manager, who was convicted for her actions in promoting Bextra. For Pfizer’s senior management, the settlement means another corporate integrity agreement—but not direct accountability in the form of criminal charges.

At least so far.

But one wonders how long that pattern will continue. It is worth noting that the Pfizer settlement was negotiated before Inauguration Day—that is, before the new Administration had a chance to decide what if any changes it wants to make in approaching health care fraud prosecutions.

The Stryker case does not by itself answer that question. This investigation also began in the prior administration, and the charges (against the company and several sales executives in addition to Philip) focus on explicit acts, not the broader notion of executive liability inherent in Park. Specific counts include wire fraud and conspiracy, as well as overt acts of introducing misbranded or tainted products to the market—all based on what the government claims was a deliberate campaign to market bone morphogenic protein beyond the limits allowed by its humanitarian device exemption approval by FDA.

We have no idea whether those allegations are true, of course. But we also know this: Philip is no longer the President of Stryker Biotech, and he is no longer free to travel.

Philip “self-surrendered yesterday and appeared in court,” the US Attorney’s Office told us. “He was released on standard conditions and surrendered his British passport. His arraignment is set for tomorrow (Friday) at 2:00 p.m. in front of Chief Magistrate Judge Judith Dein.”

We’re betting Philip won’t be the only top executive to find himself standing before a judge as the Justice Department works though its backlog of marketing cases.

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.