First it was Integra picking up IST‘s IP for a cool $9 million. Then Synovis bought out Pegasus Biologics for horse feed ($12.1 million). And Cardo Medical did the same with Vertebron, for a bargain-basement price of $1.3 million.
Now a similar deal has gone through, with Facet Solutions buying Archus Orthopedics’ IP.
Here we have several venture-funded spine companies with early success and investor interest, several spectacular craterings and, finally, several opportunistic acquisitions. One spine blogger dubbed the carnage “The Spine Industries Roadkill Tour of ’09.”
Much has been written about the mis-steps that led these spine companies to their downfalls, but it’s much more interesting to look at why other companies are snatching up the IP and remaining assets from the busts. Is it merely a case of the acquiring companies shopping for bargains, or are there meaningful strategic reasons for these acquisitions? Is there a lesson here for us? Being somewhat familiar with the situation at FSI, I’d like to share my thoughts.
Starting off with a quick breakdown of the finances (using VentureSource data) to bring things into a sharp focus:
- IST raised $74.2 million and had $2.2 million in sales in 2008, but reaped only $9.25 million after filing for bankruptcy.
- Pegasus Biologics raised $33.65 million and had 2008 sales of $9.1 million, before Synovis Life Sciences acquired them for $12.1 million in cash.
- For Vertebron, the numbers are $29.5 million in and $1.3 million out, with 2008 sales of $11 million.
- For Archus, the amount in is $72.3 million, but the amount paid by FSI has not been publicly disclosed. But using the aforementioned fire sales as a barometer, we can guess it was cents on the dollar. I think FSI scored big.
Of course, FSI’s recent cash infusion of $3.6 million, with potentially more on its way, gives them a little discretionary spending.
So what’s so special about this acquisition? For FSI, there does seem to be a genuine strategic advantage to buying up all of Archus’ IP on the cheap. Although both companies had strong and relatively independent patent positions, the overlap was confusing to investors. That issue is obviously settled, but more importantly, the combined portfolio is greater than the parts.
For nearly 10 years FSI and Archus were actively trying to avoid, outmaneuver and outwit each other. The two groups of engineers/lawyers spent countless hours dreaming of ways to overcome the disclosure of the other. So what happens when you put those two efforts together? They mesh like a zipper. The combination leaves essentially zero white space for others.
It’s likely that some people were salivating for the FSI/Archus fight. As we know from past litigation in spine, a good battle invalidates claims, airs obscure prior art and generally yields “scorched earth” public space for the benefit of all. Not now. According to the press release, FSI now controls 36 issued patents (counting international) and a whopping 194 patent applications. Not only is there synergy in the portfolio, this huge volume of disclosure on file should allow FSI to ensnare competitive products of the past, present and future.
As far as I know, such a stranglehold on a single spinal technology segment hasn’t occurred since Kyphon aggressively locked down vertebroplasty. In the official press release, Marc Peterman (Facet’s VP of R&D) says, “The combined portfolio represents an unprecedented level of coverage for an orthopedic product category. The acquisition clarifies Facet Solutions’ intellectual property position and provides a tremendous platform for innovation. Our posterior motion solutions hold the potential to supplant the bulk of the degenerative fusion market.”
Who should be the most worried by this? How about Impliant, which also has a facet replacement technology and recently raised another round of funding. Where was Impliant during the bidding process for Archus’ IP and why they didn’t push (or push harder) to get their hands it? According to the USPTO website, Impliant is currently the assignee on five patents and seven patent applications. I realize that IP isn’t the only piece of fuel that keeps a startup moving forward, but I bet that the management team at Impliant will be kicking themselves over this lost opportunity.
