The 1M1M Deal Radar 2010: Arthrosurface ,Franklin, Massachusetts

Oseteoarthritis, also known as degenerative joint disease or degenerative arthritis, is not a new disease – evidence of it has been found in skeletons from the Ice Age. But effective methods of stopping the disease, especially ones appropriate for young and middle-aged adults, have been elusive. In the United States, anywhere from 16 million to 20 million people over the age of 25 have osteoarthritis. World statistics are not easily calculated, but British researchers estimate that 9.6% of men and 18% of women over 60 have osteoarthritis. For older osteoarthritis patients, often the only option to restore range of motion is total joint replacement. For patients too young for joint replacement, Arthrosurface offers a less invasive implant system that it says is effective in slowing the disease’s progress.

The implant system is analogous to a filling for a tooth cavity (carie). Instead of taking out the entire joint and replacing it with an artificial implant, only the damaged area of the joint surface is restored using thin patient-matched implants in the hope slowing or stopping the spread of arthritis and cartilage damage in the middle-aged patient. Arthrosurface’s proprietary technology, HemiCAP®, offers partial joint resurfacings using an innovative three-dimensional mapping technology. The company has over 20,000 implants around the world to date, with a six-year follow-up success rate of 98%.

Franklin, Massachusetts-based Arthrosurface was founed in 2002 by Steve Ek (executive VP and COO) and Steve Tallarida (president). Ek has over 18 years of experience in designing and building orthopedic devices and implants, including as vice president of engineering at STD Medical. Tradallia has more than 17 years of experience bringing medical products to market and is president and CEO of STD Medical Inc., a medical device and manufacturing company. Arthrosurface was incubated and then spun off by STD Medical, which is owned by several of the founding shareholders of Arthrosurface.

The founders of the company recognized that there was a serious gap in the market when treating joint disease. The existing treatments, which consisted primarily of biotherapies and joint replacement, didn’t address active patients in the age range of 35–65. The Arthrosurface resurfacing technology was developed to “bridge the gap” between conservative biotherapies that may slow disease progression in younger patients and total joint replacements intended for older patients with full-blown arthritis. Both biotherapy and joint replacement involve long recovery periods, whereas the Arthrosurface procedures are usually done on an outpatients basis and have an accelerated and relatively short recovery period.

Before the company developed the HemiCAP, patients with joint disease were presented with limited choices, such as the use of expensive biotherapies with restrictive rehabilitation and recovery scenarios or to continue to live with pain and a reduced range of motion. For many “baby boomer” patients, neither treatment is an attractive option. An example of biotherapy for the knee is a cell-based treatment offered by various companies. These treatments consist of two surgical procedures. First cells are obtained from a patient’s biopsy so that cartilage cells can be taken and grown in an outside lab to produce new cartilage cells. Second, the patient is brought back in for another surgery so that the cells can be inserted into the defective cartilage area in the patient’s knee joint in order that they regenerate into new cartilage.

As mentioned above, over 12% of the U.S. population over the age of 25 has osteoarthritis – that’s 21 million people. This number is projected to grow to 20% (72 million people) in 2030. As joint replacement surgery is a mature market, the numbers are well understood. What is unclear at this early stage is how many people are silently suffering from the early stages of osteoarthritis. It is this market where Arthrosurface says it will make an impact. The company refers to these patients as “waiting room” patients because they are waiting to be educated that there is an option for them.

Arthrosurface’s top segments are in order of priority: knee, shoulder, and foot & ankle. The knee is actually divided into two separate joints, the patello-femoral (PF) joints and the condyle. The PF joint is the joint behind and including the knee cap and groove. The condyle includes the end of the thigh bone (femur) and the top of the shin bone (tibia). The knee is by far the most commonly operated on joint in the body. All segments of interest are joints that receive early cartilage damage and can be life-changing as far as pain and mobility for an active middle-aged person.

The company’s beachheads were dictated by regulatory approval processes. Arthrosurface’s first beachhead in the United States was providing a product to offer focal resurfacing of cartilage versus complete replacement of the shoulder bone. Overseas, focal lesions in the knee condyles were the first market. Arthrosurface markets its products directly to orthopaedic surgeons and hospital facilities. Early traction was established by identifying key opinion leaders who saw the need for something to fill the treatment gap discussed above.

About half of Arthrosurface’s funding has come through friends and family, who typically contribute $50,000 to $100,000. The remaining funding has been raised through Boston Millennia Partners in a series of six rounds from 2003–2008 totaling $31.3 million. Arthrosurface projects over $25 million in revenue in 2010 with positive cash flow, a run rate of over $50 million in two years with annual growth rates to exceed 40%–50%. The company does not foresee the need to raise additional capital.

The company says that realistically there are two exit strategies, acquisition or IPO in the orthopaedics market, a segment that is very conservative when adopting new technology. Because its patients are pre-Medicare and pre-joint replacement, it remains attractive to top-tier orthopaedic companies as a bolt-on, no overlap type of acquisition but large enough to be beyond the value at which a midlevel company would be able to acquire Arthrosurface. The other, more attractive option is an IPO. The company says that it is at the break-even point in the business and the only thing keeping it from the next level of explosive growth is an infusion of capital. The company says that whoever gets the pre-arthritic patient first gains the best chance of keeping them as they move through the various stages of joint disease from early to advanced. Arthrosurface says it has created a wedge where it can “capture” that patient before they need technology used by the large orthopedic companies. An IPO would “keep the train rolling” in that direction.

Recommended Readings
Deal Radar 2009: SpineMatrix
Deal Radar 2009: ClearCount Medical Solutions
Deal Radar 2009: WaveMark

This segment is a part in the series : The 1M1M Deal Radar 2010