Interview: Paul Nichols of Bio2 Technologies answers questions about the State of Orthopedic Industry

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An Inteview with Paul Nichols (Editor @ HealthPointCapital)

We recently spoke with Paul Nichols, the current Executive Chairman of Bio2 Technologies who formerly worked with HealthpointCapital as President and CEO of Nexa Orthopedics. Learn what he has to say about the opportunities and challenges of the musculoskeletal industry and his advice for young companies.

Can you tell us about your background and experience in the orthopedic sector?

PAUL NICHOLS: My career in the orthopedics sector began in 1985, when I was recruited by Sutter Biomedical, a San Diego manufacturer of orthopedic implants and postoperative rehabilitation products. I wore many management “hats” during my ten years at Sutter, including oversight of the Small Joint Orthopedics division. This business unit manufactured silicone implants for hand and foot surgery and was the primary competitor to the Wright Medical Swanson product line. In 1994, I was presented with the opportunity to purchase the assets of the SJO division, which led to the formation of Avanta Orthopaedics, Inc. (now a part of Small Bone Innovations) and subsequently to Futura Biomedical (products now owned by Tornier).

Following two years with DJO as a business development consultant and senior executive, I was approached by Healthpoint Capital to support an investment initiative in the extremities segment. Nexa Orthopedics was launched in 2004 and grew rapidly through a series of acquisitions combined with an extensive product development program driven by key opinion leader relationships in the upper and lower extremity subspecialties. Nexa was successfully divested to Tornier in 2007 and subsequently integrated as the Distal Extremities Group.

Since 2007 I have engaged with early stage companies in the trauma, extremities, spine and biomaterials segments. My primary focus today is Bio2 Technologies, Inc. where I serve as Executive Chairman.

What do you think are the biggest opportunities in orthopedics?

PN: Surgeon productivity enhancement represents an immediate value creation opportunity as demographically-driven procedure demand continues to escalate in the face of declining fees and new administrative burdens imposed by private and public payers. I believe the key to successful exploitation of this opportunity is for orthopedics companies to venture with the right development partners to synthesize their clinical and market expertise with robotic, diagnostic and communication technologies.

Which sectors do you find the most exciting or innovative?

PN: As we all know, tissue regeneration will transform musculoskeletal clinical practice. Replacing a joint with steel and polyethylene or fusing a section of the spine with screws and rods will be viewed in retrospect as primitive in the not- too-distant future. In the interim, innovation in biomaterials and fabrication processes will give rise to low-cost, “one-off” implants for clinical applications where personalization adds value.

What do you think is the biggest challenge facing the industry? How do you think it can be surmounted?

PN: The reduction of marginal selling costs is pivotal for the profitability of the industry going forward. Logistics and technical support services must be delivered through a more economic business model. As the industry was developed around relationships, implementing change in this area poses risk that companies have been hesitant to accept. The successful transition strategy will find the right incentive structure between the surgeon, facility and manufacturer that retains a positive customer relationship.

Do you believe the current M&A trends will continue? What do you think acquirers are looking for?

PN: Strategic acquirers have exhibited an increasing preference for later-stage investment opportunities where US regulatory approvals have been garnered and early adoption has been demonstrated to some extent. Recent transactions confirm that market leaders are continuing to value such assets at attractive multiples.

As someone who’s led a company from concept through exit, what advice do you have for young companies?

PN: Maintaining capital efficiency through focused and fundable growth strategies is the key to survival for early stage companies in today’s orthopedics market. Minimizing the investment and cash burn associated with commercial infrastructure and working capital is the key to optimizing the rate of return to investors.

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