Smith & Nephew Biologics new Joint Venture with Essex Woodlands – An Interview with Mark Augusti

We recently heard the news about Smith & Nephew selling 51% of their Biologics division to Essex Woodlands in a Joint Venture. We caught up with the new President and CEO of the new company and got his thoughts on the news.

Interview with Mark Augusti, CEO Bioventus LLC.

Drue De Angelis: Mark, thanks for taking some time with us today. Could you give us your brief background and how did you end up where you are today? 

Mark Augusti:  I joined GE Medical Systems right out of earning a Degree from Duke University. I was in the imaging business for a number of years, and I had a foray into investment banking from 2000 to 2002. I joined Smith & Nephew in April of 2003 as the Global VP of Marketing for the trauma business, and I’ve been with them since Friday of last week (May 4), when I transferred over as CEO of Bioventus at midnight on May 5^th. At Smith & Nephews I had various orthopedic roles, going from VP to general manager, to President. I’ve been involved with our clinical therapies business, which was EXOGEN and SUPARTZ, in-and-out of the trauma business, and in 2008 moved to President of Smith & Nephews Biologics Division. 

Drue De Angelis: Why did Smith & Nephew want to “spin-off” the biologics division?

Mark Augusti: If you look at the new, stated, strategic aspirations of the CEO of Smith & Nephew, he really wants to focus on the growing markets, the emerging markets, because they’re international and he wants to reallocate the resources from the established markets to the growing markets.  He also wants to focus on their core surgical implant business —  both the orthopedics as well as wound management. So when you look at the biologics business, it was a bit of a tough strategic challenge. Smith & Nephew felt that biologics was important and regenerative medicine was important for the future direction they wanted to play in, but they felt they couldn’t invest it appropriately. There were three investment challenges. One was the scale of investment — the amount of investment required to have meaningful play in that space. Second is  the length of time to market. Most orthopedic companies look to a three year product cycle. Really when you look at biotech or biologics, you’re talking about getting minimum three to five, maybe seven year product development cycle. The third thing is the riskiness of that profile as a public company, and seen more as a medical device company, it’s harder to justify to the investors of Smith & Nephew, public company, the profile of that. So when we started talking about it, even before Olivier came on, we had these challenges. And then when Olivier came on, and really looked at it, he realized that given those three things, there’s a real win-win here for the shareholders. An opportunity to monetize some of the current value in the business for Smith & Nephew shareholders, and that will probably only be 5% of the Smith & Nephew revenue, for Smith & Nephew to retain the minority position, the significant minority position, which should give them the window into biologics. And this is all assuming we find the right investor to partner with us, provide capital, to dedicate to the space. That would allow Smith & Nephew to have that window, and potentially, assuming we do our jobs well, create value for their equity stake. So that’s the reason for the spin-off. We’re very excited about it, obviously, as Bioventus, a private company, focused on ortho biologics, with orthopedic active healing. We think we will be able to do different licensing and acquisition deals that normally wouldn’t rise to the “doablility” of Smith & Nephew, just because, given the other demands they have from their strategic priorities that I’ve outlined previously. As far as what we are going to do different, the main thing is, we’re still going to run our business, competing to win, we’re going to focus on our spaces and we’re now going to focus on longer term investment deals, as I said that 3, 5 to seven year profile. And we’re looking to do very interesting deals off this platform that we have of Bioventus.

Drue De Angelis:  What will happen to the existing Smith & Nephew employees as a result of the spin-off?

Mark Augusti:  As of the transaction closing on Friday, all of the US employees including myself and my executive staff have transferred over. We’re no longer Smith & Nephew employees, we’re now employees of Bioventus.  As for our international business — just due to the regulatory issues, both from a legal and a labor law standpoint – we couldn’t really get it done right away, so you have a process you have to go through, you have  to adhere to that process. Our plan is to do that over time, so that we have roughly 80 to 90 international employees and plan is to have them all come over the next 6 to 12 months. The way it’s working is, as of the close of the transaction, Smith & Nephew is now our distributor internationally, and those employees are still Smith & Nephew employees doing the same thing they did last week, selling our products. Now, given the distributor relationship, we will just work with Smith & Nephew, we have a very good working relationship with them, and we’ll transfer the international business in an orderly fashion.

Drue De Angelis: So, the focus is then in the non-surgical arena, bone healing and different injectables. Are you thinking of expanding beyond that to other non-surgical modalities as well?

Mark Augusti: Well, certainly when things come our way, we look at them and we’re free to do as we want. But I think right now, there’s interesting opportunities in bone healing technologies, as well as cartilage regenerative technologies. We’re looking at some things in soft tissue as well, but we think between bone and healing and cartilage technologies, there’s a lot of opportunity. We have a 300 or so person direct sales force in the US calling on orthopedic and podiatry outpatient clinics, and we think that’s a huge value for Bioventus. We think we have the best performing and largest scale sales force, so we’re looking to leverage that platform to other interesting things. So from that standpoint we also, given the equity and new capital of Bioventus, we’re going to build out this model internationally. It was a little hard to do that under Smith & Nephew given the substance of the operations, given it was a more surgical distribution platform OUS. We started that process and will continue that process under Bioventus and build our own direct selling force internationally  that will focus on orthopedic outpatient and orthopedic active healing technologies.

Drue De Angelis: Very good. That sounds like you got your hands full. Lots to do.

Mark Augusti: Well we do. We got a good partner in Smith & Nephew, and given they have retained a significant position they have every incentive to make sure we get our sea legs under us and get running. You can imagine, I had direct responsibility for a pretty large sales and marketing development, and even clinical affairs and regulatory affairs capabilities. But the challenge is, back office finance, back office HR, and all the IP systems, we got to build those within Bioventus. So that’s what we will be doing over the next year.

Drue De Angelis: Do you think we’ll see more Joint Ventures like this in orthopedics?

Mark Augusti: I think it represents a very interesting model. There’s been partnerships done in the pharma and biotech world before, and med-tech spin-offs but I don’t think there’s been anything as interesting as this where, a major device multi-national has maintained such a large position in the spin-out. And I think if you take the Essex Woodlands and their profile as a growth equity player, as someone who really can invest in technology and do this, it’s a unique model that people are going to watch to see if we can really be successful doing this. At the extend we can, we’d be paving the way in a changing environment with a lot of regulatory changes, challenges on data and health economics data, and really creating value. I think we’re going to prove as we become successful, that this may be a different way to go. I think the days of just getting a product out there, a device, a 510k and try to get a certain amount of run-rate revenue, and hope a strategic comes along, I’m not going to say that’s still not going to happen now and then, but there’s so much stuff chasing the deals, there’s so much capital out there, this is a different model. This is a model that is compelling that will take some strategic thinking, but there’s few firms that can pull it off.  I think other multi-nationals are going to look at this, because frankly, even if you’re larger than Smith & Nephew, you’re going to have similar type challenges when you look at precious resources, and where your investment dollars go. I think, to that extent, people will be interested over time.

Drue De Angelis:  Do you have any announcements relative to new product offerings?

Mark Augusti: I’m not expecting to have any major announcements over the short term, I think we have enough just doing this, and people are going to be watching. This is a challenge for all medtech, and if you look at the Covidiens, the J&J’s, the Strykers of the world, even GE, there’s a lot of big medtech companies who are looking to the emerging markets for their growth. The big challenge for them is, how do they stay relevant and manage their share in the established markets, given all of the changes and the pricing pressures and still fund that growth, which is challenging, while still maintaining an appropriate R&D and new product development pipeline. We’re smaller, but we aren’t very small, we’re an over $200 million company, and I think we’re on the right platform to compete in this space, and orthopedics is calling out for that. There’s so much biological research and research going on, there are few entities that are going to be positioned to really look at what is out there and take a little bit of a longer view, and do the work to invest in this space, and created really good value propositions. The way we’re approaching it is that you’ve got to have a health economic value proposition. You’ve got to have something that has clinical data that you can then talk to the payors and governments about, and get reimbursement for your product. If you look at our two core products that we have, both Bone Stimulation and Joint Fluid Therapy, both have great health economic stories and they’re saving dollars in the healthcare system. One of the key things we look at is, what’s the value proposition, and is it sustainable, and what are the economics behind it? And that’s the way the government is going, whether or not Obamacare gets repealed and those types of things, it is already being established. Having good clinical data really make a difference in allows you to, tell your story, protect your franchises, and frankly, justify being a value for your products, and that’s the direction we plan to move in.

Drue De Angelis: With the challenge of raising money these days, do you think joint venture is something that smaller companies can take advantage of?

Mark Augusti: That’s a great question, and we will see. I think it is tough if you don’t have the scale, the revenue. That remains to be seen, and that is why this is so unique, in that, we’ve got a really good cash flow which gives us the platform and the options to move forward. I think it is going to be tougher on the startups, and people want to see startups with a more detailed plan, funded through, getting beyond pre-revenue. It’s clear to me, at least is today’s environment, that strategics are not really interested in taking on the regulatory risk, the reimbursement risk, and all the other things they might have taken on in the past if they thought that the idea that a new “mouse-trap” would look good. There’s so much risk out there in the medtech world, you may not even get reimbursement. I think things are having to be funded longer as such are requiring more capital, and it’s making it tougher for the venture community. That’s why Essex Woodlands has been really farsighted in trying to partner and do a deal like this. They have set themselves apart on this deal and being able to do something like that. I also think Smith & Nephew did the same thing, and the board of directors should get credit for that. Clearly, I had the germ of the idea for that and advocated for it, but it’s not any one person, there’s a few people who see the value in it and have to get comfortable with that. I do think when this deal was announced back in January, other multi-nationals took notice and said, we’ve got “smaller” businesses in our portfolio that are a bit trapped, that we know we’re not able to fund appropriately, as we would like; so let’s try and understand this deal, how do you do a deal like this and have it make sense.

I think we’ve got a great team and we’re all about transitioning the team appropriately, and we’ve got great partners, great employees. I know my employees are excited about this. There is more to come as we go forward.

Drue De Angelis: Thank you Mark for taking time to give us your insights into your new role in the new company Bioventus.  Best of luck to you!