Growing up, Globally

COVER STORY

In the mid 1990s, Kyphon Inc. (Sunnyvale, CA) developed an innovative procedure for the treatment of vertebral compression fractures, effectively creating a niche for the application of its own technologies in a previously untouched segment of the hotly contested spine market.

Today, less than a decade later, Kyphon has grown into the fourth-largest spine company in the world. Outpacing growth in the overall spine segment, the company reported 2005 sales of $306.1 million—a 43% increase over 2004. It has continued to report significant quarterly gains and expects full-year sales for 2006 of approximately $400 million. Overall, Kyphon estimates that it addresses a market opportunity of more than 1 million diagnosed spinal fractures, translating into $3 billion of revenue potential for the company.

In light of such figures, it's not surprising that the market opportunity forged by Kyphon has caught the attention of competitors. In late September at the annual meeting of the North American Spine Society (NASS), both Disc-O-Tech Medical Technologies (Herzeliya, Israel) and Medtronic Inc. (Minneapolis) launched devices designed to compete in the spinal injury treatment market pioneered by Kyphon.

But despite the new competition, Karen D. Talmadge, PhD, executive vice president, cofounder, and chief science officer of Kyphon, says the company has just barely scratched the surface of its financial and clinical potential. Kyphon continues to invest substantial resources in clinical research designed to demonstrate the advantages of its procedure—balloon kyphoplasty—compared with surgical and nonsurgical alternatives. In addition, the company is setting the stage for continued growth by exploring new clinical applications, complementary acquisitions, and international market opportunities.

In this interview with MX editor-in-chief Steve Halasey, Talmadge discusses the procedure and devices upon which Kyphon was built, the challenges associated with changing the practice of medicine, and the clinical research essential to supporting continued growth and innovation.

MX: What is kyphoplasty and what are its core applications? More specifically, what are the device components of the procedure?

Karen D. Talmadge: The goal of kyphoplasty is to correct the deformity and stabilize the spine in a patient with a vertebral-body compression fracture, which are fractures in the large blocks of bone in the front of the spine. Most of these fractures are due to osteoporosis or cancer, although they can also be seen in younger people due to trauma. But the majority of these fractures are seen in older people whose bones have been weakened by osteoporosis. These fractures cause the vertebral body to collapse.

Kyphoplasty enables spine specialists to access the spine with two small cannulae and deliver orthopedic balloons to the center of this collapsed bone. The balloons are inflated, compressing the inner bone and pushing the outer bones apart when possible, with the goal of restoring anatomy. Then the balloons are removed, and a filler is inserted under very fine control in order to stabilize the bone.

Kyphon manufactures a variety of balloons with a variety of different purposes for moving the bones apart. It also manufactures a bone cement—the filler that stabilizes the bones—as well as the access tools and delivery devices that bring the balloons into the vertebral body. The company also produces mixing devices for the bone cement.

Describe the events and research that led to the founding of Kyphon in 1994.

I cofounded the company with Arie Scholten, a surgical product developer, and Mark A. Reiley, MD, a Fellow in the Musculoskeletal Tumor Clinic at the University of California at San Francisco Medical Center in the mid 1980s. During that time, Reiley attended to a patient with four simultaneous vertebral-body compression fractures. In trying to help this patient, he recognized that the issue with these cases is that the bones aren't stable. They are moving. And any time a fractured bone moves, it hurts.

Dr. Reiley developed an idea for a simple minimally invasive procedure that would enable physicians to stabilize the bone through the insertion of an appropriate material. He began working with Arie Scholten to develop his idea, and together they realized that the ideal way to accomplish stabilization was also the ideal way to correct the deformity.

They developed the concept for a procedure that uses orthopedic balloons to restore anatomy and then allows for the simple fixation of the bone—all accomplished through two tiny incisions in the back. Once they had developed this concept, they began to explore ways in which they could bring the procedure to patients.

That's where I came in. I have a mixed background: I am a scientist by training, but I also spent many years on the business side of the biotech industry. I was head of a small subsidiary of a larger company, a position in which I had gained some operational experience, and I also later gained some experience in the orthopedics sector.

After I met Dr. Reiley, I began delving into clinical literature, and I realized that a large number of patients have the type of fractures that his procedure was designed to address. I thought his solution was very elegant.

Beyond the pain, the deformity is a profound problem in these patients. They have tremendous health burdens related to the deformity.

There are many ways practitioners can address these patients' pain. They can put them on strong painkillers. They can put them in whole-body casts. Such methods immediately address the pain, which is obviously highly inconvenient.

Physicians can do vertebroplasty to stabilize the bone and address the pain, but they must correct the deformity or they will not be able to stop the spiral of health problems related to the deformity itself. These problems include lung function complications, loss of appetite, difficulties performing activities of daily living, and decreased ability to walk, all of which reduce a patient's physical and social function. These deformities can lead to significant decreases in quality of life and are also associated with excess mortality.

I was compelled to become a part of Mark and Arie's mission to develop a solution. Due to my mixed background in science and business, I was able to explain to Mark and Arie the steps needed to achieve this goal. I outlined how we could form a company, find financing through the venture capital community, and bring the product to patients ourselves.

When you first reached out to the venture community, how developed was the concept for the procedure?

Of course, we had never performed the procedure in an actual patient. Until you do, you can't be certain that it works to relieve pain and restore anatomy in actual patients. But based on our understanding of the mechanics and the available clinical literature, we strongly believed that the procedure would work. But again, at that point we had not treated any patients, so we didn't know for certain.

Regardless, in anticipation of demonstrating its value to actual patients, we had a full business plan. The plan followed the product all the way to market and included sales projections. It also included details related to the product's development and its anticipated trip through the FDA approval process. The business plan laid out our strategy and expected milestones, which included first showing proof of concept in cadavers and later showing safety and effectiveness in humans. We had an entire strategy.

How did the venture capital community respond to your proposal? Were you able to meet the milestones of your original plan?

It actually took us three years to obtain funding for our concept. Each investor cited a different reason for being reluctant. Some thought FDA would never approve it. Some thought it would never be reimbursed. Some thought these patients didn't need such a treatment. But what these reasons told me was that investors were most concerned about the risk associated with backing an idea that would change the practice of medicine.

In promoting our idea to the investor community, I offered the analogy of angioplasty. This procedure changed the practice of medicine, and a large industry segment was built around—coincidentally—a balloon technique. But investors were still uncomfortable with Kyphon's concept.

Because so many expert investors were uncomfortable with the level of risk associated with our proposal, I spent a large amount of time investigating our business plan to see if there was in fact a reason we shouldn't be moving forward. But the more I dug, the more compelled I felt.

That's why I did not give up, and I did not take no for an answer. I knew I had to find somebody who was willing to invest in a company that would change the practice of medicine, and I found that person in Jack Lasersohn of the Vertical Group.

Almost three years after I first started seeking funding from the venture community, Jack gave a presentation at the Wilson Sonsini Goodrich and Rosati Medical Device Conference. His presentation was titled something to the effect of, "The Ones We Missed." It was aimed at the venture capitalists in the audience, and he talked about important opportunities that were missed because venture capitalists are often uncomfortable changing the practice of medicine.

After his presentation, I knew without a doubt that he would be comfortable with our business proposition, as well as our business analogy. And indeed, he was immediately interested. He brought Bess Weatherman of Warburg Pincus on board because he recognized—just as we recognized—that our business proposition required deeper pockets to be able to deliver our proposed technology. Together they evaluated the deal, and I had my funding within months.

After three years.

It was actually two years and 11 months from the time I first took the business plan to a venture firm.

As a result of your efforts and those of others like you, do you think the venture capital community has become more savvy regarding opportunities such as the one that Kyphon presented?

Venture capitalists are very savvy—they just want to minimize their risk. I don't think that is any different today than it was when we started Kyphon. Now, a lot of venture capitalists are trying to find a way into our market because we've proven it's a big one. So the risk associated with a company like ours is now much lower.

I'm currently the biotech investment committee cochair for Life Science Angels, which invests in early-stage deals. I find that there is a lot of concern on the part of the angel investors as well as the venture groups who fund the next stage—the series A financing—when they are faced with the prospect of changing the practice of medicine.

Investors are a lot more comfortable taking on technological risks. Once a company demonstrates that it has addressed the technological problem, the other risk is gone. The company already knows what to expect with the FDA approval process. The company already knows how the technology will be reimbursed and that doctors will use it. It's much more comforting for a venture capitalist to hear a company say, 'We can solve this one technical problem with a defibrillator and gain a large portion of that $3 billion market,' than to hear a company say, 'We can create a new procedure that requires us to pioneer a whole new FDA approval process and reimbursement model, and also requires doctors to change the way they treat their patients.'

I felt very comfortable with that proposition, though, because I believed from the outset that our procedure was the right way to treat patients. I believed that we could produce strong clinical outcomes to support that belief, and that practitioners would adopt the procedure.

I could see in the clinical literature how poorly these patients did with conventional therapy. So I was not worried about whether there was a need for our procedure. But then again, I wasn't the one investing in getting the concept off the ground—unless you count my time, effort, expenses, and lost salary.

You just described a lot of the issues that early-stage companies and their investors face. It seems almost like a chessboard, and companies must determine when to move their reimbursement pieces forward and when to move their FDA pieces forward. How did Kyphon move those pieces in the early years?

The first thing we did was develop a product appropriate for commercialization and demonstrate its feasibility in cadaver studies. We then had to determine when to approach FDA, and we decided that earlier was better than later. However, we wanted enough data to demonstrate that the product was reasonable. With a 510(k) submission, in which you claim similarity to the safety and effectiveness of a predicate device, FDA evaluates whether a product introduces new issues of safety or effectiveness. Therefore we developed the data in cadaver models to show that there were no new issues of safety or effectiveness associated with the product. We had a meeting with FDA to verify that they were comfortable with the arguments presented in our application, and we proceeded from there.

The wonder of 510(k) submissions is that a company can get its product on the market much earlier. The difficulty of 510(k) submissions is that the company does so without clinical data. There are some 510(k) submissions now in which clinical data are required, but such requirements were not common at the time of Kyphon's submission.

The company received its 510(k) in 1998 and didn't have clinical data at that point. So we immediately initiated clinical studies. In addition, practitioners who began to use our devices on patients who weren't in our own clinical studies also began to prospectively follow their patients. So clinical data were built quickly. Then it was time to begin talking to reimbursement groups.

Clinical Research

How did Kyphon's relationship with the clinical community develop?

During the process of getting the company off the ground, we connected with a few key leaders in the spine segment in order to be certain that our ideas made sense.

Our procedure presented an unfamiliar concept, so it wasn't immediately grasped by practicing physicians. We were looking to establish a new minimally invasive way to correct a deformity with our devices. And we were looking to use a material that was not generally being used in a minimally invasive way at that time. And we were looking to treat a patient population that at the time was just being medically managed.

Regardless, the people who sat down and listened to our scientific and mechanical arguments became comfortable with our idea. That comfort was very meaningful to us because we specifically targeted surgeons who were well known for being scientific and conservative in their operations. In other words, they were surgeons who were not widely associated with a lot of different companies. They were people who had the reputations of being among those surgeons who don't perform surgery as often as other spine surgeons might.

We decided to go to the skeptics first because we knew that if we could validate our concept among conservative surgeons, that would be a strong testimony to our procedure. When Kyphon got off the ground, it was those conservative physicians who reached out to their colleagues throughout the United States to say, 'I've looked at this very carefully, thought it through, and I'm very comfortable.' They invited their colleagues to join them in validating our technology.

That is how Kyphon developed a strong group of clinical advisors, first within the United States and then internationally. It was based on the company's dedication to science.

And how has that core group and its adherence grown over the years?

The core group is still there, and Kyphon has many more spine specialists who are comfortable with and involved in the science behind its procedure. For example, a group of physicians just published a prospective study that we supported with data from 19 centers in the United States that demonstrates the immediate benefits of kyphoplasty in 100 patients using multiple outcome measures, as well as two-year follow-up data that show those benefits were sustained. That multicenter study, combined with the other approximately 35 papers with original data in the clinical literature, demonstrates that the amount of data behind kyphoplasty is growing, as is the involvement of the physicians.

In addition, we have knowledge of patients whose experience is significantly longer than two years, but we have not yet documented such patients in a formal clinical study. But some of the physicians involved in the 19-center study, as well as other physicians, are following their patients for the very long term.

So we can expect to see their publications in the future?

Absolutely. Kyphon is also conducting major randomized controlled clinical studies to develop the highest level of evidence to demonstrate the benefits of our company's procedure compared to alternatives. For example, our facture reduction evaluation (FREE) study is fully enrolled and will compare kyphoplasty to conventional nonoperative therapy in patients with spine fractures due to osteoporosis. We're following those patients for two years. We are also conducting a similar study in cancer patients.

In addition, there is the kyphoplasty and vertebroplasty in the augmentation and restoration of vertebral-body compression fractures (KAVIAR) study. That study is comparing kyphoplasty to vertebroplasty, and I believe it will be the largest randomized controlled study ever performed on spine surgery alternatives.

How many sites are participating?

Up to 75 sites. Our institutional review board submissions are under way now, and we just enrolled our first patient at the beginning of the fourth quarter. With 1234 patients, it will take a substantial amount of time to enroll. We'll begin to open sites and continue to open them as we see how enrollment progresses.

A study like that must require a significant cadre of trained surgeons. I imagine it would not have been possible to conduct such a study in Kyphon's early years.

That is true. In addition to that, we wanted to first document the outcomes of kyphoplasty compared to nonoperative care before we entered into a comparison of kyphoplasty to vertebroplasty.

We're starting the KAVIAR study a little earlier than we would have preferred, because we are still obtaining the data comparing kyphoplasty to nonoperative care, and we had hoped to use this to help us design KAVIAR. However, we began now because we want to ensure it is done right. The endpoints we examine must be over the long term. Other similar studies have begun that have very few patients and very short-term endpoints. But we believe that a comparison study such as this must examine both short- and long-term outcomes. In addition, multiple clinical outcomes need to be measured, including multiple measures of pain, function, quality of life, and safety.

Are you also evaluating cost-effectiveness issues and ease of surgical use?

In FREE, we are looking at quality-adjusted life years using a European measurement system called EQ-5D, which evaluates patient outcomes in five dimensions (mobility, self-care, usual activity, pain and discomfort, and anxiety and depression), and is among the few such systems recommended for use in cost-effectiveness analyses. In KAVIAR, we're going to document healthcare utilization throughout the study.

What is the expected time frame for the KAVIAR study?

We anticipate it will take between two and three years to enroll patients, and we will then follow them for two years. So it will be about four to five years before we finalize all the data. And then, of course, we have to analyze it all.

So a few years down the road, you expect Kyphon to have extensive data on its procedure.

Yes. We are approaching these studies very rigorously. Because Kyphon is the company that developed kyphoplasty, we are challenged to produce data that the people who support vertebroplasty will find compelling and convincing.

With KAVIAR, we've worked to ensure that we have the most rigorous design possible and that we are representing all viewpoints. For example, one of our coprincipal investigators is an interventional neuroradiologist who was one of the people who brought vertebroplasty to the United States. In addition, our protocol steering committee features equal representation of people who support vertebroplasty and people who support kyphoplasty.

We've also taken our protocol to FDA and the Centers for Medicare and Medicaid Services to get their perspectives on our study's design. We didn't need to send the protocol to them, but we recognize that these agencies are the experts in clinical studies, and we thought they would be excellent resources that could help make the study design even better. We've completed that process and are now ready to kick off the study.

Does Kyphon design and conduct all of its clinical studies or does it outsource some of these functions?

Most of it is done in-house. We have strong clinical departments in the United States, Europe, and Japan. Each group oversees studies in their regions, but there is coordination among all the studies.

We do use outside statisticians and outside imaging companies. Those people are expert in statistical and diagnostic-image analysis. And because they are independent of Kyphon, their participation provides another level of rigor to our studies.

Is it uncommon for a company to do all of the clinical trial design and administration itself instead of outsourcing it?

Based on my experience in biotechnology, I believe it is fairly common for companies to handle these functions themselves. When a study is small and straightforward, a company might choose to work with a clinical research organization. But any study of substantial importance to a company should be handled in-house to ensure it is conducted in the best possible way.

But I do think that Kyphon is unique in the sense that its dedication to science and to proving the benefits of kyphoplasty has driven the company to undertake large randomized controlled clinical studies that it has no regulatory obligation to run. The approval process for the devices used in kyphoplasty does not require these kinds of studies, but we are making substantial investment in them because we believe in our product, we believe in our procedures, and we believe in demonstrating their benefits. In the future, people will look to studies like these to make decisions, and we want to provide the highest-quality data possible.

It sounds as though the company has been rigorous about the studies that it's undertaken. Do you feel as though the rigor with which Kyphon approaches its studies is a key part of its success?

I do. Kyphon approaches everything with that level of rigor. That includes how we train our salespeople and many other functions, but it certainly includes our clinical studies.

Kyphon's relationships with its physicians are stronger than ever before, and that is because they see that the company is continually pursuing science, asking questions scientifically, and conducting studies that will answer important clinical questions. Physicians typically don't see that with companies, and therefore it's something they value highly about Kyphon. It means a lot to them to know that their questions will be answered. As I've said before, from the very beginning, the executives at Kyphon felt that if we were going to create a new scientific procedure, we would have to do it right. And part of doing it right is providing the science that supports the company's claims.

We initially approached FDA for an investigational device exemption, but the agency denied the request because Kyphon didn't own a bone cement. Therefore, we had to pursue the 510(k) route—which we did. But even though our products represented a 510(k) submission, we wanted to provide a randomized controlled clinical study that would answer physicians' questions. And now those studies are being done.

Everything we've done from day one has been focused on making sure we did it right. We moved rapidly, and we tried to be good stewards of the money that was invested in our operations. All the while, we've kept our focus on the patient, with the physician right next to the patient.

Expanding into the Future

Kyphoplasty brings a lot of significant advances in the medical device industry together in a unique way. What opportunities does the company see for expanding the indications for use of this procedure?

Kyphon has acquired a small German biomaterials company that produces a calcium-containing material that, with time, can potentially turn into bone. And yet when it's first placed in the bone, it is immediately structural and does stabilize the spine. That material is on the market in Europe, and Kyphon is performing clinical studies with it. We intend to bring that opportunity to the United States. We are also focused on developing instruments that provide more-robust deformity correction.

One of the hallmarks of vertebral-body compression fractures is that they often occur slowly. Therefore, diagnosing these fractures can take quite a bit of time, and many of them are missed. The patient may be in pain, but an x-ray might not show any meaningful change in the shape of the vertebral body. It's then assumed that there isn't a fracture, but the patient continues to have pain. When the patient is reexamined later, the vertebral body may have collapsed.

Due to the time that elapses before a patient is diagnosed, the patient may already have areas of healed bone. So Kyphon also manufactures a device that can loosen that healed bone, allowing the balloons to perform.

In a minimally invasive procedure, there's a constraint on how much mechanical force can be brought into a bone. Kyphon wants to continue to improve the performance of its existing devices, and introduce new devices that can eventually enable the treatment of patients with established deformities. There are certain patients who may not have an acute fracture, but they have a deformity that is causing health problems. For example, consider those little old ladies with hunched backs who slowly shuffle along with their walkers and their canes. It's my dream to be able to safely and effectively correct those established deformities. I believe it would be very meaningful to those patients. That is one of Kyphon's long-term goals, and we're moving toward it step by step as we iterate on the instruments that enable spine specialists to break up healed bones.

When Kyphon acquired InnoSpine earlier this year, the company indicated that it would conduct some research and development (R&D) in Switzerland. What will that encompass?

Kyphon's new Swiss facility is being built right now. Switzerland is the home of beautiful precision metalworking. In particular, Neuchâtel—where Kyphon is setting up its facility—is the home of the Swiss watchmaking industry. So in Europe, Kyphon has access to some of the best metalworking in the world. The exact R&D that the company will conduct over there is still being determined.

In addition, two superb scientists who started the German biomaterials company that Kyphon acquired are going to conduct research in Neuchâtel.

So those two companies are being integrated?

Yes.

Market Expansion

Aside from Germany and Switzerland, where else does the company have a presence? And in the United States, are most of the company's sales direct?

Kyphon has a presence in approximately 40 countries worldwide. In 15 of those countries, including the United States, we have a direct sales force.

Kyphon's European headquarters is currently in Brussels, Belgium, and the company also has an operation in Tokyo. We plan to go direct in Japan as well. Right now, the company is in clinical studies there, and we are pursuing approval through the Ministry of Health, Labor, and Welfare, which is the Japanese equivalent of FDA.

Kyphon has indicated that Japan is the second-largest market opportunity for the company. What is the company's anticipated timeline for tapping into this opportunity?

For our current clinical trial, the Ministry of Health has requested that Kyphon enroll 81 patients. We've enrolled about half of those patients to date. Once enrolled, the ministry has asked us to follow those patients for two years. So if we complete enrollment by the end of 2006, we could potentially have commercial products available in Japan around 2009 or 2010.

That's a long way to go.

Yes, but it's a big opportunity. The trial is under way, patients are enrolling, and the Japanese government has left the door open for Kyphon to potentially combine some of its existing data with those that we gather during the new trial. We might be able to shorten the time that we have to follow the Japanese patients, which would open the door for Kyphon to enter the market earlier. But, assuming that we follow all the patients for the full two years, commercialization in 2009 or 2010 is reasonable.

Describe Kyphon's current presence in Europe.

Kyphon is active in all the major countries of Europe. The company's level of activity varies from country to country based on reimbursement. Today, about half of our international sales come from Germany.

Reimbursement in Europe can be tricky. Did certain countries raise specific issues relative to reimbursement for Kyphon's products?

Not very long ago, Kyphon was a very small company. Considering our size, we've made some unusual decisions. First, Kyphon decided to go direct in the United States, a choice that not many companies of Kyphon's size would make. Then we chose to go direct in major European countries. Even medical device companies that choose to go direct in the United States often don't choose to go direct in Europe. And now—in an even more outrageous decision—we've decided to eventually go direct in Japan. That is very unusual—many companies that are much larger than Kyphon have not gone direct in Japan.

We believe that you must do things right. And to do things right, you have to do them yourself. But the investment is worth making in every single case. The impact of vertebral-body compression fractures on patients—and populations—is substantial.

As we built our operation in Europe, we selected countries that we felt would be appropriate to target first. Early on, Kyphon was active in Germany. When the country put its new reimbursement system in place, Kyphon was fortunate enough to have a diagnosis-related group code in the system. Well, I shouldn't say fortunate—we worked very hard to make that happen. Kyphon has superb reimbursement teams in the United States and in Europe, and it is building one in Japan. Those teams ensure that the company does everything right to support reimbursement in each market.

In the United Kingdom, Kyphon recently had a positive recommendation from the National Institute for Health and Clinical Excellence. This recommendation paves the way for us to pursue reimbursement from the National Health Service as well as from private payers established there.

In short, we're moving forward in each European country, but we are on different timelines for each country. As reimbursement and other elements fall into place in each country, Kyphon ramps up its commercial activity.

Often, growing companies reach a certain point at which they want to expand. If they don't have a direct-sales force or distribution channel, they may become an acquisition target. Has Kyphon avoided that by building its own channels?

To put it a different way, being acquired has never been one of Kyphon's goals. From day one, we believed that our founding technology would build a substantial company. Building on that founding technology, Kyphon has continued to grow.

The decisions we've made have not been based on building Kyphon as an acquisition target. Everything we've done has been designed to build the best possible company. Our goal has always been to become a major, independent medical device company. That has been the basis of every decision, and that is how the company has grown.

Kyphon has grown rapidly because thought-leading spine specialists believed in the benefits of our products. Those benefits have been demonstrated, and that's why the adoption rate of Kyphon's products has been so rapid. And on top of it all, the company has gone direct in multiple countries. That's how companies do it right, and that's how they grow stronger. A company's revenue is much higher if it is in control. We believe this to be true, so we've invested in making it happen. And that's why it has happened.

There is a lot of competition in the spine market. How well is Kyphon positioned to keep its competition at bay?

Last year, we estimate that Kyphon's products treated only 9% of the vertebral-body compression fractures that were diagnosed—and that doesn't even count the ones that don't get diagnosed. So there is an enormous opportunity in this area. Other companies have recognized that and are looking to participate.

But we think Kyphon is different. We believe the company has an innovative procedure. It's supported by substantial clinical studies, and these are already documented in the clinical literature. There are more than 35 published studies documenting outcomes in almost 2000 patients, and the studies consistently support the performance of Kyphon's devices and demonstrate the benefits of performing the company's procedure. We are also conducting large, randomized studies, including FREE and KAVIAR. I'm confident that Kyphon has both the right approach and valid data to support it.

Toward New Products

Kyphon's significant financial growth over the past few years must be helpful in funding R&D, clinical research, and acquisitions. How do you prioritize use of the company's funds? What has the company been able to do that it couldn't have done five years ago?

Strategically, we are always looking to first support our current business to ensure that it's as strong as it can be. Second, we look to expand on that business in order to grow into a fully functional minimally invasive spine company.

Acquisitions are something we couldn't have achieved five years ago. But now, Kyphon has an active business development group with a specific agenda. I'm very excited about the potential in that area. Kyphon has an equally active R&D function, as the company iterates and innovates within kyphoplasty. Kyphon is also putting its tentacles into new business areas. For example, we strongly believe that we can bring minimally invasive benefits to the disk area. We want any new projects we undertake to be significant.

In addition to its R&D efforts, Kyphon made a strategic acquisition that we believe has the potential to fundamentally change outcomes in patients if we are able to prove our hypothesis. On the surface, the $2.5 million acquisition of InnoSpine might be perceived as a small one because there has not been a lot of interest in diagnostics associated with disk degeneration.

Diagnosing axial back pain is difficult. That pain is often associated with disk degeneration, but a practitioner might not be able to determine that there is any mechanical problem with the disk.

There are methods and procedures to deal with the source of the back pain, and the procedures may appear to have excellent outcomes on a radiograph. Practitioners might think they've achieved their goal, but for some reason the patients don't feel better. One possible—and likely—reason for this is that some of the patients weren't correctly diagnosed.

The functional anesthetic diskography technology Kyphon acquired with InnoSpine brings physiologic response into the diagnostic paradigm for back pain. It enhances the information available to physicians when diagnosing these problems.

In other parts of the body, when physicians want to know if a joint is hurting, they use a little anesthetic and then observe the motion of that joint. That's what functional anesthetic diskography brings to the spine. The technology is logical. It adds information to the diagnostic process for patients, which could potentially improve their outcomes. In the meantime, while physicians are using the technique to obtain additional diagnostic information, Kyphon will be doing the appropriate research to prove its hypothesis.

Is the alternative to functional anesthetic diskography to put fluid into the spine and ask a patient if it hurts?

Yes. In the alternative procedure, patients lie on their stomachs and fluid is injected into their spines under a very specific pressure—enough pressure to cause a response, but hopefully not enough to cause an inappropriate response. In this procedure, not only do physicians have to induce pain, but the patients also have to decide if the pain is the same kind of pain that they would feel when their backs hurt. But they are lying down. They are not standing or sitting or doing the things that they would usually be doing.

Functional anesthetic diskography allows patients to do exactly what it is that hurts them. Then they receive a little anesthetic and repeat the motion to see if it still hurts.

So functional anesthetic diskography removes the ambiguity associated with the traditional procedure?

That is what we hope to demonstrate.

Into the future, we think there might also be applications of the InnoSpine technology for treating disks. For the time being, though, Kyphon is pursuing it as a diagnostic application.

What would be the timeline for establishing functional anesthetic diskography as a commercial therapeutic product?

At this point, we are just discussing the therapeutic possibilities. A timeline hasn't been set. It's currently still a thought process.

What new products did Kyphon launch at this year's North American Spine Society (NASS) meeting?

At NASS, Kyphon brought the Discyphor catheter for the functional anesthetic diskography procedure to spine specialists. The device is a tiny balloon catheter that is placed into the disk to allow the anesthetic to be inserted. It includes all the components required to do a conventional diskography—the one in which physicians induce pain. So the practitioner can use the product to perform both procedures in order to maximize the available diagnostic information.

Kyphon also launched the KyphX Latitude II curette, a more-robust curette with a simple grip handle. It offers a mechanical advantage and is designed to increase the ability to break up bone within the collapsed vertebral body, thereby allowing the balloons to function more effectively in areas where the bone may be healed.

Sustaining Growth

Kyphon's financials over the past few years have reflected the efforts it has made to move its procedure and products to the standard of care. Will those efforts enable the company to sustain significant growth going forward?

We have barely scratched the surface of the market in which Kyphon currently operates. And with all of the company's R&D and business development activities to expand its product offerings into new therapeutic arenas, I certainly believe that Kyphon will continue to grow. The company is doing what is required to sustain growth.

On April 1, 2004, Kyphon received the first 510(k) clearance for bone cement used in the spine for kyphoplasty procedures. Prior to that, FDA considered use of bone cement in kyphoplasty an off-label use. Therefore, none of the company's sales and marketing efforts could use the word kyphoplasty or discuss the outcomes of the procedure. They couldn't even describe how to perform the complete procedure.

Prior to April 1, 2004, Kyphon was hamstrung as to how it could market its procedure. Nevertheless, physicians were adopting the procedure because they read the initial published clinical studies, observed its favorable outcomes in their own patients, and believed it was the right thing to do for their patients.

We worked very closely with FDA in order to move forward with the 510(k) for bone cement. We spent a substantial amount of time writing the 510(k) submission. We also spent a lot of time documenting the published clinical data on use of bone cement in the spine, both in kyphoplasty and vertebroplasty. We also included data on use of bone cement outside of the spine in areas that are mechanically equivalent, as well as unpublished clinical data from studies we supported. In the end, we thought we had put together a compelling clinical argument, and we were pleased that FDA agreed.

In fact, the agency went beyond just giving Kyphon 510(k) clearance for the bone cement. Based on the data we provided, FDA also allowed us to make claims about the outcomes of the kyphoplasty procedure. We are able to link kyphoplasty to improved patient pain, function, and quality of life, as well as angular deformity correction, maintenance of vertebral-body height, and an increase in the volume of the vertebral body. Significant and maintained improvement in patients' ability to perform the activities of daily life, significant and maintained improvement of back pain and mobility, high and maintained rates of patient satisfaction with the procedure, low complication rates—those are just some of the things that we are allowed to promote based on the data we provided FDA.

Also, as I mentioned, we were finally able to say the word "kyphoplasty." Indeed, we put a large banner on the front of our building that read "kyphoplasty." It meant nothing to 99.999% of people driving past our building, but it meant an awful lot to us.

After that milestone, Kyphon representatives began talking to physicians about the outcomes of kyphoplasty. The company was able to reach out to referring physicians and let them know that the procedure existed. We showed them how it was performed and its clinical benefits as they were documented in the clinical literature. And that is significant in terms of allowing us to support our company's future growth.

In addition to individual physicians, is Kyphon working closely with specialty societies?

Kyphon has grown substantially because of physicians and the patients they treat, and we want to give back in a meaningful way to both groups. We feel that the best way to do that is to work with medical societies in a way that gives back to those organizations.

In addition to exhibiting at various meetings, Kyphon donates a substantial amount of unrestricted funding for research and education to a number of physician specialty societies. Being a scientific company, we feel there is no better way to give back to patients and physicians than by supporting research.

Kyphon's commitment to its physicians goes much deeper than the science. It includes how the company supports its physicians. As I mentioned, the rigor that we apply to our science we also apply to the people we hire and how we train them. Kyphon is frequently complimented by physicians on the quality of its sales professionals. They have a significant level of technical knowledge about our products, information that the physicians value and use. That is an important part of the relationships we have with physicians.

Kyphon has been rated as one of the best midsized companies to work for. The company must be proud of that achievement too.

Absolutely. It's a reflection of the quality of people who work at Kyphon—not just in the sales force, but throughout Kyphon. In addition to the award you cited, last year our Belgian headquarters was named the 19th-best Belgian company to work for, of any size. Other companies on that list included Ricoh and Microsoft—many important international players.

So Kyphon is joining the big players.

That's exactly what it's doing. It's on its way. There are many challenges ahead of the company, but we are enthusiastic about what's on the horizon. Little Kyphon is growing up, and we believe the company is now the fourth-largest spine company in the world.

How many employees does Kyphon have now?

Kyphon has more than 1000 employees worldwide.

That's significant growth for only 12 years in business.

Yes. Kyphon was founded in 1994, but the company didn't receive any funding to open its doors and begin product development until 1996. Although I was active in pursuing the patent portfolio and trying to raise the financing, we did not truly begin to build the company until 1996. So we've achieved all that growth in only 10 years of operation.

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