Growing up, Globally 4126

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 excerpted 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. 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.

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.

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.

How did the venture capital community respond to your proposal?

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.

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.

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. 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.

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.

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 with alternatives. For example, our fracture reduction evaluation (FREE) study is fully enrolled and will compare kyphoplasty with 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 with vertebroplasty, and I believe it will be the largest randomized controlled study ever performed on spine surgery alternatives.

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.

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.

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.

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 them, 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.

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.

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.

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.

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.

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. The functional anesthetic diskography technology that 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.

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.

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.

Copyright ©2006 MX