The MX Q&A: Dan Gladney, Lanx

When Dan Gladney became CEO of Compex Technologies in September 2002, the company had been struggling with a poor sales and a low stock price. Despite these problems, the Minnesota-based firm, which makes electrotherapy devices for pain management and rehabilitation, showed positive cash flow and a bottom line in the black. A former star athlete in high school, Gladney saw the company’s potential in both the sports and medical fields. By the time he left Compex in February 2006, he had overseen a bump in its stock price, restructured the company, increased its average rate of growth by a factor of three, and sold it to Encore Medical for $109 million.

Gladney, who has had similar successes with Acist, Heart Leaflet, and other device companies, hopes to do the same for Broomfield, CO–based Lanx. Founded in 2003, the privately run company manufactures products for spinal surgery, most prominently the Aspen spinous fixation system. Designed as a less-invasive alternative to pedicle screw-rod fixation surgery, the Aspen system has been used by more than 800 spine surgeons in approximately 20,000 lumbar fusion implantations, the company announced in July. Intended for single-level use in the thoracic or lumbar spine, the technology can treat conditions such as degenerative disc disease and spinal tumors.

A driven entrepreneur, Gladney says his assessment of a company’s potential for success entails a close look at the growth possibilities of the specific device market, the segment’s capacity for technological development, and the focus of the employees. Gladney has been praised for his collaborative management style.” I’m not a rocket scientist, but I think I’m pretty good at working with them,” he says.

Selected by the Twin Cities Business Journal as one of the Top 40 CEOs to Watch in 2004, Gladney is a veteran of more than 25 years in the device industry as founder and head of companies in the orthopedic and cardiology markets. He most recently served as healthcare operating partner for Norwest Equity Partners. Gladney holds BA from Eastern Michigan University.

In this MX interview, Gladney discusses the effect of the recent S&P credit rating downgrade, the attributes of successful device companies, up-and-coming device markets, and the ramifications of an upcoming patent bill.

MX: Starting from the top of the news, has there been any fallout from the debt ceiling controversy in Washington? Specifically, will the recent S&P downgrade in the U.S. credit rating have any effect on Lanx or on the device industry in general?

Dan Gladney: You’ve asked two distinctly different questions. On the debt crisis I really think the debt ceiling debate rocked confidence in our economy. Evaluating the medical device industry or any industry, we could be impacted in the long-term. For instance, if the government is spending more on the debt service than we can afford and we don’t have enough government revenue to fund our educational system, in the long run that’s going to hurt us. The medical device industry or high-tech industry depends on well-educated engineers to develop innovation. As that starts to slow down, in the long run it’s going to hurt us.

In terms of the S&P downgrade of the U.S. credit rating, that again has a lot to do with people’s confidence, and I think that has a direct impact on a fair number of companies like ours in the medical device industry. Basically, folks who are worried about their job security may not choose to have, for example, spine surgery. Even though they’re in a lot of pain, [the surgery] still is elective. Also, as investors lack confidence they choose to sit on the sideline instead of putting their cash to work, [and as a result] companies like ours might find it difficult to grow and innovate.

I was going to ask you about the investment side of this issue. I’d imagine all that could have an effect. Have you talked to anybody on the investment side about it?

I certainly keep in touch with the finance side of the healthcare industry in terms of private equity funds and venture funds, and they were already cautious. I think something like what we’re going through is probably causing them to pause. Yeah, I think people are nervous about it. Definitely.

But you don’t see any financial fallout for Lanx over the near or medium term?

No, I don’t. There could be a slowdown in procedures overall in our market, but I don’t see anything short term.

You’ve worked with Compex Technologies, Acist Medical Systems, and you did really well with Heart Leaflet Technologies. What did you learn from your time as the head of these companies that will tell you whether a company will be successful or not? What do you look for and what are some of the challenges?

Usually when I look at companies I first look at the markets they’re in. What is the size of those markets? What’s the opportunity for technology development and innovation in those markets? I look at the people in the company. Are they experienced and committed to the company’s mission? Are they focused? Are they well-balanced in terms of understanding market opportunities and customer needs? Do they understand their company’s core competencies?

In evaluating these companies, typically what we want is a low-cost producer or a great technology surrounding good people.

What are danger signs when you’re looking at those scenarios? Probably the opposite of what you were saying….

Clearly, if you’ve got a market that isn’t growing and is not really technology friendly. Another challenge could be a company with a great product but weak distribution, or a weak R&D pipeline. Usually, in a P&L those would be companies that aren’t spending any money in R&D that you could point to. Those would be some red flags that I would try to stay away from.

Right. Have you ever turned down opportunities or looked at certain market segments and decided that you weren’t going to pursue those for those reasons?

Absolutely.

Are there any market segments aside from Lanx’s that you believe are particular up-and-comers?

Certainly, I like the spine market because right now the spine market is a very big one, and the leaders in the market aren’t innovating. I think there’s a great opportunity for medium or even smaller companies to innovate in a situation like that. So that’s why I was very attracted to Lanx.

I think the cardiac industry is still a very good market. What we’re seeing with percutaneous aortic heart valves is an example over in Europe that’s performing extremely well. It’s American technology that’s going to be entering the U.S. here in the next couple of years. I think that’s going to do quite well, and I think there’s still a lot of room for innovation in cardiac.

In terms of management philosophy, a business magazine cover story noted you have a collaborative leadership style. Could you talk a little bit about that?

I think some leaders are more collaborative than others with their employees. I’m not a rocket scientist, but I think I’m pretty good at working with them. You have to allow your direct reports to understand all the key issues and be a part of making the key decisions in the company.

I pretty much have an open-door policy with my folks, and any time there are any major issues or major decisions that need to be made, I involve my group, ask them for their feedback, and listen to their thoughts. Together we come up with solutions. I think getting good people to work together is the key to not only moving a business forward but also the key to keeping people focused.

On that note, your first day as CEO of Lanx was January 10 of this year. What’s the biggest challenge you’ve had to face, if any, since you became head of the company?

I would say we’re constantly working on growing and upgrading your distribution. Right now we’re a company that has great technology, especially with our Aspen product portfolio, which is in the spinous process fixation market. We’re the market leader. We’re always evaluating ways to get that technology in front of spine surgeons in a very effective manner. We run a hybrid system, so we have direct [distribution] as well as dealers. Ensuring that those dealers are well trained and that we have the best possible dealers representing us out in the marketplace is a continuous and constant job. It takes a lot of focus.

How would you characterize the effort to interest surgeons in seeing what Lanx has to offer in terms of advantages in spinous process technology as an alternative to pedicle screws? Recent press releases pointed out something like 20,000 implantations by about 800 surgeons using the Aspen system.

Yes, actually, I would say we’re attracting a variety of surgeons now versus the low-hanging fruit, which in the earlier years were the guys willing to try new things. Now we’re able to get after and attract some major teaching institutions and major-name doctors who are looking for alternatives and looking for better ways to treat their patients. I think what’s helping us there are some early clinical results that we have and some clinical studies that we’ll be publishing here over the next year or so that really support the use of the products. So we can show less blood, significantly less operating room time, and less x-ray time.

We’re getting good, solid results there, of course, with high fusion rates. That kind of data is beginning to attract more of the mainstream of spine surgeons out there and it’s allowing us to grow our market.

That should also help you with the insurance companies, I would think.

Yes. Once we get these studies published we can certainly take them to the insurance companies and continue to move the technology in a positive direction.

As far as the technology goes, I understand you have plans to expand the platform with certain enhancements. Is there a timetable on those and any challenges involved in that effort?

We’re launching two additional lines to the Aspen products in the second half of the year. We’re starting to work with some key thought-leaders, and next year we plan to begin development of the next-generation Aspen. Today we have a minimally invasive approach. My guess is that in the future you’ll see more minimally invasive products.

As far as the two new products for this year, is there more specifically you can say about them?

One is what we call our Aspen Flared for L5-S1 [spinal fusion]. The other one is the Aspen plate systems. It’s more of an economic approach to Aspen.

Speaking more broadly again, there’s talk in Washington of a patent bill that could be signed in September. Would that legislation affect Lanx in any positive way at all going forward?

It will certainly affect us and just about anybody else that’s dealing with patents today. The president commented that he’d like to see the bill passed in September; it’s currently in committee. We don’t know yet the substance of what will ultimately get passed, but the key aspect of the bill might involve a change from the U.S. being a kind of first-to-invent country to being a first-to-file country.

“First-to-file” means that the person who has the first patent application on file will have the ability to get that patent. Currently, we’re a first-to-invent country. What that suggests, of course, is that as long as you have a document and the timing of your invention, the invention date is going to decide who gets that patent first. What that means essentially is that the change to first to file would place additional pressure on companies such as ours to get disclosures documented internally [and] get applications on file as soon as possible. That could be referred to as “a race to the patent office.”

Would that be a burden?

It wouldn’t be for us only because we’re very active in that space, and we’ve got a very active R&D program. It causes you to have your patent department work much closer with R&D to get on file as quickly as possible.

So you just can’t sit on it.

No, you just can’t sit on it. Especially if it’s an active area.