Biotech startup focusing on bad backs, knees

By Megan Woolhouse, Staff Writer

An Atlanta startup, Orthonics Inc., appears poised to receive seed funding from a New York venture capital firm, money that will help launch an artificial spinal disk that could help eliminate the need for spinal fusion.

“We’re currently looking to have a round of financing in the neighborhood of $1 million in the third quarter of 2004, said Orthonics CEO Steve Kennedy.

The funding comes from Viscogliosi Bros. LLC, a venture capital firm specializing in the development of musculoskeletal and orthopedic products. Like other investors, the firm is interested in the commercial potential of hydrogels, long-lasting polymers under development that may one day replace metal devices used in knee and back surgeries. The devices take less time to bring to market than most drugs and are in demand by aging baby boomers. Forty-seven venture capital firms have invested an estimated $394 million in the development of the devices since 2000, according to research by PricewaterhouseCoopersLLP.

Viscogliosi Bros. Recently benefited form the sale of another spine disk replacement company, Spine Solutions Inc., for $350 million, and despite the risks, decided to use the profits to fund developing technology at companies like Orthonics.

“There’s no certainty in this, that’s for sure,” said Mark Viscogliosi, one of the founders. “But if the technology works the way we think it can, it has the potential to be significant.”

Orthonics wasn’t even a company five months ago. Kennedy came to Georgia Tech as a Venture Fellow in 2002, where he was given a one-year stipend to look for business and commercial opportunities among research at Georgia Tech. The stipend was funded by the Georgia Research Alliance, and public-private partnership that uses state funds to promote growth in the biotechnology industry.

Kennedy has a Ph.D. in biophysics and was vice president at Mirex Corp., which had been sold to pharmaceutical giant Abbott CC. He was also a former competitive tennis player suffering from back pain so severe he ultimately quit the sport.

Kennedy met Barbara Boyan, a tissue researcher who had left the University of Texas health science program in San Antonio to come to Georgia in late 2002. Boyan had founded OsteoBiologics Inc. in Texas. During a half-hour meeting, Kennedy said, it became clear that they could work together to develop a product.

Boyan’s research led to the creation of a surface-patterning technique on a hydrogel that causes cells to develop. The hydrogel disk has the texture of calamari, Kennedy said. The cells that form are the precursors to cartilage growth, eventually connecting the bone and hydrogel permanently and without inflammation.

Kennedy said the new device would help eliminate the need for spinal fusion, and could serve as the next stage in the development of devices currently made of metal.

The Viscogliosis have funded the second phase of Orthonics development, matching a $100,000 grant from the Georgia Research Alliance. The remaining venture funding terms have not yet been set, Kennedy said.

However, he expects that pre-clinical and animal trials could begin later this year, followed by clinical trials in humans by 2006. The materials will also require U.S. Food & Drug Administration approval.

Wayne Hodges, director of the Advanced Technology Development Center at Georgia Tech in charge of overseeing all economic ventures and the university, said other technology projects are being considered for funding by other venture capitalist groups but have yet to be announced. He said it’s a sign that the overall economic climate is improving.

“There seems to be a lot more activity, more motion,” he said of venture capital firm interest. “We’re not getting it locally based, but some are coming back into the market.”

Thomas Brooks, a venture capitalist at HealthCare Capital Partners LLC, an early-stage seed fund based in Atlanta, said he considered investing in Orthonics.

Brooks said he sees so much investment in orthopedic device startup companies that the potential for a high return on an investment is questionable. He said he knew of at least five companies developing spinal devices for the lumbar region. Another company, Raymedica Inc. in Bloomington, Minn., is developing spinal technology that is about a year ahead of Orthonics’, he said.

“There’s a lot of money chasing these companies,” he said. “The ones that win will iwn very, very big on their investment. The rest of them, if they’re in business at all in two years, will have very, very small market shares.”

Viscogliosi Bros. Recently invested $12 million in venture capital in Raymedica Inc. Viscogliosi said his firm has financed several companies with similar missions in orthopedic medicine, including Biothex Inc. in Canada and Cortek Inc. in Massachusetts.

After following Boyan’s research for several years, Viscogliosi said, his company felt her biomaterial research could have a number of applications and her affiliation with Venture Lab and the Georgia Research Alliance would cut costs and streamline the process of going to market.

Kennedy said that it probably won’t be in time to get him back on the tennis court, but hydrogels are the future of the industry.

“Technology-driven companies generally don’t succeed,” Kennedy said. “Market-driven companies succeed.”