Tutogen Medical, Inc.

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Tutogen Medical, Inc.

1130 McBride Avenue, Third Floor
West Paterson, New Jersey 07424
Telephone: (973) 785-0004
Fax: (973) 812-1722
Web site: http://www.tutogen.com

Public Company
1984 as BGM Exploration Ltd.
Employees: 192
Sales: $30.3 million (2003)
Stock Exchanges: American Stock Exchange
Ticker Symbol: TTG
NAIC: 339113 Surgical Appliance and Supplies Manufacturing

Based in West Paterson, New Jersey, Tutogen Medical, Inc., is a publicly traded company that makes bio-implants and medical devices used primarily to repair tissue and bone. Its most important products are allografts, donated human tissues that the company subjects to a patented process called Tutoplast, which uses dehydration and sterilization to prevent infection or tissue rejection. Unlike autographstissues taken from a patient's own bodyallografts are tissue and bone harvested from cadavers, a process that offers a number of advantages: less pain for patients, quicker and less expensive surgeries, and faster rehabilitation. Examples of allografts include the use of a cadaver's patella tendon to replace a patient's knee ligament, the brain sheathing used in pediatric brain surgery, or bone wedges as a replacement for surgically removed spinal discs. The company also makes wound dressings and materials used in dental implants. Tutogen maintains offices in Germany and France and production facilities in Alachua, Florida, and Neunkirchen, Germany. The company's products are available in 45 countries around the world.

1980s Origins

Technically, Tutogen was incorporated in April 1984 in Vancouver, Canada, as GBM Exploration Ltd., an oil exploration company. This may have been an ill-advised time to enter the oil business, which collapsed during this period and led to the ruin of countless energy companies, but it was an opportune moment to start a biotech venture. A more relevant date for the launch of Tutogen was October 1985 when Texas doctor Weldon S. Guest founded Biodynamics Inc. in Houston to develop medical and surgical products. In 1986 he attracted $2.6 million in Canadian venture capital money and a reverse merger was engineered with GBM Exploration, which served as little more than a shell in order to gain Canadian standing. The name was then changed to American Biodynamics Inc. and the headquarters was relocated to Houston. The seed money did not last long, however, and by late 1987 most of the funds were exhausted. To help establish the young company Guest brought in a seasoned executive, John Hargiss, from a San Antonio medical technology firm to serve as the chief executive.

Although Guest had several research projects under way, by 1988 American Biodynamics only had two major productsand just one that was bringing in any money. The company served as the exclusive distributor for a West German company, Viggo GmbH, which processed human connective tissue used in surgical transplants. American Biodynamics also was getting another product ready for the market, the Extracorporeal Circulation System (ECS). It was a proprietary blood transfusion device that collected, cleaned, and reintroduced a patient's own blood during surgery. In this way, the risk of contracting a transfusion-related disease such as AIDS or hepatitis was eliminated. The technology was promising enough that it attracted the interest of much larger corporations. Minneapolis-based Medtronic Inc. courted American Biodynamics in 1989, but its buyout offer for ECS was ultimately rejected. A subsidiary of Pfizer Inc., Shiley, Inc., stepped in with $200,000 in 1989 and provided technical assistance in developing the device, but when it also made a offer to buy the technology, American Biodynamics declined. Hargiss told Houston Business Journal that the offer "fell short of what we wantedby a lot." Instead, the company elected to move forward on its own to complete the design work on the device, gain Food and Drug Administration approval, and find a way to get ECS on the market.

In 1989 Hargiss and Guest had a falling out over the direction of the company, after Hargiss pulled the plug on three of Guest's research projects that were draining resources. A battle for control of the company ensued, with Hargiss coming out on top. In November 1989 Guest sued the company, alleging that Hargiss required his approval before selling off assets, terminating research projects, and negotiating corporate partnerships. Hargiss responded by suing on behalf of the company alleging that Guest had failed to live up to his fiduciary responsibilities to shareholders. With the filing of additional lawsuits in both Canada and Texas, the matter lingered for three years. Because Guest owned a 15 percent stake in the company he was able to submit his own slate of directors to shareholders in an attempt to win back control of the board. Finally, in 1992 a settlement was reached between the two sides. A noncompete agreement was signed, Guest stayed in Texas, and American Biodynamics changed its name to Biodynamics International, Inc. and moved its headquarters to Tampa, Florida. The company also reincorporated in Florida, putting an end to its unusual Vancouver-Houston connection.

Steady Growth Marking the Early 1990s

While Hargiss and Guest fought for control, the company made advances on some fronts. In 1991 it formed an alliance with Surgimedics Inc. to market a new bone-graft product and other surgical products. A year later it established a German subsidiary, Biodynamics International GmbH, to produce allografts using the company's new Tutoplast sterilizing process. As Biodynamics made its move to Florida, it appeared positioned to enjoy steady growth. It also was involved in areas other than tissue and bone. It owned a 51 percent stake in Corin Othopedic Products, which served as the U.S. importer for British partner Corin Medical Ltd., maker of artificial hip and knee joints. Biodynamics also had forged a joint venture, Advance Haemotechnologies, with a subsidiary of Surgimedics to continue its long-term work on a blood autotransfusion system. Although ECS at one time held out great promise, it faced stiff competition and never did perform as well as management hoped. Rather, it was the Tutoplast technology that now offered the greatest promise. The company turned a profit in fiscal 1991, fiscal 1992, and fiscal 1993, altogether earning about $2.5 million during this stretch. In May 1993 Biodynamics was strong enough to acquire the Wound Care Division of Pfimmer-Viggo, but then events would now combine to stunt the company's growth.

In late 1993 the FDA refused to accept bone imports from the German subsidiary because the donors had not received serological testing from an FDA-approved laboratory. It was an impossible condition for the company to meet because there were no FDA-approved labs in Germany. Next, in May 1994 the FDA banned the importation of brain sheathing from the German plant. According to the company, the FDA never suggested that the products were unsafe; they merely forbade their sale in the United States. Because about one-third of Biodynamics' revenues resulted from these German imports, the company took a major hit to the balance sheet. It also had to invest money in order to ramp up production of hard and soft tissues in the United States. Because of these difficulties, the price of Biodynamics' stock sagged below $1 and was almost delisted by the NASDAQ. In 1994 the company posted revenues just shy of $12 million and lost $3.2 million.

Biodynamics took another blow in 1995 when France placed a moratorium on the importation of bone allografts. The country had been Biodynamics' best market for the product. In April 1995 Hargiss resigned as president, CEO, and a member of the board in order to "pursue other interests." He was replaced on an interim basis by Chairman Charles C. Dragone. A permanent replacement was hired in March 1996, when Karl H. Meister took over as president and CEO. He brought more than 30 years of experience in the pharmaceutical and medical device field, including a five-year stint as the head of Carrington Laboratories and executive positions at Pfizer, Inc. and Schering-Plough Corporation. In 1997 Meister moved Biodynamics' headquarters to New Jersey, where he lived. More important, the area was home to all the major players in the pharmaceutical and medical device field.

As Meister attempted to turn around Biodynamics, he had to contend with the same kind of challenges that Hargiss faced. In March 1997 the Japanese Ministry of Health banned the company's brain sheath products. But during the same month, France also lifted its ban on bone allografts, a move that buoyed Biodynamics' business considerably. Meister also was able to reopen the U.S. market for the company's products. Another nettlesome problem he had to overcome was Biodynamics' high level of debt, taken on because the company in the past had relied on lines of credit and institutional investors to make up for a lack of cash flow. In order to shore up a shortage in working capital and gain some long-term flexibility, Meister in 1997 worked out an arrangement with the company's institutional investors to convert debt into equity. With the company on a better financial footing, he now began to pursue a growth strategy that banked the company's future on its Tutoplast technology, using it as a platform to develop tissue engineered products. In keeping with this concept, in 1998 Biodynamics changed its name to Tutogen Medical, Inc., an effort to more closely link the corporate name with the company's core technology.

The company also enjoyed positive developments on other fronts in 1998. It forged a strategic alliance with Regeneration Technologies, Inc., bringing technology transfers to Tutogen, and the two companies began to develop a European tissue banking program. Moreover, Tutogen received positive research results in 1998. In Germany a case study was conducted involving a jawbone with a malignant tumor that was removed from a body, the cancer destroyed, then the bone treated with the Tutoplast process and successfully reintroduced to the patient. It was the first published case of such a procedure, which offered a marked improvement over the traditional treatment in which part of the jaw is removed and replaced by bone from the patient's hip.

Company Perspectives:

Tutogen's mission is to become a world leader in creating and providing superior and safe biological implants for surgical solutions to surgeons for the benefit and health of patients worldwide.

As a result of the steps Meister took, he was able to begin the process of restoring sales levels and returning the company to profitability. In fiscal 1997 sales totaled $8.9 million, resulting in a net loss of $5.2 million. A year later, sales grew by a modest 3 percent to $8.9 million but because interest payments dropped from $934,000 in 1997 to $362,000 in 1998, Tutogen was able to turn a profit of $122,000 on the year. A year later revenues improved 29 percent to $11.5 million, much of which came from the United States where the company was again able to market its products. Because domestic sales increased by 80 percent over the previous year, net income improved to $414,000. Having turned around the business in little more than three years, Meister elected to retire in 1999, and once again Dragone stepped in as interim CEO. Manfred Krueger, brought in earlier in 1999 as chief operating officer, was soon named as Meister's permanent replacement.

New Century Bringing New Research Development

In 2000 Tutogen gained a listing on the American Stock Exchange, a move that management hoped would boost the company's reputation with the investment community. The company's investment in research and development also was beginning to pay off in the form of new products. In late 1999 Tutogen introduced Tutofix pins, made from cow bone and used to help with fractured bones, especially forearms and small breaks in the hands and feet. Not only were Tutofix pins absorbed, eliminating a second surgery, they were replaced by bone during the healing process. In 2001 Tutogen introduced a Tutoplast Processed Dermis product that was used in a procedure that treated female incontinence, and Puros, a bone graft material used with dental implants. The company entered the sports medicine field in 2002 by offering the LigaTech line of products that repaired and replaced ligaments. Also in 2002 Tutogen began the European marketing of Tutomesh, a membrane used to repair abdominal walls damaged by hernias. In 2003 Tutogen introduced Cervical Space, a spinal product.

Sales grew steadily through the early years of the new century, increasing from $16.6 million in fiscal 2000 to $30.3 million in fiscal 2003, while net income improved to $2.3 million. But the company's small size limited its ability to fully realize the potential of its technologies. As a result, in 2003 the Tutogen board gave management permission to look for a strategic buyer, one with the resources to adequately market the company's products. Tutogen began the process of selling itself to a private equity firm but the negotiations were terminated at the close of 2003. The company remained independent in 2004, although it would change leadership. Krueger stayed on as president, but 55-year-old Roy D. Crowninshield now took over as CEO and chairman. Holding a doctorate from the University of Vermont, he was a former faculty member at the University of Iowa, where he headed the orthopedic biomechanics laboratory. He also had 21 years of experience at Zimmer Holdings, maker of orthopedic products. Crowninshield took over a company with a great deal of potential and unanswered questions about its future.

Principal Subsidiaries

Tutogen Medical GmbH; Tutogen Medical (United States) Inc.

Principal Competitors

CryoLife, Inc.; Osteotech, Inc.; Regeneration Technologies, Inc.

Key Dates:

Dr. Weldon Guest launches American Biodynamics in Houston, Texas.
Biodynamics merges with BGM Exploration Ltd.
The company moves to Tampa, Florida, and changes its name to Biodynamics International, Inc.
Headquarters is moved to New Jersey.
The company's name is changed to Tutogen Medical, Inc.
The company gains a listing on the American Stock Exchange.

Further Reading

Marcial, Gene G., "Tutogen May Get a Facelift," Business Week, April 1, 2002, p. 91.

McNamara, Victoria, "Founder Files Suit, Delays Biotech Board Meeting," Houston Business Journal, June 10, 1991, p. 10.

, "Small Biotech Firm Rebuffs Big Buyers," Houston Business Journal, April 2, 1999, p. 1.

Shepherd, Gary, "After Losses, Biodynamics Relies on Medical Miracles," Tampa Bay Business Journal, February 10, 1995, p. 17.

, "Biodynamics Moves to N.J.," Tampa Bay Business Journal, May 16, 1997, p. 3.

Ed Dinger