Medical Device Daily National Editor

MINNEAPOLIS — Pretty much every CEO of a company making its way from early-stage to development-stage to commercialization has a story or two to tell about overcoming adversity, since adversity is an all-too-frequent visitor to such companies during the growth process.

That's especially true among regulated companies, such as med-tech firms that rely on FDA approvals before they can get to market — at least domestically.

Two such CEOs shared some of their angst with an appreciative second-day audience at last week's IBF Med-Tech Investing Conference here. The 7th edition of the annual conference was co-presented by International Business Forum (IBF; Massapequa, New York) and LifeScience Alley (St. Louis Park, Minnesota).

For a session titled "Persevering Through Adversity," John Booth, CEO of Spineology (St. Paul, Minnesota), and Kevin Nickels, president/CEO of Celleration (Eden Prairie, Minnesota), discussed two different tales of woe that evoked both sympathy and "Please Lord, keep that from happening to me" thoughts from the audience at the Radisson Plaza Minneapolis Hotel.

Booth noted that his company was founded by an orthopedic surgeon in 1998 to develop minimally invasive solutions for certain spinal disorders, and that he joined the firm as CEO in late 2004.

"They had gone out and done private and angel financing rounds in 2001," he said, "and the board felt it now was time for an institutional/VC round. So we embarked on a private placement in the latter part of 2005."

Unfortunately, another young company embarking around the same time on a similar development path within the same space was successfully sued for patent infringement by a larger competitor, and, well, that substantially dimmed the interest of more than a few would-be investors.

"As one VC told me, 'It's an interesting technology, but I'm not interested in financing litigation,'" Booth recalled.

But Booth persevered, and eventually got a $20 million round lined up in the early part of 2006, with a close eyed that summer. "We were working diligently toward that close," he said, with only one relatively small item relating to individual shareholders signing off on certain "drag-along" aspects of the financing remaining to be accomplished.

"One shareholder just didn't want to sign it," Booth said "but everyone involved with the negotiations said, "Don't worry, someone will blink" — meaning the shareholder or the lender would back off from the seemingly mundane issue.

Unfortunately, no one did.

"I couldn't convince the shareholder to sign the drag-along agreement, and the lender didn't blink either," he said.

So the company, which had been in a substantial "power up" mode, including hiring the beginnings of a sales force, had to slam on the brakes and begin pedaling in reverse.

"Here we were going from one Friday, expecting to see $20 million wired to our account, to being totally out of money and trying to figure out how to meet payroll the following Friday," Booth said. "We had to rapidly downsize the company and live on what we brought in (from a small stream of revenue)."

He had to lay off more than half the 40-person workforce, prop up the sagging spirits of those remaining, and move forward. "We were able to rebuild and start to re-grow the business," Booth said.

"We have ridden through this very adverse situation and actually increased sales in 2007 from 2006 — all with 17 employees."

Even better news is that Spineology has just closed on a financing and is hiring, having added "eight or nine" sales people.

Reflecting back on the problem, Booth said it was a setback, all right — "but a setback for all the wrong reasons."

He noted, "You always try to have contingency plans. In hindsight, I wouldn't have scaled up the company as much as I did in anticipating of that financing taking place ... don't get out ahead of things."

Nickels empathized with Booth's rug-pulled-out-from-under-us story, then told his own, this one an FDA story.

"We had been rejected by FDA, then got a second rejection letter," he said. "We were always cash-starved, and we were about a month from going out of business."

He noted that "the guy at the FDA said, "I don't understand how this works. The guy was incredibly incompetent and here he was writing these rejection letters."

So Nickels went with a "heavy stick" approach in his response to FDA, and "the examiner's boss's boss called me the next morning." That got the product application moving.

As he puts it, looking back, "Stuff happens, and you need to have resiliency and to rally the team to face the problem."

Touching on the subject of communicating with the company team, Nickels said, "I'm probably an over-communicator," especially when it comes to the board of directors. "I think it's better to keep people informed as to what is happening."

He said he tries to be very visible, with monthly employee meetings. "It's important to keep people calm and moving forward as you're dealing with difficult issues."

Booth agreed: "I don't think you can communicate too much in times of crisis."

During his company's crisis, he communicated immediately with customers, "to let them know we're still in business." With vendors, "it was more begging and pleading."

As for the team facing such difficulties, "you need people who are agile enough to react to this," Nickels said. "You need people who are calm. It's all about creating 'calm urgency.'"