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From Promise to Poverty: The End of ReGen Biologics?

It was, by far, the cruelest of blows: After waging a protracted, very public war with the U.S. Food and Drug Administration (FDA) over its controversial knee implant, ReGen Biologics Inc. ultimately was forced to admit defeat.

For ReGen, that admission came in the form of a bankruptcy petition (also known as Form 8-K) it filed with the U.S. Securities and Exchange Commission (SEC) on April 8. The firm’s petition for Chapter 11 bankruptcy protection includes its wholly-owned subsidiary RBio Inc. but not its wholly-owned Swiss subsidiary, ReGen Biologics AG, according to the SEC document. ReGen is planning to use cash flow from operations and proceeds from a loan to continue to operate during the bankruptcy process.

ReGen claims in its SEC filing that it raised $1 million through a private deal with Sports Medicine Holding Company LLC, an affiliate of Ivy Healthcare Capital II LP, a creditor and one of the company’s largest shareholders. Sports Medicine Holding Company has agreed to provide the firm with funding through senior secured notes that carry a 12 percent annual interest rate and are due Aug. 31. Sports Medicine Holding Company also has entered a debtor-in-possession financing deal with ReGen that is subject to U.S. Bankruptcy Court approval. That arrangement would allow the Hackensack, N.J.-based orthopedic implant manufacturer to borrow up to $1.4 million; the loans mature on June 20 and, like the first agreement, carry a 12 percent annual interest rate (18 percent if ReGen defaults). The $1.4 million is secured by “substantially all” of the company’s assets, according to the SEC filing.

ReGen’s bankruptcy filing could very well be the final setback in the company’s prolonged effort to market its controversial Menaflex knee implant in the United States. The firm has spent more than five years and $30 million trying to prove the implant’s safety and efficacy for the FDA’s Center for Devices and Radiological Health. ReGen executives thought they had sufficiently argued their case after the FDA cleared the device in December 2008, but the approval occurred over the objections of agency scientists. Nearly a year later, in September 2009, the FDA launched an investigation into the Menaflex approval after admitting that its decision was influenced by four New Jersey congressmen and former FDA Commissioner Andrew von Eschenbach.

After conducting its investigation, the FDA concluded that Menaflex was “technologically dissimilar” from other surgical-mesh devices the agency had approved, and it embodied differences that could affect its safety and effectiveness. Unlike predecessor products that repair or reinforce damaged tissue, for example, Menaflex helped the human body grow new meniscal tissue. “Because of these differences, the Menaflex device should not have been cleared by the agency,” the FDA said in a news release.

On March 30, the FDA officially rescinded the 510(k) clearance it granted ReGen for its Menaflex Collagen Scaffold, an absorbable mesh implant designed to encourage the re-growth of damaged knee cartilage. As a result, ReGen must keep the device off the U.S. market until it can prove its safety and effectiveness to the FDA’s satisfaction.

Such a herculean task is bound to take time, though. And time is a commodity that quickly is running out for ReGen. With loans due over the next few months and relatively no capital investment in its future, the company has little, if any, chance of financing another lengthy, expensive—and quite possibly, frustrating—product approval process, one that some experts claim could take as long as 10 years if Menaflex is required to undergo premarket approval, the FDA’s most stringent clearance process.

Such a mandate could force ReGen to close its doors for good. Between 2002 and the first half of 2009 (nearly the length of time it might take to finally quell the FDA’s concerns about Menaflex), the company’s net losses significantly outweighed its revenue. In the second quarter of 2009—the last earnings statement the company could afford to file with the SEC—ReGen reported revenue of $409,000 and a net loss of $4.16 million. Its assets were listed at $4.64 million and total liabilities amounted to $10.6 million, according to the earnings statement. ReGen’s total stockholder deficit was $7.5 million and its accumulated deficit reached a staggering $115 million.

Revenue during the spring of 2009 was not nearly enough to offset ReGen’s deficits, though the earnings report shows rising sales figures. Sales for the three months and six months ended June 30, 2009, amounted to $401,000 and $689,000, respectively, an 81 percent and 24 percent jump compared with the $222,000 and $556,000 the firm garnered in sales during the same period in 2008. Executives attributed the upsurge to increased sales of both the Menaflex and SharpShooter products, with the latter being a suturing device used to implant ReGen’s collagen matrix merchandise. ReGen has an agreement with ConMed Linvatec to distribute the SharpShooter worldwide.

Sales of Menaflex in the United States never really took off, mostly because the product’s U.S. launch coincided with congressional scrutiny and concerns about the way the scaffold was cleared by the FDA. For the three months and six months ended June 30, 2009, worldwide Menaflex sales totaled $294,000 and $487,000, respectively, compared with the $144,000 and $452,000 the product earned respectively, during the same periods in 2008 (the device was cleared for sale in Europe in 2001). Selling prices for the Menaflex went up about $180 compared with 2008, averaging $1,741 per unit during the first three months of 2009 and $1,646 per unit during the second three months of the year, according to ReGen’s earnings statement. Sales nearly doubled in Q1 of 2009 but leveled off during Q2—the data show that ReGen’s sales force sold 161 units in Q1 and 286 devices in Q2.

Despite such promise, however, ReGen executives suspected their prized innovation could become an easy target for lawmakers skeptical about its efficacy. In the company’s second-quarter 2009 earnings statement, managers warned stakeholders that the FDA could revoke its clearance of Menaflex. Such a move, executives said, “would significantly and negatively impact ReGen’s business. Further, the FDA review and the congressional inquiries, if each continues, could (among other things) continue to adversely affect ReGen’s ability to raise additional capital to fund its business…”

Though it predicted the FDA’s about-face with astounding accuracy, ReGen was unable to prevent the significant impact on its finances. And nearly two years after its last earnings statement, the company is using some of the same language in its Chapter 11 documents to describe the potential effect of the bankruptcy filing on its business: “The company’s current business relationships and arrangements and the company’s ability to negotiate future business arrangements, may be adversely affected by the filing and pendency of the bankruptcy petitions and related filings.”

While ReGen’s business relationships and its finances certainly are vulnerable, there still is a chance the firm can overcome its misfortune and emerge from bankruptcy a stronger, more viable player in the orthopedic market. Dozens of companies that have fallen into bankruptcy have picked themselves up, dusted themselves off and drafted a business strategy that returned a steady flow of cash into their thirsty coffers. General Motors and Delta Airlines Inc. are two of the more easily recognizable alumna of the Chapter 11 school of hard knocks. Others include Pacific Gas & Electric Co. (emerged from bankruptcy in 2004), Global Crossing Ltd., and UAL Corporation (emerged from bankruptcy in 2006).

Another lesser-known success story took place several years ago in Rochester, N.H., a small city in the southeastern part of the Granite State that is home to Spaulding Composites Inc., a manufacturer of engineered thermoset composite materials and components used in air motors, pumps and compressors for products ranging from flare guns to medical devices. President and CEO Donnita Rockwell claims the firm was “an hour away from the bank locking the doors and closing [the company] forever.” The company was languishing in bankruptcy for the second time when it was purchased by Metapoint Partners, a private investment firm based in Peabody, Mass.

Metapoint hired Rockwell to lead the struggling company out of bankruptcy. She did that by reducing Spaulding’s lead times—which, at the time of its bankruptcy, was measured in months rather than weeks—and transforming the corporate culture from one of failure to success. “We had an organization that was a skeleton of its former self,” Rockwell told Business NH Magazine. “We had to do a fundamental 101 of discipline and consistency.”

Rockwell transformed Spaulding’s culture by setting modest goals and objectives in order to build a pattern of success. She also met with customers to explain the firm’s strategy of turning business around. In addition, the company closed a plant in Illinois between 2005 and 2006 and transferred the 40 jobs there to the Rochester plant, which improved profitability and eliminated duplicative efforts.

The steps that Rockwell took to transform Spaulding from a company with bad credit that could not afford the raw materials it needed to manufacture its products to a business with new innovations and investments can be undertaken by most any company battling bankruptcy. Though the process of turning around a bankrupt company can be daunting, the changes necessary for improvement are not complicated. One of the first suggestions from experts involves the filing of the petition. Companies struggling with their finances should file for bankruptcy before creditors decide to take their business to court, attorneys advise.
Companies that file for Chapter 11 have court protection and usually are given 120 days to draft a reorganization plan.

Other essential steps to successfully emerging from bankruptcy include:

• Identifying the two or three areas the company does well and building around them. Discontinue, sell or outsource anything that falls outside these core areas.

• Focusing on financial matters within the company’s control, such as cash flow and debt reduction. Cut overhead, aggressively pursue outstanding (billable) accounts and renegotiate the terms of outstanding bills.

• Reorganizing/redesigning the management team. Often, workers that are not part of the top layer of executives have a good working knowledge of the company and may be able to offer viable suggestions for improvement.

• Being receptive to all complaints and comments from employees.

• Communicating with customers, suppliers and employees. An angry (or unpaid) customer can tarnish a company’s reputation and damage its integrity. Honesty can help bankrupt companies regain their customers’ trust and earn a second chance at conducting business.