One of the Seattle biotechs that’s been flying low on the radar this year popped back up on the scene with news of an important partnership.

—Seattle-based Trubion Pharmaceuticals had its best day of the year last Friday, when it said it secured a partnership with Redwood City, CA-based Facet Biotech (NASDAQ: FACT) to co-develop a drug for chronic lymphocytic leukemia. The deal provides Trubion with $20 million in upfront cash, plus $10 million in equity investment from Facet. Shares in Trubion (NASDAQ: TRBN) shot up more than 40 percent on news of the deal.

—Bad news hit one of the stars of the Seattle medical device cluster this week as Redmond, WA-based Archus Orthopedics filed paperwork to dissolve the company. The company raised more than $60 million from a prominent group of venture investors since 2001, before it ran out of cash this year. Archus showed great promise, at least according to one patient who got its spinal implant in a clinical trial in 2006.

—Merck (NYSE: MRK) looked like it delivered a body blow to Seattle biotech last October when it said it was shutting down its Rosetta Inpharmatics division, sending 300 workers into an uncertain job market. It didn’t turn out to be as damaging to the region as first feared, as more than 110 Rosetta alumni will keep doing what they’re good at in local jobs at Covance, Microsoft, and Sage Bionetworks.

—Biotech companies haven’t had much progress to brag about toward a real treatment of the underlying cause of Duchenne Muscular Dystrophy, the crippling genetic disease in young boys, but Bothell, WA-based AVI Biopharma has a chance to be a trailblazer, University of Washington neuroscientist Jeff Chamberlain told me during an in-depth interview.

—UW’s entrepreneurial bioengineering professor, Buddy Ratner, organized a conference on campus last week that attracted one of the top life sciences entrepreneurs of the past decade, Tufts University chemistry professor David Walt. I caught up with Walt, the co-founder of San Diego-based Illumina (NASDAQ: ILMN), for an exclusive interview on where he thinks genomics is heading, and his next big idea for a company.

—The Seattle-based Infectious Disease Research Institute licensed some technology from an Israel-based company for “microneedles” that might be a less painful way to inject its experimental vaccines, and might have the added benefit of better stimulating powerful immune system cells just under the surface of the skin.

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Archus Orthopedics, the Redmond, WA-based developer of implants to help people retain flexibility after back surgery, is shutting down its operations and dissolving after it was unable to raise enough capital to bring the product all the way to the U.S. market, Xconomy has learned.

Archus filed paperwork with the Delaware Secretary of State to dissolve the company and wind down the business, according to a legal notice on The Seattle Times website. Archus CEO Jim Fitzsimmons, reached by phone, said he had no comment.

We broke the story back in May about financial troubles at Archus, which had been one of the rising stars in the Seattle medical device industry for years. The company had a veteran medical device entrepreneur in Fitzsimmons as CEO, and raised more than $63 million in equity since its founding 2001 from a group of big-name venture firms—MPM Capital, InterWest Partners, Polaris Venture Partners, and Johnson & Johnson Development Corporation, as well as a loan from GE Capital. Cash ran low this spring when Archus was sponsoring a big clinical trial of 450 patients, and it was forced to lay off most of its 45 employees. In the last few months, it tried to find a partner or some other way to finish the clinical trials it needed to start marketing its experimental device.

“Although Archus Orthopedics has been performing very well, we have the unfortunate luck to be a relatively mature, but still pre-revenue company, in need [of] sustaining capital in an extremely challenging financing market,” Fitzsimmons said in a statement back in May.

Archus had been developing artificial facet (fuh-set) joints in the spine, with a technology called the Total Facet Arthroplasty System. These facet joints—not to be confused with artificial spinal discs—play a role every time we bend forward, bend backward, or twist laterally. These joints typically get fused together when people have back surgery, because conventional wisdom says cutting down movement will reduce the pain. It also greatly cuts down on people’s mobility, and puts extra pressure and twisting movements on the non-fused parts of the spine, Fitzsimmons said.

One patient who received an Archus implant, Larry Kirschner of Baton Rouge, LA, said he was disappointed to hear of the dissolution because his device worked “superbly.”

Kirschner, a 62-year-old microbiologist, had his surgery in May 2006. Six weeks later, he helped load a moving truck and drove it more than 1,600 miles from Pasadena, CA to Baton Rouge. Last year, he felt good enough to go on a snowshoeing and camping trip above 9,000 feet in the Sierra Nevada mountains.

“The Archus device freed me from the vast majority of the debilitating pain I was experiencing (there is still a small spot on my right shin that aches a little from time to time, but nothing significant),” Kirschner wrote in an e-mail. “I haven’t started in-line skating again but may this winter when things cool off around here.”

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Archus Orthopedics, the Redmond, WA-based company developing spinal implants to help people remain mobile after back surgery, has laid off most of its 45 employees and significantly scaled back its operations to conserve its remaining cash, Xconomy has learned.

The news has surprised many in the Seattle medical device industry, because Archus has a strong management and investor pedigree. Archus has raised more than $63 million in equity since its founding in 2001 from a group of big-name venture firms—MPM Capital, InterWest Partners, Polaris Venture Partners, and Johnson & Johnson Development Corporation, as well as a loan from GE Capital. Last month, Archus’ investors put in another $2.3 million through a bridge financing, although the company was aiming to raise $19.5 million, according to a regulatory filing.

Archus is sponsoring a study of 450 patients with its spinal implants, although it’s no longer recruiting patients, according to a posting on clinicaltrials.gov.

“Although Archus Orthopedics has been performing very well, we have the unfortunate luck to be a relatively mature, but still pre-revenue company, in need [of] sustaining capital in an extremely challenging financing market,” said Archus CEO Jim Fitzsimmons, in an e-mail. “Outside funding for companies at our stage is particularly difficult to obtain these days. We recently closed a bridge financing with our current investors. We also made the difficult decision to substantially reduce our headcount and scale back operations in order to reduce our burn rate and extend the runway provided by our current cash.”

The company’s board is “confident that we will be able to engineer a successful outcome for the company,” Fitzsimmons said. When asked if that means more financing, a partnership, or an acquisition, he added, “We are looking at all options going forward to maximize shareholder value.”  He wouldn’t say how many employees remain at the company.

Fitzsimmsons is a highly-regarded medical device entrepreneur formerly with Scout Medical Technologies, Guidant, and EndoVascular Technologies. Archus has already won approval to sell its device in Europe, although it doesn’t generate revenue there yet because the company needs a marketing partner, Fitzsimmons said in an interview at his office in September. Archus’ artificial spine joints have $1 billion annual sales potential in the U.S., although the company needs to complete clinical trials before it can win FDA approval to start selling them in the U.S. That key milestone isn’t expected to happen until 2012, Fitzsimmons said last September.

Archus is focused on developing artificial facet (fuh-set) joints in the spine; its technology is called the Total Facet Arthroplasty System. These facet joints—not to be confused with artificial spinal discs—play a role every time we bend forward, bend backward, or twist laterally. These joints typically get fused together when people have back surgery, because conventional wisdom says cutting down movement will reduce the pain. It also greatly cuts down on people’s mobility, and puts extra pressure and twisting movements on the non-fused parts of the spine, Fitzsimmsons said.

The Archus technology is supposed to allow patients to retain greater range of motion after back surgery, and reduce the post-operative pain that often comes with people who have back surgery. Archus has two competitors—Hopkinton, MA-based Facet Solutions, and Princeton, NJ-based Impliant. Archus was thought to be about one year ahead of both companies in development, Fitzsimmons said last fall.

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[Updated, see below.--WR] Our stories last week about the shutdown of Innovative Spinal Technologies, a Mansfield, MA, company that raised $75 million in private funding to market devices for stabilizing injured spines, prompted a number of IST’s former employees and business associates to contact Xconomy to help flesh out the details of the company’s demise more fully. A picture is now emerging of an organization hobbled by management decisions that distanced it from its founding scientists in Texas, impaired its ability to sell its products to surgeons and hospitals, and exhausted its capital too quickly before it could get traction with enough sales of its spinal devices.

In particular, several sources I interviewed blame the company’s failure on IST president and CEO Scott Schorer. He’s a 40-year-old serial entrepreneur, real estate developer, and former Army Ranger who joined IST in 2002 when it was spun off by the Texas Back Institute under the name MusculoSkeletal Research Corporation. It was Schorer who transformed the company from a research incubator into a standalone medical device manufacturer, and Schorer who single-handedly raised the company’s crucial $39 million Series B venture funding round in 2005, sources agree. But the same person ultimately “drove this plane into the ground,” says Stephen Hochschuler, a spine surgeon who co-founded the Texas Back Institute and was a member of IST’s board until 2006.

IST “would make a great Harvard Business School case study of what not to do at a startup,” Hochschuler says.

As we’ve already reported, IST used much of its venture money to relocate to facilities in Massachusetts and to hire more staff, eventually growing to more than 100 employees. But disappointing sales of the company’s pedicle-screw system—marketed as a minimally invasive way to fuse or stabilize spinal segments in patients with damaged intervertebral discs—evidently meant it couldn’t sustain itself at that size. It shed staff drastically in 2008, shrinking to no more than 10 employees before finally closing its doors on January 23.

Executives tried to avert a shutdown by selling the company, and were close to a deal with Biomet Spine, a subsidiary of Warsaw, IN-based Biomet, according to one source I spoke with last week. But Biomet backed off in the end, the source says.

And now, according to a confidential IST memo shared by one source, IST is requiring customers to return all implants and surgical equipment to the company.* The memo from IST vice president of quality assurance Brian Callahan, issued January 23 (the day the company closed down), says all IST customers must immediately send back their inventory while the company works through “strategic and financial issues” and seeks a “different corporate partner” to sell the technology. Because the equipment is no longer supported by the company, the memo continues, anybody who uses it could be liable for civil and criminal penalties. It’s not known how many of IST’s devices were implanted in patients. [*Updated, 8:00 pm, 2/3/09: The first two sentences of this paragraph were edited for clarification.]

I reached Schorer by phone today, asking him about the state of affairs at IST and soliciting his responses to the criticisms lodged by former employees and associates. Contrary to an assertion from one source quoted in my January 27 story, the company has not filed for bankruptcy protection, Schorer says. “We hope to avoid that,” he says. “Obviously we’re trying to sell assets in order to take care of our liabilities and obligations to all of our constituents—the creditors, the shareholders, and the employees.”

Schorer said that as long as these negotiations were going on, he will not be able to respond in detail to questions or criticisms about the path the company has taken. “I’m happy when we are done with the process to come back and talk about what happened,” he says. “I just don’t want that to interfere with the process or cause issues for the process.”

“We have nothing to hide here,” Schorer continues. “I’m fine after we’re done with all of this for the truth to come out about what happened here, and shed a more credible and balanced light on what happened, as much as I can.”

If the criticisms of Schorer’s decisions were coming from a single source, it might be easy to write them off as the opinions of a disgruntled former employee. But a great many people seem to be disgruntled about IST’s fate. And the twists and turns in that story seem to merit further exploration, considering how much praise the company won for its early engineering efforts and how much money it eventually burned through before shutting down.

Hochschuler and other surgeons at the Texas Back Institute hatched MusculoSkeletal Research in 2002 with the idea of earning a financial return on the extensive research going on inside the institute. “Initially we kind of gave all our technology away through our non-profit research foundation,” Hochschuler says. “But after a while we said, ‘this is crazy—we have so many ideas, and we’re so connected in the spine world, why don’t we do something for-profit that would still help the community.’ ”

Hochschuler says Schorer, who had scored a big success by selling his previous company, a medical device shopping site called CentriMed, to Global Healthcare Exchange in 2000, approached TBI together with an associated named Fred Moll about investing in MusculoSkeletal Research. At that time, the organization was funded by investments from big medical-device companies such as GE Healthcare. Says Hochschuler, “I met with them and I liked them and I said, ‘We’re not taking any individual investments, but Scott, if you will become the CEO, I’ll let you guys invest.”

Schorer accepted the post, and the company was soon renamed Innovative Spinal Technologies. In 2003 the company raised a $6.2 million Series A funding round that included investments from device companies ANS, Orthofix, Synthes, and GE. But the company’s big break came two years later, when …Next Page »

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First came artificial hips and knees that were good enough to let people walk normally, or even run again. Now Redmond, WA-based Archus Orthopedics is doing the same thing with artificial spinal joints. If it can pull this off, patients will be able to have back surgery, and still be able to play golf with a normal range of motion for years later.

“The spine is meant to move,” says Jim Fitzsimmons, the Archus CEO. “It’s ripe for the same kind of joint replacements like hips and knees and everything else we replace now.”

Big medical device companies have gotten attention for their efforts to introduce artificial spine discs as a way to improve on the old-school spinal fusion surgery method. Archus is going after this opportunity through a different part of the spinal anatomy. It is making artificial facet joints, which are the small stabilizers that are almost constantly in motion and play a big role in twisting of the neck and lower back, Fitzsimmons says.

Archus has gathered some serious money behind the concept. It has raised $61 million in venture capital since its founding in 2001, from MPM Capital, Polaris Venture Partners, InterWest Partners, and Johnson & Johnson Development. The company was born at Kirkland, WA-based Scout Medical Technologies, the incubator formed by a quartet of successful medical device entrepreneurs: Fitzsimmons, John Adams, Scott Wolf, and Xconomist Clif Alferness. Fitzsimmons went on to lead Archus, and the company has grown to the point now that 200 patients have received its artificial facet joints in clinical trials. So far, patients who get the surgically implanted devices report less post-operative back pain and shorter recovery times, and X-rays show it can offer a full range of motion, Fitzsimmons says.

To get a grasp, I needed to first understand the context of how this got started. When Scout was looking around at innovative medical device ideas in 2001, it found patents from Mark Riley, a Berkeley, CA-based orthopedic surgeon who founded Kyphon and its Kyphoplasty procedure. Scout knew about that quite well. The procedure is for people with vertebral compression fractures, the sort of osteoporosis-related fractures that are painful as people age, and cause the widow’s hump. It works by sticking a device with a balloon into the spine that creates space between the compressed joints, and inserts a glue that hardens in place, restoring people’s height. It was successful enough that Kyphon was acquired by Medtronic in November 2007 for $4.2 billion.

So when Riley filed lots of intellectual property in 2001 on facet (fuh-set) joint replacements, the Scout team took notice, and got the technology license it needed to go to work, Fitzsimmons says. “Spinal care is the fastest-growing segment of the orthopedics market, and everyone in the market is benefitting from the aging Baby Boom population,” he says.

Traditionally, people with severe back problems, like bulging discs between vertebrae, degenerative facet joints, or both, tend to get spine fusion surgery, Fitzsimmons says. It removes the broken-down bone and cartilage, and uses titanium hardware fused into remaining bone to hold everything in place, allowing bone to re-grow around the apparatus and fuse it all together. In theory, that should stop the movement that causes pain. Medtronic (NYSE: MDT), Johnson & Johnson (NYSE: JNJ), and Stryker (NYSE: SYK) are some of the big names that sell those commodity surgery parts.

The problem is that, as Fitzsimmons says, the spine is meant to move, and when part fused together, it creates pressure points in the spine that have to absorb some of that motion. So people end up with back pain in new places, and come in for additional surgeries years later, Fitzsimmons says. If a device could preserve the natural motion, then maybe it could reduce wear and tear on the spine years later.

Other companies were already working with artificial discs, so Archus looked at the facet joints. Those joints play a role every time we bend forward, bend backward, or twist laterally, he says. As he showed me in a spine model in his office, the Archus device is meant to be held in place by the same titanium hardware used for spinal surgery. But the device has a ball-and-cup joint design to allow just the proper degrees of motion we need to swivel or swing a golf club—but not so much that you’d spin around backwards, he says.

The devices also need to be made modular, because a 250-pound linebacker has a bigger facet joint than a 100-pound ballerina.

While bad spine discs get the blame for most back pain, facets are often little-known culprits that contribute to pain as well, Fitzsimmons says. The market for people with this problem—spinal stenosis, the painful narrowing and degeneration of the spine—is projected to affect 350,000 patients in the U.S. by 2012, Fitzsimmons says. About 180,000 could benefit from the Archus device, and at $5,000 to $6,000 per patient, the market is worth more than $1 billion, he says.

Because of the patient follow-up needed to satisfy the FDA, it will probably be 2012 until the device wins FDA approval, Fitzsimmons says. Archus has two competitors, Hopkinton, MA-based Facet Solutions and Princeton, NJ-based Impliant, which are both thought to be at least a year behind in development, Fitzsimmons says. “Archus has a dominant IP position in facet joints,” he says.

The device has already been cleared for sale in Europe, where regulatory standards are less demanding for this particular type of medical device. Archus has 45 employees in Redmond, and no sales force, so it would look to a partner, or possibly an acquirer, to commercialize its system in Europe. Archus has some expensive work ahead, because it needs to continue to gather data on its device in the U.S., while also pushing forward in development a second-generation device that combines an artificial facet joint with an artificial disc in one procedure, Fitzsimmons says.

When I asked if he’s looking to raise more capital, Fitzsimmons said that’s not his first choice, because he’s more interested in a partnership or acquisition that will give Archus the resources needed to take the technology to the marketplace. He sounds like he’s in talks to make his investors a lot of money. “We’re at a point in time where we’re going to discuss our destiny,” he says.

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