A Minnesota company has bought what’s left of a once-promising Orange County medical implant maker.
The assets of Pegasus Biologics Inc., an Irvine maker of implants used to repair muscles, tendons and other soft tissue, are being bought for $12.1 million by Synovis Life Technologies Inc. of St. Paul, Minn.
Synovis, which makes tissue products used in obesity, hernia and breast reconstruction surgeries, won a competitive sealed bidding process for Pegasus, according to the Minneapolis Star-Tribune newspaper. The deal is expected to close this week.
Pegasus, which started in 2003, had raised more than $38 million in venture capital and other funding. It abruptly ceased operations in May after it was unable to raise more money.
Venture backers included Minneapolis-based Affinity Capital Partners LLC, Onset Ventures and Three Arch Partners, both of Menlo Park, and Frazier Healthcare Ventures of Seattle.
An Onset spokesman declined to comment on the Pegasus sale. Representatives from the other firms didn’t respond to inquiries.
Pegasus had about 75 workers before winding down and $9.1 million in 2008 revenue. The company started selling its implants in 2006, generating about $3 million in revenue that year.
Synovis plans to keep Pegasus’ Irvine plant.
The products of the two companies are similar. Pegasus makes implants from horse collagen. Synovis makes them from cow tissue.
Synovis has annual sales of about $50 million and a recent market value of $200 million.
The company appears to be buying Pegasus at a fire sale price, or about 30% of what it had raised in venture capital funding.
Profits
But the deal isn’t seen adding to Synovis’ profits right away. Pegasus is expected to post an operating loss of $1 million to $2 million for the 12 months through October, as well as a potential $5 million loss in the 12 months ending October 2010.
Synovis said it didn’t expect Pegasus to reach a yearly break-even point until October 2011.
“In the near term, it’s obviously going to cost them some money to get Pegasus back up to speed and back into more of an operational state,” said Matt Dolan, a senior medical device analyst who follows Synovis for Newport Beach-based Roth Capital Partners LLC.
Synovis bought Pegasus for 1.3 times its historical sales, according to Dolan, which he called a “reasonable price.”
Pegasus’ sales for the three months through March were $2.5 million, according to the Web site of Gerbsman Partners, a management and consulting firm based in the Bay area city of Kentfield that conducted the asset auction.
The goal is to take Pegasus’ products and integrate them into the selling network of Synovis, Dolan said.
“Considering that (Pegasus’) products have been cleared by FDA and used to treat approximately 10,000 patients to date, we believe the company faces substantially less risk than if the products were still in the development stage,” he said.
Pegasus has two main products: the OrthAdapt Bioimplant, which helps repair soft tissue in orthopedic surgeries; and Unite Biomatrix, a collagen wound dressing used to treat diabetic foot ulcers and other chronic wounds.
Clients include the University of California, San Diego Medical Center.
Competitors include Wright Medical Group Inc., an Arlington, Tenn.-based public company that makes Graft Jacket, which is made from human skin grafts. Johnson & Johnson’s DePuy unit is another Pegasus competitor.
Failed Model?
Pegasus’ business model may have posed challenges, Dolan said.
Last year, Pegasus built up its own sales force rather than selling through independent representatives, according to Dolan.
“Obviously, it’s more expensive to pay for your own sales organization, and the revenue didn’t get to a point where it was a profitable venture in the near term,” Dolan said.
Synovis plans to hire back and maintain 10 to 12 direct salespeople for Pegasus, in addition to 15 to 20 independent sales representatives, “which collectively should drive revenue back toward a $9 (million) to $10 million level,” Dolan said.
At its peak, Pegasus had 31 sales representatives.
Dolan said he expects integrating Pegasus’ operations into Synovis will take two to three years.
Pegasus was started by France Dixon Hel-fer, a former executive at Minneapolis-based Medtronic Inc. with a background in collagen.
Dixon Helfer used $100,000 of her own money and an early $1.75 million from friends and family before landing venture investors. She left an active role at the company in 2007 but stayed on as an adviser. She was succeeded by Michael Will.
Dixon Helfer briefly served as chief executive of Alure Medical Inc., a maker of tissue implants used in plastic surgery that moved from San Diego to Santa Rosa, after she left Pegasus.
