Collapse of Innovative Spinal Technologies was Years In the Making, Sources Say; CEO Responds

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raising more money than it really needed. The company got too big, too fast, these sources say, spending more than it should have on items like the 38,000-square-foot office it renovated in a Mansfield industrial park. “I think we should have stayed at about 15 to 20 people in a very low-rent place until we had sales to support the kinds of initiatives that we wanted to do,” says the early employee. “That would have helped our chances. Instead, we moved into a very spacious, state-of-the-art facility—a space most companies would flat-out kill for—with no revenue.”

“It was an unbelievable opportunity, but it was overfunded,” Hochschuler agrees. “I think there was too much money and it wasn’t watched closely enough.”

It’s possible, the early-employee source points out, that Schorer was under pressure from the company’s investors to get big fast. “You have to understand that Scott was taking his directions from the board, and that they wanted their money back in four years,” says the source. “But this was not, based on the technologies I’ve seen, a four-year plan. It was more like a six-or-seven year plan.”

I’ve contacted MPM Capital and Orbimed Advisors to request their own views on IST’s shutdown, but neither firm has responded. For his part, Schorer says questions about the company’s expansion and its burn rate are things “we can talk about later, in the future. Every decision was made carefully and run by the board, with the intent to produce a good result.”

It will evidently take some time for all of the factors that brought IST to its current crisis to surface. Meanwhile, though, creditors are waiting to be paid right now. One source I spoke with at a medical-device company said that even before the shutdown, IST was months overdue on royalty payments for a device technology it had licensed.

As Schorer acknowledges, IST is attempting to raise the money to meet its obligations by selling assets. “The company hasn’t failed yet,” he says. “There are still some great products that we’ve innovated and that we expect will be on the market.”

But it’s all a question of what price these products might fetch. “It is still very much a strong technology in the field,” says the early employee I spoke with. “Do I think that there is $75 million worth of value in it, so that we could all end up with a dollar-for-dollar return? Yes.”

Hochschuler, however, disagrees with that assessment. He cites the abundance of spinal technologies now on the market, the increasing difficulty of getting the FDA to approve (or Medicare to pay for) any new medical device, and, of course, the economic downturn.

“In my opinion they are never going to see that number,” he says. “Had Scott gotten to market when he should have, this would all have been history. It would have been an ongoing, viable company. But now the perfect storm has hit, and nobody is investing in anything.”

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Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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