Posted: October 23, 2005
By: Michael Schroeder - The Journal Gazette
Startup Filling a Medical Need
Main revenue to come from subsidiary sale
The new wood smell is unmistakable in Herb Schwartz’s office at the Northeast Indiana Innovation Center’s new site at Stellhorn and St. Joe roads. It’s a forward-looking scent to be sure, with Schwartz Biomedical LLC’s four employees – including Schwartz – adjusting to the new space.
Schwartz made the move from the innovation center’s site at 1410 Production Road in early August. But more than the move, it’s the youthfulness of his company and its subsidiaries that has him looking ahead. All are developing new orthopedic technology geared toward improving quality of life.
Schwartz Biomedical was started in January 2004.
Subsidiary BioDuct LLC was formed in August 2004. It’s developing a product to help heal damaged meniscus tissue in the knee as an alternative to removing the tissue.
BioDuct gained recognition in late September as one of 30 companies chosen from more than 100 applicants to participate in the Indiana Venture Idol Competition at the Indiana Venture Conference in Indianapolis. The conference, sponsored by the Venture Club of Indiana, promotes investment in entrepreneurial companies. While BioDuct didn’t win the $10,000 grand prize, it was among 10 finalists.
BioDuct’s tiny duct prototypes, which give the company its name, could provide healing by facilitating vital blood flow into the “white zone,” where this blood flow would otherwise not occur, Schwartz explained. Initial short-term tests in dogs – which have similar meniscus – showed evidence of healing when the ducts were used, he said.
BioDuct – like other technologies birthed by parent company Schwartz Biomedical – still requires further testing and FDA approval before it can be sold. Currently, Schwartz Biomedical and its subsidiaries don’t have any products that are ready for the market.
At the same time, investor confidence seems strong. About $1.3 million was raised from local investors for subsidiary BioDuct.
“In the immediate term, what BioDuct does is allow repairs to the knee that could not be done (otherwise). That’s a good market,” said Karen Goldner, special projects director for FourthWave, a Fort Wayne-based holding company that manages the adVenture Fund.
AdVenture Fund invests in companies with new technology promising rapid growth. Goldner said it invested in BioDuct because its technology has potentially broad-based application.
She liked that Schwartz Biomedical’s business plan includes spinning off companies around specific products to spell out which technology investors are putting their money toward. But its not just local investors who are banking on the company’s success.
In July, Schwartz Biomedical won a $1.3 million state 21st Century grant over two years to develop a self-lubricating bearing material geared toward enhancing the longevity of joint replacements. Including private equity, the company and its subsidiaries have infused about $4 million in capital into their collective operations, Schwartz said.
Initial lab tests show the product BioPoly – which is made of specialized polyethylene – reduces wear in joint replacements by 50 percent, Schwartz said.
Like subsidiaries BioDuct LLC and BioAfix LLC – which is developing a synthetic knee implant design to help regrow tissue – the plan is to spin off BioPoly into its own company, he said.
In the next 12 to 18 months, Schwartz hopes to sell off BioDuct or at least rights to its technology, which could mean a big lump sum payoff and royalties for Schwartz and investors. If the price isn’t right, Plan B would be to set up a distribution system and reap a steady stream of revenue.
Such is the anticipated approach with other companies as their products win approval. The process of selling off subsidiaries won’t mean the loss of employees because Schwartz Biomedical employees are “leased” to spinoff companies, Schwartz said.
He’s confident that the company will be able to build a working partnership with manufacturers in Warsaw, which is touted as the “world’s orthopedic capital.” The city’s Orthopedic Big Three include Zimmer Holdings, DePuy Orthopaedics and Biomet Inc.
“I consider the orthopedic companies more of a customer than a competitor,” Schwartz said.
Brad Bishop, a spokesman with Zimmer, said the company has working relationships with entrepreneurial companies developing biomedical technologies, such as Schwartz Biomedical, but couldn’t predict how it would respond to the new company and its subsidiaries. Zimmer develops joint replacement solutions for knee and hip pain and spine care solutions for acute and chronic back pain, as well as manufacturing a range of trauma, dental implant and orthopedic surgical products.
Barb Goslee, Biomet spokeswoman, said she had not heard of Schwartz Biomedical. In general, she said the company tries to do as much as it can in-house. Biomet designs and manufactures products for hip, knee, shoulder, elbow and other small joint replacement.
Monika Gibson, associate communications director for DePuy, did not have any immediate information on a potential relationship between the company and its former employee’s business. DePuy designs, manufactures and distributes orthopedic devices and supplies such as hip, knee, extremity and operating room products.
For Schwartz, one of the most difficult aspects of starting his own business was stepping out from beneath the secure corporate umbrella of DePuy, where he had been a manager in the research department from 1998 to 2003. There he was guaranteed a steady paycheck.
It was a “scary” first step, he said. But it set him on the path to a familiar place. After all, running a business is in his blood.
In Berne, where Schwartz grew up, his father, Joe H., and his brother Joe A. co-own a construction company and his brother Myron owns a consulting firm. His sister, Mary Ann Dynes, had been co-owner of a restaurant in nearby Geneva.
Schwartz recalled when his father started his business at age 42 – Schwartz’s age today.
“It was a scary step for him, too,” he said.
But sacrifices made in the early years, when Schwartz was an adolescent and a teen, laid the groundwork for his father’s successful venture, Schwartz said. Now Schwartz turns to his Christian faith and family, especially his wife, Sheila, to guide and encourage him in his own fledgling venture.
“She’s my biggest fan,” Schwartz said of his wife, adding that she’s quick to keep him grounded with constructive criticism.
At a glance:
Schwartz Biomedical LLC
Northeast Indiana Innovation Center, 3201 Stellhorn Road
Employees: 4, including president and CEO Herb Schwartz, director of research Rhonda Clarke, project manager Frank Proch and chief financial officer Matt Hirschy
Projected revenue: “It’s a moving target right now,” Schwartz said. “Especially for this coming year, we don’t know that yet.” He said the first significant source of revenue from Schwartz Biomedical is expected to come from the sale of subsidiary BioDuct LLC, the sale of its technology or BioDuct product distribution in the next year to year and a half.
Products: Subsidiary BioDuct is producing tiny ducts to help facilitate blood flow to heal damaged meniscus tissue in the knee and subsidiary BioAfix LLC is developing a synthetic knee implant design to help re-grow meniscus tissue. Schwartz Biomedical is also fine-tuning a self-lubricating bearing material called BioPoly aimed at enhancing the longevity of joint replacements. While some testing has been done, none of the products is ready for the market.
