Camille Farhat’s 3-Year Legacy in Orthopedics

Mr. Farhat’s tenure in orthopedics was not long. Just 3 years. Yet, his effect on one company, RTI Surgical, Inc. was profound.

We spoke to him, fresh from RTI Surgical’s announcement that the sale of RTI’s OEM business had closed, the name was changing to Surgalign Spine Technologies, Inc. to reflect its sole focus on spinal implants and he was retiring. We asked the obvious question—what would he do for an encore?

After taking a few months off, he said, he’d likely apply his considerable talents to addressing illiteracy and hunger.

Two things are true about Camille Farhat; he goes after big problems and he finds innovative ways to solve them.

The Insolvable Problem Known as RTI Surgical

Within orthopedics, Mr. Farhat’s legacy is based on the three-year transformation of perennial underperformer, RTI Surgical. RTI, which was founded by Jamie Groomes from the University of Florida in 1997, was one of the founding companies (along with MTF, CryoLife and AlloSource) of the $3 billion (annual sales) allograft life sciences industry.

RTI’s original two innovations were engineered bone allografts and a tissue cleaning process, BioCleanse, which ensured that allografts could be safely and routinely implanted in any patient.

RTI sold its first share of common stock to the public in April 2000. The allograft industry was generating $410 million in annual revenues at the time and RTI accounted for $122 million or 30% of that total.

Within a year, Jamie was replaced as CEO and, ultimately, eased out by “professional managers.”

Since 2000, allograft industry sales have septupled (7x) and RTI reached $200 million in tissue (allograft and xenograft) sales and about $80 million in spine hardware sales the year before Farhat joined.

This chart shows RTI’s sales and market value growth in the 18 years before Farhat.

The management team that replaced Groomes created a lot of RTI activity in those 18 years, but no forward motion. They diversified beyond allograft into multiple new markets, including spinal hardware, but with limited connectivity and depth to support such expansion. In addition, they placed costly bets in the pipeline that failed to materialize in a meaningful way. They grew sales 128%, but marketing, general and administrative expenses soared 551%. The company lost money in 10 of its first 18 years and was worth 16% less in 2017 than when it went public in 2000.

Over the course of RTI’s pre-Farhat years a handful of employees left to form innovative allograft companies based on living cell allografts, nerve allografts or amniotic tissue allografts. The combined market value of those companies, as we write these words, is over $1 billion. Notably, one of those companies, Axogen, was founded by Jamie Groomes and currently carries a market value of $490 million—2x RTI’s value at the time Farhat joined the firm.

Breaking Out of a Strategic Box

The biggest issue facing RTI Surgical the year Farhat joined was a misperception of what the company was relative to what it had become—it was stuck in a strategic box. RTI was long known as an allograft company, but its strongest growth prospects lie in its spinal hardware and OEM segments.

Additionally, RTI’s industry was (and remains) in a long-term deflationary cycle. Annual industry growth rates are stuck at 1-2%. To grow by even 5% means taking share from someone. As the 15th or 16th largest spinal implant company, RTI had precious little market power.

Maintaining profit margins—much less raising them—must have seemed like a pipe dream on Farhat’s first day.

Recalling RTI in 2017, Farhat is candid.

“Three years ago, the business was losing money. We missed commitments. We lost credibility with investors. We spent $3 million fighting an activist.” He remembers. “Banks were not willing to refinance us. Our operating costs were too high relative to the revenue. There was nothing in the pipeline.”

“Our one platform was a solution looking for a problem, candidly. Our OEM business was ignored and, most of the contracts were coming for renewal within 12 months. There was nothing that connected the company together. There were no overarching priorities.”

As Farhat noted to OTW in 2018, “Growing spinal implant business is a delicate task.”

But, RTI also had significant (if hidden) assets. Farhat recalls: “RTI’s tissue business was very strong in terms of processing, sterilization and distribution. RTI owned its design history files, IP and registrations. RTI had very knowledgeable people who understood the opportunities that needed to be uncovered and connected the organization together. RTI did have differentiated products, but not enough. There were also some interesting technologies in the pipeline. RTI was undervalued significantly in my mind.”

Farhat started by focusing on the demand side of RTI’s business. “Creating demand in this market is a game-changer. We want to train doctors on new therapies and products. We want to increase RTI’s value to the surgeon.”

And…here is what happened next.

Changing RTI’s Hardware and Software

Farhat characterizes the process of transforming RTI as a series of hardware and software changes. In his own words, here is what he means.

“For hardware changes we reduced RTI’s complexity, sold the cardiothoracic business, narrowed our focus to key markets internationally and reframed how we engaged with industry partners, including organ procurement organizations. We improved the operational excellence of the company, removing $25 million in operating costs and strengthening the balance sheet. Our productivity on sales per employee basis improved 50% in three years.

“Then we set the stage for growth. We focused the company on two segments—OEM and spine. We rebuilt the OEM pipeline, signed longer-term contracts with our OEM partners and created four unique platforms on spine.”

“For software changes, we focused on creating a common culture where people are thinking and acting on behalf of the customer. We focused on breaking down silos and creating an environment ripe for innovation. This was a mindset shift for many in the company.”

“Just like athletes who compete and want to do better today than yesterday, we were looking for employees who embraced a growth mindset and the mentality of ‘Give me the ball, I’ll take it and run with it. You can count on me. And we will work together to win.’”

“We focused on clarity of responsibility, accountability and integrity and relentlessly drove alignment to get results. We gave people permission to do their jobs and showed them a career progression—whether professional or technical. We had a standard operating mechanism and cadence that served as the heartbeat of the organization and placed patient and customer interest at the center of our focus.”

“If you’re just a pedicle screw company – you’re screwed.” – Camille Farhat

Farhat quickly realized the way to grow in a highly crowded spinal market is through a focus on differentiation and scale. So, Farhat’s first strategic move was to buy a small, Minnesota-based spine company named Zyga Technology, Inc. which had developed a unique surgical solution for SI joint pain. It was the only minimally invasive procedure that fostered SI joint fusion through decortication. In short, a highly differentiated product.

That purchase put RTI into a market where approximately 850,000 patients in the U.S. were in severe pain, but less than 20,000 were being treated surgically. RTI was now a player in a phenomenal growth market that presented no issues with RTI’s key customer, Medtronic Spine.

With it came a wealth of clinical data.

Then Farhat acquired Paradigm Spine. Paradigm was the company that had brought coflex—another MIS treatment, this time spinal stenosis—another massive market—to U.S. surgeons.

coflex also came with a wealth of clinical data—and importantly, a rare FDA approval.

coflex, which had been implanted in more than 10,000 patients in Europe prior to entering the USA, had an FDA approved level one clinical study, beat fusion as a treatment for patients with moderate to severe lumbar stenosis (up to grade I spondylolisthesis) at 21 clinical study sites around the United States at the 3 month, 6 month, 12 month, 24 month and, over a five-year follow-up period.

Just let that sink in for a minute. Better than fusion. At the five-year mark.

Two years after taking RTI’s reins, Farhat had converted 50% of his spinal implant sales into an 80% gross margin business with these highly differentiated products. As an added benefit, the purchases expanded international sales which now comprise fully 20% of Surgalign sales.

Selling OEM for $440 million, Cash

Buying Zyga and Paradigm required some fairly sophisticated financing legerdemain. As 2019 drew to a close, Farhat and his CFO, Jonathan Singer, had put $174 million in debt and $66 million in preferred stock sales on the balance sheet. Equity, incidentally, was just $35 million.

Importantly, however, RTI’s rate of profitability and cash generation was rising.

Investors were impressed with Farhat’s deft moves but still discounted RTIX’s value because of that strategic box.

On January 13, 2020 that changed.

That was the day RTI Surgical agreed to sell its OEM business to the Montagu Private Equity firm for $490 million. The price would later be adjusted downward to $440 million to account for the COVID-19 effect.

The sale closed on July 20, 2020.

The original RTI tissue processor and OEM business is now owned by Montagu. The RTI spine business is renamed Surgalign (NASDAQ: SRGA) and has no long term debt, no preferred stock, a big bank account, a new CEO (industry veteran Terry Rich) and an intriguing future.

What’s next?

Farhat told OTW, “I would be really surprised if Surgalign, even with COVID-19, didn’t launch over a dozen new products in 2020 and I would probably venture to say the same in 2021.”

Furthermore, says Farhat, the focus of Surgalign will be an extension of his growth through differentiation mantra. “You grow with differentiation. It could be smaller acquisitions that add up to something significant. It could be way beyond just the implant itself and thinking broader across the procedure by asking what can we do to improve the procedure so that we can impact outcome.”

“Whether you believe in evolution or whether you believe in creation, the spine is made to provide stability and mobility, not to be fused. What else can you do to improve the outcome for these patients and try to bring them back as close as you can to normal?”

“We have to keep thinking disruptively and push the standard of care. Surgalign is well-positioned with incredible talent, experienced leadership, a strong balance sheet and a deep pipeline to deliver growth and innovation.

“If you’re just a pedicle screw company, you’re screwed.”

Indeed.