Silverglide Surgical Technologies (A)

Abstract

From a rocky perch above the city of Boulder, Colorado, Jon Thorne gazed across the
city and onto the great plains that stretched eastward before him. "There's nothing like
a vigorous mountain bike ride into the hills," Thorne thought, "when crucial decisions
have to be deliberated. It was a summer afternoon in 1999, and Thorne had devoted
much of the past three years developing and taking to market a surgical instrument that
he thought had the potential to significantly improve surgical practice. Though the
feedback from surgeons had been excellent, Thorne's company, Silverglide Surgical
Technologies, Inc., had little to show for his efforts. The $80,000 in start-up capital that
Thorne had raised was nearly gone and his company's sales to date "rounded to zero,"
as a member of his Advisory Board had remarked at a board meeting earlier that week.
Was it time to broaden his company's market focus from plastic surgeons into other
surgical specialities? Was it time to abandon the probe and develop a new product
line? Or should he abandon his entrepreneurial dream and return to a salaried job in
the medical products industry from which he had come?

This case was developed with the support of the Centre for Scientific Enterprise. The
author thanks Julian Lloyd for his research assistance. John W. Mullins, Associate
Professor of Management Practice, prepared this case as the basis for class
discussion rather than to illustrate either effective or ineffective handling of an
administrative situation.

Copyright 2004 London Business School. Revised January 2005.

All rights reserved. No part of this case study may be reproduced, LondonBusiness
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stored in a retrieval system, or transmitted in any form or by any means, School reference
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CS04-004
written permission of London Business School.
Developing the Probe
In 1996, as an engineer working for a
leading independent research and
development institute serving medical and
other technology-orientated markets, Jon
Thorne had helped develop an
electrosurgical probe dubbed the silver
bullet whose purpose was to seal a new
and innovative lung patch to human lungs
("Like patching a tyre," as Thorne put it).
With its proprietary alloy coating, the probe
effectively seared the patch to the lung
without causing any sticking or tearing of
tissue. Ultimately, however, the client that
had contracted for the development of the
probe and won Food and Drug
Administration (FDA) approval for it
decided to abandon the lung patch project,
so the probe that Thorne and his
colleagues had developed and filed patent
for languished.
A year later, tiring of working for others
and having the fate of his inventions in
their hands rather than his own, Thorne
decided that, at age 37, it was time to start
a business of his own. After examining a
number of ideas in the medical industry
and elsewhere, Thorne decided that the
electrosurgical probe he had helped
develop offered real potential. The probe
quickly and effectively cauterised1 blood
vessels to stop the bleeding. And, unlike
most other surgical instruments, it simply
did not stick to the tissue it touched, a
significant benefit to surgeons, for whom
sticking was a major frustration. Some
other solutions had come to market, like
disposable Teflon-coated instruments, but
the Teflon quickly broke down under the
high-temperature conditions in which
electrosurgery was conducted, rendering
its performance less than ideal.
It took six months of negotiation, but by
mid-1998, Thorne had signed an
agreement to license the probe technology
1
To cauterise a blood vessel cut during a surgical
procedure means to seal it so that the blood stops
flowing. Cauterisation is a crucial part of virtually
every surgical operation.
Silverglide Surgical Technologies (A)
from his former client, who owned it.
Thorne's new company was born!
The Electrosurgery Market
Electrosurgery involved the application of
radio frequency energy to human tissue in
order to stop bleeding, seal vessels or
dissect tissue. Electrosurgical instruments
incorporated an electrode mechanism
which would be placed in contact with the
human tissue and convey the radio
frequency energy to the patient. A wide
variety of instrument shapes and sizes had
been developed over the years for
different surgical specialities (see Exhibit 1
for a list of the main surgical specialities).
These included blades, spoons, hooks,
forceps and many other varieties,
including ball electrode devices similar to
the Silverglide probe.
The sale of electrosurgical instruments
and accessories had grown into a $578m
international market in 1997.
Electrosurgery was less costly than many
other methods of surgery such as laser or
ultrasonic surgery and most forecasts
envisaged the market continuing to grow.
Devices were manufactured in disposable
and reusable configurations (the latter
commanding a premium). In the
disposables category, several
manufacturers had had success with non-
stick products, the market for which had
grown from virtually nothing in 1990 to
over $30m annually by 1999.
Three companies dominated the
disposable non-stick market: MegaDyne,
ValleyLab and ConMed.
MegaDyne Medical Products was the
first company to pioneer non-stick
technology with its introduction in the
late 1980s of the E-Z Clean line of
Teflon-coated disposable instruments.
Its sales had grown from virtually
nothing in the late 1980s to $16m by
1999, almost all of them generated
from the sale of non-stick disposable
instruments.
2

ValleyLab, the global market leader in
electrosurgical products, had sales of
$190m in 1997. The company
unsuccessfully attempted to acquire
MegaDyne in the early 1990s, and
following this attempt, developed its
own line of non-stick disposable
instruments based on silicon coating
technology. The product line was
branded The Edge, sales of which
steadily increased to reach $12m by
1998.
ConMed, another major electrosurgical
products company with 1998
electrosurgical product sales of
$67.2m, also introduced a line of
Teflon-coated instruments, but lost a
patent infringement lawsuit to
MegaDyne. After unsuccessfully
attempting to license MegaDyne's
Teflon coating technology, ConMed
developed its own non-stick coating
technology for disposable instruments.
Selling under the Stealth ER name, it
had negligible sales by 1998, but was
beginning to achieve clinical
acceptance and showing signs of
making market inroads.
Overall, the competitive environment in
disposable non-stick instruments was
intensifying, fuelled by rapid growth and
enthusiastic acceptance of the benefits of
non-stick products by customers.
Thorne knew that entering the established
non-stick disposables market would be a
tough challenge. However, he was
convinced that the non-stick performance
of Silverglides probe would enable him to
tap into a sector that was currently
unexploited the market for reusable non-
stick surgical instruments. Only
Silverglides technology, he reasoned,
provided non-stick capabilities that did not
deteriorate with re-use, and while rivals
might ultimately be able to improve their
technologies to enter this market,
Silverglide had an opportunity to get in first
Silverglide Surgical Technologies (A)
(see Exhibit 2 for Silverglides projected
market positioning).
Building a Team
Thorne knew he couldnt pursue the
opportunity without help, so he convinced
Kevin Morningstar, with whom he had
worked at another medical products
company earlier in his career, to join him
part time in exchange for equity in the new
company. Morningstar would serve as
Director of Regulatory Affairs and Quality
Assurance and deal with the rigorous FDA
approval process, while Thorne would
handle marketing and sales and provide
overall direction for the company. With 15
years of experience in the medical device
industry, Morningstar brought thorough
knowledge of the FDA approval process.
He was also a certified ISO 9001 assessor
and was an expert in regulatory affairs.
Thorne also convinced Don Hargraves, an
experienced and successful entrepreneur,
to join his board. He also formed an
Advisory Board of highly qualified and
seasoned business executives, each of
whom brought perspectives and expertise
that Thorne knew would be useful (see
Exhibit 3).
Raising Capital
Maintaining control of his venture was one
of Thorne's principal objectives, so he
decided that he would work without pay at
the outset and that he and Morningstar
would do most things themselves, to keep
the company's cash needs modest. "I can
always do some engineering consulting to
bring in some cash to feed my family if my
savings run short," Thorne reasoned. But
there would be some company costs that
would require cash, so in September 1998
Thorne convinced several friends and
family members to invest in his company,
selling 7.6 percent of the equity for
$80,000 in common stock (see Exhibit 4
for a summary of this financing round).
One investor decided to invest when he
read the company's Mother Test: We
3
will never forget that every day the
products each of us make are used on our
mothers, fathers, friends, and loved ones.
We will make our business decisions
accordingly."
Mission aside, however, Thorne knew that,
though his pro forma forecasts were
attractive, any real success would depend
heavily on the degree to which the market
accepted his new product and future
products that his company might develop
or license from others.
Preparing for Market
From his previous experience in the
medical products industry, Thorne knew
that word-of-mouth publicity could make or
break a new product. The
communications of medical practitioners
were close-knit, and they talked to one
another regularly about new
developments. Thus, an early step for
Thorne was to put his probe in the hands
of surgeons to learn what they thought of
it. "Too large," said one surgeon. "It
blocks my view of the surgical site. "I like
how it doesn't stick," said another, "but it's
a lot of trouble to have to disassemble it
after each procedure in order to sterilise
it," said another.
Based on the initial feedback they
received, Thorne and Morningstar
completed a redesign of the original probe,
retaining the crucial non-stick properties
but streamlining the product and making it
easily sterilisable in a conventional
autoclave.2 By December 1998, he and
Morningstar had finished the design of a
new product line that had won FDA
approval, was smaller and thinner (for
better access to the surgical site) and
required no disassembly for sterilisation. It
was time to see how the market would
react.
2
Surgical tools are sterilized after each use in an
autoclave (a sterilisation chamber involving steam
under pressure), so that every surgical procedure is
conducted with a sterile set of tools.
Silverglide Surgical Technologies (A)
Redesigned electrosurgical probe
Identifying a Target Market
Surgeons worked in several specialities
(see Exhibit 1), and Thorne knew his
embryonic company lacked the resources
to address them all. To start, he and
Morningstar chose one segment to target:
plastic surgeons.
For plastic surgeons, sticking was a
particularly important issue, since the
appearance of the surgery's outcome was
especially apparent. "Sticking tissue can
cause complications that mar the final
appearance of the surgical procedure,"
Thorne pointed out, "so the Silverglide
probe should offer significant benefits to
this target market. Further, 85 percent of
the 9,000 doctors who do plastic surgery
do most of their work in their own
independent clinics, so they themselves
are the decision-makers when it comes to
choices among surgical tools and
equipment. There's no hospital
bureaucracy to wade through in order to
make a sale."
Testing the Market
Fortunately for Silverglide, there were a
few key trade shows that most plastic
surgeons attended each year, to hear the
latest research, learn the newest
techniques, and learn about new products
like the Silverglide probe.
At one of these trade shows in spring
1999, Thorne and Morningstar
demonstrated the Silverglide probe by
performing surgery on meat and fresh fish
fillets, which clearly showed that these
tissues, at least, didn't stick to the
4
Silverglide probe, though it didn't exactly
smell very good! A few surgeons bought
probes on the spot, paying by credit card,
while others asked for follow-up calls
following the show. Two surgical products
distributors also agreed to take on the
probe and offer it to their surgical clients.
Within a month, two leading surgeons had
become excited enough by their surgical
results that they agreed to let Silverglide
shoot videos of the probe in action and
provide testimonials of the probe's
effectiveness.
Progress Comes Slowly
By the summer 1999 meeting of the
Advisory Board, however, it was becoming
clear that, while the surgeons liked the
idea of a truly non-stick instrument, the
probe was proving difficult to sell, even
though some progress on sales had been
made. Thorne and Morningstar had sold
some probes at trade shows and in follow-
up conversations over the telephone, but
progress had been slow. The distributors
had sold very few probes and one had
returned most of its initial inventory. "It's a
tough sale for a number of reasons," said
Thorne to the board. "First, we're a new
company that most surgeons have never
heard of. Second, to make a sale, we
have to convince the surgeon that the
probe doesn't stick, and we also have to
convince them that a probe itself is a
useful surgical tool. It's not one that most
of them have used before. Third, for the
distributor, there's not much incentive to
show our product. It's a very small product
line (only probes, in only five sizes), and
even if they like it, there's little incentive to
reorder, since the probe lasts for hundreds
of surgical procedures. It's not clear to the
distributors that the sales are going to be
enough to be worth their selling time. The
educational process is an uphill road."
As Thorne saw it, there were two
decisions to face, and they had to be
faced quickly, as Silverglide's cash was
running out. "First, we have to decide
whether to stick with the probe, or see if
Silverglide Surgical Technologies (A)
we can do better with bipolar forceps,
which many surgeons use in every
surgical procedure. A plastic surgeon told
me last week that he simply doesn't use
probes. He and a number of other
surgeons basically said the same thing: 'If
you can make non-stick forceps, I'll buy
them.' So maybe forceps are a better way
to go. One good thing about forceps is
that surgeons need as many as a dozen
sizes and shapes of forceps on each
surgical tray that they use for each
surgical procedure. If a surgeon does two
or three procedures a day, that's a lot
more sales potential than we seem to
have with the probe, where one or two
sizes seem to be all a surgeon can use."
"The second question we have to
address," said Thorne, "is whether to stay
with plastic surgeons as our focus. They
use forceps, too, as most surgeons do.
But there's another target market that
could be attractive: neurosurgery.
Sticking tissue is a problem in the brain (a
few brain cells here or there is really
important!) or near the spine, where they
do most of their work. Electrosurgical
forceps are one of the neurosurgeons
primary instruments. And in hospital
settings, where neurosurgeons do most of
their work, if there are a typical six
operating rooms and two or three
procedures per day in each room, plus
some backup stock, that's a lot of forceps.
Unlike the plastic surgeons who run their
own clinics, though, there are lots of chefs
in the buying kitchen, so the sale cycle
might be a lot longer, and getting through
the hospital bureaucracy probably wouldn't
be easy."
Morningstar thought if forceps were the
way to go and things went well, prototypes
could be developed within less than a year
and put into some surgeons' hands to gain
some user feedback. FDA approval could
also be obtained, with limited production
and sales starting soon thereafter. But it
would take nearly all of his and Thorne's
time to develop a new forceps product
line, find suppliers and work out a new
5
design, patent, and production details,
time that would have to be taken away
from marketing probes, which still seemed
to hold some promise.
"The surgeons who use our probe swear
by it," said Morningstar. "It's an enabling
product, something that enables surgeons
to do things they cannot now do. Once
they try a probe, they like using it. In the
long run, enabling products are where
most of the real breakthroughs come
from."
abandoning the probe and developing
forceps or doing both I'm not sure."
"I'm not too concerned about using your
time to try a new direction," remarked one
of the board members. "Our sales to date,
though they've grown in percentage terms,
still round to zero [see Exhibit 5]. I'm not
sure that Plan A is really working."

Thorne just did not know if he and

Morningstar had enough time and money
to develop forceps. They were already
strained financially and there did not seem
to be a whole lot of investors out there
willing to help them fund a new
development project.

Another concern was competition. No one

else was marketing non-stick probes, so
there was little direct competition.
Forceps, on the other hand, were sold by
the biggest players in the surgical products
industry including ValleyLab and ConMed,
although no one offered a true non-stick
forceps.

"It's not an easy decision," Thorne said in

summing up the board's discussion.
"There are tough challenges whichever
way we go. There is no guarantee that we
will be successful in developing a non-
stick forceps. I do know that Kevin and I
have more knowledge about what makes
tissue stick and how to prevent it than
virtually anyone else in the world. I've
always heard that entrepreneurs have to
be tenacious, willing to keep fighting until
the barriers are overcome. Now I know
what that means! It's not entirely clear to
me whether tenacity is what's called for
now, or whether Kevin and I should stop
putting our efforts into selling the probe to
plastic surgeons and try Plan B. But
whether Plan B means changing our target
market from plastic surgeons to
neurosurgeons, or whether it means

Silverglide Surgical Technologies (A) 6

Exhibit 1: Number of Surgeons by Speciality (United States)

Surgical speciality No. of %

surgeons
General surgery3 38,239 27.0%
Obstetrics/gynaecology 35,619 25.1%
Orthopaedic surgery 20,980 14.8%
Opthalmology 16,587 11.7%
Urologic surgery 9,511 6.7%
Otolaryngology 8,399 5.9%
Plastic surgery4 4,864 3.4%
Neurosurgery 4,526 3.2%
Thoracic surgery 2,215 1.6%
Colon-rectal 906 0.6%
Total 141,846 100.0%

3
General surgery includes paediatric and vascular specialities.
4
Does not include 2,000 dermatological surgeons and 2,500 facial plastic surgeons in residency, most of whom
also perform plastic surgery procedures.

Silverglide Surgical Technologies (A) 7

Exhibit 2: Silverglide Surgical Technologies Market Positioning

Standard Non-stick
(commodity) (proprietary)

Price sensitive Premium pricing

instruments
Disposable

Many distributors with small market Few distributors, each with large
share and low margins market share

MegaDyne quickly claimed

significant market share with E-Z
Clean technology

Price sensitive Premium pricing quadrant

Many distributors with small market No one is competing in this

instruments

share and low margins quadrant due to technology

Reusable

barriers
Over 50 forceps OEM distributors
worldwide Silverglide Surgical Technologies
is poised to claim this quadrant

Quadrant market potential is over

$200m?5

Source: Silverglide business plan

5
Independent forecasts indicated that current trends within the electrosurgical market pointed toward strong
growth in the reusable electrosurgical instruments market as manufacturers adapted their technologies to
introduce new lines of reusable, non-stick equipment such as ball electrodes, bipolar instruments (such as
forceps), suction coagulators, vessel sealers, and so on. As an example, the compound annual growth estimate
in the reusable electrosurgical forceps market from 1998 to 2001 was estimated at over 15 percent.

Silverglide Surgical Technologies (A) 8

Exhibit 3: Silverglide Advisory Board, Summer 1999

Jerry Donahue, President, Boulder Technology Incubator. An experienced medical

technology executive.

Jay Wadell, Vice President, Sterling-Rice Group, a branding consultancy.

Dick Fleenor, CEO, successful serial entrepreneur in the medical technology industry,
currently founder and CEO of a medical instruments company.

Don Hicks, angel investor and former CEO, Ball Aerospace, Inc.

All Advisory Board members served without compensation and without liability.

Silverglide Surgical Technologies (A) 9

Exhibit 4: Family and Friends Financing Round September 1998

Common shares outstanding from founders round* 1,219,332

New common shares to family and friends 100,000

Price per share $0.80

* 95 percent owned by Jon Thorne.

Silverglide Surgical Technologies (A) 10

Exhibit 5: Pro Forma Profit and Loss 1999 (US Dollars)
Best estimate as of July 1999

Total revenue 5,775

Cost of goods sold 3,436

Gross profit 2,339

Operating expenses
Total selling expenses 15,913
Total G & A expenses 28,907
Total R & D expenses 11,972
Total 56,801

Profits/loss before tax (54,462)

Silverglide Surgical Technologies (A) 11