Interpore Cross International (BONZ)
Interview with:
David Mercer, Chairman and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
innovative products for spinal surgery.

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Interpore Cross International – delivering their new product stream into the highest growth market in orthopedics – the spine

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Medical Equipment

Interpore Cross International

181 Technology Drive
Irvine, CA 92618
Phone: 949-453-3200

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David Mercer
Chairman and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
April 2003

Bio of CEO,

David C. Mercer - Chairman of the Board and Chief Executive Officer
has served as Chairman of the Board of Directors since April 1997, as Chief Executive Officer since March 1992 and also served as President from March 1992 through May 1998. Mr. Mercer was President, Orthopaedic Division, of Kirschner Medical Corporation, a manufacturer of orthopedic devices, from October 1988 through March 1992, and Senior Vice President, Marketing, Orthopaedic Implant Division of Zimmer, Inc., a manufacturer of orthopedic devices, from April 1986 through October 1988. From April 1983 to April 1986, he was President of Aspen Labs, Inc., the arthroscopic and electrosurgical product subsidiary of Zimmer, Inc.

Company Profile:

Interpore Cross International (NASD: BONZ) is an independent public medical device company focused on providing innovative products for spinal surgery. The company designs, manufactures and markets spinal implant devices and orthobiologic products as well as instruments that facilitate minimally invasive surgery. Interpore Cross' products are used by orthopedic surgeons and neurosurgeons around the globe in a wide range of applications.

Products include:
Spinal Products:
SYNERGY™ - lower back and deformity systems.
C-TEK™ - Vertebral Body Replacement Device.
GEO™ - Vertebral Body Replacement Device.

AFG™ technology – enables a physician to collect and concentrate growth factors from the patient’s own blood during surgery.
Pro Osteon™ - a natural bone graft substitute, which mimics the porosity of human cancellous or cortical bone, providing an ideal scaffold for new bone growth.
BonePlast™ - a proven, economical solution for bone defect repair.

Minimal Invasive Products:
CDO™ - designed to facilitate the delivery of biocompatible materials into bone through a small incision.
LP2™ System – provide easy access to small bone anatomy for material delivery.

CEOCFOinterviews: Mr. Mercer, please give us a brief history of Interpore Cross International.

Mr. Mercer:  “Interpore Cross was formed with the merger of Cross Medical and Interpore International five years ago. Interpore was the acquiring company. Interpore went public in 1993, after having released our first orthopedic product at the very end of 1992. It was Pro Osteon, the very first synthetic bone graft material approved for use by the FDA. Prior to that time Interpore was primarily a research company. Since the merger with Cross Medical five years ago, we have really focused on the spine. We see ourselves primarily as a spinal products company with a variety of solutions for spine problems for orthopedic and spine surgeons.”

CEOCFOinterviews: Please share a little more about your product offering.

Mr. Mercer: “The products group out in three categories: first are the spine fusion hardware products, second the biologic product line, which is the graft materials used in association with the hardware to fuse the spine. The third is a product line of minimally invasive products to deliver material into crushed vertebral bodies, typically in osteoporotic patients. Within spine hardware; we have the Synergy system, which accounts for more than half the sales. It is a lower back system with titanium or stainless steel hooks, rods and screws that are used for spine fixation. In biologics, we have our Pro Osteon™, which is a coral based synthetic bone graft material.”

CEOCFOinterviews: Who is using your products and are these products unique to you?

Mr. Mercer: “There are about fourteen thousand orthopedic surgeons in the United States; of those about two thousand are fellowship-trained spine surgeons. There are probably just over a thousand neurosurgeons that are doing spine fusion procedures. These are the decision makers for our products. The ultimate user is, of course, the patient. We ship to independent agents or sales people or ship to the hospitals. We bill the hospitals and the hospitals pay us. Just like any other product line, there are competitors in the marketplace. The leading two competitors account for about a 75% share of the market. We are probably four or five in the marketplace with about a 6% share and there are quite a number of smaller players below us.”

CEOCFOinterviews: What is it about your products that make them different from the others?

Mr. Mercer: “Of all the lower-back systems that are out, there are no bad products, all are capable systems. Every system has features and benefits designed to get surgeons to use the product. We try to have excellent instrumentation for implanting our products. It really minimizes the fiddle factor, which is a design rationale that we have with the base system. We now have cages, which we recently released for inter-body fusions that are between the vertebrae. The ease of use design philosophy followed through on this product as well. Being cast titanium with high strength and over 90% void space, it’s truly a very uniquely designed product.”

CEOCFOinterviews: Is there customization of these products and is there inventory?

Mr. Mercer: “If a surgeon is doing a doing lower back fusion, the sales rep is taking in hundreds of pieces and the surgeon does the construct intra-operatively. We have multiple sized screws and multiple length rods, etc. It is customized to a certain degree onsite from standard products. For the cages, there are various sizes of these and the surgeon can select the proper one for the appropriate patient.”

CEOCFOinterviews: What is the market opportunity for your products?

Mr. Mercer: “The spine market in the U.S. is about a 1.2 billion dollar market; and growth is in the fifteen to twenty percent range. The biologics market in the U.S. is about a 500 million dollar market, probably growing in the twelve percent range. Both are large markets are exceeding double-digit growth. The growth is being fueled by the classic aging of the population as well as improved outcomes with the advances in the instrumentation. There will be a continued growth in the utilization of the products.”

CEOCFOinterviews: What about R&D and new products?

Mr. Mercer: “We are involved in rolling out a significant amount of new products. We came out with a cervical plate for the cervical spine just over a year ago and it has been a very important product for us. We are rolling out our GEO titanium cage product, and we will be rolling out a posterior cervical spine fixation system. We have recently received FDA clearance for, and have just started to sell a telescopic plate spacer for corpectomies, that is the removal of a vertebral body. (Typically in the case of tumors). In the biologics area, we are just now rolling out a proprietary allograft bone graft material, which is a putty. We are in beta testing and we will begin selling in March, our Access™ system, which is a means by which we concentrate a patient’s own growth factors from their own blood. Our R&D costs as a percent of sales are high, but new products are essential and that is where the funding goes.”

CEOCFOinterviews: Is cost a factor for the doctors looking at your product?

Mr. Mercer: “There is always a concern with cost but it is not a low-bid situation because the surgeons want to use the product that is going to work best for the patient. While price is important, these products are not commodity items that hospitals bid on.”

CEOCFOinterviews: What’s the financial position of the company?

Mr. Mercer: “We have cash in the bank though we have been a cash user to bring all these products out. We have been historically cash flow positive until just the past year as we have started using the cash to fund the development work and build all the inventories for the new products. We should return to cash flow positive in the third or fourth quarter of this year. In the mean time, the company is very strong. We have about ten million dollars in the bank, and a ten million dollar credit line that is unused.”

CEOCFOinterviews: Why should potential investors be interested?

Mr. Mercer: “From an investor prospective standpoint, I think you’ll find most CEOs think their companies are undervalued.  We think that to be the case now, particularly with the new product stream that we have coming out… in the highest growth market in orthopaedics. From an investor perspective, the two hot areas of medical devices are the cardiac area and orthopedics. Within orthopedics, probably one of the more interesting areas is the spine area, which is growing at a more rapid rate than the rest of orthopedics. We are strong financially; we have a stream of products and we will be cash flow positive. It has been an era of consolidation in orthopaedics and as that continues, it would be nave to think we could not, at some point, be a consolidation target for a company that wants to get into the spine market.

I think the fact that we are a real company and we manufacture and sell real products is important. This is not a virtual company. While we are not number one in the marketplace; (there are a number of very large competitors), one doesn’t have to be number one to be a winner. If we can execute our plan with new products, we can bring a lot of shareholder return.

I would like to reiterate that the company is focused on the spine. We will look at additional product or small company acquisitions opportunities, but our focus will continue to be on the spine. We sometimes get questions of whether we are going to broaden out into other orthopedic market segments. Our view is “no”, we want to stay focused on our core business. It is where we are the experts, so it is best for us to stay focused. We don’t see any need for a financing or a secondary offering at this time. We feel we are in good shape to execute our growth strategy.”

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