ENTREPRENEUR OF THE YEAR Lee/Collier: REINHOLD SCHMIEDING

ENTREPRENEUR OF THE YEAR Lee/Collier:

REINHOLD SCHMIEDING

FOUNDER AND PRESIDENT, ARTHREX INC.

by Jean Gruss| Lee/Collier Editor

Who is Reinhold Schmieding?

Few people have heard of Reinhold Schmieding, but the reclusive Naples entrepreneur has quietly built one of the world's leading medical-device manufacturing companies.

When Reinhold Schmieding pulled into Naples on a steamy August day in 1991, all the assets of his small company, Arthrex Inc., fit in the van and a U-Haul trailer he was driving.

Today, Arthrex may be the biggest company on the Gulf Coast you've never heard of.

With a half a billion dollars in annual revenues and more than 3,000 products, Arthrex has quietly become one of the largest arthroscopic medical-device manufacturers in the world. But unless you're a surgeon or a Naples insider, you're not likely to learn anything about the company or how it became so successful.

And that's fine by its founder and president. Schmieding, 53, rarely grants interviews and declined requests to tell the Review the story of his entrepreneurial success. Friends and colleagues explain it this way: The less people know about Arthrex, the better.

Arthrex' edge is the fact that it is a privately held company. All its major competitors are publicly held and it serves little purpose to give them any ammunition. You can't even read the company's press releases on its Web site without a password (the Review was not granted access) and few business associates are willing to publicly speak about their employer. Executives at Barron Collier Co. won't discuss Arthrex or its plans to build 200,000 square feet of manufacturing and distribution space at their Ave Maria development in eastern Collier County.

But in interviews with the few friends, colleagues and business associates who agreed to talk about Schmieding, as well as details from his self-published autobiography, a picture emerges of Arthrex' founder as an entrepreneur who is not easily distracted from his goal of becoming the world leader in his industry.

He has a fanatic devotion to surgeons and has built world-class laboratories for them to experiment and practice their craft with Arthrex medical devices, naturally. His drive for innovation and perfection carry over into his private life, where friends know him as a competitive scratch golfer, an avid fisherman and an agile tennis player despite leading a hectic work schedule.

Colleagues say Schmieding instinctively knows where the company is headed, even if the goal seems far-fetched at first. "He would say we're going to double and triple in size and everyone would laugh, but we'd go make it happen," recalls Mark Brunsvold, Arthrex' former vice president of manufacturing who now runs his own medical-device company in Wisconsin.

"As his company has grown, he's really never changed," says Tom Flood, the president and chief executive officer of Collier Enterprises who has known Schmieding for 20 years. "What's impressed me the most is he has a tremendous commitment to his employees. No matter where I've been, he knows everybody."

Schmieding knows his surgeon-customers so well he could do their job even though he's received no formal training in surgery. "He's been in the operating room more than I have," says James Guerra, medical director at Arthrex and the Collier Sports Medicine & Orthopaedic Center in Naples. "He could do these procedures," he says.

One thing is certain: Schmieding's success is the classic story of American entrepreneurial grit and perseverance.

The son of German immigrants, Schmieding started his company from his home. He peddled his wares at surgeon conferences-often alone-gradually gaining acceptance from leaders in the field one surgeon at a time. Corporate calamity struck early and often, but Schmieding always managed to overcome the most daunting obstacles, including a near-fatal legal assault by health-care colossus Johnson & Johnson that cost him millions of dollars.

Roots in Munich

Although based in Naples, Arthrex has its roots in Germany where Schmieding started his career in the mid-1970s as a salesman for U.S.-based Richards Medical, now a part of Smith & Nephew, Arthrex' biggest rival today. But the entrepreneurial Schmieding decided he could build his own company, which he did out of his house in Munich in 1977.

According to his autobiography, Helping Surgeons Treat Their Patients Better: A History of Arthrex's Contribution to Arthroscopic Surgery, Schmieding had a special affinity for Germany and spoke the language fluently even though he grew up in Bloomfield Hills, Mich. His father had been a German paratrooper during World War II, was wounded and captured by the Americans in Italy. (History buffs say the elite German paratroopers in Italy were among the toughest soldiers of the war.) The elder Schmieding became the prison-camp translator and built a good relationship with the U.S. commanders. Upon his release from the camp, U.S. soldiers gave Schmieding a backpack full of canned goods for his return home. After graduating from dental school, he emigrated to the U.S. and that's where son Reinhold was born six months later.

The younger Schmieding was driven to succeed, perhaps in part because his father was disappointed his son didn't attend medical school. "He, of course, had visions that someday I would take over his dental practice in Detroit and work with him," Schmieding writes in his book. After leaving for Germany, the elder Schmieding "took little interest in my profession."

But Schmieding was determined to build his company on his own terms. He steadfastly maintained control over the ownership even though he faced cash-flow problems throughout the startup's infancy.

In the introduction to his autobiography, Schmieding looks back on his decision to start his business as one that "might even qualify as a Harvard case study on how not to start a company."

Schmieding takes a shot at those who choose the easy route to entrepreneurial success, writing: "The era of personal sacrifice and risk taking has been replaced today with venture capital and IPOs that use other people's money as collateral. Companies today that are driven by financial investors or public markets are dictated by pressures of compromise in order to provide the maximum financial return for investors. Their primary focus on quarterly earnings and shareholder value instead of customers runs counter to the critical responsibility of product performance and medical education in the better interest of surgeons, their patients and society as a whole."

Laser focus on surgeons

Schmieding's fanatic obsession over his surgeon customers even at the expense of short-term profits has built solid loyalty among those who buy his medical devices. Many of these products were groundbreaking precisely because he listened to the surgeons who needed them, even in the early days when orthopedic surgeons shunned their arthroscopic brethren because of their groundbreaking work.

For example, Guerra says Arthrex was a pioneer in the repair of the anterior cruciate ligament (ACL) by inventing a device that hooks onto the femur to guide the surgeon. Guerra says Schmieding often refers to his German engineers as "elves of the Black Forest," who magically create the tools he sells.

Because Arthrex is privately held, Guerra says Schmieding often creates tools he knows won't necessarily make money but help surgeons with rare procedures, such as a device that they use to transplant a damaged meniscus cartilage in the knee. "He takes on projects that at best will break even," Guerra says. "It's not always about the bottom line."

In his book, Schmieding writes: "Our mission was to serve surgeons, not financial investors."

Naples is a perfect location for Arthrex's headquarters because surgeons can fly in for a hands-on seminar on the newest technology while their spouses enjoy relaxing at one of a dozen luxury hotels. At one time, Schmieding even conducted courses for doctors on a private jet while flying them to Naples. It was dubbed the "Jet Lab," Guerra says.

Schmieding learned the art of schmoozing surgeons long ago in Munich. With a touch of humor, Schmieding writes: "In the afternoon, after the course, we would take [the surgeons] to the famous Munich Biergartens and after a liter or two, they would express their interest in purchasing the instruments and equipment they needed to begin performing arthroscopic surgery."

Today, Arthrex trains thousands of doctors at sophisticated labs all over the world. For example, Arthrex held a four-day knee and shoulder conference in Cologne, Germany, last year for 1,500 surgeons. In June, a similar conference will be held in Cancun, Mexico. Arthrex has a team of 100 "surgeon champions" who teach courses at any given time, Guerra says. Sometimes, they travel on road shows to cities where surgeons don't have time or resources to leave their practice for an extended period.

Guerra couldn't say how much Arthrex spends on medical education. "I bet that's bigger than his marketing budget," he speculates.

Arthrex also trains its staff to become experts. "You don't find that at the big companies," says Brunsvold. "Their sales guys aren't nearly as well trained, so the doctors don't like them as well."

That starts at the top. Schmieding writes: "Arthrex attracted the best orthopaedic distributors and sales representatives with a continuous flood of exciting new products to sell at a commission rate that was the highest in the industry. As a product designer, I knew every product and surgical procedure cold, which allowed me to bond with [surgeons] at a level they were not familiar with from a company president and founder."

Fighting Goliath

Schmieding has faced many obstacles in building his business, some of which were nearly fatal to Arthrex. In its infancy, according to Schmieding's own account, the company's American managers were siphoning off money to pay for their own medical problems and he had to shut down the U.S. operation. Fortunately, at the last minute, a leading surgeon bought $40,000 worth of equipment that saved the company.

It took five years before the first bank agreed to lend Schmieding money. For years, Schmieding's attempts to get financing had failed as banks turned him down until Dresdner Bank in Munich lent the company $180,000. "We invested the new funds by hiring employees," Schmieding writes, noting that annual sales in 1981 were $300,000.

By 1990, the German operations had grown to more than $600,000 in annual revenues. Looking back, Schmieding writes that Germany was a good place to start his business because cost controls by the government on medical-equipment reimbursement made the company better disciplined financially. Today, the company operates in 90 countries, which Schmieding writes is the equivalent of "playing 90 chess matches at once."

By the end of the 1990s, as Arthrex was building a substantial U.S. presence out of its base in Naples, Johnson & Johnson began to notice the upstart company. The conglomerate had recently acquired competitor Mitek and didn't like Arthrex encroaching on one of its most lucrative businesses: surgical sutures. So Johnson & Johnson sued Arthrex for patent infringement, hoping to bury the Naples company in litigation costs. In his book, Schmieding recounts how he was spending 25% of his time defending his company and mounting his defense.

That's when Arthrex' surgeons came to the company's defense, including some of the leaders in the field. After $2.5 million in attorneys' fees, Arthrex survived the legal challenge and Johnson & Johnson's subsequent appeal. Johnson & Johnson officials declined to comment.

In his 2006 book, Schmieding reflects on his success. Shortly after Arthrex built its new headquarters in Naples - an event Schmieding called "the best day of my professional life" - his father came to visit. "We walked through the new building and the surgical-skills teaching lab. He understood that my destiny to contribute to science and medicine had taken a different path. At the end of the day, he said quietly that I was doing the right thing."

A Euro-American business culture

Reinhold Schmieding, the president and founder of Arthrex, says the company's corporate culture gives it an edge over its competition. Here's how he describes it in his self-published autobiography, Helping Surgeons Treat Their Patients Better, A History of Arthrex's Contribution to Arthroscopic Surgery:

"From Europe, you take a commitment to providing employee security as your first major ingredient. Security breeds confidence, loyalty and long-term commitment that are rarely tasted in the U.S. From the U.S., you add a twist of humor to increase employee morale and workplace enjoyment. From Germany, you add a liter of discipline and work ethic. You toss in a spoonful of team decision-making and delegation skills from the U.S. You mix in a healthy dose of health care and pension packages of Europe. Add sweetened performance incentives from the U.S. You serve it all to them as a cost-free catered lunch every day to keep them hungry to cater to others. For a year-end dessert, you provide them the equivalent of a German Christmas bonus based on seniority, overall company results, their personal performance that year and their contribution to a positive attitude and teamwork towards fellow workers. You dine together in a new facility that creates an atmosphere of quality, professional service and integrity. You wash it all down with German beer, French Champagne or Italian wine at frequent corporate events to celebrate individual achievements. It is the new Euro-American business culture menu prepared by the 'Iron Chefs of Arthrex'."

What is Arthrex?

Naples-based Arthrex has five subsidiaries, according to a credit report by Dunn & Bradstreet. They are:

• Allograft Tissue Systems, Naples, (chartered in 2000) operates as a medical and human-organ service provider;

• Arthrex Medizinesche Instrumente GMBH, Karlsfeld, Germany (chartered in 1977), manufactures medical instruments;

• Arthrex California, Walnut, Cal., (chartered in 1999), manufactures surgical instruments;

• Arthrex Manufacturing, Naples, (chartered in 2002), operates as a medical-device manufacturer;

• Arthrex Mexico, Mexico City, Mexico (chartered in 2002), operates as a distribution and sales office.

Officers and Directors of Arthrex Inc.

•Reinhold Schmieding, president and director

•John Schmieding, secretary

•R. Scott Price, vice president and director

•Kathleen Sparrow, treasurer

•Jon Cheek, vice president and director

•Rainer Grimm, director

Source: Florida Department of State's Division of Corporations

BY THE NUMBERS

ARTHREX INC.

Year Revenue* % growth

2005: $350 million *

2006: $400 million * 14%

2007: $540 million 35%

3-year ave. annual growth: 25%

Employees

2005: 300*

2006: 400*

2007: 550

(*2005 and 2006 revenues and employee counts are estimates; 2007 revenues supplied by Arthrex; 2007 employee counts courtesy of the Economic Development

Council of Collier County)