Inside Orthopedics: Who is Reinhold Schmieding? (Podcast 13)

Brought to you by Tiger Buford. Hello, orthopedic entrepreneurs. Welcome to Inside Orthopedics. My name is Tiger. I'm an orthopedic industry insider and retained recruiter for early-stage orthopedic companies. Thanks for listening. This is episode number 13. Title is: Who is Reinhold Schmading? So here we go. Everyone in orthopedics today knows that Arthrex is the number one sports medicine company in the world. The 800-pound gorilla. But few people know the founder and owner Reinhold Schmadinger and how he did it. Last year Forbes had Reinhold's net worth at $5.9 billion, which slotted him at the 104th richest American. To give insight into how Reinhold built one of the world's greatest orthopedic companies from scratch, I'm going to read a piece from the Business Observer in Florida that named Reinhold the Entrepreneur of the Year back in 2011. You will see a theme over and over in this article of insane customer focus while avoiding publicity. Many orthopedic companies today could learn from Reinhold's focus, and style. So here we go, the Reinhold story in 5 short chapters. Chapter 1: Who is Reinhold? Few people have heard of Reinhold Schmating, but the reclusive Naples entrepreneur has quietly built one of the world's leading medical device manufacturing companies. When Reinhold pulled into Naples On a steamy August day in 1991, all the assets of his small company, Arthrex, fit into a 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 half a billion dollars in revenues— and this is an old article, so keep that in mind— and more than 3,000 products Arthrex has quietly become one of the largest arthroscopic medical device companies in the world. Unless you're a surgeon or a Naples insider, you probably are not likely to learn anything about the company or how it became successful. And that's fine with its founder and president, Schmating, age 53. He rarely grants interviews and declined requests to tell their view the story of his entrepreneurial success. Friends and colleagues explain it this way: the less people know about Arthrex, the better. Arthrex's edge is the fact that it's a privately held company. All its major competitors are publicly held and serves with little purpose to give them any ammunition. You can't even read the company's press releases on its website without a password. And the review was not granted access for this article. And few business associates are willing to publicly speak about their employer. Executives at Barron Collier Company won't discuss Arthrex or its plans to build a 200,000-square-foot manufacturing distribution space later this year. But in interviews with few from friends, colleagues, and business associates who agreed to talk about Schmading, as well as details from his self-published autobiography, a picture emerges of the 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 Schmating instinctively knows where the company's headed. 'Even if the goal seems far-fetched at first. He would say that we are going to double and triple in size and everyone would laugh, but we'd make it happen,' recalls Mark Brunsvold, Arthrex's former Vice President of Manufacturing, who now runs his own company in Wisconsin. 'As his company has grown, he's never really changed,' says Tom Flood, President, CEO of Collier Enterprises, who has known Schmading for 20 years. What's impressed me most is he has a tremendous commitment to his employees. No matter where he— I've been, he knows everybody. Schmading knows his surgeon customers so well he could do their job even though he's not received any formal training in surgery. "He's been in the operating room more than I have," says Jim Guerra, medical director, Arthrex and Collier Sports Medicine Orthopedic Center in Naples. "He could do these procedures." One thing is certain: Schmading's success is a classic story of American entrepreneurial grit and perseverance. The son of German immigrants, Schmading started his company from his home. He peddled his wares at surgeon conferences, often alone, gradually gaining acceptance from the leaders in the field one surgeon at a time. Corporate calamity struck often, but Schmating always managed to overcome the most daunting obstacles, including a near-fatal legal assault by healthcare colossus Johnson Johnson that cost him millions of dollars. Chapter 2: Roots in Munich. Although based in Naples, Arthrex has its roots in Germany, where Schmading started his career in the mid-'70s as a salesman for US-based Richards Medical, now Smith Nephew, Arthrex's biggest rival today. But the entrepreneurial Schmading decided he could build his own company, which he did out of his house in Munich in 1977. According to his autobiography called Helping Surgeons Treat Their Patients Better: A History of Arthrex's Contribution to Arthroscopic Surgery, Schmading has a special affinity for Germany and spoke the language fluently even though he grew up in Bloomfield Hills, Michigan. His father had been a German paratrooper during World War II and was wounded and captured by the Americans in Italy. History buffs say the elite paratroopers in Italy were among the toughest soldiers of the war. The elder Schmading became the prison camp translator and built a good relationship with the U.S. commanders. Upon his release from camp, US soldiers gave Schmadinger a backpack full of canned goods for his return home. After graduating from dental school, he immigrated to the US, and that's where his son Reinhold was born 6 months later. The younger Schmadinger was driven to success partly because his father was disappointed his son did not attend medical school. He, of course, had visions that someday he would take over his dental practice in Detroit and work with him. Schmating writes in the book, "After leaving Germany, Elder Schmating took little interest in my profession." But Schmating 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 of his autobiography, Schmadinger looks back on his decision to start his business as one that might even qualify as a Harvard Business Case on how not to start a company. Schmadinger 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 in medical education in the best interest of the surgeons, their patients, and society as a whole. End quote. Chapter 3: Laser Focus on Surgeons. Schmating'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 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 ACL by inventing a device that hooks onto the femur to guide the surgeon. Guerra said Schmating often refers to the German engineers as "elves of the Black Forest" who magically create these tools he sells. Because Arthrex is privately held, Guerra says Schmating often creates tools he knows won't necessarily make money but help surgeons with rare procedures, such as the device that they use to transplant a damaged meniscus cartilage in the knee. He takes on projects that at best will break even. It's not always about the bottom line. In his book, Schmating writes, "Our mission was to serve surgeons, not financial investors." Naples is the perfect location for Arthrex headquarters because the surgeons can fly in for hands-on seminar on the newest technology while their spouses enjoy relaxing on one of the dozen luxury hotels. At one time, Schmading even conducted courses for doctors on a private jet while flying them to Naples. This was dubbed the Jet Lab. Gera says. Schmadinger learned the art of schmoozing surgeons long ago in Munich. With a touch of humor, Schmadinger writes, "In the afternoon after the course, we would take the surgeons to a famous Munich beer gardens, 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 in sophisticated labs all over the world. For example, Arthrex held a 4-day knee and shoulder conference in Cologne last, last year for 1,500 surgeons. In June, a similar conference will be held in Cancún. Arthrex has a team of about 100 surgeon champions who teach courses at any given time. 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, but I bet it's bigger than his marketing budget, he speculates. Arthrex also trains its staff to become experts. You don't find that in the big companies. Their sales guys aren't nearly as well trained, so the doctors don't like them as well. This starts at the top. Schmading writes, "Arthrex attracted the best orthopedic distributors and sales representatives with the 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 the surgeons at a level they were not familiar with from a company president and founder. Chapter 4: Fighting Goliath. Schmading has faced many obstacles in building his business, some which were nearly fatal to Arthrex. In its infancy, according to Schmading's own account, the company's American managers were siphoned off money to pay for their own medical problems. He had to shut down the US operation. Fortunately, at the last minute, a leading surgeon bought $40,000 worth of equipment that saved the company. It took 5 years before the first bank agreed to lend Schmading money. For years, Schmading's attempts to get financing had failed as banks had turned him down until Dresdner Bank in Munich lent him $180,000. We invested the new funds by hiring employees, Schmating 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, Schmating 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 Schmating 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, J&J became to notice the upstart company. The conglomerate had recently acquired competitor Mytek and didn't like Arthrex encroaching on some of its most lucrative businesses—surgical sutures. So J&J sued Arthrex for patent infringement, hoping to bury the Naples company in litigation costs. In his book, Schmading recounts that he was spending 25% of his time defending his company and mounting his defense. That's when the Arthrex surgeons came to the company's defense, including some of the leaders in the field. After $2.5 million in attorney fees, Arthrex survived the legal challenge and J&J's subsequent appeal. J&J officials declined to comment. In his 2006 book, Schmading reflects on his success. Shortly after Arthrex built its headquarters in Naples, an event Schmading calls "the best day of my personal life," his father came to visit. We walked through the new building and the surgical skills teaching lab and he understood that my destiny to contribute to science and medicine had taken a different path. At the end of the day, he quietly said that I was doing the right thing. Chapter 5, the last chapter: A Euro-American Business Culture. Reinhold, the president and founder of Arthrex, says the company's culture gives it an edge over the competition. Here's how he describes it in his autobiography: "From Europe, you take a commitment to providing employee security as your first major ingredient. Security breeds confidence, loyalty, long-term commitment that are rarely tested or tasted in the U.S." From the US, 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 US. You mix in a healthy dose of healthcare and pension packages from Europe, add sweetened performance incentives from the US. You serve it all up to them as a cost-free catered lunch every day, keep them hungry to cater to others. For a year-end dessert, you provide 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. This is the new Euro-American business culture menu prepared by the Iron Chefs of Arthrex. That's it. Hope you enjoyed learning more about him. Don't forget to subscribe, and you can always follow me at TigerBuford.com. Be safe out there.