The New Bionic Man Ossur revolutionized the business of building prosthetic legs, making amputees better, stronger, faster--and itself more profitable.
By Paul Keegan

(Business 2.0) – As Hilmar Janusson begins his weekly hike up a volcano in southwestern Iceland, he strides up a sloping, moss-covered hill for a while, then lifts and bends his right knee to hoist himself onto an outcropping of lava rock. Hilmar is the head of research and development for Ossur, a $94 million prosthetics and orthotics firm based in Reykjavik, so he has a keener appreciation than most for what an astonishing feat of engineering and design that knee truly is: The ball of his femur is rotating snugly on the tibia, cushioned by layers of soft cartilage and stabilized by tough, flexible ligaments, with the whole delicate apparatus firmly protected by a bony kneecap.

After pulling himself up to level ground, Hilmar--Iceland is so small that people go by their first names--stops to take a call on his cell phone. The other eight Ossur employees marching up the hillside with him on this warm, glorious summer evening don't seem to mind the interruption. The sun won't dip below the horizon until about midnight, so Icelanders don't observe any of the usual time limits on work or play this time of year. Besides, everybody knows it's probably the California office calling about the crucial launch of the Rheo Knee, Ossur's newest artificial joint and the industry's most ambitious attempt yet to replicate the miracle of the human knee.

Created in cooperation with MIT, the Rheo is equipped with a microprocessor that calculates the correct level of resistance 1,000 times per second and can determine the precise grade of incline or decline of the ground an amputee is walking on. Until a few years ago, even the most motivated amputees would never have dreamed of attempting a hike like this grueling, three-hour trek up the 2,600-foot Hengill volcano. But now, as Hilmar hangs up the phone and continues up the mountain, he says, "If we walked slowly, they could come with us."

Today is an extraordinary moment in the history of prosthetics, and Iceland has become an unlikely source of inspiration and innovation. Feet made of carbon fiber are allowing Paralympic athletes like Marlon Shirley to leave able-bodied competitors in the dust. (Shirley's 10.97-second time in the 100-meter dash earned him second place among eight runners in last year's Utah Summer Games.) Next fall Ossur will team up with a Canadian company to produce the world's first powered leg that uses a small motor to replace amputated muscles. The Bionic Man is moving so quickly from science fiction to reality, in fact, that the "disabled" may soon become faster and stronger than ordinary people, who are limited to what Mother Nature gave them.

"At some point, amputee athletes will be banned from competition because they will have such an advantage over able-bodied competitors," says Pat Chelf, vice president for American marketing at industry leader Otto Bock HealthCare of Duderstadt, Germany, which came out with the first computerized knee, the C-Leg, seven years ago. "In 20 years, mechanical bones and plastic muscles will not be a crazy, wild idea."

The Six Million Dollar Man is arriving not a moment too soon. A grisly boom in amputations is expected during the next two decades as aging, often overweight baby boomers succumb to various diseases. Surprisingly, most limb loss is not caused by trauma: Wars, terrorist bombings, car accidents, and the like are the reason for just 6 percent of all amputations. Rather, vascular diseases (40 percent), diabetes (34 percent), and cancer (20 percent) are the main culprits. About 3,000 people in the United States become amputees each week, and the unhealthy lifestyles of a rapidly aging population are expected to drive that number up rapidly--by a startling 47 percent between 1995 and 2020, according to the National Commission on Orthotic and Prosthetic Education.

Until a few years ago, prosthetics manufacturing was a quiet, conservative--OK, downright depressing--industry dominated by the private giant Otto Bock, which had $542 million in sales last year. But Ossur believed that the growing market of baby boomer amputees would flock to its flashy high-tech devices and upbeat New Age message: "Life without limitations." That phrase also happens to describe this tiny family-owned company, which has more than quintupled in size since going public in 1999, thanks to an audacious string of acquisitions that have suddenly transformed it into the world's second-largest prosthetics maker.

Ossur stumbled badly last year but is now back on track. A costly lawsuit to defend its intellectual property and a botched branding strategy caused its 2003 net income to plunge by more than 50 percent. But the company insists that its solid first quarter of 2004 proves it's well on its way to becoming a global powerhouse in the booming prosthetics industry. Not by selling powered wheelchairs, as Otto Bock does, but by challenging patients to get up and climb mountains instead.

Sitting in his office on the outskirts of Reykjavik, Ossur chief executive Jon Sigurdsson laughs when asked if he's related to the 19th-century national hero of the same name whose picture adorns the 500-krona bill. An Icelander's last name, he explains, provides no clues about heritage except his father's first name. "My father's name was Sigurd," he says, which made him Sigurdsson, while his three sons got a different last name: Jonsson. If he had a daughter, her last name would be Jonsdottir.

Operating on such a cozy first-name basis gives Ossur's corporate culture an intimate, informal feel. Iceland is about the size of Kentucky, and the entire population of 283,000 is listed in the phone book by first name. (There are 21 pages of Jons.) Even Ossur's company name is derived from the first name of its founder, Ossur Kristinsson.

Most of Ossur's products--primarily knees, feet, knee braces, and silicone liners that keep artificial limbs attached to stumps--are manufactured in Iceland and sold directly to prosthetists in North America and Europe, who fit them to their patients. Among the 200 employees in Reykjavik (another 400 are scattered worldwide), there is a palpable, almost missionary zeal. "You're helping people who can't even walk to the restroom--there's nothing they can do," Jon says. "And now they can walk. It's almost biblical."

In fact, Ossur Kristinsson himself couldn't walk--he was born with a deformed right foot. After getting his prosthetics training in Sweden and returning to start his own clinic in Reykjavik in 1971, he quickly realized that the industry was stuck in the Dark Ages. A young German clinician named Otto Bock had revolutionized the field shortly after World War I by inventing a component system so prostheses could be custom-built for their users, but the interface between man and machine was still a nightmarish contraption of straps left over from the U.S. Civil War.

So Ossur invented a soft, durable silicone liner that rolled onto a residual limb like a condom to provide a tight vacuum seal and attached to the prosthesis with screws and bolts. Iceland was the perfect testing ground. The commercial fishing fleets that dominate the nation's economy created a steady supply of amputees--snapped cables on the boats severed limbs with some regularity--but Icelanders haven't survived on a rugged, windswept island for more than 1,000 years by letting such accidents slow them down. And the country's health-care system, ranked among the best in the world, provides full reimbursement.

By the 1990s, Ossur's liners were the standard in the industry. But it was still a small family-owned enterprise with just $5 million in sales when Jon took over as CEO in 1996. (Ossur himself was managing director until 1989.) Formerly a diplomat and the chief financial officer for a local textile company, Jon saw a golden opportunity: Because the prosthetics industry was mostly a collection of mom-and-pop shops, it was ripe for consolidation.

Ossur went public in 1999, just as Iceland's stock market was booming, and its share price of 33 cents at the offering soon rocketed to a high of $1.08. (Such low prices are typical of Iceland's exchange.) Within a year it had issued 64 million shares, raising the cash it needed to go shopping. It acquired Flex-Foot of Aliso Viejo, Calif., which makes an ingenious carbon-fiber foot that helps cushion the impact on the residual limb, creating a more natural walk. Then it went after Century XXII of Jackson, Mich., inventor of a knee with an advanced locking system that keeps it from collapsing. Both companies, like Ossur, were started by amputees or their families who were frustrated by clunky, heavy, outdated products.

In just two years, Ossur's annual revenue soared from $18 million to $68 million, and net income more than quadrupled to $8.6 million. Flex-Foot brought with it the inspiring story of a customer named Marlon Shirley, a young American sprinter who soon would wear Ossur's Cheetah carbon-fiber foot on his way to breaking Paralympic world records in the 100-meter sprint and long jump.

But then trouble started. Iceland's stock market tumble of 2001 sent the company's share price plunging to 47 cents, and some former Flex-Foot employees started a competitor that sold its own carbon-fiber feet at "factory direct" prices. Ossur felt it had to sue that company, Freedom Innovations of Irvine, Calif., for patent violations.

Though the prosthetics industry has always been short on breakthroughs and long on imitators, lawsuits are rare because few companies invest much in research and development--at 8 to 10 percent of revenue, Ossur spends twice as much as Otto Bock. "We thought it was important to send a signal that we will protect our intellectual property," says Eythor Bender, head of Ossur North America.

Though the case was finally settled in December (neither side will disclose terms), it put Ossur in the hole to the tune of $2 million in legal fees and consumed the attention of its top executives for most of 2003.

Meanwhile, an Ossur marketing campaign went badly awry. The company tried to persuade surgeons to send their patients to prosthetists who had paid between $750 and $3,000 to be designated as "affiliates" worthy of carrying the Ossur logo. "They wanted it to be like the Good Housekeeping seal of approval," says Chelf, the Otto Bock marketing executive. It created a severe backlash instead. Though about 640 prosthetists signed up, some of Ossur's best customers--especially bigger prosthetic clinics that didn't need its endorsement--resented the company's threat to send patients to their competitors. "It alienated our customer base," says Eythor, who maintains that the program was a good idea poorly executed.

With net income plunging from an all-time high of $10 million in 2002 to just $4.7 million last year, Jon decided to clean house. He abandoned the affiliates branding program, replaced his entire North American management team with a new group led by Eythor, and went directly after Otto Bock's orthotics business (braces, supports, and such) by spending $31 million to acquire the Vancouver-based Generation II Group.

So far, so good. Ossur's sales climbed 41 percent in the first quarter of 2004 compared with the previous year, profit more than doubled, and the company believes it's well on its way to meeting its ambitious goal of $180 million in sales by 2006. But Jon is taking nothing for granted. In that sense, this peculiar business is like any other. "If you think for a second that things are on track," he says, "you're in trouble."

At the summit of the Hengill volcano, Hilmar places a lava rock on a big pile, makes a wish, and begins walking back down the mountain. If he were an amputee wearing even the best hydraulic joint on the market, Hilmar would probably tumble down the hill right about now as the knee swung freely, like a door hinge. That's what bedeviled his research and development team: How can you make a knee that provides resistance on an incline but swings loosely just moments later, when the ground becomes flat again?

The Rheo, short for "magneto-rheological actuator," is Ossur's answer, performing this miraculous feat by adjusting the viscosity of a fluid that regulates resistance in the joint. Built-in sensors pick up detailed data about the leg's motion and send it to the microprocessor that calculates 1,000 times a second precisely how much resistance to provide.

"It works like your nervous system," says Scott Elliot, a prosthetist at Ossur North America. "Normally your body receives input from the environment, sends it to the spinal cord, and this brings you into voluntary control. That's what's happening with the microprocessors as they change the viscosity of the Rheo's fluid."

This device is not cheap, costing the patient's insurance company as much as $32,611 (the prosthetist pays Ossur about $17,900). Otto Bock's C-Leg knee costs about the same, but it runs its calculations only 50 times per second. The difference means that the Rheo swings more naturally, Elliot says, and isn't as stiff and ornery in tight spaces like cars. Otto Bock's Chelf scoffs at such assertions and questions whether the Rheo Knee is really ready for market.

The jury is still out, as Ossur is just now selling its first 100 or so Rheo Knees in phase one of the product's launch. But if the reaction of a soft-spoken 57-year-old amputee in Mesa, Ariz., is any indication, Ossur's new knee could be a big hit. Richard (who asked that his last name not be used) is an avid hiker who lost his leg in an industrial accident in 1977 and says hydraulic knees make every step exceedingly difficult, especially on inclines. During a six-week trial with the Rheo, he says, treadmill tests showed that he was expending far less energy with every stride--his heart rate dropped from 150 beats per minute to 127, even as the level of difficulty was cranked up from three to nine.

And that's only the beginning, Jon says. Once a prosthetic limb can understand and anticipate a person's movements, it's relatively simple to provide power. Ossur has teamed up with a Quebec firm called Victhom to produce the first bionic leg equipped with a small motor to replace lost muscles. Looking like a small vacuum cleaner, the leg is scheduled for a limited launch next fall.

Though such advanced prosthetics could conceivably give amputees superhuman powers, the field of orthotics--now confined largely to items like knee braces and shoe insoles--might do the same for able-bodied people. Think of the metal suit that Sigourney Weaver used to destroy the monster in the movie Aliens. "Once you have the motorized prosthesis," Jon muses, "could you make a device for a fireman that would make him able to lift a car?"

When Hilmar reaches the bottom of the volcano, he climbs into his black SUV and heads home. It's already 10 p.m., but the sun is shining so brightly it feels like late afternoon. So after having dinner with his wife, Hilmar will get on the phone for a conference call with Victhom researchers in Canada to dream up the next miraculous artificial limb that might give hope to a whole new generation of amputees. Because here in the Land of the Midnight Sun, where summer days never end, anything seems possible.

Paul Keegan is a Business 2.0 contributing writer living in New York.