The next little thing

In its cover story, FSB features 10 big ideas coming from small businesses in 2007.


(FSB Magazine) -- When a new product from Microsoft debuts, it doesn't arrive quietly. Instead it gets tracked through the R&D pipeline by trade magazines, bloggers and carefully controlled announcements from the marketing department.

Small-business innovations don't work that way. They tiptoe into the market, heralded by minimal PR (if any) and propelled instead by the inventor's enthusiasm.

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What makes that more ironic is that small businesses these days come up with better ideas more consistently than their corporate competitors. "Rates of R&D growth among small firms tend to have been higher than among large R&D-performing firms," says John Jankowski, director of the R&D Statistics Program at the National Science Foundation.

To find these innovative companies you need a field guide, and that's were FSB comes in. Exploring everything from ocean-generated electricity to six-foot roses to an ATM for books, the stories on the following pages offer a preview of the companies, products, people, trends and ideas likely to make news in 2007 - all from the world of small business.

Six-foot roses

ORGANIC BOUQUET

organicbouquet.com

Gerald Prolman founded organic Bouquet with the belief that a growing number of consumers want their flowers to deliver two messages: "I care about you, and I care about the earth too." Now the 47-year-old retailer has found a way to let his customers send their sentiments in a big way. Early in 2007 he will introduce a six-foot-long rose to the U.S. Market.

Prolman calls them "extreme roses." The flowers may be taller than the person who receives them, and they boast a larger head size - the blossoms open to almost four inches wide, about twice the industry norm - as well as a higher petal count, a minimum vase life of seven days (compared with about five for standard roses) and unique colors. Red Intuition is light red with streaks of deep crimson, Pink Intuition follows the same variegated pattern, with pale pink and fuchsia and for the traditionalist, there's a classic red.

These supersized roses were not engineered to reach six feet, but the grower, John Nevado, president of Nevado Ecuador, a farm in Latacunga, Ecuador, noticed that a few varieties produced unusually long stems.

"We sell to the high-end Russian market, where long stems are in demand," Nevado says. "So we decided to see how far we could push it." While any grower could attempt the same feat, Nevado believes his farm can beat the competition though careful management of the crop. Shade cloths in the greenhouse control light levels, encouraging stems to grow longer before the buds form. A fine-mesh sleeve around each bud keeps it from opening before the stem reaches its full length. The farm's location near the equator and its altitude - nestled between two volcanoes at more than 9,600 feet above sea level - provide the powerful, consistent sunlight that oversized roses require.

The farm has won certifications worldwide for its environmentally and socially responsible practices, including one from the new U.S.-based VeriFlora program, a private organization that helps consumers find eco-friendly flowers produced using sustainable methods and better conditions for workers. That made it a good partner for Organic Bouquet, and Prolman negotiated a deal with Nevado to be the sole supplier of the roses in the U.S.

Making the supreme declaration of love will not come cheap. Each flower takes 100 days to grow, two to three times the industry norm. All that shading and sleeving require more labor, and the six-footers have to be shipped in special boxes. "You should have seen the expression on the delivery guy's face," Prolman says. "He couldn't believe we had roses that long." Prolman's roses will set you back about $21 a stem, or $250 for a dozen (including shipping). He has already placed an advance order for 100,000 in 2007.

Launched in 2001 and based in San Rafael, Calif., Organic Bouquet today employs 14 people and posts annual revenues of $3 million. "What people fantasize about in a rose - we deliver that," Prolman says. "But we're selling integrity too." Most of all, he knows that it takes a big rose to make a big statement. "They don't get any bigger than this," he says. "And if they do, we'll find a box for them." --Amy Stewart

Amy Stewart is the author of "Flower Confidential: The Good, the Bad, and the Beautiful" in the Business of Flowers, coming from Algonquin Books in February.

An ATM for books

On Demand Books

ondemandbooks.com

Buying a book could become as easy as buying a pack of gum. After several years in development, the Espresso - a $50,000 vending machine with a conceivably infinite library - is nearly consumer-ready and will debut in ten to 25 libraries and bookstores in 2007. The New York Public Library is scheduled to receive its machine in February.

The company behind the Espresso is called On Demand Books, founded by legendary book editor Jason Epstein, 78, and Dane Neller, 56, but the technology was developed six years ago by Jeff Marsh, who is a technology advisor for New York City-based ODB (ondemandbooks.com).

The machine can print, align, mill, glue and bind two books simultaneously in less than seven minutes, including full-color laminated covers. It prints in any language and will even accommodate right-to-left texts by putting the spine on the right. The upper page limit is 550 pages, though by tweaking the page thickness and type size, you could get a copy of War and Peace (albeit tough to read) if you wanted.

Neller says that future versions of the machine will accommodate longer works with fewer hassles. Prices for the finished product will vary depending on locations, but the production cost is about a penny per page. (Above, FSB's interpretation.)

Some 2.5 million books are now available - about one million in English and no longer under copyright protection. On Demand accesses the volumes through Google and the Open Content Alliance, among other sources. Neller predicts that within about five years On Demand Books will be able to reproduce every volume ever printed.

Epstein says that the larger obstacles are consumer preference - the machine can't make you a latte - and convincing skeptics in the industry. But some early adopters are already sold on the idea.

Niko Pfund, a publisher at Oxford University Press, says the evolution away from traditional bookstores is only natural. "For hundreds of years the industry was unchanged," Pfund says. "Then audio came out. Now it's time for digital."--Emily Maltby

Removable tattoos

Freedom-2

freedom2ink.com

Like a Vegas wedding, getting a tattoo can be a regrettable experience. While about one out of four Americans now has a tattoo (up from one out of six in 2003), 17 percent will seek to have it removed at some point, according to a recent study.

Worse, the FDA does not regulate the tattoo industry, and some inks contain harmful toxins. However, a Manhattan-based startup called Freedom-2 (freedom2ink.com) aims to solve both issues with a new durable but removable tattoo ink.

Co-founder Rox Anderson, a professor of dermatology at Harvard University who pioneered several nonscarring laser treatments for blemishes such as birthmarks and skin lesions, helped design the ink using FDA-approved, digestible pigment particles.

Freedom-2 ink tattoos are professionally applied with a standard needle, but they can be removed with a simple laser treatment that will release the ink from the skin into the body, where it can be safely reabsorbed.

The laser removal treatments cost about $1,000, compared with the $5,000 to $10,000 spent to remove conventional tattoos. CEO Martin Schmieg, whose upper left arm sports a removable tattoo in the shape of the Freedom-2 logo (gothic font, biker style), expects the ink to begin appearing in about a dozen tattoo parlors early in 2007 and to cost about four times the price of standard ink. --Brandi Stewart

Electricity from wave power

OCEAN POWER TECHNOLOGIES

oceanpowertechnologies.com

If you wanted to choose the perfect location for capturing the ocean's energy, you couldn't do much better than the Oregon coast. Waves arrive there with immense power, having traveled across thousands of miles of open water with few barrier islands, reefs or other obstructions to slow them down. Some are so large that they can be tracked by Satellite days before they arrive. Starting in 2007, those massive, ceaseless waves will help light homes and businesses along the West Coast, thanks to an entrepreneur named George Taylor.

A former surfer who grew up in Australia, Taylor, now 72, studied electrical engineering and spent the past 40 years as a small-business owner in the U.S. His most recent invention is a buoy that can convert a wave's up-and-down motion into electricity, which can be carried ashore by undersea cables and fed into the national power grid.

The buoys get deployed a mile or so offshore, either individually or linked together in a field of a dozen or more covering 30 acres of the ocean's surface. They are also an environmentalist's dream - barely visible from the beach, drawing on an abundant, renewable energy resource, with little or no impact upon marine life and emitting no gases that contribute to global warming.

A handful of competitors are designing similar wave-power systems, but Taylor's company, Ocean Power Technologies (Charts) , based in Pennington, N.J., is the furthest along, say experts, with working prototypes in the water and generating power off several countries.

According to Roger Bedard, a researcher for the Electric Power Research Institute (epri.com) in Palo Alto, the research and development arm of the electric utility industry, no other U.S. company is close to matching OPT's progress.

The company, founded by Taylor and a business partner, Joseph Burns (who died in 2001), began operations in 1994 and now employs 35, with about $5.4 million in annual sales for 2005. But if the project in Reedsport, on Oregon's central coast, pays off, that revenue number could grow substantially. "The market is huge, and the world will spend $200 billion on new generation equipment over the coming decades," Taylor says. "In 20 years China alone will be consuming all the energy that the entire world uses now."

Buttressing Taylor's optimism, researchers at Oregon State University say that only 0.2 percent of the ocean's untapped wave energy could power the entire world. This figure may seem incredible, but water is a very dense medium, about 1,000 times thicker than air, and capable of transmitting immense energy when in motion.

What's more, about 60 percent of the world's population lives within 40 miles of a coast. The buoys Taylor plans to install off Oregon in 2007 will generate electricity at rates competitive with that produced by coal - currently the cheapest, most abundant, most commonly used (and dirtiest) source of energy, at about 4.5 cents a kilowatt hour. Future generations of the buoys could conceivably produce power more cheaply than that.

"Timing is critical in life, and for once the gods have been good to us," Taylor says. "Climate change, $60-a-barrel oil, dicey relations with oil-producing countries - I hate to put it this way, but suddenly wave power is looking good."

Ocean Power Technologies illustrates the saying that it takes 20 years to become an overnight success. In 1970, Taylor and some engineering colleagues founded a small startup in Princeton, N.J., to design flat-panel liquid-crystal displays. (Today that basic technology is used in everything from televisions and computer screens to cellphone displays.)

Five years later Taylor and his partners sold their company to Fairchild Semiconductor (Charts), a forerunner of Intel (Charts). Taylor and Burns started consulting for small and large engineering companies, helping them get products out of the lab and into the hands of consumers. But the pair still had the urge to create something of their own. With the energy crisis still fresh in everyone's mind, they started exploring alternative energy sources.

The duo initially considered wind power, which at the time was the most mature proven technology and is still considered highly promising. But they foresaw a number of problems with wind, especially on the scale needed to generate commercially significant electricity: Wind is unpredictable and often intermittent, and generally requires big, unsightly turbines (though the technology has improved since then - see "Your Own Windmill").

By comparison, waves are abundant and predictable. Moreover, technology for a buoy system could piggyback on some of the innovations developed to support offshore oil platforms.

From their previous startup experience, Taylor and Burns knew that they wanted investors willing to think long term about Ocean Power's plans. They decided to avoid venture capitalists, who "think in time frames of five years or less," Taylor says. "Instead we wanted friends, wealthy individuals, and customers with long-range goals who were willing to be strategic partners for ten to 15 years."

The company also received early-stage financing from an electrical-components maker and a small energy company in Australia. Because there was so little enthusiasm for alternative-energy investments in the U.S., even as recently as a few years ago, Taylor had to take the company public on the London Stock Exchange. (Britain is far ahead of other countries when it comes to funding and research in wave power, thanks to more than a decade of generous government subsidies, capital grants, and a long, wave-tossed coastline.) Ocean Power's October 2003 IPO raised $40 million, at a time when interest in the U.S. was almost nil.

The company has tried to perfect its technology on a small scale and then make it bigger. Ocean Power launched its first experimental buoy off the New Jersey coast in 1997; about six feet tall, it was capable of generating one kilowatt. Last year Ocean Power installed a 40-kilowatt version in100 feet of water nearly a mile off the Hawaiian coast to provide supplemental power for the U.S. Navy. That project - a contract worth about $7 million - is still expanding. Five more buoys are to be installed, each progressively larger, in a field that will ultimately generate as much as one megawatt of electricity, or enough to power as many as 1,000 homes.

"They were a good customer and a good learning experience, because they know all about how to deal with the ocean and its demands," Taylor says. "If they know how to anchor an aircraft carrier, they're going to know how to anchor a buoy."

The Navy enlisted an outside firm, Honolulu-based Belt Collins (beltcollins.com), to assess the environmental impact of the buoys. It found that the problems environmentalists had feared - marine mammals getting entangled in the mooring line, or electrical faults disrupting sea life - did not occur. If anything, the undersea cables and anchors provided a place for coral to grow and attracted fish, much like an artificial reef. Similarly, there were no effects upon currents or wave patterns, no electromagnetic disturbances, no heat generation, and no undersea noise to disturb sea creatures.

The buoys used in the Reedsport, Ore., project will be Taylor's biggest yet - 30 feet wide, weighing 50 tons and capable of generating 150 kilowatts each - but they work the same way. Looking like a typical navigation marker, each buoy houses a massive float that moves up and down like a piston as a wave passes. (As with an iceberg, most of the buoy remains below the water, with only about nine feet projecting above the surface.) The piston's motion drives a generator near the top of the buoy that creates an electric current, which is then piped back to shore via undersea cables.

It sounds simple enough, but the key lies in the buoy's sophisticated sensors. No two waves are identical, so sensors measure each wave in the first tenth of a second as it passes, and an onboard computer "tunes" the buoy, adjusting the travel and resistance of the piston mechanism to capture as much of the wave's energy as possible. The system can even automatically lock and unlock the piston, protecting the buoy during storms. OPT holds 28 patents on the technology, with 16 more pending.

In July, Ocean Power filed for a federal permit to install a series of power buoys in water 150 feet deep, 2 miles offshore of Reedsport. Built in sections, the buoy field will initially generate two megawatts that will be added to the power grid of the entire West Coast, but the ultimate goal is 50 megawatts, enough to power about 50,000 homes. Reedsport is the "sweetest of all spots in Oregon," says Bedard, the alternative-energy researcher. The town features an old paper mill, no longer in use, with a large outflow pipe going down to the beach and extending two miles into the ocean, making it an ideal conduit for the electrical cables needed to transmit power from the buoys back to shore. And an abandoned utility substation nearby has a lot of unused heavy-duty transmission wires already in place, providing a ready-made connection to the electrical grid. (A study by EPRI found that a comparable installation in Northern California would cost about $50 million just to upgrade the existing lines and allow them to handle the extra capacity.)

There is widespread support in Reedsport for such a project, judging from a series of town meetings covered by the local newspaper, the Newport News Times. The town has been suffering economically since the paper mill closed, and an EPRI analysis estimates that a project of this type could provide as many as 150 jobs during construction.

Some locals worry that the buoy system could harm the local Dungeness crab population, but early studies haven't shown that to be a problem. And at least one Reedsport fisherman gives Ocean Power's buoys a cautious endorsement. Bob Eder, captain of the 66-foot crab boat Michele Ann, says, "How can any citizen be against clean, nonfossil energy? Even as a commercial fisherman, I can see the benefit of this project." But, he notes, as part of "the most successful sustained crab fishery on the West Coast, of course we want to be careful to protect it and everything else in the related ecosystem."

For his part, Taylor is still thinking bigger. By the year 2010 he plans to have a 100-ton, 37-foot-wide buoy that could generate 500 kilowatts, a size that he calls the "magic number," because that's the point at which substantial economies of scale kick in. An array of 40 buoys that size, linked together, could generate electricity at prices significantly less than that of a typical coal-burning power station, and far less than the price at plants that burn more expensive fuels such as natural gas. Clean electricity that cheap could be used to desalinate seawater, split water molecules to make hydrogen for fuel-cell cars, or provide inexpensive power for other ambitious, energy-hungry projects. Taylor's voice drops off as he dreams of the possibilities. "It's a very exciting thing to come late in one's career," he says "It keeps me young." --Dan Drollette

Body parts from bovines

REGENERATION TECHNOLOGIES

rtix.com

In a northern California valley carpeted orange with poppies, thousands of cows munch so happily on grass that they hardly ever moo. The herd is organic - never given animal-derived protein or growth hormones - and has been "closed" since 1964, meaning that no new cows have been introduced in more than 40 years. Every aspect of their lives, from conception to death, is precisely controlled by Prather Ranch in Fall River Mills, Calif., which owns the cattle and sells their dry-aged beef to some of San Francisco's top chefs.

Lately, though Prather has begun selling its cows to a new customer, one that wants more than steaks and shanks. A biotech company called Regeneration Technologies (Charts) Inc. (RTI) is buying up Prather's cattle - more specifically, their bones, tendons, ligaments, and other body parts - for a new and promising segment of the medical-device industry.

Based in Alachua, Fla., RTI is one of a handful of U.S. companies that produce precision screws, spinal wedges and hundreds of other surgical implants from biologic tissue instead of synthetic materials or metal. As the company's name implies, the implants have regenerative properties, leading to faster healing, less pain and greater range of motion than patients experience from metal or plastic parts.

Until now RTI has manufactured allografts, parts made from donated cadavers. But recently RTI unveiled a line of xenografts, or animal-derived implants, from cow tissue. The company's first xenografts were implanted into patients in December 2005. In 2007 the eyes of the medical community will be on RTI as it ramps up distribution of its line of a dozen xenografts and completes its first-year clinical studies. If the results are good, these bovine bits could represent the future of medical implants.

To see why RTI is taking a gamble on xenografts, head to the company's headquarters in the Florida countryside north of Gainesville. There, in a glass-walled lab, a technician dressed in blue scrubs and protective headgear stands at a seven-foot-tall machine called a Fadal, loading small white chunks of human bone into cube-shaped stainless-steel molds. He taps a code into a computer keyboard as he watches a monitor. The Fadal's drill spins. It chooses the bit needed to pierce a sugar-cube-sized spinal implant with holes for tiny pins that will secure it to a patient's spine.

Fadals were designed to mill and manufacture parts for the auto and aerospace industries - or any industry requiring intricate, precise designs cut from chunks of metal. Turns out that they can work wonders on a piece of bone too.

RTI mills human tissue into everything from dental implants to bone-graft substitutes. The company's tiniest products, chips that look like newfallen snow, fill bone voids - for example, gaps left by the removal of tumors.

Its largest, wedges that resemble hunks of Parmesan cheese, are used to repair large skeletal defects such as fractures. Surgeons use the products as a sort of biologic scaffold; over time they are absorbed into the patient's own bone so seamlessly that even X-rays can't distinguish where bone ends and graft begins.

RTI founder Jamie Grooms was one of the first biologists to discover that human tissue could be machine-cut with the same dependability and speed as synthetic implants. Grooms started what would become RTI while working at a small tissue bank in the University of Florida's Department of Orthopedics and Rehabilitation. The university spun off RTI in 1998 after demand for his allografts began to take off, and the company went public in 2000.

Now RTI is hoping to make a similar leap with its cow-derived xenografts. The company unveiled its xenograft line at the American Association of Orthopedic Surgeons' annual meeting in March. The line includes five xenograft products for which RTI has received FDA approval - chips, cubes, wedges and screws. (A xenograft lumbar spinal implant is under review) RTI has also received regulatory approval to distribute those and several other xenograft products in Europe.

For RTI, cow-derived xenografts boast considerable advantages over human-derived allografts. The animals are much easier - and cheaper - to procure than cadavers, and while the average human donor yields 20 to 30 grafts, RTI's technicians can manufacture more than 300 from a single cow.

So far, the company's studies show that such grafts are just as biocompatible and safe as those from donated human tissue. They are also stronger and stiffer - although still much more flexible than the top synthetic equivalents made from plastics or metal. RTI officials hope that the results of its first-year clinical studies, which will be completed throughout 2007, will boost acceptance of xenografts, particularly among orthopedic surgeons who have never worked with bovine tissue.

Perhaps most important, xenografts could decrease RTI's exposure to the taint of scandal that clings to human-based products. In 2001 a healthy 23-year-old college student died from an infection caused by a contaminated knee implant sold by one of RTI's competitors. The case was an anomaly - the cartilage came from a corpse that had sat unrefrigerated for 19 hours - but the ensuing press coverage tarnished the reputation of the entire allograft industry.

In 2005, RTI was implicated in a scandal involving one of its 300 suppliers, BioMedical Tissue Services (BTS), based in Fort Lee, N.J. Police arrested BTS's two principals - an oral surgeon whose license had been revoked and a Staten Island funeral home director - and two other men for stealing tissue from cadavers. Authorities say the four men secretly carved bones and other parts from hundreds of bodies and, to mask the crime, replaced the bones with PVC pipes.

They also are charged with forging family-consent forms and paperwork required to ensure that transplant donors are disease-free. FDA officials fear some of the stolen parts were diseased and call the risk of infection "unknown." One of the bodies allegedly plundered was that of Alistair Cooke, the legendary journalist and host of PBS's Masterpiece Theater, who died of cancer at 95. Cooke's advanced age and the spread of the disease to his bones, would have made him ineligible as a donor.

RTI voluntarily recalled products linked to that supplier, but not before some 8,000 of its products made from BTS tissue were implanted. By June 2006, 50 federal lawsuits had been filed against RTI and two other companies in the industry. RTI, which posted revenues of $75 million in 2005, took a $4 million hit on legal fees related to the lawsuits and lost $3.5 million on the allograft implants it recalled. Its stock, which was trading at about $10 the month before the news broke in October 2005, lately has been struggling to stay above $6.

The man charged with improving RTI's fortunes looks like the sort of middle-aged fitness hound who might someday need the company's orthopedic implants. Brian Hutchison is 47, with the strong jaw and broad shoulders you'd expect from someone who worked his way through college - Grand Valley State University, near his hometown of Muskegon, Mich. - hauling two-by-fours for a lumber yard.

He spent 12 years working for medical-products giant Stryker (Charts) before joining RTI in December 2001. Since then Hutchison has done what he can to reassure RTI's varied customers - distributors, doctors, hospitals and patients - that its products are safe. He wrote letters and launched a public-information campaign promising that RTI's proprietary sterilization process, called BioCleanse, eliminates any risk of disease transmission, including HIV, hepatitis and syphilis.

Since it began using BioCleanse in 2000, the company has distributed more than 700,000 allograft implants with no incident of infection, according to the FDA. (Nevertheless, Miami lawyer David Jagolinzer says that even if his clients who received the allografts in question don't test positive for disease, "you cannot deny that these recipients are suffering pretty severe emotional distress.")

RTI now spends about 70 percent of its R&D budget on xenografts - essentially a bet on the future. So far just 16 U.S. hospitals and clinics have placed orders, and the company posted second-quarter sales in that division of about $100,000.

The biggest question is whether the new products will work as well in the long run as they have so far. Raymond Myers, medical technology analyst at Emerging Growth Equities, a brokerage firm in King of Prussia, Pa., Says that physicians will want two to three more years of clinical studies to make sure that the implants are durable and don't trigger an immune reaction. (Doctors have been implanting heart valves from cows and pigs in human patients for decades, but several other types of xenografts have been rejected by recipients.)

Hutchison insists that the company's sterilization expertise reduces that risk, but time will prove whether he's right. "It's hard to be a market leader, because the practice of medicine changes slowly," Myers says. "Over several years, not six months." --Cynthia Barnett

Street-smart filters for rainwater

AbTech Industries

abtechindustries.com

The U.S. environmental Protection Agency has ordered that all towns with populations of more than 10,000 must stop grease- and oil-contaminated storm water from running into lakes, rivers, and other waterways by 2008.

To combat such pollution, cities such as Chicago are already spending as much as $3 billion to build huge underground reservoirs and tunnels where rainwater can be treated. But in early 2007 a Scottsdale startup will begin selling a more cost-effective solution, one that easily fits into a city's existing sewer system.

AbTech Industries has spent seven years and $16 million developing its Smart Sponge filtration technology. The sponge, made from the same plastics found in automotive dashboards and sneakers, can be molded to fit any catch basin, drain or pipe. It absorbs oils, PCBs and other toxins while allowing water to pass through. The contaminants permanently bond to the sponges, which can be thrown away without harming the environment (or even recycled). Depending on the location, the sponges must be replaced every one to three years.

More than a dozen cities and Newark Liberty International Airport already line their drains with the Smart Sponge, catching pollutants leaked from cars and planes. AbTech's latest version, due to hit markets in mid-January, comes dipped in an antimicrobial coating that destroys bacteria as well.

AbTech (abtechindustries.com) has been testing the new sponge since 2004, lining 1,950 storm drains near the shore of Southern California, where high levels of E. coli and enterococcus bacteria sicken nearly 1.5 million swimmers each year and force cities to close beaches.

On average, the Smart Sponge has killed about 75 percent of those types of bacteria and costs about one-tenth the price of systems currently used to clean up polluted water. (Most cities either route contaminated seawater through a filtration plant or set up large lamps along the beach, which destroy bacteria by shining ultraviolet rays into the water.)

"A city would have to pay at least $700,000 to deploy and maintain these light systems," says AbTech founder and CEO Glenn Rink, who launched the company in 2000. A former executive at an agricultural products company, Rink says he drew his early inspiration from a 1996 oil spill off the coast of Puerto Rico. "I watched government crews swabbing fish and rocks with what looked like paper towels," says Rink, now 46. "I figured there had to be a better way." --Maggie Overfelt

Drug plans go generic

Medco Health Solutions

medcohealth.com

Small-business owners have grudgingly grown accustomed to double-digit increases in their health-care insurance premiums each year. That probably won't change radically in 2007, but one new idea promises to ease some of the burden: generic-only prescription plans. In October, Medco Health Solutions (Charts) (medcohealth.com), the giant pharmaceutical benefits manager in Franklin Lakes, N.J., known for its low-priced mail-order drug service, introduced Generics First, prescription coverage aimed at small and midsized companies.

Under the plan, employees who purchase generic medicines receive a 90-day supply for a $10 co-payment, while those purchasing brand-name drugs must pay the full cost out of pocket. Meanwhile, employers are charged just $600 to $700 a year for each employee, about half of what traditional plans cost, says John Driscoll, president of Medco's insured-markets group.

Similarly, Wal-Mart (Charts) has announced that it will soon start selling certain generics for as little as $4 a prescription. "That supports the notion that generics are one answer to rising drug costs," says Driscoll.

Medco's plan is not the first to offer lower co-pays for generic drugs, but it is by far the most aggressive. That will probably make some employees unhappy. Under Medco's new plan, patients shoulder the cost of brand-name drugs even if they have no generic equivalent.

But Driscoll says that as more and more generics are developed, employee complaints should diminish. About $50 billion worth of pharmaceuticals is expected to go off patent by 2010. Generics already make up 50 percent of all prescriptions written, and at least 80 percent of all therapeutic drug categories have at least one generic available. --Walecia Konrad

Lunch-hour liposuction

LipoSonix

liposonix.com

Vacuuming fat from more than 455,000 patients - and some $1.2 billion out of their wallets - made liposuction the No. 1 cosmetic-surgery procedure in the U.S. in 2005. Like many operations, standard liposuction procedures carry a risk of infection, other complications, and even death. But a startup called LipoSonix hopes to minimize such dangers with a device that can dissolve fatty tissue without penetrating the skin.

The device uses high-intensity ultrasound energy, which breaks down the adipose tissue, or fat. A week after the procedure, which takes about an hour and requires no hospitalization, "the body's normal healing response takes over," says LipoSonix CEO Dr. Jens Quistgaard, and the fat cells are reabsorbed and metabolized.

About 70 patients have participated in clinical trials in mexico, which are still underway, and LipoSonix plans to begin testing in the U.S. in early 2007. At the same time, the company will stage trials in Britain, France, Germany, Italy and Spain. Depending on how long the U.S. trials take, LipoSonix hopes to hit the market late in 2007.

The company was founded by the Innovation Factory, a Duluth, Ga., business incubator for medical-device technologies, and Quistgaard, now 43, joined as its first full-time employee in 2002. So far LipoSonix (liposonix.com), based in Bothell, Wash., has raised about $39 million from investors, including $6.7 million from the Carlyle Group.

Considering the money Americans spend on liposuction, "The potential market for a nonsurgical body-sculpting procedure should be significantly larger," says Ryan Schwarz, managing director at the Carlyle Group.

Don't count on the device to make significant inroads into the current obesity epidemic in the U.S., however. Most patients enrolled in the Mexico test have had one to 1.5 pounds of fat removed during each procedure, and Quistgaard says that number isn't likely to change when U.S. trials begin.

By comparison, surgical liposuction can remove as much as five pounds of fat. In other words, LipoSonix may help you lose the love handles, but it won't take away that spare tire.--Mikhail Sedov

Your new bankers: hedge funds

Parker Boston Group

parkerboston.com

Growing companies could be tapping into a new source of capital in 2007: Hedge funds are getting into the private-equity business. And although some are investing in large venture capital or similar institutional funds, other managers are hitting the VC breakfast circuit in search of direct investments.

Hedge fund Managers have always had the freedom to invest 10 percent of their fund, known as a "side pocket," in illiquid assets. Traditionally they've chosen real estate or big energy companies. But lately they've been looking at more creative outlets, including small growth businesses.

"This is money directly going to companies," says Russell Tencer, managing partner at the Parker Boston Group (parkerboston.com), a consulting firm that has played matchmaker for half a dozen such deals in the past year. "We found that around half our contacts in the hedge fund world were willing to consider making a private-equity investment."

This summer Parker Boston brokered a $1.5 million investment for a software company and $600,000 in seed capital for a startup jewelry manufacturer in New York City called Classic Gems.

Typically, Tencer says, hedge fund managers are looking for established companies with $1 million to $5 million in annual operating cash flow, though some are willing to make early-stage investments.

So far, hedge fund managers behave less like venture capitalists and more like giant angels, including sometimes passing on board seats. "They're usually not as active as the VCs," Tencer says. "That's what everybody thinks is so great about it." --Phaedra Hise

Tap the tide

Verdant Power

verdantpower.com

A startup's plan to draw power from rivers.

Like water-based windmills, small turbines will begin generating power this winter from tidal flows in New York City's East River. The turbines, made by a Manhattan company called Verdant Power (verdantpower.com), feature 16-foot blades and will produce about ten megawatts total, helping power a local supermarket. Because the turbines swing freely, they can draw energy no matter which way the tide is running. Says Verdant president Trey Taylor, 59: "We're the first in the world to do something like this." --Jeff Garigliano

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.