Private med-tech firms see rosy futures in varied spaces

By Larry Haimovitch

Medical Device Daily Contributing Writer

December 10, 2010

NEW YORK — The 22nd annual Piper Jaffray (Minneapolis) Health Care Conference took place here last week. As usual, the conference was very well-attended by a wide variety of constituents from the financial community and, as always, featured an exciting roster of both public and private med-tech companies.

The virtual shutdown of the initial public offering (IPO) market in the past few years has forced almost all med-tech firms that have not been acquired to remain private, heavily relying on continuing infusions of capital from the venture capital community and from strategic investments from larger med-tech firms. As a result, many of these companies have progressed well into the commercial phase of their lives, registering significant revenue gains, sharply reducing their losses and showing the potential to enjoy lucrative profitability.

There were several vivid examples of companies prospering without access to public market capital. For example, Barrx Medical (Sunnyvale, California) has enjoyed meteoric growth in the past four years, with annual revenue soaring from $8 million in 2007 to an estimated $34 million in the year ending Dec. 31, 2010. Moreover, according to vice president of finance Rick Short, who made an impressive presentation, 4Q10 revenue will likely exceed $10 million. Based on that showing, it is conceivable that the company will generate revenue in calendar year 2011 in excess of $45 million.

Short proudly noted that the company has enjoyed profitability on an operating basis on four of the last five quarters (including 4Q10) with total operating expenses in recent quarters remaining steady while gross profits and revenue have surged.

"We have clearly turned the corner and expect that we will continue to enjoy improving operating margins as we look ahead," he said.

Short described Barrx as a company that uses "ablative therapy for disorders of the gastrointestinal tract." Specifically, the company aims to eradicate two precursors of esophageal cancer, which are Barrett's esophagus and squamous neoplasia. Barrx's family of bi-polar radiofrequency-based ablation devices, tradenamed HALO, uniformly and safely ablate malignant tissue.

The former is a pre-cancerous condition in which the esophageal lining changes and becomes similar to the tissue that lines the intestine, which is referred to intestinal metaplasia. It is caused by acid or bile reflux, a condition often referred to as gastroesophageal reflux disease or GERD. An estimated 3.3 million people in the U.S. alone have Barrett's esophagus disease.

Squamous neoplasia of the esophagus, which primarily occurs outside the U.S., is a precursor to squamous cell carcinoma and is typically caused by exposure to cigarettes, fumes or fungus.

Although not widely appreciated as an important or deadly cancer, it turns out that the incidence of esophageal site cancers have been growing dramatically in the past 35 years. In addition, according to statistics from the American Cancer Society (Atlanta) publication "Cancer Facts and Figures 2010, the five-year relative survival rate for esophageal cancer is the third lowest of all cancers, trailing only liver and lung carcinomas.

The company has initially focused its clinical trials at Barrett's esophagus and the clinical data reported to date has been impressive.

The most notable article, titled "Radiofrequency Ablation in Barrett's Esophagus with Dysplasia," was published in the May 28, 2009 issue of the prestigious New England Journal of Medicine (NEJM). This sham-controlled, randomized trial demonstrated excellent safety and efficacy and the article concluded with the comments "in patients with dysplastic Barrett's esophagus, radiofrequency ablation was associated with a high rate of complete eradication of both dysplasia and intestinal metaplasia and a reduced risk of disease progression."

While the NEJM may be the most important trial reported, there have been 45 peer-reviewed scientific papers which strongly validate the technology for Barrett's esophagus. In addition, solid early results with have been seen in squamous neoplasia. In addition to its strong efficacy, the procedure has demonstrated remarkable safety, with an overall adverse event rate of 0.23%.

In July, the company completed a $15 million Series D offering to venture investors. With excellent reimbursement in place, the support of several professional society guidelines, a direct sales forces in the U.S. as well as select foreign markets and its robust revenue ramp and profitability, Barrx would have likely opted to do an IPO to raise money in more "normal" times. However, given the state of the equity markets, it chose to raise private capital.

Another privately-owned company, VC-backed medical device company that is prospering by addressing cancer, in this case, lung cancer, is superDimension (Minneapolis).

According to the Centers for Disease Control (Atlanta), lung cancer is the leading cause of cancer deaths in the U.S., causing 160,000 deaths per year. It results in more deaths than breast cancer, prostate cancer and colon cancer combined.

The company markets a minimally-invasive procedure called electromagnetic navigation bronchoscopy (ENB), which provides a three-dimensional virtual roadmap of the lungs that enables a physician to maneuver catheters, extending beyond the capabilities of the traditional bronchoscope to distant, previously inaccessible regions of the lungs. If the targeted lesions are determined to be cancerous, the physician can use ENB to place radiosurgical markers in and around lung tumors to help radiation oncologists treat patients with external beam radiation. The outpatient procedure typically leaves the patient with no more than a sore throat.

Prior to ENB, the options for lung cancer diagnosis consisted of two invasive surgeries – wedge thoracotomy or open chest partial lung removal to biopsy the lung and mediastinoscopy or invasive lymph node surgery to biopsy the lymph nodes. Patients with poor lung function who could not tolerate these more invasive procedures were left with "watchful waiting" as their only option.

CEO Daniel Sullivan a veteran med-tech entrepreneur, noted that there are currently no screening programs in place for lung cancer, which partially explains the dismal 16% five-year survival rates that is reported by the American Cancer Society. Other significant cancers (breast, colon and prostate) have screening programs in place and their survival rates are vastly better.

A watershed clinical trial result was reported in early November, when the National Cancer Institute (Bethesda, Maryland) released initial results from a large-scale trial of screening methods to reduce deaths from lung cancer by detecting cancers at relatively early stages. The National Lung Screening Trial (NLST), a randomized national trial involving more than 53,000 current and former heavy smokers ages 55 to 74, compared the effects of two screening procedures for lung cancer – low-dose helical computed tomography (CT) and standard chest X-ray – on lung cancer mortality, The NLST found 20 percent fewer lung cancer deaths among trial participants screened with low-dose helical CT.

According to Sullivan, "this study marks the first time a clear benefit has been shown for the use of a lung-cancer screening test. In turn, the initiation of lung cancer screening program would create a $4.8 billion market opportunity for superDimension. This estimate is based on 3.2 million patients requiring a superDimension diagnostic procedure at $1000 per patient, plus the sale of more than 8,000 consoles at nearly $200,000 per device.

Sullivan noted that EENB is quickly emerging a standard of care, with 21 peer reviewed published papers, and more than 16,000 patients treated worldwide and many luminary hospitals now using ENB on a routine basis.

Category 1 CPT code reimbursement is expected to begin on Jan. 1, 2010 and other positive reimbursement developments are in the offing. With direct sales efforts underway in both the U.S. and in Europe, superDimension is likely to continue to register strong growth.

For the nine months ended September 30, the company reported global revenue of nearly $16 million, up about 82% over the first nine months of 2009. To finance its tremendous growth, in September the company raised $25 million in debt and equity financing in two separate transactions.


2010 Piper Jaffray Health Care Conference

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