Despite difficulties, med-tech industry still having success

By Larry Haimovitch

Medical Device Daily Columnist

January 4, 2011

Happy New Year!

For many years, I have used the quiet time (business-wise) in the week between Christmas and the New Year as an opportunity to reflect on the events of the past year and, of course, prepare for the year ahead.

In thinking about the medical device world of 2010, one strong observation has been the gaping disparity in the performance of the largest of the med-tech companies compared to many of their small fry competition. We have all been hearing for many months now about the lackluster revenue growth for Medtronic (Minneapolis), Boston Scientific (Natick, Massachusetts) and to a lesser extent St. Jude Medical (St. Paul, Minnesota), C. R. Bard (Murray Hill, New Jersey) and Covidien (Dublin, Ireland).

At its analysts' meeting in mid-November, Boston Scientific management noted that fully 50% of its current revenue base, comprised mainly of its cardiac rhythm management (pacers and implantable defibrillators) and vascular (angioplasty and drug eluting stents) businesses was essentially mature. Moreover, the company forecasted that these businesses would grow at a sluggish 3% annual rate between 2010 and 2015.

The other large players are experiencing similar challenges, literally starving for dynamically growing businesses. This factor may explain why we are witnessing the acquisition of early stage companies and their technologies. Excellent examples abound, Boston Sci's purchase of venture-backed Sadra Medical (Campbell, California) for $225 million in cash upfront, with the potential for up to $225 million more in milestone payments (Medical Device Daily, November 22, 2010). Or, Medtronic's, breathtaking $800 million cash plus revenue-based milestones purchase of VC-backed Ardian (Mountain View, California) (MDD, November 24, 2010).

Interestingly, in both deals, the buyers had previously been investors, thus the reported purchase prices of $225 and $800 million were understated. The Sadra deal valued it at about $261 million while the Ardian deal valued it at $889 million.

Each of these companies is hugely promising, the former has an excellent device in clinical trials for the burgeoning minimally invasive aortic valve repair market while the latter recently reported very promising data at the American Heart Association (Dallas) annual meeting for a unique catheter-based therapy to treat hypertension through renal nerve denervation.

However, both companies are at least four years away from domestic commercialization. I wonder whether these staggering purchase prices will ever be justified financially? Or, perhaps these deals are meant to show the financial community that there is hope for these med-tech behemoths and that they will be players in some of med-techs emerging and most glamorous markets, albeit several years away.

A few weeks ago, I attended two excellent med-tech conferences, the Piper Jaffray (Minneapolis) Healthcare Conference held in New York and Canaccord Genuity (Vancouver, British Columbia) Cardiovascular Conference held in San Francisco. These two meetings showcased many interesting private med-tech companies and the takeaway from these gatherings is that there are many med-tech companies that are showing very strong growth, gaining market share and building significant shareholder value. Of course, this contrasts sharply from the gloomy news that emanates from the very largest med-tech firms.

Let me cite a few examples of impressively performing private companies that appeared at one or both of these meetings. AngioScore (Fremont, California) currently markets its AngioSculpt scoring angioplasty balloon catheter in the U.S., Europe, the Middle East and Asia (except Japan, where it is in clinicals). This product, which features an innovative nitinol scoring element, scores the plaque circumferentially, providing a precise and predictable dilatation across a wide range of lesion types, has been a tremendous success.

According to CEO Tom Trotter, who has led the company since August 2005, worldwide sales have surged from virtually zero in 2006 to an estimated $36 to $38 million in 2010. Moreover, both 2009 and 2008 revenue leaped 40% over the previous year, as AngioScore has been rapidly garnering market share.

The company has several new and exciting products in the pipeline, including a balloon-based product to prepare the aortic valve site prior to a transcatheter aortic valve implant. In his talk at the Piper conference, Trotter emphasized that this product will not compete against transcatheter valve companies but will be complementary to them and enhance the performance of their valves.

Another private company enjoying solid growth is Medivance (Louisville, Colorado), which for many years has been engaged in the field of "targeted temperature management" for the treatment of sudden cardiac arrest and stroke. Whereas several other companies that have addressed this market with invasive and higher risk approaches have either been shut down or acquired at "fire sale" prices, Medivance has prospered.

The premise of targeted temperature management is that precisely managing core temperature of the body in critically ill patients can slow the chemical cascade of events that occurs after a traumatic event, potentially improving patient outcomes.

Its product, tradenamed the Arctic Sun, was introduced about six years ago and is the only non-invasive product in the market specifically designed to manage the core temperature. It is easy to use, performs very reliably, and is based on disposable gel pads and a temperature control module. These attributes have catapulted the company to a market leadership position, with nine of 10 "honor roll" hospitals, 85% of the top 20 heart programs and 70% of the top 20 neurology programs all solid customers.

With a direct sales force in the U.S. and with distributors in over 30 other countries and a classic "razor/razor blade" business model, Medivance has registered excellent revenue growth, going from about $300K in 2004 to an estimated $28 million in 2010. More importantly, according to the CEO Bob Kline who presented at Piper, the company enjoys a 70% fully loaded gross margin and has now had six consecutive quarters of positive operating profit.

A major new and positive influence on market acceptance occurred in mid-October when the American Heart Association (Dallas) moved therapeutic hypothermia after cardiac arrest guidelines to its highest recommendation (Class I). This will certainly foster even faster market growth and could make therapeutic hypothermia a "standard of care."

Several other conference participants that are registering robust growth included (1) Optical coherence tomography (OCT) pioneer Optovue (Fremont, California), whose sales have tripled about $50 million in the past four years based upon its superb ophthalmic industry OCT imaging technology; (2) superDimension (Minneapolis), whose minimally-invasive lung cancer diagnostic procedure called electromagnetic navigation bronchoscopy is rapidly being accepted as an alternative to highly invasive and risky older procedures. Its revenue has grown 82% this year, reaching about $16 million; (3) Barrx Medical (Sunnyvale, California), whose radio frequency ablation technology for gastrointestinal tract disorders is gaining tremendous traction, expects to report calendar year 2010 revenue of about $34 million, compared to just $8 million in 2007. (4) Zonare Medical Systems (Mountain View, California), whose innovative echo data acquisition and image formation acquires ultrasound data up to ten times faster than conventional systems and implements the full reality of data acquisition and management in software rather than hardware. This approach delivers major clinical benefits and capabilities and has fueled a dramatic rise in revenue from $19 million in 2005 to more than $55 million in 2010.

There were numerous other companies, too many to go into detail, that have proven to me that despite the headlines, many med-tech companies are enjoying outstanding growth and are making a big impact in their markets. To paraphrase the famous quote from Mark Twain, "reports of the death of med-tech are greatly exaggerated."

Editors Note: Larry Haimovitch, founder of Haimovitch Medical Technology Consultants (Mill Valley, California), can be reached at Larryhaim@aol.com. Larry is a frequent "angel investor" and discloses that he is a shareholder in Medivance. His opinions do not necessarily reflect those of Medical Device Daily

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