BB&T Staff Writerand BB&T Staff Reports

Large med-tech companies will have to continue to look toward M&A activities to supplement slower organic growth in mature markets, according to the Walden Group's (Tarrytown, New York), 2010 report. The 30-page document, which includes acquisitions in the medical device sector, highlights seven key deals or those transactions with a value of more than $100 million, and Richard Cohen, president of the Walden Group, a strategic investment banking firm for the healthcare industry, spoke to BB&T about some of the highlights of the report.

“The larger medical device companies have product lines that are addressing markets that are flattening,“ Cohen said. “They're under price pressure. So they're seeing huge portions of revenue . . . large businesses with slow growth. They need to grow, plus they have recovered from the recession and their balance sheets are very strong so they have cash and access to significant financings.“ Cohen added that this was going to prompt larger companies to acquire smaller companies to effectively grow.

One such deal was Boston Scientific's (BSX; Natick, Massachusetts) $225 million purchase of Sadra (Campbell, California). Additional payments of up to $193 million are contingent upon achievement of specified regulatory and revenue-based criteria through 2016. Sadra is developing a fully repositionable device for percutaneous aortic valve replacement to treat patients with severe aortic stenosis. The company recently completed a series of European feasibility studies for its Lotus valve system, which consists of a stent-mounted tissue valve prosthesis and catheter delivery system for guidance and placement of the valve. The acquisition puts Boston Scientific firmly into the TAVI market where it goes head to head with Medtronic (Minneapolis) and Edwards Lifesciences (Irvine, California).

“Sadra is an acquisition that is Boston Scientific's entry into what is arguably the next big growth area.“ Cohen said “It's an important transformative move“ by [BSX]. “I'm not sure it's a game changer, but without“ the Sadra acquisition, BSX “would be a company without a critical treatment that is getting a lot of attention,“ Cohen observed. “Without it, they would be stuck in more mundane product lines that were cutting edge a couple of years ago. It was required of them. It keeps [BSX] in the game.“

One of the largest and most important deals of last year was when Novartis (Basel, Switzerland) acquired Nestle's (Veve, Switzerland) 77% stake in Alcon (Huenenberg, Switzerland) for $51.6 billion. Novartis said the merger was expected to yield a number of benefits to the company and its customers, including: increased commercial capability to accelerate sales growth and customer support; expanded ability to develop eye care products that reach the market faster; greater patient and market access to advanced technologies; enhanced product development and branding opportunities in contact lenses and solutions; and cost efficiencies that can be reinvested in research and other growth opportunities.

“The largest deal here in terms of size was the Novartis/Alcon deal, but that's by way of size,“ Cohen said. “But by way of qualitative measures . . . it is Novartis because it does reflect certain underlying trends.“ He added that “the underlying dynamic is that there is a dramatic worldwide aging population – so ophthalmic surgery and eye conditions are arguably the most prevalent surgery. It was important to focus on the ophthalmic area because of its frequency of surgeries and the aging population. “This very large transaction enables Novartis to address - I think they quote – 70% or so of eye conditions“

Another important deal cited in the report was the Ardian (Mountain View, California) acquisition. Medtronic snagged the firm for $800 million plus milestones for its investigational catheter-based treatment for uncontrolled hypertension. Ardian's flagship product, the Symplicity catheter system, addresses uncontrolled hypertension through renal denervation, or ablation of the nerves lining the renal arteries. It has received the CE mark and Australia's Therapeutic Goods Administration listing, but is not yet approved by the FDA.

Speaking on the deal and on BSX's acquisition of Sadra, Cohen remarked that both were equally important and brought new dimensions to markets. “They're important so much because they're large or bringing in current revenue,“ he said. “But they reflect the maturing of mini-sectors like orthopedics and cardiovascular stents and even hypertension drugs. They open up new minimally invasive treatments that were formerly conducted by open surgery or drugs.“

The report also included Medtronic's acquisition of Invatec (Roncadelle, Italy) for $350 million and its purchase of Osteotech (Eatontown, New Jersey) for $123 million. Covidien (Mansfield, Massachusetts) also made the list with its purchase of ev3 (Plymouth, Minnesota) for $2.6 billion. Cohen said that he continues to see the big deals in med-tech's future, but that doesn't necessarily mean there will be deals for the sake of big deals. He said that companies will look for the best growth markets in a way that's complementary to their offerings.

“I think there will [continue to] be large transactions,“ he said “The bar is now raised for companies to make acquisitions.“

Foreman sees no support for the abbreviated 510(k)

Christy Foreman, acting director of the Office of Device Evaluation at FDA, made an appearance on the first day of the annual meeting held by FDA and the Association for the Advancement of Medical Instrumentation (AAMI; Arlington, Virginia), and offered little in the way of breaking news for industry, but her interaction with the audience suggested that at least one channel in the 510(k) pathway may be headed for the history books.

Foreman's principal motive for appearing was to go over the 510(k) program overhaul, but she inquired at one point as to the audience's views of the abbreviated 510(k) mechanism. While the survey was anything but scientific, it appeared that this portion of the device clearance process is not the stuff of industry's water-cooler chatter. Foreman noted that the total annual abbreviated 510(k) filings numbered 153 last year compared to the thousands of total 510(k) filings each year, and she asked the audience, “would anyone see it as a great loss if we didn't have an abbreviated program?“ Nobody in the audience indicated it would present a problem for their firm.

Foreman said that CDHR is working on draft guidances for clinical trials, de novo applications, standard 510(k) applications, pre-submission interactions with FDA, and product codes. However, she also said CDRH intends to implement an assurance case study for infusion pumps as a pilot for assurance case studies in general, but as was already announced by others at CDRH, center managers also want to “establish notice-to-industry letters as a standard of practice . . . as an addition to guidances.“

“We're also going to draft a transfer of the 510(k) ownership program,“ Foreman said, a move prompted by the “too many mysteries about whom it was sold to.“ She said other ideas will wait for the upcoming report on the 510(k) program by the Institute of Medicine, including the proposal to fuse the terms “intended use“ and “indications for use,“ the idea behind which she said was “to parallel the statutory language a little better.“ The dependence on the IOM reporting date extends also to the proposal to require 510(k) filings to include data on possible off-label use, but this is also the case for the notion of adding a class IIb category to the device clearance mechanism. Foreman claimed that FDA's intent with the IIb proposal is “to provide transparency“ as to which applications will require clinical data – a claim industry views with some skepticism – but she also noted that FDA “received significant comment on that and we're going to defer“ action until the IOM report, which is due in June.

Regarding the controversial topic of 510(k) review times, Foreman said “there's a trend“ in that “the average number of FDA review cycles . . . is going up.“ Her chart indicated that the metric for average reviews was at 1.89 in 2010 vs. 1.43 in 2003. “We're trying to find out why.“

“We have to send more and more deficiency letters“ to industry for their applications, Foreman said, stating that despite the increase in “the total time to market, FDA is meeting its performance goals,“ including that 98% of applications are decided on within 150 days, “The manufacturer response time is increasing,“ she said. In response to a question posed by BB&T about a correlation between reviewer experience and requests for additional information, Foreman said “we did analyze the program six ways to Sunday“ and that CDRH managers “didn't necessarily see an increase in the number of cycles, but [did see] an increase in the number of questions.“ She said “the majority of requests [for additional information] were for failure to address guidance documents and or recognized standards,“ while the second most common was inadequate device descriptions.

Matrixx decision could prompt more data dumps

The case of Matrixx v. Siracusano has made its way through the courts, and the resounding 9-0 decision by the Supreme Court of the United States (SCOTUS) in March affirmed an earlier decision by the 9th Court of Appeals that companies that finance their operations with securities must disclose adverse events, even those that are not statistically significant.

Drug and device makers now face a more complicated decision about what sort of information to include in a filing with the Securities and Exchange Commission, and one of the implications of the decision, according to a regulatory attorney, is that while drug and device makers may conclude that an exhaustive detailing of all adverse events would be cumbersome – and possibly off-putting – to potential investors, that very exhaustiveness may be necessary to minimize the risk of litigation.

The lawsuit in question pitted Matrixx Initiatives (Scottsdale, Arizona) against shareholder James Siracusano, who lost a district court fight with Matrixx over the firm's disclosures in part because of a perceived failure to demonstrate an intent to deceive shareholders. The pivotal element for Siracusano was the existence of reports of partial and total loss of smell from the use of the product Zicam, which at the time contained two ingredients based on the metal element zinc, the ingredient alleged to have led to the loss of sense of smell. Siracusano's attorneys managed to have that decision overturned on appeal, and the Supreme Court affirmed the appeals court decision.

The SCOTUS ruling indicates that Matrixx's position was that a bright-line rule separated statistically significant data from data of other quality, and that such a line should limit the kinds of evidence included in an SEC filing. “We conclude that the materiality of adverse event reports cannot be reduced“ to such a fixed standard, the ruling states, but the Court also indicated that the plaintiff had also alleged facts “giving rise to a strong inference“ the defendant had “acted with the required state of mind“ to determine an intent to mislead. One incident the Supreme Court relied on to infer “the required state of mind“ to determine intent was that Matrixx had received communication from a researcher at the University of Colorado inquiring into anosmia she had allegedly incurred while using Zicam. Following that incident, the company moved to suppress the use of its name in a presentation of anosmia connected to zinc products at an annual meeting of the American Rhinological Society (Warwick, New York).

The court's opinion, penned by Justice Sonia Sotomayor, points out that FDA is not entirely reliant on statistically validated evidence in making regulatory decisions, which undercut Matrixx's argument that statistical significance “is the only reliable indication of causation.“ The decision is obviously couched in the context of pharmaceuticals, but one of the interesting – and somewhat perplexing – passages in the Court's decision was that firms do “not create an affirmative duty to disclose any and all material information.“ Without offering specifics, the decision notes that companies “can control what they have to disclose under [SEC] provisions by controlling what they say to the market,“ a passage that suggests applicability to any device maker that seeks outside financing via securities.

Patrick O'Brien, a partner at the law firm of Holland & Knight (Washington) told BB&T that attorneys are not especially baffled by the gray area left in the decision. “I think in general most [attorneys] are clear“ on the implications of the decision, he said, clarifying that the court “is not saying that this information [in Matrixx] was material.“ The message here, he said, is that the courts cannot decree that statistically insignificant data are immaterial. That, O'Brien said, is still up to a jury to decide.

Part of the task for industry is to “make judgment calls about what a jury would think“ about low-level data, O'Brien remarked, a task prosecutors will also have to muddle through when considering a government action. Such dilemmas are “part of the risk of this business,“ O'Brien shrugged, observing that the fact of “merely engaging means you run the risk of getting dragged through the [litigational] mud,“ even if the underlying facts are not especially supportive of the allegations.

When asked whether the passage “controlling what they say to the market“ means any firm that communicates in an effort to obtain financing is subject, O'Brien said, “there's some truth to that.“

“Every small company that files with FDA“ can claim to have hit a milestone, O'Brien pointed out, and even a small firm that is not required to make a 10b-5 filing with SEC will take note. Such firms, O'Brien mused, “are going to have an intense interest because if they don't have shareholders, the intent [for many] is to get shareholders,“ and any data collected before sales of shares could trigger a suit.

O'Brien said he did not believe that any communication with a clinical scientist about adverse events is fodder for a 10b-5 filing, however. “I think the court is putting all that in to support“ the argument that an intent to deceive did indeed exist.

Still, O'Brien acknowledged the possibility that the filings will look more tome-like as a consequence of the outcome. “It certainly drives things in that direction,“ he said, despite that the decision cites a need to “not to set too low a standard“ for material that has to be noted in a filing for fear of triggering “an avalanche of information.“

The court “does not want that to happen,“ O'Brien said, but “most people . . . want to engage in a set of conducts“ that provide some indemnification. This, he said, could force industry to “weigh on the side of over-reporting,“ but that in turn could affect marketability. Still, he acknowledged, the market could develop a learning curve in dealing with the data avalanche.