BB&T Managing Editor and BB&T Staff Reports

SAN FRANCISCO — In his opening remarks at the 29th edition of the J.P. Morgan Healthcare Conference, Doug Braunstein, chief financial officer for the firm, briefly waxed nostalgic with a look back at the first edition of the conference back in 1983. He noted that first edition of the conference had only 21 presenting companies and the U.S. spent about $350 million on healthcare. Of that original list, he noted that only four companies remain independent entities.

This year, Braunstein noted, there are a record 350 public and private companies presenting at the conference with more than 8,600 registered attendees.

“Here we are 29 years later . . . we have almost 1,200 public investors and almost 1,500 private equity and VC investors and a little over 7,700 one-on-one meetings, the most we have ever set and U.S. healthcare expenditures of $2.6 trillion dollars, up eight fold in 29 years, and that's obviously one of the issues, amongst many, that is facing the country today.“

The conference bridges emerging growth to large cap companies across a host of sectors as it has throughout its history and nearly 90% of the presenting companies are represented by their CEOs.

While the conference is steeped in tradition, Braunstein noted two important additions to this year's agenda, a not-for-profit company track and a track featuring 14 healthcare companies from China. Braunstein noted a catalyst for the China track was the 40 U.S. IPOs of Chinese companies coming in 2011.

M&A activity, he said should be improving in 2010, “relative to where we were over the last two years. The story there is really one of increasing CEO confidence and that confidence equating to the ability to make strategic decisions.“

A recent Piper Jaffray report bears this out. The report notes that in 2010, more than 17 deals with price tags over $150 million were consummated.

Some notable examples from 2010 included Boston Scientific's (Natick, Massachusetts) $194 million of Asthmatx (Sunnyvale, California), a start-up that has developed a catheter-based procedure to treat severe asthma, a largely untapped market in med-tech. Additionally, Medtronic (Minneapolis, Minnesota) paid about $900 million late last year for Ardian (Mountain View, California), a firm developing therapies to treat high blood pressure.

In that group alone, $10 billion changed hands. The report has expectations for M&A to accelerate even more in 2011.

While residual questions about the passage of healthcare reform legislation in 2010 will continue to dog the med-tech sector this year, Braunstein noted that for the most part, “the markets reacted positively to healthcare as a function of what we underlined, fundamentals, a function of the improving economic environment, the functioning of a growing global economy and greater clarity as it relates to U.S. government policy.“

While there may be more clarity on the regulatory front, apparently much of the damage has already been done to the med-tech sector with venture funding — a critical source of start-up funding in med-tech — shifting to foreign med-tech markets, such as Israel and Singapore, and to other fields entirely, In a recent interview with the Minneapolis Star Tribune, Piper Jaffray med-tech analyst Thom Gunderson said in coming years, there may be a gap where there won't be many med-tech companies around to acquire.

“The pipeline of new companies is not being funded now to the extent that it was,“ Gunderson said. “I'd liken it to post-World War I in Europe, where you just lost a whole generation of men, and it took a generation to build it back up again. It's going to be like that in med-tech.“

Broadening many of Braunstein's observations in his presentation was a report from J.P. Morgan on the med-tech sector outlook for 2011, the coming year should bring challenges around healthcare consumption/demand, especially in the U.S and Europe, and the firm recommended underweighting the med-tech group this year as in 2010.

Within the space, the report indicates a preference toward supplier companies over cardiovascular and orthopedic companies, but notes this may change as the year progresses, dependant largely in 2H11 growth.

As in the past, the report indicates a preference for small cap stocks over their large cap brethren, with an eye toward differentiated technologies and sustainable top-line growth.

The report noted that 18 of the 26 companies that the firm covers with market caps over $1 billion ended the year with consensus estimates lower than when they started, and 70% of these companies are seeing downward revisions to their Wall Street estimates.

Finally the report looked at the tea leaves and came up with the firms top healthcare stock picks for 2011 On the large cap front, they are Covidien (Dublin, Ireland) and St. Jude Medical (St. Paul, Minnesota). The top small cap companies were insulin delivery system maker Insulet (Bedford, Massachusetts) and BioMimetic Therapeutics (Franklin, Tennessee), a biotechnology company working in the field of orthopedic regenerative medicine.

CEO discusses success,emerging overseas market

Five years ago, Medtronic (Minneapolis) was at a place that some would call a crossroads. The med-tech giant was on the verge of being just a portfolio company. It was also called a simple (but large) medical device company. That perception began to change when Bill Hawkins stepped into the chairman/CEO position and began growing the firm's pipeline.

Now looking forward, Hawkins, who is set to retire in April, told those attending J.P. Morgan's 29th annual Healthcare Conference that Medtronic had a strong robust pipeline and was now a company focused on the treatment of chronic illnesses through a wide array of solutions at its disposal.

“I feel like we have one of the strongest pipelines in the company's history,“ Hawkins said. “The good news is that in this environment good technology prevails.“

Hawkins touted recent FDA approvals saying that the business was moving on track with bringing stronger products to market.

Just in December alone, the company had two approvals one was clearance for its Arctic Front cardiac cryoablation catheter system. The company also received clearance to treat adolescent idiopathic scoliosis (AIS).

This marks the first such clearance by the FDA under the agency's newly established category for pediatric AIS patients treated with posterior pedicle screw instrumentation. Hawkins also said the acquisition of ATS Medical (Minneapolis) helped broaden the company's portfolio. In August 2010, Medtronic purchased the company for $370 million.

“Acquiring ATS gives us new valve product access,“ he said.

Just recently, Medtronic reported the launch and first clinical use of the Tri-Ad Semi-Flexible Tricuspid Annuloplasty Ring for the treatment of tricuspid valve disease. The ring is designed to adapt to the movement of a diseased patient's natural valve to help restore the valve to its normal size and shape. It was able to secure this technology from the ATS acquisition.

Hawkins also echoed a familiar theme during his presentation that could be heard from other companies at the conference. He said that greater focus was going to be placed on penetrating those emerging markets – specifically China.

“Nine percent of our revenues come from these emerging markets,“ he said. “We estimate [in the next few years] that amount will increase to at least 20%.“

Hawkins added that when it comes to China Medtronic is making specific investments in the nation to garner a stronger presence.

“We're transforming ourselves from a host to a home,“ he said. “All these things are setting us apart from our competitors.

In other J.P. Morgan news: Zimmer's (Warsaw, Indiana) CEO David Dvorak said the company was moving forward in its momentum and has seen tremendous growth throughout the past years.

“In 2001 we had revenues that were [in the] $1 billion [range],“ Dvorak told the audience. “Now we've got quadrupled revenue in the last decade and our revenues exceed $4 billion. About 60% of that revenue is generated in the U.S.

A significant driver in the business comes from the baby boomers reaching an age where they will need these products.

“The baby boomers are just now maturing to the point where they will need a total joint replacement,“ he said. “They're going to be a significant driver for the next decade.“

To catch further attention and in an effort to capture more market share the company is starting an aggressive marketing campaign.

Dvorak briefly presented the commercial to attendees and said that people should be on the look out for

“It's part of a broader branding campaign, he said. “So keep your eyes on these. We're going to aggressively go after competitor's market share.

When it comes to products for the knee, the company has 27% market share; 21% market share in hips; 13% market share in extremities; 3% market share in spine and just 5% market share.

“Our pipeline is robust and its the lifeblood of the company.“

DeParle plugs healthcare reform to skeptical crowd

The passage of healthcare reform last year has given all the players in the healthcare field a new set of hurdles, albeit with many opportunities, that now must be negotiated. Making her case for the reforms to a largely skeptical audience as a luncheon keynote speaker was Nancy-Ann DeParle, counselor to the President and director of the White House Office of Health Reform.

The need for the Affordable Care Act was great, DeParle said. “The president believed we had to reform our healthcare system. Essentially what is the cost to the economy, to our productivity and to the American people of doing nothing?“

DeParle asserted that President Obama was concerned about more than just providing universal healthcare in this country, with cost containment being another element that was high on his agenda from the very beginning. “From the very first time that I sat down to talk with him to talk about his vision in March 2009, and ever since, he's been focused on the problem of growing healthcare costs and how they threaten our economy, our businesses ability to compete globally and the livelihoods of American families. That's because the growth in healthcare costs is a root cause of broader structural problems in our economy.“

When President Obama took office, DeParle said it was clear that something had to be done about healthcare. As economic growth declined, she said “growth in healthcare spending continued its inexorable rise to more than 17% of GDP. It was heading towards one-third of GDP by 2035 and nearly half in 2080.“

From a competitive perspective on the international stage, DeParle noted that healthcare costs have been a serious drag on American businesses, with U.S. companies spending nearly double what their foreign competitors do for healthcare. To illustrate the dire nature of the issue, DeParle showed a graphic that total family premiums for employee-sponsored coverage from both the employer and employee side of the equation increased by 138% between 1999 and 2010.

“Our healthcare system wasn't working for American families, businesses, or the government, and that's why President Obama and Congress worked so hard and yes, so long to pass the Affordable Healthcare Act.“

The new law, DeParle said, could be especially important for small businesses to be able to afford healthcare for their employees. She said the Congressional Budget Office estimates that small businesses will be able to purchase coverage in the exchanges for 14% to 20% less than what they're paying now “primarily because of larger risk pools and streamlined administrative costs.“

One particularly interesting part of the new healthcare law that DeParle discussed was the newly created CMS Innovation Center, which will be able to test new care delivery and payment ideas.

“That should be music to the ears of entrepreneurs who've wanted to test ideas like disease management and Medicare in the past but have been stymied by the agency's lack of funding and flexibility.“

DeParle pointed out that since the healthcare legislation was enacted the economy has made some progress which she believes should dispel any notion that it is slowing down job creation. She argued that slowing the growth of healthcare costs as the Affordable Healthcare Act is designed to do, “will have the likely impact of creating more jobs since businesses will have to spend less on healthcare for their employees.“

For those who seek to repeal the legislation, she issued a warning that doing so could stymie economic growth. She cited a report issued last Friday from Harvard (Cambridge, Massachusetts) economist David Cutler that cautioned that repealing the Affordable Healthcare Act policies to slow healthcare cost growth could result in the loss of more than 300,000 additional jobs each year.

CMS is on track, DeParle said, to set up the first set of criteria for Accountable Care Organizations (ACOs) of Medicare. Through the ACO model, a clinical care team will receive a bundle payment from Medicare for all a patient's services. Theoretically, this will move patient care from what DeParle called “piecemeal care“ to more a “population-based care.“

“ACOs have the potential to make it easier for clinicians and hospitals to coordinate the care they provide and produce better results for patients.“ She added that if the shared savings incentives in the ACOs are properly aligned, the Medicare ACO program will also encourage investments in health information technology and innovative ways of delivering care.“

DeParle noted that President Obama has acknowledged that there are some imperfections and flaws within the legislation, and that he is willing to work with Democrats and Republicans to fix those imperfections. “What we won't do is go back to a system that wasn't working for American families and businesses and wasn't helping to put our government on a path to fiscal sustainability.“

Edwards eyes U.S. launch of Sapien valve in 2011

Edwards Lifesciences (Irvine, California) is not the type of company to try to do everything. Rather, Edwards' strategy is to pursue opportunities where the company believes it really offers substantial value, Michael Mussallem, Edwards' chairman/CEO, said during a webcast.

Mussallem told listeners and audience members that the company expects to have a “steady drum beat“ of technology being released in the coming year. He added that Edwards is “very focused“ on figuring out what complications matter most and how to improve the safety and durability of the heart valve procedure in patients who don't currently have it as an option.

Edwards is currently engaged in some “truly landmark clinical trials“ in an effort to build up its evidence base, Mussallem said. That too is part of the company's strategy.

In November, Edwards said that in addition to survival seen in inoperable aortic stenosis patients treated with its Sapien transcatheter heart valve in the PARTNER trial, a newly released analysis of the same patients shows they also experienced substantially better quality of life. The PARTNER trial assessed 358 patients upon enrollment and at follow-up intervals of one month, six months, and a year. The trial was the first randomized, controlled pivotal trial of a transcatheter aortic heart valve, the company noted.

The Sapien can be inserted through an incision in the groin, then threaded through an artery using a thin wire into the heart. The device was approved for sale in Europe in 2007. It may help patients with diseased valves who are too weak to undergo standard valve surgery. The company forecast sales of $200 million last year for its Sapien valve and $300 to $340 million in 2011.“As we introduce the [Sapien] XT valve into the U.S. we're going to need to run another clinical trial because it is a different valve,“ Mussallem said.

Just last month at the company's investor conference Edwards said it anticipates launching its Sapien transcatheter valve in the U.S. during the fourth quarter, pending FDA approval. The company also said at that time it expects to begin enrolling patients early this year in its PARTNER II trial, which will study the Sapien XT compared to the Sapien in up to 500 patients with severe, symptomatic stenosis using one-to-one randomization. Edwards hopes to complete enrollment in that trial by the end of the year.

Mussallem told J.P. Morgan conference attendees that the FDA still has not given Edwards the green light to begin the PARTNER II trial, but that the company believes its timelines are still intact and that the trial will enroll very rapidly once it begins.

Bringing the transcatheter heart valve technology into the U.S. will require a significant $40 million investment to launch the device at up to 400 sites in the first year, Mussallem said. “We think it's worth it . . . it sets up a very bright future,“ he said. “Introducing this appropriately and having just terrific clinical results will be our top priority.“

For the sake of assumptions, Edwards is assuming an October launch of the Sapien valve in the U.S., Mussallem said, but in truth “nobody knows“ when the device will win FDA approval.

Once launched in the U.S., Mussallem said the company expects the Sapien valve sales to grow substantially. “This is just the beginning of a very important introduction in the U.S.,“ he said.

“So our strategy is very much an innovation strategy,“ Mussallem said. He added that the company believes there are still enough big unmet needs that it can innovate and offer true clinical value. “We think innovation is more of the solution to the problem than anything else . . . we know that we need to bring more evidence than ever before . . . evidence that takes longer, it's more expensive, but it's worth it.“

Taking the time and investing the extra cash into building clinical evidence also will allow Edwards to build a durable competitive advantage, Mussallem said. “We are aggressive investors in R&D,“ he added.

“We are a very focused company; we don't do a lot of things, we try to be the best at what we do,“ Mussallem said. “We are not afraid to actively manage our portfolio . . . we're not afraid to get out of those businesses where we don't offer a lot of value . . . we pursue those opportunities where we really offer substantial value.“

Bloomberg recently reported that Mussallem said in an interview that Edwards may use its $360 million in cash for purchases of small heart-device makers. He also said that being acquired is “not part of our strategy“ according to the report.

BSX CEO touts pipeline, future growth opportunities

The last few years Boston Scientific (BSX; Natick, Massachusetts), has dominated med-tech headlines, but not every story was necessarily a good one. From dealing with fallout from the Guidant acquisition to acquiring Intelect Medical (Boston), the company has seen its share of success and distractions from cultivating its pipeline.

However, BSX CEO, Ray Elliot, told attendees at the conference that the company was on track and working to strengthen its pipeline.

Under the title 'our pipeline is no BS(X)' – Elliot discussed the strengths and goals of the company.

“If you do the math and look at the target markets we're going into, we can make this company into about a six or eight percent grower,“ he said. “If we can do that – at least where medical devices are going in these days – that probably is the new double digit growth.“

Elliot emphasized that the company wasn't going to step out into new territory, but was merely going to improve upon the markets it already knew.

“Boston Scientific will pursue priority growth initiatives by buying or building products we understand, to be sold through sales forces we already have,“ according to a mission statement Elliot presented to the audience. “The products will be least or less invasive, cost and comparatively effective and where possible, reduce or eliminate refractory drug use.“

Part of cultivating existing products and familiar territory meant looking back at the deep brain stimulation (DBS) market. Elliot said that the market which was $400 million in 2010 has the ability to grow to $1.5 billion in 2020.

There's a high unmet need, he said, especially in the refractory population of the market.

Most recently the company acquired Intelect for $60 million to help augment its Vercise DBS system. Intellect is working on its Guide DBS programming system, an application to enable clinicians to visualize stimulation fields in the brain and provide more precise targeting of therapy. The Vercise DBS system is a neurostimulation device designed to deliver electrical signals to specific areas within the brain through individual lead contacts that allow a more tailored amount of current flow based on patient needs. Boston Scientific recently announced the first Vercise DBS system implant as part of its VANTAGE clinical trial to treat Parkinson's disease.

Elliot said the combination of the two devices makes Vercise more precise and that the Guide system will act as a “light“ switch for the application.

Elliot also touted the company's work with its Synergy stent platform.

Synergy uses a bioabsorbable PLGA polymer and everolimus drug formulation to create a thin, uniform coating confined to the outer surface of the stent. Once the drug has been delivered, the bioabsorbable coating resorbs into the body, leaving behind only a bare-metal stent. This technology is designed to provide the same degree of restenosis reduction as a conventional drug-eluting stent while offering faster and more complete vessel healing after stent implantation.

The firm launched EVOLVE is a randomized, single-blind, non-inferiority clinical trial that will enroll 291 patients at up to 35 sites in Europe, Australia and New Zealand to evaluate the performance of the Synergy stent.

Particularly, Elliot said that the firm's greatest competitor in this endeavor was Abbott (Abbott Park, Illinois) and its bioresorbable vascular scaffold (BVS) stent.

“There is no question that BVS has some terrific curb appeal, look at the concept itself,“ he said. “But there are a number of issues around it.“

Some of those issues Elliot said BVS faced were strut thickness, radial strength and the increase in the price of stents.

“So are we very confident in the Synergy platform and what the clinical implications are and what the economic implications are,“ he asked. “Yes.“

Elliot talked a bit about the firm's acquisition of Sadra Medical (Los Gatos, California) for $193 million. The transaction follows the definitive merger agreement first reported in November 2010. Boston Sci paid $193 million to acquire the remaining 86% of Sadra's equity not already owned by the company. Additional payments of up to $193 million are contingent upon achievement of specified regulatory and revenue-based criteria through 2016.

“As you see us purchasing companies – match it against that first paragraph I gave you and it should be a 100% match,“ he said.

In closing, he put up a slide of the number of products each segment of the company was responsible for. More than 150 dots, denoting products, filled up the slide.

“We do in fact have a great pipeline, the 150 plus pipeline is indeed correct,“ he said.

Health IT panel proves to be HIT with attendees

A topic that has been of interest for some time, but has not come close to reaching its potential is healthcare information technology (HIT). The coming federally mandated adoption of HIT technology by hospitals and physicians may finally give this sector wings, and more importantly for investors, a pathway to profitability.

Exploring this interesting area was a panel with several big players on both the government and private sectors who already have some skin in the game.

Of course, patients are the backbone of any viable HIT system, and panel moderator John Doerr, a partner at investment firm Kleiner Perkins Caulfield & Byers, queried the participants on the value of such a system for the patient.

“We believe this movement, this effort, this set of policies will open up opportunities to see more choice in terms of a value-driven healthcare system,“ said Aneesh Chopra, the U.S. chief technology officer who works to advance President Obama's technology agenda.

The way the government decided to establish a comprehensive HIT network was through its doctrine of meaningful use, Chopra said. “Meaningful use is a shift in incentive payments for providers focused less on the particulars of IT by this product or this vendor and more encouraging or engaging them on a set of criteria, verbs, actions that they should take to be meaningful users of that technology in the pursuit of improved care delivery.“

As to the initial money part of the equation, Chopra noted that there are more than $20 billion in government incentives that are currently scheduled to be paid out to incentivize adoption of meaningful use tenets by 2015. This money he said should be sacrosanct and not subject to the withholding whims of Congress, Chopra said, something that should provide comfort to those seeking to make investments within the sector.

Looking at the potential for patient adoption of HIT, Google (Mountain View, California) chairman/CEO Eric Schmidt noted the ubiquitous nature of smart phones in the U.S. “Why can't you take your mobile phone and download all your personal health records onto it? And why can't your doctor just plug in that phone and say 'I'm going to give you this drug as opposed to that drug or stop doing this please because you're killing yourself?'“ He also noted that if a patient was not conscious the phone downloaded with the information might even save a life. Schmidt also noted the value of plugging in the phone to perform real time telemetry for an instant diagnosis no matter where a patient is, “so that if I have a problem, just like that, an alert is issued.“

Schmidt noted that while some people may not like that the government “is going to force a disaggregated industry to get itself interoperable, the stakes here are huge.“ Schmidt asserted that “it's better for society to force some level of interchange [between disparate healthcare organizations] and the information that is provided is of great value to consumers.“

Todd Park, chief technology officer at the Department of Health and Human Services, noted that right now this country is not getting much bang for its healthcare buck, with more hospitalizations and more sick patients. “We actually disincentivize care coordination.“ No matter what your political affiliation, he said “you come to the conclusion that you can't keep paying for healthcare by the yard, it's an unsustainable pathway.“

Park noted the coming of bundled care rates to the Medicare system, in which a check is written to a team that performs, say a hip replacement surgery, instead of cutting all the different team members a separate check, the accountable care organization model, or ACO for short. These type of arrangements have already been used with success by private payers, but having CMS aboard will be transformational for healthcare, Park said. “We pay in a really goofy way for healthcare and there has been a lot of private payer innovation in this country that has been stifled as a result because they don't have the critical mass,“ that adding Medicare recipients will provide.

Chopra sought to assure potential investors that the Federal government is not interested in regulating software development in the field. “Governments good at enabling infrastructure, that's what the healthcare meaningful use incentives are good for.“ He noted that entrepreneurs must now come in and develop the software and systems that allow consumers, hospitals and doctors to communicate with each other.

“We would make a lot of progress if we simply took the large IT systems that exist today and have a very large amount of patient information in them and got them to be interoperable and were able to use that to for example study clinical outcomes, that's a really easy thing to do,“ said Schmidt. Changing doctors' habits and incentivizing them to use electronic healthcare systems, Schmidt said, “is a much harder problem.“ If the patient becomes excited about having this technology and demanded that it be available, he noted, everything else would fall into place because the consumer dictates adoption, and doctors would really have no choice but to embrace the technology. “Figure out a way to get the consumers to love the product, and what do patients care about, they care about their health.“

Chopra noted that while it would be great to have patients as consumers, the more immediate need that requires a solution is figuring out how to service ACOs. People should be listening to their needs and responding agilely to them. I don't know how many people are doing that right now . . . I think the pace [of implementation] suggests that there is an opportunity there.“

Stryker overcomes adversity with acquisitions

Part of Stryker's (Kalamazoo, Michigan) appeal has always been its ability to constantly manage and acquire a wide array of businesses. That's the take-home message that Stephen MacMillan, chairman, president/CEO of Stryker told attendees during a session at conference, in describing the firm's longevity, coupled with its ability to overcome tough obstacles.

“We've been on a diversification kick our whole careers,“ MacMillan told the audience. “We have the magic of acquiring new businesses. We still will always believe our best strategy is to acquire businesses. Our goal is then to turn these small acorns [businesses] into big trees.“

The company completed several acquisitions last year, OtisMed (Alameda, California) for $100 million; Gaymar Industries (Orchard Park, New York) for $150 million and Porex Surgical (Newnan, Georgia) for $9 million.

Perhaps its biggest coup was when it reported the closing of its previously disclosed $1.5 billion acquisition of the assets of the Neurovascular division of Boston Scientific (Natick, Massachusetts), which includes products used for the minimally invasive treatment of hemorrhagic and ischemic stroke .

But the company suffered its share of regulatory headaches, including a class I recall of cranial implants and a warning letter issued for distribution of the company's OP-1 Implant, a bone morphogenic protein product without study site approval. The company had to deal with more bad news in the form of a decision by an FDA advisory committee to recommend that the agency not approve the PMA for its other bone morphogenic protein, the OP-1 Putty.

Stryker picked up a license for the OP-1 line of products from Curis (Cambridge, Massachusetts) in December 2007 . Conditions were further complicated because of the economic meltdown and a slowdown in the amount of elective procedures.

“But we emerged a far stronger company,“ MacMillan said.

The key factors that led to this turn around according to MacMillan were:

• investing in a company wide comprehensive quality system;

• resolving the Trident Hip recall;

• resolving all 4 warning letters;

• increasing research and development spending;

• further broadening the sales footprint, and;

• selling OP-1 for use in bone applications.

Although last year wasn't great for hip and knee replacements, MacMillan said that the company had a broad enough and diverse portfolio to do significantly well.

“No single franchise is more than 18% of our revenue,“ he said. “We don't do any 'bet the farm' ideas in any one direction.“

He cited that happens when a firm has a strong base business.

“I wouldn't want to trade our success with anyone,“ MacMillan said. “We like where we're going here.“