Interview by HOLLAND JOHNSON, Managing Editor
Larry Haimovitch is president of Haimovitch Medical Technology Consultants (Mill Valley, California), a healthcare consulting firm. His firm specializes in the analysis of the medical device industry, with particular emphasis on the current trends and the future outlook for emerging medical technology. The current areas of emphasis are ophthalmology, interventional medicine (cardiology, electrophysiology, radiology and neuroradiology), urology, minimally-invasive surgical technologies and medical lasers.
His clients include money managers, venture capitalists, investment banks and healthcare corporations, who use his expertise for the evaluation of public and private investments, acquisitions, divestitures and strategic alliances. His experience in the medical device field is very diverse, including equity selections on both the long and short side, fairness opinions, expert witness work, private placements and as an advisor and board member to public and private medical device companies. He is also a regular contributing writer to BB&T and its sister publication, Medical Device Daily.
Larry has served on the board of several medical device companies, including privately-held Quest Vision Technology (acquired in 2005 by Advanced Medical Optics) and ECO-Cath Lab Systems and public companies Milestone Scientific, Cardiac Control Systems, Electropharmacology, Medical CV and Fralex Therapeutics.
Prior to forming his consulting firm in 1990, Haimovitch spent more than 20 years working as a healthcare and medical device industry analyst for a variety of brokerage firms and financial institutions.
Larry currently serves as a board member for a Sausalito, California-based non-profit organization, the Metta Institute.
BB&T: It seems like everyone connected with the medical technology sector is decrying the short-term "death of innovation" due to the falloff in venture funding. However, with the economy showing signs of resurgence, might a funding rebound in the sector be looming?
Haimovitch: I think there's such a strong demand for healthcare in this country and really globally that all the technology improvements that we've seen in the past are going to continue to be very important as we go forward. People are going to demand less invasive approaches, people are going to be looking for faster and less painful recoveries.
I suppose the question is if you get no funding, what's going to happen? I don't really see that happening. It certainly is getting harder lately to get venture funding, but there are still so many unserved market opportunities. A lot of companies are still getting funded, there's a lot of action still and there's obviously, as witnessed by the recent Abbott (Abbott Park, Illinois)/Visiogen (Irvine, California) deal, there's still an appetite for big companies to acquire leading edge technology.
My sense is that there are just too many strong trends supporting future innovation. And certainly the desire of an aging population to remain mobile, to have an arthroscopy rather than an open knee surgery, to have some kind of minimally invasive procedure to get back on their feet and to be active and to enjoy life and to continue working if that's what they want to do. Patients are still going to have a very strong demand for that. I don't see that going away at all.
BB&T: Maybe some of the technology that was out there that was marginal, those are the types of products that won't get funded. Don't you think companies will have to have a paper trail now?
Haimovitch: I think it's fair to say that marginal technologies might not get funded. Certainly in the venture community over the last decade there's been a lot of money going into the venture funds and probably too much money chasing too few good deals, the result of which is that many deals have become overpriced. And marginal companies that, as you say, probably ought not to have been financed in the first place were financed because there was a lot of money sitting around and people were paid to invest it. They aren't paying them to hold on to it, they're paid to invest.
We're seeing that now the venture capital returns over the last decade have been really, really poor. I think we could see a major change in the whole venture capital industry going forward. I think the idea of half a billion and billion dollar funds might be something of the past and people will be doing smaller deals. Maybe companies will have to be more economical about how they use their cash.
I've been personally invested in some early stage medical device deals where the spending was too aggressive relative to the approval cycle or market readiness. There's been spending way ahead of, what in retrospect, was appropriate, spending sales and marketing dollars when the product wasn't really ready and ramping things up way, way too soon. There's a value of having less money at times because it forces you to become more disciplined.
BB&T: Do you see the initial public offering market thawing anytime soon for med-tech? This has been a virtual dead end as an exit strategy for several years now.
Haimovitch: You know I thought earlier in the year we might [see some IPOs], and I think we're getting closer to maybe seeing some action. Maybe we'll see a bunch this fall, but I would have thought by now we would have seen at least a few. Companies like AGA Medical (Plymouth, Minnesota) which are very profitable and have showed very, very good growth, I would have thought by now they would have filed. (Editors note: In October, AGA reported that it had, in fact, filed for its IPO, seeking to raise up to $275 million).
Certainly the marginal public IPOs that I think we've seen in other periods, I don't think they have a chance of happening because people are not going to step up to the plate. The thing that characterized the market's decline in the last part of 2008 and the early part of 2009 was a tremendous aversion to risk, and you saw that in the way investors fled small cap stocks. More recently an index that I follow has shown small cap stocks, those under $500 million are up about 40%. What that says is that investor's appetite for risky stocks has somewhat returned. As that trend continues, I think you'll begin to see signs of an IPO market. We're at the beginning of a recovery in risk tolerance. We're now showing clear signs that we're beginning to tolerate more risk. If that trend continues, we'll see an IPO market.
BB&T: The pace of clinical change has been a hallmark of healthcare, especially over the past two decades. Now, with healthcare reform in the wings, will that situation change?
Haimovitch: I think that healthcare reform is a wildcard, but given that we both agree it's going to be pretty moderate, I don't think you're going to see a big change. Again, I think that people are going to continue to demand better and better solutions to their problems.
BB&T: Does the coming of some form of healthcare reform automatically mean fewer opportunities for med-tech companies?
Haimovitch: There are still many, many diseases and many parts of the body where we need better solutions. Alzheimer's, Parkinson's, depression, and atrial fibrillation to name but a few. There are some massive diseases that are especially daunting as the population ages. I think there are still some huge market opportunities out there. So many major diseases are still not being managed things as good as they could be.
BB&T: How should companies best organize themselves - particularly insofar as development of new technologies is concerned - to deal with the new realities?
Haimovitch: One of the things that's so clear to me after all the years of following this sector is where does the innovation come from? Almost exclusively from the small, mostly private companies. And why is that? Because they have tremendous focus, they're just absolutely one-minded. If big companies really want to succeed at being true innovative leaders, I think they've got to look at organizing smaller teams. They've got to decentralize more, they've got to give more autonomy and they've got to lose the attitude that 'hi, I'm from headquarters and I'm here to help.' They've got to form into more aggressive tightly knit units. I'm just amazed at how poorly the big companies innovate compared to the small ones, it's just remarkable.
I would have expected by now that big companies would have figured this out. That they would have said that it's obvious that we're not very good at innovation, what's the problem here? What can we do to become better at it? Well, let's organize ourselves in such a way that we have the benefits of the big companies, we have the financial resources, but we don't have the drawbacks of the big company which is the bureaucratic, slow overly cautious attitude. That's why there's so much acquisition activity in medical devices because the big companies realize they can't, or haven't been successful innovating so if they want to stay up to the cutting edge of technologies they've got to buy these companies.
BB&T: What promising trends are you seeing in the ophthalmology space, is there one area of particular interest to you? I know we've talked about macular degeneration in the past a good bit.
Haimovitch: Ophthalmology continues to be an extremely innovative part of the medical technology landscape. Medical technology is exciting, but ophthalmology is the most exciting field that I follow. Even though the eye is such a tiny part of the body, it's remarkable how much progress we've made, but yet it's amazing how much more there needs to be done.
We've made tremendous progress in treating macular degeneration, with the availability of Lucentis and Avastin, but there are other promising solutions on the horizon. The use of radiation is very interesting in this space. NeoVista (Fremont, California) has been very successfully moving through its clinical trial. They're going to be finishing up their PMA trial very shortly. I like the opportunity in macular degeneration, I think there are still huge opportunities in that space.
In refractive surgery, we've made a lot of progress with LASIK and other technologies [but] I think the refractive field continues to be wide open.
Another interesting area is presbyopia, which is what the Visiogen acquisition was all about. Everyone, if they live long enough will become presbyopic. Everyone, if they live long enough will get a cataract. Presbyopia is still a huge area. We've made some real progress, but we haven't really developed the penultimate intraocular lens that completely mimics the natural one. There are some things going on in the clinics that look promising, and Visiogen is the farthest along, with a PMA approval likely in 2010.
How about glaucoma? Glaucoma's a massive worldwide problem, it is the second leading cause of blindness in the world, according to the World Health Organization.
The solutions today for glaucoma are very mediocre in my opinion. You've got drugs that are essentially palliative, you've got lasers which help a little bit but are pretty much palliative. Now you've got some interesting, venture-backed private companies like Glaukos (Laguna Hills, California), Transcend Medical (Menlo Park, California) and others that are developing stent-like devices that will help with the flow of the aqueous out of the eye, thereby reducing intraocular pressure.
BB&T: Let's talk about the recent $400 million purchase of Visiogen by Abbott, something we touched on earlier. What are the implications of that in the ICL space?
Haimovitch: There are essentially three big ophthalmic players now: Abbott/AMO; Bausch & Lomb (Rochester, New York), which in 2008 was taken private by Warburg Pincus and Alcon (Huenenberg, Switzerland), which could become part of Novartis (Basel, Switzerland) in the next year or so.
What the Abbott/Visiogen deal said to me is that there are still tremendous opportunities in ophthalmology and that big companies will still step up to the plate to buy attractive technologies. It was a steep price, but clearly a high quality company with a very good product and with a leading edge technology. When Abbott gets FDA approval in the first half of 2010, it will become the technology leader in the very attractive and lucrative premium accommodating IOL category.
BB&T: One trend I've noticed in the ophthalmology space is the increasing use of pharma compounds in conjunction with an implantable device to treat disease such as the use of iontophoresis technology to deliver an active compound into the eye for the treatment of acute anterior uveitis. Do you see this trend increasing like it has in the cardiology space with many new iterations of drug/device combinations?
Haimovitch: It's always a difficult regulatory challenge when you try to get a drug and device approved together because your dealing with two separate divisions within the [FDA], and that always makes it a little more complicated. I think you're going to see more of these kinds of products, but it's proven to be very challenging technically though. Allergan (Irvine, California) just got an approval for its Ozurdex injectable eye implant, which effectively treats macular edema by delivering a high concentration of the corticosteroid dexamethasone into the eye. That might be a harbinger of things to come.
BB&T: Let's drill down to some interesting areas in the Cardiovascular sector, an area I know you follow with some interest. Let's start off with interventional cardiology. Any interesting trends you wish to talk about there?
Haimovitch: I'll tell you what's exciting is transcatheter valves. The promise for transcatheter valves is huge. There's a huge segment of the population that has valvular problems, particularly aorotic valvular problems that really aren't candidates for surgery. So this could represent a huge expansion in the market. We've got a long way to go, but the clinical results are getting better, and the products are getting better. Of course you saw the acquisition of CoreValve (Irvine, California) and Ventor Technologies (Netanya, Israel) by Medtronic (Minneapolis), that's indicative of how excited people are about the field. Edwards Lifesciences (Irvine, California) is also making a lot of progress.
I'm still interested in PFO [patent foramen ovale] closure. I'm watching very closely what's going to happen with NMT Medical (Boston). NMT has completed their pivotal trial last September and they're in a two year follow-up period, but there's been some talk of shortening the trial to one year. (Editor's note: In mid-September, NMT reported that they would move up their timetable for completion of the CLOSURE I trial from fall 2010 to April 2010. The trial is evaluating the effectiveness of the company's StarFlex device in treating PFO, stroke and transient ischemic attack). To get a PMA for a device in the treatment of stroke instead of a drug regimen, which is typically an anti-coagulant like warfarin, would be really big.
BB&T: How about the interventional radiology sector? What do you see happening there in the next five to 10 years?
Haimovitch: I'm very intrigued in interventional oncology. There's a small public company called Delcath Systems (New York) which has a very interesting device and drug combination for treating hepatic cancer that I think looks very interesting. Essentially it's a way of delivering a proprietary drug directly to the site. It's called the percutaneous hepatic perfusion delivery system. It's a minimally invasive regional therapy device using a drug that is proprietary to them plus a delivery system. So the drug is delivered directly into the liver. Basically the system isolates the circulatory system around the liver and so you're able to infuse much higher doses of concentrated chemotherapeutic agents in a much more targeted fashion.
Another interesting technology is irreversible electroporation (IRE), which is minimally invasive energy source for the treatment of cancer being developed by AngioDynamics (Queensbury, New York). IRE is a non-thermal tissue ablation technique in which electrical fields are used to create nano-scale defects in a cell's membrane, which is designed to cause cell death only in the targeted tissue, without destroying critical structures such as ducts, blood vessels and nerves. Early clinical results look promising and this technology could make an important impact on the field of oncology.
BB&T: Let's shift over to genetic testing and take a trip into the future with personalized medicine. Where truly are we headed, and how fast will we get there?
Haimovitch: While I haven't focused in it a lot, I do think personalized medicine is going to become more and more important. If you think about how rudimentary it is, how we target illnesses today without knowing the genetic causes or the individual makeup on a very detailed level. Whereas if you had a better understanding of a person's unique characteristics I think you could do a much better job of targeting therapy, and I think that's going to become very big in the coming years. I think that's going to be funded well and it's going to be a huge market. I think it's just another example of just how primitive we really are in many respects.
There's still plenty of innovation as you look across the universe of med-tech. There's still plenty of reasons to be excited.