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and HOLLAND JOHNSON
BB&T

SAN FRANCISCO — The annual OneMedPlace Finance Forum was held during two days of the JP Morgan Healthcare Conference, with many attendees switching name badges as they walked back and forth between the Westin St. Francis and the somewhat less posh Sir Francis Drake in the next block of Powell Street.

A panel on cardiology started off with a discussion about stents, what moderator Casey McGlynn, chairman of the Life Sciences Group at Wilson Sonsini Goodrich & Rosati (Palo Alto, California), called "the biggest elephant in the room when we talk about cardiology." Though most panelists agreed there are still opportunities in drug-eluting stents, they suggested solid players in the future will be in emerging and unmet markets rather than workhorses.

"If I were to get involved in one of these workhorse stents, it certainly wouldn't be a drug-eluting stent right now," said Peter Fitzgerald, MD, PhD, a partner at Latterell Venture Partners (San Francisco), citing the long length of time to market, the difficult regulatory process and the atrocious public perception. "I just am too old to try to work on another drug-eluting stent," he said, unless it addresses an unmet area like the neuro space, small vessels, bifurcations or periphery.

Fitzgerald, a well-known interventional cardiologist and an associate professor of medicine at Stanford University (Stanford, California), said that despite the wishes of the investment community and cardiologists, he does not see fully biodegradable stents as the next platform for drug-eluting stents.

Teo Forcht Dagi, MD, a partner at HML Venture Partners, added a few items to the list of potential areas of interest: biliary stents and renal artery stents. "We're looking for adoption, ease of use, outcomes and differentiation," he said.

Fitzgerald spoke positively about balloon-eluting technology, calling drug-eluting balloons exactly what some of the pharma companies are looking for. Pharmas have hated interventional cardiology because they don't want to embrace implants, he said, but balloons bring "site-specific therapy without off-target toxicity."

The market has changed tremendously, noted Charles Maroney, president/CEO of CardioMind (Sunnyvale, California). Two years ago, he said, drug-eluting stents were all anyone could talk about. Analysts were looking at 10% annual growth, with some annual market forecasts as high as $8 billion. "But where the heck are all these stents going to be placed?" he asked.

Then safety issues pulled back penetration rates in the U.S. and worldwide, changing perceptions and making it harder to get FDA approval and CE mark. To be successful today, Maroney said, a company must get to the point where it can say it has a product that is differentiated both mechanically and clinically.

Members of the panel also offered advice to companies about exits.

Fred Middleton, a managing director with Sanderling Ventures (San Mateo, California), said that to sell to a large device manufacturer, it's important to have a good set of clinical data. "If you can develop a viable clinical program and technology that's patent protected for $50 million, you can make those metrics work on an investment," he said.

Dagi highlighted several characteristics of technologies that will be bought rapidly: first-in-class, first treatments for previously untreatable areas, and products that a large company's sales force can address.

As far as pricing, "the general rule has always been that the size of the market caps the amount that will be paid for a technology," Dagi said. For stent technology, the market is segmented amongst different stents and different technologies, "so you have to ask what portion of that constitutes the actual addressable market for the particular technology that you're looking to sell or looking to buy, and that will always be a fraction of the total market."

According to McGlynn, many investors "lost heart" in the cardiovascular market after stents, thinking all the unmet clinical needs had been addressed. He asked panel members what non-stent investments they would be interested in.

Fitzgerald cited heart failure, stroke and peripheral arterial disease as potential interest areas. Topping the list of interests is percutaneous valve technologies, a treatment that "is here to stay" and that will "make a huge impact on how we treat people with heart disease."

Dagi also said stroke was interesting, though hard to treat, especially from an FDA standpoint. The next large stroke area probably will be arteriovenous malformations, he said. HML is looking hard at congestive heart failure, the largest enters for Medicare & Medicaid Services expenditure, Dagi added.

Middleton mentioned tissue regeneration as an important area, as well as related areas such as gene therapy and the use of stem cells to regenerate heart tissue.

Another top-of-mind issue at the panel was the investment landscape, and panel members were optimistic about med-tech receiving money.

Dagi said HML sees this "as an incredibly interesting and potentially profitable time to invest. The only thing we wish is that we had more money to put to work right now." He said HML is reserving more money for its existing companies, but that it expects to put the same amount of money or more to work in 2009.

Middleton said Sanderling likely will be providing more reserves for existing companies and less money to new companies. One area of interest for 2009 will be new companies that don't require a lot of capital.

In a similar vein, Fitzgerald said Latterell is "hunkering down a little bit, taking care of the home."

Due to similar plans by other investment firms, companies looking for money may not have many funding choices this year. For companies with no data that are short on cash, "you've either got to take the valuation hit, get the money and move on, or you're going to have to find an alternative financing strategy," said Maroney.

Despite the cash crunch, the panel concluded on a positive note. Maroney said that it is now a fantastic time to start a company. "In bad times you get better people ... for reasonable prices," he said.

Fitzgerald said he was impressed with the current innovation, especially since innovators even have started thinking about costs and regulatory issues up front. "I think the quality today is better than it was last year. People get lazy when there's a lot of money... . From an innovative standpoint, I am incredibly encouraged. It's like being in a sandbox."

Diabetes, deals & government

Another panel covered a variety of issues surrounding diagnostics, touching on how to create successful molecular diagnostics, challenges for the diabetes market, and what large companies are looking for in partnerships and acquisitions.

Diagnostic tests drive about 80% of medical decisions made by a doctor sitting with a patient, said panel member Brook Byers, founding partner at Kleiner Perkins Caufield Byers (KPCB; Menlo Park, California). But even with so much use, challenges remain for the sector. "There's not enough economics put on diagnostics, there's not enough innovation going on, and we need a different regulatory and reimbursement network and policy," he said.

Byers let the audience in on KPCB's "secret sauce," the method it uses when developing its companies: The starting point is a doctor and a patient in an examination room, trying to make a decision about therapy. In most cases, data are not good and decisions are made based on age or size of tumor — all told, a fairly random method of decision-making.

"We start with that decision and then start working backwards," said Byers. "What is the biology that would speak to that? What are the tools that would speak to that biology?" Then they ask what samples are needed, where samples can be found, and what product development procedures will be required. Only then do they look at the type of team needed to ensure development, clinical validation, and peer-reviewed publications on the studies. "Then we put the team together, and then we do the funding," he said.

Peter Wyles, vice president and general manager, Bayer HealthCare (Leverkusen, Germany), offered insight into the history and challenges of his company, which has been in the diabetes business for about 30 years.

"What many people don't know is that we actually started the business. It was more of a pet project within the larger diagnostics group, and we started out with a 100% market share." The business didn't receive much money or attention, and slowly its market share plunged to the single digits.

When Bayer sold its diagnostics business to Siemens Medical Solutions (Malvern, Pennsylvania) a few years ago, it retained the diabetes care piece, changed the management team, and restructured the business. Since then, Wyles said, Bayer has had a successful run. It has moved into third position but still is trying to gain back market share.

A large focus for Bayer is glucose monitoring, currently dominated by four major players — Bayer, Roche, Abbott Laboratories and Johnson & Johnson. It's a bit of a "tired old realm," Wyles said. "Everybody's kind of chasing the same customers. We've gotten to the stage now where we just change the colors [of products]." He said that the technology has been taken about as far as it can go: Meters are small and smaller blood samples are needed for testing.

In fact, in terms of direct-to-consumer advertising, the market is at the level of offering companies a Ford, Chevy or Mercedes, he said. "You're just trying to prove that your product's a little bit better and more convenient and simpler to use."

Wyles pointed out that the market is not expanding since battles going on now are for market share rather than market expansion. He mentioned a few areas that could shake up the market: changes in diagnosing, especially to make it more efficient, as well as early stage diabetes treatments that could delay onset.

"We're really at a precipice now around the business as to what is going to be the next technology in this field in order to address this exploding disease, and also bring it more to a population that is underserved or not being served, or even people who don't care about being served, which is about 80% of the diabetes population," he said, referring to the large number of diagnosed diabetes patients who do nothing to manage the disease.

Another key issue in the space is reimbursement, especially in developing nations with increasing diabetes populations that don't have any reimbursement infrastructure in place.

"Who could shake up the market?" he asked later during the panel. "Apple, probably, if they wanted to get into the business." He said anything that can make a product easier, more convenient and more discreet is attractive to customers. "There's more discreetness with an iPhone type of product because people don't know what you're doing; they think you might be doing e-mail. I think that would certainly broaden the use base amongst those that aren't testing today."

Wyles said the wave of the future could be at the pre-diabetes stage, if there was a pill to manage diabetes, similar to the popular cholesterol-lowering drugs.

The panel discussion then changed course, as Byers commented on the role of the federal government thus far and into the future. "For the most part they've been useless. It's all been driven by the medical and private sector."

Although many people are worried about the Democratic lineup, Byers said he is less so, citing a personalized medicine bill written by President-elect Barack Obama and his health advisor, Dora Hughes, MD. "It called for a variety of things that I think are the right things to get done," he said, including a registry of all new molecular tests for personalized medicine and good regulation of all diagnostic tests under formal rulemaking rather than guidance.

Byers recommended that industry leaders get involved with organizations such as the Coalition for 21st Century Medicine (Washington), a group of diagnostic companies working with the FDA to help it understand what would be best for innovation and regulation.

The panel also addressed funding and how to build a successful company.

According to Byers, molecular diagnostics products are "closer to devices on time," but "closer to biotech in some of the capital required." He estimated that it takes about three years and between $20 million and $40 million to develop a good molecular diagnostic test.

He said he sees companies that try to do it quicker and for less money. They make shortcuts on the science and don't run all the trials needed for clinical validation. "The consequence of doing that is you're not going to get respected FDA, you're not going to get peer-reviewed journals to get you adoption, and you're not going to get reimbursement," he said.

Ruedi Stoffel, PhD, vice president, business development, Roche Molecular (Basel, Switzerland), said it's rare to see companies that have biomarkers which have been validated in a consistent manner. Roche sees value in partnering and realizes it can't do everything, but it likes to see technologies that have made through two or three clinical trials, showing that they're getting consistent results. With that in place, he said, Roche is agnostic as to whether its pipeline is developed internally or externally.

Wyles echoed this opinion, saying there is a lot of activity in the med-tech arena, though "what is good stuff and what isn't is another question."

The panelists also offered insight on what they look for in companies they will invest in or acquire.

Byers said KPCG doesn't necessarily need to see a business plan, but prefers to see the team's field notes."We like to see the raw data of their notes as opposed to a slicked-up PowerPoint presentation on 30 slides."

Bayer's Wyles said his company doesn't have a shopping list for acquisitions and in-licensing, though its products are generally geared to consumers. "We're more into monitoring now; we don't go into big-box diagnostics anymore."

He said Bayer isn't stuck on its business plan as the only model that will work. "We are looking for things that may make us better at what we do, and transformation in the way we approach our business. We are prepared to even change our organization around a new technology if we think that technology will be a game-changer."

Corey Strege, vice president, business development at Olympus (Tokyo), said that in the past, the company had an internally driven culture. After the Gyrus ACMI (Berkshire, UK) acquisition, however, "we're realizing that we can't do it all ourselves and that we must turn externally for potential opportunities to really grow our business to the next level."

Strege said the company spends a lot of time in due diligence. First it looks at whether the move would be a good fit for Olympus, if the technology is safe, efficacious and meets an unmet need. After that, it looks at the financial opportunity.

Wyles said dealmaking is fairly competitive at the moment. "We're seeing this year as a year of great opportunity, so we're prepared to go after things that we may have not gone after before. We're willing to spend. I think we'll see some more activity coming up by all of the players."

Targeted, intimate setting

The OneMedPlace Finance Forum gave attendees a glimpse at some private and smaller public companies that are on the cutting edge of medicine, and in a much more intimate setting than the vast crowds that are a hallmark of the JP Morgan conference held just down the street.

Attempting to bring to market a product to improve the surgical repair of mitral valve regurgitation is a company called Neochord (Minnetonka, Minnesota). President/CEO John Seaberg said the company has developed a device that eliminates the need for a sternotomy and cardiopulmonary bypass.

The company licensed the technology from the Mayo Clinic (Rochester, Minnesota) that was invented by a cardiac surgeon while in practice there. The tool is designed to allow for the use of minimally invasive use surgical techniques for the implantation of artificial chordae tendineae on a beating heart.

During normal function, the chordae tendineae tether the mitral valve leaflets, ensuring correct closure during ventricular contraction. Rupture of the chordae due to myocardial infarction or degenerative disease is a common cause of mitral leaflet prolapse and subsequent mitral regurgitation.

Seaberg said the company is currently looking for investors to top off a $3.5 million Series A round, the funds of which will be used to carry the company through the completion of its human feasibility trial which it intends to begin in May 2009.

While the company plans to pursue those people who are already prime surgical candidates, Seaberg said NeoChord's ultimate goal is to tap into the U.S. patient population of more than 2 million people with mitral regurgitation who have not been treated because the risks of the current procedure are currently deemed to be too high compared to the severity of their disease. These people, he said, are in need of a minimally invasive treatment option.

"Current patients will be treated with less trauma, lower risk and less cost and frankly, that more patients will be treated because of the less invasive technology."

According to Seaberg, the clinical literature has shown that it is much better to treat patients in this sector while they are still relatively symptom-free. He noted that nearly 42% of asymptomatic patients died from complications related to this disease within five years. "It is a silent killer," he said.

Seaberg said the company is hoping to have FDA approval for the technology sometime in 2012.

Developing a photonic-based platform technology for the diagnosis and treatment of various diseases is InfraReDx (Burlington, Massachusetts). The private company is initially focusing on the creation of a system that will enable the diagnosis of lipid-core containing plaques in the coronary arteries.

The company received FDA clearance for its catheter-based LipiScan coronary imaging system last April. The LipiScan device uses near-infrared (NIR) spectroscopy to identify lipid core containing plaques of interest in the coronary arteries in patients already undergoing cardiac catheterization. Such plaques, which cannot be detected by commonly used tests such as a treadmill exam and even coronary angiography, are suspected to be the cause of most sudden cardiac deaths and non-fatal heart attacks. This condition recently attracted heightened attention due to the death last June of Meet the Press host Tim Russert.

James Muller, company founder and president/CEO said that NIR spectroscopy is used to measure the chemical composition of unknown substances. The LipiScan system uses optical technology, much of it developed for telecom uses, to deliver and retrieve NIR light from coronary plaques.

Muller said the light reflected back at different wavelengths is analyzed to detect the chemical composition of the coronary plaques. At the completion of the catheter pullback, the LipiScan console instantly displays the scan results on a "chemogram," a digital color-coded map of the location and intensity of lipid core containing plaques of interest in the artery.

The company believes that the vulnerable plaque diagnostic market will exceed $2 billion by 2013. Muller said the company's primary customers include interventional cardiologists, and its secondary market extends its reach to clinical research for drug and medical device development.

According to Muller, the company is preparing a second generation of the device that can visualize and determine the chemical composition of lipid-rich plaques.

InfraReDX has currently raised more than $87 million in private funds and is in the process of raising a $20 million C-2 round that Mueller said "will get us to financial breakeven."

Symphony Medical (Laguna Hills, California) is looking to treat heart failure, post-operative atrial fibrillation and other cardiac abnormalities with its biopolymer and biotherapeutic devices.

The company's CEO, Raymond Cohen, noted that the company's goal is to deliver biocompatible polymers to specific areas of the heart during either open chest surgery or via a minimally invasive procedure. He said the biopolymers are engineered to achieve clinical benefit by locally modifying cardiac physiology.

The company currently has two products in its late-stage development pipeline. Algiysl-LVR is a treatment to prevent or reverse the progression of chronic heart failure and mitral regurgitation. The other product, Plexisyl-AF, is a prophylactic method of preventing sustained post-operative atrial fibrillation, a common side effect of the roughly I million coronary bypass and cardiac valve replacement surgeries performed each year.

Cohen described how the company's lead product, Algiysl-LVR, is delivered to achieve ventricular augmentation. He said the polymer is administered as an inert compound into the left ventricular wall of the heart where it reshapens and thickens the tissue. By restoring the shape of the ventricle from more of a "basketball shape to more of a football shape," Cohen said pumping efficiency is re-established and cardiac wall stress is also reduced. Essentially, the strategically placed biopolymer reconstructs the heart chamber so that it assumes its more natural, healthy form. Cohen said the implanted material does not cause negative immune reactions and it coexists permanently with the heart muscle.

Cohen said the company is planning a first-in-man study of the Algiysl-LVR product sometime this quarter. The company filed an IDE for the product in December. The Plexisyl-AF product has advanced to human clinical trials, and a human clinical study was completed in Europe in May 2008. The company plans to file an IDE for that product sometime this quarter, and a U.S. clinical study is planned for 2H09.

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