CDU National Editor

NEW YORK — Many of the largest cardiovascular device firms missed the late-November annual Piper Jaffray Health Care conference — no Medtronic (Minneapolis), no Johnson & Johnson (J&J; New Brunswick, New Jersey), no St. Jude Medical (St. Paul, Minnesota), not even an Abbott (Abbott Park, Illinois), a relative newcomer to the cardio space. But medium-sized and smaller companies more than made up for the big guys' absence from the lineup.

With only Boston Scientific (Natick, Massachusetts) carrying the banner for the major players in the sector, there was ample room for smaller and emerging firms to wave the flag and strut their stuff.

But before delving into some of the insights the CEOs and other officers of the smaller cardio companies delivered at the venerable Pierre Hotel, just across from the southeastern tip of Central Park, let's tune in to Boston Sci's chief operating officer, Paul LaViolette, as he goes about correcting any "misimpressions" those selfsame investors might have about his company.

From a review of the agenda for the 19th annual Piper Jaffray gathering, LaViolette appeared to be a last man standing from among the companies that perch atop the large-cap cardiovascular/interventional medicine space and usually fill prominent spots on the Piper Jaffray agenda. Their absence left Boston Sci to wave the flag for the sector.

It is a tattered flag, reflecting the shots the sector has taken over the past year to year-and-a-half, mostly from a significant falloff in the drug-eluting stent (DES) business — the result of clinicians' concerns over the performance of what was once clearly the single biggest commercial success story in recent med-tech history.

Boston Sci has suffered the largest share of the battering, but what LaViolette was waving wasn't a white flag of surrender. In fact, he could have filled in admirably for any of the military leaders who have led a troop surge. All that was missing was a trumpet sounding the stirring notes followed, in the movies, by hordes of voices shouting "Charge!"

"What I'm describing," he said, "is a new phase for the company, one focused first and foremost on increasing shareholder value ahead of gross margin and revenue expansion in the future."

Simplifying, aligning

LaViolette said that the company "has made a number of changes and continues to implement those changes that simplify our operating structure and model, that align operating expenses much more closely with our current revenue stream, and then ultimately create a new base for earnings growth ahead of planned expansion."

As for DES technology, he billed it as "our largest single market, and we believe there are basic indications of a recovery in that market."

One important change in the strategy followed by this company — formerly careening down the M&A highway to add technologies intended to fuel explosive expansion — is a focus "with more intensity on profitable sales growth," LaViolette said. Couple that with "a reversion of our engineering focus back onto value improvement" and you have what appears to be an almost entirely new company.

No more willy-nilly acquisitions, some appearing to outsiders to be deals made for the sake of doing deals rather than bringing real or perceived future value. No more standing before groups of investors such as those he was addressing that morning and proclaiming Boston Sci's pre-eminence in stretching its tentacles into all manner of businesses, some of them curious new directions. And perhaps most importantly, no more gargantuan deals such as Boston Sci's $2 billion acquisition of Guidant in 2006 that, combined with DES market falloff, contributed to the well-publicized humbling of a firm that once basked in the "best bets" choices of numerous investment houses.

"We have been executing our restructuring plan," LaViolette said. "We have made these commitments and we are making tangible, measurable progress toward those commitments."

He noted that the previously announced sale of the company's cardiac/vascular surgery business unit to the Getinge Group for $750 million in cash will close in 1Q08, and that Boston Sci is "seeking buyers" for its venous access/fluid management business. (On Dec. 13, Boston Scientific and Avista Capital Partners, a New York-headquartered private equity firm, reported a definitive agreement for Avista to acquire Boston Sci's Fluid Management and Venous Access businesses for $425 million in cash. If all goes well, the transaction will close in 1Q08.)

"We're very focused on the execution of our internal restructuring," LaViolette said, adding that those restructuring moves will result in a total headcount some 4,500 persons lower than it is today. As a result, he said, "while we expect 3% to 5% revenue growth, [we see] 18% to 20% in EPS growth."

DES: signs of recovery

Turning to DES, LaViolette said this sector "is showing signs of health and [market] penetration recovery." Even with the overall market decline that has ridden a well-publicized wave of clinician concerns over efficacy, he said that Boston Sci's market shares remain strong at 56% in the U.S., 41% in Europe, 62% in Japan. "Our market share has been powerfully stable," he said.

Worldwide, he put DES market shares at 46% for his company, 39% for J&J, 8% for Medtronic, 5% for Abbott and 2% for all others. "Despite the intensity of competition," he said, "we have ... grown our market share in the past year."

After the unimpeded DES growth was stalled by clinical data and the reports of increased thrombosis and death, LaViolette said there now is "compelling medical rationalization behind DES utilization. It's sound, it's strong, and in some ways, it's stronger than ever. If you look at what caused the disruption in DES utilization, those early reads on mortality concerns were falsely based.

"The overall story of DES superiority over bare-metal stents on mortality is likely to drive a recovery" in the market, he said, though acknowledging that this new data "has not yet reached the market." He predicted that it will, with DES utilization coming back stronger than ever.

"There are signs of PCI [percutanous coronary intervention] volume recovery — a positive trend," he said. "We expect to see leading indicators [point the way toward] potential volume recovery in PCI."

Media now 'positive'

LaViiolette added that the media — which he said played a significant role in heightening patients' and clinicians' concerns about DES mortality rates — "has turned to the positive," accompanying the assertion with a slide citing a number of recent stories from major news sources reporting on new, supportive clinical data.

"Our ultimate goal," LaViolette said, "is to have a healthy DES market."

He said the company's Liberte DES is "under-appreciated for its role as a substantial upgrade in the DES space."

Citing Boston Sci's Promus stent as "identical to Xience [Abbott's newly approved DES]," LaViolette said the company "feel[s] we have the best DES lineup in the market." The addition of Promus to the existing Taxus lineup, he said, "gives us a dual-drug strategy" in the DES space - the "olimus" of the Promus model coupled with the paclitaxel of the Taxus line - "on "two highly competitive platforms.".

And, he added, "We have third-generation stents already developed." As for the pending entrance of other big competitors such as Medtronic into the DES space, LaViolette said: "We have the best lineup. No other company can match the balance we have in DES selection."

As for another troubled business, cardiac rhythm management, he acknowledged that CRM was "another market in some duress in recent years," but said: "Our business is to focus on quality." Citing "a total cultural change" in the company's CRM team, LaViolette said it is "much more disciplined in driving quality into our platforms. We have invested with conviction in quality improvements. In CRM markets, the role of quality will be the difference."

After substantial turnover in the CRM sales force over the past year, LaViolette said 4Q07 "will [mark] a sign of market resilience for CRM." And he cited the Latitude patient management system, saying the company "is seeing traction in that space," with some 70,000 patients currently under management.

"We believe 2008 will be among the most active years for our CRM market. Product launches planned in the first half of 2008 will play an extremely important revitalization role for our CRM business." And LaViiolette said the company's "steady progress in quality improvements ... ultimately is a risk reduction and ultimately will turn into a competitive advantage for us."

Zoll a defib leader, eyeing new directions

Zoll Medical (Chelmsford, Massachusetts) isn't as big as Boston Sci, but it's no small-fry. And given the way his company has operated while its fellow Bay State company has endured its litany of problems, Zoll CEO Richard Packer certainly had a right to look, well, almost sanguine during his time at the Piper podium.

With revenues of about $300 million in FY07, the company is the market leader in the professional defibrillation category and, as Packer told his audience, is developing an intriguing variety of products that may very well change the way we — investors, the media, others — view the company. "A lot of exciting things are happening at Zoll these days," he said. "We have a very large and growing core business which we are well-known for in the world of defibrillation."And, even as it has continued to lead what the company refers to as the "professional" defibrillation market (primarily in-hospital and EMS use), "over the last few years we have added a number of different products that are moving us beyond defibrillation," Packer said.

Zoll puts defibrillation to combat sudden cardiac death (SCA) as a $1.2 billion market. And in defending its market leadership in that sector, the company is rolling out "three major new products," Packer said. "In the world of professional defibrillation, new products come along every seven, eight or nine years, so it's very exciting to have three new products [in that segment] at about the same time."

One is the R Series: Code Ready defibrillator for in-hospital use, another the E Series, Zoll's newest entry for the EMS space, and the third is the AED Pro, a "rugged" automated external defibrillator for the public-access market. "We think these three great new products will allow us to take market share" in their respective segments, Packer said.

In the U.S. hospital market, "we have grown much faster than the 5% the market has grown," Packer said. And in what he termed "the high-end EMS market," the company believes it is gaining on leader Medtronic Physio-Control, which he noted has suffered in 2007 from a variety of difficulties concerning product quality and control (which has delayed its proposed spin-off by Medtronic).

While Zoll is the leader in the hospital segment and a strong second in EMS, its position in the public-access AED market is less prominent. In fact, among the four leading players — Philips Medical Systems, Cardiac Science, Physio-Control and Zoll — "We are the fourth player," Packer acknowledged.

But, he said, "we also have the most unique product," the new, ruggedized AED Pro, which sells for some $3,000 — about double the usual public-access AED price — and is aimed at the ambulance market as well as public-access sites. "This AED offers more than just the shock," Packer said. "It also offers CPR assistance, which is critical."

The company's AED strategy "is to support our professional business," he said, so its products for the public-access segment will be clearly differentiated from the offerings from its competitors.

Beyond the traditional defibrillation business, Zoll is developing new products that Packer said are likely to change the face of the company. He forecast that whereas virtually all of the roughly $300 million in company revenues in 2007 came from defibrillation products, Zoll may grow to say, $650 million in revenues by 2012, with much of it coming from businesses well apart from its traditional base.

Automating CPR

Of those new products, "one of the most exciting" is AutoPulse, which is aimed at automating CPR. "An automated device can move a lot more blood than manual methods, and that's important." Packer called the problem that the AutoPulse addresses "a huge unmet clinical need, because manual CPR is inadequate."

Another new product is the LifeVest, a "wearable defibrillator" that is available to patients seen as being in danger of cardiac arrest. That product is built on a rental model, with patients paying a monthly fee —fully reimbursable, Packer said — for as long as the protection is deemed necessary, after which the LifeVest is returned, refurbished then put back out for rental.

So far about 850 centers in the U.S. have purchased some 1,600 of the vests. "We're just getting started with this product." So far, it represents only about 5% of our revenues, but it's one of the most exciting things that we have going."

Packer also cited the recent acquisition of Radiant Medical (Reedwood City, California), "a company that we just tucked into Zoll."

During the Zoll conference call on 4Q07 financial results, Packer referred to the company making "a modest investment"in therapeutic hypothermia by purchasing the assets of Radiant, which he said "had delivered the best catheter-based hypothermia product."

He said that in that deal, Zoll had obtained "designs, tooling, some inventory and an expensive IP portfolio in the hypothermia space."

The remains of Radiant have been tucked into Zoll's Circulation Division in Sunnyvale, California, and Packer said the company plans to spend "an incremental $2 million or so" in fiscal 2008, "perfecting the catheter design and verifying the console designs, so that we can start commercial beta sites in 2009."

In that call, he said the area of hypothermia is "very attractive and fits directly into our resuscitation strategy, as induced hypothermia is quickly becoming the standard treatment for resuscitated patients around the world."

Volcano: erupting in endovascular imaging

Among the interesting second- and third-tier cardio firms presenting at the Piper conference, Volcano (Rancho Cordova, California) stood out both for the interest it drew and for the rapidity of its growth in platform imaging and functional measurement technologies for enhancing endovascular procedures. CEO Scott Huennekens cited the firm's "significant revenues," noting that they totaled $103 million last year and $90.6 million in the first three quarters of 2007. "We've had six straight quarters exceeding the Street's consensus projections."

That performance has come from growing the imaging side of diagnosing and treating heart disease. "We have taken share from Boston Scientific," Huennekens said, adding that the company expects to continue such market share gains vs. Boston and Radius

Volcano's products are aimed at two primary markets — intra-cardiac echo and vulnerable plaque. "We provide imaging from inside the artery," he said, and that the "big movement that has occurred in intravascular ultrasound is the integration" of equipment in catheterization labs.

With some 6,000 cath labs worldwide, that movement to integrate all systems within those labs adds up to a big potential market. "This is the first really big year for moving to integrated labs," he said. "We estimate that by the end of the year, about 400 to 500 of those 6,000 cath labs will feature integrated systems."

Volcano's push in the market involves partnerships with not all, but "a lot of the major [imaging system] players, such as GE Healthcare, Philips and Siemens."

Competitor Boston Sci, he said flatly, "doesn't have these relationships." Going up against a competitor the size of Boston Scientific doesn't exactly have Volcano quivering in its boots. Huennekens said that from the company's market data, "we're winning 70% of new placements."

He said that part of the company's competitive advantage is rooted into its strong product-development structure. "We have 80 engineers," he said. "They have, from what we know, 25 to 30." And Volcano is continuing to focus on its distribution channels. "We have 95-plus direct sales and distribution employees in the U.S., eight in Japan and 12 in the rest of the world," Huennekens said.

The detection of vulnerable plaque is the market upon which the company really is hanging its hat. "Vulnerable plaque arguably is the largest unmet clinical need in cardiology," Huennekens said. "Too many people are having heart attacks, and there's no way of finding the plaque that's causing them."

He said there are 2 million-plus heart attacks a year, 45% of them recurrent attacks. "We're very focused on this space," he said, citing the 750-patient PROSPECT trial being conducted in conjunction with Abbott Vascular (Redwood Vity, California) on technology the latter firm acquired as part of Boston Scientific's 2006 acquisition of Guidant.

He called the market opportunity in vulnerable plaque fairly easy to quantify: "There are 6 million invasive cardiovascular procedures a year, 4 million of them diagnostic, as in angiograms, and 2 million PCIs with drug-eluting stents." That adds up to a $3-plus billion potential market, Huennekens said.

Combining developing markets with its existing IVUS products -- which follow the razor/razor blade business model that sees upwards of 75% of revenues coming from disposable catheters and the like -- has Volcano on a revenue growth path of 20% a year, he said.

"We have a unique competitive structure here," Huennekens said. His comments on Boston Scientific aside, "we're not highly competitive with other device companies; we're highly valuable and complementary to all of them, so we help value the device company therapies and non-invasive imaging companies."

That position has Volcano "on a clear path to profitability by the second half of 2008," he said.

Aussie firm making a splash with LVAD

Ventracor (Chatswood, Australia) is another cardiovascular company that is gaining traction after a lengthy period of development for its VentrAssist left ventricular assist device (LVAD). The implantable blood pump is designed for use as a bridge to transplant or a destination alternative to heart transplantation for heart failure patients. It has a single moving part — a hydrodynamically suspended impellor.

CEO Peter Crosby said end-stage heart failure is "a huge opportunity. There are 50,000 new HF each year in the U.S., with one-year mortality around 50%." He said the only solution today is heart transplant, but only about 2,000 such procedures are done annually in the U.S.

Noting that competitor Thoratec (Pleasanton, California) was to go before the FDA circulatory systems advisory panel just days later, Crosby said panel approval of that company's HeartMate II LVAD was anticipated, adding: "We would expect to benefit" from its approval by the FDA

He characterized Ventracor as "a fast follower gaining ground on a market leader" and that it is "the only third-generation device in U.S. clinicals." He said there are six companies doing battle in the space, but that Ventracor has "more clinical experience than all the others combined."

He said patients in the VentrAssist trials "have shown excellent long-term survival worldwide." The survival numbers post-implant: 83% at six months, 76% at one year.

Of the company's U.S. regulatory pathway, he said patients are being recruited for the bride-to-transplant (BTT) trial, scheduled to total about 140 patients at up to 40 centers. Meanwhile, the destination therapy (DT) trial has two models - one featuring 2:1 randomization against medical management, the other a 2:1 randomization between receiving a VentrAssist LVAD or a currently approved DT device. The first module is scheduled for 180 patients; the second, 45 patients. Crosby said participating physicians have told the company that enrollment in the trials will be "much faster than Thoratec's was."

VentrAssist already is CE mark-cleared in Europe, having received approval in December 2006. "About 400 LVADs will be implanted in Europe in total in 2007," Crosby said. Of these, 23 FY07 implants were VentrAssist devices, and the company anticipates 60 to 90 implants in FY08. He said his company "is taking share from competitors and is growing the market overall for LVADs. We have reimbursement in place in the Scandinavian countries, Germany and the UK, and are working on it in France, the Netherlands and Belgium."

He noted that the company has 13 centers cleared and trained for VentrAssist procedures in Europe, along with a logistics center in Heesch, the Netherlands.

Looking to the future, "our product pipeline is focused on improved external components," Crosby said, including smaller, lighter patient-worn controllers with advanced battery technology, along with software that is upgradable for advanced control algorithms. "The long-term goal is a fully implantable system with rechargeable batteries and no percutaneous lead, for a better lifestyle and less infection risk."

Ventracor expects that a fully implantable system will lead to "more rapid acceptance of LVAD therapy."

In discussing the company's outlook, he said Ventracor "anticipates a solid news flow in the next two years." That will be driven in turn by what he characterized as "a huge potential market" for LVADs. "We see ourselves in a great competitive situation, with the only third-generation pump and only centrifugal pump in the U.S."

As merger plays out, ev3 sees gains

CEO Jim Corbett says his company, ev3 (Plymouth, Minnesota), is "an endovascular-focused business" with two business units: peripheral vascular and neurovascular. And its already significant presence will be further enhanced by the early-October close of a $780 million merger with FoxHollow Technologies (Redwood City, California), a developer of minimally invasive devices for the removal of plaque and thrombus.

Corbett said the integration of the two companies during 4Q07 "is providing the platform for 2008 execution" of the combined firms' growth plan and that integration of the firms "is off to a great start." Noting that "we want to capture cost synergies of about $40 million," he said some $35 million of that has indeed been achieved — or will be as cost savings kick in from paring a combined sales force of 328 to 212.

Corbett didn't focus on other device companies in the peripheral artery disease (PAD) space, saying instead that "the biggest competitor we have is under-treatment." In the PAD segment, he said FoxHollow brought about 500 accounts, representing some 80% of combined revenues from that line of business, while ev3 had 360 accounts. That 140-account overlap is, he said, "a $134 million opportunity."

On the neurovascular side, Corbett said ev3 has become the No. 2 franchise in terms of revenues, "without having as competitive a coil as we would like." He added that the company is "very excited" about its new Axium 30 coil with its Linear Release System, and added that ev3's partnership with the Novation (Irving, Texas) group purchasing organization "will drive our share growth in this sector."

Corbett said that "greater than 70% of the neurovascular device purchases in the U.S. are Novation accounts," which obviously will provide a solid sales growth path for its neurovascular coil product line.

ATS 'not the same old valve company'

Because the Piper Jaffray analyst who had been covering ATS Medical (Minneapolis) had left the firm recently, senior med-tech analyst Thom Gunderson introduced the firm at the meeting, saying, "It ain't [just] the old valve company anymore."

CEO Michael Dale expanded on that view, citing not only developments in the company's traditional mechanical heart valve business, but also its burgeoning efforts in atrial fibrillation (AF). "ATS Medical is focused on cardiac surgery," Dale said, its chosen niche, as in many other device categories, "driven by the aging of the population." Growth of structural heart disease in that segment of the populace, he said, "means expansion for ATS in dramatic fashion over the next 10 to 25 years." Noting the company's performance in its traditional heart-valve business and what he termed "the emerging clinical pathway of AF," Dale said that the company enters each segment "with genuinely innovative technologies."

With the "strong demographic trends" in its target population, he said the ATS solutions "are in demand." Those solutions include the ATS Open Pivot mechanical heart valve, the product upon which the company was built. The Open Pivot represents about 65% of the company's current revenues, providing a base upon which Dale said ATS can branch out into new business lines such as AF, "the fastest-growing market in cardiac surgery."

ATS, he said, will launch six new products across its heart-valve and AF areas between now and year-end 2008, which underlined Gunderson's "not the same old valve company anymore" assessment.