By DON LONG
BB&T Executive Editor
And reporting by HOLLAND JOHNSON
BB&T

SAN FRANCISCO — Investor/analyst conferences are nothing, if not schizophrenic — or, more politically correct, bipolar.

Almost without exception, they feature two moods, two modes. One is flashy, optimistic, constantly showcasing an upbeat, uplifting atmosphere — suggesting, even in the darkness, that a bright sunny dawn is just around the corner.

Then there is the less sunny side of things, the less optimistic exchanges in the hallways. And at the JP Morgan Healthcare Conference, those must be soto voice, given the incredibly packed corridors of the Westin St. Francis Hotel, the traditional venue of this event in the most recent years of its 25-year history.

Reinforcing the less sunny mood, especially at this year’s event, was the sponsoring organization’s program book, The MedTech Monitor, a document that looks first at the entire med-tech forest, and less on the individual trees shouting their bright foliage, and then zeroes in on the trees, but some with less bright foliage and not-so-healthy roots.

And then there is the venue itself, the hustle (or hussle?) and bustle of the well-suited and well-coiffed, packed into the Westin, their cell phones, blackberries and i-pods in a frenzy of constant interconnected isolation.

But not too far away, in the nearby streets of San Francisco, a bevy of the ill-clad, ill-of-health homeless at a significant remove from the benefits of the increasingly expensive medical technologies and pharmaceuticals being pumped at the conference. (For that view, see sidebar, p. 6).

As an introduction to this year’s event, JP Morgan analyst Michael Weinstein told Biomedical Business & Technology that the conference’s “sentiment” would be “pretty positive” and have particularly strong attendance — later put at 6,500. But his additional remarks belied an extremely sunny outlook. He foresaw a “slowing in profit growth in the first half of 2007” and a trend toward investor “defensiveness,” the organization’s term for putting most investment dollars into pharmaceuticals and large-cap biotech — a comment and trend not boding well for med-tech companies, especially those in developmental mode.

The money increases

But, first, the good news.

In his remarks opening conference activities, Douglas Braunstein, head of Americas Investment Banking for JP Morgan, predicted an upward trend line for 2007, with equity markets to be “very, very strong.” Overall, his presentation emphasized the vibrancy of healthcare markets in the infancy of this new century with broad sector expenditures of $2 trillion in the U.S., compared to $350 billion in 1983, the year of the conference’s inaugural edition. He also cited figures indicating investment in health doubling from somewhat more than $1 trillion in year 2000 to “almost $2.3 trillion today.”

Braunstein also highlighted the showcase importance of the conference by pointing out that 90% of the presentations at the conference would come from company CEOs.

The organization’s Monitor said that “disruptive stories” in med-tech in the first half of the decade are past, and it predicted “a good year for MedTech stocks, so long as fundamentals hold.”

Its “Sector Performance Expectations” were as follows: “Despite a paucity of new product and new market stories, we expect 2007 sector performance to improve versus 2006, as growth rates accelerate in the first half of the year, while S&P earnings growth slows to what is expected to be mid-single digits. While there are only a handful of companies where we see real upside to 2007-08 estimates, decelerating corporate profit growth should make the sector’s stable of high-single digit top-line growers with low double-digit bottom lines increasingly attractive.”

But this judgment is followed by a rather dampening summary: “Our overview on the sector is neutral, acknowledging that on an absolute basis, it will still be hard, as it was in 2006, to find stocks generating greater than 20[%]-25% annual returns.”

And the companies listed by JP Morgan as most likely “to beat estimates in 2007” (the envelope, please):

• Large Cap: Baxter, Bard, Becton Dickinson.
• Mid Cap: Hologic, Gen-Probe, Varian Medical, Edwards Lifesciences.
• Small Cap: Volcano, Wright Medical.

After this introductory emphasis on a glass about half full, the company presentations naturally attempted to suggest that the glass actually would be filling up rapidly in 2007.

The presentations of the major cardiovascular companies predicted strong improvements in sales.

But this couldn’t be easily contradicted since 2006 had not been all that good, marked as it was by a variety of negative headlines, most obviously the difficulties of Boston Scientific (Natick, Massachusetts) in its dealings with the FDA, its slow and not-yet-completed integration of Guidant and the general declines in the implantable devices markets. Less dramatic but also troubling were the problems of the eye care med-tech firms.

(See sidebar, this page for the Monitor’s “Top 15 stories of 2006).

Orthopedics looks to aging future

The orthopedics industry probably has less to be concerned about than the major cardiovascular powers. Though some of the large ortho firms garnered their share of negative publicity at the end of the last century as the result of defective hip and knee implants, their only current worries — though who knows how large these may turn out to be? — the federal government’s close look at their marketing practices.

But such concerns aren’t too likely to slow their sales and the key demographic facts that drive them: you and me growing older but trying to stay active via the leverage of brittle joints, and younger people doing damage to their joints earlier, needing earlier repair and significantly earlier revisions of those parts.

The interest in these companies, large and small, was indicated by attendee attention, if rooms crowded for their presentations is a barometer.

Zimmer (Warsaw, Indiana) represented the biggies in the sector. Though the company must deal with the problem that Ray Elliott, its president/CEO is departing, he was on hand to promise that the company will launch more than 20 new products in 2007, making for a busy year. On the biologicals side, Elliott said the company expects to release its DeNovo NT (Natural Tissue) product by the end of the year for allografts. And its DeNovo ET (Engineered Tissue) was launched clinical trials for use in treating knee cartilage defects.

Of course, no discussion of Zimmer is complete without a presentation of its current “it” product, the Gender Solutions knee, which the company pitches as the first knee replacement system designed specifically for women.

Elliott said the roll-out for this product was difficult since it came out at the same time as a large batch of other product introductions. He said the company will rectify this with the launch of a massive direct-to-consumer ad campaign valued at between $6 million to $7 million.

While company marketing will get the word out about the product to consumers, he said this is a type of technology that must be sold to the surgeons based on good science. “You have to go and sit down with people and take them through the science of the product,” he said, “otherwise it does appear just like marketing.”

While claiming to enjoy its mid-size status and its ability to be “nimble,” Wright Medical (Arlington, Tennessee) is focused more than ever on its growth strategy, according to Gary Henley, president/CEO. He acknowledged that while Wright had been progressing quite nicely as a public company, it had “a bit of a hiccup along the way,” particularly last year. He said the company “worked through those issues in 2006 and [we] have returned back to the growth profile on the EPS side that we experienced in our early years as a public company.”

Among new products that the company hopes will aid this growth are its extremities products, Charlotte knee system and its Micronail, used to repair wrist fractures.

Henley was best in talking about the company’s Graft Jacket product, used to repair tendons, cartilage and rotator cuff injuries. The Graft Jacket is one of the major contributors to growth in the company’s fledgling biologicals division. It is used to repair tendons, cartilage and rotator cuff injuries. “It’s amazing what doctors have done with that,” Henley said. He noted that the product has affectionately been dubbed “biological duct tape” because of its “incredible remodeling characteristics.”

Smaller also gets large interest

Privately held Spine Wave (Shelton, Connecticut) was an interesting representative of the smaller players in the sector. The developer of technologies for treating spine disorders played to a packed house hanging on the every word of presenter Mark LoGuidice, co-founder and president/CEO.

LoGuidice and John Pafford, both former Sofamor Danek executives, founded Spine Wave in 2001 in conjunction with Protein Polymer Technologies (San Diego) and Windamere Venture Partners, with the purpose of commercializing an injectable polymer for spine surgery called the NuCore injectable nucleus.

LoGuidice said that when people discuss Spine Wave products with him, they generally want to talk about NuCore, an injectable nucleus. NuCore is an in situ curing protein with physical properties specifically designed to mimic those of the natural nucleus. LoGuidice called it “really one of the Holy Grails of spine.”

He said that the exciting thing about this technology is that it can be used in two distinct markets. The first is lumbar discectomy, the most commonly performed spinal procedure in the U.S. And it also can be used to treat early stage degenerative disc disease, targeting an even larger patient population.

While praising competitor Kyphon’s (Sunnyvale, California) success with its kyphoplasty system for the treatment of vertebral body compression fractures, LoGuidice said his company’s StaXx FX system is an improvement for that procedure. “There are a lot of clinicians who feel that there is some room for improvement in terms of a device that can more consistently restore the height of the vertebral body and that’s where our system come into play.”

The device, looking somewhat like a gun, delivers the interlocking wafers used in the procedure, much like a Pez candy dispenser, he said. Basically what the system does is build a stack of the wafers within the vertebral body “generating a tremendous vertical lifting force,” LoGuidice said. The company hopes to initiate a U.S. pivotal clinical trial for the Nucore in the first half of 2008

Thus far, Spine Wave has completed 70 clinical cases, all outside the U.S. and is now using a second generation of the device, which LoGuidice said will be used for the commercial device. The company expects to begin selling the system in Europe by the middle of the year and hopes to have a U.S. marketing clearance by the end of the year.

The company also has developed the StaxX XD expandable device, an implant that provides contolled in situ distraction of the interbody space and allows surgeons to customize the height of the device to match individual anatomy. The XD device has been cleared by the FDA, and Spine Wave expects U.S. launch before the end of the year.

Thus far, Spine Wave has raised two private rounds valued at $51.5 million; the most recent round was a $36.5 million round completed in February 2006. LoGuidice said the company would like to raise one more private round before initiating a possible initial public offering. “We’d like to get something closed before the summer of this year,” he said.

A sector getting more traction?

Diagnostics is a sector with a continuing problem. While the assessment of disease drives much of healthcare, it represents only about 5% of the total healthcare market. But the diagnostics and imaging fields probably represent some of the most active areas of research and development, ranging from a growing panoply of consumer diagnostic systems and point-of-care assays to advanced systems for assessing drug appropriateness in the growing personalized medicine sector.

Representing the smaller-to-larger spectrum of the diagnostics sector at the conference were diaDexus (South San Francisco), still an adolescent in the field, and the more mature Hologic (Bedford, Massachusetts)

diaDexus was spun out of SmithKline Beecham (now GlaxoSmithKline; London) in 1997 as part of a joint venture with Incyte Genomics (Palo Alto, California), with the view to be focused on diagnostics “where the scale and margin would be akin to therapeutics,” said Patrick Plewman, president/CEO. Plewman emphasized the potential of his company’s flagship PLAC test, characterizing it as a potential blockbuster “when you put it in context of the some 130 million lipid panels that are performed every year in the United States alone.”

The PLAC test measures an enzyme in the blood called lipoprotein-associated phospholipase A2 (Lp-PLA2), and diaDexus says that “large population studies” demonstrate that elevated Lp-PLA2 is associated with an increased risk of ischemic stroke. The test offers another advantage, Plewman noted, in that it can be run on the installed clinical base of instruments in all of the clinical reference laboratories around the world, “and today we have it available through these various leading national reference laboratories including LabCorp [Burlington, North Carolina] and Quest [Teterboro, New Jersey].”

The PLAC test was approved in 2003 by the FDA to be used as an aid in predicting an individual’s risk for coronary heart disease and ischemic stroke associated with atheroslerosis.

Plewman said the aim of tests like PLAC are to identify patients who have an intermediate risk of stroke. “Doctors know what to do with the high-risk patients — they’re treating those patients aggressively already.” But for low-risk patients, he said that they are often told to “come back and see us in five years,” when it may be too late. And he noted that nearly 40% of adult Americans fall into this intermediate risk bucket.

“We know that they would benefit from a statin,” he said, but not everyone is going to get those drugs. “What we need is better tools to help identify who is within this group who should be elevated to a higher risk and treated more aggressively.”

A major platform for increased diaDexus sales has been the recent granting of a CPT code from Medicare for the test at $47 vs. a year ago when the government was only reimbursing the test at $18. That increase has been coupled with the new version of the test that has moved from manual to fully automated.

The company is not shy about its goals. As it rolls out its automated test, it expects to increase sales for the PLAC test from 200,000 in 2006 to 600,000 this year, and aims to get the test into 5 million to 6 million of all lipid panel tests in the U.S. by 2010, for revenues of $150 million vs. $17 million last year.

While the PLAC test is its major play, the company also is developing cancer diagnostics, the most advanced currently being evaluated for the early detection of ovarian cancer. It hopes for approval by year-end. It also has initiated a nucleic acid diagnostics program focused on developing tests to aid in the prognosis and staging of breast, colorectal and other cancers.

Hologic moving forward via acquisitions

Hologic, a diagnostics and medical imaging company focused on women’s healthcare, reported on its plans to take newly acquired technology to market. The company was highly acquisitive in 2006, with purchases of R2 Technology (Sunnyvale, California), a major player in the field of computer-aided detection (CAD), for $220 million; Suros Surgical Systems (Indianapolis), a developer of devices used for minimally invasive biopsy and tissue excision, for $240 million; and AEG Elektrofotografie (Warstein, Germany), which manufactures photoconductor materials — and Hologic’s sole supplier of amorphous selenium photoconductor coatings used in its Selenia full-field digital mammography detectors — for $26.56 million.

Jack Cumming, CEO and chairman, said that the most exciting short-term development for Hologic is hoped-for FDA approval of its Selinia tomosynthesis 3-D full-field digital mammography system sometime this year, probably in November or December.

Tomosynthesis obtains digital data that can be manipulated and displayed in a variety of ways, including paging through or cine display of thin sections or slices of breast tissue, helping to eliminate the problem of overlying tissue that might be mistaken for lesions or that may hide small cancers. Eventually, Cumming said that 3-D tomosynthesis will be standard-of-care for digital mammography — “it has that kind of promise.” He said this will mean that women “will not be sent for [unnecessary] biopsies,” or, conversely, “they will be sent because the doctor can be more sure that the area is highly suspicious.”

The company also recently unveiled its Discovery bone densitometry system that is able to perform 3D analysis. “What that system allows us to do is look at the integrity of the hip, and this has not been done before,” said Cumming. He added, “you’ll be able to tell if this bone is likely to fracture. Fracture risk is going to be the most important determinant going forward in bone densitometry. This, like tomosynthesis [in mammography imaging], we believe will end up revolutionizing osteoporosis over the next five to ten years.”

The Suros buy has excited the company, especially because “disposables are 70% of the revenue of Suros and the growth rate is over 50%.” The R2 buy, said Cumming was an essential move for the company, since “CAD will be an important element for tomosynthesis.”

Founded in 1986, Hologic can banner a string of 11 consecutive quarters of improved profits and top-line growth, noted Cumming. “We are clearly the market share leader in the United States,” he said, the most lucrative market in the world for the company’s products, with the highest margins from selling these imaging systems. But he said that Hologic will be more aggressive in penetrating international markets over the next three to five years.

Wild cards, challenges and estimates not met

These presentations typified most others at this and many similar conferences, the highlighting of opportune flagship products and brightly-painted opportunities.

But, as noted, the JP Monitor presented a picture very much on the grey side, noting the possibility of a strong year for the sector, but layering the potential pluses with a rather large frequency of “ifs” and qualifiers.

It expressed some of these qualifiers in terms of three “wild cards” in 2007: 1) “the health of the ICD and Orthopedic implant markets, 2) the risks associated with concerns about “U.S. reimbursement” and 3) again as to government behavior, “the Fed’s next move on rates. If the Fed ends up cutting rates in 2007, history suggests that it could serve to boost sector performance. If, however, the Fed ends up resuming the pattern of rate hikes that ran from July 2004 up until last August, it will be harder for the sector to outperform.”

Overall, the publication projected that, based on a general 4Q downturn in 2006, 2007 will be a relatively slow starter based on “rising unit labor costs and a more muted environment for oil and commodity prices.” But it sees improvement approaching the first half of the year.

Again, all of this depends on what it called “challenges”: an outlook “for none of the major markets is what we would call robust”; a sector growth rate of 8%, “which isn’t bad, but still well below ‘up cycle’ averages; and “[b]ig new product and new market stories . . . few and far between . . . .”

For the crucial, increasingly debated and extremely important drug-eluting stent (DES) sector, the news from JP Morgan was not good. It noted a decline in DES utilization to 75% at the end of 2006 because of growing concerns about the technology, and said: “As a result, we expect the DES market to decline 6% globally in 2007, including 9% in the U.S. The broader Interventional Cardiology market is expected to decline 1% in 2007 and then be flat to up slightly in 2008-2009.”

Opposite to the companies expected to beat estimates in 2007, it listed companies with “Downside Risk to Street Estimates”:

• Large Cap: Boston Scientific, St. Jude Medical.
• Mid Cap: Cooper Companies, Bausch & Lomb, Beckman Coulter, Dade Behring.
• Small Cap: SonoSite, FoxHollow, NxStage Medical.

More qualifications: e-health needs industry

Perhaps the most heavily qualified presentation of all came from David Brailer, MD, the first national information technology coordinator in 2004, until leaving the post to become vice chairman of the American Health Information Community, a federally chartered commission.

One can’t help speculating that Brailer left that post as the result of an admixture of frustration with 1) bureaucratic inertia (about 50%), and 2) the size of the problem (at least 75%!). His experience in trying to push forward electronic health records (EHRs) probably gave him the emotional foundation for the following statement: “I personally don’t look for the federal government to lead [healthcare change], at least in the short-term. No one there has a mandate for change.”

In a keynote luncheon address, Brailer mixed bad news with a challenge that the med-tech industry could, with enough spunk, turn into a big profit opportunity. But probably too many people are making too much money in the current fragmented EHR sector to provide any incentive for changing the system. Exactly how many people would be out of work if the government actually developed a national EHR or put in place a national healthcare insurance plan tied to that system?

The challenge that Brailer issued was to the private healthcare sector, not the public venue, telling attendees that the government isn’t going to push for essential change and so they better do it. “I want to see the private sector flourish,” he said, “and really take its appropriate role in helping organize the healthcare industry and really bring it better value in the future.

“The more official Washington neglects the issues in healthcare, the more openings it gives to the private market to evolve, to innovate, to experiment. I call it policy-making by neglect,” he said, and “a very common form of policy-making” in Washington.

Brailer, who has also been involved on the business side of healthcare via his founding and involvement in CareScience (Philadelphia), pinpointed three fundamental challenges to U.S. healthcare.

• The first, he said, is the “unabated cost and affordability crisis.” While he noted that inflation in healthcare spending is at its lowest levels since 1999, “it’s still 2.4 times the consumer price index.”

And he argued that this inflation is different than in the past, when price increases were the dominant factor. “Now it’s dominated by volume increases,” he said. Thus, he argued that 80% of the price increases over the past three years have been driven by more procedures done on the same group of people, with “huge implications for policy and what it means to the industry.”

• He said the second challenge is a “quality crisis.” Though “we’re now more than a decade into knowing that 100,000 Americans die from a medical error every year,” he charged that basic safety issues still aren’t being addressed.

• Thirdly, he said that a patient in this country can’t find out which hospital has the best safety record, “because we can’t compare quality, or certainly prices, as we shop around for better healthcare. It’s a tremendous challenge and it’s one that still gives us consternation . . . .”

Patients: radical and pacifist

Despite these negatives, he cited one encouraging healthcare trend: the rise of the “radical consumer” —that is, “someone who becomes an expert in their disease, who becomes a self-advocate who manages their illness and holds doctors to account, but they’re still a small share of the total patient population.” And he suggested that this healthcare radical is the exception proving an unfortunate rule.

U.S. healthcare, he said, allows American citizens to avoid making the tough healthcare decisions. “We’ve protected them from the dynamics, the costs and the operations of healthcare, and what we’ve gotten are pacifist patients, not activist consumers.”

Similarly, Brailer noted recent moves by the states to take the helm of healthcare change. “We’ve seen Massachusetts announce its access to care, its universal insurance plan. We’ve seen California yesterday one-up that with a broader plan with a bigger reach. A strongly worded financing mechanism that involved not taxes but fees imposed on business and providers.”

Brailer argued that these state initiatives will have to be carried out in an environment of budget neutrality, which means “in most states, not raising taxes or fees to pay for budgetary expenditures.”

The one source for providing the states the funding to support these initiatives, he said, is the “33% of healthcare spending that is caught up in waste, inefficiency, errors and the treatment of errors.” And with heightened consumer interest in healthcare delivery, Brailer said he expects that the level of innovation in healthcare organization, delivery and financing “is going to increase dramatically.”

Such innovations, he said, are not simply a new molecule or device — “they’re innovations that can extract more value in care delivery by making it a more cost-efficient, higher in quality and more responsive to what our consumers want as opposed to what we say they want.”