While vagus nerve stimulation (VNS) developer Cyberonics (Houston) has had to deal with multiple issues concerning its device systems and regulatory strategies, it was accounting problems rather than technology issues that served to knock out its top-level executives in late November. The review by the company's audit committee showed flaws in its reporting of stock option grants between 1999 and 2003, the company said. The errors mean Cyberonics must restate results for the fiscal years 2000 through 2005.

As a result of the investigation of these problems, Robert "Skip" Cummins, company president/CEO, and Pamela Westbrook, company CFO, resigned. Cummins' resignation serves to muffle one of the most vociferous and combative voices in the med-tech industry. He has been an aggressive promoter of the company's VNS technology, in particular for the treatment of treatment-resistant depression (TRD), and was not afraid to take on critics of that application at any level — from the national media, to analysts to FDA regulators.

Perhaps one of the most interesting chapters in Cummins' tenure as head of the company was his calling out a device analyst who had managed to infiltrate one of the company's stockholders meetings—apparently using a grad-student "mole." While Cummins billed that strategy as an invasion of the company's privacy, other analysts praised the move for dedication to getting "ground-zero" information out of Cyberonics.

Cummins also headed the charge in the company's lengthy campaign to win FDA approval for the TRD application, a campaign that served to overturn a panel recommendation against that approval and well-publicized criticism of the company's trial data indicating that VNS for TRD was no better than placebo. But Cummins apparently was able to override these criticisms often via rhetorical fireworks and frequent claims that VNS was the only option available for the severely depressed who had run out of other possibilities for treatment.

Even after winning FDA approval of VNS for the broad application to treat TRD, the company has struggled to win private and CMS reimbursement of the system, though it is currently reimbursed for use in the treatment of epilepsy. The TRD application was finally approved by the FDA in July 2005 after a nearly seven-year struggle.

But at least one critic — Public Citizen — had launched a campaign to bash the company's strategy as promoting a technology for a disease application that it basically created. That criticism is certainly valid since any disease can be labeled "treatment-resistant" if there is no cure for its worst cases.

The outspoken Cummins did not leave the company empty-handed; he will receive $1.7 million cash as part of a severance package that includes 75,000 shares of unregistered stock, the company disclosed in a regulatory filing.

Reese Terry Jr., the company's co-founder, former CEO and a current director, has been named interim CEO. In addition, George Parker III has been named interim COO, and John Riccardi has been named interim CFO. The company's board said it has already initiated a search for a permanent CEO and CFO with the assistance of an executive search firm.

Westbrook, who was also vice president of finance and administration, will receive a payment of $300,000 in cash, along with the acceleration and vesting of any stock options and restricted stock that would have vested within the next 12 months if she had remained employed by the company. Westbrook has been retained by the company as a consultant and will advise it with respect to financial matters, including the preparation and filing of the company's annual report for the period ending April 28, and quarterly reports for the quarters ending July 28 and Sept. 29. The company will pay Westbrook $1,200 per day for those services.

Besides the external pressures on the company, the criticisms were more recently from internal sources. A group of Cyberonics shareholders since September had been clamoring for changes on the company's board, including the nomination of three new directors, and had cited a "series of bad decisions" by the company's management and board.

The company also received several delisting notices from the Nasdaq, citing non-compliance with standards due to a failure to file financial results for the quarter ended July 28. The delay in filing reports with the Securities and Exchange Commission was the result of an investigation by the commission into the company's stock option practices, primarily related to Cummins' options. Also, the U.S. Attorney's Office for the Southern District of New York has subpoenaed the company.

Kyphon builds arsenal with big purchase

In a bid to dramatically expand its already potent minimally invasive spine product arsenal — and marking one of the biggest deals of the year —Kyphon (Sunnyvale, California) last month said it would acquire privately held St. Francis Medical Technologies (Alameda, California) in a transaction valued at $525 million in upfront cash payable upon closing, plus additional revenue-based contingent payments of up to $200 million, payable in either cash or a cash/stock combination.

St. Francis is the maker of the X Stop Interspinous Process Decompression (IPD) system, the first FDA-approved — in November 2005 — interspinous process device for treating lumbar spinal stenosis. The X Stop has been available in Europe and Japan since 2001. More than 15,000 X Stop devices have been sold worldwide, the companies said.

Kyphon noted that the transaction broadens its focus in minimally invasive surgery (MIS) for the spine by adding the X Stop platform to its existing KyphX balloon kyphoplasty technologies for repairing vertebral compression fractures and its recently launched Functional Anaesthetic Discography procedure for diagnosing the source of low back pain.

"This acquisition directly supports our stated strategy of bringing minimally invasive spine therapies to our markets and adds an innovative new product platform to benefit the large number of patients suffering from lumbar spinal stenosis," said Richard Mott, president/CEO of Kyphon during a conference call. "It gives us a new platform for future revenue and earnings growth in one of the fastest-growing segments of the spine industry."

Mott noted that the X Stop "fills a gap in the continuum of care," between conservative therapies, such as analgesics and injections, and invasive surgery with a laminectomy. Laminectomy, a lumbar decompression surgery, is a more invasive procedure to widen the spinal canal and relieve pressure on the spinal cord or nerve. It involves removing part of the spine to relieve the pain associated with the spinal stenosis.

The less-invasive X Stop procedure can be performed under local anesthesia, taking less than an hour. Since the device is not fixed to any bony structures, the procedure does not result in fusion and is completely reversible, thus allowing for future therapeutic alternatives, if needed.

The company said its initial target market is the 200,000 patients who undergo a laminectomy each year, translating to a $1 billion market opportunity.

The company anticipates closing of the deal in 1Q07. Upon closing, Kyphon said it expects to incur an estimated one-time, pre-tax charge of about $35 million to $50 million for in-process R&D.

GMD to provide device 'generics'

At a time when rising healthcare costs make headlines almost daily, a new medical device company has set out to respond to the pending Medicare crisis the same way the pharmaceuticals industry has: by offering generics. Generic Medical Devices (GMD; Gig Harbor, Washington) last month touted itself as the first to offer what it calls "commonly used and efficacious surgical products at generic prices."

Richard Kuntz, president/CEO of GMD, told Biomedical Business & Technology that he got the idea while traveling and found a newspaper article slipped under his hotel room door about Medicare predicting bankruptcy by 2019, seven years earlier than previously predicted. "I didn't understand why the medical device industry had not followed in the pharmaceutical industry's path of when a product patent expires offering a generic alternative," Kuntz said. "It was sort of a 'duh' — as my kids say — and a 'Why not?'"

GMD says it will leverage expired patents on standard-of-care surgical devices and bring generic alternatives to market in the $80 billion-a-year industry. The devices chosen will all have existing 510(k) classification approvals, reimbursement by Medicare and third-party payors, established product safety, efficacy and outcomes, and a trained surgeon/physician base, the company said. As with pharmaceuticals, generic medical devices would be developed based on the specifications for existing FDA-approved products that are becoming a commodity in the marketplace.

GMD reported that it has filed three 510(k) applications and expects its first products to be available to hospitals, clinics and physician-owned surgical centers worldwide in 2007. Kuntz declined to unveil the identity of its first three products but said those chosen will save the healthcare system, Medicare and third party payers, more than $360 million a year in the U.S. alone. He did say that the company's initial product focus is in the pelvic healthcare area.

"The pie is only so big — we can't keep taking pieces," Kuntz said. "But we can keep the pie in a constant state by reducing the cost of the devices that have come off patent."

Kuntz said the concept of GMD has been "very well-received," both in the U.S. and internationally. He said the company plans to open an office in Europe after the first of the year. The company has received Series A funding, with Kuntz saying that at least half has come from surgeons and physicians "which we didn't expect or foresee," Kuntz said.

End-of-year moves for several companies

December saw a variety of companies taking actions to pull back, refine or abandon product lines.

• Following the path taken by Bausch & Lomb (B&L; Rochester, New York) earlier in the year, Advanced Medical Optics (AMO; Santa Ana, California) recalled 18 lots of its 12-ounce Complete MoisturePlus multipurpose contact lens care solution and Active Packs in the U.S. after three lots sold in Japan were found to have bacterial contamination which compromised sterility. The problem was traced to a production-line issue at AMO's manufacturing plant in China.

Of the 2.9 million units being recalled, 183,000 units were shipped to the U.S. and the remainder was shipped to Asia Pacific and Japan. Products made in AMO's facility in Spain, which produces the vast majority of its contact lens solution products distributed in the U.S. and Europe, are not affected by the recall, the company said.

Steve Chasterman, a spokesman for AMO, told Biomedical Business & Technology: "This is an isolated issue, not a formulation issue" and that the recall is being done as a precautionary measure "in the best interest of our consumers."

"Because three lots of products we sold in Japan were found to have sterility issues we decided we would recall the lots in the U.S. that were produced on the same production lines in the same production period," Chasterman said.

AMO said it expected the recall to reduce its revenue for through the end of 2007 by $40 million to $45 million.

Medtronic (Minneapolis) disclosed a plan to spin off Physio-Control (Redmond, Washington), its automated external defibrillator (AED) unit, sometime in the first half of its 2008 fiscal year. The spin-off, said Art Collins, CEO and chairman, is being made because Physio-Control "is not central to our long-term strategic business."

In a conference call, Collins said, "[w]e believe this transaction … will allow Physio to renew its focus, while allowing Medtronic to focus" on opportunities that align better with its strategic aims. Those aims, he said, include pursuing growth in the mid-teens. The company, which operated as Medtronic's Emergency Response Systems division, will continue operations with its headquarters in Redmond, its location prior to the Medtronic buy-out.

Physio-Control was purchased for $538 million in stock in June 1998, and it has built sales, but Medtronic said it had not found a marketing match —described as "tangible operating synergies" —between its emphasis on implantable cardioverter defibrillators (ICDs) and AEDs. Even in hospitals, it said, AEDs are a capital equipment purchase while ICDs are purchased as therapeutic devices.

Edwards Lifesciences (Irvine, California) reported two initiatives: the discontinuation of its Optiwave 980 Cardiac Laser Ablation System and "realigning resources to better drive key strategic opportunities," it said. In the realignment, the company said it will eliminate about 70 full-time positions and target saving an estimated $16 million pre-tax charge in the fourth quarter. Michael Mussallem, CEO and chairman of Edwards, said, "At this time we are actively recruiting talent to fill many new roles as we increase investments to drive growth."

The announcement from Edwards came on the heels of its report that it will sell its angiogenesis program to Sangamo BioSciences (Richmond, California) in a share transaction worth about $7.5 million.

Dropping the Optiwave program impacts PLC Systems (Franklin, Massachusetts), which manufactures the system under a supply agreement with Edwards signed in March 2006. In the first three quarters of 2006, PLC reported recording about $20,000 in sales from Optiwave 980 laser systems, plus about $12,000 in royalty payments on sales of Optiwave 980 disposables, or less than 5% of the company's total revenues in the first nine months of 2006.

Lifestream Technologies (Post Falls, Idaho), a supplier of cholesterol monitors, said it filed a petition for bankruptcy and entered into an asset purchase agreement with Polymer Technology Systems (PTS; Indianapolis) to sell off its assets for $750,000.

HIT exec, Vanderbilt roll out IT firm

Building on pilot implementation at Bassett Healthcare (Cooperstown, New York), Gary Zegiestowsky, a health information technology (HIT) executive, and Vanderbilt Medical Center (Vanderbilt; Nashville, Tennessee) unveiled a new clinical software and solutions company, Informatics Corporation of America (ICA). ICA's foundation was laid early 2005 with informatics-based tools and processes developed by physicians at Vanderbilt for improved patient information, along with better evidence and best practice guidance

Bassett — a rural health system which compromises four hospitals, 23 community health centers and 14 school-based health systems — completed pilot implementation of ICA's core aggregation solution in November and said it will roll it out across its delivery network early next year. The first phase of Bassett's implementation went live with the production pilot in November, and the expanded implementation is already underway.

Zegiestowsky, CEO of ICA, said that ICA's solution "integrates the clinical systems and processes across a delivery network to create a unified electronic medical record solution. The core solution, typically implemented in less than six months, involves aggregating all available patient information and making it easily accessible to clinicians anytime, anywhere."

ICA further provides communication and workflow tools to improve communications, facilitate data capture, track clinical metrics and incorporate evidence to help clinicians more effectively act on available information.

ICA has the exclusive right to use the products outside of Vanderbilt.

DCS and Wound Care Centers to unite

Diversified Clinical Services (DCS; Jacksonville, Florida) and Wound Care Centers (formerly Curative; also Jacksonville) reported that the two wound care management companies will be under common ownership of WCS Clinics. The consolidation is being funded by private equity firms, The Jordan Company, Edgewater Capital, and Bolder Capital, and their respective affiliates. The investor group said it began investing in the wound care industry in 2005.

The companies said that on a combined basis Diversified Clinical Services and Wound Care Centers will have a leading position with more than 260 hospital contracts in 40 states. With the consolidation, the companies will have more than 700 employees nationwide. The management teams of both companies will remain in place following transaction close.

Both companies contract with hospitals to establish and manage comprehensive wound care programs, providing clinical expertise, research, data systems, and experienced staff to treat the growing number of patients who have problem, non-healing wounds as the result of diabetes, pressure ulcers, vascular insufficiency, radiation injury, and other conditions. It is estimated that there are more than 7 million people in the country in need of such services.

DCS manages wound care centers at more than 160 contracted hospitals in 36 states nationwide, allowing hospitals to provide a needed, value-added service to a growing patient population. Wound Care Centers says it pioneered the wound care management services industry, establishing its first hospital program in 1988.