Medical Device Daily Contributing Writer
DANA POINT, California – The 18th annual OC conference sponsored by Roth Capital Partners (Newport Beach, California), held at the St. Regis Monarch Beach Resort last week, enjoyed a tremendous turnout from Wall Street analysts, money managers and attending companies.
Roth Capital, which bills itself as “a leader in small and micro cap markets,“ is one of the few investment banking firms that focuses on small and emerging companies. Its 25 or so equity research analysts cover a broad range of industries, with a strong emphasis on healthcare in general and medical technology in particular.
More than 200 companies made 30-minute presentations here during the two days of the conference, giving the attendees a glimpse at their business strategies, their past results and future outlook. Medical device companies were well represented, as one of the several meeting rooms at the St. Regis was devoted solely to their presentations.
Among the most noteworthy stories were those from companies where a change in top management had made a significant impact.
One of the first companies presenting was Diomed Holdings (Andover, Massachusetts), which describes its mission as “leadership in minimally invasive medical procedures.“ It is the leader in endovascular vein laser therapy (EVLT), with an installed base of over 850 units, which CEO James Wylie said is “more than all the other competitors combined.“
Wylie said that EVLT, which essentially treats venous insufficiency in the legs that can lead to varicose veins, is a $300 million market opportunity. Some 12 million to 15 million Americans suffer from chronic varicose veins, with the target EVLT treatment population at about 1 million. The target physician groups that treat this condition are interventional radiologists and vascular surgeons who have trained in endovascular techniques. These two groups total roughly 15,000.
Wylie joined Diomed in January 2003. Calendar 2002 revenue was reported at less than $6 million. Since his ad-dition to the management team, the company's fortunes have soared, with recently reported fiscal 2005 revenue growing 74% over the prior year and hitting $19 million. Record gross margins also were achieved.
Several factors have contributed to this stellar performance, including outstanding reimbursement for the physician, impressive clinical benefits, especially relative to competing radio frequency equipment and the fielding of a strong direct sales effort.
With regard to reimbursement, Wylie said that the granting of a dedicated CPT code for MD reimbursement, with an average in-office payment of about $1,950, was “the single most important event in our company in 2005.“
This level of reimbursement is for Medicare, with private carriers actually paying about 50% more than Medicare. The actual total in-office revenue, with one pre-op exam and three follow-ups is $2,751, an extremely lucrative amount for a relatively short, in-office surgery.
The licensing of a new diagnostic technology, called the VeinViewer, from Luminetx (Memphis, Tennessee) was cited by Wylie as an important addition to Diomed's market presence and an adjunct to its core EVLT.
The VeinViewer is a patented technology that is used to locate subcutaneous veins and image their exact location onto the surface of the skin. This allows clinicians the ability to visualize the location and orientation of the target vein, as well as observe any movement of the vein and accurately guide a needle into the skin on the first attempt. It will simplify sclerotherapy and phlebectomy, which account for about 2.3 million annual procedures.
“It will clearly boost our competitive position in the EVLT market,“ Wylie said.
On the litigation front, Diomed is engaged in a spirited patent dispute with other players in the EVLT market. These include AngioDynamics (Queensbury, New York) and Vascular Solutions (Minneapolis), its two principal competitors. The case is likely to go to trial this summer and Wylie indicated a high degree of confidence in its outcome.
“We think our intellectual property position is very strong and we will continue to aggressively protect it,“ he said.
Another company that is enjoying strong momentum is BioSphere Medical (Rockland, Massachusetts). Like Dio-med, the addition of a new CEO, Rick Faleschini, has been a catalyst to its growth. After mediocre results in prior years, the company recently reported that fiscal year 2005 revenue leapt 31% over last year, with domestic sales growing 39%.
Faleschini, who joined BioSphere in the fall of 2004, said that two key strategies have been pivotal to the company's recent success. The first is a strong emphasis on differentiating its embolic device from the competition “because we clearly have the best product.“
Second, BioSphere has worked hard on developing a strong clinical story, which had to be “convincing and credible.“ Its flagship product and the undisputed leader in the uterine fibroid embolization (UFE) market is EmboSphere, which is by far the most clinically studied spherical embolic agent. It currently commands a 75% share of the UFE market.
More than 5,300 patients have been followed since 1995, including the Fibroid Registry that was completed this past December, with 3,000-plus patients enrolled. UFE clearly demonstrates a high degree of safety, efficacy and durability and very importantly, pregnancy is possible after UFE. Clearly, hysterectomy, which is widely used today for treating uterine fibroids, eliminates that potential for patients selecting that route.
A landmark development occurred a little over a year ago, when the American College of Obstetrics and Gynecology (ACOG; Washington) included UFE as a viable treatment option in its patient education brochures. Previously, ACOG had been reticent to support UFE, in part because it competes directly with hysterectomy and myomectomy, two surgical procedures performed by gynecologists.
Similar to Diomed's EVLT procedure, UFE has very favorable reimbursement in place, with an average physician reimbursement of about $2,500, extremely attractive for a procedure that takes less than one hour. Hospitals also benefit handsomely, as Falsechini noted that it is “the most favorable fibroid treatment,“ yielding between $1,100 and $1,600 of profit to the hospital.
The UFE market opportunity is a large one and very underserved, according to Faleschini. Some 5 million wo-men in the U.S. alone suffer from uterine fibroids, which are essentially benign masses of tissue that grow in the uterus. Of the 5 million potential patients, a mere 22,000 were treated in the U.S. in 2005.
Another compelling opportunity in an earlier stage of development than UFE is the liver cancer market. Currently, revenue from HepaSphere, an agent used to restrict blood flow to liver tumors, accounts for 18% of the company's global sales (about $3.2 million). The release of this product for Europe occurred in 4Q05 and with approvals for the U.S. and China expected in 1H06, the future is bright for this sector as well.
He said BioSphere has “a very robust business model, which looks deceptively simple but is highly effective.“
A third company that dramatically benefited from a change in top management was Natus Medical (San Carlos, California). Prior to the appointment of Jim Hawkins as CEO in April 2004, Natus had languished, despite a very strong balance sheet, a dominant position in the worldwide neonatal hearing screening (NHS) market and a solid business model that featured a high percentage of disposable revenue.
The company pioneered the NHS market and still commands an 80% domestic share, a market that Hawkins estimated at $100 million globally. “This is a great business, with over 80% of revenue generated from steady and recurring disposables supplies,“ he said.
A watershed development in the company's history was the early January acquisition of Bio-Logic Systems (Mundelein, Illinois). Acquired for Natus stock and cash valued at $69 million, Bio-Logic substantially strengthens Natus in several ways.
First, it solidifies its already dominant position in the NHS market. Second, it broaden its product line to include diagnostic audiology, a market which Hawkins estimated at around $100 million. Third, it increases the combined sales force to 26 direct reps, giving it a far stronger market presence. Fourth, it expands its international presence to over 80 countries and finally it allows Natus to enter the EEG market, which Hawkins estimated at $250 million.
The EEG addresses two exciting areas, neurology systems which diagnose and measure seizure disorders, epilepsy and brain tumors; and sleep systems, which are used by the 1,800-plus sleep labs around the country. The growing awareness of the serious health consequences of obstructive sleep apnea is fueling demand in this market.
“We are very excited about this deal and we expect it to be accretive to earnings this year,“ Hawkins said.
Natus's growth in the past few years has been propelled by its foreign business, which accounted for 17% of revenue in 2002 and now accounts for 37% of revenue. In that time frame, its offshore sales have surged from $4.6 million to nearly $16 million. Growth in this category has benefited by a less-mature neonatal hearing screening market outside the U.S., plus the purchase of Fischer-Zoth (Germering, Germany) in September 2004.
This merger enabled Natus to more effectively compete in the international market with a less costly NHS technology, otoacoustic emissions (OAE). This screening methos is less accurate than Natus' U.S. flagship technology auditory brainstem response but sells for nearly 90% less and thus is affordable in less-developed countries.
The availability of OAE has been a key factor in the increase in screening outside the U.S., from less than 5% five years ago to about 25% today. By comparison, ABR is now used to screen about 95% of the 4 million babies born annually in the U.S.