BB&T Executive Editor
SAN FRANCISCO – Diagnostics and orthopedics, the former a med-tech sector featuring steady if not spectacular growth and the latter one that has shown dramatic ramp-up of some of its specific market segments, were among the spaces drawing substantial investor interest during the 24th annual JPMorgan Healthcare Conference, held here last month.
Those involved with the medical diagnostics sector like to refer to how diagnostics – despite accounting for under 5% of hospital costs and less than 2% of total healthcare expenditures – are responsible for between 60% and 70% of all healthcare decisions.
In an environment where cutting costs is taking on chiseled-in-stone status, diagnostics are clearly only going to grow in importance. This growing stature is obvious in the ubiquitous presence of test manufacturers in the lineup of presenting companies during the conference at the Westin St. Francis Hotel, adjacent to Union Square.
Most of those firms, in turn, attracted considerable audiences, indicating that investors are recognizing their considerable role as healthcare trods the path toward personalized medicine.
Ken Buechler, president and chief scientific officer of Biosite (San Diego), expressed the diagnostics development proposition succinctly: “Improving diagnostics will improve healthcare outcomes and save lives.”
Discussing Biosite’s line of cardiac testing products, Buechler cited in particular the growing use of the firm’s Triage test panel, which he characterized as addressing “a huge market” of diagnosing acute myocardial infarction.
Noting that some 6 million persons present in emergency departments (EDs) annually with chest pain, he said cardiac assessment “is relatively poorly served by Troponin I.” Thus, the Triage Cardiac Panel has carved out an 18% share of the ED chest pain assessment market.
Use of the Triage BNP test in cardiovascular profiling is another area of large market potential for Biosite, and the test also is widely used in hospitals for acute monitoring on an off-label basis, Buechler said.
He cited several additional areas of interest to the company for its protein- and antibody-based technologies, including applications for stroke, sepsis and abdominal pain which, taken together, represent some $1 billion in market potential.
“Stroke is a massive medical problem,” Buechler said. “Early diagnosis can lead to greatly improved outcomes.”
He said the market for the stroke product would include some 2.4 million tests annually in EDs, 800,000 additional tests in other U.S. care settings, and 2.1 million tests outside the U.S.
Biosite has its Triage Stroke Panel at the FDA for review, but the application is on hold pending submission of additional data by the company in the present quarter.
The stroke panel is in use in some 50 centers in Europe, where Buechler said it “has shown comparable accuracy to that of an assessment by an expert stroke professional.”
Of the company’s sepsis program, he said 750,000 patients in the U.S. develop sepsis each year, and about 215,000 of them die.
“The condition is very complex, symptoms vague,” he said, and the current testing regimen, blood culture tests, “low.” Biosite has identified about 80 potential markers for analysis, and a prospective study involving about 1,000 patients is under way.
Abdominal pain is another potentially large market for the company, according to Buechler. “Abdominal pain is the leading cause for patients coming to the emergency department, some 8 million patients.”
He noted the complexity of this diagnosis, primarily via ultrasound, so there obviously is room for a test panel such as that under study by Biosite.
Another noteworthy diagnostics firm, Cytyc (Marlborough, Massachusetts), has broadened its women’s health focus by acquiring two companies with therapeutic products.
CEO Patrick Sullivan noted that the company, whose foundation is its 10-year-old ThinPrep system for cervical cancer screening, now has a two-division setup.
The Diagnostics Division is built around the ThinPrep system, with some 55% to 60% of the cervical cancer screening market in the U.S. Some 50 million to 55 million tests are done annually in the U.S., 100 million internationally.
In international markets, Sullivan said, Cytyc is pushing its global sales efforts, now operating in more than 20 countries. It sees a $200 million-plus revenue opportunity in Europe, $250 million-plus opportunity in the Asia Pacific region, and a huge growth opportunity in China, “which has the potential to be our biggest market outside the U.S.”
Sullivan said the company would launch the ThinPrep product line in Japan in March, a market with the potential for 10 million tests to be conducted annually.
The Surgical Products Division includes the NovaSure treatment, a radio frequency-based procedure designed to treat excessive uterine bleeding that came via the Cytyc acquisition of Novacept (Palo Alto, California) in 2004, and the MammoSite Radiation Therapy System, a breast cancer treatment that allows a lumpectomy to be performed rather than removal of the entire breast. It joined the Cytyc product lineup as a result of the acquisition of Proxima Therapeutics (Alpharetta, Georgia) last March.
Sullivan said of the Novacept acquisition: “This has been a tremendous ‘home run’ for us – really a grand slam.”
Another diagnostics firm in the cervical cancer space is Digene (Gaithersburg, Maryland), with the only FDA-approved test for human papilloma virus (HPV), a primary cause of cervical cancer.
President and CFO Charles Fleischman termed Digene “a leading player in a very large business,” citing a potential global screening market upwards of $1 billion. He said that with some $122 million in revenues, the company has U.S. market penetration of only 13% thus far, so major market and revenue growth opportunities are available.
Referencing reports last year of several pharma firms working on HPV vaccines, Fleischman said such vaccines would not diminish its market but rather would “increase market awareness.”
XDx (South San Francisco, California), an emerging firm focused on developing products to help physicians better manage transplant patients, drew an overflow crowd of interested investors to the hotel’s Elizabethan C&D meeting rooms.
Pierre Cassigneul, president and CEO, described XDx as working “in the space of personalized medicine.” He said the company’s AlloMap product is “a monitoring system to provide longitudinal data for physicians.”
He characterized the science involved as “the convergence of genomics and informatics,” adding that AlloMap “reduces a huge amount of data to something actionable for the physician.”
The first use is in monitoring heart transplant patients, which Cassigneul described as “an unmet clinical need” in a “protocol-driven environment” involving “closely followed patients.”
XDx’s analysis of such patients involves 20-gene PCR (polymerase chain reaction) testing, and results in a quantitative score ranging from zero to 80. As a non-invasive alternative to standard-of-care cardiac biopsies, AlloMap offers “immediate benefits of enhanced patient management, better control over infections, and improved quality of life,” he said.
The company is already in clinical trials on a similar system for lung transplant patients, and also is looking at applications for kidney, liver and other transplants.
Cassigneul said the other side of XDx’s business is in autoimmune diseases such as lupus, where there is “a critical need for better tools to measure the efficacy of drugs” for patient treatment.
New systems aimed at meeting labs’ needs
As diagnostic test makers roll out new products as part of sector-wide growth, the labs that run such tests are being peppered with pitches for new equipment on which to do their work.
Almost in lockstep with the growth of the test sector, the major makers of diagnostics lab equipment also are rolling out new products aimed at helping such labs deal with their most significant problem areas:
- Ongoing cost pressures.
- Severe shortages of technicians.
- Space constraints.
Two of the major makers of lab equipment took to the podium on the same day at the conference to describe their efforts in the segment.
Jeff Steffenhagen, senior vice president of corporate strategic planning and business development at Beckman Coulter (Fullerton, California), cited the steady growth of the routine diagnostics sector, which he pegged at 5% to 6% annually, driven by the demographics of an expanding older population and by the introduction of new tests.
“There’s a resurgence in understanding the value of diagnostics in healthcare overall,” he said.
Steffenhagen noted his company’s focus on laboratory processes, saying Beckman Coulter helps its customers “automate and optimize” their testing efforts in order to create customer value.
“That is particularly important because of laboratories’ need to lower costs and also because of the shortage of medical technologists,” he said. “Our systems can address that shortage.”
The company’s objective is straightforward, Steffenhagen said: “To place more systems with more capacity and to provide more tests to run on those systems.”
System placements are important, he said, because they drive the biggest chunk of Beckman Coulter’s revenues – the so-called “aftermarket,” largely the reagents and assays used in operating the company’s lab systems. Sales of such products represent fully two-thirds of Beckman’s revenues.
The other big reason such placements are important is that they tend to be in place for a substantial length of time, since replacing such capital equipment as automated test analyzers is a costly step for the hospitals or other healthcare entities that operate diagnostic labs.
Beckman Coulter’s key business units include Cellular, Chemistry, Immunoassay, and Discovery & Automation. Steffenhagen said of the company’s customers, “We offer everything they need to do their testing.”
He cited several of the company’s products, including the next-generation autochemistry units known as Unicell DxC 600 and 800. Those machines have twice the number of tests onboard, allowing for 15% to 50% more testing with the same unit.
A new chemistry workstation, the Unicell DxC 600i, combining chemistry and immunoassay analysis in a single workstation, is due in the third quarter of this year.
The company’s next-generation immunoassay machine, the Unicell Dxi 800, will be Beckman Coulter’s fastest-operating system.
Steffenhagen noted that on the day of his presentation, the company announced plans to cut some 350 jobs, with another restructuring move likely to involve the closing of three facilities, due to be announced this month.
John Duffey, CFO of competitor Dade Behring Holdings (Deerfield, Illinois), lauded the clinical diagnostics sector, saying it “creates tremendous opportunities to reduce healthcare spending.”
Citing Dade Behring’s focus on the $12 billion global clinical lab segment, he said it’s “a very good industry, very stable, with good, steady growth.”
Duffey said Dade has an 11% share of the key chemistry/immunochemistry segment, tied in share points with Beckman Coulter and trailing leaders Roche (Basel, Switzerland), with 18%, and Abbott Laboratories (Abbott Park, Illinois), at 17%.
Referring to the laboratory instrument field as a “razor/razor blades” type of business, he noted that the company has an installed base of 37,000 instruments, which in turn generate a recurring revenue stream. Some 90% of the company’s overall revenues come from the “recurring” side of the business.
Duffey said Dade has been “very successful” with its workstation combination efforts, directed toward developing analyzers that perform multiple functions and allow labs to save on both space and personnel, both key problem areas.
He noted, for instance, that the Dimension line of chemistry/immunoassay workstations is the No. 1 instrument in the market, saying, “This [unit] helps our customers address the problems they face.”
Dade Behring is “the only company with a truly integrated platform,” he said, and that “competitors are doing it by bolting systems together,”which isn’t the same as operating an integrated system.”
The company is developing a full Dimension line, including the Dimension Expand for low-volume labs and Dimension RxL Max for mid-volume labs. On the way is the Dimension Vista, a high-volume, integrated analyzer that is expected to be commercialized in the second half of this year.
That product is greatly anticipated, with more and more of the company’s lab customers trying to meet high-volume needs by “taking multiple mid-volume Dimension machines and putting them together for use in high-volume settings,” he said.
Duffey said the company has been “showcasing” the Dimension Vista to some of its larger lab customers, and producing “tremendous excitement.” Once the Dimension Vista is on the market, he said, “there is no technology out there today that will be able to compete with us.”
‘Innovation’ is word for ortho firms
Investors with a gimpy knee from, let’s say, an old football injury or a degenerative hip that is getting in the way of being competitive in that weekly tennis showdown, couldn’t have picked a better day to attend the annual JPMorgan gathering than the conference’s second day. Tose responsible for scheduling put three of the top four orthopedic companies, along with a highly inventive challenger to the bigger players, on the same day’s program.
Sector leader DePuy (Warsaw, Indiana), part of the Johnson & Johnson (New Brunswick, New Jersey) empire, was missing, as was its parent, but there was plenty of other news to absorb from the knees, hips, elbows and biologics crowd.
Making arguably the biggest impression on attendees – judging from post-presentation chatter was Stephen MacMillan, president and CEO of Stryker (Kalamazoo, Michigan).
In his initial foray at the JPMorgan podium after taking over from longtime Stryker point man John Brown a year ago, MacMillan took a decidedly more aggressive approach to getting the company’s story out than the traditional lower-key path traditionally trod by his highly respected predecessor.
One of his primary points of emphasis was that Stryker is much more than just an orthopedics powerhouse. “We’re a $4.8 billion-plus diversified med-tech company with a leadership position in orthopedics,” said MacMillan. He noted, for instance, that his firm has “more than $2 million in sales beyond reconstructive implants.”
While Stryker is known for its public conservatism, it has long captured the attention of the investment community by its nearly unfailing ability to deliver on the oft-stated commitment to deliver 20% annual earnings growth.
“We tend to not do a great job of marketing ourselves,” MacMillan said, “but we do a good job of delivering results.”
He emphasized Stryker’s broad mix of business lines, saying its diversified business model virtually assures overall growth even when some product or geographic sectors may lag.
A chart of the company’s businesses showed that no single segment holds as much as a fifth of overall revenues. Hips at 19%, knees at 17% and MedSurg instruments at 15% are the biggest contributors, but numerous other businesses are significant parts of the Stryker story.
Only the largest segment, hip reconstructive products at 4%, registered less than double-digit global growth in the first nine months of the most recent fiscal year. Beyond business segment growth, Stryker registered “strong growth country by country,” MacMillan said.
He cited, in particular, 89% growth in what the company calls its Biotech business, providing the opportunity to comment on the long-delayed OP-1 orthobiologic, for which a pivotal U.S. trial was recently completed and a new drug application is expected to be filed with the FDA in the current quarter. Using the word “finally” for emphasis, MacMillan said the company is looking toward a 2007 launch of the product.
Stryker also is enjoying “industry leading growth” in its MedSurg instruments business, he said, riding what he described as “a mini-boom in capital spending in worldwide markets.”
Noting the emphasis companies in the sector are placing on minimally invasive surgery solutions, MacMillan said Stryker is “capitalizing on [that] push through our MedSurg business.”
In citing the strength of the company’s product pipeline, he noted its “unprecedented boost in R&D spending,” now approaching $300 million annually, almost double the figure of as recently as three years ago. In addition to products nearing commercialization, MacMillan said Stryker has added “an entire new layer of projects with longer-term results.”
Among other orthopedics-centered firms that presented on “Ortho Day” at the conference:
• Zimmer Holdings (Warsaw, Indiana) President, CEO and Chairman Ray Elliott ran through a lengthy list of new products either introduced by the company recently or on the way in the near term, but spent much of his allotted time touching on philosophic and strategic issues.
Citing the firm’s “Flawless Execution” slogan, he said Zimmer’s goal in a global climate of trying to rein in healthcare costs is “to be the low-cost manufacturer, the low-cost distributor, and also the best innovator.”
By way of example, Elliott cited the company’s 1 million square feet of manufacturing space. “That’s on a non-outsourcing basis,” he said. “We would be Lou Dobbs’ hero,” he added in a reference to the outspoken CNN commentator who regularly lambastes U.S. industry for sending manufacturing and service jobs overseas.
Touching on a “Women are Different” bullet point, Elliott said: “women are taking over this industry,” adding that “two of every three [reconstructive] knees that we do are done on women.
“For years, we have been putting men’s implants into women,” he said, noting the growing need to design such implants to meet the different dimensions, mass and other important characteristics of female patients. “That makes for an interesting market approach.”
• Biomet (also Warsaw) President and CEO Dane Miller, whose firm holds down fourth place in the ortho sector behind DePuy, Stryker and Zimmer, emphasized the company’s culture of innovation. He said that over the past six years, Biomet has introduced more than 500 new products.
Citing demographic statistics showing that the number of persons in the 55-to-75 age group in the U.S. will grow from 48.2 million in 2005 to 66.2 million in 2015, he said that population will support major growth for orthopedics in the U.S., as well as worldwide.
In addition to running through developments in Biomet’s reconstructive implant lines, Miller cited the company’s push in biomaterials. “I believe we have the broadest biomaterials platform in then industry,” he said.
• Barry Bays, interim president and CEO of Wright Medical Group (Arlington, Tennessee), cited the growing emphasis on biologics at that company, which has a niche-focused product line that emphasizes its unique approaches in the hips, knees and extremities spaces.
“Extremities and biologics are very complementary,” Bays said. “We’re driving our biologics specialty products across all segments of our business.”
Citing the company’s “very strong pipeline,” he said its orthobiologics program is paying dividends in a broad range of reconstructive products. Bays said, for instance, that Wright Medical’s “strong intellectual property position in infection control” is allowing it to treat infection while also regenerating bone.
The company’s Graft Jacket material can be sutured into soft-tissue tears, which gets the rehabilitation process going immediately while also beginning the regeneration process for cartilage and other tears.
Bays also noted that Wright “has led the charge” in the hip implant bone-conserving space, with products focused on resurfacing bone in the region of such implants in order to preserve bone quality for future revision procedures.
Market, trial data boost spinal sector
Two firms involved in minimally invasive spinal solutions captured the attention of many of the dwindling number of attendees on hand for the final day of the conference.
Relative newcomer St. Francis Medical Technologies (Alameda, California) was consigned to the nether reaches of the Westin St. Francis Hotel meeting space, the Elizabethan C&D space, but thanks to a cancellation in the original presentation schedule, Kyphon (Sunnyvale, California) got a chance to strut its stuff in the premier Grand Ballroom locale, and Richard Mott, president and CEO of the developer of an innovative solution to spinal fractures, took full advantage of it.
Mott said Kyphon’s approach represents “an incredible opportunity in the medical device space,” adding that the company “was founded on the premise that we could revolutionize the practice of spinal medicine.”
Kyphon’s primary product, the KyphX system, is directed toward restoring spinal function via balloon inflation of creating a void in spaces where spinal disc compression has occurred due to osteoporosis, trauma or cancer. That void is then filled with a bone cement to restore at least a portion of the lost height in the region.
The kyphoplasty procedure, as the technique is known, has earned a substantial following among spinal surgeons as what Mott characterized as “Band-Aid surgery for internal fixation” of such decompression.
But, with just some 57,000 kyphoplasty procedures now being conducted among the just short of 1 million potential annual procedures (700,000 due to osteoporosis, 150,000 caused by cancer and 100,000 by trauma, according to Kyphon estimates), Mott said “there’s plenty of room for growth” in the $213 million in annual revenues racked up by the company.
“This is a truly safe procedure with significant long-term outcomes,” he said, citing new data published this month in the journal Spine. That study, which featured two-year follow-up on 77 patients, showed that 90% of those treated via kyphoplasty reported complete pain relief, while 88% were “fully ambulatory.”
Most importantly, there were no kyphoplasty-related complications, Mott said.
He cited other data from recent German studies indicating a low rate of subsequent fractures and no progressive height loss, the latter a particularly important measurement of both the success and longevity of the procedure.
That study focused on both kyphoplasty and vertebroplasty, another minimally procedure developed by competitor ArthroCare (also Sunnyvale), but Mott said kyphoplasty-related complication rates were lower than were those for vertebroplasty.
Still touching on clinical trial issues, he said Kyphon had recently completed enrollment in the 300-patient, multi-center FREE trial in Europe, which he said would be “a landmark study.”
Mott noted that enrollment continues in the planned 200-patient CAF trial in the U.S., a study involving repair of cancer-related fractures, as well as in the planned 100-patient INSPIRE trial, which is focused on pulmonary function and on which enrollment began last September.
He also cited three other studies, including a Japanese trial involving osteoporotic fractures, in which six of a planned 81 patients have been enrolled to date. “This gets us started on our Japan commercialization effort,” Mott said. He added that enrollment in the KYPOHOS(x2) osteoporotic/trauma trial in Europe is expected to begin this fall.
The 1,200-patient KOVIAR (Kypholasty and Vertebroplasty in the Augmentation and Restoration of Vertebral Body Compression Fractures) is being aimed toward a 4Q06 start.
Noting that Kyphon has 260 U.S. sales reps and 85 “and growing” in Europe, Mott said that some 3,000 U.S. hospitals “have the capability to do this procedure, and we’re roughly 50% penetrated” in that market.
He said the company would have direct distribution of its products upon their approval in Japan. “We want to own the approval and not dilute the revenues from them through distributors,” Mott said, adding that Kyphon anticipates beginning commercial sales in that country in 2008.
Kevin Sidow, president and CEO of St. Francis Medical, was no less enthusiastic about prospects for his company and its X Stop Interspinous Process Decompression (IPD) System. He termed the X Stop treatment for lumbar spinal stenosis (LSS) “the right combination at the right time.”
After more than a year-long delay following an FDA panel turndown, the X Stop system finally received approval from the agency last November. In a 5-3 vote in late 2004, the Orthopedic Rehabilitation Devices Panel of the FDA’s Medical Devices Advisory Committee voted against recommending approval of the X Stop system, even though many of them praised the device’s “innovative design.”
While the system had achieved its primary effectiveness endpoint, the panel members were apparently not convinced by the study data. And though they said they thought it was safe, they focused on discrepancies in trial data. In some ways, the delay ended up being a good thing for the company, Sidow said at the time of the approval.
“We felt like we took advantage of the delay,” he said. “Certainly the awareness of the product in our situation has grown since the turndown 15 months ago, and I think we’re in a much better position to take this to surgeons and have them make this part of their practice.”
The system has been approved for sale in Europe and Japan since 2001, and has been successfully implanted in more than 4,000 patients, according to the company.
St. Francis, founded in 1997, has billed the IPD system as a “middle-of-the-road measure” between non-surgical treatment and the much more invasive lumbar laminectomy. A laminectomy relieves pressure on the spinal cord or spinal nerve by widening the spinal canal via removal or trimming of the lamina – or roof – of the vertebrae to create more space. The procedure also may involve fusing vertebrae or removing part of a disc.
“Unlike laminectomy, the X Stop procedure does not require general anesthesia, making it a more viable option for those with lumbar spinal stenosis who cannot tolerate general anesthesia as a result of their age or other health conditions,” said James Zucherman, MD, co-inventor of the X Stop and medical director of St. Mary’s Spine Center (San Francisco). “This new procedure fills a gap in the continuum of care that, until now, required patients to make the leap from conservative therapies, such as analgesics and injections, straight to invasive surgery.”
The small two-piece non-fusion titanium device is inserted through a small incision while patients lie on their right side in a fetal-like position. Since the X-Stop is placed outside the spinal canal, no bone or soft tissue must be removed. The procedure requires only local anesthesia and takes less than an hour.
Sidow told his JPMorgan audience that 96 out of 100 patients who undergo the IPD procedure are out of the hospital in 24 hours. “It has a very low risk profile,” he added, calling it “a simple solution for degenerative spine patients.”
He said the X Stop system and IPD procedure “mimic what happens in the flexion [sitting] position,” which is where patients find the most relief from their pain.
Noting that St. Francis Medical functions in a “large and growing space,” he cited a total of 2.3 million suffering from spinal decompression, adding that “80% of patients are not getting better.”
Saying that just over 200,000 LSS patients are candidates for the IPD procedure, Sidow said that results in a market valued at some $1.6 billion. So far, the company is marketing its product to spine surgeons in 16 countries.
“This will be a product empowered patients will gravitate to,” he said, adding: “There is a strong interest in less-invasive procedures by both physicians and patients.”
While it’s a field that is attracting a number of competitors, he said St. Francis Medical expects “strong and sustainable sales,” and said “we’re confident this will become the standard of care in the U.S.”