By DON LONG
BBI
and HOLLAND JOHNSON
BBI Associate

At healthcare investor conferences on both the East and West coasts of the U.S. in January, representatives of securities firms and medical technology companies, along with a smattering of clinicians, took a look at how the sector performed last year and where it is headed in 2005. At both the lid-lifting JP Morgan Healthcare Conference in San Francisco and the bellwether Piper Jaffray Health Care Conference later in the month in New York, the operative words to summarize the comments by those who took to the myriad podiums at the conference venues were "enthusiasm" and "optimism." And judging by the throngs of attendees who crowded the meeting rooms and the hallways at the Westin St. Francis and Pierre hotels, respectively, that enthusiasm and optimism is shared by many in the investment community.

Taking the first crack at a capsule review of 2004 and forecast for 2005 was Douglas Braunstein, head of Americas investment banking coverage and global M&A for JP Morgan (New York), who spoke on opening day of the firm's 23rd annual healthcare conference. Calling 2004 a "great year" for the healthcare industry and saying he was looking forward to a successful 2005, Braunstein particularly cited the strength of the medical technology sector. "In my almost 20 years involved in the healthcare space, I have to say that 2004 was one of the most exciting years," he said, adding that the med-tech and healthcare services sectors were the strongest performers within that space.

Citing investor interest in the sector, he noted that more than 4,000 public institutional investors and 1,000 private investors probably closer to a total of nearly 6,000 persons all told would jam the hotel's hallways and meeting rooms to listen to some 230 public and 50 private companies present during the four-day event.

Braunstein offered a quick snapshot of the financial performance of the public companies that would be represented at the conference: "If you look at a non-weighted base of the companies presenting this year, their [2004] stock prices were up on average almost 14%, exceeding the S&P by almost 500 basis points."

He added that 2004 was a "pretty exciting year" in terms of strategic activity, equity raising and debt-raising, particularly the strategic advisory business, which enjoyed its strongest performance in more than five years. In fact, it was the strongest year for strategic transactions in the last decade, he said. "It [was] a very active year across all sectors of the healthcare industry."

On the equity side, he said that 2004 was a "more modest year," but noted that there was excitement with the reopening of the initial public offering (IPO) window, with more companies coming public last year than in the three prior years. Braunstein called the IPO resurgence "an interesting start to what we hope will be a very robust window that continues through 2005."

He said the med-tech sector had an "incredibly strong fundamental year" in 2004. He noted that within the sector, stock prices increased an average of from 17% to more than 25%. "Superior growth and price performance in this space was led by such notable classes as the CRM [cardiac rhythm management] business, which enjoyed exceptional double digit fundamental growth during the course of 2004." He added that the market believes CRM to be an incredibly robust market opportunity again in 2005.

Braunstein said med-tech was a space that was "exceptionally active" on the strategic front, with the most notable transaction taking place near year-end with Johnson & Johnson's (New Brunswick, New Jersey) pending $24 billion offer to merge with Guidant (Indianapolis). He also noted that other transactions in the space, such as The Cooper Companies' (Lake Forest, California) $1.2 billion stock-and-cash merger with Ocular Sciences (Concord, California) that was completed the week prior to the JP Morgan conference, "highlighted a year in which continued combination and strength of strategic purpose drives the M&A marketplace."

Overall, Braunstein said there are "real tailwinds for the healthcare sector in general and each of these specific sectors that will bring us a very exciting 2005."

The Piper Jaffray conference, held later in January in a very much snow-covered New York, served once again as a bellwether event for the medical technology sector. Launching the gathering was a Medical Technology Overview, with lead med-tech analyst Thom Gunderson noting that in 1989, a slender roster of just 18 companies made their pitches to investors at the first Piper Jaffray (Minneapolis) healthcare gathering, then a single-room affair at the Waldorf-Astoria.

From that launching pad, consisting only of med-tech firms, the event has grown to this year's 17th such gathering, now also including healthcare services, pharma and biotech firms. The conference totaled just under 200 companies across all sectors, 138 public and 60 private, featuring nearly every important med-tech firm in the country and many coming on strong.

Gunderson also suggested the tantalizing alteration, repositioning and volatility of med-tech over the past 17 years, referring, as just one example, to a key change in one of the lead technology sectors, cardiology. While he noted that in 1989 coronary angioplasty was "coming on," there was little hint of those little tubes now used to open arteries and other vessels. "Lasers were the hot thing of the day," he said. "Our coronary arteries would be scrubbed and cleaned with laser power. But that didn't work out, did it?"

Overall, Gunderson and two other Piper Jaffray analysts, Steve Hamill and Raj Denhoy, were consistently upbeat concerning the year just past and the prospects for 2005.

Hamill highlighted his portion of the overview with "key story lines" for 2004.

Among the plot of those stories were:

• The "big year for stents," living up to the hype and large expectations preceding drug-eluting stents (DES).
• Unusual strength in the wound care market.
• Orthopedics "driven by demographics" and having "continued strength but with the first sign of weakness," that being Stryker (Kalamazoo, Michigan) falling short of revenue expectations over the summer.
• Diagnostics having "a remarkable run in 2003 and 2004."
• Breast implants experiencing "quite a saga" in 2004 and likely to produce "interesting headlines" again this year.
• And 2004 "capped off" with the proposed merger of Guidant into J&J.

While the outburst in the DES market produced the biggest and most frequent headlines in 2004, Hamill was even more enthusiastic about the diagnostic sector, saying it "led the way this time up 62% in terms of median return. Diagnostics is no longer the weak stepchild within the medical devices sector, as multiples have shown."

Moving to a broader overview of med-tech, he noted that large-cap med-tech firms, with their 20% to 25% premiums, outdid the small caps, which were "down into the teens." But, he added, "both the large-cap and small-cap revenue multiples increased in 2004."

In terms of "liquidity events" he called 2004 a banner year for mergers and acquisitions. Even taking out J&J's proposed $24 billion buy of Guidant, he put the M&A total for the year at $17 billion, with average deal sizes increasing to $400 million as compared to $300 million in 2003. And he called the breadth of transactions across several sectors "dramatic."

Echoing other analysts, Hamill noted what amounted to an outbreak in initial public offerings (IPOs) in 2004, putting the number in med-tech at 17 and calling these "an encouraging mix from the venture capital standpoint [and] a large number of early or pre-revenue deals."

Gunderson also praised the diagnostics sector, saying that there were at least five firms in that space among his top "winners" for the year. At the very top of that list he put Immucor (Norcross, Georgia), saying that "customers, the hospitals, the labs that are buying Immucor's products are moving with the trend to automation. Hospitals have labor issues, as that becomes more and more of an issue with profitability and their replacing labor with machines." Another diagnostics firm he placed as a major winner was Cytyc (Marlborough, Massachusetts).

Turning to cardiovascular, Gunderson said that both Guidant and St. Jude Medical (St. Paul, Minnesota) had continued strong in 2004 especially in the implantable defibrillator market but he questioned its having sufficient platforms "for new hope in growth."

By contrast, he said Boston Scientific (Natick, Massachusetts) had "knocked the cover off the ball, hitting a powerful, one-in-a lifetime home run with the Taxus stent and now reinvesting that cash. Again, we expect them to execute well in 2005." But in 2006 there will be an expectation for "a lot more of the execution side," he said.

Medtronic (Minneapolis) "had executed well this year, absolutely," with possibilities for future growth "from drug-coated stents or a new acquisition or an area they haven't revealed yet."

Cardiology firms a focal point

Appearing before a large crowd in the Grand Ballroom of the crowded-as-usual Westin St. Francis, Medtronic CFO Robert Ryan addressed his company's continued opportunity for growth, Ryan said that in the areas where Medtronic has a presence, there is the potential for more than $100 billion in additional revenue in the coming years. He said the company will reach this expanded growth potential through a threefold strategy to "first, extend our leadership in current markets; second, to expand the size of the markets to meet their potential; and thirdly, to explore advanced technologies."

The second important topic that he stressed was the company's continuing need to innovate. "This is the engine or the lifeblood of Medtronic," he said. "This is what drives our growth, and this is what enables each one of our strategies." To enhance this innovation potential, Ryan said that during this fiscal year, the company would spend more than $1 billion on research and development, with a "significant portion" of that going toward product development and clinical trials.

A critical piece of the "new development" puzzle, according to Ryan, will be the rise of hybrid products. "We believe that ultimately, medical technology will converge with biotechnology and/or information technology." He said that Medtronic is leading this convergence, citing the example of the Infuse bone morphogenic protein being used in spine and potentially other areas. On the information technology side, he mentioned the company's CareLink system, currently used in cardiac rhythm management (CRM) products and which he said will probably be used in other company businesses down the road.

A third important area, according to Ryan, is to renew the company's current growth platforms. "Medtronic is well-positioned in a number of large, growing and underpenetrated markets," he said.

One of the company's strongest sectors is cardiac rhythm management, where Ryan said it enjoys a No. 1 market share in both the high-power and low-power segments. The most significant new launch for Medtronic in the CRM sector came with the November introduction of the InSync Sentry system with OptiVol fluid monitoring, which the company calls the world's first implantable medical therapy offering automatic fluid status monitoring in the thoracic cavity, where fluid accumulation is a primary indicator of worsening heart failure and is a precursor to frequent hospitalizations.

Ryan said that over the next 18 months, the company would introduce five new low-power pacemakers, eight new lead systems and seven new high-power devices. Additionally, he said that he believes the results of the Sudden Cardiac Death in Heart Failure Trial (SCD-HeFT) will give Medtronic "a significant opportunity to expand the [CRM] market." Ryan said he expects the CRM implantables market, which currently accounts for roughly 45% of the company's revenues, to grow overall by 15% to 17% over the next five years.

He also addressed the only market in which Medtronic does not hold a No. 1 market share, the highly profitable coronary vascular market. He said the company's Endeavor drug-eluting stent (DES) program is progressing, with the ENDEAVOR III clinical trial completed last September and enrollment in ENDEAVOR IV, expected to begin in the next few weeks. He also noted that Medtronic expects to get the CE mark for its Endeavor DES in the March/April timeframe.

Ryan said that the company has "multiple growth drivers" in the vascular business to go along with its DES program, cited among them the November acquisition of Angiolink (Taunton, Massachusetts), a company developing wound closure solutions for vascular procedures.

Another promising sector for Medtronic is the global diabetes market. Ryan said the company, via its Medtronic MiniMed (Northridge, California) unit, is on the road to developing the world's first artificial pancreas by fiscal 2008. "This road is built upon the convergence of our Paradigm insulin pump platform and our Guardian continuous glucose monitoring system," he said.

A key component to the realization of the artificial pancreas, he said, would be the release of the Guardian RT system in fiscal 2006, which will be able to display real-time glucose values every five minutes. "The convergence of pumps and continuous sensors is key to developing an artificial pancreas," Ryan added.

Following Ryan to the Grand Ballroom podium a half-hour later, Boston Scientific CEO Jim Tobin said it will be hard for the company to outdo this past year's success story, spurred on by the U.S. approval this past March of its wildly popular Taxus DES system. However, he said that is exactly what the company intends to do over the near-, mid-, and long-term.

Tobin said that Boston Scientific was able to grow its business by roughly $2 billion over the past year, largely due to its Taxus DES program, an almost unheard-of feat for a medical device company. Using a baseball analogy, he acknowledged that while it is considered "poor form to stand there and admire your dingers when they go . . . this is a hell of a year." In testimony to that, he said that even if Boston Sci didn't add any new products or acquire additional companies through 4Q05, the company would still grow 15% next year. "We've got pretty good momentum going here," Tobin said, noting that "[DES] stents are as big as the whole company was just two-and-a-half years ago."

While he said that 2004 was a great year, particularly for the DES business, 2005 and 2006 are shaping up to be a great years as well, with the pending European launch of the company's next-generation DES product, the Libert , this year and a U.S. launch for that product the following year.

He said that until probably 2007, only J&J and Boston Sci would have a DES product on the U.S. market. Even more importantly, he said, "We'll have our second-generation Taxus Libert on the market before J&J has their second generation or anybody else has their first and that is to me perhaps the most important thing I can say."

Tongue in cheek, he added: "We actually know what we are doing here, folks."

Tobin said that Boston Scientific has invested heavily in promising companies. "We have kissed every frog out there for years now and have been making balance sheet investments in new technology." He said that in addition to spending nearly $600 million a year on R&D, the company is spending nearly that much on balance-sheet investments.

Tobin briefly looked at areas where Boston Sci either wants to expand its presence or protect its position from competitors during the coming years. Obviously, he said, it needs to protect its DES franchise, a market that is the cornerstone to advances in all the other markets because of the revenue that it brings in. "We have to protect that franchise that's what is generating $2 billion a year."

Aside from the DES sector, Tobin described other markets that he tabbed as potentially having a market size of more than $1 billion, including vascular sealants, abdominal aortic aneurysms, CRM and "endovations." In the $500 million to $1 billion range, he placed bifurcation stents, carotid solutions, spinal chord stimulation and migraine therapy.

Two weeks later, after Piper Jaffray's Gunderson challenged the big companies in the med-tech sector by saying they must develop new sources of revenue and provide superior "execution" as important says to satisfy their investor customers, Larry Best, senior vice president and CFO of Boston Scientific, appeared to be targeting those particular goals in his remarks in the main ballroom of the venerable Pierre Hotel. Emphasizing his company's "consistency of results," Best promised that Boston Sci "would continue to deliver solid growth in one of the most exciting places to be in medical devices."

He particularly emphasized two opportunities where the company can both move forward with new products and execute that movement: via continued development of DES technology and the emergent area of bifurcated stents. Best pointed to the recently reported one-millionth implant of the Taxus Express DES along with record sales in 2004 but said even better is yet to come with next-generation products and the company's plans "to be the leader in coronary stenting for at least the next five years. Our leadership in drug-eluting stents is sustainable. We have a huge pipeline."

He particularly emphasized the launch of the Taxus Libert stent in 18 countries outside the U.S., saying the product was not just "another stent with the same coating and the same drug," but rather, "a revolutionary technology we've shown that in clinical trials and in practice. We're way ahead of the game in terms of superior technology."

Further out, he emphasized the opportunity in the development of stents to treat bifurcated vessels, saying that Boston Sci would be the leader in bifurcation in three or four years. Driving that leadership, he said, will be Advanced Stent Technologies (AST; Pleasanton, California), acquired by Boston Scientific in December. Saying he was "very excited" about AST's technology, he said that the use of bifurcated stents would eventually total about 30% of the overall stent market and further drive the company's profile.

"The bifurcation market is going to be a sweet spot," Best said. "AST, just recently, is the first company coming to market with a bare bifurcated stent." And he promised follow-on with a Taxus DES bifurcation stent. "This is not just another device," Best said. "Believe me, this is a big deal. If you can lead the bifurcation market, it leverages a lot of all the other products in the cath lab."

Other firms advancing in sector

Several other companies operating within the cardiovascular space drew crowds of interested investors at both conferences. Two that presented at the Piper Jaffray gathering Zoll Medical (Chelmsford, Massachusetts) and Abiomed (Danvers, Massachusetts) emphasized broadening their horizons.

Zoll is one of several firms making automated external defibrillators (AEDs), but its 12% share is far from market-leading. And so, "with a long way to go," Zoll is extending its reach by "diversifying into pulmonary resuscitation," Richard Packer, company CEO, told a roomful of attendees. That move was made with Zoll's purchase last fall of Revivant (Sunnyvale, California) for $50 million, thereby adding the AutoPulse resuscitation device as a complementary piece to its AED line. Packer said that new knowledge concerning defibrillation indicates that "more than 50% of [heart attack] patients need something else circulation, blood flowing through their bodies," before shocking their hearts to normal rhythm.

He said the American Heart Association (AHA; Dallas) is "redoing its protocol right now, changing from shock first, pump second, to pump first and shock second," thereby likely to advance the AutoPulse. Essentially an instrument for pulmonary compression, the AutoPulse is strapped onto the chest of the cardiac arrest patient and then automatically provides increased and improved compression to boost circulation. According to Packer, 60% of heart attack patients need CPR, but doing this manually provides hemodynamic benefits that he termed "inadequate."

Backing the value of the AutoPulse, he cited the newest studies in resuscitation terming previous research in this area a "backwater" demonstrating the benefits of the AutoPulse, and supporting its $11,000 price tag. Citing two EMS-based studies, he said that one had shown a 35% increase in survival using the Autopulse, the other a 75% increase. "The market for assisted circulation technology makes sense if you come across a victim in cardiac arrest . . . half the time you need circulation therapy initially, and it only makes sense that you're going to want sophisticated technology to provide that part of treatment."

Packer said Zoll already has found 100 customers for the AutoPulse, and he estimated producing $30 million in sales in 2005. The technology, he noted, "will go every place the professional defibrillator market goes," including expanded sales to the international market.

While Zoll is preparing a "broader agenda" of products "beyond shock," Packer noted that it remains targeted on defibrillator technology in hospitals, emergency services and public access. The latter, he said, offers the best chance for expansion, driven by "a lot of legislative and regulatory activity" to get defibrillation to people more quickly. He bannered the company's AED Plus as a device differentiated from other AEDs in that it "helps you with things you need to do before and after" applying a shock. "It helps people get through more of the steps of resuscitation. With better resuscitation, you have the chance of moving enough blood in someone's body."

Zoll, he said, "has the most superior medicine" out of "a smaller, lighter, brighter box. Our biphasic [shock] works better than the 'gold standard' biphasic waveform."

For its part, Abiomed probably is best known as the company attempting to bring to market the AbioCor, a totally artificial, totally implantable heart, but President and CEO Mark Minogue told conference attendees more than once that the company is most focused "on wanting you to go home with your own heart" rather than the artificial kind. And Minogue emphasized that the "profit-generating revenue" for the company is coming from the sale of its BVS heart support technology and pushing its other heart "recovery" products and services.

He said that in taking the helm from company founder David Lederman, he had set a variety of goals, including double-digit product revenue, "margin improvement" and "new products introduced" and that the company is accomplishing these goals. He noted that the last quarter was profitable for Abiomed "for the first time in years." Though he said that company losses had been driven largely by heavy R&D costs to develop the AbioCor, he put this investment in positive rather than negative terms. That technology platform "gives us a great depth of knowledge" in heart pump technology, Minogue said, adding that this had produced "lots of patents, patents pending and lots of trade secrets" still remaining unpatented.

Besides selling the BVS system, the company sees large potential value in two other heart support devices that provide extended support to failing hearts. Its AB 5000, for example, is a system that has gone "about a year in the lab, in patients beyond 90 days of support," he said. Using its "hearts outside the body," Minogue said, these longer periods provide bridge to recovery and "longer support of the heart" beyond the five to 10 days of support provided by the BVS. "It's a critical element for keeping people alive."

Ongoing, Abiomed awaits FDA approval of its humanitarian device exemption for the AbioCor so that it can start sales "in a very controlled rollout." That, Minogue said, will be followed by a second-generation AbioCor. The AbioCor 2, he said, will be 35% to 40% smaller" and serve as a "five-year device."

An interesting private company making a presentation at the JP Morgan meeting was OmniSonics Medical (Wilmington, Massachusetts), which is developing breakthrough treatments for vascular occlusive disease based on its OmniWave acoustic technology platform. The company, which is exploring a broad range of potential clinical indications, is initially targeting the treatment of peripheral thrombosis via its Resolution System. OmniSonics, which has undergone an extensive management change over the past year, raised a $40 million Series C round of financing in June, and has raised roughly $70 million total since its founding.

Exploring why the company was able to raise such a substantial amount of money with just one product in development was CEO Richard Ganz, himself a relatively new hire he was appointed to the position in June. "I think one of the reasons we were successful in going out and raising the amount of money that we did was that this technology is not a one-off kind of product but rather, a platform technology that can be used in many areas of the body."

The first market launch in the U.S for end-stage renal disease will occur in the second half of this year. Following that will be launches in deep vein thrombosis and peripheral arterial disease and finally in coronary artery disease.

The Resolution System, consisting of a thin titanium wire that is placed into a clogged artery or vein, delivers low-power (40 KHz) acoustic energy to resolve blood clots into minute particles approximately the size of red blood cells. Ganz said the sonic waves "create unstable bubbles in the fluid and those bubbles explode generating an acoustic energy." He said his company's product is differentiated from other ultrasound-delivering technologies on the market by the fact that they are tip-focused or boring products rather than internally generating the frequency.

While Ganz said that the first market launch for OmniSonics in dialysis access grafts is not a big one, he added: "We're excited about the opportunity to prove that this technology works, validate it and put it in the hands of our customers because we think there's a fair amount of pent-up demand not only for using it in dialysis access but in other parts of the anatomy as well." The company also said it sees potential use for the system in "non-core" applications, including neurology, orthopedics, urology and gynecology. "We're going to be talking to companies about partnership for those non-core applications," Ganz said.

In addition to the usual mainstream cardiovascular sector topics such as DES and implantable defibrillators, which were prominently featured, niche markets such as the treatment of patent foramen ovale (PFO) and other congenital heart defects that are gaining notoriety in the medical device space, sparked interest in presenting companies on the part of investors at the January meetings.

Publicly traded NMT Medical (Boston) is the best-known company in this arena, having pioneered this segment and still owning the lion's share of the market worldwide. The company recently stated that more than 15,000 PFOs have been closed globally with its two closure devices, CardioSEAL and STARflex.

A PFO is an incomplete sealing of the atrial membrane of the heart and has been implicated, although not conclusively proven, to cause various neurological disorders such as stroke and migraine headaches. Awareness of its potential role in these disorders has dramatically increased in recent years.

Speaking near the close of the JP Morgan gathering, NMT Medical CEO John Ahern recalled a conversation in 2001 with a prominent interventional cardiologist who asked Ahern "what's a PFO and what does it have to do with me?" Now, a little over three years later as the awareness of PFOs has surged, Ahern said this same physician recently exclaimed: "Wow, this could be bigger than the drug-eluting stent market!"

In these intervening three-plus years, NMT has initiated the 1,600-patient CLOSURE 1 trial, which compares the benefits of device-based PFO closure with traditional medical management for patients that have suffered an embolic stroke and have been found to have a PFO. As reported by the company in a conference call last November, enrollment for this trial has been sluggish and very disappointing, suggesting that it will be several years before the trial is completely enrolled and the results are available.

The company's main rival in the PFO market, privately held AGA Medical (Golden Valley, Minnesota), also has suffered the same fate, as enrollment for its 500-patient RESPECT trial also has lagged badly.

As disclosed last fall, NMT received approval in the UK for the Migraine Intervention with STARflex Technology (MIST) study. MIST is a prospective, randomized, double-blind study enrolling migraine patients with a PFO to either PFO closure with the STARflex implant or to a sham procedure. The primary endpoint of the study is to compare the incidence of migraine attacks in patients with the most serious migraine headaches who have failed all conventional medical management. This new indication represents a potentially huge new application for PFO closure technology. Moreover, results could be forthcoming quickly, as fewer than 200 patients will be enrolled (50% in each arm) and follow-up will be for only six months.

The week prior to the JP Morgan conference, NMT Medical reported that patient recruitment for MIST has progressed more quickly than originally anticipated, and full enrollment could be achieved in 3Q05, one quarter ahead of the initial year-end target. At the conference, Ahern said that he has been "pleasantly surprised" by the huge interest in the trial and expressed optimism about its results. He cited the strong support of the Migraine Action Association, a migraine headache advocacy group representing more than 14,000 members in the UK. In the critical U.S. market, the company hopes to begin a domestic trial sometime in the second half of this year.

In addition to representing a "more immediate" revenue opportunity, Ahern noted that the migraine opportunity is enormous. For example, of the 30 million estimated migraine sufferers in the US, roughly 20% are considered to be in the most serious category. About half of these are refractory to medical management and about half of those are likely to have a PFO. This leads to a target market of about 1.5 million patients. The international market adds another 2.3 million potential patients. With a selling price of each PFO closure device of roughly $5,000, NMT's migraine opportunity alone is a multi-billion-dollar one. Coupled with a stroke opportunity, which he described at more than 600,000 patients annually worldwide, Ahern strongly believes that his company has major growth ahead.

In support of that assertion, he provided a model showing NMT's worldwide revenue growing from about $20 million in 2005 to more than $200 million in 2008. The migraine indication is expected to account for the majority of its growth, as stroke revenue will be constrained by the lack of a U.S. approval until at least 2009.

Another PFO contender is lesser-known, privately held Velocimed (Minneapolis), targeted for purchase by St. Jude Medical in mid-February. Speaking to a large crowd of attendees at the JP Morgan conference, CEO Dennis Wahr, MD, a former interventional cardiologist, also indicated tremendous enthusiasm for the PFO market, describing it as a "staggering opportunity" at $800 million and with a paltry 4% current penetration rate. The company recently received the CE mark for its innovative Premere PFO closure system and will shortly begin marketing in Europe with a small, dedicated direct sales force. Wahr described Premere, which consists of two flexible, low-profile, nitinol anchors connected via an adjustable length polyester tether, as a revolutionary device "designed specifically and exclusively to close PFOs."

Discussing the company's plans in the U.S. market, Wahr said that he hopes to begin a stroke trial by mid-2005. Given that both NMT and AGA have had so much difficulty in recruiting patients, Wahr was asked how his trial could attain speedy enrollment. He told BBI that he has an "innovative but highly confidential" trial design that could enable Velocimed to compete the stroke trial expeditiously.

Regarding a migraine/PFO trial, Wahr said that he is "seriously interested" in this market opportunity and hopes to begin a trial sometime in the future. He went on to say that "everyone will be watching the MIST trial with great interest" and that his sense is that there will be benefit for a subset of patients.

In addition to discussing Velocimed's PFO activities, Wahr noted that its major revenue in the next few years would be derived from its Proxis embolic protection device, which he claims is the only such device to treat distal lesions and protect during initial crossing as well as protect the side branches. Proxis is CE-mark approved and Wahr hopes it will attain FDA approval before the end of 2005 for saphenous vein graft procedures. To date, Velocimed has raised about $46 million from a group of highly respected venture capitalists and is supported by an experienced board of directors.

Ortho firms make no bones about their success

A significant number of the med-tech companies represented at the JP Morgan and Piper Jaffray conferences are in the orthopedics space. Among those presenting from that market in San Francisco were Zimmer Holdings (Warsaw, Indiana), Wright Medical (Arlington, Tennessee) and Kyphon (Sunnyvale, California).

Zimmer is the poster child for dramatic expansion and has risen in recent years to become the largest orthopedics company in the world. The company, which was spun off from Bristol-Myers Squibb (New York) in 2001, has consistently delivered 30% or better results and has garnered the No. 1 pure-play orthopedics position since its $3.25 billion-plus acquisition of Europe's largest orthopedics company, Centerpulse (Zurich, Switzerland) in the fall of 2003.

Because of its integration with Centerpulse, the new Zimmer now has more than 6,500 employees, operations in more than 24 countries and sells products in more than 80 countries. The Centerpulse buy also added spine and dental franchises, though the company still remains heavily weighted toward hip and knee implants.

Ray Elliott, president and CEO of Zimmer, said the company is focusing on broadening its minimally invasive (MIS) surgical offerings across the spectrum of markets in which it is involved. He cited the December additions of the University of Nebraska and University of Alabama as new Zimmer Institute teaching facilities, designed to train orthopedic surgeons to use the company's minimally invasive technologies and participate in MIS product refinement.

One interesting new product that the company is developing is an allogenic tissue cartilage. "If there is a 'Holy Grail' in our industry, it is the probably the re-creation of the cartilage in a natural way," Elliott said. Commenting on the dental business that the company acquired with the Centerpulse purchase, he said that while some people thought the company would sell that line, it actually has good technology correlations with Zimmer's orthopedic offerings, with such terminology as inter-body implants, next-generation surfaces and image-guided. The spine sector is another area that the company will focus on, with the areas of exploration including enhanced MIS spine procedures, nucleus replacement and cervical disc replacement.

Concerning the Centerpulse deal, Elliott said Zimmer has been "very, very pleased" with how the integration process is going. He said the company has met 1,905 out of a total of 3,341 milestones from the merger in the 15 months since the merger closed. He said the company has also met a 500-person headcount reduction, and all the sales forces of the two companies are now integrated.

A company that has enjoyed a dramatic turnaround since the new millennium began is Wright Medical, a more than 50-year-old global orthopedic medical device company specializing in the manufacture and marketing of reconstructive joint devices and biologics products.

Reconstructive joint devices are used to replace knee, hip and other joints that have deteriorated through disease or injury. Biologics are used to replace damaged or diseased bone, to stimulate bone growth and to provide other biological solutions for surgeons and their patients. Within these markets, the company focuses on the higher-growth sectors of advanced knee implants, bone-conserving hip implants, revision replacement implants and extremity implants, as well as on the integration of its biologics products into reconstructive joint procedures and other orthopedic applications.

"When you think about Wright Medical," said Barry Bays, company chairman, "you really need to focus in on three segments of the orthopedic surgery business. The lion's share of the company's business falls into the first area, the large-joint reconstruction market, primarily hip and knee replacements." He said the company growth rate in that sector has been about 13% over the past three to four years, just about at the market rates.

The second sector the company is involved in is what he termed the "extremities" market, which includes digits and foot and ankle products and other areas where small joints are reconstructed. Bays said Wright is currently growing this market at roughly two times the market rate of 10% a year.

The third area, biologics, has been one of the fastest-growing segments within the market place with an average growth rate of between 15% and 20%, with Wright Medical doing significantly better. "We've had an outstanding growth of 30% to 45%, averaging 36% over the last 3-1/2 years."

The primary focus of the company's biologics group is in the spine area, which accounts for 43% of that divisions business. According to Bays, since Wright Medical is not primarily in the spine business, "we have to think about expansion in the biologics marketplace a little differently than our competitors." To do that, he said the company has looked a little deeper into the areas where bone-grafting is occurring. It also layers in soft-tissue augmentation, which often is used in conjunction with bone grafting.

That biologics market is further broken down into four major platforms these include: bone repair; protection treatments; soft tissue repair and the longer-term anti-adhesion platform, which includes the Adcon Gel that the company acquired via bankruptcy proceedings involving Gliatech (Cleveland) just over two years ago.

Bays said that between 6% and 6-1/2% of sales are going to research and development. "Each year, we have about 20% to 25% of our revenues that come from products that we did not have in the product line 18 to 24 months prior. So I think that's a strong indication of our commitment; it also gives us a lot of confidence that our new pipeline of new products will continue to flow out year after year."

Kyphon treats vertebral compression fractures caused by osteoporosis, cancer and trauma. When the spine is structurally weakened, routine downward pressure can cause a vertebral body to collapse and fracture. Kyphon's KyphX family of instruments is designed to help repair these fractures during minimally invasive spine surgery. Minimally invasive spine fracture surgeries using the company's current KyphX instruments involve the insertion of two disposable balloon devices into the fractured bone. During a procedure known as kyphoplasty, a surgeon inflates the balloons to compact and move the deteriorated bone. As a result of the inflation of the balloons, the collapse caused by the fracture may be reversed. The balloons are then removed, and the newly created cavity is stabilized by filling it with the surgeon's choice of bone filler material.

"Our mission over the next three to five years is to become the recognized global leader in restoring spinal function through minimally invasive therapies," said Richard Mott, president and CEO. He said that Kyphon already has enjoyed a great deal of success since its inception and first commercial revenues in 2000, with 19 quarters of consecutive revenue growth.

Mott said that 2004 was a very important year for the company, since it finally received FDA clearance to promote and sell its proprietary bone cement, thereby expanding use of this bone cement, which had already been used frequently off-label in conjunction with the procedure. The clearance was the first in the U.S. for a spinal bone compression cement. With the launch of the company's KyphX HV-R bone cement in the U.S., Mott said Kyphon would be able to provide and promote a complete procedural solution for surgeons who treat patients with vertebral fractures. In addition, the company can now train spine specialists on appropriate techniques for delivering bone cement during balloon kyphoplasty.

In an ironic twist, Kyphon had to wait nearly four years to gain a specific spinal application for the cement, even though it had received clearance for the instruments used in the procedure in the late 1990s without ever performing a single procedure on a patient. The studies used to generate the bone cement approval also have served to show the long-term benefits of kyphoplasty. Participants in the 100-patient prospective study had lost an average of 38% of their vertebral body height pre-surgery. One week after the surgery an average of 88% of that vertebral height had been restored. "The important point here is that two years out, that height has been maintained, "said Mott. "There was no further [vertebral] collapse in these patients and we believe this represents a significant outcome for these patients."

Kyphon estimates that there are 700,000 spinal compression fractures annually in the U.S. caused by osteoporosis alone. And of that number, only a third of these are diagnosed. The cancer market represents roughly 50,000 people in both the U.S. and Europe. The company said the trauma market represents about 100,000 patients a year in both the U.S. and Europe.

A question being asked by those interested in the orthopedics space was whether sector powerhouse Stryker (Kalamazoo, Michigan) could maintain its mantra of 20% annual earnings growth. Missing from the podium at this year's Piper Jaffray gathering was longtime company CEO John Brown, who late last year turned over those reins to Steve MacMillan, also missing from the gathering, with Stryker's presentation handled by Dean Bergey, vice president and CFO.

Bergey credited Brown with bringing both "a result orientation" to the company and "unbending integrity" and for establishing, he said, "what came to be known as our 20% standard-of-growth mantra." However, he was less definitive in reaffirming that standard as an absolute over the long-term future of the company. Bergey did cite Stryker's 14% increase in sales in "in real dollars" in 2004 and 21% increase in earnings.

Among product highlights described by Bergey were the introduction of a hyaluronic coating for implants, a ceramic-on-ceramic hip product and an antibiotic bone cement, called Trident, which he said had been "extremely well-received in the marketplace." He noted that Stryker competes in a broad range of orthopedic sectors. While it holds leadership in only one of these, Bergey said that the company's overall high share position in all the others areas makes it "the most broadly-based orthopedic company in the world."

The conclusion to be drawn, he said, is "how diverse" the company is. And he found a cause for optimism in its lack of a broad range of leading sector positions. "One of the things this represents," he said, "is that there's still a lot of opportunity for the company to continue to grow and strive to be No. 1 in all of these areas."

Asked by Piper Jaffray's Denhoy about the company's ability to maintain Brown's 20% "mantra," Bergey replied that if Brown were making the presentation, the 20% promise would be "forever." But his answer was: "At this point in time, we're very comfortable [with 20%] through the end of the decade, given things we have coming on board."

Those things, he said, included turning current losses from Stryker's OP-1 bone matrix product, with a "putty approval," to profitability with expanded approvals for "posterior lateral spine fusion." That, Bergey said, "will be the rocket ship that takes OP-1 forward in terms of profitability." But he did not see that happening until 2008.

A second notable opportunity he cited is in artificial vertebral discs, though still three years and more away. Bergey projected the conclusion of enrollment in the company's lumbar disc program "sometime this year, probably in first half of the year," followed by two-year follow-up and a plan to get U.S approval in the first half of 2009, with overseas sales "in the intervening period." Approval of a cervical artificial disc is even further out, he said, with the company seeing application for an FDA investigational device exemption for such a device "in the first half of 2009."

Expressing a continued optimism, he said that Stryker is "in a good industry with a lot of growth prospects . . . and a lot of franchise headroom"

(Next month: Where the orthopedics sector is heading, and growth in diagnostics.)