By DON LONG
BBI
and HOLLAND JOHNSON
BBI Associate

The cardiovascular sector was a focal point during 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 med-tech 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, 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 going 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 (J&J; New Brunswick, New Jersey) pending $24 billion offer to merge with Guidant (Indianapolis). He also cited 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 small 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 past year 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 Johnson & Johnson.

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 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."

Denhoy leaned heavily on metaphor in his comments, describing the med-tech opportunity as "still lots of unplowed acreage," that acreage consisting of "hundreds of millions of people suffering medical states that can benefit from some sort of med-tech fix." Operating margins in the sector ranged around 30%, a figure he called "virtually unheard of in the broader industry."

He cited also "the sickness of big pharma companies the last couple of years," suggesting that this is good medicine for med-tech's cause, but warning: "Of course, the monsters are never truly dead. They will come back eventually [and that's] something to look out for."And he offered another set of warnings from the regulatory side, saying 2005 will likely bring "increased scrutiny" of clinical trials and marketing practices, further pushed by a more selective consumer.

Reimbursement also should continue to "draw some attention," he said, coming from "pushback" by government reimbursing agencies and other payers.

He cited cardiovascular, diagnostics and ophthalmology as arenas continuing to feature technologies that "just keep coming" and offering solid near-term gains. "Med-tech is solid in 2005 and beyond," Denhoy concluded. "There's a lot of unplowed land. Earnings growth looks sustainable."

Touching on some of the cardiovascular sector's big hitters, 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 it 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, once-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) also "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."

Big companies in the spotlight

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 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 (Fullerton, 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 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 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 Johnson & Johnson 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 DES, 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" 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: 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."

A company that has certainly benefited from and contributed to Boston Sci's success in the DES sector is Angiotech Pharmaceuticals (Vancouver, British Columbia), which supplies the paclitaxel coating for the Taxus stents.

Bill Hunter, president and CEO, noted during his JP Morgan presentation that while Angiotech is primarily known at this time for that role, it does have a number of different programs, including divisions in bio-coatings, polymers and orthopedics implants.

That being said, Hunter acknowledged that the Taxus program has been the catalyst for the company's drive to expand into other areas. "Taxus has been a fabulous program for us. It has grown at a rate that I think has exceeded anybody's expectations." He added that the product's sales have outperformed so-called "blockbuster" pharmaceutical products, with more than $2.2 billion in sales in less than a year.

Where does his company go from here? How about more drug/device combinations? "We started to believe that there was a business to be had here in combining drugs with medical devices and biomaterials," he said, "and what we have put together in our business is a comprehensive look at drug screening, trying to find the right drug for the right medical device problems [and] combining that with a diverse biomaterial platform that allows us to deliver drugs in very complicated ways in very specific places."

By putting together such drug-based medical device delivery systems, Angiotech has turned out to be a pharmaceutical company that really operates in the med-tech space.

The rationale behind this approach is really quite straightforward, Hunter said, noting that while there are literally tens of thousands of different medical devices, they're all constructed from the same basic building blocks. What one finds, he said, is that there are not 200 different devices with 200 distinct problems. "You probably have three or four recurrent problems that occur over and over again every time you try to do a surgical intervention and try to introduce a foreign body into the area."

What Angiotech discovered was that nine out of 10 devices ultimately failed because of inflammation, infection or tissue overgrowth. "And here was an entire industry [pharmaceutical sciences] that was spending billions of dollars a year making anti-inflamatories, anti-infectives and anti-cancer drugs," Hunter said. The problem with putting together a comprehensive program was that there were several sophisticated technologies needed to deliver the drug compounds. "Sometimes we need a suture, sometimes we need a gel, sometimes we need a biomaterial," he said.

The company decided to build its program though an intensive series of acquisitions over the past 16 months. It acquired adhesion barrier and hemostat technology through its Cohesion Technologies (Palo Alto, California) buy. The company added lubricious coatings and neuroguidewires with its STS Biopolymers (Henrietta, New York) acquisition. Additionally, the NeuColl (Los Gatos, California) buy gave them a collagen implant that got Angiotech into the field of orthopedics.

Another investment that the company made with Orthovita (Malvern, Pennsylvania) came to fruition in January with the commercial launch of Vitagel, a surgical hemostat that is designed for use in cardiovascular, orthopedic, urologic and general surgery indications to control bleeding. Vitagel differs from other competitors in that it uses a patient's own blood as opposed to products from pooled donor blood, thus reducing the risk of transmission of diseases associated with donor blood.

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 it 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 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 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.

Speaking as to 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.

Interest grows in PFO solutions

In addition to the usual mainstream cardiovascular sector topics such as drug-eluting stents 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 or 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 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), recently targeted for acquisition by St. Jude. 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 CDU that he has an "innovative but highly confidential" trial design that could enable Velocimed to complete 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 respected venture capitalists and is supported by an experienced board of directors.