BBI Contributing Writer

SAN JOSE, California – Attendance at the 12th annual Medical Device Conference sponsored by Wilson Sonsini Goodrich & Rosati (Palo Alto, California), with events held here and up the road in Palo Alto, was up 6% from the previous year, totaling 465. At a dinner gathering on a quiet, cool, evening that marked the kickoff of the conference in the latter part of June, attendees heard David Cassak of Windhover Information's (Norwalk, Connecticut) IN VIVO: The Business and Medicine Report publication, interview Dr. Brian Firth, vice president of medical affairs at Johnson & Johnson (J&J; New Brunswick, New Jersey). Firth described how his team's concentrated efforts resulted in an almost unheard-of decision from the Centers for Medicare & Medicaid Services (CMS, Baltimore) – an incremental reimbursement code.

In these days of managed care and constant cost containment, healthcare delivery organizations look askance when a new product brings significant additional cost to a surgical or interventional procedure. This time J&J forged a new path through the reimbursement jungle. Firth explained, "The Cypher sirolimus-eluting coronary stent's reimbursement was approved before FDA approval was obtained." He said the accomplishment was "part science, part alchemy and part politics."

"We had to make sure we had compelling clinical and economic data. We started work with CMS very early on in our product development process. When we got the first clinical data, CMS did, too. We presented a roadmap of our IDE (investigational device exemption) trial plan to CMS. We kept them informed regularly. We were able to justify the $3,200 price for the Cypher because of the clinical and economic data. Not only does Cypher lower the probability of restenosis (the clinical payoff), but by doing so, the healthcare enterprise sees a payback in nine months or so. This is a very powerful story."

The Cypher stent is manufactured by the Cordis (Miami Lakes, Florida) unit of J&J. It is a tiny metal mesh tube that is covered with the drug sirolimus. Drug-eluting stents such as Cypher may have a substantial impact on the occurrence of restenosis for patients with coronary artery disease. Each year 800,000 angioplasty procedures are performed in the U.S. to open clogged coronary arteries. In between 15% and 30% of patients, the arteries become clogged again within a year, and must be treated again with angioplasty or open-heart surgery. "Drug-eluting stents combine drugs with medical devices to provide more effective care for many patients with heart disease," said then-FDA Commissioner Mark McClellan, MD, PhD in a press release announcing the approval of Cypher in April 2003 .

"Results from clinical trials were so conclusive about restenosis prevention that we got very little pushback on the price of the Cypher," Firth said. "But keep in mind, we live in a global market today. You must decide your price and hold it globally. If not, you face a reference pricing phenomenon where clients in the U.S. will demand the same lower price used in a less-advantaged country."

"Getting the whole process going, working a European strategy country-by-country was a tough process and required a lot of manpower. And then getting CMS and the private payers to sign off on the cost of Cypher was really plowing a new furrow. There were countless meetings. We see the effect of our incremental reimbursement success marking a major transition within CMS. Now CMS is looking for a product to do no harm and be effective for the intended disease, but to be cost-effective as well."

Firth answered a question about a developing J&J product, "Yes, we intend to follow the same formula for our carotid stent product. Early talks with both the FDA and CMS will be our mode again. Keep in mind, incremental reimbursement is not going to happen for a minor-priced product. The product must be expensive enough that it would derail the current DRG reimbursement. You can expect to see this kind of model being used, for instance, on the percutaneous cardiac interventional devices. J&J is interested in any product combining a device and drug replacing a more-invasive approach."

Future devices

The next morning Cassak interviewed Robert Stack, MD, managing general partner of SyneCor (Research Triangle Park, North Carolina), a business generator of new life sciences companies. Stack is currently executive director of the Atlanta Cardiovascular Research Institute (ACRI) and a professor of medicine in cardiology on leave of absence from Duke University Medical Center (Durham, North Carolina).

Stack has invented a number of devices designed to improve and further the technology of angioplasty. A major thrust of Stack's current basic and clinical research effort includes new devices for the treatment of peripheral vascular disease, particularly cerebrovascular disease.

According to Synecor's mission statement, "We believe four major trends will shape the evolution of the cardiovascular device industry over the next decade. First, we believe that major advances in interventional cardiology will be driven by the use of devices as platforms for the local delivery of potent biologicals and pharmaceuticals."

"Secondly, there will be a major trend toward a convergence of technology among various medical specialties toward the local diagnosis and treatment of diseases at the cellular level.

"Thirdly, the aging American population will continue to fuel ever-increasing, very large market potentials for cost-effective technologies to treat cardiovascular disease.

"Finally, further consolidation within the medical device industry and the likely continuation of the capricious nature of the private and public equity financial markets supporting these fledgling start-up companies will provide challenges that only the best-positioned companies can successfully navigate."

Cassak asked Stack to review some of his historical participation in the growth of interventional cardiology. Stack reminisced about his work at Duke in the early 1970s, "I thought echo [echocardiography] and 2-D echo and nuclear imaging were going to be the gold standard for cardiological diagnosis. At first, I was not at all interested in angioplasty. I thought for certain that the procedure would never fly. It took two to three hours per procedure, even for a simple LAD (left anterior descending coronary artery) with a straight lesion. The equipment was very bulky and immensely complicated. Keep in mind, these catheters could not, at that time, be steered."

Then came a seminal event, said Stack. "John Simpson, MD, did a residency at Duke, became enamored of the angioplasty procedure and invented the steerable guidewire. John was inspirational in other ways, too. His role model coupled with that of Dr. Tom Fogarty showed me that a physician could be an entrepreneur – something I'd not thought possible for me."

Speaking about SyneCor, Stack said, "We're looking for disruptive technology. That is, a new technology that has potential to change the paradigm, disrupt the status quo. We want products/technologies that will be way more usable for the customer and provide better outcomes for the patient."

Device investing today

"Investor interest in the medical device industry has increased significantly during the last year," according to Michael O'Donnell, a partner at Wilson Sonsini Goodrich & Rosati. With the changing environment, several existing life science funds have added new partners with strong operational healthcare experience and existing funds have recently opened in the Bay Area to focus on the industry.

O'Donnell chaired a panel discussion on the subject of "Fresh Perspectives on Device Investing." The panel included Michael Carusi, managing director of Advanced Technology Ventures (Palo Alto, California); John Maroney, managing director of Delphi Ventures (Menlo, Park, California); Jay Watkins, managing director of DeNovo Ventures (also Menlo Park); and Scott Wolf, vice president of Frazier Healthcare (Seattle).

Asked by O'Donnell what the state of the market for healthcare investments is today as compared with 1998, Maroney said, "Well-positioned deals are getting funding. There is more money available for young companies today." Watkins chimed in that healthcare companies "have remained interesting for VCs (venture capitalists) throughout the lean times."

Wolf's response was that "no good deed goes unpunished. There were VCs like us who hung with the healthcare device market, but now we have more competitors. The interest is still on a significant product or procedure."

Noting the uptick being seen in interest in medical technologies, O'Donnell asked: "Are the ideas better or [is it] just big companies looking for acquisitions?"

Carusi replied, "There's a back-to-reality mindset now. We're not looking for 100 times original investment." With what he termed "a more realistic expectation of return," he said the healthcare device sector "is on the new investor's radar screen."

For Wolf, the answer is simple: "All the money that was in the IT (information technology) market has to go somewhere." He cited another renewed phenomenon seen in 2004: "The IPO [initial public offering] market for medical devices is possible again."

Wolf had some practical advice for entrepreneurs and would-be entrepreneurs in the audience, saying the best way to get a business plan reviewed is to already be known to your potential investors. "This [the VC business] is a relationship business," he said. "We like to know the leader of the new firm or have him/her recommended to us by someone we know."

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