The tissue engineering and processing sector of medical technology presently finds itself under a large federal microscope, the current closer look largely the result of a federal recall of cadaver tissues produced by CryoLife (Kennesaw, Georgia). The FDA last month issued an order requiring the company to recall those tissues processed after Oct. 3, 2001, and to destroy any materials processed since then. The FDA's order was based on concerns, it said, that CryoLife was unable to guarantee that the materials it processes are free of fungal and bacterial contaminants. It specifically cited the death of a Minnesota man who received a soft tissue implant during knee surgery last November, with material from CryoLife implicated in his death.

The FDA said that CryoLife cannot resume sales of the tissues until it meets the appropriate standards to ensure that they are not infected. The agency said it had confirmed that the company was processing and selling infected tissues from a cadaver even after the presence of infection in that donor was discovered. Besides having to deal with meeting the FDA's concerns, the company also faces a liability suit concerning the death in Minnesota, and CryoLife then acknowledged a Securities and Exchange Investigation, with the SEC requesting information related to the company's accounting since Sept. 1, 2001, and the tissue recall.

Shortly after that recall was issued, a variety of other problems in the industry were brought to light.

AlloSource (Centennial, Colorado), a large network of four human-tissue donor banks, has been required to recall of a transplant tissue which the FDA said had tested positive for Clostridium perfringens, the most common etiologic agent of gas gangrene. And in another case, the FDA said there was reason to suspect that transplant tissue from the company was involved in the post-operative infection of a patient with Enterococcus facealis and Escherichia coli.

The company disputed this claim, saying that it believes that the infections occurred elsewhere. Spokesman Ron King emphasized the company's rigorous testing procedures but acknowledged "in the past that [AlloSource] could have been doing a better job" of documentation and scientific methodology. According to King, the company has added five new layers of checks to insure that there is not a repeat of these incidents. Allosource was warned about the problem by the FDA after an inspection at its Centennial site.

In still another case — perhaps even more disturbing — the Federal Bureau of Investigation said it is investigating whether parts of bodies donated to a Texas medical research program later were improperly sold. The University of Texas Medical Branch (UTMB; Galveston, Texas) said it found "inadequate records" for its cadaver-donation program, which receives about 300 bodies a year, after starting a routine internal audit in March. The center said the lack of records also suggests that some body parts shipped between November 2000 and May 2002 may not have been tested for the viruses that cause hepatitis and AIDS. While the medical center called the risk to public health "negligible to zero," it could not guarantee that transplant patients are safe from infection. The FBI shut down the Willed Body Program after the discrepancies were reported by the medical center, and the case has been under investigation since May.

While these cases play out, CryoLife is attempting to meet the FDA's requirements following the recall order, and David Fronk, vice president, said CryoLife hopes for a variety of positives from a bad situation. He said the company is trying to win "some relief on the order for our life-saving and limb-saving cardiac and vascular tissue" through discussions with the agency. "All of the company's efforts and energies are going to be focused on addressing [the FDA's] needs and getting back to providing the quality and safe allograft tissue that CryoLife is respected for in the medical community," he said. Additionally, he said that new regulations likely to be put in place for the entire tissue processing industry will result both in improved quality and a level playing field for all participants.

Devices garner 25% of healthcare VC

While venture capital has generally been seen drying up in various sectors of U.S. industry, healthcare has remained steady, according to a recent report from Growthink Consulting, a business consultancy unit of Growthink (Venice, California), focused on supporting the development of new companies and the creation of database information that gives perspective to early-stage business development.

Corey Lavinsky, director of market research for Growthink, sees healthcare bucking the general downward trend with a continuing steady flow of VC funds to developmental firms in the sector. "There was a glut of investments in some of the other sectors — optical, networking, wireless. And a lot of investors who put their money into failed companies have become a lot more conservative and they're keeping their money," he told The BBI Newsletter. But healthcare "remains stable and has gone up a little bit in every quarter," he said.

Growthink's newest quarterly report shows a total of nearly $2.06 billion in healthcare venture capital (VC) funding during the recent quarter. Those funds went to 162 privately held U.S. firms, with an average deal size of somewhat more than $12.7 million. As might be expected, the lion's share of this VC funding — about 56% of the total — has gone to the biotech and pharmaceutical sectors, with an average of nearly $16 million per deal, about 40% larger than the average deal size in the sector.

But medical device firms aren't doing badly either. Companies in this sector garnered a solid 25% of the healthcare VC total for the quarter — nearly $513 million at about $12 million per deal. Add to these the other two sectors of healthcare broken out by Growthink — software and services (more than $352 million for the quarter, with an average deal of just over $8.8 million) and diagnostic/patient care (with $43.4 billion and a $6.2 million deal average) — and that gives medical technology firms outside the pharma sector more than $909.9 million in 2Q02 VC funding.

Of the $513 million raised in the non-pharma sector, the largest amount was garnered by Vertis Neuroscience (Seattle, Washington), a developer of devices for central nervous system treatment, with a $37 million round of financing. The next largest was Calypso Medical Technologies (also Seattle), which raised $28 million for development of a device to locate cancer tumors. While eight of the top 10 investments in the healthcare sector were biotechnology or pharmaceutical ventures, a healthcare tech company, TechRx (Coraopolis, Pennsylvania) cracked the top 10 as fourth on the list, raising $52 million to support the development of its medical software products. Vertis was No. 7.

Growthink said San Francisco Bay area firms led the nation by receiving 19% of the total healthcare VC funding for the quarter, followed by New England-area companies at 16% and companies in the Southern California region with 14% of the total.

Northfield meeting may be showdown

The Sept. 13 annual meeting of Northfield Laboratories (Evanston, Illinois) could prove to be a management showdown for the company, which has been attempting to bring its oxygen-carrying blood substitute PolyHeme to market. Northfield in August 2001 filed for premarket approval (PMA) with the FDA seeking an indication for use of PolyHeme in trauma situations. Since that time, however, the company and the agency have disputed the results of the clinical trial data the company submitted with the PMA. Rather than conducting a randomized, blind trial for the blood substitute, the company compared results of the product with medical records.

Shareholder Robert Coates challenged Northfield's leadership and is seeking a seat for himself and another critic of the company on its board of directors. Besides seeking to shake up the company's leadership, Coates has proposed various actions to support PolyHeme approval. Chief among these, he says, is to seek a pharma partner that could help push PolyHeme's clearance and extend its applications. To support this latter point, Coates in August issued a statement saying that at least one pharmaceutical firm, Zengen (Woodland Hills, California), is interested in PolyHeme.

The statement quotes James Lipton, Zengen's chief scientific officer, as saying "We contacted Northfield about a year ago to explore ways of marrying our technology with PolyHeme, but we never got a response from the company." Lipton said he made his interest in PolyHeme known to Coates after learning of his plans to win board membership. PolyHeme, according to Lipton, "might ... be used as an agent to deliver our anti-infective and anti-inflammatory medication" or, alternatively, to use Zengen's technology to deliver PolyHeme to treat infection and inflammation

Northfield, which Coates has accused of having a non-communicative approach to its operations, has more recently released a series of announcements about its progress. It has reported that data about the product will be published in the October 2002 issue of the Journal of the American College of Surgeons, calling this a "a significant accomplishment" validating the product's value.

The company issued a response to Coates' charges in a letter announcing the distribution of proxy materials for the meeting. Steven Gould, MD, chairman and CEO, told shareholders that dialogue with the FDA "continues to be constructive — we are convinced that its concerns can be addressed and that a successful conclusion [for reaching product clearance] is achievable." He also said that the company is pursuing a partnership "with world-class pharmaceutical companies to fully exploit PolyHeme's potential," as well as seeking additional funding.

In the letter, Gould also criticized Coates' pursuit of a position on the board, terming the other nominee offered by Coates "a crony." And he said that "the nominating committee of the board, which is composed entirely of independent directors, met individually with Mr. Coates by phone and unanimously determined that candidates with significantly better qualifications were available."

Boston Sci, Aspect team for sedation tech

Aspect Medical Systems (Newton, Massachusetts) and Boston Scientific (Natick, Massachusetts) formed a partnership to produce sedation management technology for interventional and specialty medical procedure operations. The alliance will focus on developing and distributing brain-monitoring technology designed to improve sedation in patients undergoing less-invasive medical procedures.

Aspect's consciousness monitoring system, called Bispectral Index (BIS) technology, is designed to reduce the instances of over- or under-sedation during surgery. The firm will lead development efforts for a procedural sedation index, a stand-alone monitor and an accompanying sensor to be used in less-invasive applications.

With the technology agreement, Boston Scientific made an equity investment of $10 million for 1.4 million shares of Aspect stock. Now the owner of about 12% of Aspect's outstanding shares, Boston Scientific also provided a $5 million credit facility. Additionally, Boston Scientific may purchase up to 25% of Aspect's voting securities in the open market.

The BIS system directly measures the effects of anesthetics and sedatives on the brain. The company touts its index as superior to vital sign and other sedation assessment scales by avoiding under-sedation, which can result in surgical consciousness, or over-sedation, which can result in slowed recovery times.

"This opportunity is very substantial," Aspect President and CEO Nassib Chamoun said during a conference call last month. "It's approximately 30 million procedures per year and represents about a third of the $1.4 billion annual consciousness monitoring sedation market potential. As a result of this transaction, today we have more than $40 million in cash in the bank, which will give us the financial flexibility to build the business moving forward."

In return, Boston Scientific gains an option right for worldwide distribution of the monitors and sensors, while Aspect's OEM partners will gain access to the index and sensors.

Knee implant milestone

Zimmer Holdings (Warsaw, Indiana) called itself the first company to report 1 million knee replacement implants in the U.S., passing that milestone in the last week of July. Ray Elliott, chairman, president and chief executive officer, said, "It required 20 years for Zimmer to sell its first half-million knees since we first commercially introduced our knee replacement products in 1975. We sold the second half-million knees in just the past seven years." Zimmer's knee line is anchored by the NexGen Complete Knee Solution.