Kirkland, WA-based Pathway Medical Technologies has to be considered one of the bright spots in the recent history of Seattle life sciences. The medical device maker won FDA approval for its first product about 15 months ago, raised $42 million in venture capital, and recruited a CEO with loads of experience in commercializing medical devices. Back in February, co-founder and chairman Tom Clement said the company showed signs of becoming “a real winner.”
If only the story were that neat and tidy.
Even with that good fortune, Pathway has had some hard knocks. The company introduced its tool that drills through and vacuums out blockages in leg arteries right in the middle of the recession, as patients were losing health insurance and hospitals were tightening their belts. The old medical device business model of simply pitching a cool new toy to doctors who place orders appears to be morphing into a new paradigm in which hospital purchasing committees are calling more of the shots, and demanding more proof that such a treatment is cost-effective. These changing market forces are at least part of the reason why Pathway wasn’t able to meet its aggressive internal sales forecasts in the first half of this year.
In May, it axed one-fifth of its workforce. CEO Paul Buckman made clear then that the company had raised $120 million from investors, and with a plan to turn profitable in 2011, it needed to lower the burn rate so it wouldn’t have to raise any more venture capital.
So while Pathway hasn’t been quite the overnight success that it might have been with its nifty tool a few years ago, Buckman offered a candid assessment in a recent interview of how the company is adjusting parts of its plan while sticking to its long-range philosophy. Buckman says he sees encouraging evidence of acceptance from physicians even while Pathway has learned the hard way about what it still needs to prove.
Pathway doesn’t disclose absolute revenues or net losses, but it did say last month that it has seen 172 percent sales growth over the past two quarters. About 200 to 215 hospitals have ordered Pathway’s Jetstream products as of the last week of September, and they have treated about 2,500 patients, according to a conservative estimate, Buckman says. Some of the early adopter physicians have done 50 or more procedures, so there are signs that repeat business will grow. If all goes well, about 4,000 patients will get the Pathway treatment by year-end, he says. Back in March, the company said about 100 medical centers had bought its device, and it had been used on 500 patients.
While that might look encouraging, it’s not the kind of breakout performance Pathway had envisioned earlier this year.
“Our projections at the beginning of the year were a bit over-optimistic,” Buckman says. “It is taking longer to get accounts started than we thought.”
For those relatively new to the Pathway story, here’s a little background. The Jetstream device was first approved in July 2008 for patients with peripheral artery disease, in which fatty plaque buildups accumulate in leg arteries, like they do in the hearts of people with cardiovascular disease. An estimated 2 million Americans have sought treatment for peripheral artery disease, complaining of pain when they walk. Most people go undiagnosed now, partly because there haven’t traditionally been many good options for treatment. The Pathway device is designed to work with a tiny stainless-steel drill mounted on a catheter that slides inside clogged leg arteries, where it cuts through and vacuums out blockages.
The company hopes to make its money via a classic razor and razor blade business model. Pathway sells a console for about $15,000 to a medical center in order to power the high-speed drill, and then charges about $4,000 apiece for a disposable component used for each patient, which is where the real potential profit margins are.
Pathway has a few competitors fighting for a piece of this market, although each has a technology that’s quite different. Plymouth, MN-based ev3 (NASDAQ: EVVV) markets the SilverHawk and RockHawk that slice through and scrape out blockages in the legs. Colorado Springs, CO-based Spectranetics uses a laser-based system. St. Paul, MN-based Cardiovascular Systems has a high-speed diamond-tipped cutting tool.
Pathway has tried to separate itself from the pack by showing doctors that its tool is the only one versatile enough to cut through every kind of blockage in the legs at once—from rock-hard calcium deposits, to a squishy type of blood clot called a thrombus. Pathway says it is able to do this without raising the risk of having the drill puncture the leg artery and cause dangerous bleeding. The company’s device is also the only one with a vacuum feature, which sucks up tiny particles that can get dislodged and flow through the bloodstream, potentially causing strokes.
Shortly after he took over as CEO, Buckman told investors some compelling field anecdotes in January at the JP Morgan Healthcare Conference in San Francisco. He said one doctor used it to clear out blocked leg arteries in a 91-year-old woman in less than an hour. Before the Jetstream device came along, the physician was reluctant to operate at all on such a patient, given how fragile she was, and how it would have taken seven different tools, 14 onerous insertions of catheters, and about $20,000 of equipment to do the same thing with other methods. The versatility and ease of use of the Pathway tool were clearly going to make it a hit—or so the story went.
But Pathway has learned through experience this year that its tool is not a one-size-fits-all answer to peripheral artery disease.
Without getting too technical in the engineering lingo, the original Pathway device was compatible with an 8-French diameter sheath needed to mount it into the patient, which some doctors weren’t comfortable with for all patients, Buckman says. If Pathway was going to be successful, it needed to make a follow-on product with a narrower 7-French sheath that some doctors prefer. That narrower version came out in August.
The Pathway cutting tool is made to work in vessels that are 3 millimeters in diameter or larger. That’s important to know, because basic anatomy of leg arteries says they aren’t all the same width, and with the current product, “we participate in about half of the market, and we didn’t fully appreciate that at first,” Buckman says. Pathway now has two new devices scheduled for market introduction in 2010—one larger and one smaller—that will allow the company to treat the entire leg, Buckman says.
“We are rapidly improving the product to address more patients,” he says.
The other big challenge is a fundamental change that many device companies are seeing in how hospitals buy new equipment. The hurdles for all new products are higher than they were a couple years ago.
“It used to be at most hospitals that if a doctor wanted to use a new product, you would just go to the [catheter] lab manager and say, ‘Order the product,’ ” Buckman says. “Those days are gone.”
Now it’s more likely that the doctor who wants the product will have to go before a committee and argue that the new technology is superior to the standard of care, or a more cost-effective way to treat a serious condition, Buckman says. That takes time. “Instead of booking revenue in a couple of weeks, it’s more like three, four, five months. It delays our revenue ramp,” Buckman says.
It would be tempting for a CEO in such a situation to dial up the pressure on his sales force, or maybe try some discounts or gimmicks to move product out the door to boost quarterly numbers. But Pathway’s reps need to spend time training physicians on how to use the device properly, and Buckman says cutting corners with training is not the way he wants to go.
By offering a more diversified product line, and sticking to the fundamental benefits of its product, does Pathway think it can still reach its goal of turning profitable in the first half of 2011? Buckman didn’t want to go out on a limb to answer that, saying it’s “hard to project.”
“I want to get the company profitable as soon as I can and do the right things to build the business the right way and make customers happy,” Buckman says. “We want to make sure hospitals have a good experience, and the patients have a good experience.”