Selling expensive new medical equipment to doctors today, no matter how good it may be, is no easy thing. Just ask Pathway Medical Technologies.

Almost three years have passed since the Kirkland, WA-based company won FDA approval for its first device, which drills through and sucks out tough-to-treat blockages in leg arteries. The company, founded in 1998, has raised $130 million of investment capital for this feat of engineering, and has a staff of 170 employees today.

Yet Pathway, stung once before by setting its own overly aggressive sales goals, has carefully watched its budgets the past couple years, and is taking a grind-it-out approach to get to the next level—sustained profitability.

“It’s not about growth at any cost. It’s about pursuing growth we feel we can afford,” Pathway CEO Paul Buckman said when I visited his office in Kirkland a couple weeks ago.

Pathway has had a lot of success with winning a series of FDA approvals for various versions of its device, which it markets under the Jetstream name. For those new to the story, Pathway’s device uses a tiny stainless-steel drill mounted on a catheter that slides inside clogged leg arteries, where it cuts through and vacuums out hard plaque blockages and squishier clot-like substances. It’s approved for patients with peripheral artery disease, a condition related to cardiovascular disease that has caused 2 million Americans to seek treatment, complaining of pain when they walk. Most people go undiagnosed, partly because there aren’t many good options for treatment.

The company showed some early signs of breakout potential in its first few months on the market, and raised $40 million in March 2009 during one of the worst stretches of the recession. But just a couple of months later, Pathway made a public admission that it had set overly aggressive sales goals, and had to cut 20 percent of its workforce to conserve cash, with an eye toward reaching break-even in mid-2011.

Paul Buckman

It’s mid-2011 now, and when I stopped by Buckman’s office for an update a few weeks ago, he said the company still isn’t profitable. Even though Pathway vowed two years ago that it wouldn’t raise more capital, Buckman now says the company will likely have to raise money next year.

Even though Pathway is falling short on those predictions, if there’s a word to sum up the company’s performance, it might be “stable.” The company still has 170 employees, the same as it did two years ago. Under constrained resources, it grew revenues by 50 percent in 2010, compared to the prior year, Buckman says. This year, Pathway expects to grow sales by another 30 percent, he says. About 15,000 patients in the U.S. have had a Pathway procedure done, and about 300 doctors are routinely using the device, Buckman says.

The hurdles here are numerous. Pathway doesn’t like to disclose what its drill sells for on average, but Buckman says all devices in its class sell for about $3,000 per procedure, and Pathway’s sells for a premium. This comes at a time when many hospitals and insurers are increasingly wary about adding costs. There are strong competitors like Dublin, Ireland-based Covidien and St. Paul, MN-based Cardiovascular Systems. And there is the inertia that comes from treating a form of cardiovascular disease in the legs that hasn’t traditionally been treated … Next Page »

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The FDA felt the heat in the 1990s when AIDS activists marched in the streets, shouting about how bureaucratic foot-dragging meant that patients died while waiting for approvals of experimental drugs. The FDA listened. It started clearing more new drugs for sale, and completing safety and effectiveness reviews faster than before.

Now it’s venture capitalists, and their industry friends on Capitol Hill, who are on the move, applying pressure behind the scenes to try to get the same result. Done right, this could be a healthy way to keep the FDA on its toes and allowing valuable new products on the market while protecting public health. But if the lobbyists and their allies in Congress overreach, I worry that this could hobble the agency and turn the pharmaceutical and medical device industry into a lightly-regulated Wild West (remember how that turned out for financial services in 2008?).

The effort to shake up the FDA is still in its early days, and it’s way too soon to say how it will turn out. But it is progressing, and this time the central battleground is in medical devices, and the rallying cry is for saving U.S. jobs.

The argument from the National Venture Capital Association and medical device trade groups is that the FDA, stung by high-profile safety controversies in recent years (think cardiac stents, Vioxx, Avandia), has become so fixated on risks of new products that it is stifling innovation in an industry where the U.S. has a competitive edge. FDA reviews of new medical device applications in particular, the VCs say, have become maddeningly slow, expensive, opaque, and unpredictable. The situation has gotten so bad that U.S. investment in medical technology is declining, companies have been testing and marketing their products in Europe first, and now jobs and operations are moving to Europe.

None of these arguments are new, but for the first time in a long time, I’m picking up signs that VCs and industry groups might get their way at the FDA.

“I do think the pendulum is going to swing back for us,” says Ross Jaffe, a managing director at Versant Ventures in Menlo Park, CA. “Back in the ’90s, the FDA got bogged down and it took pressure from AIDS activists and Congress to go back toward a middle-of-the-road path. Now it’s become too risk-averse. It will take pressure from industry and Congress to get it back to a middle ground.”

Both Democrats and Republicans in Congress, as well as the White House, are paying attention, Jaffe says. Leaders in the biotech drug business are making similar arguments, too, he says. “Congress is getting interested because there’s a sense that innovation is moving overseas. And there are implications for jobs.”

Ross Jaffe

Most of the industry’s self-serving arguments about the need to reform FDA regulation have gone nowhere in the past, partly because they were based on anecdotal horror stories. This time, the industry has been offering more data to back up its claims. It appears to be working.

Back in November, prominent medical device entrepreneur Josh Makower released an industry-supported survey of 204 medical device companies that has become frequently cited. About 85 percent of respondents said European regulators were predictable, compared with 22 percent who said that about the FDA. Companies that spoke to the FDA about running a clinical study for a low-to-moderate risk medical device, through what is known as the 510(k) regulatory pathway, said it took an average of 31 months to get their device approved in the U.S., compared with seven months for comparable applications in Europe. For higher-risk devices, it took 54 months here, and 11 months in Europe. It now costs about $31 million to take a low-to-moderate risk medical device application through the FDA approval process, and $94 million for a higher-risk application with more novel products.

The time, expense, and risk of medical device product development no longer justifies investment in an industry where half of all reported exits are worth less than $100 million, according to the Makower report.

Two months later, PricewaterhouseCoopers weighed in with another report, which said the U.S. is still No. 1 in medical devices, but that the nation’s leadership is eroding.

The FDA appears to be listening. In February, Jeffrey Shuren, who heads the FDA center for review of medical devices, announced the agency proposed an “innovation initiative” to speed up reviews of new medical technology to enable safe and effective innovations to reach the market faster.

Shuren’s explained the need for this initiative in terms that are quite friendly to the industry.

“We must assure that our oversight doesn’t stifle innovation—but rather, … Next Page »

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San Diego’s Reva Medical says its stock is expected to begin trading tomorrow on the Australian Securities Exchange under the ticker symbol RVA after the medical device company raised almost $85 million in its initial public offering. Reva says it issued more than 7.7 million new shares of common stock, which represents nearly 77.3 million CHESS Depository Interests, or CDIs, at $1.10 per CDI (a type of security that enables international companies to trade on the Australian exchange). Reva, which we profiled in 2009, says it will use the proceeds to continue development of its absorbable ReZolve stent, including clinical trials.

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Natick, MA-based Boston Scienfic is getting out of the neurovascular business. The medical devices giant (NYSE:BSX) said today it has agreed to sell the business to Kalamazoo, MI-based Stryker (NYSE:SYK) for $1.5 billion in cash. The deal is expected to close before the end of the year, according to the companies.

Boston Scientific said it plans to use about half of the $1.2 billion in after-tax proceeds of the sale for acquisitions and the remainder for retiring debt. Stryker has agreed to pay Boston Scientific $1.4 billion for the business at the closing of the deal and the remaining $100 million after the closing based on certain milestones, including the commercial launch of the business’s new Target detachable coils for treating hemorrhagic stroke.

Boston Scientific’s neurovascular business is based in Fremont, CA, and had 2009 revenue of $348 million. The unit employs 1,150 people. The company first acquired the business in 1997 through its purchase of Target Therapeutics. That deal was valued at $1.1 billion.

Stryker said it has tapped Mark Paul, the current president of Boston Scientific’s neurovascular business, to continue to lead the unit after the acquisition closes. The business is a leading provider of medical technologies such as detachable coils, stents, and guidewires used in the treatment of neurovascular diseases.

“The sale of our Neurovascular business is part of our overall strategic plan that will refocus our portfolio to, amongst other criteria, leverage existing sales forces with least invasive, cost and comparatively effective medical devices that reduce or eliminate refractory drug regimens,” said Ray Elliott, Boston Scientific’s president and CEO, in a press release.

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Minnow Medical, which we profiled just over a year ago, has raised a total of $4.7 million through two separate financings, according to a statement yesterday. The lead investor in both transactions was Neomed Management of Switzerland, according to Minnow, which has a new CEO, Raymond W. Cohen, who has replaced founding CEO Tom Steinke. Minnow also has moved its headquarters from San Diego to Laguna Hills, CA, in Orange County.

Former Domain Associates partner Olav Bergheim, Minnow’s board chairman, Christopher Weil & Co., and several private investors also participated in the financings. Minnow plans to use the proceeds to pay off its bank debt, for working capital, and to fund European clinical trials of its ZCath System, the proprietary angioplasty balloon catheter combined with controlled radiofrequency energy. The design is intended to prevent restenosis, a recurrence of the narrowing of a blood vessel, in peripheral vascular stents.

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TriReme Medical, a Pleasanton, CA-based developer of cardiovascular stents, catheters, and balloons, said this week that it has raised $17 million in Series D funding. The round was led by EDB Investments subsidiary Bio*One Capital of Singapore, with existing investors Three Arch Partners and Adams Street Partners also participating. “This investment will allow us to ramp up our commercial activities worldwide, continue to develop internal R&D programs and pursue key regulatory approvals for our products in large markets such as the US, Japan, and China,” said TriReme president and CEO Eitan Konstantino in a statement.

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San Diego-based Reva Medical, which is developing bioabsorbable stents for treating arterial disease, has filed for a $63 million IPO on the Australian Stock Exchange, according to PE Hub. Inteq Ltd., a boutique investment bank in Sydney, is serving as the lead underwriter. The company has raised about $57 million in venture capital funding from Domain Partners, Cereberus Capital Managemet, Brookside Capital, and Group Outcome, according to PE Hub.

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Boston Scientific (NYSE:BSX) said yesterday that it has agreed to pay $22 million in a settlement related to a U.S. Department of Justice investigation of surveys conducted by the Natick, MA-based medical device firm’s subsidiary, Guidant. The company admitted no wrongdoing in the settlement. Reuters reported that the DOJ was investigating Guidant for paying doctors between $1,000 and $1,500 to use the firm’s heart implants and to increase sales of the products.

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Natick, MA-based Corindus has corralled $5.3 million of a proposed $10 million round of equity financing, according to an SEC filing. The firm is developing a robotic system that helps surgeons control the position of guidewires in veins in procedures to implant vascular stents, according to the firm’s LinkedIn profile. A call to company CEO David Handler was not immediately returned today, and it’s not stated in the SEC filing who participated in the financing. Prior to this financing, the firm raised $12.8 million in a Series B financing in spring 2008, according to a story I wrote about the deal for Mass High Tech.

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People who make a living creating innovative medical devices—whether it’s an ultrasound diagnostic tool, a stent to prop open clogged arteries, or an MRI machine—are an unhappy bunch these days.

Let us count the ways, as described in the second annual medical device industry analysis being released today by Ernst & Young. Because unemployment is up, people are losing their employer-sponsored health insurance. That means patients are postponing elective medical procedures, and hospitals and government payers are tightening their budgets. A powerful U.S. Senator, Max Baucus, wants to raise $40 billion in taxes on the medical device industry; healthcare reformers like President Obama are talking about comparative effectiveness studies that would add time and expense to device development; and lawmakers are considering whether to require companies to disclose all gifts and payments to doctors who help develop and buy their products.

Those are the megatrends medical device companies have to deal with in this recession, but what does the data say about how they’re being affected? Here are some highlights that caught my eye in this 60-page report:

—Despite the recession, revenues of publicly traded medical technology companies in the U.S. and Europe actually climbed 11 percent to $289 billion (although the growth was only about half that much when factoring out foreign-exchange rate fluctuations and acquisitions).

—While Johnson & Johnson, Medtronic, and Boston Scientific appear to be performing fine, that’s not so much the case for the smaller players that create most of the innovations the big boys acquire to keep growing. U.S. and European medical technology companies saw total industry financing drop 38 percent in 2008—although when E&Y subtracted two big European deals, the numbers looked a lot worse, with financing down 44 percent in Europe and 53 percent in the U.S. “One area where the growing chasm between medtech’s haves and have-nots is most visible is in fundraising,” the report says.

—Mergers and acquisitions, which are usually the only way medical device startups can make returns for their investors, showed a big-time decline in 2008. There were just 79 deals in 2008, down about 41 percent from the prior year.

—The IPO market was basically flat-lining, with medical device companies raising a puny … Next Page »

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Boston Scientific has agreed to pay $716 million to Johnson & Johnson to settle 14 lawsuits related to patent disputes in the field of interventional cardiology. Both companies make products in that field that seek to be less invasive alternatives for patients with cardiovascular disease, who otherwise might be headed toward open-heart surgery.

Natick, MA-based Boston Scientific (NYSE: BSX), said the money for the settlement will come out of its existing cash reserves, which stood at $1.19 billion at the end of June, when the company issued its most recent quarterly report with the Securities and Exchange Commission. The legal disputes go at least as far back as 1997, according to company filings. Despite the size of the payment, Boston Scientific didn’t get rid of all its legal issues with one fell swoop.

“We are pleased we have been able to significantly reduce the amount of outstanding litigation we have with Johnson & Johnson,” said Ray Elliott, Boston Scientific’s CEO, in a statement. “We continue to work with them to resolve other outstanding matters.”

Boston Scientific has been bracing itself for a big legal payout for some time. The company accumulated $1.27 billion as of June 30 for its estimated legal payments, after it lost a court ruling this year to J&J for an estimated $237 million and a $50 million settlement payment to inventor Bruce Saffran. Both of those disputes were related to stent products.

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Tom Steinke says he founded San Diego’s Minnow Medical out of an abiding conviction of the limitations of the medical stent, a mesh tube inserted in arteries to help prop open clogged blood vessels.

Steinke came to this view after spending 20 years developing medical devices in the cardiovascular industry. His previous startup was San Diego-based Reva Medical, which he founded in 1998 around a novel slide-and-lock design for a metal stent that does not deform as it expands. Before that, he was a product group director for Medtronic, director of engineering for Sonotek, and a development engineer at Advanced Cardiovascular Systems, which became Guidant, the maker of heart pacemakers and defibrillators.

“I know the industry,” Steinke says. With a metal stent, he says, “you’re going to have an ongoing inflammation to a foreign body… Even a [stent with a] drug coating doesn’t last forever; eventually the coating dissolves.” As Denise has reported, drug-coated stents represented a major innovation for the industry, and one that caught Reva off-guard. As the industry shifted to drug-coated stents, Steinke helped Reva reinvent itself in 2003 by developing a bio-absorbable stent that fully dissolves over time.

By the end of 2003, though, Steinke had moved on.

Tom Steinke

He founded Minnow Medical that year, and tells me the company sprang from his “altruistic desire to improve health care for the masses.” Now, after six years of development, Steinke is working to commercialize the technology that sprang from his convictions.

Steinke tells me that during his first couple of years at Minnow, he searched for alternatives to vascular stents. The founder and CEO says he self-funded Minnow until he had identified a way to improve the medical device used in balloon angioplasty to treat arteries that have narrowed and hardened due to atherosclerotic disease, the build-up of waxy plaque along the inside walls of an artery. In the process, Steinke also focused on … Next Page »

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Back in February 2008, a Texas jury told Natick, MA-based Boston Scientific (NYSE: BSX) it would have to pay $431 million in damages to Dr. Bruce Saffran, who alleged that the company’s Taxus Express and Taxus Liberte drug-eluting stents infringed on patents he owns. Boston Scientific appealed the ruling, and a Federal Circuit panel reviewed the case in early March. In a late-afternoon filing with the SEC today, Boston Scientific said it settled the case with Saffran on March 16, and that as a result, it will record a pre-tax charge to earnings of $50 million this quarter.

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Boston Scientific (NYSE:BSX), the Natick, MA-based medical devices giant, reports that it has acquired drug-eluting stent developer Labcoat, headquartered in Galway, Ireland. Labcoat has developed technology to produce ultra-thin coatings of biodegradable polymers and drugs on the outer surface of coronary stents, which are designed to prop open arteries after surgeries to remove plaques. Financial terms of the deal weren’t disclosed.

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Natick, MA-based medical devices giant Boston Scientific has garnered market approval for a carotid artery stent, the company announced yesterday afternoon. The stent is a coiled metal tube intended to prop open the carotid artery in the neck that keeps blood flowing from the heart to the brain. When plaques cause the arteries to narrow, patients are at risk of stroke and death.

Boston Scientific’s (NYSE:BSX) carotid stent, which is already marketed in Europe and other foreign markets, is intended for used in conjuction with another of the company’s devices, a filter that captures plaques dislodged from the artery during the stent-insertion procedure. The company says the procedure is less invasive than surgery to remove buildups in carotid arteries.

The FDA has previously approved carotid stents for at least one other firm, Abbott Laboratories (NYSE:ABT), the Illinois-based medical products powerhouse. Still, insurance coverage for use of carotid stents is limited to patients for which the traditional surgical option would be risky, and in April researchers reported in the New England Journal of Medicine that a study of treating carotid artery disease with stents versus surgery saw no difference between the two.

News of Boston Scientific’s stent approval follows company CEO Jim Tobin’s announcement this week that the FDA had lifted part of a moratorium on new product approvals placed on the firm in January 2006 due to quality-control issues throughout the company, according to media reports.

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It appears that Natick, MA-based Boston Scientific (NYSE: BSX) will be forced to pay medical products giant Johnson & Johnson the full $703 million patent-infringement award finalized last week by the U.S. District Court of Delaware, after the U.S. Supreme Court declined yesterday to hear the company’s appeal of the case. Johnson & Johnson claimed that Boston Scientific infringed on a coronary artery stent patent owned by its Cordis division. A $521 million judgment against Minneapolis-based Medtronic will also stand, as Medtronic did not appeal the Delaware court’s judgment.

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Boston Scientific (NYSE:BSX), a Natick, MA-based medical devices maker, has been ordered to pay $703 million to the Cordis unit of medical products giant Johnson & Johnson for infringing on a Cordis patent on stents, according to J&J. The U.S. District Court of Delaware made a final judgment in the case that also involved Minneapolis-based medical devices firm Medtronic, which was ordered to pay Cordis $521 million.

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Boston Scientific said today it has won clearance from the FDA to market the Taxus Express2 Atom Stent System. The new device, which props open clogged heart arteries, emits a small dose of a chemotherapy drug designed to minimize scarring around the implant. It is the only device approved for vessels as small as 2.25 millimeters in diameter, the Natick, MA-based company (NYSE: BSX) said in a statement. The company plans to start selling the device immediately.

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An FDA application for a Boston Scientific (NYSE:BSX) coronary stent currently awaiting approval was supported by a flawed statistical equation, according to today’s Wall Street Journal. Citing its own review of a clinical study of the device, the paper said the Taxus Liberte stent, which is already approved for use abroad, would have been judged “a failure by the common standards of statistical significance in research,” even though the statistical method that Boston Scientific used is widely employed by other stent manufacturers as well. A Boston Scientific spokesman said the company used standard methodology. BSX stock was down more than 5 percent, to $12.69, in early trading today.

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Much has been written about Boston Scientific’s retrenching, in light of the decline in its business with stents, the tiny wire mesh devices that prop open clogged arteries. Now as Boston Scientific focuses on its core businesses, one of the units that has been spun off has a new name, Navilyst Medical. The company has 800 employees, and what its founding president calls a new focus on the opportunity for devices that can minimize infections in hospitals.

Before it had a name or logo, Navilyst officially left its parents’ nest on Valentine’s Day, when the private equity firm Avista Capital Partners paid $425 million to buy the venous access and fluid management businesses from Boston Scientific (NYSE: BSX). The divisions were projected to have $180 million in annual worldwide revenue, but not much beyond that has been said about its finances or prospects.

Here’s what I gathered yesterday from an interview with Dave McClellan, the president of Navilyst, and the former president of Boston Scientific’s oncology division. The new company is being headquartered in Marlborough, MA. The R&D, manufacturing, process engineering and other functions are in Glens Falls, NY, where about 680 of the 800 employees will be. Navilyst’s name comes from the root words “navi,” which is short for devices that navigate their way into patients arteries for IV drips or injections, combined with “-lyst,” as in catalyst for innovation, McClellan says. He didn’t want to say much about any plans for hiring or expansion, other than they will depend on how well the company performs.

McClellan repeated the word “focus” a couple of times in our conversation. He made it clear that the new organization can channel its energy and resources to the opportunities it sees with vein-access devices, instead of competing for resources with many other projects inside the larger company.

The opportunity for Navilyst is in hospitals. Anyone who remembers the fearful TV and Internet reports last year of the rise of the drug-resistant bacterium known as MRSA, and another called C. Diff, knows that hospitals are motivated to cut down on the risk of such infections. About 1.7 million people get these infections in hospitals, and almost 100,000 people die from them each year, according to the Centers for Disease Control and Prevention.

Navilyst aims to help hospitals deal with this problem through vein-access technology, which uses a pressurized safety valve that’s designed to keep blood from flowing back up into an intravenous line, an exchange of fluid that can cause infections. The products are used in hospitals routinely every day, for injecting things like chemotherapy drugs, antibiotics, or nutrient drips. Navilyst calls it the PASV Valve Technology, and the company is planning to build on the concept with new products from its internal R&D, as well as with strategic partnerships, McClellan says.

Navilyst’s main competitors are Murray Hill, NJ-based C.R. Bard (NYSE: BCR) and Queensbury, NY-based Angiodynamics (NASDAQ: ANGO). McClellan insists that his new company can go toe-to-toe with them, even without the backing of Boston Scientific. “We have the scale, we’ve got the R&D horsepower, the focus and the sales channel,” he says.

One line in yesterday’s press release from CEO Ron Sparks mentioned that the company will look very different in 2011 than it does today. I asked McClellan what that meant, and he avoided specifics. “The strategy here is to continue to identify innovative technologies that bring value to our customers. We’re not just talking about me-too products,” he said.

I guess we’ll have to wait to see specifically what he means by innovative, but my guess is Navilyst will have to make a compelling case to hospitals that its technology will decrease the risk that the next scary headlines about MRSA will emerge from their wards.

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