BB&T Contributing Writer

MINNEAPOLIS – An interesting view of the brave new world for medical technology – that is, post-global financial meltdown – came from Glen Nelson, MD, retired vice chairman of hometown device colossus Medtronic, during the 9th annual MedTech Investing Conference here in the latter part of May.

The conference, held here each May under the sponsorship of IBF Conferences (Massapequah, New York) and LifeScience Alley (Minneapolis), drew the largest number of attendees in its nine-year history. The 350 attendees gathered at the Graves 601 Hotel in downtown Minneapolis for the two-day event heard speakers and panelists weigh in on a wide range of questions affecting the industry.

Nelson, who now chairs his own firm, GDN Holding, minced no words in a keynote address during an opening-night banquet, saying of the U.S. healthcare system: “We have a system where care is unevenly delivered, and that which is delivered is at an unsustainable cost.“

Noting that “our costs [for healthcare] are two to three times those of the rest of the world, but we lag most of the rest of the world in life expectancy, so it's hard to argue that we are getting our money's worth,“ Nelson said care in the U.S. is marked by “slow adoption [of new technologies] and a lack of coordinated care.“

But, he added, “I believe we're at the breaking point, and change is inevitable.“ Healthcare reform, he said, “affords us the opportunity to broadly apply electronic healthcare records“ to the existing system.

Saying there are “more questions than answers“ when it comes to how healthcare reform will play out, Nelson pointedly noted that the law passed earlier this year “doesn't do anything to address the quality and cost of care.“

While saying that the U.S. “provides most of the new medical innovation in the world,“ he added that the more stringent regulatory climate that faces developers of new products in dealing with the FDA today “adds to the cost of bringing new technology to market.“

Nelson said that what is needed “is faster access to new technology,“ which he said could be accomplished better with stronger post-market surveillance than with higher pre-approval hurdles.

One fallout from higher hurdles such as more stringent 510(k) requirements, he said, “is that clinical research is moving offshore and challenging the U.S. as a leader in medical innovation.“

Noting that “some think we could see a merger of CMS [the Centers for Medicare & Medicaid Services] and the FDA,“ Nelson said, “We might think that would be a good thing, but that would also lead to a new, more cumbersome bureaucracy.“

From his perspective of observing a domestic healthcare system in action for more than 50 years, he said the key to maintaining the U.S. lead in medical innovation is to continuously take down the barriers“ that limit such innovation getting into the hands of physicians.

In tough market, only top-quality deals get done

With the initial public offering (IPO) window essentially nailed shut over the past two-plus years, corporate buyers have held the keys to the exit for venture-backed companies. The general dismal state of the economy has impacted that sector as well, with merger-and-acquisition activities slowed considerably from the free-spending days prior to the global financial downturn – a period one panelist referred to as a “buying frenzy.“

But, as corporate buyers and investment bankers pointed out during a panel discussion at the conference, the financial environment for mergers and acquisitions, while still challenging, is looking up. The panelists also made clear that it most definitely is a buyers' market, and they are drawn to “cream of the crop“ deals while less-dazzling deals are going undone.

Jeff Hoffman, managing director and head of West Coast healthcare investment banking for JP Morgan Securities (San Francisco), said, “What a difference a year makes!“ He said improvement in the business climate means that “all the capital markets are operating, so the big guys are out there looking at things.“

Fellow panelist Kevin Davies, managing director and head of healthcare investment banking for RBC Capital Markets (New York), was a bit less buoyant, saying, “It's a challenging environment, but it is getting a little better. We are cautiously optimistic about M&A activity.“

From the corporate ranks, Shawn McCormick, senior vice president/CFO of growing device firm ev3 (Plymouth, Minnesota), said, “The corporate buyer is getting much more focused compared to the buying frenzy of a few years ago. Buyers now are focused on finding the highest-quality assets, and they are willing to pay more for more certainty“ with the technology being acquired.

“I don't believe the fundamentals have changed as to what drives value,“ McCormick said. For an acquisition target, he said, the key questions are: “Do you have revenues? Do you have good clinical data? Where do you stand on reimbursement?“

As a potential acquirer, he said, “companies with just a 'me too' product don't add value to our shareholders.“

Noting the “volatility“ that has roiled his company's business in the past couple of years, Isaac Zacharias, director of business development for Boston Scientific (Natick, Massachusetts), said the company has become “much more disciplined in what we're looking at“ in the way of potential deals. “Our CEO and CFO have to see that a company has the answers to the things we worry about.“

Hoffman cited big players Covidien (Mansfield, Massachusetts) and C.R. Bard (Murray Hill, New Jersey) as being active acquirers, and noted that Abbott (Abbott Park, Illinois), which has built up its cardiovascular franchise in recent years, has more recently become a new entrant in the ophthalmology space with its February 2009 acquisition of Advanced Medical Optics (Santa Ana, California).

He said that because mid-cap companies are getting more access to capital in an improving economy, “so it's a more vibrant market now. It's a good market, but it's driven by the buyers.“

Davies hewed to the “quality deals“ theme, saying that changing – that is, elevated – regulatory requirements bring with them “a lot of risk regarding clinical trials and their costs.“ That means “there are not going to be buyers for many venture-backed companies.“

He said clinical data is a key element is determining the value of an acquisition target. “The price may depend very much on the quality of your clinical data.“

To a conference attendee who asked if a large company has any advantage in getting product applications through the FDA, McCormick said he thought that historically they had a disadvantage, but his view is that “I don't think anyone has an advantage today.“

If you're going to attract a corporate buyer, he said, “You have to have your data and processes wrapped up.“

As for factors that can trip up a potential deal, Hoffman said, “It's a lot harder now. Acquirers look at things like sales practices and off-label usage, which is a huge deal right now, physician relationships, clinical trial design.“

“Marketing practices is a huge deal right now, and so is off-label usage,“ Zacharias said. And “unwinding“ international distributor agreements “is time-consuming and costly for us.“

McCormick added: “At one point in time, it was all about the revenues, but that has changed.“ Noting that inappropriate practices can derail a potential deal, he said, “Even if you're not generating revenue, you need to be sensitive to what revenue-generating companies are sensitive to.“

On the question of whether a company should be operated on the expectation that it is going to be acquired, Hoffman said, “I think you have to assume that you're going to be independent and run it that way.“

Davies urged developing companies to establish relationships with investment bankers early on, “so they can take a temperature of where you're at.“

Hoffman concurred, saying, “Start those relationships early – the earlier the better.“ He added that possible acquisition targets also need to establish relationships with larger corporate entities early. “You need to be meeting with the big corporate buyers and educate them as to what you're doing.“

Zacharias agreed, saying his group “takes all meetings – our job is to talk with people and see what's out there.“ Asked if the “all meetings“ stance might cut into the finite number of available working hours, he acknowledged that “some meetings are quicker than others.“

Touching on philosophies that affect where companies might be looking in particular, McCormick cited ev3's 2009 acquisition of Chestnut Medical Technologies (Menlo Park, California), which added to its neurovascular product portfolio. “We acquired technology in a space we're very familiar with,“ he said. “That's the kind of thing we're looking for – to leverage our position in existing markets. We're not looking for true 'white space' deals.“

As for segments offering opportunity, Hoffman cited peripheral vascular, obesity/diabetes and neurovascular as good spaces for growth, while Davies said that obesity “seems like the best 'white space' area – we could end up with hundreds of companies being involved in that space.“

Docs weigh in on outlook for innovation

A panel discussion on “A View From the Trenches“ brought a set of physicians offering their views on where healthcare in the U.S. stands today and where it is going. The lively discussion directed by moderator John Deedrick, managing director of Accuitive Medical Ventures (Rochester, Minnesota), who asked the panelists their views on healthcare reform now that a bill has been passed and changes are eventually going to be implemented.

Eugene de Juan, MD, a noted practicing ophthalmologist and founder/vice chairman of ForSight Labs (Menlo Park, California), said “the game has changed“ for new technology. “It's not just a matter of solving a medical problem, but solving it in an economical way.“ He said the innovations generated by physicians from this point forward “are going to have to be more simple, not more complex.“

“Yes, things have changed,“ said Robert Ganz, MD, of Minnesota Gastroenterology (Plymouth, Minnesota). “Insurers are going to hold the line on new technology – they aren't going to pay for it without top clinical results and the backing of the professional societies.“

Noting that clinical studies likely will all need to be randomized, controlled, multicenter trials, he added: “It is going to be a lot more expensive to get new technology out there, and it is going to take longer.“

“We all realize that reform is here,“ said David Schultz, MD, founder and medical director of MAPS Medical Pain Clinics (Minneapolis), “but there is no cost reduction built into the system.“

So, Deedrick followed up, “Should we now be thinking about innovation simply as a cost issue?“

“Cost is a huge issue,“ said de Juan. “Establishing clinical parity [with existing products] at a lower cost will be the endpoint.“

Schultz said, “Cost will be the overriding concern in the U.S. over at least the next decade.“

“It's cost,“ agreed Ganz. “In insurers' minds, new technology always increases costs.“

Citing the age-old art vs. science discussion, Schultz said that in practicing medicine in the 1980s and 1990s, “art prevailed, but going forward, cost reduction will prevail and science will be used as the weapon.“

Ganz had a succinct closing view on the discussion: “Data and politics will drive healthcare in the future.“

Deedrick asked the panelists whether their respective areas of specialization would be considered “conservative“ or “aggressive.“

De Juan said, “Oh, we're conservative.“ Despite the broad popularity of LASIK surgery (at least before the economic decline hit this pay-out-of-pocket space), he characterized ophthalmology as “a very dated field – anything that you do that introduces any risk isn't well-accepted.“

Ganz said his field is pretty basic: “Food goes in, food goes out, and if it doesn't, you're in trouble.“

As for new products, he said “we have a real problem in GI, getting the professional societies to support new technology.“

Schultz said pain management is “a very aggressive field.“ As for “needs“ he might see the space having, Schultz said, “We'd like to be able to keep people at home with epidural pain management,“ as opposed to epidurals only being done in healthcare provider settings. “That would revolutionize pain management.“

Deedrick recast the “needs“ question into one focused on patients, asking, “What do your patients have on their minds?“

Ganz described his area of work as “really a lifestyle field – patients don't usually die from gastroenterology-related illnesses.“ What they do find, he said, “is that they can't eat the way they want, can't sleep the way they want, can't go to the bathroom the way they want.“

Schultz said his patients “know what they want,“ which historically has been narcotics-type drugs for pain relief. “But we have an interventional focus, so we want to try and avoid such drugs“ in favor of such solutions as neurostimulation devices, for example.

De Juan said, “Most of the people I see are afraid they're going blind, so we kind of refer to what we do as 'ophthalmic psychiatry.'“

With much of the talk at the two-day conference centering on innovation and how it may be endangered because of changing FDA policies and the sharp falloff in venture financing in the medical industry, Deedrick asked the physicians if their patients care enough about innovations to pay all or part of it out of pocket.

“Most of my patients don't have the kind of financial wherewithal to pay for it,“ said Schultz.

De Juan said, “They will pay for anything because they're afraid of going blind.“ He cited the popularity of LASIK and cataract surgery with implantable accommodating lenses, both with big out-of-pocket elements.

Ganz said it depends. “For solutions dealing with obesity, they'll pay a lot. But there needs to be a fixed price“ on such solutions. “We don't have that capability now, but it's going to change.“

He noted that, unlike some medical specialties, “there is no retail component to what I do – we prescribe, but don't do actual providing of medications. There is real opportunity there.“

Schultz, Leahey and Ubl on policy, regulation

The topic of regulation found its way into virtually every agenda segment at the conference. Whatever the subject – whether it was the status of investing in the sector, the outlook for innovation or looking outside the U.S. for commercialization opportunities – dealing with the FDA became part of the discussion

That was particularly true for the two closing sessions, one featuring former FDA device center director Dr. Daniel Schultz and the other bringing together the top executives of the two main national med-tech trade associations for a shared discussion of policy issues facing their members and the industry as a whole.

Advanced Medical Technology Association (AdvaMed; Washington) President/CEO Steve Ubl and Mark Leahey, who holds the same posts with the Medical Device Manufacturers Association (MDMA; Washington), discussed a variety of public policy issues, but Schultz first held forth on more directly-focused FDA questions in the conference's annual “FDA Fireside Chat“ segment, in which he was interviewed by Mark DuVal, president of DuVal & Associates (Minneapolis), a law firm that focuses on regulatory issues.

Schultz, who resigned as director of the FDA's Center for Devices and Radiological Health last August, now is senior vice president for medical devices and combination products at Greenleaf Health (Washington), a well-known regulatory consulting firm.

Though it seemed clear to outsiders that Schultz had been nudged out the door by new FDA Commissioner Margaret Hamburg, his comments couldn't be characterized as “FDA bashing.“ He said that when he became CDRH director in 2004, his goal was “to create the most efficient regulatory system possible. We were able to put a matrix together [that featured] people working together“ toward that goal.

He said all those with an interest in how the agency operates would “hope there isn't a tendency to just wipe the slate clean and start all over again with something new.“ Schultz said there are a number of broad-based initiatives ongoing at the agency on which the jury is still out, and expressed the hope that FDA leadership “will spend time learning about what was done in the past and how that can apply moving forward.“

As for changes coming to the FDA's 510(k) program, under which so-called “me too“ devices gain market clearance, historically under less-rigorous requirements for clinical data, Schultz acknowledged that there is “a sense of uncertainty, and that is a concern.“

He said that for some 510(k) products, “the bar will be raised,“ which he said is most appropriate, citing an example of a device that when initially approved 10 years ago was “mechanical“ in nature. “The device doing the same thing today is full of computer chips,“ Schultz said. “You can't expect the agency to just ask for old data they were asking for 10 or 20 years ago.“

Clearly anticipating substantial change in the 510(k) process, he said, “There are going to be changes, some in 510(k)s, some in PMAs [premarket approval applications]. He added: “The question is how these changes will be communicated and how quickly they will be made.“

Noting that his view is that the FDA “is very adverse to risk,“ DuVal asked, “Is there an imbalance today between protecting the public health and moving innovation forward?“

Schultz said, “There are times when there is a grey area – the review staff needs to know that it's okay to take some degree of risk as long as you can justify it.“

On the possibility of wholesale changes stiffening up the 510(k) program to the point where there is little difference in clinical requirements between 510(k) and PMA, he said, “To me it's better to focus on areas there are real problems rather than saying that we need to revise the 510(k) program overall.“

As for complaints that the review process at the agency appears to be in slow motion, he observed: “What isn't good is when the idea isn't to get to a decision, but just to continue the discussion.“

Filling the final agenda spot at the meeting, industry association leaders Leahey and Ubl kept the attention of the remnants of what had been a standing-room-only crowd earlier in the day. Ubl set the tone by noting that “never has there been a time when public policy has been more important . . . we have challenges across the board.“

Leahey lamented the state of the regulatory environment: “We're at a point with FDA that it can't get much worse.“

Saying that “advocacy is not a spectator sport,“ Ubl told company members in the audience: “It has never been more important for you to interact with your elected representatives. It's incredibly impactful for small groups of companies to meet with members of Congress on the FDA. You need to tell them what the added costs of regulation will do to you.“

He said the new FDA leadership “has inherited some challenges,“ and as a result, “we're seeing a greater emphasis on enforcement.“

Leahey said the agency leaders “are operating in a political environment. When members of Congress say 'the process is broken,' they have to react in ways that are not always positive“ for the med-tech industry.

Ubl noted that recommendations for changes to the 510(k) program are expected to be made public next month, with the changes themselves anticipated to be implemented beginning this fall.

Turning to healthcare reform, he said, “There are a lot of opportunities within the law, [but] while millions more will be insured, the reality is that they are not going to be heavy users of medical technology,“ since they will be younger and generally more healthy. “That's the issue we have with the device tax,“ which Ubl said “directly hits us in an already difficult fiscal environment.“

Leahey said the device tax “is a whack on the top line“ for device companies.“ In a perfect world, he said, “that tax will be repealed before it takes effect in 2013.“ At the very least, he said, “having some sort of relief for small companies is important, and we'll be working hard on that.“

Ubl said he is “not optimistic about repeal of the tax in the short term, but we [AdvaMed and MDMA] are working closely together to get relief for small companies.“

Leahey hailed the big-company members of Ubl's organization for helping push the concept of relief for smaller firms. “Their large companies have stepped up to recognize that there is benefit in getting relief from the tax for smaller companies,“ he said.

“There are warning signs out there on the decline of innovation in the U.S. and companies choosing to do business elsewhere,“ Ubl said. “As a matter of industrial policy, what are all these new regulations and policies doing to innovation in the U.S.?“

Leahey said, “The message is that the quality of care is being compromised because of this environment.“

Regulatory path uncertainty concerns VCs

A group of veteran venture capitalists opined on the outlook for healthcare investing in 2010 and beyond in a panel dubbed “The Crystal Ball.“ The question of dealing with an increasingly recalcitrant FDA was of real concern for the VC panelists.

Asked by moderator Bill Harrington, a partner in Three Arch Partners (Portola Valley, California), how the FDA's “shift to the right“ affected their portfolio companies and prospective investments, the panelists were blunt in their assessments.

“The regulatory process is as uncertain as I have ever seen it,“ said Peter McNerney, partner in Thomas, McNerney & Partners (Minneapolis). “At both the 510(k) and PMA [premarket approval application] levels, it's unclear as to the requirements and interpretation“ by the agency.

“It causes us to rethink“ investments, said Mike Carusi, general partner in Advanced Technology Ventures (Palo Alto, California). “Predictability [in the regulatory process] is the key word for investors. In theory there is a known path with PMAs, but that isn't as predictable as in the past.“

On the subject of early-stage vs. later-stage investing, panelist John Freund, managing director of Skyline Ventures (also Palo Alto), said, “A lot of VCs are looking for later-stage opportunities, but we still do early stage if it looks like a good opportunity.“ For those entrepreneurs whose companies are in the early stage, his advice is simple: “You need to find the firms that are doing early-stage deals.“

As for corporate investors in VC-backed companies, McNerney said, “Corporate investors are in a good position these days, and they know it. But for a company, it is real validation of what they're doing when they get corporate interest.“

Harrington said his group “is seeing more strategic [corporate] investments earlier. We're also seeing more corporate interest is 'white space' investment, so they can see if a particular space is something they may be interested in.“

Noting, for example, that his firm is “looking much more closely at cost effectiveness these days,“ Harrington asked the panel how healthcare reform will impact their decision-making on investments.

“The dilemma is that [as a firm developing new medical products] you now need to both add value and reduce costs, and that is a higher hurdle that affects our decisions on companies to back,“ McNerney said. Saying that the healthcare system – Medicare in particular – is going to be underfunded, he added that in the short term, “approved products will get more utilization“ due to the addition of millions of new individuals to be covered under healthcare reform.

Carusi said, “You need to work through all the constituencies involved – how you navigate the waters [of change] is very important.“