Medical Device Daily Contributing Writer

NEW YORK — Traditionally, the most successful medical device companies have been built around a consumable product that generates a continuing stream of revenue. Companies that sell expensive capital equipment have often languished or grown erratically.

Several companies that presented at the Bear Stearns (New York) annual health care conference are defying this conventional wisdom and are growing nicely, and in some cases, very profitably.

Stereotaxis (St. Louis) is prospering despite selling a system that costs about $1 million, and the company’s magnetic navigation system can cost the hospital an additional $1 million to $2 million to construct the room to house the system.

Trade-named Niobe, this sophisticated device is designed to provide greater efficacy, efficiency, predictability, ease of use and safety for routine and complex procedures in electrophysiology and interventional cardiology. It is used in conjunction with magnetically-enabled catheters and other disposables.

Niobe has enjoyed strong market acceptance despite its hefty price. Since it began commercializing the technology in 2003, the company has shipped and recorded revenue on 77 systems. An additional 47 units are ordered but not yet fully installed. The backlog as of mid-year 2007 was approximately $55 million.

CEO Bevil Hoag said that “the company’s goal is to simplify procedures and enable a hospital to increase its patient load.”

Earlier this week, the company reported a significant milestone, unveiling the milestone of 10,000 total cases performed worldwide with its system.

The case breakdown is as follows: more than 2000 percutaneous coronary interventions and vascular procedures; about 6,000 right-sided electrophysiology (EP) mapping and ablation procedures; nearly 2000 atrial fibrillation (AF) and other complex left-sided procedures, including 400 for ventricular tachycardia.

The clinical benefit in ablating on the right side, primarily supra-ventricular tachycardias (SVTs), appears to be significant. Hoag said that SVTs performed on the Niobe have an 98.6% efficacy rate, significantly exceeding the efficacy level that has been reported by other catheter ablation firms in their SVT trials. And, “the safety record has been exemplary,” Hoag said.

Whereas right-sided ablations (of the heart) like SVTs are relatively simple to perform for an experienced operator, it is on the left-sided AFib cases, which are complex, highly skill dependent and often very lengthy, where Stereotaxis unique technology may really shine.

“We think that our technology will make a huge difference to EP physicians performing atrial fibrillation ablations,” said Hoag.

AF ablation cases are growing rapidly worldwide, despite relatively poor clinical success and safety concerns. Stereotaxis believes that about 50,000 AF ablations will be performed worldwide in 2007, over two-thirds in the US.

In an interview earlier this year, Andrea Natale, MD, medical director for the Center for Atrial Fibrillation at the Cleveland Clinic Foundation (Cleveland), a world renowned expert in the EP field, said that “robotically-controlled catheter ablation represents the future of the EP lab.”

Two new initiatives are expected to buoy the company’s growth. First, a proprietary, magnetically-enabled AF catheter, manufactured by the Biosense Webster (Diamond Bar, California) division of Johnson & Johnson (New Brunswick, New Jersey) will be launched in Europe in the fourth quarter. Its debut U.S. launch is expected in early 2008, following FDA approval, expected in late-2007.

This catheter, trade-named Thermocool, introduces saline at the tip, which lowers the catheter’s temperature and improves the physician’s ability to successfully treat AF. Its concept has already been proven successful by Biosense in non-magnetically-enabled catheters.

Second, the company is developing technology to address the chronic total occlusion (CTO) market. CTO lesions are very difficult to pass a catheter or guide wire through because they are blocked by very hard calcium. As a result, many of these procedures are lengthy, result in complications and prove unsuccessful. Often the patient must be sent for a bypass procedure.

Use of a magnetically tipped guidewire and the Niobe robotic system for guidance will likely improve the clinical success. Stereotaxis is planning to file its 510(k) application by year-end and intends to launch in the U.S. in 4Q08.

The CTO market could be important for the company. According to some studies, up to one-third of patients referred for coronary angiography, and up to 10% of all percutaneous interventions, are CTO-related.

Stereotaxis is competing with another public company, Hansen Medical (Palo Alto, California). that is targeting similar markets with its Sensei robotic system. Hoag noted that while his company’s upfront capital cost is higher than Hansen’s, its per-case disposable cost is significantly lower than that of Stereotaxis.

“We think that high recurring disposable costs are an anathema to hospital administrators,” he asserted. Further, “we think we can dominate this marketplace because of our superior technology and better value proposition for hospitals.”

Another prospering capital equipment company, Intuitive Surgical (Sunnyvale, California), has established itself as one of the great success stories in medical device history over the past decade.

It has shipped 656 da Vinci surgical robotic systems, which cost between $1.1 and $1.7 million worldwide, thoroughly dominating the surgical robot market. More importantly, with its large installed base, it has developed a robust disposable and recurring revenue stream that in the first half contributed $124 million to revenue, exceeding the $110 million generated by capital equipment sales. More than 80% of recurring revenue is from disposable surgical instrument consumption, which generate an average of $1500-$2000 per case.

Since calendar year 2002, when global revenue reached $72 million, the company’s revenues have mushroomed and are projected by Wall Street analysts to reach about $560 million in calendar 2007. Whereas about 70% of 2002 worldwide revenue was derived from capital equipment revenue, about less than half of 2007 revenue is forecast to be from capital sales.

Without doubt, the major growth driver for Intuitive is the da Vinci prostatectomy (dVP) procedure, which will account for about over half of the company’s annual 2007 global procedures and close to half the total number of prostatectomies performed in the U.S. in 2007.

“We believe that we have become the gold standard in this market,” said Alex Sukic, the company’s VP of corporate development.

The company is now aiming its sights at the very large hysterectomy market, which has already demonstrated good clinical outcomes and robust growth this year. The potential market is larger than for prostatectomy but market development issues are considerable as well.

Proving that a company founded on capital equipment can be highly profitable, Intuitive’s pre-tax operating margin currently exceeds 30%. “We are pleased with our margins but our focus is now to continue to drive revenue growth,” Sukic said.