BB&T

Innovative medical technologies come and go, and the tipping point for which path they take — or, alternatively, their ability to expand into broader application highways — increasingly seems to be the result of decision-making by the Centers for Medicare & Medicaid Services.

That at least was the corporate interpretation provided by vagus nerve stimulation (VNS) developer Cyberonics (Houston) with its most recent workforce cut in August. The company said it would reduce its headcount by 12%, meaning about 65 employees. Cyberonics reported a similar restructuring plan in May, resulting in the loss of 15% of its workforce, at that time equating to about 90 employees. And the company again put the blame for the staff reduction on the decision by the CMS not to provide national coverage for the company's VNS therapy as a treatment for Medicare beneficiaries suffering from treatment-resistant depression (TRD). The company first received a preliminary ruling from the agency rejecting the coverage for VNS therapy for TRD in February, and that decision was then confirmed by CMS in May.

Cyberonics said the roughly $2.5 million in costs associated with the reductions will be expensed in 2Q08, which will end Oct. 26. The workforce reductions are expected to result in significant cost savings beginning in the third quarter of this fiscal year, the company said.

The VNS Therapy system consists of a stopwatch-sized device implanted in the chest to send electrical pulses to the brain via the vagus nerve. The technology has had FDA approval since 1999 for treatment of pharmacoresistant epilepsy and approval since 2005 for treatment of TRD, and the company has built its long-term prospects on the system's use for TRD.

That path has been blocked by a series of speed bumps, pot holes and, finally, the CMS roadblock. Among these barriers have been criticisms of its clinical trials, especially from the psychiatric community dependent on pharmacological treatments; news stories indicating worsening effects in some patients; attacks on the credibility of TRD as a "made-up" disease (since many diseases could be termed "resistant" to treatment); and the CMS decision which clearly questions the therapy's efficacy from a cost-effectiveness point of view.

"The recent non-coverage determination by the Centers for Medicare and Medicaid Services has resulted in reduced sales of VNS Therapy Systems for treatment-resistant depression (TRD) patients," said Dan Moore, president/CEO of the company. He added: "We are fully committed to creating shareholder value by returning the company to positive cash flow generation and profitability as quickly as possible."

Moore, who previously worked for Boston Scientific (Natick, Massachusetts), was hired to head the company in May following the departure of Robert "Skip" Cummins, its president/CEO and chairman, the company's most vocal backer of VNS for TRD, and Pamela Westbrook, its CFO — moves further hampering the company's prospects.

Commenting on the latest staff cutback at Cyberonics, Alex Arrow, senior VP and med-tech analyst at Lazard Capital Markets, wrote in a company note that the 12% reduction may benefit fiscal 2008 LPS by 11 cents and fiscal 2009 by 23 cents.

"Reducing depression-related expenses is, in our view, the best value-creating strategy for Cyberonics," Arrow said. "Because the company's opportunity to sell implantable neurostimulators failed to materialize, reducing the cost structure to match the base epilepsy business will likely return the company to profitability."

He noted, however, that the impact of the entry by Medtronic (Minneapolis) to the device/epilepsy market that Cyberonics now rules, in FY10 — a year after Cyberonics is most likely to become profitable —will likely weigh on investor sentiment in FY08.

Northfield: SEC concludes investigation, will seek no action

Mixed in with the financial complications faced by developmental companies is the clinical trial balancing act they must conduct as they attempt to move forward. Northfield Laboratories ( ) last month reported that the U.S. Securities and Exchange Commission had completed its review of an early trial of its flagship blood substitute product, Polyheme, and will take no enforcement action against the company.

The SEC investigation was launched in March 2006 following public concerns abut the safety of Polyheme that was highlighted in a news story by The Wall Street Journal.

The WSJ article, headlined "Amid Alarm Bells, Blood Substitute Keeps Pumping," said about 10 patients treated with the product used in an abdominal aortic aneurysm procedure — totaling about 12% of enrollments — suffered heart attacks and that two out of 81 patients died within seven days of receiving PolyHeme. None of the 71 patients in the trial who received real blood had heart attacks, the WSJ report said, and charging that the trial results were intentionally never published.

The article said the company had "quietly shut down the trial and didn't publicly disclose the results." It also suggested that the trial results indicated that the use of PolyHeme was linked to other serious adverse events such as heart rhythm aberrations and pneumonia. The company responded to the WSJ article, saying it contained several errors of fact and misinterpreted the trial protocol and its results.

The trial in question was conducted in the late 1990s, and the company called it a "complex study involving a difficult and unusual procedure in a high-risk population from whom individual consent was obtained." It said also that the trial had received periodic review by an independent monitor that had considered it fit to continue.

It said that the heart attacks in the trial may have been caused by excessive fluid volume delivered to the study patients. It said that the FDA had considered that explanation "plausible" and had approved study continuation.

The company said it particularly disagreed with the characterization that it had not disclosed the results of the trial and had discouraged others from publishing its results. In fact, it said it believed that that prompt publication of all the study data would have been favorable to the company.

The trial protocol also had received criticism from Sen. Charles Grassley (R-Iowa), a frequent and highly vocal critic of the FDA.

"It is outrageous," Grassley said at the time, "that, for all intents and purposes, the FDA allowed a clinical trial to proceed, which makes every citizen in the United States a potential 'guinea pig' without providing a practical, informative warning to the public."

Masimo goes public, nets $48 million in IPO

Monitoring systems manufacturer Masimo (Irvine, California) has closed its initial public offering of 11.9 million shares at $17 a share. The underwriters of the offering also exercised their over-allotment option and bought 1,787,494 additional shares of common stock.

Including the over-allotment, the company and selling stockholders sold 13,704,120 shares in the offering for gross proceeds of $232.9 million. Excluding shares offered by selling shareholders, net proceeds to the company amounted to about $48 million after deducting the underwriting discounts and commission and the estimated offering expenses. Masimo initially filed with the SEC for the IPO in April.

Masimo said it plans to use the proceeds for sales and marketing activities, capital expenditures, R&D, including clinical studies, and for general corporate purposes. The company may also use a portion of the proceeds for the acquisition of or investment in companies, technologies or products complementary to its current focus.

The company bills itself as the inventor of Masimo Signal Extraction Technology, or Masimo SET, which provides the capabilities of read-through motion and low perfusion pulse oximetry to address the primary limitations of conventional pulse oximetry. Pulse oximetry is the non-invasive measurement of the oxygen saturation level of arterial blood, or the blood that delivers oxygen to the body's tissues, and pulse rate.

J&J plans to slash its workforce by 4,820 jobs

Johnson & Johnson (J&J; New Brunswick, New Jersey) in late July said that it will reduce its global workforce by 4,820, around 3% to 4% of its total staff, in an attempt to generate $1.3 billion to $1.6 billion in savings for 2008. The plan will primarily impact two of J&J's business segments, Cordis (Miami Lakes, Florida) — maker of the Cypher drug-eluting stent (DES) — and its pharmaceuticals unit. The cutbacks are forced, the company said, by flattening of the drug-eluting-stent market and tougher competition for its drug products.

"In drug-eluting stents we have seen significant compression in the market due to shifts in the medical community's approach to cardiovascular disease," William Weldon, J&J CEO and chairman, told analysts during a conference call. "We remain committed to the drug-eluting stent market, and we have new products in development across our cardiovascular franchises that will address the unmet needs of the patients, doctors and nurses in this area. We believe a more integrated approach to this market will better serve our customers."

Apparently attempting to allay investor fears, Weldon emphasized that J&J is still very optimistic about the DES market, one that has been hit by concerns about DES safety and expects to see hotter competition with the expected approval of second-generation DES devices over the next two years. "We still see the drug-eluting stent market as a huge opportunity," Weldon said. "We think that, as we all know, there have been some issues that are there, but we think this will, in time, resolve itself and we continue to invest in the Conor stent, for example, and other stents. So we think that we'll be better focused on the overall customer need in the whole cardiovascular area, but by no means do we mean to diminish or lower the expectations we have going forward in the drug-eluting stent market."

Weldon said that three of the four cardiovascular businesses within Cordis are doing well, as are the other six companies in the device and diagnostics segment.

"Our medical devices and diagnostics businesses present us with exciting opportunities in seven different franchises. Each one of these businesses has staked out a leadership position in an important area of healthcare, and with the exception only of our drug- eluting stent business Cordis, is showing substantial growth quarter-by-quarter. We continue investing in innovative products throughout these businesses to drive performance."

Miami billing owner guilty of $170 million in Medicare fraud

The owner of a Miami-based Medicare billing company has been charged with submitting $170 million worth of fraudulent bills to the Medicare program, Assistant Attorney General Alice Fisher of the Criminal Division and U.S. Attorney R. Alexander Acosta of the Southern District of Florida reported.

Rita Campos Ramirez, owner of R and I Medical Billing (Miami), a Medicare billing company, was charged in a two-count criminal information with conspiracy to commit healthcare fraud and submission of false claims to defraud Medicare of $170 million.

As charged, from October 2002 through April 2006, Campos was employed as a medical biller for about 75 Miami-based health clinics that purported to provide HIV infusion services to Medicare-eligible beneficiaries.

HIV clinic owners provided Campos with bills stating that HIV patients were being infused with expensive HIV medications in amounts that Campos knew were medically impossible. In most instances, the Medicare program was being billed for the same HIV medications and services at each of the 75 HIV clinics. During the three-and-a-half year conspiracy, of about three-and-one-half years, Campos submitted $170 million in fraudulent bills to the U.S. Department of Health and Human Services on behalf of the 75 clinics. Of the $170 million in fraudulent bills submitted by Campos, about $105 million was paid to the HIV clinics, with Campos receiving a fee of about 5% of the claims.

The prosecution resulted from the establishment of the Medicare Fraud Strike Force, a team of federal, state and local investigators. Each team has four to six agents, at least one agent from the FBI and HHS Office of the Inspector General, as well as representatives from local law enforcement.