CDU Contributing Editor

BOSTON, Massachusetts – Since the advent of balloon catheter angioplasty two decades ago, the pace of technological innovation in the field of interventional cardiology has been very rapid. This has resulted in tremendous improvements in revascularization techniques. But there are still major opportunities to reduce restenosis rates, gain access to smaller and more tortuous vessels and demonstrate better results in removing obstructive material.

A private company, OmniSonics Medical Technologies (Wilmington, Massachusetts), appears to offer an innovative solution to the latter problems. Speaking during the 22nd annual Summer Sessions and Knowledge Seminar sponsored by the investment banking firm Adams, Harkness & Hill (Boston, Massachusetts) last month, CEO and founder Bob Rabiner stated that "we hope to re-define the treatment of endovascular occlusive disease."

In another presentation during the Adams, Harkness & Hill gathering, cardiovascular diagnostic firm Quinton Cardiology Systems (Bothell, Washington) discussed its renewal under new management. OmniSonics is currently developing the Resolution Endovascular System, which in testing is demonstrating the capability to improve the removal of occlusive material without collateral damage through a patented acoustic mechanism.

This technology features a tabletop-sized generator which generates low power (2 watts) ultrasonic energy, a handpiece that converts the signal to acoustic energy and a wire that vibrates at 20 kHz, treating tissue through a process known as cavitation. The Resolution 360 Therapeutic Wire is constructed of a medical grade solid titanium alloy. Its overall length is 95 cm, with a .015" diameter distal tip. The acoustic energy is released circumferentially along the entire 20 cm active length of the wire.

The concept of cavitation for tissue destruction is not new in the medical device world, having been introduced many years ago. Using this technology, cavitation is caused by the ultrasonic motion of the wire, which creates tiny microvacuums in the blood. It can be seen as analogous to "cold boiling" of water. When the bubbles contract, they cause a focused shock wave or acoustic energy, resolving targeted tissue in an orderly way. Ultrasonic energy to treat peripheral and coronary vessel disease has been attempted by several companies previously but has never achieved any major clinical or commercial success, primarily because the energy has been limited solely to the area of the tip of the probe, reducing its clinical effectiveness.

OmniSonics' device uses a proprietary method called OmniWave technology to deliver therapeutic energy along the entire active length of the wire, dramatically increasing the rate of tissue removal. OmniWave technology is effective on both fresh and organized thrombus and results in particulate approximately the size of a red blood cell (10 microns or less).

The company's potential market is huge, and it plans to initially address hemodialysis access sites and peripheral vessels. The company has even smaller-diameter wires under development, and, down the road, this technology could prove to be valuable for treating deep vein thrombosis, in-stent restenosis and acute myocardial infarction.

Animal results and early human data appear promising. In animals, the device does not appear to cause any thermal damage and preserves the intima. OmniSonics' first investigational device exemption was approved for synthetic hemodialysis access grafts, which serve as the entry site for dialysis needles. It is well-known that these grafts tend to thrombose and require intervention on a regular basis. Roughly 300,000 to 350,000 interventions are performed annually, with an estimated two-thirds treated with catheter or other minimally invasive techniques and one-third through surgery.

Initial results from the company's limited three-center study have shown that the device may be safe and effective, with 100% procedural success shown, demonstrated ease of use and rapid treatment times. Enrollment for the pivotal trial is expected to begin shortly, while European commercial launch will occur in October.

For the interventionalist, there appear to be several advantages of this technology compared to other debulking/tissue removal devices. These include the use of existing introducers and catheters, elimination of the need to acquire costly capital equipment (e.g., lasers) and the ability of the physician to rapidly resolve thrombotic lesions.

The OmniWave technology is part of a portfolio of eight issued patents and 35 patent applications. The technology is "the ultrasonic vibration along a longitudinal axis ... with conversion of that vibration into a standing transverse wave along the active length of the flexible member," according to OmniSonics.

The company's business model will feature an emphasis on high-margin, disposable, single-patient contact wires. It plans to use distributors in Europe and other offshore markets and will field a direct sales force in the U.S.

OmniSonics was originally funded in a seed round in December 1998 and subsequently has received two rounds of venture capital, with the most recent round completed in May 2001. The VC investors include Prism Venture Partners (Westwood, Massachusetts), Johnson & Johnson Development Corp. (New Brunswick, New Jersey), Domain Associates (Princeton, New Jersey), Canaan Partners (Rowayton, Connecticut) and Hambrecht & Quist Capital Management (Boston, Massachusetts).

Rabiner noted at the Adams, Harkness & Hill meeting that with "a proprietary technology platform and a large market opportunity with unmet clinical needs, we hope to become a rapidly growing, highly profitable company."

Quinton moves toward profitability

There have been very few initial public offerings (IPOs) in the medical device sector over the last several months, as negative investor sentiment has cast a pall over public financing efforts. Quinton Cardiology Systems is one of the few to successfully complete its IPO, which netted proceeds of about $28 million in May, selling 4.6 million shares (including the underwriters' overallotment) at $7 a share. Although the price was well below the initial filing range of $12 to $14 a share and raised less money than the company had hoped, Quinton nevertheless was able to pay off its bank debt, strengthen its balance sheet and build a war chest for potential acquisitions.

Quinton president and chief operating officer John Hinson said during the Adams, Harkness & Hill gathering that "acquisitions and strategic alliances are one of our key growth drivers for the future." He indicated that management is currently very active in this area, evaluating a plethora of companies and technologies that would be a good fit for the company's core business – diagnostic cardiology systems. With about $24 million in cash and a publicly traded common stock, Quinton is well-armed for making deals, but thus far "we either haven't found the right fit or [the sellers'} purchase price expectations have been too high," Hinson said.

Quinton, which was founded in 1953 and developed the first treadmill designed for cardiac stress testing, was purchased in leveraged buyout in 1998 by management and investors led by W. R. Hambrecht (San Francisco, California) from the pharmaceutical giant Wyeth (formerly American Home Products; Madison, New Jersey). As has been the case for many medical device divisions of drug companies, Quinton had been a stepchild – underfunded and lacking focus, resulting in outdated technology and erosion of market share in its several market niches. In Quinton's case, it also was losing significant sums of money and consuming cash when purchased.

New management, led by chairman Rudi Naumann, formerly CEO and chairman of highly successful OEC Medical Systems (Salt Lake City, Utah), has moved quickly to staunch the operating losses and cash burn, stabilize market shares and set the company on a growth course.

Hinson identified four key initiatives, or growth drivers designed to buoy its performance. "Successful implementation of these strategies should enable us to achieve our target growth rate goal of 15% per year," Hinson said.

First, in the domestic market, the company will enter new market segments that it currently is not competing in or improve on its exiting product offerings. In June, Quinton launched a new generation of cardiac rehabilitation management system called the Q-Tel RMS, as well as beginning to ship an enhanced version of its Q-Stress Cardiac Stress Monitor system. Earlier this year, the company also announced the introduction of an integrated stress monitor and automated echocardiography bed. The latter technology was developed by Medical Positioning (Kansas City, Missouri). This product enables clinicians to complete an exercise stress echo procedure without moving the patient from the exercise device to the examination table, thereby avoiding the potential loss of valuable clinical data.

Also on the domestic front, it will broaden its distribution reach into underserved or unserved areas such as the large hospitals and smaller physician practices.

Internationally, Quinton will introduce new product offerings into existing markets and establish new distribution partnerships in markets it currently does not serve. A good example of the latter is the recent distribution agreement with Nihon Kohden (Tokyo), one of the largest Japanese medical device companies. Nihon Kohden will have distribution rights to Quinton's cardiology products for three years, with contract renewal options. Japan is the third-largest medical device market in the world.

A third driver will be "connectivity," that is, enhancing the customer's ability to assimilate, collate and interpret data and then disseminate the results of diagnosis, treatment and rehabilitation. In this light, the company has targeted wireless communication as an important new method to link up its diagnostic information. It strongly believes that connectivity addresses a significant unmet need in its marketplace.

Finally, as noted above, the experienced management team is hot on the trail of new technologies and strategic alliances to either buy or align with. It appears likely that the company's keen interest in growth will result in product or company acquisitions or alliances in the coming months.

Hinson indicated that Quinton currently competes in a capital equipment market of about $800 million per year, growing 5% to 10% annually. The inclusion of disposable supplies and services boosts the overall diagnostic cardiology market to nearly $1 billion annually. Its products serve a "continuum of care, from diagnosis, to treatment to rehabbing the cardiac patient," he said. Diagnostic systems include resting ECG, Holter monitoring and stress testing systems, treatment involves cardiac catheterization systems and rehabilitation involves post-interventional follow-up.

Recently reported results for 2Q02 showed that the company's strategies and tactics are beginning to bear fruit. Though sales were flat at about $11 million, its gross profit margins improved over two percentage points to more than 39% and its pretax operating loss shrunk from $1.4 million in last year's second quarter to $0.4 million this year.

Looking forward, Hinson stated that he expects that the gross profit could swell an additional 10 percentage points to the area of 48% to 50% and that the introduction of new products and broadened distribution would enable its top line to grow at 15% per year. With frugal management of operating expenses, the company also expects its profits to grow rapidly.

Hinson predicted that Quinton would be profitable in the fourth quarter of this year, as these positive trends begin to manifest. He added, "we want to become a dominant and highly profitable player in the diagnostic cardiology market."