Gray Sheet: CDRH Director Resigning Amidst Controversy

Courtesy of our friends at 'The Gray Sheet' we've heard that CDRH Director Daniel Schultz is leaving FDA.

Gray says that Schultz is "resigning from the agency after discussions with new FDA Commissioner Margaret Hamburg, the longtime FDA employee told staff in an Aug. 11 memo."

Schultz and the new FDA chief came to a "mutual agreement" that his resignation "would be in the best interest of the center and the agency." The decision isn't a shocker: the center--formally FDA's Center for Devices and Radiological Health--has been at the center of corruption allegations. Schultz and other FDAers have been accused of "coercing and intimidating staff into modifying device evaluations," Jessica Bylander writes for Gray. Schulz has been with FDA since 1994 and has been director at CDRH since 2004.

Read more at Gray Sheet's blog Medical Devices Today.

image from flickr user splorp used under a creative commons license.

While You Were Nice to Your Mother

Happy belated Mother's Day to all you moms out there. To help celebrate a day late, here are some tidbits of (completely stereotypical) motherly advice tied to a few industry happenings over the weekend.

• The squeaky hip gets the grease. Sunday's New York Times carries an article about artificial hips and the sometimes unwanted squeaking that can result with newer, ceramic, replacement joints. Merely an annoyance or a potential hazard?
• Don't drool! (or, Wipe your face!). Also from the NYT, in the event you don't like the novacaine-induced hour or so of numbness that follows a visit to the dentist, you're in luck. FDA just approved OraVerse, an injectible formulation of the antihypertensive phentolamine, which reverses numbness by dilating local blood vessels which whisks away the anesthetic.
• Don't count your chickens. A late Friday addition to FT.com explains why Sanofi and BMS shares were under pressure at the end of last week. Another generic Plavix may be about to enter the market, this time in Germany. European sales of Plavix were about $3 billion last year, according to the potential source of the generic, Schweizerhall Holding.
• Always wear clean underwear. Merck and Indian generics co. Ranbaxy have inked a deal to discover and develop anti-infectives. You really never know who's going to see them.
• It ain't over 'til it's over (applicable if your mother is Yogi Berra). Yes, Pittsburgh fans, we know the Flyers are in a 2-0 hole.

photo from flickr user shoothead used under a creative commons license

Neuro Companies Causing Headaches

Ever since President Bush (the First) declared the 1990s to be the Decade of the Brain, hopes have been high for device innovations to treat a variety of neurological conditions ranging from stroke to migraines to depression.

For all the promise these therapeutic areas hold, neurological device applications have proven to be among the most inscrutable for entrepreneurs and investors, replete with technological and clinical challenges, not the least of which is the difficulty of conducting neuro trials, e.g., the inherent problems in enrolling acute patients for stroke studies.

Several recent announcements have done nothing but confirm how challenging the neuro space is. In fact, this year is starting out to be one that neuro investors would just as soon forget. Highlighting the bad news cascade was Northstar Neuroscience Inc.'s announcement that its EVEREST pivotal trial failed to meet its primary efficacy endpoint. This caused Northstar's stock to immediately plummet by nearly 90%, hovering today at just above $1 per share. Coming off what many investors called the most successful device IPO of 2006 (raising more than $100mm), Northstar's stock took an unexplained hit not long after going public, but there is no doubt about the reason behind this most recent crash.

Hopes surrounding Northstar were high. The EVEREST trial was designed to determine whether cortical neurostimulation, together with rehab therapy, would improve hand and arm function in stroke survivors better than rehab alone. Not only did the initial four-week data fail to show any meaningful difference between the investigational and control groups, but a preliminary review of the longer-term (24-week data) appears to show similar results. John Bowers, Northstar's president and CEO, during a conference call discussing the trial results, noted, "To put it mildly, we are extremely surprised and disappointed" by the study's outcome, and couldn't explain why EVEREST failed to reflect the positive results demonstrated by the company's two previous feasibility trials.

Northstar remains well-financed--the company reported having more than $80mm in cash and investment on hand as of year-end 2007. While feasibility studies are still being explored for possible applications of Northstar's Renova technology to treat tinnitus, aphasia and depression, Bowers acknowledged that it is unlikely the company will make sufficient progress in any of those areas to launch a new pivotal trial this year.

Northstar is not the first high-profile failure in the hot neurostim/neuromodulation space. Cyberonics' decision to no longer focus on treatment-resistant depression with its vagus-nerve stimulation technology--concentrating instead on epilepsy--has been well documented. Northstar's fall may, however, cause investors to pause and assess what progress other players in this area are making before committing additional funds.

Other recent examples of bad neuro news come from one particular therapeutic area: PFO closure (a hole in the heart that fails to close after birth) thought to possibly cause both migraines and stroke. NMT Medical Inc. just announced that it was shutting down its MIST II PFO/migraine trial, primarily due to patient enrollment difficulties, to concentrate on its CLOSURE I pivotal PFO/stroke trial. Investors didn't take the news well, driving the company's stock price down as much as 35%, although it has regained about half of that lost value in the last couple of days.

Indeed, one whole area of PFO closure technology--so-called energy-based approaches that use sources including RF-energy to seal the PFO--has apparently proven unworkable. Cierra Inc., a company out of The Foundry incubator, is in the process of winding up its operations, and, according to executives familiar with this space, CoAptus Medical Corp., the other player in this space using an energy-based approach, may soon follow suit.

Lest we leave you with a completely negative take on the prospects for device-based neurological therapies, here's one recent positive development: earlier this month, the FDA cleared Penumbra Inc.'s system, which is a tool-set designed to treat ischemic stroke by removing occlusions from the brain's larger vessels. Penumbra's approach is designed to provide neuro-interventionalists with an approach that can be used beyond the narrow, three-hour window during which the drug tPA is indicated, as the company's system can be employed within eight hours of an ischemic event.

"Human Brain" by Flickr user Gaetan Lee used under a creative commons license.

Cardiovascular Systems Antes Up

IN VIVO Blog heard some muted, but optimistic tones about this year's device IPO market at the JP Morgan conference. But Cardiovascular Systems Inc. must have heard a ear-splitting rendition of "Happy Days Are Here Again" that convinced it to file for an $86.25 million offering.

Don't get us wrong. The filing pleased as well as surprised us. We’re pleased because we identified Cardiovascular Systems as one of our notable Series A deals of the year in 2006. Imagine the sound of us tooting our own horn here.

But we’re surprised because, well the company just started selling its Diamondback 360° Orbital Atherectomy System, a minimally invasive catheter system for the treatment of peripheral arterial disease. That's because the FDA just granted Cardiovascular Systems 510(k) clearance in September.

In fact, the company says it “commenced a limited commercial introduction of the Diamondback 360° in the United States in September 2007.” By the end of the year the company shipped more than 1,700 single-use catheters to 57 hospitals and generated revenues of approximately $4.6 million, according to the S-1.

That’s a nice start, no doubt. But is it enough to go public on?

IN VIVO Blog says yes. Here's why.

Hedge Fund Maverick Capital, with 15% of the company, is among its biggest investors. Maverick is increasingly well regarded as a patient investor in start-ups, but when a company pursues a public offering the firm--with a reported $9 billion or more under management--can bring its considerable public market-oriented resources to bear. If Maverick isn't investing in the IPO itself, it already has a pretty good idea about who will.

Easton Capital is another large investor. A few years ago, Maverick and Easton seemingly brought another cardiovascular company to the public markets way too soon.

That company, Conor Medsystem Inc., also didn't have revenue or FDA-approval for its drug-eluting stent technology, giving an opening to critics who thought the company was unwisely testing the IPO market in 2004. Conor did spectacularly well in the IPO and post-IPO performance, well enough on the public markets to be acquired by Johnson & Johnson acquired the company for $1.4 billion, admittedly with disappointing results but also some new hope.

Some may see Cardiovascular Systems filing as an unwise move or the issuance of a 25-page "For Sale" sign. IN VIVO Blog, however, will be betting on an IPO.

Photo 'A Roll of the Dice' by Flickr user Darwin Bell used under a Creative Commons license.

Forsight Scores Big

With the Red Sox and Indians facing off in the American League Championship Series, IN VIVO Blog would like nothing more than to toss in an old baseball metaphor to describe how well investors in Forsight Labs second company did with their investment, but even the ever popular grand salami falls a bit short.

So with the shameless favorite sports team plug firmly inserted, we can go on to tell you that Forsight Newco II, founded just 10 months ago, raised approximately $5 million from investors to cover costs of product development and some early clinical testing of the company’s drug-eluting ocular punctual plug, a technology that can deliver drugs through the eyes’ own tears. For a video showing the product go here.

Now, just 10 months after the company’s inception, QLT stepped forward to pay $42 million upfront for the company. But the potential returns don't stop there. QLT also agreed to pay $5 million payment upon the initiation of phase III clinical trial for the first product; $20 million for the first commercialization of a product; $20 million for the commercialization of a second product; and $15 million on first commercialization of each subsequent product.

For those keeping score at home, that’s $67 million if QLT succeeds in getting one of these products on the market; $87 million if it gets two; $102 million for three and so on. To be sure, all of these potential payments are years off. QLT will need a few years to run the plugs through clinical study and isn't likely to get a product to market until 2011 or 2012.

QLT management is being criticized for overpaying, but Bob Butchofsky, president and chief executive officer of QLT, says the company’s punctual plug, which is inserted in one of the two ducts that drains tears from the eye, will put QLT in position to challenge the $6 billion eye drop market.

Unlike standard punctual plugs, which only slow the drainage of tears from the eye as a means of treating dry eye, QLT’s new plug contains a drug core. As the tear film flows against the plug, the drug is released delivering a steady stream of drug. The Newco identified glaucoma as a first application for the device, but the plug could be used to deliver any drugs currently delivered as eye drops. “I believe this is a start of a major change on how we treat ocular disease,” Butchofsky told analysts in a conference call this morning.

Others aren’t as impressed. QLT shares hit a 52-week low today after the deal was announced. An item on the Globe and Mail web site reported:

National Bank Financial analyst Prakash Gowd calls the deal pricey, citing “very limited data supporting the theoretical benefits of [ForSight’s] punctal plug technology. Moreover, he figures the technology is likely to be a “very competitive area and patents have not yet been clarified.”

QLT must be high on the technology as it made the only real bid for the company. Forsight CEO K. Angela Macfarlane says while Forsight had talks with other companies about its various programs, Newco II wasn’t being shopped around. (Curious about Forsight's first product? Go here.)

Robin Bellas, general partner at Morgenthaler Ventures, one of the investors, called the acquisition, "quite a surprise. We always expected to raise another round. It was unusual that QLT came to us and expressed strong interest in the program. We had no plans to sell it.”

For more about Forsight Labs go here.

If Hamlet Were a VC

To tranche or not to tranche, that is the paraphrasing of a tired cliché.

Cliché or not, it’s an important question venture capitalists often ask themselves when financing a start-up that potentially could require significant capital. (We ask it here.) The obvious benefits are clear. Venture investors can commit large bits of capital to these companies—enough perhaps to carry a company to commercialization—without actually having to hand all the money over at once. (As an added benefit, they boost their IRR by shortening the time between their distribution of capital and their realized--they hope--returns.)

This morning’s panel at our In3 East conference in Boston examined two specific cases of companies running on tranched financings: atrial fibrillation company Endosense SA and spinal implant maker Innovative Spinal Technologies Inc. (IST) In the spirit of obtaining both sides of the argument, the panel included an investor perspective—delivered by Thomas Pollare investment director at 3i and lead investor in Endosense—and management—represented by Scott Schorer, president and CEO of IST.

The discussion—led by colleagues David Cassak and Stephen Levin—didn’t come to any definitive conclusion, pro or con. Pollare and Schorer obviously endorse the concept since each agreed to tranched financings in 2005. Pollare negotiated a $20 million Series A financing with Endosense, which is developing a catheter capable of delivering radiofrequency energy that scars heart tissue and disrupts the irregular electrical flow that leads to atrial fibrillation.

Schorer, meanwhile, signed a $39 million Series B with Orbimed, MPM and JPMorgan Partners taking equal parts. The company is currently selling and developing several new spinal implants.

Both suggested the tranched financing structure gives companies the capital necessary to make serious headway on a business plan. Pollare suggested the inclusion of milestones aligns the interests of management and investors as both will be rewarded by the execution of the business plan. “As an investor it’s important to have the capital working for you so it can be used efficiently,” Pollare said. “Obviously, it’s important for a second reason because if they don’t hit milestones something is wrong. You have to rethink the plan and the valuations.”

Schorer agreed but warned that the milestones could easily become a problem if management and investors don’t share the same interpretation of milestones and results. “I generally don’t like milestones and, as I was telling myself that, I looked back at the last few deals I’ve done and I realized that they all have contained milestones,” Schorer said.

IST, according to Schorer, drew down $20 million in July 2005 when it first closed on the $39 million Series B. The second $19 million came later, after the company and investors renegotiated the terms of the second tranche when the company missed some of its milestones. “We did that in reasonable terms,” Schorer says, concluding that the key to the success of tranched financings is high level of trust and respect between investors and management. The biggest risk is that investors and executives don’t share similar interpretation of results, so disagreements can arise over whether or not milestones have been met.

“There is nothing you can build into the deal structure to make it smoother,” he added. “You have to trust the people you’re working with to be fair.” IST is raising a $30 million to $35 million Series C round. It hopes to close on the financing early next year.

An audience member challenged the structure, saying it was unhealthy because it automatically put management and investors at odds. Experienced investors should be capable of judging management, evaluating performance and rewarding results without dangling the carrot and stick of a tranche investment.

Pollare, however, defended tranching, saying it gave investors an additional level of control over how their capital is used. “You can’t just give the check and say, `Call me in three years,'” he said.

“That, would be ideal,” Schorer joked.

Ortho Settlement Doesn't Settle Everything

Yesterday’s announcement that the U.S. Attorney and four of the nation’s biggest orthopedics companies agreed to a $311 million settlement of bribery accusations would seem to put this entire matter to bed.

Under the agreement, four companies—Biomet Inc., DePuy Inc., Smith & Nephew plc and Zimmer Holdings Inc.—paid varying portions of the settlement while all agreed to adopt corporate integrity agreements and to hire outside firms that will monitor their relationships with physicians.

(It’s worth noting that Stryker Orthopedics did not take part on the settlement. CEO Steve McMillan touched on the subject before the settlement in a recent IN VIVO magazine article. Medtronic Sofamar Danek also has had prominent role in this debate.)

But once the cloud cover over the industry clears, we may find an orthopedics industry facing a whole new set of daunting questions:

What of the clean up that’s already begun? Certainly, few industry executives would deny privately that there are more than a few skeletons in the closet of most orthopedics companies—arrangements entered into around consulting agreements or royalty payments that richly reward surgeons for minimal amounts of work. But the $311 million settlement aside, our bet is that most orthopedic industry executives are applauding the settlement and—particularly given that no heavier, industry-disrupting judgments were handed down—may even have welcomed the scrutiny that the case brought.

For one thing, many orthopedic companies have themselves been trying to clean up their act over the past several years, following guidelines such as those promulgated by industry trade association AdvaMed governing appropriate compensation in sales and marketing practices and consulting arrangements.

That’s good corporate citizenship, but also good business sense. Particularly as the industry has consolidated in recent years and become much more of an oligopoly, legacy consulting arrangements that don’t deliver real clinical and economic value to orthopedics companies have become both fiscally irresponsible and unnecessary. Were there times in the past when orthopedics companies set up less-than-robust consulting or royalty arrangements with surgeons just because the surgeons demanded arrangements similar to ones they believed other surgeons were getting? Sure. But as the industry has consolidated and competitive positions stabilized, the ortho giants have no longer felt the temptation to enter into these agreements. Adherence to the AdvaMed guidelines were one rationale for pushing against these kinds of practices; the federal investigation into these practices now gives ortho companies more and more plausible arguments to deny surgeons who come asking for lucrative deals.

Does this tilt or level the playing field for smaller companies? The US Attorney investigations focused on the largest orthopedics companies, a group who, in aggregate represent greater than 90% market share. What are the implications for smaller suppliers and start-up companies? Does the ban against aggressive sales training and consulting agreements eliminate questionable practices and level the playing field? Or does it do just the opposite, erecting huge barriers to entry around the market leaders and preventing others from using well-established tactics that get the attention of important customers? More to the point, particularly where things like the AdvaMed guidelines are concerned, what posture should non-market leaders take? Strict compliance with what are voluntary rules? Or an attitude of, “Let Big Ortho do what it has to; we’ll do what we have to?”

What of the historical and vital relationship with physicians?
Most of the scrutiny has focused on sales and marketing practices—product training programs at the Ritz or sales training done on championship golf courses—those kinds of things. But what rules do we want to adopt about surgeon/supplier relationships where it concerns new product development? Rigid firewalls in the area of technological innovation might cut down on some abuses but almost certainly would signal the end of meaningful new product development in a field where innovation comes largely, if not exclusively from collaborations and feedback from suppliers.

Already some surgeons are beginning to claim that rather than simply ending abuses, the current scrutiny is giving orthopedics and spine companies license to deny them fair compensation for new ideas and new product iterations. Many device industry executives argue that while the current wide-scale scrutiny (one which embraces physicians working with drug companies on clinical trials and the like) is entirely appropriate, some special consideration should be set aside for device companies when it comes to oversight on product company/surgeon relationships.

As noted, the settlement is most likely good news, particularly in that few believe it will call for fundamental changes in industry dynamics. But no one should breathe a sigh of relief until we see what impact, if any, the future oversight will have on surgeon relationships as they apply not to sales and marketing efforts, but to product development.

Ready, set....

Globus Medical Inc. is ready to run.

Earlier this week, the company settled its lawsuit with Synthes USA, reaching an agreement that absolved Globus of allegedly stealing trade secrets and key personnel from Synthes. As part of the deal, Globus agreed to pay Synthes $13.5 million in cash and to not hire any additional Synthes employees for one year.

Freed by the drag of that lawsuit, Globus today announced it raised a $110 million Series E investment in a round assembled by Clarus Ventures, which led a syndicate of private equity investors with a commitment north of $50 million. AIG SunAmerica is the only other identified investor although several private equity firms supposedly took part.

Not that the company had exactly been standing still. Started in 2003 by CEO David Paul and other executives who left Synthes, Globus Medical last year reported more than $80 million in revenue. The size of the settlement surprised some. (Healthpoint Capital's blog has some nice before and after takes here and here. But the Philadelphia Inquirer suggested at least one juror saw some holes in Globus' case.)

Hard to say for sure why the settlement happened, but it's easy to envision Globus executives opting to settle quickly with $110 million piled atop their board room table.

The massive deal signals two developments. The first involves Globus which currently resides on the second-tier of the spinal device market. Medtronic Sofamar Danek, Depuy Spine, Synthes USA, Stryker Corp and Zimmer Spine Inc./Zimmer Holdings Inc. still lead the way. But Globus is now positioned to make a move past other mid-tier players like Blackstone Medical Inc., NuVasive Inc., Alphatec Spine Inc and others. The capital infusion enables the company to plow through with sales of its fusion products while advancing its internally developed line of non-fusion implants and spinal spacers. For more on these areas go to MedTech Insight reports here and here.

The second interesting aspect of this financing of course involves Clarus Ventures, the firm founded by five former partners of MPM Capital who left in a very public split two years ago. This financing will likely be reported as a significant “venture capital” deal, probably the biggest since CardioNet secured its $110 million (which also wasn’t really a venture capital round.) But make no mistake, this is a private equity-style investment with private equity firms involved.

Private equity firms continue to survey the medical device industry, and orthopedics particularly, for opportunities. While the Globus deal clearly resides in a different neighborhood than the $10.9 billion acquisition of Biomet Inc. by Blackstone, KKR and others, it demonstrates how well-heeled venture firms--such as Clarus--can position themselves as private equity players, at least when when medical devices are involved. The $50 million-plus investment in Globus represents roughly 10% of the $500 million debut fund that Clarus closed on at the start of 2006, so it’s a big bet. It also may be the last device deal in this debut fund.

Clarus is clearly comfortable with big wagers as it demonstrated with its participation in the $80 million financing for Sientra, which is pushing for FDA approval of a silicon-based breast implant.

Check out our next issue of START-UP to hear more about the deal and Clarus.