Medical Device Link.

Originally Published IVD Technology May 2001

In Person

IVD Technology: Careside originated as a spin-off from SmithKline Beecham Clinical Laboratories. How did that come about?

W. Vickery Stoughton: Careside actually started within SmithKline Beecham (SKB) as a project to examine the future impact of rapid testing on SKB's reference lab business. Recognizing that the essential purpose of lab testing is to provide useful clinical information, we realized that healthcare providers would likely be most interested in technologies that could provide that information as quickly as possible. Rapid testing is attractive to such healthcare professionals because it provides information quickly and cost-effectively.

Our idea was to see what could be done if one attempted to decentralize all routine testing. We recognized that if you intended to decentralize all routine testing, you would have to include clinical chemistry and hematology and certain coagulation and immunoassay tests. But we couldn't find anybody that was attempting to do that. None of the device companies were doing it; they were all watching what was happening with the start-up companies. And the start-up companies were focusing on disease-specific testing or a subset of common tests for patients in critical situations, so-called STAT testing. So we decided to reinvent the company by creating a project to accomplish complete decentralization.

Now, after all this, SKB decided to focus on its pharmaceuticals business and to dispose of its diagnostic businesses entirely. After some discussion, SKB agreed to spin off the Careside project and see what could be done with it. Since the spin-off, which took place in 1996, we've raised about $50 million and created a very exciting product.

Where did the funding that you started to get in 1997 come from?

The initial rounds were private financing through a boutique investment banking group, so the funding came from hedge funds and a lot of high-wealth individuals. Then we went public in June of 1999, and again got financing from some investors and institutional funds. Since we've become public we've done some additional private-equity financing, and most of that has been drawn from institutional funds.

In the past year there's been quite a bit of falloff from initial offering prices. Has that hurt your ability to keep the company viable and con-tinue development of the Careside analyzer?

Every time you have to do financing you have to tell your story. And if you don't hit your milestones, your credibility can suffer. So even though four years is a reasonable period for development of a product of this type, the market has been problematic. Investors are not always patient—particularly initial investors.

Fortunately the story is now very good. We now have an FDA-approved product, it's working, and we've got good manufacturing yield. We have a sales force, we're signing distribution agreements, and we're very optimistic about this year.

A lot of companies go into business with the specific idea that they want to be acquired. Is that an attractive option for Careside?

I wouldn't say never to anything. So far, the very largest IVD companies have done very little in point-of-care testing with the exception of glucose monitoring. But they all know about Careside, and they're watching. If one of them tried to snap us up now we'd do everything we could to fight it because the value of our product isn't reflected in the company's market valuation yet.

So far, we've been trying to create a product with a large enough market opportunity to enable the company to achieve a fairly reasonable size as a stand-alone. But that's not to say that if the right company and offer came along we wouldn't say 'sold.' That possibility hasn't been precluded.

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FDA approved the analyzer in November 1999. In its first year, the device won a Medical Design Excellence Award. Did that achievement help to get attention in the marketplace?

It absolutely got us attention and we still market the fact that we received that award. When we entered the competition, we knew we had a device that could work spectacularly, and we had produced a handful of the analyzers that were doing everything they were supposed to do. But last year's challenge was to ensure that all of the devices would work that way when we began to manufacture them in batches of 300 or 400.

At last year's annual meeting of the American Association for Clinical Chemistry (AACC) the Careside analyzer seemed to generate a lot of interest among attendees. How does that kind of reception translate into orders and a viable market for Careside?

The AACC show is attended primarily by laboratorians, and selling a product for decentralizing lab testing to laboratorians is a hard way to start a company. Laboratorians might buy certain types of point-of-care devices for use in emergency rooms and intensive care units, and perhaps we'll sell a few Careside analyzers to that environment. But it's a pretty hard sell.

Instead, we need to pursue a different strategy. What we want to do is to move routine testing to physicians' offices and nursing units—and that means initiating lab decentralization. To achieve success with that kind of approach, we're going to have to convince some enlightened institutions and individuals—administrators, laboratorians, and nurses—to conduct some pilot projects. So we're looking for institutions that are interested in working with us.

Of course many large testing systems are provided as part of a lease-back arrangement, so their retail price is of little concern to the physician-user. Aside from the substantial difference in retail price, how does a point-of-care analyzer respond to the economic needs of physician office labs?

Large instruments usually employ liquid reagents that have limited shelf lives. So if a physician-user doesn't perform a certain volume of tests in a 30-day period, whatever reagents are left over have to be thrown out. Such waste can make the use of large systems even more costly.

And this is where it's important to know that 20,000 of the 30,000 licensed physician office labs involve 10 or fewer physicians. A group of 10 physicians might achieve the volume of testing necessary to use reagents efficiently, but even many 10-physician groups don't. And if there are even fewer members in the group, forget it. So, in addition to the CLIA requirements, this is one of the major reasons that smaller physician groups no longer perform their own testing. There hasn't been an economically efficient system that would enable them to do the testing.

How does this information about your potential customers translate into a selling strategy?

The notion is to identify a very narrowly focused target for the product and then expand to other, related users. In this case, the target is physician-users who are already over the CLIA barrier—those who have already convinced themselves that it is worthwhile to deal with CLIA's regulatory requirements. When those buyers experience the easier regulatory compliance and other benefits that the system provides, they become a group of customers that can provide testimony to physicians who are still on the other side of the CLIA barrier. And this enables us to expand into the broader universe of physicians who are currently sending their tests out to reference labs.

A similar approach is applicable to hospitals. If you try to decentralize a 500-bed hospital or academic medical center, you'll be in your grave by the time it's finished. But if you narrow your focus to a target that already has incentives to listen, you can actually make some headway.

So our initial approach is going to be with doctors while at the same time we look for a few select hospitals to serve as pilot sites.

Among those who crowded the Careside booth at last year's AACC meeting there were a lot of laboratorians from abroad. Do you see overseas laboratories as a viable market?

Not yet, no. I think those visitors were just curious, and the Careside analyzer represented something really new and different.

We don't have the resources right now to consider market decentralization at small institutions in foreign countries. We just don't. Instead, we've been trying to determine whether the reimbursement systems in certain select countries would support decentralized testing down to the level of the physician or, in certain cases, into hospitals. After that, we'll consider what distributors are appropriate for the countries where support for decentralization is possible.

Do you feel that other analyzers represent strong competition for you, either technologically or because they have a strong business base?

There are some companies with brand name and presence that offer potential competition, but they're not really trying to sell into doctors' offices the way we're trying to do.

Our challenge will be to execute sales and marketing, and get people to know who we are. One satisfied customer will probably generate another 5 to10 sales, but we have to get a lot of those in order to get the 5 or 10 more.

When the SKB report was written, what was the state of the art in rapid testing and how did the Careside project set out to advance it?

The premise that we began with was to take routine tests that have been performed for years using gold-standard technologies and, without reinventing those technologies, microfabricate and miniaturize the tests onto a platform that would deliver test results while a physician is seeing the patient.

In 1995, we identified 70 tests that represented 60% of SKB's volume—and probably close to 90% of what the average doctor orders on an outpatient basis. So when we began, those were the tests that we decided to go after.

It soon became very clear that just one test methodology was not enough to handle such a large test menu. The device would have to include multiple test methodologies for electrochemistry, routine chemistries, coagulation, immunoassay, and hematology. In the end, we realized that including hematology tests would make the device much larger, so we split those off and created a separate hematology analyzer. But we were able to combine all the other tests into a single product that is now the Careside analyzer, which offers a testing platform that incorporates multiple test methodologies. Using both analyzers, we can now perform 59 tests, and we're continuing to validate more tests and submit them to FDA.

How many of the 59 tests are now FDA approved?

All of them. And this year we expect to submit three or four more for FDA clearance. Right now the Careside analyzer is approved for 41 tests, and the hematology analyzer offers another 18 parameters, so that's how we get up to 59. The number of tests run on the hematology analyzer won't change, but we'll be adding more to the menu of the Careside analyzer.

What are Careside's plans for advancing its technology to the next generation over the next couple of years?

Immunoassays represent less than 10% of total test volume in the United States, but they generate pretty close to 40% of test revenues. So that would be an area in which we would have some incentives to expand.

There is also a lot of opportunity centered on the field of informatics. Consumers—whether or not they are patients—are becoming very interested in having access to their own clinical data. And the Careside analyzer is set up so that creating individual access to clinical test results over time, tracking health status, and tracking chronic illnesses are all achievable.

In addition, because we have the ability to monitor linked devices from a central location, we could conduct quality assurance and quality control processes on behalf of our customers from a remote site. And if customers express an interest, we might consider setting up a service to handle QA/QC on their behalf.

The cartridges that are used with the Careside analyzer are designed to handle patient specimens, but they also offer us the ability to mount any chemical, and thereby give us a broad platform for performing various kinds of tests. A number of companies are developing genetically coded sensor chips that can be used to detect defective genes in blood samples, and there's no reason that a Careside cartridge couldn't handle similar fluidics. What we'd have to look at then would be whether the device contained the necessary reading capabilities. Right now, it isn't possible to miniaturize that function, but perhaps in the future it could be, and then we could develop the analyzer into a platform for handling biosensor chip fluidics.

So is this an area that you are likely to pursue?

It has always been in the back of my mind. It's another way of making the esoteric routine. This field could develop the way that computer software has. And if so, well, just consider all the statistical and accounting capabilities that are available now right on your desktop. Why not blood testing?

Copyright ©2001 IVD Technology