Medical Device Link.

Originally Published MX March/April 2006

COVER STORY

Interview by Steve Halasey

For an emerging medical technology company, having access to a platform technology—an intellectual property portfolio that offers a wide range of potential medical applications—isn't a bad way to begin. That was certainly the starting point for RITA Medical Systems (Fremont, CA), which was founded in 1994 to develop the medical applications of a technology for radio-frequency interstitial tissue ablation (hence the acronym, RITA). After receiving a general FDA clearance for the use of its technology in ablating soft tissue, the company began to explore additional applications and received clearance for intended uses against unresectable liver tumors.

But the blessings of a widely applicable technology can also become a company executive's worst nightmare. With limited staff time—and sometimes even scarcer funding—prioritizing company efforts to conduct clinical research, gain regulatory approvals, approach a wide variety of clinical specialists, and gain reimbursement coverage can become an all-absorbing challenge.

RITA Medical's president and CEO Joseph M. DeVivo on turning acquisition and integration into sector leadership Photo by KENT CLEMENCO

One way of dealing with such a mixed blessing is the strategy adopted by RITA. Since 2003, under the leadership of president and CEO Joseph M. DeVivo, RITA has dramatically altered its positioning in the marketplace, taking on the role of a medical device company with a broad focus on the field of oncology. To forward this effort, in 2004 RITA went after and acquired Horizon Medical (Atlanta), a company with a specialty in catheters and access ports for the delivery of oncology medications.

So far, RITA's new approach to the marketplace appears to be a winning strategy. Over the past two years, the company has increased revenues significantly—to the point that it is now cash-flow positive and looking forward to new opportunities. In this excerpted interview with MX editor-in-chief Steve Halasey, DeVivo discusses the strategy that led to RITA's acquisition of Horizon, the challenges of postacquisition integration, and how RITA's new positioning is going over in its target markets.

MX: RITA Medical Systems was founded in 1994. Where did the intellectual property originate?

Joseph M. DeVivo: RITA was a spinout of VidaMed (Fremont, CA), a company focused on radio-frequency ablation (RFA) technology for the treatment of benign prostatic hyperplasia. Medtronic acquired VidaMed in 2001 for about $340 million. All of VidaMed's intellectual property (IP) was created by Stuart Edwards, who also spun out a company called Curon Medical (Fremont, CA). So several companies use the same radio-frequency ablation platform, in which multiple electrodes on a needle destroy tissue using primarily heat.

Did the technology come before the clinical opportunity, or did they come hand in hand?

The technology came first, and the clinical applications second. When dealing with a technological invention with broad applications across medicine, the art is not only in the development of the technology itself, but identifying where it will reside and where it can have the greatest clinical impact.

For many years, RITA was focused on one technology and one application, which was the ablation of hard tumors.

Initially VidaMed was using the technology for a benign application within the prostate, but clinical evidence demonstrated that there were many cancer patients who did not have the option of surgery. Because urology and not oncology was VidaMed's primary call point, the company's executives believed that if they extended the IP and the technology to cancer, it would need to constitute a separate organization. RITA was formed to take the technology and apply it to the areas of greatest unmet clinical need. The first place the company focused on was the liver.

That initial focus developed into the core and infrastructure of our business. Now our focus is building on that core and getting into other areas of solid-tumor destruction where surgery is not an option.

Has much of this been driven by off-label application of the technology by the physician community?

It has and it hasn't. RITA has general clearance for soft-tissue ablation, and clinicians can use the system on-label to ablate soft tissue anywhere in the body. There are current procedural terminology (CPT) and diagnosis-related grouping (DRG) codes in place so they can be reimbursed, and use of the technology is ethical. The company also has specific indications for palliation of pain associated with bone tumors and for the destruction of unresectable liver lesions, and we are working on additional approvals. This gives the company the ability to actively market outcomes and specific indications.

That said, the FDA approvals have been so long in coming that the marketplace has not waited for FDA. When clinicians see the clinical benefit that they have achieved using RITA's technology within the liver—adding years to patient's lives that they would not have had otherwise—they are much more inclined to make the leap to other organs.

Strategic Considerations

You joined RITA in 2003, and in 2004 the company acquired Horizon, an access port company. How did this strategy develop?

The Horizon acquisition was developing as I joined.

When I conducted my diligence on RITA and saw the type of clinical impact the company was having, I started looking into other sectors within oncology. Historically, chemotherapy, radiation, and surgery have been the three pillars of cancer care. The oncology sector has focused on pharma treatments. But I realized there was a burgeoning marketplace and a very large unmet need for devices in the area of oncology.

Since identifying this unmet clinical need, RITA has created a business plan focused on building an independent oncology-specific medical device company—one that can consolidate a set of local or regional therapies to provide minimally invasive benefit to cancer patients where there traditionally has not been a focus.

Does the physician community understand the device aspect of oncology, or are practitioners skeptical?

The physician community is very excited about our strategy because we are championing its cause. For example, radiologists and interventional radiologists have placed great emphasis on minimally invasive cancer therapies. So much so that the creation of a potential new subspecialty, interventional oncology, is being contemplated by several medical societies. Some interventional radiologists have become so aggressive and so comfortable with multiple therapies, including direct drug delivery and ablation and destruction of tumors, that they are focusing their entire practice on oncology. Companies like RITA, whose business revolves around techniques, devices, and minimally invasive procedures for oncology, become their best partners and their biggest supporters.

Are they defensive of older methods using only drug therapy?

Every patient on whom an interventional radiologist can perform one of RITA's procedures is a new patient to them—a new procedure, a new income stream, a new benefit.

At the last two annual meetings of the Radiological Society of North America and the Society of Interventional Radiology, during press conferences to promote their societies to the general public, both organizations featured clinical studies based on RITA's investigators, RITA's technology, and RITA's clinical data. If anything, RITA has tremendous support among practitioners.

With that strategy in mind, was RITA looking for a company to acquire to broaden its line, or did Horizon drop into RITA's lap?

It basically happened on both fronts. Horizon initially approached RITA about a potential joining of companies when RITA was without a CEO. After I came on board, we looked at our strategic alternatives and realized that building a larger-based medical oncology device company would allow us to double our sales force, reduce a substantial amount of operating expense, and eliminate duplication in our sales efforts.

After the merger, our sales efforts became more productive. We also consolidated manufacturing, which made RITA a leaner organization. This consolidation makes the company more fiscally responsible and builds into the overall vision.

Merging Cultures

Over the last five years, sales, general, and administrative costs have constituted an extraordinary percentage of RITA's expenses. But as you just suggested, the merger with Horizon has doubled the capacity of RITA's sales force, allowing it to bring more products to the same customers.

Absolutely. There is definitively a short- to medium-term financial benefit to the transaction. It is an important strategic fit that broadens RITA's definition and vision of itself as more than just an RFA company. RITA is now a broad-based company, but more practically, the company has also been able to eliminate a substantial number of redundant positions and reduce costs—especially redundant public company costs—in order to achieve self-sufficiency.

We believe that a $14 million, $15 million, or $16 million company is just too small to sustain itself as a public company in view of today's Sarbanes-Oxley accounting requirements. Now RITA is on a run rate of roughly $48 million.

From a management perspective, how did you develop your strategy for integrating Horizon into RITA?

The unique challenge faced in the RITA-Horizon integration was that a $16 million company was acquiring a $28 million company. When a company is acquiring a larger business, management has to rely on the people and the infrastructure. Management cannot—like a big company might—move into the company, wipe everybody out, and have its own people manage the business. RITA's challenge was that the company had to rely on people whose abilities were yet to be proven. In some areas, the merger was very successful and we were pleasantly surprised. In other areas, we were terribly disappointed and the transition did not go according to plan.

Turning the Corner

It looks like RITA is about to turn the corner into profitability.

As a company, RITA's profit-and-loss (P&L) statement and balance sheet are definitely at two different levels. With the acquisition of Horizon, as well as some other transactions, the company holds its cost of goods around $900,000 to $1 million of quarterly depreciation and amortization. The company has about $1 million dollars of noncash expenses on its P&L. If the company loses any less than $1 million dollars, it is generally in a position to generate cash—and that is a huge milestone.

When a company is cash-flow positive, it is in control of its own destiny. It is a real business. One of my board members says, "As long as you are burning cash, you are a public charity." But now RITA is a real business. We are excited about that.

How will being cash-flow positive change the way RITA does business on a daily or strategic basis?

That is a great question. We, over the last year, have operated this business as a mature company, as a fiscally responsible company that has to drive the balance sheet. At times, that forces a company to abstain from investments that the business would normally make or like to make.

As RITA begins to generate cash, the company will gain the ability to invest in many of the high-growth opportunities on which it has not yet capitalized. Radio-frequency ablation is a platform technology that can be used across multiple markets and for multiple unmet clinical needs in cancer.

With that kind of progress, what is the attitude on the investor-relations side?

What our investors want is to see the company be able to stand on its own two feet, deliver a good revenue number, and have a solid balance sheet. Those are the milestones we have outlined for our investors, and I am looking forward to communicating with them as we reach those important milestones. As we do, the excitement will increase due to RITA's newfound ability to execute on some of the opportunities it has as a company. But today, RITA's investor base is in a show-me state, and its management team is ready to deliver.

Looking at other disease states, there is spine, there is obstetrics and gynecology, there is general surgery, there is heart disease. There are so many different areas that are very well served and penetrated. Oncology, from the standpoint of surgery and intervention on the minimally invasive side, is incredibly underserved. In the next 5 to 10 years, every large medical device company will turn its attention to cancer.

Developing a Pipeline

What technology challenges does the company face, what kind of research and development (R&D) is RITA conducting, and where is the company pushing its pipeline?

We know what we do works for cancer patients—not just from the experience of our sales reps in the field, but from the large body of scientific evidence being published and presented at conferences each year. RITA's technology can accurately destroy culprit tissue that clinicians wish to destroy when applied within cancer. Where the company is competing and focusing is on the delivery of that into other organs, particularly areas in which patients do not have another option.

We are also developing technology that enables the procedure to be performed faster. And we are developing software interfaces that enable the procedure to be performed more easily.

RITA is the market share leader, particularly from the standpoint of championing reimbursement in clinical data and championing the technology. The company is doing everything possible to maintain that lead. Even though RITA has been losing money, the company still invests $1 million a quarter in research and development and clinical affairs. It would be very easy for me to cut that to nothing, say, "We are profitable," and pat myself on the back. But as RITA has been driving toward operational efficiency, the company has also continued to make investments in its technology.

So far, all of RITA's devices have required 510(k) clearance. FDA has not required a premarket approval submission. However, the company is still conducting a lot of clinical work, working with physicians to explore the applications of the device, and then pushing the reimbursement side. What are the mechanics of that from your point of view?

In RITA's case, it is a challenge to be the market leader as well as a small company that has to carry the torch for the marketplace. Our competitors have been treating this technology as one of many product lines in their bags. This is RITA's life and lifeblood.

The company has been very fortunate and tremendously successful in showing the clinical efficacy of the product and then getting customers paid for the procedures. Interestingly enough, RITA has been so successful that the company recently received a new reimbursement code from the Centers for Medicare and Medicaid Services (CMS; Baltimore) for the radio-frequency ablation of a kidney tumor in advance of FDA approving our technology to perform the procedure. That has to do with the close relationship that RITA has with the Society of Interventional Radiology, which has lobbied CMS because so many clinicians are already performing radio-frequency ablation procedures of the kidney. Therefore, a code was issued before a specific FDA procedure indication was obtained.

What does RITA have to do to get FDA approval for that indication?

We have an active application in with FDA. The agency has continually requested additional information. We think that may be in part because the data look almost too good. FDA is looking for more science behind the application. We are working with FDA on a day-to-day basis and providing more information to ultimately get that clearance.

This brings us back to physician use of the product, adoption of the product, and then use in an off-label fashion. Are you working with physicians to conduct formal clinical trials in addition to what they may be doing off-label?

Yes. We have just completed a two-year follow-up on a prospective trial of the use of radio-frequency ablation for unresectable lung tumors, or pulmonary malignancies. The success of that trial was recently reported in a press release and has shown quite definitively that RFA has a benefit. A historic look at the data has shown improved benefits over radiation therapy as a sole therapy. RITA funded that trial and is communicating with FDA in regard to its outcome. We believe we will need more data in order to get FDA clearance for that indication. RITA has also worked with multiple centers to supply kidney data.

Most recently, RITA began exploring the development of an RFA-assisted lumpectomy procedure for breast cancer patients.

In 2005, RITA launched the Habib resection device. How is it doing in the marketplace?

It has been a great success. The product has opened the company's eyes to a whole set of prodigious devices that can be used for surgical resection of tumors and vascular tissues in the body. It has been an amazing uptick. If RITA were solely crafting its vision as a radio-frequency ablation company for unresectable tumors, it would have missed this opportunity. But because the company has doubled its sales force and broadened its vision, it was able to attract a third party as its partner.

RITA has a lot on its plate with its existing device, expanding its indications for use, and now the Habib device. Is it too soon to talk about what the product pipeline might look like?

RITA is organically investing in a third-generation ablation system, which will leapfrog everything that is currently on the market or about to enter the market. The company is also investing in the breast cancer business with the hope of launching a full line of products to meet the clinical need. In addition, RITA is organically investing in developing a number of adjunctive products for the Habib resection device, which will allow the company to get into areas that it currently does not serve within cancer.

We are also currently negotiating several licensing opportunities under which RITA can bring in other minimally invasive oncology devices that serve both surgeons and radiologists in the performance of minimally invasive cancer procedures. That is an area where the company seems to be gaining momentum. People understand RITA's vision and acknowledge that it is a good company to work with. RITA delivers, and we are excited about those license opportunities.

On a grander scale, as the street gives RITA more credit for its accomplishments and we build a better currency with our stock, one of the benefits of being a public company is having the resources to do transactions. There are several potentially large transactions for the company that can build on the vision of RITA's business and accelerate its ability to grow.

How do you see RITA's technology changing?

Thermally destroying tissue is shown as a safe and efficacious way to provide options for patients who have no other option. RITA is looking at multiple ways of identifying and creating energies that can destroy tissue. But there is also a very large component where a drug-device combination makes sense. Heat activation can definitely trigger other very positive mechanisms. That same application of heat can create a pathway directly into the tumor that can be used not only for energy delivery, but also for drug and componentry delivery. There is a plethora of technologies that are synergistic with RITA's core competency, and we are aggressively trying to bring them into our portfolio.

Are you actively talking with pharmaceutical companies about particular agents?

We have had discussions. Until a company closes a deal, it's hard to tell how close it really is. But that is definitely a part of RITA's strategy.

An Emerging Specialty

The emergence of interventional oncology as a medical specialty is interesting. I understand RITA is very involved in it. How has that involvement come about and what is RITA's hope for the first World Conference on Interventional Oncology, a meeting that will take place in Italy this June?

There is a large unmet need within oncology for a consolidated list of interventional oncology therapies. Today, the medical oncologist is very heavily compensated, motivated, and trained within a drug-based framework.

Thirty years ago, cardiology was in the same situation. Drugs were cardiologists' only option. Interestingly enough, when the angiogram came to fruition, cardiologists made a very important decision that they would be the ones who would handle the catheters. They could have easily placed responsibility for the catheters on the radiologists. But the cardiologists decided that they were not just going to give drugs; they were going to intervene. That decision led to angioplasty and stenting and everything that defines the sector today.

The person who controls the patient is the one who is being paid to deliver a therapy. That is why in interventional cardiology there was an incredibly rapid adoption and, consequently, a tremendously large device market. Had the medical oncologists chosen to be the ones to do the ablation procedures and develop the imaging competence like the cardiologists did, that would have been an explosive marketplace as well.

In the future, interventional radiologists who develop a specialty in oncology will start getting patients referred directly to them. They will start being the ones who control the patient flow in oncology and will be the ones developing a very powerful, very unique, very specialized cancer lobby. That is why we are investing in our relationship with this emerging specialty. Although RITA is a little company, it is a silver sponsor-a second-tier sponsor-of that meeting. We do not have the funds that the larger companies have to invest, but we are giving everything that we can to that meeting and to the people who support the meeting. Over time, the interventional oncology movement will not be ignored by the Medtronics, the J&Js, and the other major device companies that are interested in oncology. They will build interventional oncology divisions and will focus a large part of their merger-and-acquisition resources on this area over the next three to five years. That is my prediction.

Does the establishment of a specialty field right in RITA's ballpark make it easier for the company to strategize greater adoption of its products?

Absolutely. Interventional oncologists are now completely and unequivocally our partners. Every patient who gets referred to their practices is a win for RITA and a win for them. RITA has built its business over the last 10 years and has driven adoption.

How does RITA hope to control the new competitive technologies on the horizon?

RITA's objective is to continue to invest in research and development. To date, RITA has been involved in more than 100,000 operations that have been safe and efficacious. The company's data work across specialties, across countries, and across organs-whether they be liver, lung, kidney, breast, or uterine fibroids. Our data come out of the United States, Europe, and Asia. We believe that this large platform of success is something that cannot be taken lightly, and we believe we will be able to stand on top of this platform as we develop our technology for the future.

Copyright ©2006 MX