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. There is a large patient population for which practicing clinicians, both surgeons and radiologists, have no other option. It has been proven over and over that radio-frequency ablation is a safe procedure with low morbidity, and virtually no mortality. In liver cancer patients who would have otherwise died from progression of their cancer, it has been shown to extend their lives more than three and sometimes up to five years.

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. Interestingly enough, within the last year, cancer has become the number one killer of Americans among all disease states, surpassing heart disease for the first time in history.

That being said, there are many new devices and ways that devices are changing how cancer can be treated in patients who have not responded to one or all of the three pillars of care. We have identified a large unmet need, and by consolidating the company, we are not only meeting short-term financial objectives, but also feeding the long-term vision of building a medical oncology device company.

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.

The company is also building support among medical oncologists. They are the general practitioners for cancer patients, and they are the ones who have the power to choose what type of therapy the patients receive. It is RITA's and the interventional radiologists' challenge to motivate, to communicate, and to inspire the oncologists to refer more patients. That is new business for us and new business for our customers.

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. That gives the company a much better footprint, allowing it to compete with larger companies and continue to broaden its vision. There are definitely plenty of synergistic reasons why it made sense financially for these companies to be together, but the acquisition also meshes with the long-term vision of becoming a leader in device oncology.

Companies like RITA that grow around a single product or technology often develop that technology to a certain point and then begin attracting a lot of interest from larger companies. For better or worse, many end up selling to those companies. Was that an option for RITA? If so, why did the company choose to remain self-standing?

It has been and is always an option for RITA to become part of a larger company. The company went through a very long patent litigation process with Boston Scientific at a time when it would have been logical for the company to have presented itself to a larger buyer. However, the company was not an attractive target, given the litigation.

The board brought me into the company to bring the company to independence, to build a vision, and to improve RITA's financial strength. They didn't bring me in to give up and sell the company. They chose me to help build a strong sales and marketing infrastructure, and create a clear vision for the company's future. In my first quarter with the company, which was the fourth quarter of 2003, we did $4 million in revenue and lost $3 million in cash. Now, the company is at a quarterly run rate of about $12 million and is relatively cash neutral, if not cash positive. That is a very positive milestone for us.

Today, our objective is not to build a company to put up for sale. It is to build a great company that anyone would want to buy.

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

I was not afraid of going through an integration. I was with United States Surgical (Norwalk, CT), a unit of Tyco Healthcare, for 10 years, and during that time it acquired companies and integrated them. I learned a lot within the Tyco management. I learned a lot from the management team's discipline and ability to immediately execute an integration plan. Then I was with Computer Motion when it merged with Intuitive Surgical—its primary competitor. I learned a lot through that process as well.

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.

The basic integration went well. There were areas that executed and transitioned nicely; but we also had our share of surprises. As in any situation where a strong partnership is formed, you learn a lot that you did not know during due diligence while the deal is taking shape. We most certainly discovered that. We have taken our medicine. Yet at the same time, RITA has emerged a much stronger, more-focused, and leaner organization than either of the two companies could have been individually.

In what areas did you encounter the greatest surprises?

Most of the surprises were personnel issues. There were certain events that RITA forecast that simply did not come to fruition. The company intended to close its California facility and transition into the Georgia facility by February or March 2005, but the California facility was not closed until June. The manufacturing plant in Georgia was not able to pick up the added workload as quickly as anticipated, and that was a personnel issue. But we have rectified the situation, learned, and moved on. The other issues regarding the business transition were related to basic blocking and tackling.

Today we are very happy where we are. As the company dealt with surprises during the integration, the biggest challenge was having to quickly develop and rely on a single team of people from two different companies. RITA could not just put all the players together the way a normal acquisition might.

Logistics Planning

In previous years, RITA worked with some third-party contract manufacturers. Is the company now doing all of its own manufacturing?

RITA has maintained all of its contract manufacturers, which produce most of the company's componentry. Our Georgia facility is mainly an assembly operation for our catheter and RFA business. The basic functions that RITA performed in the past are the same functions it performs today, and the vendors that it relied on are still the vendors that it relies on today.

Prior to moving manufacturing to Georgia, we contemplated outsourcing. As a small company with a relatively low volume, we found that, from a cost standpoint, we would still have to maintain a very large infrastructure to manage the outsourcing initiative. When we factored in the need to maintain a certain infrastructure, we were cost-neutral to the outsourcing decision. The manufacturing facility is in rural Georgia, and is a very efficient facility with a very motivated work force. And it is located here in the United States.

What made Georgia stand out as an ideal place for a manufacturing facility?

If we had not completed the transaction for the Georgia facility, we most certainly would have outsourced. In California, the company had a high-quality, but very low-volume manufacturing facility. The company simply could not sustain its overhead.

We did not necessarily choose Georgia over every other state in the union, and we did not organically build a plant. We did not have that luxury. We chose the transaction for the strategic synergy, for the operational synergy, and also for the excess capacity of the facility. The facility was already there, so we were able to move our RFA business into it without adding any major capital infrastructure. Not only that, but the facility remains a core asset to RITA because the company can double its revenue and still stay in the exact same facility without any major capital investment.

The facility is about 60,000 sq ft?

Yes, a 65,000-sq-ft facility.

So you have some room for expansion.

Yes. Right now, RITA is the second-largest employer in the small, wonderful city of Manchester. From an employment standpoint, there is zero unemployment and zero turnover in that small rural area. We do a lot for the community, and the employees do a lot for us.

Does requiring high quality at a relatively low volume militate against offshoring or outsourcing in most circumstances?

In RITA's situation, it did. A medical device company has to maintain a certain amount of fixed infrastructure in order to maintain quality systems, purchasing systems, and incoming quality control. There are a tremendous number of checks and balances needed in the process. If a company is going to ship 100% of its operation overseas, under RITA's model of having to maintain fixed costs, any savings under the outsourcing arrangement would be absorbed.

In RITA's case, which may be unique, management felt that, from a cost-neutral standpoint, the company had the ability to have control over its process and still have a facility that is not overabsorbed. RITA can double its volume through that facility, and take the fixed component of its cost and substantially reduce it. The company has a lot of leverage in the situation. However, that does not mean we do not believe in outsourcing or that it won't be a part of our future.

Following the integration, where are your research and development (R&D) operations located?

We maintained our corporate headquarters and research and development for the radio-frequency ablation business in the Bay Area. We rely heavily on consultants and vendors in the Bay Area, as well as on the know-how in Silicon Valley. Keeping our ablation research and development in California, along with our corporate offices, allows us to maintain very strong ties to our vendors, consultants, and the people we depend upon.

Is the R&D for the vascular access business still in Georgia?

It has always been in Georgia, and it will remain with the plant. The facility does a lot of manufacturing engineering, as well as research and development for new products.

Accounting for Change

RITA's previous accounting firm, PricewaterhouseCoopers, resigned recently. What were the issues surrounding this departure?

We did not have any issues. We went through an entire 2004 audit and an entire Sarbanes-Oxley audit. Our numbers were completed, and our 2004 statements were signed off by the management team of RITA and PricewaterhouseCoopers. We have not had any issues, restatements, or anything to that effect. PricewaterhouseCoopers, thanks especially to the new requirements of the Sarbanes-Oxley Act, has more customers than it can shake a stick at and the company chose to resign our account. We had no dispute with PricewaterhouseCoopers, and it has signed off on all of our statements.

I also believe that a major contributing factor in the PricewaterhouseCoopers decision to rotate off the account after five years was the fact that most of RITA's operations moved to Georgia. This would have required a whole different relationship to the facility and a new PricewaterhouseCoopers office would have picked up that relationship. Due to the firm's requirements and workload, the company chose to resign the account.

But publicly it has signed off on all of RITA's statements. There are no disputes. The company has signed documentation stating there are no disputes.

How does a company go about finding a new accounting firm? Do you open the Yellow Pages?

That's not too far from the truth. Our company is actually very heavily marketed by accounting firms. Again, because RITA is a public company, it was public knowledge that it was rotating off a firm. Once that announcement was made, we were called by several high-quality regional firms that were seizing the opportunity of Sarbanes-Oxley requirements and of the additional workload being put on the Big Four accounting firms. We were very pleased with the quality of companies that marketed us, and the one that we chose was Stonefield Josephson (San Francisco).

In any situation when a company hires a smaller firm, it gets more face time with partners and is a much bigger fish in that firm's portfolio. So far, that has been a pleasant surprise. I do not want to say PricewaterhouseCoopers did us a favor, but we have had a much more comfortable and customer-oriented working relationship with a smaller firm.

When evaluating accounting firms, in what criteria are you interested?

The biggest area of interest for us was the firm's amount of public-company experience and its ability to handle and understand Sarbanes-Oxley audits and the requirements of those audits. For Stonefield Josephson, we did a set of due diligence. We had our audit committee interview them, as well as check references with other companies. We felt very comfortable in their ability and desire to work with us.

For us, with all of the public-company requirements, the firm's public-company experience was most important. A large regional firm with limited public-company experience would not have been our bell order.

Was experience in the medical device industry important?

No, it was not. On that note, we used similar criteria when choosing a new chief financial officer.

At the same time that PricewaterhouseCoopers resigned RITA's account, the company was transitioning between CFOs. For any company going through a change in leadership, whether it be an accounting firm or the company's CFO, the best time to do it is when the company's audit is complete for the prior year. The March-April-May time frame is the time in which, from an accounting standpoint, it is the quietest, the easiest, and the best time to make changes. It was unfortunate for RITA that the company had two changes at the same time, signaling what people believed to be larger issues, which there were not.

RITA hired a CFO from the tech industry, Michael Angel. We are ecstatic with his experience. What we wanted was the best financial officer—not the best medical device financial officer. Considering the demand among the pool of people who were available, RITA was very, very lucky. In looking for a financial officer, we felt we already had enough medical device experience on our team. We wanted public-company, academic-accounting, Sarbanes-Oxley experience. Coming from the tech industry, in which the life cycles of businesses are short, Michael has experience in a wide variety of transactions—buying companies, selling companies, divesting companies, raising hundreds of millions of dollars. He has seen a number of transactions that will benefit RITA as the company becomes more aggressive with its business, develops its strategy, and looks to grow.

I've heard company executives say that Sarbanes-Oxley compliance, including setting up automated systems for record keeping and compliance activities, can cost hundreds of thousands of dollars. What has been RITA's experience?

Our experience is that infrastructure costs have increased $500,000 to $750,000 a year, and RITA's audit costs have increased on a project basis about another half-million dollars. In 2004, the company spent a little more than $1 million dollars. Then in the 2004 audit, which was booked in 2005, RITA spent another $600,000 to $700,000 in audit fees. It is incredibly, incredibly expensive. The biggest expense pain is the audit fees. Once a company builds that new core infrastructure, has an internal audit function, and has the processes in place—although it is definitely more expensive to manage a company—it is much less arduous than the project costs of working through a third party.

Is that a reason why private medtech companies might hesitate to go public?

I think the bar for a medtech company to go public has increased dramatically, and the profiles of medtech companies that do go public have entirely changed. From 1996 to 2000, there were companies going public well before their technologies had proven themselves and well before any type of revenue inflection. Today, a company has to make a choice as to its exit strategy. For a successful initial public offering (IPO), that company must have a level of maturity and a level of definitive revenue inflection.

Today, we see drug companies being able to go public after 8 to 10 years on the market. That is the dynamic of their business. I don't think device companies will be able to do that. On average, device companies are going to have to be much more mature before they go public. That plays into the hands of the larger companies because the number of exit options is dramatically reduced for smaller private companies.

Turning the Corner

RITA has had a number of private placements and various kinds of equity financing. How much has the company raised?

The company has raised between $60 million and $70 million from the IPO and its last several private investment in public entity (PIPE) financings. When I came to the company, the board was against going to the markets to fund operations every year. The board members charged me with getting the company to a point of balance-sheet independence. And now, postintegration, the company is balance-sheet independent. The management team is doing everything within its power not to go back to the public markets for funding unless it is for a very important incremental benefit, such as an acquisition or a new technology requirement. Our company has used cash for 44 straight quarters, and it is exciting that that has finally ended.

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. As RITA generates cash, it will become more aggressive in investment. That is the benefit of turning the corner. The investors do not want to see the company build cash and maintain low growth. Our investors want RITA to return to a high-growth company status. We are right at that precipice of turning the corner and becoming a high-growth investment company again.

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

Our investor base has turned over dramatically over the last 18 months. For a small company that only has a $180 million market cap, RITA trades more than 200,000 shares a day and its shares are very actively traded. Our investors have been waiting for RITA to deliver.

It is very easy to get excited about the market opportunities and the clinical outcomes we have, which are both exceptional. 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.

When is your annual meeting?

Our annual meeting will be some time this spring.

It sounds as though this year's meeting will be a pleasant one. That is a great position to be in.

Yes, it is. But it did not come easy. It has been a lot of hard work and an amazing accomplishment. We have taken two organizations with two cultures and created a very focused medical oncology device company. Our employees are excited about the future. That is not my accomplishment; it is the accomplishment of our board and our management team. We are excited that we not only have a real business, but we have also crafted a prominent position for ourselves in what we believe is the next big medical device marketplace.

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 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.

We know that the party is over on operational improvements at a certain point. If a company is not investing in its business, not only is it going to lose share, but it's also going to be unable to leverage its future potential. I think our investor base is pleased to know that RITA is continuing to invest. The management team has already identified several new opportunities, which we hope to communicate to our investors shortly.

As a percentage of revenue, what is RITA's investment in R&D?

Just about 8%.

Presumably part of the flexibility that you will gain in turning the corner is to increase that a little bit.

Absolutely.

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 order to be successful in selling its device, a company has to cross the finish line. Crossing the finish line means enabling customers to be reimbursed when using the company's product. If customers get paid when they use a company's product, that company has completed the necessary medical device circle. The company comes full circle by developing the technology, showing its clinical efficacy, training people, creating awareness, showing the long-term clinical benefits, and then showing that there are positive economic outcomes for its customers.

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. The company is continuing to invest in its data.

That latest application is used to give a wider margin around the lump that is resected?

Exactly. Between 25 and 40% of patients who receive a lumpectomy must return to surgery for some level of reexcision. Proxima Therapeutics Inc. (Alpharetta, GA) has developed a very successful technology using liquid brachytherapy to treat these lumpectomy patients. RITA has developed a way of delivering radio-frequency energy to accomplish the exact same clinical end point—without having to deliver radiation into the patient and without the patient having to come back for multiple dosages. RITA's procedure simply adds 30 minutes to an existing lumpectomy operation by including an ablation. The company was visionary in its application, and we are excited that our technology and our IP protect us to deliver the margin with ablation. Once approved, certain patients will choose to have an intraoperative procedure with no toxicity versus a high dose of local radiation.

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

It has been a great success. It is one of the few times in my life that I have been involved with a device that has received so much immediate positive clinical feedback. Our representatives love to sell it.

The device works, and it is highly synergistic. Again, with RITA's call point being surgical oncologists, the Habib leverages the company's strategy. It leverages RITA's base of current installed RF customers who already have generators, because the device operates on RITA's generator through a special software package.

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.

Due to RITA's success with this product, other companies are seeking out RITA to benefit from its distribution structure, which is like no other in the world. No one is more focused on the opportunity and, in our opinion, better positioned to sell devices for cancer. The success of the Habib device has not only had a material benefit for the core of RITA's business, but it has also opened up the company to many other good things to come.

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.

Shifting Strategies

Right now RITA's sales team has a complex job in talking with a lot of different physician specialties. In the United States, the company has a direct sales force, but overseas RITA is using distributors. Do you see that changing in the coming years?

We just recently took our three largest markets in Europe direct. We now have sellers in France, Germany, and the United Kingdom. We have partnered with a company called HealthLink, which does all of RITA's back-office transactions, as well as its in-country shipments. Previously, RITA would sell products to distributors for about $500 a unit, and now the company is beginning to capture more than $1200 a unit for its products. The essence of RITA's business is to develop a distribution structure to deliver minimally invasive cancer products to customers, and going direct internationally where it makes the most sense is definitely a part of the company's strategy for growth.

Do you think that you will move to direct sales in the rest of Europe before taking on Japan?

We have a new partnership with Nupro, which is the second largest medical device company in Japan. I do not see Japan going direct any time in the near future, and RITA still has wonderful distribution partners throughout the world. However, once the company gets to certain revenue levels within those markets, the essence of RITA's business is to be able to distribute its own product. Also, by going direct, the company increases its value for potential distribution partners. Yes, going direct is definitely a big part of our strategy for growth, but there are many markets where we will always have distributors. Even the largest medical device companies rely on partners in some markets.

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.

RITA has a unique franchise, and the company is looking at many minimally invasive ways to treat cancers. Today, many therapies are end-stage therapies. Many types of radiation are end-stage therapies, aside from intensity modulated radiation therapy (IMRT) and other focused energies. RITA is looking at multiple ways to minimally invasively attack tumors and give patients options that do not exist today. 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.

The only successful way that RITA has driven adoption has been by building the practice of its customers. Our company has made attempts at mass-media marketing—radio advertising, TV advertising, and direct-to-consumer marketing.

We have found through trial and error that what really works best is finding clinicians who have developed an expertise and promoting those clinicians in their local communities to medical oncologists. This promotion is done through dinner programs and hand-to-hand-combat education. It has been a hard road, but the company has been successful. RITA has built such a close partnership with those societies that their success is ours, and vice versa. And we will continue to support those societies. Strategically, we are on the same track as these emerging specialists. The areas of therapy that they are interested in delivering in the future become our company's business plan and technological focus.

You mentioned direct-to-consumer advertising. A large component of RITA's Web site is dedicated to patient education. That seems to play a vital role in the company's strategy.

Absolutely. The Internet is such a powerful source of information. As more and more people are stricken with inoperable cancer, they are searching for alternatives. RITA has a very patient-centric education site, and through an independent site, www.livertumor.org, the company has the ability to help those patients find practitioners who are skilled at the application of radio-frequency ablation to treat cancer.

Our company tries not only to educate patients on the opportunity to have the procedure, but also to help our customers build their practices. If a person goes on Google and types ‘RFA liver tumors,' that person will find hundreds and hundreds of Web sites of people performing this procedure. In many cases, the biggest challenge facing a patient with, for example, colorectal metastatic liver cancer is getting the medical oncologist to consider giving the person a referral, which gives the patient more options than just chemotherapy. It is important that patients know they can receive chemotherapy as well as ablation.

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

RITA has been successfully competing with two industry giants for more than five years—Tyco Healthcare and Boston Scientific. Our company's success stems from these competitors treating this as an additional product in their bag, whereas RITA has treated this as its bread and butter. The company has taken the market development on its own shoulders. This has paid off in customer loyalty and in maintaining our technology lead.

There are many different potential ways to use energy to destroy tissue, including focused radiation, as in IMRT systems and the Accuray system. There also are other types of energy sources, like microwave, as well as the potential of using focused ultrasound energy to destroy tissue. 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.

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