Interview by Steve Halasey
For medical device executives, making the right moves to support company growth involves constant vigilance. Ever watchful for market opportunities and the means to conquer them, savvy leaders can maneuver their companies along the path to successeven when the route is anything but direct.
That kind of watchful activity is paying off for AngioDynamics Inc. (Queensbury, NY), a provider of minimally invasive medical devices used by interventional radiologists, surgeons, and other physicians for the diagnosis and treatment of cancer and peripheral vascular disease.
AngioDynamics entered the growing interventional oncology market in January 2007, through its $220 million acquisition of RITA Medical Systems Inc. (Fremont, CA). Through the acquisition, AngioDynamics gained access to a highly complementary line of vascular access products. But perhaps more importantly, the company also acquired the resources and market position needed to fuel the development and ultimate launch of its next-generation ablation technology, irreversible electroporation.
AngioDynamics' balance sheet reflects the merits of the RITA acquisition and other recent strategic moves. For full-year 2007, the company's net sales reached a record $112 million, up 43% over fiscal 2006. And despite the pricing pressures of an increasingly commoditized market, the company has demonstrated its commitment to continued growth through a series of strategic product launches.
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Eamonn P Hobbs, president and CEO of AngioDynamics, on enabling strategic and sustained growth.
As AngioDynamics' revenues increase, so does its level of sophistication. In recent years, the company has invested heavily in developing the robust research capabilities that will be required to capitalize on its jam-packed pipeline of innovation. As AngioDynamics president and CEO Eamonn P. Hobbs sees it, the company is well on its way to becoming a medtech player known for its home-run playsnot just the occasional base hit.
Hobbs is a recognized industry leader as well as a company leader. This June, he will assume the role of chairman of the Medical Device Manufacturers Association (MDMA; Washington, DC). In this excerpted interview with MX editor-in-chief Steve Halasey, he discusses AngioDynamics' early origins, the company's evolving position in the medtech industry, and its latest steps toward becoming a focused, data-driven device powerhouse.
MX: You were a cofounder of AngioDynamics. How did that come about and how did the company develop from its earliest days?
Eamonn P. Hobbs: I cofounded AngioDynamics with the two cofounders of the public company E-Z-EM Inc. (Lake Success, NY), Howard Stern and Phillip Meyers, MD. I had known them both for quite a few years. In fact, they had tried to purchase my first medical start-up back in the early 1980s. So I knew they had an ample amount of cash and were looking for ways of putting it to work for them.
In January 1988, I approached Howard and Phil with the business plan for AngioDynamics. When I approached them, I positioned the business plan in a way that E-Z-EM would be the bank that would finance AngioDynamics as a start-up. That's how we rolled out the company. We leveraged the E-Z-EM organizational structure in developing AngioDynamics as an entrepreneurial venture. The initial business plan ultimately culminated in 2004 as a carve-out initial public offering (IPO) and tax-free spin-off.
How did it happen that E-Z-EM went from being from being an investor to becoming the owner of AngioDynamics as a subsidiary?
We structured AngioDynamics as a subsidiary from day one. We envisioned a carve-out IPO and tax-free spin-off as the way to maximize shareholder value while minimizing the amount of duplicate overhead we would have to put in place to have an interventional company. That worked out pretty well. At first, we leveraged the E-Z-EM sales force. Later, we hired specialists who sold nothing but AngioDynamics products. These specialists outsold the rest of the E-Z-EM sales force combined. So it quickly became apparent that we should add more specialist salespeople and cut the cord with the E-Z-EM sales force.
Did the timing work out pretty much the way you planned it?
It definitely took longer for us to execute the carve-out IPO and tax-free spin-off than we originally planned. In fact, we positioned ourselves to execute the transaction around 1996. We had developed the third draft of our Form S-1 for the U.S. Securities and Exchange Commission when the market window closed. So we shelved the S-1, put our heads down, and ran AngioDynamics as a wholly owned subsidiary. We essentially operated as though AngioDynamics were an independent public company. We had our own board, and we focused on hitting quarterly goals just like an independent public company. AngioDynamics became the biggest profit center for E-Z-EM overall.
In 1997, we expected the market window to reopen. We figured we'd just blow the dust off our S-1, update it, and then be off to the races again with our carve-out IPO and tax-free spin. But from 1997 on, every quarter we expected the window to reopen, and every quarter it failed to do so. In fact, the market didn't present a comfortable window for us until 2004, which is when we executed the IPO and spin-off.
I suppose the period after the bursting of the dot-com bubble in 2001 was not a good time for an IPO.
It wasn't. It made for public markets being very skittish. But we were profitable from 1997 on.
What is the relationship between E-Z-EM and AngioDynamics now?
There is no formal relationship. Outside of a lot of gratitude, we have no relationship whatsoever.
So E-Z-EM hasn't remained an investor in the company?
Not at all; it was a complete spin-off. We share some investorsthe two founding families are still major shareholders in both companies, or will be until the sale of the company to Bracco Diagnostics closes. E-Z-EM shareholders have voted to accept an offer from Bracco, so after another few weeks there will be no more E-Z-EM.
You mentioned that AngioDynamics behaved as an independent company long before it became formally separate. How did that contribute to the company's progress as an independent entity?
For a long time prior to executing the transaction in 2004, we were on deck for an IPO. We were managing the business as though we were independentit was a dress rehearsal for being public. AngioDynamics' management team was intact throughout the entire period between its founding and its IPO and spin-off. So when the company went public, there was none of the usual drama and stress associated with becoming a newly public company. By then, we were operating as a tried and true public company. We had been through the wringer enough times to avoid many of the pitfalls of public markets. And we had a little luck too.
Was the company also preparing the sort of documentation it would need for SEC or Sarbanes-Oxley filings?
Well, not Sarbanes-Oxley filings. The founding of AngioDynamics predated enactment of the Sarbanes-Oxley Act by a decade, and we even launched our IPO prior to its passage. Like everyone else, we had to put Sarbanes-Oxley compliance in place during 2005. Before there was a Sarbanes-Oxley Act, of course, nobody had those kinds of 'benefits,' if you will.
But we certainly had all the audited financials and public company systems in place, and we were ready to support an IPO.
A number of company executives have lamented that attaining the benefits of Sarbanes-Oxley compliance has required significant spending to upgrade their company's systems. How much has AngioDynamics had to spend to become compliant?
We think the hard costs of becoming Sarbanes-Oxley compliant totaled approximately $2 million. And because we had really good systems in place prior to becoming Sarbanes-Oxley compliant, we didn't get the kind of benefit that companies starting at a lower baseline might have gotten.
In many ways, Sarbanes-Oxley compliance was merely a lot of non-value-added expense. It was more about validating systems that had already been working under public company scrutiny for a long time.
In addition to the $2 million investment as turnover and start-up costs, what is AngioDynamics' annual outlay to maintain its Sarbanes-Oxley systems?
I would say the additional requirements of Sarbanes-Oxley cost us about $1 million a year above and beyond public company expenses.
For an emerging medtech company, that's a significant chunk of money.
Yes, it is. AngioDynamics is at a stage now, with $165 million in annual revenues, where that kind of expense is not the end of the world. But back when we had $30 million in annual revenues, boy, $1 million represented a huge part of our profits on a percentage basis. It was a dominant part of our profits, and it made a really big difference.
Reform of the Sarbanes-Oxley Act is an idea that's been circulated many times. As a matter of public policy, that's one of the things we hope to accomplish. Reform would relieve small companies from some of the burdens of Sarbanes-Oxley requirements through materiality testing.
One nice thing about becoming larger and having increased revenues is that the company can invest its profits in a variety of useful ways. At the beginning of 2007, AngioDynamics chose to take that kind of action by acquiring RITA Medical Systems (Fremont, CA). What was it that made RITA an attractive acquisition target?
RITA was attractive from a number of perspectives. First off, the company was an excellent tactical fit. The RITA business we acquired was the summation of the historical RITA business plus the company's relatively recent acquisition of Horizon Medical Products, which developed vascular access products. Prior to our acquisition of RITA, the majority of RITA's sales were from vascular access products or legacy Horizon products, primarily in vascular access ports.
Overall, however, RITA's vascular access business was not faring wellit was declining about 46% year over year. We determined that the company's portfolio in this segment was a perfect match with our vascular access business, which at the time was dominated by the sister product of access ports, which are peripherally inserted central catheters. We saw that fit, and we determined that if we put RITA's vascular access products into the bags of our AngioDynamics sales force, we would be able to drive those product sales up to at least our corporate average growth rateand do so in a very profitable way.
On top of that synergy, the acquisition provided the technical fit of merging two relatively small public companies, both of which had the high overhead of public company expenses. We saw a lot of benefit in combining the companies. The acquisition enabled us to eliminate duplicate public company costs. It also enabled us to eliminate duplicate marketing expenses because both companies participate in the exact same trade shows.
Furthermore, the RITA sales force was doing an extremely good job selling the company's oncology products. The merger enabled us to free them from the burden of also having to sell the vascular access products. We put those products in the bags of the AngioDynamics sales force so we could further enhance the RITA team's ability to drive oncology product sales. So those were the tactical benefits that attracted us to the RITA acquisition.
There were also significant strategic benefits. AngioDynamics' pipeline was crammed full of tremendous opportunities in the interventional oncology area, in which RITA was a market leader. Some of these opportunities are already public. For example, we feel our irreversible electroporation technology will prove to be the next generation of ablation technology. But when we looked at the process required to develop that technology on our own and roll it out to customers, we realized that there was a certain risk in that AngioDynamics does not have a long history of developing oncology-focused ablation products. So our R&D team didn't have a history in that field, and AngioDynamics didn't have a historical track record of supplying oncology products to our customer basebut RITA did. Virtually the same customers buy AngioDynamics' and RITA's products.
RITA has demonstrated again and again that its radio-frequency ablation products are the best-performing products in the marketplace. By acquiring RITA and handing our irreversible electroporation technology off to its R&D team, we knew we would be lowering our risk profile for our new product rollout down the road.
In addition, by acquiring RITA, AngioDynamics' new technology would be entering the interventional oncology marketplace with the benefit of RITA's existing market leadership. RITA's sales team is already positioned to up-sell its installed base to the new technology, which, once again, lowers our strategic risk profile.
So on all fronts, RITA represented a very compelling fit for AngioDynamics. In fiscal 2009, roughly around the second quarter, we plan to roll out our irreversible electroporation technology. This progress is due in part to the fact that we were able to leverage the RITA R&D team and the RITA sales force, which is now referred to as AngioDynamics' oncology products group sales force.
How did you redivide these units during the integration phase of the acquisition? It sounds as though RITA provided a very strong, self-standing R&D group and an equally strong sales team. How has that worked?
We pretty much kept those teams intact, with very little turnover. The RITA R&D team is still in the former RITA headquarters facility in Fremont, CA. We think that's a good location for the R&D teamright in the middle of the Bay Area's Silicon Valley. The team is largely composed of electromechanical and programming experts. So the talent pool in that region of the country is outstandingnone better in the world.
As I mentioned, we also kept the RITA sales force intact with very little turnover. We renamed the team the oncology products group, and they've been executing flawlessly since the acquisition.
And the preexisting AngioDynamics R&D and sales teams are then focused on the vascular access part of business?
Yes, vascular access and peripheral vascular products.
In addition to the Fremont location you just described, AngioDynamics also has facilities in Queensbury, NY, and Manchester, GA. Who is doing what in those locations?
Our world headquarters is based in Queensbury, NY, otherwise known as Catheter Valley. We also have a major manufacturing facility in Queensbury. The Manchester, GA, location is the former RITA manufacturing facility. We looked at opportunities to vertically integrate that location into our Queensbury facility, but we came to the conclusion that the efficiencies being demonstrated at the Manchester facility were outstanding. It made far more sense to not only keep it there but to expand it.
We've been investing in expansions at both the Manchester and Queensbury facilities. So we plan to stay at those locations for the long run. We have an excellent team down in Georgia, and their metrics speak for themselves. They give the Queensbury team a run for their money.
After the RITA acquisition, you mentioned that you were spending a lot of time flying back and forth between New York and Georgia. Have you now added Northern California, so that your jet is now flying a triangle route?
That's exactly right. We have been joking that our next acquisition has to be in San Diego, so that we can box the country in.
San Diego isn't a bad place to lookfor both good weather and good medtech acquisition targets.
Not at all. La Jolla would do just fine.
How do you break out the segments in which AngioDynamics is operating, and what portion of the company's business is represented by each of them?
We break our business into the interventional products group and the oncology products group. Oncology represents approximately one-third of our business, with the interventional products group accounting for the other two-thirds.
Do you see that breakout changing in the future?
I do. For a number of reasons, I see our fastest-growing group being the oncology products group. For one, the interventional oncology marketplace is growing faster than the peripheral vascular marketplace. And it's still nascent. We are still just scratching the surface. There's tremendous market expansion capability in the interventional oncology area. In addition, we have some blockbuster products in our pipeline that are at least initially going to be focused on interventional oncology. They have peripheral vascular and cardiovascular applications as well, but those will come out after the interventional oncology applications are already well under way.
AngioDynamics' organic R&D is already creating a very full pipeline of new products. Do you think that acquisitions will continue to be a part of the company's future growth, or will the company rely mostly on organic growth?
We are definitely looking to supplement our strong organic growth with tuck-in product acquisitions. By tuck-in, I mean acquisitions that enable us to take a product that's already on the marketor very close to being on the marketand put it into our sales forces' bags with little drama and quickly generate a strong revenue stream. A tuck-in acquisition may be only one product, or it may be a family of products. It may be an operational company that has a one-product line. We're evaluating the gamut of possibilities, and we have a very active business development program focused on mergers and acquisitions through which we hope to supplement our organic growth.
Having said that, we're pretty selective. We don't feel in any way, shape, or form that we have a gun to our head that forces us to make acquisitions. We have a very strong pipeline, so any acquisitions we make have to make sense in that context. We're interested in growth on both the top line and the bottom line. We have a phenomenal sales franchise and customer base. Our goal is to leverage that sales franchise by adding more products to its bag.
As a percent of sales, how much does AngioDynamics invest in R&D right now?
This year, that figure is a little more than 9% of revenues. Historically, it's bounced between 7 and 8%. This year the percentage rose because of our irreversible electroporation investments, which are much more clinically oriented than some of the other products with which we've historically been associated. Every year, we reevaluate our formula to determine the proper percentage of revenues to invest in R&D. We do a return-on-investment analysis. Historically, that investment has come out to be about 8%. But we would certainly consider an even greater investment if the pipeline warranted it.
When a medtech company reaches a certain size, as measured in annual revenues or market capitalization, much smaller companies may begin to view it as a potential acquirer of either a product line or of their entire company. Does AngioDynamics plan for that to happen, or does the company have to work hard to find companies that might be a good fit?
We're definitely approached every day. But we still need to work hard to find the good fits. There's a lot of choice out there, but not necessarily a lot of good fits.
When you are in that mode and evaluating potential acquisition targets, do you work with venture capitalists (VCs) and investment groups that are bringing up new companies? Do you also work with the target's executive team?
Both. We work the gamut. We are routinely pitched by VCs. And we also receive pitches from the other end of the spectrum, from investment banks seeking to run a process on the companies in their charge. And in the middle, we're talking to inventors and entrepreneurs who are self-funded. It's a healthy mixture of all of the above.
Beyond their initial indications for use, some of the technologies AngioDynamics is developing have other potential applications in cardiology and peripheral vascular. When you're already committed to developing a product for one application, how long does it take to develop another one? How much interest does the company really have in taking on those additional applications?
We're very interested in moving into those applications. The time needed to move to a full commercial rollout with supporting data and compelling reimbursement ranges from three years to five years. It's not that we wouldn't market the application as a work in progressbut data drive the medtech industry. And the generation of data takes time. And certainly reimbursement is driven by data. So there may be a case in which we can roll a product out and start generating revenues in as little as 18 months. But to get the technology to the point at which it's fully baked with a compelling case for reimbursement can take three to five years.
When you say data, I assume you're talking about clinical outcomes data?
The Clinical Side
What kind of clinical research activities did AngioDynamics inherit with its purchase of RITA Medical Systems?
Another one of the strategic benefits of the acquisition was that we inherited quite a bit of clinical data generation capability from RITA. And again, those capabilities were well-matched with AngioDynamics' needs in that our pipeline is full of next-generation ablation technologies that are going to be data driven.
To use a baseball analogy, we knew that prior to the RITA acquisition, AngioDynamics was more of a base-hit company that didn't require a tremendous amount of clinical data in order to market its products. RITA was on the other end of the spectrum, marching to the drumbeat of the data that were being rolled out. The company was very dependent on clinical data generation. These days, following the acquisition, AngioDynamics is much more of a data-driven company than in the past. It's now more of a home-run company than a base-hit company.
That transition has been driven by a number of factors. For one, our pipeline just happens to be full of potential home runs, which require a lot of data generation. And two, we're up against the law of big numbers now. When we were a $50 million company, growing the top line by 20% required us to come up with $10 million in incremental revenue. With three or four base hits, we could pull that off pretty handily. But AngioDynamics has grown. Next year, we'll need $33 million in incremental revenue to grow the top line 20%. And we're not going to be able to do that with base hits alone, that's for sure.
AngioDynamics is in a transitional period where we've got to evolve from being a base-hit-oriented company to being a broad-based company whose pipeline delivers base hits, doubles, triples, and home runs. We need to routinely deliver a mix of all of those.
You mentioned that RITA was more of a data-generating and data-driven company. When the acquisition took place, did you find that you had significant staffing in that area, or was that a focus that made use of core staff plus outside sources?
There was a core staff that was supplemented by contract research organizations (CROs). We're still heavily reliant on CROs and think that's the right formula. We have a core team that manages the CROs. If you look at industry benchmarks, that's how the big guys do it.
So, are you already heading toward conducting clinical research in some of the areas for which your platform technologies might be suitable in the future? What is the status of those efforts?
We are indeed. As a matter of fact, we've embarked on a first-in-human pilot trial for malignant prostate in the United States and Italy, and we've had complete success with the first five patients. The pilot trials should be completed relatively quickly, after which we'll be commencing multiple phase I and phase II studies. Our ultimate goal is to obtain a specific indication for use of irreversible electroporation technology for prostate ablation. That's an important distinction to be made: We're not trying to treat cancer. We're trying to ablate a prostate. In regulatory terms, there's a big difference.
At any given time, how many investigational device exemption (IDE) studies does AngioDynamics have under way?
These trials typically are IDE studies if they're domestic, and the equivalent if they're outside the United States. AngioDynamics typically has three to five of these types of studies going at any given timeand sometimes more.
What role do medical specialty societies play in the development and adoption of AngioDynamics' products? Are they involved in any of the studies that the company is undertaking?
We work very closely with medical societies and try to include them in the planning of our trials. Having medical societies support our efforts enables us to leverage their reputations to add more credence to the trials. Societies can be very helpful not only in the data generation, but also after the data are generated. We work hand in glove with the medical professional societies to pursue reimbursement, and they play a pivotal role in that process. They really take a leadership role.
Some observers of the healthcare system frequently suggest that medical device trials are somehow not as rigorous, well planned, or well executed as trials conducted in the pharma industry. How do medical specialty societies help to make sure that trials are on target?
This is a big question. As a medical device guy, throughout my career I've heard a lot of those notions coming from the pharma side. But it's comparing apples and oranges. A pharmaceutical compound doesn't evolve very quickly. During its developmental phase, lots of tweaks are made to the chemical formula. The formula is refined, then it's tested, and then maybe it gets refined a little more. When it's the best it can be, it's finally approved. And then it doesn't change at all for a very, very, very long time.
In the medical device arena, you need to think in terms of constant evolution. And if a medical device is going to constantly evolve, you need to have trials that aren't focused on the rigorous endpoints that are required to get the original device approved. Otherwise, you'd just be reinventing the wheel. Instead, for devices to evolve, trials must focus on endpoints that examine the incremental evolutionary step that the device is taking to provide additional benefit.
For example, if a drug company has a base compound such as aspirin and it wants to modify that molecule, the company has to worry about side effects. You've got to worry about immunogenicity, birth defects, etc. The company has to worry about everything under the sun because one small chemical change can wreak havoc with the value proposition that the compound is going to provide. So the trials need to be very rigorous.
On the other hand, consider a device company that manufactures a scalpel. Perhaps the company wants to improve the scalpel by adding another blade. The company wants it to be like a razor, with two blades instead of one. The modification would be designed to provide some benefitperhaps it would cut straighter lines with less bleeding. In any case, the company doesn't need a rigorous trial to prove that.
In that simple comparison, you can see that there's a tremendous difference in the rigor required to validate the value proposition of a pharmaceutical compound versus a medical device. If a device is revolutionaryif it's never been used before and there's no prior device on which a company can hang its hatthen the trial required for approval will be rigorous. If instead of a double-bladed scalpel a company wants to use a radioactive material to slice skin then, yes, a rigorous trial would be appropriate.
To what extent are the trials that AngioDynamics is involved in intended to address reimbursement-related issues such as comparative clinical outcomes or cost effectiveness?
In many cases, reimbursement coverage is a primary goal of our trials. Our first priority in a trial is to address the safety and efficacy questions that are of concern to regulatory agencies. But we try to do that with an eye toward the next step that comes after we get approval based on safety and efficacy. Following approval, we have to answer a completely different set of questions for reimbursement. The Centers for Medicare and Medicaid Services (CMS) wants to know whether the device is reasonable and necessary. A product can be very safe and effective but also be totally unnecessary and unreasonable. So they really are different questions.
The challenge is to try to answer both questions at the same time with the same trial. And that's not easy. There's a lot of science to it, and there's a lot of art to it. There are also a lot of trade-offs. Every trial that we conduct has a modicum of trying to provide not only safety and efficacy data, but also the reasonable and necessary value proposition.
AngioDynamics has a considerable portfolio of intellectual properties. Over the years, how has the company filed its patents, and what has it kept in-house? How well defended do you consider your products and technologies?
We always strive to have proprietary product positioning, and intellectual property is one of the cornerstones in doing that. AngioDynamics has been very successful in building a tremendous portfolio of intellectual property in terms of patents, trademarks, and know-how. In the United States, we have about 140 patents, with about 60 pending. If you add in our foreign patents and all pending filings, it adds up to about 400 patents.
On the U.S. patent side in particular, we've been very aggressive in pursuing solid patent protection and defending it. And I'm happy to say we've been successful in defending our IP without having to resort to litigation. In most cases, when we've spotted cases of infringement, we've been able to put the infringing companies on notice, show them our patents, and they've agreed. And that's that. We're firm believers in the importance of intellectual property as a core asset of any technology organization, and we constantly invest heavily in building that asset base.
AngioDynamics hasn't launched litigation, but it has been dragged into quite a bit of litigation. In one case, such litigation probably contributed to the delisting and bankruptcy of a competitor whose assets AngioDynamics is looking to acquire. Such litigation can become a major interruption and strain on a company. How did AngioDynamics fall afoul of so much litigation, and what has been the outcome?
The two areas of litigation where we've been on the receiving end involved Diomed and VNUS. Diomed did not survive its own litigation, and AngioDynamics is pursuing a purchase of a majority of the bankrupt company's assets. The VNUS litigation is currently scheduled for trial in June. For both of those cases, we've positioned ourselves as preferring to settle rather than to litigate.
The moral of the Diomed story, which should educate all of us in business very effectively, is that litigation doesn't pay anyone except for the attorneys. The company received a positive jury verdict in one trial, and was awarded a total of $12 millionsubject to appeal. But the company invested approximately $13 million in lawyers' fees in order to get that $12 million. And the reason that Diomed had to invest all that money into their lawyers' pockets was that the company wouldn't settle in a reasonable way. Diomed was adamant and convinced that it was going to put everybody else out of business with its single patent. So the company and its attorneys took their case to the brink and ended up losing. Nobody else has gone out of business because of Diomed's one patent.
Just imagine what a robust business Diomed would be today if it had taken its $12 million and invested it into R&D to create new products and generate more revenuesand in addition had collected an industry standard royalty from the other players in the field. Speaking as one of those players, we would have been very open to such an arrangement.
So clearly litigation just doesn't pay. It's a tool that companies need to have available as a doomsday sort of threat. But it's better if reasonable people prevail and settlements can be worked out, so that the lawyers don't end up being the only ones smiling at the end of the day.
Litigation is the bane of any business person's existence. It's very defocusing, and very expensive, for really no value added.
How big of a distraction has litigation been to AngioDynamics? Has it forced the company to do anything in particular about the way it develops its product pipeline or business strategies?
Yes, litigation is extraordinarily distracting. It's hard to calculate how distracting it is because we'd run out of paperthe numbers would be off the charts. So yes, the knowledge of how distracting litigation can be has definitely influenced how we develop products. We do everything we can to ensure that we put ourselves in an intellectual property position where we have a right to practice. But also, we would rather pursue licenses or cross-licenses than potentially be drawn into litigation.
In the case of the Diomed litigation, we had opinions from third-party attorneys who concluded that we did not infringe. It was black and white: we did not infringe. But at the end of the day, that didn't mean anything. Diomed believed we infringed and was able to convince a jury that we infringed. Statistically speaking, there was a 50-50 chance it would swing that way. So it would've been far better for us to have diligently designed around the Diomed intellectual property from the outset or to have pursued a license for the company's patent early in the gamehad Diomed been willing to grant one. We tried that. That didn't work. So consequently, we're a lot more diligent than we used to be in trying to avoid the whole infringement issue. We work hard to eliminate potential conflicts early in the game.
AngioDynamics' share price took a hit recently, after the company lowered its financial guidance for the full fiscal year of 2008 to a range of $165 million to $167 million from a range of $170 million to $175 million. What were the market conditions that caused such a reduction? How much of that is medtech specific and how much of it is related to general market conditions?
We did lower our guidance slightly4% on the year. Frankly, we were shocked by the severity of the market reaction. Even with the lower guidance, we still have a thriving business with a healthy growth rate. And we have tremendous prospects as we begin to roll out some of the revolutionary products in our pipeline.
I think the overreaction of the market has to be considered in the context of an extremely bearish public market right now. The current market is intolerant of even the slightest miss. As with many events in a public market, the hit our stock took was just a transient speed bump. There are smart people in the stock market, and they figure it out. Our stock price has already made a considerable rebound.
Generally speaking, in the worst of economic times medical technology companies are seen as the best possible investment.
Yes. As explained to me by a few fund managers, the reason the current market is so intolerant of speed bumps at companies of our size is because there's a real flight to 'quality' in the stock market. Fund managersespecially those of small-cap and mid-cap stocksare looking to reduce their small-cap positions and buy into blue chips and mega-caps, which they perceive as being a safe place to be right now. That's how the cycle goes.
When the market becomes more bullish, fund managers will start investing again in the growth side of the market, which is in the small-cap side. Small-cap medtech has outperformed the Standard & Poors 500 handily for years, and I don't see any reason why that would change.
When a company reports any sort of glitch, that company rockets to the top of fund managers' sell lists, and that creates a feeding frenzy. And then, of course, the short-sellers get hold of the company and drive its share price down even more. They buy in at the bottom and ride the stock price back up. The market's dominated by traders, not investors. That's why we see booming companies that are trading at 1× enterprise value.
Do you expect that the pricing pressure on AngioDynamics' legacy products will be reduced as the company's pipeline moves along toward the introduction of new products?
I do. I don't think it'll disappear. But it'll wane in significance as a relative revenue contributor. The pricing pressures that we've seen lately aren't anything new. They've been around for years. What has affected us is that we haven't rolled out our new products in a timely enough fashion to combat the pricing pressures.
For instance, in our third quarter this year, we cited pricing pressures on dialysis catheters as being a contributor to the slight shortfall we reported that quarter. We had anticipated that we would roll out our new Centros dialysis catheter during that quarter, which would've made up a lot of the difference and abated some of the pricing pressure. So the name of the game for us now and forever is to keep the innovations coming out of the pipe. That will keep us ahead of the commoditization pricing pressure game.
AngioDynamics boasts that 50% of the company's overall revenues come from products that are less than five years old, and more than 50% of the company's growth is from products that are less than a year old.
That's a metric that we've lived by for years and plan to continue to use.
You mentioned that AngioDynamics' R&D spending is higher this year than it has been traditionally. Is that investment specifically intended to speed the pipeline a little bit?
Yes, it is.
In the United States, AngioDynamics makes use of a direct sales force. Overseas, the company employs a mixture of direct sales and distributors. How do you see the company's overseas markets developing?
About 10% of our revenues are from outside the United States, and they are growing at a faster rate than in the United States. So we think that percentage is likely to increase over time.
We are direct in the United Kingdom, Germany, and France, and we're looking to continue to expand our direct presence in other foreign markets where it makes sense. In some countries, it may never make sense. If you look at industry benchmarks, even some of the big guys use distributors in some markets.
We are looking to continue to leverage our presence in those direct markets with more products going into the bags of our sales reps. We're also looking to expand the number of countries in which we're direct.
In terms of geographical markets, where do you think the greatest untapped market is? For instance, you didn't mention Japan.
We do sell in Japan, and Japan is definitely on our radar screen in terms of being a significant opportunity. The same goes for China. Those countries have a tremendously high incidence of many of the cancers that our products are well-suited to treat.
Are there other areas that you think are particularly hot?
Yes. Latin America is an emerging market that's very interesting. We've done well there in the past and are looking to rev things up a little bit.
Is that pretty much across the board or are there particular countries that offer greater opportunity?
There are definitely particular countries that present greater opportunities. The biggies are Brazil, Argentina, Colombia, Venezuela, and Chile.
Many companies have indicated that the markets in those countries are starting to pick up.
Oh yes. I would go so far as to say they're booming.
As the incoming chairman of the Medical Device Manufacturers Association (MDMA; Washington, DC), what do you see as the chief issues that the association is focusing on and that you'll be pushing forward?
MDMA is the advocate for smaller, entrepreneurial medtech companies. The vast majority of innovations in the medical device arena come from companies with fewer than 50 employeesthat's where the future is. Even for the big guys, that's where the future is. After all, the big guys end up acquiring these technologies down the roadeither by purchasing the product itself or buying the entire company.
So it's critically important that we recognize the important work that MDMA does to make the smaller end of the medical device industry spectrum vibrant and minimally encumbered by government intrusion and obstacles.
Without MDMA, small companies would be burdened with all the same criteria and costs that mega companies such as Johnson & Johnson Inc. (New Brunswick, NJ) and Medtronic Inc. (Minneapolis) face. Many such requirements would be extremely painful for smaller companies. So MDMA provides tangible benefits to small companies by ensuring that, for example, the fees for premarket approval (PMA) applications are greatly reduced for small medtech companies. As a percentage of revenue, smaller companies pay a far higher percentage for a PMA than a larger company. The bigger companies pay a much larger number in terms of dollars. So it's a fair system that I don't believe would exist if there were no MDMA.
Over its history, MDMA has taken on a number of issues that have special potential to harm small medtech companies. The behavior of healthcare group purchasing organizations (GPOs) and some of the issues around patent reform come to mind.
The GPO issue is an excellent example of where MDMA can provide tremendous value to smaller companies. Historically, GPOs have provided tremendous favor to mega corporations because it is much more profitable for them to deal with a few vendors than a broad base of small vendors. MDMA has been instrumental in getting GPOs to play much more fairly with smaller companies. In addition, the group continues to beat the drum to modify the safe harbor provision under which GPOs operate. Such a provision would infuse more fairness into the group purchasing organization value proposition. Achieving that goal is a multiyear project for MDMA.
GPOs negotiate prices to benefit hospitals. So it makes sense that hospitals should pay the GPOs' fees. But believe it or not, the hospitals not only don't pay for GPOs' services, they also get kickbacks from them that are quite legal. It's the medical device manufacturers and other hospital vendors that pay the GPOs' fees. It's like the fox watching the henhouse. And speaking as one of the foxes, it's an incredibly inefficient system.
The larger companies love the current situation because they can apply tremendous pressure on GPOs. And in doing so, they drive GPOs' profits. Why would a GPO want to negotiate the lowest price if it's getting paid by the vendor and gets a cut of what the vendor gets? It just doesn't make sense. They'd want to maximize the price the vendor is charging. And then GPOs take their profits and translate them into a marketing program designed to convince hospital administrators of how much they're saving them. And it's all funny money. Then they provide the CEO of every major hospital with a legal kickbackreferred to as a 'rebate.' That payment provides the hospital CEO with some discretionary funding and makes everybody at the facility happy.
This situation can and should be corrected to everyone's benefit. GPOs can provide a very meaningful service to the healthcare system by reducing costs. But they should get paid by the hospitals, and the hospitals should have full oversight of them. In such a situation, I expect GPOs would beat vendors senseless to get the best prices because their customers would be watching closely to see how much the GPOs save them.
Because this is a presidential election year, it seems highly unlikely that Congress will hold more hearings on the GPO issue before the end of calendar 2008. Do you think that the new Congress will offer opportunities for MDMA to move this issue along a little bit more in 2009?
I do. This is silly season in Washington, and it's very hard to get anything done. Congress is preoccupied, and it's going to be that way until January of next year, at the very least. So it is going to be a tough year to gain any major traction with Congress.
However, in my experience, Congress is staffed by people who are very passionate about doing the right thing. The GPO issue is such a clear no-brainer that once they understand the issueonce they get past their disbelief that this situation actually existsthen they will do the right thing. MDMA isn't trying to put a stake in the heart of GPOs. It's just trying to change the way GPOs get paid so that the right people are paying them to do the right thing. We think that such reform will facilitate an open and competitive marketplace where small companies have as much access as large companies do.
Aside from your activities with MDMA, you also are a member of the board of directors for the Society of Interventional Radiology. What does that activity consist of? Are there other areas where you or AngioDynamics are particularly active?
Yes, I'm on the Society of Interventional Radiology board, and I am a member of the board's strategic planning committee. I'm also on the board of the American College of Phlebologythe vein doctor boarddoing market development.
The reason I've taken an active role in medical society leadership is because our physician customer base consists of extremely bright and dedicated people who are sometimes not very well versed in the ins and outs of business. And medicine is the biggest business on the planet. We believe that what's good for our customers is good for us, so helping them improve their business model will trickle down into making our business even stronger.
This activity also gives us a lot of insight into where physicians think they're going to be down the road. That way, we can make sure our pipeline matches their crystal ballproducing the right product, at the right time, at the right price.
So these relationships provide a two-way street of intelligence gathering.
Exactly. And they have been really invaluable over the years. We're also involved in a regional medical device industry association, MedTech (Syracuse, NY), which offers regional programs. We're very active on the community side as well, through educational programs and internships.
Many medtech companies have begun to explore the realm of convergenceessentially, looking across sectoral lines for possibilities that might emerge through partnering with companies from other areas of the life sciences. Does that approach have any appeal for AngioDynamics? What other kinds of technological advances do you see as important for the markets that you're operating in?
We definitely see that trend, and we agree that it's very material.
Actually, AngioDynamics is also the exclusive United States distributor of the drug Sotradecol, which is used in the treatment of small, uncomplicated varicose veins. And we are partnered with a crossover company called Biocompatibles International plc (Farnham, Surrey, UK), for which we are the exclusive distributor of the LC Bead product, a microsphere that is used as a drug delivery platform in both Europe and the United States. Biocompatibles is developing a rich pipeline of drug-impregnated embolic products for local chemotherapy.
So we already see convergence as a reality for us today. And we're always looking for ways to leverage it.
Are there other kinds of technologies that you're watching for down-the-road possibilities?
Yes. At the risk of resorting to the buzzword of the day, we are very interested in nanotechnology. In years to come, there's just no question that nanotechnology is going to have a profound impact on not only medical devices, but also on combination products and drug delivery devices.
Some people have raised questions about how FDA will regulate the use of nanotechnologies. Do you feel comfortable that the agency has the expertise necessary to devise regulatory schemes for nanotech products?
I think it does. My biggest concern is to ensure that FDA gets adequate funding to be able to do such things, which isn't necessarily the case right now.
As a matter of fact, that's one of the roles that MDMA plays. We in industry are always fighting to make sure that FDA gets enough money from Congress to be an effective agency.
It might be counterintuitive to laypeople that we would want to be advocates for getting more money for our regulators. But the fact is, if they are not adequately funded everything grinds to a halt. So we want the agency staffed with excellent people who have excellent resources and are not worried about the budget crisis of the day. Unfortunately, the agency rarely achieves such a condition. But if the agency is given adequate support from Congress with regard to funding, I think it can definitely come up with a rational program.
At this point, the relationship between the medical device industry and the agency is very constructive. It hasn't always been that waygoing back to the days of Commissioner Kessler, specificallybut I think the pendulum has swung back to really an excellent working relationship. So when I am on Capitol Hill, I'm always beating the drum to get FDA more money.
That often results in some raised eyebrows from legislators, who remind me that an FDA with more money is likely to take an even more aggressive regulatory stance toward us. But that's not true. The agency might be more aggressive toward some companiesbut not ours. If we do our job well, the agency is going to be in our asset column. FDA field inspectors are not going to waste their time hanging around with us.