Medical Device Link.

Originally Published September 1999

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Business Builders

How do you keep investors, employees, and customers happy through the often-tortuous early stages of device company business development? Several CEOs share their insights.

Cliff Henke

What a long strange trip it's been."Those who have been at the helm of a medical device company start-up, especially one that is involved in breakthrough product R&D, can relate to the Grateful Dead's famous song. After all, this is an industry regularly known for companies whose forthcoming products promise to change the world—next decade. In some cases the reality doesn't quite match the hype. Sometimes the future never comes.

How do the leaders of device companies keep it all together, and keep everyone aboard the train, in these uncertain times? That is the rarefied path walked by the CEOs interviewed for this article. And as one puts it, "For anyone who hasn't done it, it's hard to even imagine."

The Faith of a Revolutionary

"For those who are involved in a true revolution, developing a PMA [premarket approval] device for which there is no predicate, the challenge of keeping it going is not only critical but more difficult than I can really describe," says Tom Loarie, president of Kera-Vision (Palo Alto, CA). Founded in 1986, Loarie's company is creating a new category of nonlaser vision correction products designed especially for mild myopia. Longer range, applications could include mild hyperopia (farsightedness) and astigmatism.

"The challenges of this—they're gigantic," he says. "There is no way to minimize them. When I came to this company, I had no employees and 10 cats with experimental corrective rings in their eyes. All I had were concepts."

The company was in almost completely uncharted territory. "In this situation, if you need to make changes to your product, you can't go into the medical literature to find out where those changes might take you because you're creating the medical literature," he explains.

The only thing the corporate leader can do in such a breakthrough environment is try to stay one step ahead of everyone else—a task that Loarie says is profoundly humbling. "I felt that one of my most important jobs as CEO was to uncover any reasons our product wouldn't work. And if there were any, I had to find them before someone else did, because as CEO you must understand your product better than anyone else."

Therein lies the raw courage of one who is leading a market revolution: "If you find an Achilles heel, you're dead. So it becomes a very difficult mental effort."

KeraVision faced such a challenge. The company had spent $5.5 million in animal testing but hadn't yet done any human testing. "We found that the product wasn't going to be practical in humans using the method of action described by the inventor," Loarie recalls. "So we had to change the method of action by changing the thickness of the device. We did it and got a titratable product, but still no one really knew if the method would work until we tried it in humans."

With such a daunting challenge, when even your allies are skeptical of success, how do you keep yourself going, much less others around you? "What kept me going was my fundamental belief in the product, our market, and human nature," Loarie says. "What kept me going was my belief that people don't really like to wear glasses or contact lenses—and wouldn't if they had something better."

That was decidedly not the conventional wisdom of funding sources, however. Institutional investors and the venture capital community didn't believe that refractive eye surgery was a viable business. They were attracted to products intended for the vascular surgery or cardiology marketplaces because there was already an established, lucrative business in those markets.

Moreover, KeraVision was developing its research at a time when radial keratotomy fell into disfavor. "Some people think that venture capitalists are risk takers. Compared to other investors maybe they are, but they still are investors, so they are risk averse," Loarie says.

"I just had this fundamental belief about human nature," he says. It's almost his mantra. "It was only a few years ago that people didn't think fax machines and Web sites were useful. There is a natural human resistance to change and to new ideas."

Okay, the CEO has faith and vision; that's expected— especially in a start-up. How do you infect others with that same faith, especially in times of crisis? "Some people think that more stock is the answer, but in times like those most people are not thinking about their stock. They're thinking about their reputations and their lives, even about finding another job," answers Loarie. "You're thinking that investors will not want to bet on you anymore.

"The most important thing is honest communication; you need to be absolutely straight with everyone. I was in another venture where everyone was not that forthright, and my first six months consisted of opening door after door to find more skeletons in closets.

"So, you never try to fool anyone, and you don't sugarcoat. You have to be straight with your investors because it's their money; then you must also be straight with your employees and your board members. If you communicate a lot and shoot straight with everyone, people will stay onboard even during times of crisis."

In addition to Loarie's leadership, KeraVision sought outside help to communicate its vision within and outside the organization. Early on, the company brought in an industrial psychologist to help the firm's nine employees create an environment of open communications. Loarie credits this move with the company's low turnover rate, even during several periods when the survival of the business was threatened.

"We still use some things she brought to us," he says. "We have Monday morning meetings every week for half an hour. They are like a town-hall format so that anyone can ask questions. We are trying to put an end to rumors. On the first Friday of every month, we have a mandatory hour-and-a-half lunch with every manager who's in town. There is only one topic: What we can do to improve the corporate culture?"

Another key to sustaining KeraVision during the long, arduous product development process was commercializing the product outside the United States before introducing it domestically. "What would I do over again if I could? I'd have moved our R&D offshore sooner," Loarie explains.

The company did move a lot of its early-stage R&D outside the United States. It has a research and clinical site in Mexico, and it has also conducted many European trials. "The costs and regulatory hurdles that exist in the United States do not allow a company to move along the learning curve as fast as it needs," Loarie says.

Because FDA review of PMA devices takes so long, any delay can jeopardize a company's momentum with investors as well as in the market, he explains. "Our capital burn rate was about $3 million per month (it's about $5 million a quarter now). But every time there is a change you need to file a supplement, and getting a response can take two to three months. For a small company, the cost of that kind of delay is not only critical financially but also in terms of investor confidence, which affects your ability to attract the capital that the company needs."

Loarie admits that the trials and tribulations can take a personal toll. "You have to dedicate a lot of personal time and be prepared to deal with a lot of stress, both good and bad—the bad coming from the fear of the unknown. In the darker moments, there is a lot of self-doubt."

Balancing this, however, is the deep reward of seeing the company's ideas come to fruition and, in the case of the device industry, to the benefit of thousands, sometimes millions, of people. "The most rewarding moment is probably still to come," says Loarie. "But it will be hard to top our success in 1991 with the first procedures we did on humans. The results were beyond our expectations; I really can't tell you how euphoric that moment was."

For Loarie, those rewards are even more personal. "My son was the first commercial patient. He now sees better than he did with glasses. Our second commercial patient was our vice president for regulatory affairs," he adds. "They were competing to see who could read the smallest type the farthest away. My son called me up shortly after and said, 'I drove my car last night. Without glasses.' That was the first time he had ever done that, and it was great to hear his excitement."

KeraVision entered the next phase of its development in April when its Intacs device became the first FDA-approved nonlaser option for the surgical correction of mild nearsightedness—a condition affecting an estimated 20 million adult Americans. Since then, KeraVision has announced agreements with three vision correction surgery companies to make Intacs available to their surgeons and patients. The companies represent more than 200 locations throughout the United States.

Meanwhile, the company accelerated efforts to develop a second potential product, for hyperopia, by starting a multicenter clinical study in Europe. "The challenge now is to see if there will be acceptance in the marketplace," Loarie says. "That's our ultimate goal, and we are on the verge of it.

"What's kept me and a lot of others in our company going is thinking about the meaning of our lives," Loarie continues. "I truly believe that 100 years from now this is going to be written about in ophthalmology textbooks. We have created a technology platform that will be used to treat all eye conditions, in potentially half the world's population. I don't know how many others can say they are involved in something that big. That's what's kept me going, and that's why we have such loyal people."

Hard-Nosed Realism

Perclose (Redwood City, CA) is an example of another company that jump-started itself with offshore product development. "We benefited from going public after we had solid clinical data that showed real patient benefits," says Hank Plain, Perclose's CEO. "We had experience with thousands of patients in Europe, which confirmed our launch strategy and established realistic sales expectations."

To Plain, having hard data was how he kept investors onboard. "Realistic expectations are the single most important factor that distinguishes the early-stage medical device companies that have done well in the public market," he explains. "It helps to have your nose bloodied a few times before you go public."

Perclose designs, manufactures, and markets less-invasive medical devices that automate the surgical closure or connection of blood vessels. The products are designed to surgically close the arterial access site in the femoral artery following catheterization procedures such as angioplasty, stenting, atherectomy, and diagnostic angiography. They are intended to offer more rapid recovery and a more cost-effective alternative to the standard method of closing arterial access sites. FDA has recently approved the company's marketing claim that its vascular surgery products reduce hospital stays for cardiac catheterization patients, making the company's products the only ones on the market approved for such a claim.

"This is an important milestone for Perclose and shows that our technology offers definitive clinical benefits for patients and an economic benefit for hospitals," says Plain.

Perclose is also developing a system designed to automate the surgical connection of blood vessels during conventional and minimally invasive coronary artery bypass surgery. Consistent with the company's earlier product development efforts, the first generation of this device is in human clinical testing outside the United States.

Plain feels that the most significant challenge Perclose faces in sustaining its business during the crucial product development period is how to continue perfecting the technology while getting it ready for market. "In the cardiology market, the best technology wins," he points out. "We have successfully continued to improve our product offerings based on direct feedback from physician users." That feedback is continuously fed into product design.

The result is a slew of products designed to meet clinical needs, all developed in a comparatively short time. "By the end of the year, we expect to launch our fourth-generation device, the Closer 6F, in the United States," he says. The Closer 6F is a new version of the firm's percutaneous vascular surgery device. "Based on the clinical trial data, we believe that it is as easy to use as any other closure device and will still give the benefit of a suture-based closure." The company recently announced that it has successfully completed a human clinical trial of the Closer 6F. The trial data were included in a PMA supplement to FDA. Additional clinical studies are pending FDA approval of the supplement.

Like Loarie, Plain says that personal rewards stem from the people whom his company's products will help. "During a recent hotel meeting, a gentleman stopped me to thank Perclose for developing its technology," Plain recalls. "He had had several coronary angiograms with conventional management of the arterial access site and had had to stay in bed for hours after each procedure. Perclose allowed him to ambulate early and be discharged from the hospital. Hearing from him made my day."

Yet what continues to sober Plain are the cold-blooded realities of the market. He says that if he could redo an aspect of his company's development he would perform more benchmarking of other successful medical device companies. "There are consistent models for successful medical device companies," he says. "In the cardiology market there are many parallels and lessons to be learned from benchmarking other successful companies. The exercise forces you to examine the similarities and explain the differences in a variety of areas such as product development time lines, regulatory approvals, success (or lack of success) in Europe, and expenses and investments."

Collaboration

In May 1997, Hyseq (Sunnyvale, CA) entered into a collaboration agreement with industrial giant Perkin-Elmer to commercialize Hyseq's DNA-sequencing technology on a computer-chip-sized array, called HyChip. Perkin-Elmer (now PE Corp.) is a leading provider of DNA-sequencing and analysis systems for research and clinical labs.

Under the agreement, Hyseq manufactures the chip component of the HyChip system and PE Corp. markets and distributes the product. The collaborators have also moved aggressively to market HyChip via an early access program for selected pharmaceutical companies and diagnostic laboratories. "Early access means these products are not available except to those customers," explains Hyseq president and CEO Lewis Gruber. "They benefit from the technology while it's still in development, and we benefit with customers at an earlier stage.

"Collaboration with PE and others has been essential to our development," he adds. He also cites federal government programs—such as the Advanced Technology Program of the Department of Commerce as well as the Argonne National Laboratory's technology transfer efforts within the Department of Energy—as key to Hyseq's early-stage development.

Hyseq's history follows a pattern of others in the emerging "lab-on-a-chip" field. Virtually all the companies in this embryonic industry have partnerships with research laboratories or pharmaceutical companies, or both, to develop products, facilitate distribution, provide needed capital, and gain market experience. The gene-chip companies afford researchers the ability to identify genes that have a role in disease and to test the effectiveness of candidate drugs for controlling this relationship.

Hyseq uses the strategy arguably more than others in this field. "We also have partnership agreements with Chiron in cancer research, and we are moving aggressively to establish agreements with other commercial partners," says Gruber.

The company also developed a collaboration with the pharmaceutical division of Japan's Kirin Brewery Co. (Tokyo). In that collaboration, Hyseq processed 1.2 million gene samples in less than three months, achieving a key milestone ahead of schedule. "Completing our collaboration efforts early enables us to double our gene discovery capacity to meet future collaboration opportunities, while continuing to accomplish existing collaboration requirements and internal gene-discovery goals," says Gruber. In other words, grow while you learn and get ready for future growth in the process.

"We are a genomics company," says Gruber, implying that his firm's core competencies are not the chips but the storehouse of discoveries and knowledge the company has developed. "Hyseq's core business is gene discovery."

Hyseq offers pharmacogenomics and polymorphism discovery programs, and believes that its fast-growing proprietary HyGenomics database of partial human DNA sample sequences is the world's best concentration of rarely expressed genes. "In only one-and-a-half years we have built our database, with now over 7.5 million partial human DNA sample sequences, into what we believe is the world's largest genetic database—over twice the size of our nearest competitor," he adds. "We have filed patent applications on more than 150,000 gene discoveries, including many rarely expressed genes that we believe have the greatest commercial potential."

The have-technology-will-collaborate strategy is not without its downsides, however. In March 1997, Hyseq was forced to sue probably the most famous name in DNA chips, Affymetrix Inc. (Santa Clara, CA), for patent infringement. In December 1997, Hyseq sued its competitor again after Hyseq was awarded a patent on its partial genetic-sequencing technology. Gruber expects that a combined trial of these two lawsuits will go forward in the summer of next year.

"When we first sued Affymetrix, they said they had heard about our patents from third parties, even though they had been in face-to-face discussions with us to license our patented technology from just after our first patent was issued in 1993. Affymetrix continued to negotiate with us until after it completed its initial public offering in 1996," Gruber says.

To complicate matters, Affymetrix countersued Hyseq in August 1998. That suit, which alleged that Hyseq was infringing on existing Affymetrix patents, was later amended to allege infringement of a further patent issued in September of last year. "Hyseq does not use the technology claimed in this new Affymetrix patent," counters Gruber. "We believe the addition of the new patent to the suit is so unfounded that Hyseq intends to seek sanctions against Affymetrix."

Conducting a legal war with a big, publicly held foe has taken a financial toll. The company's recent decrease in cash and cash equivalents was in no small part a result of its ongoing litigation against Affymetrix.

All DNA chip and biotech companies benefited from the right timing, as well, Gruber says. Hyseq was one of the last biotechnology companies to do a major initial public offering (IPO), raising more than $55 million in 1997. "A lot of the IPO excitement that was in biotech has been transferred to Internet companies," he points out. "We're looking to transfer some of that back."

What keeps Gruber and his company going is the thrill of discovery that never seems to get old. This past winter Hyseq announced discovery of something a little far afield: that its proprietary human ectoapyrases are potential anticlotting products. These potential anticlotting products could help prevent or treat blood vessel blockages that can cause heart attacks and strokes.

Closer to its core business, Hyseq also announced another patent award, this time for a one-step reagent printing device to improve the speed and efficiency of DNA-chip production. "This device allows us to deposit all probes onto a chip or other surface in a single step, rather than taking multiple steps, or using the complex in situ probe synthesis process presently being used by other chip makers," says Gruber.

Setting an Example of Commitment

Alfred Mann believes that the key to his success at business development begins with his personal commitment to the companies in which he has been involved. MiniMed Inc. (Sylmar, CA), a manufacturer of implantable insulin pumps and other devices, is the latest example.

"My most important job as CEO is to create an environment of commitment to the company," he says. "I do not do this by micromanaging people. I give them the freedom to do their jobs. I also give credit and recognition to accomplishments and to a certain extent try to reward them."

He also leads by setting an example of hard work for his organization. "Around here, people see that members of the senior management team are probably the hardest working people in the company. That motivates others to work hard, too."

What about the mistakes that come with freedom? "I accept mistakes," he says. "Mistakes are okay as long as we learn from them."

Mann's lead-by-example profile includes using his own money to finance the early stages of MiniMed's development. "Capital is probably the most important issue for a company in the development stages," he says. "MiniMed is my fifth enterprise, so access to start-up capital was not a barrier." Even so, Mann's personal support amounted to more than just seed money, as he and those close to him provided the financing until only recently. "I financed the company initially, until it saw daylight; then we had private placements through contacts with my family and friends."

Approximately three years ago, Mann entered into a partnership with the German electronics conglomerate Siemens, which invested in three of his businesses, one of which was MiniMed. Siemens later bought out Mann's interest in all of the companies but MiniMed.

Meanwhile, Mann was preparing MiniMed for a public offering. "In about 1994, I decided it would be helpful if we had a known and respected venture capital institution as a shareholder," he recalls. "This would be important as we prepared for a public offering."

His discussions with several firms led to a relationship with Galen & Associates (New York City), which resulted in a $10 million private placement. Even after the company went public, in 1998, Galen still retains its shares and has a seat on MiniMed's board of directors.

"I have had very little difficulty communicating my vision and commitment to my employees and investors," says Mann. "Part of that is because I have had only one group of people I would call outside investors in the company; everyone else knows me and my background pretty well."

And as for that outside group? "That was Galen & Associates, and they just wanted a seat on the board, which they got right away," he says.

Mann's impressive track record is one built with successive successes. But like the other executives interviewed, Mann defines his own success in terms of commitment to his customers and to the ideals of the business. "My most rewarding experiences are the hundreds, probably thousands, of people who have written us," he says. "They tell us all kinds of stories, how our products saved their lives or restored their husband's or friend's life. Those stories never get old."

Changing Minds, Quickly

"The fundamental goal of a CEO in my position is to articulate a vision of where the company is going, but more importantly, to translate that vision into what I call the organization's cultural bias," says Rich Ferrari, CEO of CardioThoracic Systems Inc. (Cupertino, CA). CTS is the manufacturer of a new technology that enables physicians to perform cardiac surgery without heart-lung machines, thereby reducing a patient's recovery time and hospital stay. CTS's technology carries the minimally invasive surgery revolution to one of the most difficult set of procedures in a hospital.

Transmuting top management's vision into corporate culture is no simple, single task, says Ferrari. "It requires strategic thinking about products and an understanding that development time is money." Yet it also requires the changing of behaviors of whole organizations of people, convincing people they can quickly and effectively do things that need to be done.

"The most difficult aspect of a start-up company is how to capture that culture," he says. "Some company cultures are bureaucratic, especially established larger ones. What is needed is a can-do mentality that cuts through the bureaucracy. That's important in all organizations that are doing expensive product development, but it's especially important in a small start-up company, because it doesn't have the luxury of messing up a project or missing a milestone."

In turn, this task requires a structured, consistent, and constantly managed process, Ferrari explains. "Our process drives the organization using milestones that are monitored daily by managers and every two weeks by our executive team. This keeps things on track much better." The milestones are developed from the corporate vision and objectives through a consensus of the firm's management. Progress against these milestones is also how the company structures incentives for staff. Ferrari says he and CTS's chief financial officer have developed this process over the past 10 years. "It is an ongoing iterative one; we're constantly refining it," he adds.

While inculcating this culture within the company has been an enormous task, Ferrari's biggest challenge has been changing the minds of surgeons about using a new technique to perform risky cardiac procedures "off-pump," as he calls it. "We've had to change the minds of a pretty conservative group of very intelligent and highly skilled people who have been doing things a certain way for 30 or 40 years," he adds.

"This still is the toughest challenge for our company," he continues. "A lot more education and training remain to be done, and a lot more clinical data remain to be to collected in order for this transition to a new way of surgery to be completed. But I am convinced it's inevitable. Minimally invasive surgery in general is a complete and utter transformation of medical practice as it is done today."

The rewards are great, and not just in shorter hospital stays and money saved. "Because of the equipment and procedures we have developed, there are people alive today who would not be here if they had had to go through traditional procedures," Ferrari says. "There are patients whose surgery is too risky for traditional approaches and whose only hope is to have surgery off-pump. Those are testimonials that I never get tired of hearing."

Ferrari's opinion is that the new technologies will also require a far different treatment strategy; patients will be treated simultaneously by an interdisciplinary team of professionals, rather than receiving a series of treatments managed individually by specialists as is done today. "This really is a revolution in medicine," he says.

CTS has certainly entered the cardiology market with the speed of a revolution. Such success, however, also requires some luck, Ferrari admits. "CTS is a four-year-old company. We were the fastest start-up IPO in history, going from zero in sales to $30 million in three years. We created an entire category of surgery called minimally invasive cardiothoracic surgery. I'm not sure it could be done again."

That sort of humility and appreciation for the revolution they have helped create is not uncommon to CEOs in these situations. In fact, it is rather normal. In some cases, like Ferrari's, developing a new company has been a breathtakingly fast journey. In the case of leaders like Mann, it has happened before. But all of them would agree with Robert Frost's great poem: "I took the road less traveled, and it has made all the difference."

Cliff Henke is a freelance writer based in Southern California.

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