Cover Story: Soaring Innovation Means Rapid Growth for Small Company

Originally Published MDDI November 2005

Fox Hollow's savvy management and faith in an innovative technology enable the small company to make giant strides.

Sherrie Conroy

One of the most compelling aspects of the Fox Hollow story is that the company managed rapid growth while continuing to innovate. “It's one thing simply to automate rapidly and ramp up capacity, but doing it at the same time you are continuing to make significant improvements to a technically complex product is quite another,” says Ron Steckel, senior vice president of manufacturing and operations.

Fox Hollow Technologies develops and markets minimally invasive plaque excision devices for the treatment of peripheral arterial disease (PAD). According to the company, an estimated 12 million people in the United States suffer from PAD. The disease results from plaque that has accumulated in the arteries and blocks blood flow in the legs. Removing the obstructive plaque restores blood flow. The company's technology, the SilverHawk system, excises the plaque, literally cutting it off the artery walls like a lawnmower. The device removes the plaque permanently, which is quite different from stents that compress plaque against the vessel wall.

The SilverHawk soared onto the market. It rose in sales from $2.58 million in 2003 to $38.6 million in 2004. For the first six months of 2005, Fox Hollow reported revenues of $50.2 million. Demand for the system was far beyond expectations and projections, yet the company ramped up its manufacturing plants quickly, and very soon it had the initial backlog under control. Moreover, the company kept the cost of the system low to enable as much access as possible. With such accomplishments, it is fitting that MD&DI has named Fox Hollow as one of its Medical Device Manufacturers of the Year.

“The company was in its relatively early stages when its management saw the need to ramp up,” says Thomas Gunderson. Gunderson is a managing director and senior research analyst at Piper Jaffray (Minneapolis). “It certainly had very astute management that was willing to take the necessary risks.” He says that geography was also important. “It helped that the company was in the Bay Area where there are people with inherent experience and the infrastructure in place that enabled the company to gear up easily.”

The company, which is headquartered in Redwood City, CA, was founded in 1996 by John B. Simpson, MD, PhD, an interventional cardiologist with a long track record of developing unique medical technologies. Simpson founded such companies as Advanced Cardiovascular Systems, which was acquired by Guidant in 1984; Devices for Vascular Intervention, which was acquired by Eli Lilly in 1990; and Perclose, which was acquired by Abbott Laboratories in 1999.

Attacking the Disease

According to the company, patients with PAD can develop critical limb ischemia (CLI). CLI can cause tissue loss or gangrene. Worst of all, it can result in the loss of a limb. Patients with CLI are at “significant risk for amputation,” according to Robert W. Thomas, Fox Hollow's CEO. According to the company, each year at least 150,000 amputations are performed in the United States as a result of tissue loss from CLI.

Thomas understands the need for this device from a very personal perspective. “My grandfather had PAD. First, he had his foot amputated, and then his leg, and then he died 18 months later,” says Thomas. “What this disease does to people is a tragedy. Their lives are stopped. They are relegated to a wheelchair, and they stop doing the things they enjoy. They become depressed and often lose the will to live.”

The SilverHawk system is being used to help patients avoid amputation or bypass surgery. “It is sometimes the last resort for patients who are about to have their leg amputated,” explains Thomas. “We remind our employees that it is good to be confident, but never cocky,” he says. “We have a great technology, but we need to be angry and embarrassed that [in the United States] there are still 500 people each day getting their legs amputated and another 500 having bypass surgery. We are passionate about changing that outcome. We want to prevent that fate from happening. Our objective is to stamp out the need for amputations and bypasses, but we still have a long way to go.”

The SilverHawk system met with overwhelming success, and for nine months in 2004, the company had back orders for its plaque excision device. In response, the company more than tripled its sales force. Thomas says the increased sales force was critical to meeting the unexpected demand and to ensure that as many patients as possible would have access to the device.

“Many companies would have made decisions too slowly, saying the bet wasn't big enough,” says Gunderson. “Fox Hollow is treating a huge and silent population whose only previous alternative was amputation.”

Adoption of the technology has been phenomenal. “There is no substitute for its product, so the back orders didn't hurt them,” says Gunderson. “People will wait.” As of the end of the company's second quarter of this year, more than 850 hospitals in the United States were using the SilverHawk to treat peripheral vascular disease. This represented a 48% increase over the fourth quarter in 2004, the year the device was introduced.

“Patients often go to the doctor with a pain in their legs, only to find out that it is because they are not getting blood flow,” says Thomas. “When the doctors tried the technology, they were surprised that they were not seeing patients return with restenosis. And word of mouth among the doctors in the physician community led to a great demand,” he says. In 2004, 10,000 patients were treated using the device.

The company tripled its manufacturing capacity in 2004 and doubled it again in 2005. Cleanroom space was increased from 800 to 6000 sq ft in about 12 months. “Our sales force will have more than doubled within 12 months by the end of this year. We ended 2004 with 69 in the field. In the second quarter, we had already grown to 119. We have indicated publicly that our sales force will hit 170 by the end of 2005,” says Thomas. “The salespeople have a passion for this technology that can help avoid bypass surgery,” says Thomas. He says the company plans to have a sales force of 270 by the end of 2006.

“Having a breakthrough technology was key,” notes Gunderson. “The company is unique. There is no other plaque removal system out there. It also had good marketing and good sales, and it came through with the supply.”

As a marathon runner, Thomas compares the company's current state to the start of a race. “We are just now at mile one,” says Thomas. “The undying dedication of the salespeople to introduce the product when it had no clinical data was incredible. Very quickly we found a lot of doctors who now consider themselves part of our family.” Thomas says the physicians tell the firm, “this is what needs to be done and this is how to make the system better.”

“What separates Fox Hollow from other companies is that it focuses on the patients, not on the sales,” says John Paul Runyan, MD. “The SilverHawk is an innovative device, and the company has made a tremendous effort to educate physicians and screen patients,” he says. Runyan is an interventional cardiologist at Christ Hospital in Cincinnati.

No Pain, Lots of Gain

Thomas attributes much of Fox Hollow's success under pressure to the company's management. “We survived the pressure because our management team has a lot of experience.” He says that Steckel and Suzon Lommel, the company's vice president of quality and regulatory affairs, identified early on a plan for attaining more controlled environmental room (CER) space for manufacturing in order to fill the back orders and to ensure that the company had the necessary space to handle anticipated future sales of the SilverHawk and related products.

“They mapped a strategy that enabled us to grow from 800 to 2700 sq ft by moving all nonoperational personnel to a new facility. We then expanded to 6000 sq ft of manufacturing space in our new facility,” says Thomas. “With continued growth in mind, we are prepared. We are currently in a 60,000-sq-ft facility with 6000 sq ft dedicated for CER manufacturing.” Thomas says that this capacity will enable the company to add production lines for coronary or other complementary products. With the completion of the new facility, the firm has increased production capacity to 25,000 units per quarter, up from 15,000 units in its prior location, according to Steckel. “We will never have to have a back order again. Last year we had back orders nine months of the year and still did $38.6 million in sales.”

Gunderson says the company was in the right place to make somewhat risky decisions. “Before it went public, it fell behind in shipments and had back orders for several months,” says Gunderson. “At that time the company added manufacturing management who knew how to do a ramp-up to increase productivity and still keep a low cost of goods.”

In just six quarters, the company saw a gross margin improvement in manufacturing from 15% in April 2004 to 69% in June 2005. According to Steckel, the gross margin increase is the result of a combination of significant catheter volume as well as yield improvements, process simplification, vendor management, quality enhancements, and the resulting productivity gains. “An important step in this process is clarity of goals and prioritization of resources. It is critical that the objectives for the team are precise and address the most important issues first with the overall goal of bringing value to the customer through our high-quality, cost-effective products,” says Steckel. “Volume increases benefit this effort, first because it provides the absolute quantities to justify some of the improvements [those that are capital intensive], but the vast majority of the gains are rooted in solid fundamentals and programs,” he says.

The company also experienced a nearly threefold increase in its device output. By moving from batch mode to flow line, the company increased its device yield by about 30%. “The progression to flow-line production is a gradual one that cannot occur until the process is debugged and at a high level of efficiency,” explains Steckel. “Once those aspects are in place, the process can be introduced. We are just now seeing the benefits of this approach, which will add even more to efficiency, productivity, and quality.” He notes that this change brings an associated improvement to the gross margin. “Flow-line setups result in increased empowerment of the production staff, a higher level of quality ownership, and significantly less space requirements,” Steckel says.

The company also had a number of revenue and market penetration statistics that are equally impressive. “We hit $38.6 million right out of the gate in our first 12 months of commercialization,” says Thomas. “We have guided Wall Street to expect $120 million–$125 million in our second year of commercialization,” adds Steckel.

Thomas explains some of the company's early struggles. “Three years ago when we were trying to raise venture capital, 57 firms turned us down. It was tough to get funding. We had a low valuation,” he says. But he says that once Fox Hollow got funding, the employees did their part to get the design just right. “There were times when the engineers were working around the clock to get the technology to the machine shop at 2 a.m., and then they would work to get it to the quality control inspectors at 5 a.m., then to test, then to redesign, and so on.” The company's success is to the credit of the employees who believed in the future of the technology, says Thomas.

“When we went public in 2004, our stock started at $14 and ended at $20 the first day. Today, it is just under $50,” Thomas explains. “We maintained our gross margin and profitability despite huge infrastructure investments.” Thomas says it was critical that the company had its senior staff in place before going public.

The Technology

The SilverHawk plaque excision system uses a tiny rotating blade on the tip of the catheter to remove plaque from the arterial wall. It is the first technology to remove significant amounts of atherosclerotic tissue from long, diffusely diseased lesions. Unlike stents, it does not stretch the vessel wall. It can be used to treat both calcified and non-calcified lesions of any length. The device is designed to enable physicians to easily determine whether the collection chamber is full. When its nose cone is full, it can be removed, cleaned, and reinserted to treat additional areas. The plaque excision is typically performed as a stand-alone therapy that does not require additional procedures such as stent placement. Patients are typically 64 ±10 years old. To date, more than 30,000 patients have been treated with SilverHawk for severe, lifestyle-limiting leg pain. In many cases, these patients were ones who had previously been scheduled for an amputation. “We think this will change the way physicians treat PAD,” says Thomas.

“It presented a wonderful alternative,” says Runyan. “We are treating patients that were not able to be treated with other devices. For CLI, it has expanded our ability to treat this patient group,” he says. Most CLI patients, he says, are 60–70 years old. “This group is only going to get larger.”

Compared with cardiovascular disease, PAD is relatively unknown, says Runyan. “We treat only 10–15% of those who need therapy. Most people think their problem is something else—or worse, that nothing more can be done for them. Now, amputation is no longer the main-line therapy for this disease,” says Runyan.

Doctors' acceptance of the technology was a key factor in the company's rapid growth. “The SilverHawk technology removes the plaque and restores the artery to its normal size without the stress on the vessel. One doctor said that he is just opening the pipes like a plumber,” says Thomas. “Doctors say that when they remove the plaque, they can actually see the patient's foot change color and feel it warm up.” He says that when the SilverHawk was first released, it was used as a last resort on patients who were scheduled for amputation. “It is minimally invasive, and the procedure routinely takes only 30 minutes to an hour. Now, there are fewer amputations and fewer bypass surgeries,” he says. “Plaque excision is the treatment of choice,” says Runyan. “For patients with CLI who are at the preamputation stage, there is no other modality available,” he says.

Thomas says that coming up with the right design was challenging. “In the six years before we got approval, we had thousands of iterations. Early management had the foresight to invest in the engineers and equipment. We used the concept of fail fast, and we developed more than one iteration every day. We learned from each iteration,” says Thomas. “It has been wonderful but challenging. We persevered and came up with what would work,” says Thomas. “It is a success from both the patient and business perspectives.”

Thomas notes the company's low employee turnover rate and stresses that every person at the company contributed greatly to the product's success. “We could not have had this level of success without that kind of dedication,” he says.

Clinical Data

The long-term effects of the SilverHawk procedure are not known. However, as part of its national TALON registry, the firm is collecting both clinical outcomes data and tissue specimens, which may help enable the identification of predictive markers for restenosis, elevated cardiovascular risk, and other conditions.

“We collect data in the TALON registry from 27 sites. As of May 1, 2005, enough patients had been followed for one year to provide some long-term clinical data, which demonstrated very high safety and efficacy results,” says Thomas. “Restenosis does occur, but the target revascularization rate is in the 20% range, which is an exceptionally good figure,” says Runyan.

In addition to tracking clinical results, the registry is designed to correlate outcomes with histology findings and genomic profiles. Plaque excised from enrolled patients is preserved for analysis. The registry has hundreds of patients enrolled, and it is the largest registry of its kind focused on PAD.

Coronary Applications

By year's end, Fox Hollow will have submitted an investigational device exemption to FDA for a major multicenter clinical trial exploring the benefits of SilverHawk in treating coronary blockages. “We would like to develop complementary products—ones that would be used by the same physicians who currently use it,” says Thomas.

According to the company, patients with blockages in bifurcation areas of arteries typically are sent for coronary artery bypass surgery, which is a much more invasive procedure with significantly longer recovery times. Fox Hollow will examine the use of SilverHawk as a minimally invasive means to treat these bifurcation blockages in the coronary arteries. “The SilverHawk does well for treating bifurcation lesions, so there is a lot of potential for treating these patients as well,” says Runyan. The company has already received a CE mark to market the SilverHawk for coronary applications in Europe.

“It remains to be seen whether the technology changes the course of treatment for other types of arterial disease,” says Gunderson. “The company has no clinical data for coronary disease, but the technology looks promising. In terms of limb salvage, it is already making a difference.”

The Next Step

So, what do they do with the plaque once it's removed? Thomas says some physicians photograph the plaque and use the images for educational purposes. But Fox Hollow hopes to do more than that. The company recently announced a novel pharmacogenomics collaboration with Merck & Co. (Whitehouse Station, NJ) to analyze the plaque removed from patients. The purpose of the collaboration is to discover new biomarkers that ultimately could lead to more biologically based diagnostics and drugs for cardiovascular disease, says Thomas. The two companies plan to use the plaque to identify new biomarkers of atherosclerotic disease progression. Merck will use the biomarkers in the development of cardiovascular compounds.

“It is our greatest hope and expectation that this partnership will lead to a more-precise understanding of cardiovascular disease and result in innovative new medicines that are specific for an individual patient,” says Simpson.

According to the company, the plaque removed by the SilverHawk system is “rich with information about the genes, proteins, and enzymes that all play a role in the atherosclerotic disease process.” The hope is that researchers will be able to profile the molecular signatures that characterize different populations of patients.

“The Merck plaque analysis is a biological collaboration that will give us the opportunity to understand what is at the heart of cardiovascular disease,” says Thomas. “It could enable the company to take a very different direction that might include drug development.”

Gunderson says it's possible that the Merck collaboration could affect Fox Hollow's direction. “They are creating a brand new business equation for a device company. This agreement is in the embryonic stage, but it could provide an option for an alternative path.”

Conclusion

Since the company launched the SilverHawk in early 2004, demand for the device and its rapid adoption presented manufacturing challenges and some tough decisions. Back orders, lack of manufacturing space, and a small sales force could have been a recipe for disaster. Fox Hollow met these challenges and took the financial and business risks necessary to make it a recipe for success.

“The enormity of the PAD market continues to reveal itself as we reach more physicians who see patients with PAD every day in their practices, but have not had good treatment options to recommend to them in the past,” says Thomas. “Our aggressive focus on this referral base, in addition to rapid adoption amongst physicians who treat PAD, are continuing to result in robust growth for our company.”

Fox Hollow is still a relatively small company. “The competitive nature of the industry won't let it stand alone for long,” says Gunderson. “Growth and great margins attract a crowd. Others will likely come along in the next one to three years, and Fox Hollow will be ahead of the competition.”

Copyright ©2005 Medical Device & Diagnostic Industry