Monitored Growth

Originally Published MX July/August 2006

COVER STORY

Interview by Steve Halasey

The single-minded devotion of medical device entrepreneurs to the development of promising clinical technologies is legendary. Even so, few can say that they would unreservedly pour 18 years of their lives and $150 million in investment funding into a technology before ever turning a profit. But for Nassib G. Chamoun, founder, president, CEO, and director of Aspect Medical Systems (Newton, MA), the chance to redefine the practice of anesthesiology presented a challenge and opportunity worthy of such an investment.

Aspect's Bispectral Index (BIS) technology, which measures the effects of anesthetics and sedatives on the brain, braved the path to regulatory clearance at a time when the medical device product approval process was at its toughest and slowest. The technology's arduous and expensive journey to clearance gave way to yet another costly challenge: the need to demonstrate clinical utility to a skeptical market. At several points along its difficult journey, Aspect teetered on the brink of bankruptcy.

But the tenacity of a dedicated management team and the financial backing of a handful of loyal investors kept the company afloat until finally, in 2004, Aspect tipped over into profitability. In subsequent quarters, the company has continued to report exceptional revenue and earnings growth, including a 39% increase in revenue between 2004 and 2005. And now, according to Chamoun, the company is fast approaching another tipping point: the one at which the maturity of the company's technology and its acceptance among clinicians come together to drive widespread, global adoption.

In addition to reaping the benefits of more than 20 years of investment and research, the company is investigating new opportunities. Under a $25 million pact with Boston Scientific Corp., Aspect is exploring applications of its BIS monitoring technology for depression and Alzheimer's disease. In May, at the annual meeting of the American Psychiatric Association, the company released promising findings from two studies designed to assess whether Aspect's technology can accurately predict treatment efficacy in patients with major depressive disorder.

In this interview with MX editor-in-chief Steve Halasey, Chamoun discusses the origins of the consciousness monitoring market, his company's hard-fought road to FDA clearance and clinical implementation, and the ongoing research and alliances that are driving the company's future.

MX: Nassib, you are the inventor of the Bispectral Index (BIS) and the related technology that is at the core of Aspect Medical Systems. Tell me about the company's origins and how you developed the idea for the technology.

Nassib G. Chamoun: When I first developed the idea for Bispectral index monitoring, I was doing graduate research at the Harvard School of Public Health. I was enrolled in a biomedical engineering PhD program at Boston University, but all of my graduate schooling and research was funded by the Lown Cardiovascular Research Foundation, the research headquarters of which were based at the Harvard School of Public Health.

At the time of my PhD work, my two mentors were Bernard Lown, MD, and Charles Zraket. Dr. Lown, who is still living today, is one of the world's leading cardiologists, as well as a humanitarian and social activist. In fact, he accepted the 1985 Nobel Peace Prize on behalf of the International Physicians for the Prevention of Nuclear War. Zraket, on the other hand, was at that time chief executive officer of Mitre Corp., one of the nation's leading technology and defense contractors. In short, my mentors were polar opposites in terms of their political views as well as their business and academic perspectives. Zraket was a high-tech academic and a businessperson, and Lown was a clinical academic and a social activist.

I have a bachelor's in electrical engineering and a master's in computer engineering. While pursuing my PhD in biomedical engineering, I began working with a technology called bispectral analysis, which is a public-domain technology that was used heavily by military contractors to develop algorithms to track submarines and process radar and sonar images and signals. When President Reagan announced the so-called peace dividend, he encouraged defense contractors to disseminate into the public domain a lot of the basic technologies that had been developed for military purposes. Bispectral analysis was one such technology on which Mitre had built a lot of expertise on the military side.

I was fortunate to know the people who had expanded the use of bispectral analysis for military applications, and I was able to say, 'Hey, I am interested in learning about this technology and applying it to electrocardiograms (ECGs).' So that was the area in which I conducted much of my PhD research.

How did this research into cardiology applications of bispectral analysis turn into a focus on brain monitoring?

One afternoon during my course of studies at the Harvard School of Public Health, an anesthesiologist who was a fellow in the laboratory with me began talking to me about the differences between the body of knowledge available on the heart versus the body of knowledge available for the brain. He said that the heart was a piece of cake when compared with the brain. It's a simpler organ, and we understand a lot more about it. This anesthesiologist said he administered anesthesia every day but had no clue how such anesthetics affected a patient's brain and consciousness. He told me it would be nice if somebody with my background and knowledge in signal processing would apply that expertise to track consciousness under the effects of anesthesia.

That conversation led me to visit Massachusetts General Hospital, where I spent several days observing the anesthesiologist at work. I became fascinated with the whole concept of brain monitoring, particularly in light of the fact that my grandfather had recently died of Alzheimer's disease. I was extremely curious and eager to pursue a greater understanding of the brain. Coupled with the encouragement of my two mentors, that eagerness led me to drop out of the PhD program and found Aspect Medical Systems. The company's initial goal was to apply bispectral analysis to ECGs and electroencephalograms (EEGs) to track changes in those functions relative to drugs and disease. Within the first couple of years, the company's focus moved almost exclusively to the brain. It was too difficult to do both simultaneously.

I am sure that anesthesiologist did not tell you, 'Oh, by the way, you are going to spend the next 10 years developing this concept before you have a product that is marketable.'

Oh no, of course not. In fact, my assumption was that developing the product would be merely an extension of my PhD work into the private sector. I thought I would have the concept licked in a couple of years and that doing so would require only a couple million dollars. I had no clue as to what I had undertaken.

This is my 20th year on this journey. I began working on the project a year before I officially founded the company. Aspect Medical will enter its 20th year this October, and I will enter my 21st year on this endeavor. I assumed my invention would require a $2 million investment over two years, after which some big company like GE Healthcare or Hewlett-Packard (HP) would buy it and I would end up working for them. That was the idea at the time. I was 25 and very naïve.

That is probably a common trait among entrepreneurs—people who know better never attempt these types of endeavors. If someone had told my 25-year-old self that my idea would become a $150 million, 20-year journey that would be fraught with regulatory, clinical, market-development, and political challenges, I probably would have said, 'Thank you very much. I think I'll graduate and go work for HP.' But then again, maybe not. I am being a bit sarcastic here, but I do think that most entrepreneurs faced with a challenge such as what I just described would find a different way to get themselves into trouble. But the idea of developing a greater understanding of the brain was a mission and vision that felt right to me, and it fell in line with my desire to be an entrepreneur.

Developing IP

You mentioned that bispectral analysis originated as a military technology. When you took it out of the military realm and started applying it to medical applications, did you develop it to the point that you were able to file intellectual property holdings on your own developments?

That is correct. A lot of signal-processing technologies and similar mathematical algorithms involve a basic concept that is then implemented for a particular solution. What Mitre did was release its general information on bispectral analysis as a processing concept into the public domain; anybody can use bispectral analysis. The implementation of that technology for military purposes is a proprietary trade secret of the military. I was never exposed to that information, nor would I be unless I worked for Mitre or for another company familiar with the implementation of bispectral analysis for military purposes. What I was exposed to through the collaboration between Mitre and the lab at Harvard was the concept of bispectral analysis. I learned a lot of the generic tricks of the trade that scientists had developed over the years.

I applied this knowledge to create an implementation of bispectral analysis for ECGs and EEGs. This led to a couple of initial patents, which have been built upon over the years and expanded by several other scientists who have joined Aspect. Today, those scientists run the day-to-day scientific and signal-processing work without any input or participation from me. In fact, they do not want me anywhere near it. So although I take credit for the initial development of the concept, the initial algorithm, and the thrust behind the idea to track consciousness and brain function, a lot of subsequent work has been done during the past 15 to 20 years by some incredible people who have dedicated almost as much of their lives to this endeavor as I have. They have made an incredible difference in terms of taking the concepts on which the company was founded and expanding them. They've worked hard to make them practical, useful, and applicable in a variety of dimensions and settings.

Developing algorithms seems a little bit like formulating a drug compound. You run the equation, test it, and if it does not work, you tweak it and test it again. Is that the process?

Very much so. In fact, the mathematical process is one of the greatest barriers to the entry of would-be competitors into this sector. The mathematics are the tools to break down an EEG and get information out of it. Even if a company can develop that, it must still meet a second requirement, which is establishing what to do with the information extracted from the EEG. A company must be able to use the information in conjunction with an index or tool for clinical management that correlates with drugs and disease in a particular situation. That requires a significant amount of clinical data, which is expensive to collect. The trials are complex to design and execute, and one trial isn't sufficient. One trial may provide a first revision. A second trial provides a second revision. As more trials are conducted and more data are collected, the performance of a parameter gets better.

The amount of data Aspect has generated and the amount of refinement that has gone into its technology are what make the company unique. Other companies that have claimed to be able to track consciousness with their EEG processing technologies have not fared as well as Aspect has because their data can't stand up to those produced by our company. Our company's technologies are supported by more than 2300 scientific publications. Data produced in trials have been used to further enhance and improve Aspect's algorithm. More than 15 million patients have been monitored over the years, and a lot of data coming from those sites have enabled further improvement of the algorithm.

Such an iterative process gives a company a leg up in the market as long as it continues to invest in further study and continues to drive toward the next trial and the next algorithm enhancement. Continual investment means a company will always be that many years and that many millions of dollars ahead of the competition. In my opinion, that advantage is stronger than any patent or any intellectual property silver bullet people discuss. I do not believe in intellectual property silver bullets. Companies must compete through continuous innovation. Companies must continuously invest in the development and enhancement of their technologies and continuously give their customers more for their investment in a product. For every dollar a customer is spending with a company today, that customer should get a lot more than they did for that dollar five years ago.

Are there parts of Aspect's algorithm or technology for which the company has deliberately held back on filing intellectual property?

You bet. In fact, it is a source of constant debate in academic circles, because Aspect has published the general concept of its algorithm—but not the particulars. In order to move away from a black-box perception, Aspect agreed to share its algorithm through a published article in the Journal of Anesthesiology. The company agreed that one of the journal's researchers who was knowledgeable and mathematically solid could sit down with its scientists and get a look at Aspect's algorithm. But there was one condition, and that was that the coefficients that combine a lot of the algorithm's parameters and the statistical equation that pulls them together into a single number would remain a trade secret.

It's like buying a can of Coke: you can look at the ingredient list, but you do not know the amount of each ingredient or in what sequence they are combined. Theoretically you may be able to design your own cola, but it is not going to be Coca-Cola. Aspect's algorithm is a very similar concept. The paper in the Journal of Anesthesiology provides all the ingredients, and the patents detail the company's technology. What is absent between the two sources is the knowledge acquired through the iterative process of hundreds of clinical trials over a period of 20 years and through an investment of millions of dollars. That trade secret is part of what makes Aspect unique and allows the company to continue to improve its technology.

When you started, you thought this endeavor was going to take a couple years and a couple million dollars. That would have been an easy sell to early investors. As time and money wore on, how did you convince your investors to stick with it? What was the pace of research and development (R&D) and what kind of milestones did you need to hit as you worked to develop a commercial product?

Over the past 20 years, the company has experienced periods of great success and periods of even greater failure. The company has had some spectacular discoveries as well as some really big losses and disappointments. What distinguishes a successful company from an unsuccessful company is that successful companies are able to not only celebrate their successes but also take advantage of and learn from their disappointments and failures. All of us are faced with those situations during the course of our lives. It is not the situation itself that determines the ultimate outcome. It is how you react to that situation that ultimately determines whether you are successful.

Beyond my personal commitment to the success of Aspect's mission, I have been fortunate to be joined by a group of people who shared the same values, the same commitment, and the same drive. Aspect has also been fortunate to have a group of investors that truly believe in the company's people and their commitment to delivering on what they set out to do. Every step of the way, most investors have been just as committed as the company's management team, and most continue to support us.

This is not to say that Aspect wasn't near bankruptcy a few times. During those periods, some fresh investors had to surface. Between 1994 and 1995, our first round of investors were just exhausted, and they wanted out. We were lucky to identify One Liberty Ventures as a lead investor to take our company to the next level. That was an incredible turning point for the company.

Ironically, during that time of financial struggle, the company was sitting on the best data in its almost seven-year history. Aspect had its strongest clinical results to date at that seven-year mark, yet that was the point at which the company had the least money, the least credibility, and the most-tired investment group. We were lucky to identify a lead investor who believed in the company's clinical results, who understood the results, and who was able to step up to the plate. That investor was Ed Kania at One Liberty Ventures. He stepped up to the plate, supported the company both financially and in an advisory capacity, and the rest is history. From that point on, the momentum began to build. That doesn't mean Aspect did not have any disappointments after that point, but at least the company was on much stronger footing and was a lot less vulnerable.

Clearing Regulatory Hurdles

Your first product launch was in 1996. Tell me about your path to regulatory clearance.

When we began developing the product, there were no products on the market that effectively monitored our product's end point, which is the effects of anesthetics on the brain. However, the end point was not a new concept. There were several products on the market that claimed to meet this end point, but their data did not always support such a use.

During the course of Aspect's initial FDA interactions, in which the company sought to use some of the products already on the market as predicate devices to establish substantial equivalence, the agency realized that the other companies' products should probably not have been cleared in the first place because there were insufficient data to support their claims. So FDA withdrew its 510(k) approval and shut them down, effectively also shutting us down. Instead, the agency told us, 'Look, you have to design a clinical trial program to better understand exactly what you guys are measuring.'

Aspect's product thus became the pioneer that defined the clinical path and the regulatory requirements for products used for monitoring the effects of anesthetics on the brain. The company went through that process shortly after the 1992 issuance of the Temple Report highlighting the deficiency of most device clinical trials, when device product approvals were at their toughest and slowest. Our feet were held to the fire—and appropriately so, we think, considering that the process required conduct of sound clinical trials demonstrating efficacy, and thus has ended up being the greatest barrier to entry of inferior products in this market.

Again, I believe that adversity represents opportunity. As daunting as the concept of spending nine years jumping through regulatory hoops was, the process allowed us to learn a lot about the technology, about how to optimize it, and ultimately about how to design clinical trials that truly demonstrated the value our technology brings to the table. It was a blessing in disguise because it helped the company grow stronger, develop effective long-term relationships with the scientific community, and ultimately succeed in its goals.

How long was the product in clinical trials before it was submitted to FDA?

We went through a couple of submissions. One of them was around 1993 or 1994, and that trial just blew up because the clinical end point (movement at incision) turned out to be insufficient to demonstrate clinical utility. We had to go back to the drawing board and start all over with FDA. It took another three years or so to redesign and complete the clinical trials and finally receive clearance in 1996.

Although Aspect's initial trials were a total disaster from a regulatory perspective, the data the company gathered were extremely powerful in terms of helping us understand how anesthetics work. The data helped us, and the anesthesia profession, to begin to understand the relationships among consciousness, analgesia, and the movement response to surgical stimulation, which helped elucidate the concept that depth of anesthesia is not defined by a single end point.

The idea that anesthesia is a series of end points that ought to be optimized separately rather than as one unitary measure is the most modern concept in anesthetic management today. It was that initial trial that carried the data to explain the concept that some drugs work on the brain to put the patient to sleep, while others work on the spinal cord to block pain. If you talk to most experts in the field today, they will tell you that is how anesthesia works. In fact, the Royal Society of Medicine, the most prestigious medical body in the United Kingdom, recently held a whole day of lectures on the topic, and I was invited to speak at the event.

It was the concept that anesthesia is not a single end point that drove Aspect to refocus its trials on measuring consciousness and other clinical end points. As I mentioned, that took another three years, and the company received FDA clearance in 1996. But during the nine years it took for Aspect to gain clearance, the economics of healthcare had started to change. As a result, we needed to do even more work to demonstrate the clinical and economic utility of the technology. We had to show not only that the technology could measure an end point accurately, but also that measuring that end point accurately would add clinical value in terms of improved patient outcomes.

Did Aspect submit a premarket approval (PMA) application or a 510(k)?

Aspect received 510(k) clearance, but the filing started as a PMA. Our trials were conducted under an investigational device exemption (IDE), but once the data from our prospective multicenter trials were available, the agency felt that we provided sufficient justification so that the application was accepted as an expanded 510(k) with clinical data.

A high demand for clinical data was typical for many products in that era, and many companies felt that FDA was continually and unnecessarily ratcheting up the need for clinical data. But Aspect's application went the other way.

Well, FDA did require much more clinical data from us as well, and our product became one of the first consciousness monitoring devices cleared in its class. FDA has since cleared several competitive products, using Aspect's device as the predicate. We became the gold standard.

Entering the Clinical World

Once you had a safe and efficacious product that was cleared, was demonstrating additional clinical and economic utility the biggest obstacle that you had to overcome?

Yes. We took the product to market, and it had limited acceptance, with the exception of interest among a few gadgeteers at each hospital. The message we heard was, 'My hospital is not going to pay for this. Show me what difference it is going to make.' So we spent the next two years doing work to show that by titrating anesthesia physicians could deliver less drug, but the patients also wake up faster, they recover faster, they are discharged sooner, they have less nausea and vomiting, and patient satisfaction is better. We also had to refine the product by making the user interface simpler and introducing a more-practical and easy-to-use sensor. That became the value proposition on which we launched our A-2000 BIS monitor in 1998. That product drove the first wave of adopters for three years, until 2000, when the technology hit a wall in regard to adoption and a competitive product was introduced by a major company.

During that period, the company must have been building relationships with clinicians, not only through its clinical trials but also through societies. What kind of resistance did the company see among clinicians and how was that overcome?

Over the years, Aspect's relationship with researchers and clinicians around the world has been and continues to be among the best of any company in its space. The company has collaborated with more than 100 clinical sites around the world. In fact, those sites probably account for most of the published work in anesthesia today. Those sites and their investigators became a major driving force in getting the clinical message for the technology out there.

The advance of the technology and the rapid adoption between 1998 and 2000 began to raise discussion about the efficacy of monitoring consciousness to reduce the incidence of intraoperative awareness. There was a great article in Time magazine in late 1997 or early 1998 that discussed the potential for this technology to reduce the risk of intraoperative awareness. The concept received a lot of publicity and took on a life of its own. That publicity was well received by the people who helped develop and introduce the technology and those who understood the value of the technology and saw it as an opportunity to advance the specialty.

But, unfortunately, others saw that publicity as an attempt by Aspect to expose the medical mistakes of the specialty and scare the public. There was a lot of tension, which is not atypical during the introduction of a new technology. People begin to take sides and debate the pros and cons of adoption. I would call it the classic creative tension that occurs when the introduction and adoption of a new concept defines and establishes a new paradigm for patient care.

What was the nature of the resistance?

I still think that most of the resistance is primarily emotional. We believe that our technology has more high-quality data than any device or clinical intervention in anesthesia today.

Of course, anyone could hold us to some unreasonably high standard and say, 'You don't have multiple Class I studies showing that your monitor is 100% effective.' Well, most monitoring companies do not have even one Class I study showing improved patient safety, but Aspect can cite more than 28 Class I studies that show improved outcome. Some have criticized our technology for not being 100% accurate. But how accurate are the heart rate and blood-pressure monitors that clinicians rely on presently? The data show that heart rate and blood-pressure accuracy in measuring whether a patient is awake or asleep is no better than the flip of a coin. Our technology may be 90 or 95% accurate, but some critics still demand 100% accuracy before accepting that it might help them.

Once a person starts working through these issues and the scientific data, the debate seems more about emotional resistance to change rather than a true disbelief in the effectiveness of the concept. Again, Aspect's technology was forcing people to reevaluate the way they managed the anesthetic state of their patients. It redefined the paradigm from monitoring a patient's tolerance to side-effects to one of tailoring the anesthetic to provide the optimum balance of effects—not too much and not too little.

Another objection we sometimes hear is, 'Well, I'm not going to trade my skill in treating a patient for anesthesia given by a machine.' That is a very naïve argument, especially considering that the people who use Aspect's technology tend to be the more-sophisticated anesthesiologists. They tend to be the ones who intellectualize the various components of their anesthetic and seek to provide the optimum care for each individual, rather than using some recipe approach. They are willing to break it apart and work a little bit harder to drive a tighter technique and a tighter combination of drugs rather than a more blanket approach of always giving the maximum tolerated dose of one anesthetic agent. Our technology does not in any way do away with anesthesiologists' clinical judgment. In fact, in most cases it exercises it to a greater level. But this can be viewed as unnecessary by those providers who believe they are infallible and that they already provide the best care possible.

Another argument we've heard from anesthesiologists is that they think the technology may cause them to make a mistake by taking their attention away from the patient. Well, that does not make much sense either. Other parameters are just as likely to cause mistakes as monitoring consciousness. Having additional information about a patient's state creates an opportunity for an anesthesiologist to more closely examine what is happening with the patient and the surgery and to track the dynamic interaction among the changes in anesthetic levels, analgesic levels, neuromuscular blocker levels, and surgical stimulation to determine the individual patient's needs.

Breaking through barriers such as those I've mentioned is what I call part of market development. It is education. It is dialogue. It is constructive tension. Some of those arguments are useful to everyone. For example, despite the obvious connection between consciousness monitoring and awareness, some experts said, 'You have to prove to me in a large prospective randomized trial that you can actually reduce the incidence of intraoperative awareness.' Well, we went out, worked with prominent experts who did the trials, and devoted three years to studying 30,000 patients—more than any other company in the device space would have evaluated. These experts published two major papers—one in The Lancet, one in Acta Anaesthesiologica Scandinavica—showing that our technology can reduce intraoperative awareness by 80%.

Based on this outcome data, this allowed us to upgrade the product's indication for use, which further separated us from the competition and gave us yet another barrier to entry. It also further accelerated adoption of Aspect's technology and enhanced the company's safety-value proposition. That enhanced proposition built on the quality, efficiency, and cost-benefit of the technology that we had been marketing early on. So yet again, a situation that was stressful and viewed as being controversial created an opportunity for learning and improvement that ultimately lead to patient care improvements and served Aspect well as a company.

Between 2004 and 2006, Aspect has experienced several breakthroughs in clinical recognition. In 2004, the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) issued a sentinel alert titled "Preventing, and Managing the Impact of, Anesthesia Awareness." Since then, the American Society of Anesthesiologists (ASA) and the American Association of Nurse Anesthetists (AANA) have highlighted the BIS technology as something that should be considered for application. Are those breakthroughs now contributing to more rapid adoption?

Absolutely. The early adopters in this market were driven by the quality, cost, and efficiency value propositions. Although those factors might be enough to drive adoption among the broader population, the energy required to activate a changed behavior in a particular discipline is a lot higher than most people think—and probably more so in medicine. But even the adoption of a technology such as cell phones or BlackBerries—basically anything that we have adopted as a society—always starts with the early adopters. Then there is adoption by the middle majority, and later there is a tipping point that converts the rest of the market. Things play out in a similar manner in healthcare—they just take longer.

Aspect's work on intraoperative awareness started in 2000. The trials were completed in early 2003, and FDA altered our product's indications for use in October of 2003. That ultimately led to the data being published in 2004, when The Lancet and Acta Anaesthesiologica Scandinavica put out the results. In turn, that led JCAHO to highlight intraoperative awareness of the patient as a safety concern and suggest that hospitals put in place policies and procedures to address it. Soon after, ASA evaluated the technology and put out a practice advisory last year. At about the same time, the AANA evaluated the whole space and recently put out its position statement. In the UK, the Royal College of Anesthetists took a similar position.

The market is beginning to see a pattern of organizations acknowledging a safety concern about intraoperative awareness and the potential for brain monitoring to help address that risk. There is an opportunity to integrate technology into practice. Some people argue that these societies aren't moving fast enough in mandating use of the technology. Well, of course not. Mandates by professional societies in healthcare just do not work to foster adoption of new technologies, but instead usually reaffirm use once most members already have access to the equipment.

But, these societies have effectively put the information about brain monitoring and awareness on the table and encouraged clinicians to read it, understand it, integrate it into their practices, and make the right decisions for their patients. The societies are facilitating discussion of the problem of awareness, which is all our company can ask from them at this stage in the game.

Once the technology has been widely adopted, a standard will be declared to reinforce and reaffirm the behavior and decisions that the majority of the societies' members have already made. That is how it plays out everywhere. People have short memories and think that standards create markets. It is actually adoption in the markets that ultimately leads to standards.

Public and Profitable

The company made its initial public offering (IPO) in January 2000. Was that primarily to fund the additional clinical research on intraoperative awareness?

With our IPO, it was time for Aspect to come of age. It was almost 13 years after the company was founded, and we had tired venture capitalists. Eleven rounds of venture capital financing will exhaust anybody. It was time for Aspect to take its growing business and its market opportunity to the public markets to secure bigger funding and begin to work toward getting the awareness data. We knew those data were going to help the company move its technology toward becoming a mandate for anesthesia monitoring and management. That is what the IPO did for us in 2000.

The offering was wildly successful. It was almost too successful. It was driven by the froth of the market and by the attitude that Alan Greenspan called "irrational exuberance." The stock traded as high as $60, and I have no clue why it was ever that high in the first place.

Eventually things came back to earth in a very difficult way. In the summer of 2000, a competitor entered the market when Baxter began distributing the Physiometrix product line. At the same tine, the whole tech bubble burst. So Aspect faced a combination of competitive pressure alongside a total meltdown in the financial markets. Within two years, our stock was trading as low as $2.60. That was painful, and it was a rude awakening. But those are the realities of being in a public market.

Having learned it on the private side, I always tell people that value and valuation are never in sync. Companies go through cycles in which the value is ahead of the valuation, or the valuation is ahead of the value, and the two are rarely in sync with one another. They intersect. It is almost like a swinging pendulum. When Aspect's stock was at $2.60, the company only had about a dollar in cash. But while the company was not profitable, it was selling plenty of product, and its margins were so high that the takeout value for the company was significantly higher than $2.60 per share.

But Aspect is a company filled with entrepreneurial people. You do not have to be the CEO or the founder to be an entrepreneur. Entrepreneurship is a state of mind. It's a commitment that people make in how they contribute, behave, and work as part of a team. When the stock price fell, the entrepreneurial people at Aspect said, 'Fine. We are just going to keep doing what we need to do.' The company entered into an alliance with Boston Scientific, which gave Aspect some additional funding. The alliance was based on expanding Aspect's technology into the procedural sedation area.

At that time, Aspect also began to show some of the results from its intraoperative awareness trial. The company's revenue began to grow again as Aspect reined in the competition and demonstrated its market leadership. We demonstrated that our product is a better product. It is supported by data, as well as by OEM partnerships. Those partnerships began to kick into high gear and included alliances with GE, Philips, Dräger, Siemens, and multiple other companies. Their products began to enter the market and proved to be successful.

When a company is no longer private, its executives have to think about every dollar they spend and how to get the most out of every penny they put out there. Aspect created a dynamic under which the company's losses narrowed rapidly, its top line began to grow, and its gross margins grew. The market also began to grow, which, combined with all these accelerators, gave the company some very nice top-line and bottom-line growth. In turn, that growth gave the company the opportunity to begin investing in its future by focusing some of its key R&D people on Alzheimer's disease and depression.

Aspect has just finished its seventh consecutive quarter of profitability, which began in the third quarter of 2004. All measures of the company's growth are outstanding—very strong double-digit increases. Is there a particular area that you think is an important element in the company's financial health that does not get much attention?

There are a couple of items. First, our current neuro efforts are covered by a $25 million R&D alliance with Boston Scientific. That means Aspect's bottom line is $25 million stronger over the next five years because the neuro investment is being funded; it is neutral on our profit-and-loss statement. Those efforts give Aspect and its shareholders the opportunity to explore two brand-new billion-dollar markets while maintaining complete focus on the company's core business. The new opportunities also receive complete focus because we have carved out teams that are funded separately. We do not have to tell the teams how to manage their spending. They are operating on their own. They are running with the ball, and their efforts are going to take this platform technology to the next level.

People have not ascribed much value to the neuro opportunity. I understand why, but as the Biomarkers for Rapid Identification of Treatment Efficacy (BRITE) depression trial and other studies begin to bear fruit, more and more people will take that neuro opportunity more seriously.

Over the past six months, our share price has dropped about 21%. Markets expect that a company's growth rate will exponentially accelerate to infinity, but market development is never linear. There are ebbs and flows in the growth rates, and that is what market development is all about. Aspect is committed to continually chipping away at this market to reach the tipping point. A few hedge funds tried to time the tipping point with the ASA advisory, despite the fact that we were very clear it would take time for the ASA advisory to affect our business. It is a complex set of statements. It is a complex document. It is going to take time to disseminate and educate people; therefore, the longer-term value of the advisory is to promote the use of brain monitoring. But it takes time for people to digest that. The company's growth rate is going to ebb and flow as it marches toward that ultimate goal of tipping the market and establishing this technology as a global standard.

Testing Investor Patience

You have described your venture capital investors as getting exhausted. Now that the company is profitable, are your current investors getting impatient and wondering where their dividends are?

I don't think so. We have a stellar group of shareholders. In fact, I can count on one hand the investors that hold 60 to 70% of our stock. It is in the hands of Fidelity Investment, MassMutual Financial, Boston Scientific management, Federated, and T. Rowe Price. This group holds about 65% of the company's stock. If you add another five institutions, it's closer to 70 to 75%. A very small piece of the company is traded by what is often referred to as fast money.

There are people who like to trade stocks to ride the short-term momentum, and those investors are bound to create volatility. Although that is not desirable, there is very little anybody can do about it. But the investors that I highlighted, as well as another five investors, are in this company for the long run. They believe Aspect can tip the market. They believe Aspect has a shot at expanding its treatment to Alzheimer's disease, depression, or both. They believe that Aspect can create a several hundred million-dollar business that is profitable. They believe Aspect can touch tens of millions of patients, have a huge social impact, create enormous financial value, and be a fun and healthy environment for its employees. That is why we are all here, regardless of what the hedge fund does this quarter or next quarter. They are going to do whatever they want to do with the stock. I don't worry too much about it because I have a clear focus on the mission and the vision of the company. Aspect is focused on the value it is creating for patients and the value it is creating for its long-term shareholders. Those shareholders understand that market development is not a linear rocket ship.

How important is it for you to have patient investors?

We are convinced of the long-term value of our company. We always have been—even when our stock was at $2. T. Rowe Price was an investor that rode the stock from $16, down to $2, and up to $40. It is our longest public investor. The firm does not buy and sell stocks on a quarterly basis. It represents the kind of investors that are a part of Aspect. There is the small portion that trades the stock frequently, which creates volatility. Those investors are trying to time the next bump in growth.

I wish I could time that, but I cannot. That is why we give quarterly guidance. I exercised a lot of options in the summer of 2000, when the stock was at $20, which shows you how well I predict the stock price. I was thinking the stock price was not going to be there for too long. Shortly thereafter, the stock was at $2 and I was holding a million-dollar tax bill. I could not even sell my stock to pay the tax bill. I almost went personally bankrupt. You cannot predict this stuff. All you can do is remain focused on your mission and on creating value.

Executives must recognize that valuation is going to ebb and flow, primarily driven by market sentiment. About 80% is driven by the broader market, and a smaller group of investors, about 20%, think relative to the quarterly forecast. You cannot predict that. Executives must focus on creating a healthy, positive, high-integrity, high-values environment because the loyalty of employees and the company's team that does the work on a day-to-day basis is the most important value creator and mission accelerator out there.

You have alluded to a lot of the company's activities in the neurology field. Can you provide a sense of the timing for the development of this field?

Let's take the depression side. The BRITE trial is something our company is very excited about. It is one of the largest, if not the largest, depression device trials being conducted today. We are going to learn a lot from it. Part of it is algorithm development. Part of it is testing the prospective accuracy of the technology. Part of it is identifying the algorithm to achieve the best outcome in order to design a pivotal trial.

We hope by year-end to have interim results that will enable us to offer interim guidance. That means we will provide the color and the directionality of the results, but we will not share actual numbers until our investigators publish them at one of the psychiatric meetings in 2007.

Positive interim data would mean that we have a large enough data set to go to FDA and begin a productive dialogue on how to develop a pivotal trial and ultimately get the product to market. The first milestone for this initiative is positive interim results and positive subsequent results in line with the interim results. That is the first value-creation event.

The second milestone is successful discussions with FDA over how to approach this technology as a product and the development of a pivotal trial program. The third major event is the initiation and completion of the pivotal trials, and the fourth event would be regulatory clearance for a certain set of indications, followed by the introduction of a product. We expect the entire sequence to take anywhere from three to four years. It all depends on how the trials go, what the results are, and the approval process. The timing of all those elements will become clearer as we get deeper into the initiative.

So the IDE might come together as early as the beginning of next year?

The early to middle of next year, with a potential start in the latter part of next year.

Wrangling Reimbursement

In general, how does Aspect deal with issues of reimbursement?

In the United States, reimbursement has never been part of our equation. This technology is not reimbursed by Medicare or private payers, neither on Part A nor on Part B reimbursement. Hospitals can integrate the technology into their cost structures and get paid for it in terms of their average cost over time, but that is not specific to this technology.

In terms of professional reimbursement, anesthesiologists are currently paid a flat fee for monitoring the patient. It is called the monitoring bundle. The anesthesiology reimbursement structure is unique among specialties because it involves a time element beyond the procedure element. It is a complex situation that Aspect will never change. The American Society of Anesthesiologists has attempted to effect change for years, but it is not Aspect's battle to fight.

That highlights the importance of the ASA and AANA practice recommendations. Without any reimbursement, they are still recommending that anesthesiologists consider this technology.

The technology in the United States is sold without reimbursement. The cost per procedure is about $15. The hospital pays it and can build it into its costs, given that the cost savings from more-efficient drug usage—whether it is the anesthetics or the postoperative antiemetics—add up to about $10 per procedure. The net cost to implement this technology is a few dollars per patient, which is a very small price to pay to improve patient safety and comfort. Most hospitals pay the money, which has neither a financially positive nor financially negative effect on the anesthesiologist. They do it because they believe it is the best thing for their patients.

Aspect does have reimbursement coverage in Japan, but I understand that the higher reimbursement rates expected for use of the BIS platform have been discontinued.

That's right. Japan is a unique market. BIS XP, which was cleared in Japan a few months ago, uses two channels of EEG. That used to be significant in Japan's reimbursement system, which paid per channel of vital signs monitored. Hospitals were reimbursed approximately 1000 yen for each channel of vital signs monitored.

That reimbursement rate was not specific to BIS monitoring. If a hospital monitored a single-channel ECG, a single-channel blood pressure, or a single-channel EEG, it received 1000 yen. If the hospital monitored two channels, reimbursement increased to 2400 yen. Aspect applied for two-channel reimbursement and was approved.

However, with the 3.8% cut in the Japanese healthcare budget for the coming fiscal year, the nation eliminated the two-channel code. So, before Aspect had the chance to benefit from the code, it disappeared. Reimbursement is back to 1000 yen per channel. That is a lay description of a much more complex reimbursement structure, but that is how I understand it.

Growing into the Future

Aspect Medical is moving its headquarters. What's your time frame for the move?

We will move some of our manufacturing facilities around July or August. The rest of the company should be in the building around November or December. The move is part of the company's build-out. We're looking to move as much of the company as possible in line with the development that is being done at the facility. The facilities are being almost completely rebuilt from scratch.

Earlier you mentioned that when you first started the company, you thought that after $2 million and two years the company would be purchased. That did not work out exactly the way you thought. But once companies achieve profitability, they tend to become acquisition targets. Do you think large companies are now looking at Aspect as a potential acquisition? Is that a desirable outcome for the company?

As one of our senior executives says, it is better to work for a company that has that rumor and potential surrounding it than a company that nobody desires or even wants to touch. Having said that, if you were to be a fly on the wall in our executive meetings, board meetings, staff meetings, and company employee meetings, you would realize that this company is single-mindedly focused on building a unique medical technology franchise that is going to serve a lot of patients and create a lot of value for shareholders. And it's going to do it while ensuring that its employees are having fun, enjoying it, and benefiting from its success. That is our focus. It's what we do every day.

Aspect's management is not trying to create a take-out candidate. To be desirable is a nice thing. If somebody knocks on the door and makes an offer, we will do the responsible thing. We will evaluate the offer according to what it represents for shareholder value relative to where the company is, where the business is, and where the new opportunities are. We would treat an offer appropriately.

Although I have invested the past 20 years of my life in this company, I am not a single owner. I am not a dictator. Many people who have worked with me would tell you that what makes Aspect unique is the true team spirit at every level—even at the executive and board level. We will make the right decision for our shareholders, not an emotional decision for Nassib Chamoun and a number of executives who have an emotional attachment to the company. That is not easy to say or do, but I can assure you that is how it will happen if an offer arises. But every day our team comes to work focused on building a one-of-a-kind medtech franchise—one that is going to have a leading global position in brain monitoring. We are committed to building a company that is going to make brain monitoring the equivalent of the ECG for tens of millions of patients every year. The technology will truly change patients' well-being and the quality of their lives by allowing clinicians to deliver the best care possible for them.

You have highlighted expansion of your U.S. sales operations, expansion into intensive care units and to procedural sedation sites, and expansion in world markets as three opportunities for company growth. With those goals in mind and the Alzheimer's and depression studies under way, are you confident that Aspect can sustain its growth for a significant length of time?

You bet. Our company currently has a core business with a solid value proposition in the operating room. That proposition includes quality, efficiency, and the safety component related to intraoperative awareness, which hasn't even run its course yet. The ASA advisory is less than a year old, and there is still a lot of work to be done in the United States and globally.

There is also work under way related to long-term outcomes that we did not discuss. There are data that suggest an association between deep anesthesia and mortality within one year after surgery. I stress the term association because the causal link has not been established. However, Aspect is investing heavily in the exploration of whether that causal link does exist. If the link exists, I truly believe that discovery could lead to a global mandate for brain monitoring for every patient undergoing general anesthesia. The only way to customize anesthesia for every patient is to monitor each patient individually. It is the only way to avoid underdosing and overdosing.

Some anesthesiologists say, 'I avoid awareness. I just give a little too much.' That is the approach: give a lot more anesthesia and the patient will probably be okay. That approach may work—and it does work in some cases—but it is still not as good as monitoring combined with good clinical skills. Our company does not suggest that anesthesiologists throw away their clinical skills and substitute monitoring for them. All Aspect's trials leverage clinical skills and superimpose the monitoring on top of them. Customizing care can only be done through good clinical judgment combined with more-accurate monitoring. Who provides the clinical judgment is not the issue. Heart rate, blood pressure, and other vital signs not being correlated with the anesthetic effect—that's the real issue.

We estimate it will take the mortality data two to four years to pan out and bear fruit. Those data could dramatically change Aspect's opportunity and create a global mandate.

Aspect is also making its entry into intensive care units and is selling product into the procedural sedation area. But the company is being primarily opportunistic because all the pushing is happening in the OR. A company cannot push on 10 fronts. It will lose its focus and its ability to tip a market. So that is a piece that is going to grow very nicely for five-plus years.

Also, opportunities in Alzheimer's and depression could potentially begin to contribute to Aspect's revenue in the four- to five-year time frame. I have a growth strategy in mind that presents an opportunity to build a several hundred million- dollar profitable business.

It is all fun for us. I go to work every day knowing that the company will touch tens of millions of patients, knowing that the company is making the jobs of a lot of clinicians better, knowing we are creating shareholder value, knowing we are creating a fun environment for our employees, and knowing our employees are doing well.

That company culture you refer to was recognized recently when Aspect received the 2006 Shingo Prize for Excellence in Manufacturing.

A lot of the companies that win the Shingo Prize are bigger and have been around longer as a force in our space. The fact that Aspect received the award speaks to the kind of organizational discipline that exists in an entrepreneurial company. Organizational discipline in an entrepreneurial company may seem like an oxymoron to most people, who think entrepreneurial companies tend to be free-wheeling and let discipline fall by the wayside. But through a good value system, a focus on innovation, good human resources (HR) practices, solid teamwork, and a highly disciplined organization, Aspect is able to create process and innovation that serve its ability to maintain a lean company, not just a lean manufacturing process. It includes how we handle our internal quality systems and controls and how we handle our internal HR practices.

Aspect also won the Shingo Prize's HR Medallion, which is given to one out of the 10 companies that win the Shingo Prize each year. It recognizes the company with the best human resources practices. Aspect is one of the top companies in its class to work for in the New England area. The HR Medallion recognizes the kind of environment we have created for our employees. I take a lot of pride in that because our employees deserve the credit for Aspect's journey over the last 20 years.

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