Shifting into a Higher Gear 4384

COVER STORY

In the medical device industry, blazing a successful trail into uncharted technological and clinical areas sometimes takes a couple of tries. Such has been the case for Stereotaxis Inc. (St. Louis), a company that started out trying to address clinical needs in the neurology market and has wound up creating a powerful niche in cardiology.

Stereotaxis and its corporate partners have developed innovative technologies that enable physicians to deliver treatment by navigating proprietary catheters, guidewires, and other delivery devices—using computer-controlled, externally applied magnetic fields—through blood vessels and chambers of the heart to targeted sites. To date, the company has sold more than 120 of its systems, and clinicians' use of the system has climbed to more than 10,000 procedures.

But according to Stereotaxis president and CEO Bevil J. Hogg, current uses of the company's system are just the tip of a much-larger iceberg of potential applications. Stereotaxis believes that its system is the platform that will improve the interventional cardiologist's performance of coronary and peripheral interventions, and that it can also serve important roles in cell therapy delivery, mitral valve repair, and other difficult structural heart procedures.

Today, with the number of installed systems increasing steadily and adoption by clinicians growing rapidly, Stereotaxis is continuing its constant march toward profitability—despite the emergence of a formidable competitor in its sector. In this excerpted interview with MX editor-in-chief Steve Halasey, Hogg discusses how Stereotaxis's relationships with key thought leaders in electrophysiology and interventional cardiology have helped to shape the company's system, as well as where the company is directing its next efforts on the trail to success.

MX: The clinical need for guiding ablation catheters isn't hard to understand. But how did the concept first come to the attention of Stereotaxis?

Bevil J. Hogg: The technology developed as an extension of work initially done in neurosurgery. Stereotaxis was founded in 1988 by neurosurgeons out of the University of Virginia. These neurosurgeons conceptualized a strategy for using remote magnetic fields to navigate and propel an implant in the brain. That concept was the genesis for the company.

As it turned out, developing the concept was easier than executing it. When I joined the company in 1997, the neuro application struck me as one that was delivering a complex solution to a relatively small market opportunity. After all, even today, 10 years later, there are very few deliverables—be it drugs, stem cells, or other agents—that have been approved for use in the brain. So Stereotaxis was initially focused on a very sophisticated and expensive delivery mechanism that didn't have much to deliver. However, there were lots of applications that the technology could deliver in the cardiac arena, and it was a natural extension to apply it to catheters and guidewires, such as ablation catheters being used for electrophysiology to treat electrical disorders or arrhythmias, and guidewires being used to deliver stents for angioplasty procedures.

How did the founders of the company—the neurosurgeons out of the University of Virginia—go about building a company out of their idea?

Because they were clinicians, they didn't initially think of it as building a company, but more like a grand science project. The founders included three individuals: Matthew Howard, MD, who is currently chair of neurosurgery at the University of Iowa; Sean Grady, MD, who is currently chair of neurosurgery at the University of Pennsylvania; and Rogers C. Ritter, PhD, who is a professor emeritus of gravitational physics at the University of Virginia.

Howard and Grady approached Ritter with the idea of using powerful magnetic fields to propel an implant in the brain. That's how the development of the technology started. But it was only when they teamed up with Sanderling Ventures—a venture capital firm interested in early-stage investments-that the concept really got off the ground. A lot of venture capitalists are more interested in later-stage ideas. The Stereotaxis founders had a very early-stage concept, but the managing partners at Sanderling Ventures—Robert McNeil, PhD, and Fred Middleton—were interested. They provided the company with some seed funding in the very early 1990s.

At that point, the company migrated to St. Louis through a connection with Ralph Dacey, MD, who was chair of neurosurgery at Washington University Medical School's Barnes Hospital. He arranged for the first installation of the Stereotaxis system at Washington University in the early 1990s.

When I came into the picture in 1997, the company had a handful of scientists, a great idea, and a wonderful platform technology that was able to deliver devices through complex pathways with extreme accuracy. At that point, the company didn't have much in the way of funding, but there were some interested venture capital firms, such as Gateway Ventures (St. Louis), Alafi Capital (Berkeley, CA), Ampersand Ventures (Wellesley, MA), Advent International (Boston), and CID Equity Partners (Indianapolis).

Technology Development

When you joined the company, had the company already registered a lot of its intellectual property or was it still in the realm of trade secrets?

The company had registered a tremendous amount of intellectual property. But most of it was in the neuro arena. So as the technology evolved and extended into the cardiac arena, new intellectual property was written under my direction. Since then, the company has generated more than 100 patent applications, with 40 or more patents granted.

It must have been difficult to convince the company to go after cardiology applications rather than neurology applications. How did you get people to accept that shift?

I was fairly familiar with how venture capitalists think, and I've never met one who wasn't interested in expanding the scope of their technology investment to encompass new areas. So I simply told them that we were dealing with a platform technology and that there was a lot of potential in cardiology. We planned to pursue cardiology in parallel with neuro applications. We did that for a year or two, but pretty soon it became obvious that we had a very powerful engine on the cardiology side. Those applications were beginning to fire on several cylinders, and it became clear that the neuro applications—although very interesting from a scientific standpoint—didn't carry much commercial weight.

The evolution explains the company name, Stereotaxis—that term was originally a neurology term.

Yes. We wanted to change it, but there was so much equity in it by then that it just wasn't worth the trouble.

It doesn't seem that the system Stereotaxis was developing would require a lot of technological modification in order to make it work in cardiac applications. But there must still have been a considerable grinding of gears when the company refocused its efforts to create a cardiology system instead of a neurology system.

There was a huge amount of gear grinding. The solution we bring to interventional medicine uses existing elements of a cath lab, which includes an x-ray system, a table and monitors, and various diagnostic devices. Integrating those elements with our magnets required partnerships with Siemens Medical Solutions (Malvern, PA) and, later, Philips Medical Systems (Andover, MA). Those two companies control about two-thirds of the cath lab x-ray systems in the world.

Siemens made an investment in our company, but we were still faced with the challenge of developing a range of devices suitable for cardiac applications. These included guidewires and catheters. Ablation catheters for electrophysiology are very complex because they have a lot of intellectual property wrapped around them. They face a challenging regulatory pathway because the devices ablate tissue in the heart. So rather than tackle that challenge on our own, Stereotaxis partnered with Biosense Webster Inc. (Diamond Bar, CA), a Johnson & Johnson company, which also invested in Stereotaxis.

So we leveraged our partnerships with Philips, Siemens, and J&J to our mutual advantage. But on our side, we had to develop different magnet systems, different software, and different user interfaces, and somehow get all of these disparate elements of the lab to deliver an integrated solution.

What additional technological developments are under way or are already being contemplated?

Interventional medicine can be divided into plumbing and electricity. Plumbing problems are caused by disease in the veins and arteries and typically require the delivery of stents, which are used to unblock those blood vessels. Electrical problems are caused by irregular electrical currents in the heart, and fall under the auspices of electrophysiology.

We have focused most of our efforts and energies on developing solutions for electrophysiology and positioning and delivering catheters safely, efficiently, and effectively. In recent years, our work has started to focus on the delivery of guidewires to solve plumbing problems as well. A guidewire is a very thin wire that can be navigated through the blood vessel either manually or using our system. In difficult, complex anatomy, it can become problematic to deliver these guidewires manually, and this is where we believe we can bring real value to the procedure.

Stents and pacemaker leads are placed over the guidewires, making the guidewire essentially a delivery vehicle. Stereotaxis has spent a lot of energy, money, time, and talent on expanding its platform to include guidewire delivery. In October, at the annual Transcatheter Cardiovascular Therapeutics (TCT) conference in Washington, DC, we demonstrated some of our guidewire delivery solutions for patients with complex vascular problems. These include solutions for diabetics with blocked vessels in the lower extremities as well as people whose coronary arteries are chronically and totally blocked, making them difficult to navigate.

Developing the guidewire solutions has required the development of new tools, new software, and new imaging capabilities. It's a very broad extension of our platform; there are millions of these procedures done annually.

Are you using your previous model of partnering with other companies as you expand into some of these new areas?

We're very interested in doing so. There's a difference between the two situations, though. For example, in our J&J electrophysiology partnership, J&J builds catheters, they are used in our system, and we get paid a royalty for the business opportunity. But in interventional cardiology, which typically comprises opening and scaffolding blood vessels, the guidewire is a universal delivery vehicle. Most companies' products can be delivered over most guide-wires. So our system already complements guidewire delivery without the need for adaptation based on a specific company's technology. Our guidewires can deliver stents that are sold by J&J, Boston Scientific, Medtronic, and others.

In the peripheral vasculature, we believe that our wire navigational techniques and technology would be complementary to the technology developed by companies such as FoxHollow Technologies Inc.—which was recently acquired by ev3 Inc. (Plymouth, MN)—as well as Spectranetics (Colorado Springs, CO) and others. At the end of the day, we will always get a better result if we partner with somebody with expertise in our targeted clinical arena of interest.

Money Matters

When Stereotaxis switched its focus from neuro to cardiology, were you worried about endangering the company's relationship with existing investors?

I think we're in a position that's fairly unique among medical device companies with venture backing because the vast majority of our original venture capital investors are still invested in the company. The fact that they've maintained their investments over an almost 15-year period says something about their level of confidence in the company and its technology. I think it's almost unprecedented.

How has Stereotaxis prioritized the need to invest in R&D, and sales and marketing? How much does the company currently spend in these areas?

As of the last time we reported earnings, we were spending somewhere around $25 million a year in R&D. I would think that the $25 million figure would be pretty close to our peak in R&D spending. And last year that represented close to 100% of our revenues. This year, R&D spending has been lower, and will continue to be progressively lower in the years to come as we strive for profitability.

Between sales and marketing and R&D, how do you handle the strain of figuring out where to invest the company's funds?

I learned a healthy lesson early in my career. I cofounded Trek Bicycle Corp. when I was young and naïve. But fortunately, I had good backers. I was in my late 20s, and at that point, I put a lot of weight and value on being the technology leader in the industry. The advice that I got at that time—which was excellent advice—was that there's a time to slow down on the technology and put money into sales and marketing. The lesson was lost on me at that time. I didn't listen very closely and, in fact, I left Trek and ended up founding a bicycle company called Kestrel, which was much more sophisticated from a technology standpoint; it was one of the first companies in the world to manufacture carbon fiber bicycle frames.

Trek went on without me. Its revenues grew to probably close to half a billion annually, and the company did this mainly through investments in sales and marketing. Witnessing such success from the outside made me realize how important it is to make that transition from technology to sales and marketing.

It was a good early life lesson that taught me to not get too caught up in the technology. Executives have to avoid falling too deeply in love with the product and remember that customers don't automatically line up to buy things. You have to go out, find customers, and convince them of the value you can bring to them. That requires competency in sales, distribution, and marketing.

That's a lot of background for a simple answer. In short, we are consciously gearing up our sales and marketing efforts.

Stereotaxis went public in 2004, and its opening share price was about $8. How did the market receive the IPO and how has the company stock performed since then?

As of mid-October, the company's stock price was close to $14. So it's up, not down. But it was a difficult IPO. The company faced a very unreceptive market at a very unreceptive time of the year. We went out in August, and the IPO window was not widely open at that time of year. So we had a difficult struggle to get the IPO done.

In retrospect, the valuation was fair. I don't think we could have done better given the fact that no one in the marketplace knew who we were. Nobody knew what robotic interventional navigation was. Intuitive Surgical (Sunnyvale, CA ), another player in robotic-assisted minimally invasive surgery, hadn't made its big move in the market yet. So investors at that time didn't have stars in their eyes when they looked at the market opportunity for robotics.

Thus, Stereotaxis faced a lot of skepticism. And my background in bicycles and, later, wheelchairs was hardly one to make me a celebrity CEO on the IPO circuit. But at the end of the day we did successfully execute the offering. And here we are today with a share price that is significantly above the IPO price. And hopefully it has more room to grow.

Although Stereotaxis has been around for 17 years, the company still hasn't made a profit. But things seem to be changing. As sales and adoption ramp up, do you expect to see not only a crossing into profitability but also a corresponding boost in your share price?

Our share price is determined by a lot of factors that are not just about our bottom line. There are psychological factors at play, and we have competition in the form of Hansen Medical (Mountain View, CA), whose CEO was also involved in the founding of Intuitive Surgical.

In some ways, I think that competitive hyperbole has had a dampening effect on our share price that is completely unwarranted by our performance or by our technology. But that being said, we're from Missouri, which is the Show-Me State. So we've focused on delivering strong financial performance, and we will continue to do so. We recognize that our company does have to be profitable. Profitability is the only true way to value a company in any space. We haven't made a specific forecast as to when we expect to become profitable, but we're certainly heading in that direction. And we're mindful of the steps we need to take to achieve profitability and of the inherent lumpiness in our sales cycle.

Clinical Adoption

What role have healthcare professionals played in the development and adoption of Stereotaxis's products?

The most important group of stakeholders that Stereotaxis deals with is clinicians. They are the backbone of our company. We have multiple scientific advisory boards. We have identified key opinion leaders and thought leaders in the electrophysiology world, and we're working with them intensively to develop new concepts, to pursue new evidence in research, and to improve our techniques, processes, and products.

We're not only focused on medical or scientific research, but also on economic research. After all, part of our value proposition is economic. The cost-effectiveness of the Stereotaxis system is something that we're looking into with help from clinicians. We're evaluating the length of the procedure, the number of staff required, the number of disposables used, and the cost of those disposables.

How long will it take for the company to begin penetrating all of the interventional medicine markets in which it has an interest?

Beyond vascular, there are a host of other potential applications, which could include pulmonary or gastro-intestinal activities. But the vascular arena itself is very large. Not just cardiovascular, but peripheral and neurovascular. There is enough business there to keep several companies working for a very long time.

Stereotaxis has one key competitor in the market, Hansen Medical, which went public last November at about $12 and is now trading at more than $30. But I gather from your last comment that you don't feel particularly threatened by its emergence in your key field.

Given the size of the markets that are out there, there's room for more than one player in this market. But we do not see much clinical activity around Hansen. And it's what the clinicians say that matters most. We believe we have the superior technology, and we're very close to the key thought leaders in the field. So long as we are the leader in the clinic and in the hearts and minds of the clinicians, we're not concerned about Hansen.

Growing into the Future

As an emerging company, how has Stereotaxis benefited from its membership in industry association AdvaMed?

We look to the association to provide rules for clinical conduct and clinical behavior. And we try to emulate the best practices that are disseminated by or through AdvaMed. That's probably the principal benefit our company receives from its membership. It's important to be able to look at a group of other companies in the industry to compare our best practices and be certain we are abreast of the latest developments across the industry.

Are there particular areas related to the medical device industry—for instance, IP management, regulatory affairs, reimbursement, or international policy—that you find especially challenging for small medical device companies?

Regulatory affairs are no more challenging for us than they are for big companies. Stereotaxis has a large regulatory department, and it's well staffed and competently run. And frankly, we have found FDA to be tremendously accommodating. Obviously, they have a job to do, but they seem to do it well. We don't believe that we have been discriminated against because of our size.

Where size matters—apart from the obvious advantages of having more cash available—is in trying to develop a global footprint. As a small company, it's hard to envision providing technical support and service to a Stereotaxis system in Russia, for example. So in order to satisfy our customers in countries like Russia, Saudi Arabia, and Turkey, we have to partner with companies like Siemens and rely on their worldwide distribution, sales, technical service, and other capabilities. Of course, gaining access to those capabilities costs money, which puts smaller companies at a disadvantage since we'd be challenged to perform those functions ourselves.

How important is it for Stereotaxis to be able to maintain its status as an independent company? What factors would influence the company to consider selling to a larger company?

That's a question to be answered by all of our shareholders, or at least a majority of them. Stereotaxis has a lot of potential to grow its business independently, and it has the potential to grow its share price independently. There's a lot for us to accomplish, including achievement of profitability.

A company can create a lot of value in a fairly short amount of time compared with the tremendously long time that it can take to build a technology. Stereotaxis could be acquired like any other public company, and if it is, we hope it would attract a premium price. But an acquisition is not in our game plan for the near future, and we would like to have an opportunity to go about the business of creating significant value before that would occur.

What do you consider to be the most important factors that will contribute to the advancement and success of Stereotaxis and its technology?

Continued clinical success is first and foremost. Our principal stakeholders, the clinicians, have to be satisfied with what we're giving them. We have to be attuned to what they want. We can't listen to our own wishful thinking-we have to hear what they're really telling us; that is an essential ingredient for success. If we remember who our customers are and we listen to them-and do our utmost to respond to their needs-I believe we'll be very successful.

Copyright ©2007 MX