The MX Q&A: John Funkhouser, nContact

“Dealing with disruptive technology is a lot different than sort of a ‘me-too’ event or someone that’s taking just a step forward,” Funkhouser says. “ We’re trying to take a leap forward.”
 

The leap involves combining the best techniques of electrophysiology and cardiovascular surgery to further enable the development of nContact’s closed-chest AF treatment system. Hence, the decision to drop “surgical” from the company name, Funkhouser notes. Founders Jim Whayne and Sid Fleischman set out to tackle the twin technical issues of creating visible linear lesions and ablating on the posterior of the atrium with direct visibility. The goal is to develop truly minimally invasive treatment for atrial fibrillation, which affects more than 5.6 million patients in the United States alone, nContact claims. That number will grow even larger as the population ages.
 

The company is conducting three U.S. clinical trials. In May 2010 nContact enrolled its first patient in IDE trials for evaluating a fully closed-chest procedure that combines EP catheter and surgery using its Numeris-AF Guided Coagulation System and Visitrax device. The procedure takes the two physicians three hours in the EP lab, according to Funkhouser.

In November 2010 nContact received $16 million in a Series D round of equity financing. In addition, the company was awarded $244,479 in federal grant funds from the Qualifying Therapeutic Discovery, a program that was established as part of the Patient Protection and Affordable Care Act. Funkhouser believes nContact’s offerings would be effective regardless of whether healthcare reform had gone forward or not.

An entrepreneur with more than 20 years of experience under his belt, Funkhouser previously served as president and CEO of two VC-based medtech firms, Pharmanetics and Coeur Laboratories. Before that, he was a general partner of Hillcrest Group, a merchant bank where he was a lead investor and board member for venture-backed companies. He received an MBA from Colgate Darden Graduate School at the University of Virginia and a BA from Princeton.

In addition to sharing his thoughts with MX on dealing with disruptive technology, Funkhouser discusses the company’s name change, the evolution of its approach, clinical trials, and the investment concerns of VCs.

MX: Are you satisfied with the business and technological progress nContact has made since it was launched in 2005?
John Funkhouser: Oh, yeah, I think that we have made dramatic improvements not only to the technology, which I think fundamentally has remained the same, but we’ve also been able to evolve the access that allows us to ablate on the heart.

At this point we’ve gone from sternotomies to thoracotomies to port access to what we call “SUBTLE” access for subthoracic total endoscopic, which is really a midline incision. And now we’re moving into percutaneous needle sticks. So virtually any way you want to go in the heart to make ablations, we can do it.

During this progress was there any one particular part of this path that was more difficult than the others?

The real critical issue for us was to get cardiologists to refer patients to surgical ablation, primarily because it’s an older population and traditional surgical approaches are very invasive.
 
When we started, our whole goal was to be able to create epicardial ablation lines through a closed chest approach on a beating heart. The big advancement for us was this subthoracic total endoscopic approach, because that allowed us to get away from traditional surgical approaches. What surgical leadership is calling minimally invasive in the surgical world are really thoracotomies, and that’s not minimally invasive. And then the industry moved toward using ports, and that’s not truly minimally invasive either  because you have to deflate the lung, cut through the pericardium, and then dissect through the heart to open up the various channels to be able to work.
 
What we can do is access any part of the heart through a closed-chest approach, so we don’t open the chest, have any lung deflations, or spread the ribs. What is really cool is that we come in through the diaphragm from the patient’s abdomen, make a little hole through the pericardium, and slide a cannula into that space. We then can roll the cannula around so that we get direct visibility of the entire posterior of the atrium to see exactly how to position [the device] on the heart to create the most important ablation lines. That was a big breakthrough.
 
It appears that you took the word “surgical” out of the name because the company believes it’s on the right track. I assume that you’re making progress toward solving the technical issues that founders Jim Whayne and Sid Fleischmann identified when they started the company. Is that correct?

Yes, we believe the company is on the right track. To give you a little flavor, there are two major aspects to this: ablation technology and access with visibility. First we needed to be able to create complete linear lesions that can be placed on the heart where cardiologists want them placed. We started with a good device design: the integration of suction, perfusion and energy. This gave us the ability [to know] that wherever we put the device on a beating heart it was going to stay in place, and because it stays there you’ve got really good, consistent tissue contact. Hence the name “nContact.” [When] you’ve got good contact with the heart tissue and you deliver a consistent energy, you can get complete linear lesions lines.
 
So the technology is what we started with. But we needed to evolve the access to understand how to get to the posterior of the heart.  How in the world are we going to be able to see and get good visibility? It was a process of starting with sternotomies, moving to thoracotomies, then to ports and then finally to SUBTLE access. All of those things were bases that had to be touched, and we gained great experience in order to continually evolve access.
 
On the business side of things what risks does a company face when it changes it name? Your case is pretty straightforward.

I think that your name is to a certain extent your branding, and it’s what people identify with. In the early stages our technology was strictly used by surgeons. I think that when we started out there in 2005, surgeons and EPs worked in two silos: There were those that worked with catheters and those that worked with surgical products. And the two silos never really talked very much. One of the things that we recognized early on is that if we were going to be able to make a significant contribution to ablation techniques, we were going to have to integrate the best techniques and tools of both surgeons and EPs.
 
On the one hand, surgeons maybe get a little better single-procedure result, but it was highly invasive. And then on the other side, you had catheters that had relatively poor efficacy, and they were having a number of re-dos to improve efficacy to the surgical level, or about 70%. So our thought process was to say, hey, what we need to do is combine the best of both worlds, so that you get the type of ablation outcomes that the physicians have been demanding. Now we are combining the techniques of both disciplines and believe it will potentially improve results.
 
So the name change was just natural because it’s not a surgical or an EP company. It’s both. We didn’t want to be identified with one or the other; we wanted to be identified as the company that hopefully provides the device that integrates both disciplines and brings this all together.
 
The “convergent” aspect of things.
That’s right. That’s why we called it “convergent.”
 
I want to touch on the new project grant because it relates to the ongoing debate over the direction of healthcare reform. I have asked this question of others in your position. Your company has benefited in some small way from the legislation. Do you see healthcare reform as beneficial for your company or for the device industry in general?

Well, that’s a loaded question. It really depends where you are in all this. It’s also very confused right now in terms of what it all means.
 
That’s a big part of my question—that confusion. Is it tough for device manufacturers because of the uncertainty surrounding the issue?

The uncertainty is probably the thing that is hurting the industry the most. But I think what we’re doing is transformative. I think what we’re doing is acting to integrate these different disciplines and helping to enable the entire EP platform. So I think that that’s a good story in any type of environment. Anytime a company can act as a catalyst to improve care, it always has a place.
 
The big push is for improvements in outcomes, cost-cutting, and similar measures.

I just think that things that can enable existing technologies and complements them [so that they can be used] better and [lead to] better results, that’s what we’re all trying to do. Regardless of whether we have reform or not. It’s rare that you get the opportunity to do that, and frankly if EPs didn’t already have all the mapping and the navigation and the catheter diagnostics, we would not be success because creating cardiac lesions is not enough. But the combination of technologies is where the “win” is.
 
Speaking of treatment, nContact has three clinical trials going on now. The first one involves an IDE trial where the first patient was brought in for a closed-chest procedure trial in May 2010. Two of the three trials are for closed-chest procedures. What’s the status of the clinical trials, and what challenges are you facing with them?

The first one is a concomitant approach, and that is when surgeons treat atrial fibrillation, but generally it’s in addition to another surgery, generally a valve or a “cabbage” [coronary artery bypass graft] procedure. That was our first trial, and that’s a pivotal one. The other two are for looking at our closed-chest procedures. The reason there are two is that one of them is for paroxysmal patients and the other is for longstanding persistent patients. They are 25-patient feasibility studies, and the concept is to take those studies and work with FDA to come up with a pivotal [study]. We hope these trials will be completed this year and then we hope to start negotiating with FDA to get a pivotal up and going in the following year for our closed-chest approach.
 
As far as financing goes, nContact raised $16 million last November, and you’ve received total investments of more than $42 million since the company was founded. How would you characterize the level of investment support for your company at this point?

One of the things it has allowed us to do [is] to evolve what we hope will be truly transformative technology, and I think it has given us the ability to prove it and begin commercialization of the approach. From a technology aspect we have evolved as far as we can. We are continuing to evolve access and that is allowing us to look at new opportunities such as ventricular tachycardia, or the VT market. This is an exciting opportunity.
 
When I look at this [investment issue], the question is, “is it enough?” It is probably enough for moderate growth. At some point if we continue to demonstrate, and put on more sites—and  certainly name sites, or larger institutions, so to speak—I think there’s going to come a time when there’s going to be a real opportunity to expand.
 
At least four of the firms that have invested in nContact are based in the South. Are there regional differences in the financing outlooks that are taken by venture capital firms in your location compared with those everyone’s most familiar with in, say, Silicon Valley or the Northeast?

In an early-stage company—and you’ve got to remember we started with just the drawing on the napkin like a lot of companies—so when you’re starting from a raw startup, most venture capital firms would like to invest close to where they are located. They feel like the companies need to be nurtured, and they need to be watched, and it’s all about milestones and whether you’re making progress. And sometimes that’s not easy to determine unless you’re familiar with what’s going on.
 
You can be face to face that much easier, right?
Right. And I think one of the reasons that you see Silicon Valley and you see Boston is because there are a lot of startups in those areas coming out of the educational institutions and then of course, once that happens, it breeds itself.
 
You’re in North Carolina.
Yes. In North Carolina it’s a little more difficult…but the venture community has been very, very supportive. As you get larger you do have the opportunity to attract other med device specialty venture funds. I think in our case, because we’re one of the last players in this market, many of those VC funds have already placed their bets in the marketplace. So they’re “conflicted out” of second investments into the space.
 
The other side, too, has been that over the last two years it’s just been a very difficult market for venture capital anyway. I think that we’re getting to the point where we’re damned attractive anywhere. (Laughs.)
 
Well, you know, you’ve got to have that belief and that confidence, obviously. I have another off-the-wall question perhaps, and it has to do with conferences. Several are mentioned on contact’s Web site. What role do the conferences play in helping to develop a company such as yours?

We look at those in a two-fold way. One, it helps build our presence. Obviously, most of the thought-leaders are in those meetings, which attract an awful lot of the doctors. It’s a three-day opportunity to show physicians what you’re doing and get some feedback from them, and potentially get some sales leads.
 
The second aspect is to present our latest data from the podium. As we perform trials, people have experience with our technology, and they’re going to talk about their experiences. Ultimately, our goal is to be the leader in the industry and be the best at what we do. Our marketing has always been peer-to-peer. We don’t have an AF indication even though we have AF trials. So we’re dependent on one physician telling the next physician that, “Hey, you need to talk to these guys, they can do the complete epicardial lesions.” So [conferences are] very important for us.
 
Finally, on a personal level you were an executive with Pharmanetics and Coeur Laboratories. What did you take from that experience that has helped you as head of nContact?

The Pharmanetics experience was similar in that we were providing cutting-edge technology. In a real sense the technology was equally as transformative in its space. We were doing point-of-care diagnostics in the operating room and with a drop of blood you could pretty much dose an anticoagulant, telling the physician how much drug to give. That experience taught me a lot about dealing with disruptive technology. It is a lot different than a “me-too” event, or someone that’s taking a single step forward. We’re trying to take a leap forward. It’s a mindset to commercialize disruptive technology, it’s how you train, it’s how you talk about your company, it’s how you explain the advantages of your company.
 
I think that the Pharmanetics experience actually prepared me pretty well for managing nContact.