Access to Innovation 4458

COVER STORY

For medical device executives, making the right moves to support company growth involves constant vigilance. Ever watchful for market opportunities and the means to conquer them, savvy leaders can maneuver their companies along the path to success—even when the route is anything but direct.

That kind of watchful activity is paying off for AngioDynamics Inc. (Queensbury, NY), a provider of minimally invasive medical devices used by interventional radiologists, surgeons, and other physicians for the diagnosis and treatment of cancer and peripheral vascular disease.

AngioDynamics entered the growing interventional oncology market in January 2007, through its $220 million acquisition of RITA Medical Systems Inc. (Fremont, CA). Through the acquisition, AngioDynamics gained access to a highly complementary line of vascular access products. But perhaps more importantly, the company also acquired the resources and market position needed to fuel the development and ultimate launch of its next-generation ablation technology: irreversible electroporation.

In recent years, AngioDynamics has invested heavily in developing the robust research capabilities that will be required to capitalize on its jam-packed pipeline of innovation. As AngioDynamics president and CEO Eamonn P. Hobbs sees it, the company is well on its way to becoming a medtech player known for its home-run plays—not just the occasional base hit.

Hobbs is a recognized industry leader as well as a company leader. This June, he will assume the role of chairman of the Medical Device Manufacturers Association (MDMA; Washington, DC). In this excerpted interview with MX editor-in-chief Steve Halasey, he discusses AngioDynamics' evolving position in the medtech industry and its latest steps toward becoming a focused, data-driven device powerhouse.

MX: You were a cofounder of AngioDynamics. How did that come about and how did the company develop from its earliest days?

Eamonn P. Hobbs: I cofounded AngioDynamics with the cofounders of the public company E-Z-EM Inc. (Lake Success, NY), Howard Stern and Phillip Meyers, MD. I had known them both for quite a few years. In fact, they had tried to purchase my first medical start-up back in the early 1980s. So I knew they had an ample amount of cash and were looking for ways of putting it to work for them.

In January 1988, I approached Howard and Phil with the business plan for AngioDynamics. When I approached them, I positioned the business plan in a way that E-Z-EM would be the bank that would finance AngioDynamics as a start-up. That's how we rolled out the company. We leveraged the E-Z-EM organizational structure in developing AngioDynamics as an entrepreneurial venture. The initial business plan culminated in 2004 as a carve-out initial public offering (IPO) and tax-free spin-off.

AngioDynamics has grown considerably since its spin-off. One nice thing about becoming larger and having increased revenues is that the company can invest its profits in a variety of useful ways. At the beginning of 2007, AngioDynamics acquired RITA Medical Systems (Fremont, CA). What was it that made RITA an attractive acquisition target?

First off, the company was an excellent tactical fit. The RITA business we acquired was the summation of the historical RITA business plus the company's relatively recent acquisition of Horizon Medical Products, which developed vascular access products. Prior to our acquisition of RITA, the majority of RITA's sales were from vascular access products or legacy Horizon products, primarily in vascular access ports.

We determined that the company's portfolio in this segment was a perfect match with our vascular access business, which at the time was dominated by the sister product of access ports, which are peripherally inserted central catheters. We determined that if we put RITA's vascular access products into the bags of our AngioDynamics sales force, we would be able to drive those product sales up to at least our corporate average growth rate—and do so in a very profitable way. The acquisition also enabled us to eliminate duplicate public company costs as well as duplicate marketing expenses because both companies participate in the same trade shows.

Furthermore, the RITA sales force was doing an extremely good job selling the company's oncology products. The merger enabled us to free them from the burden of also having to sell the vascular access products. We put those products in the bags of the AngioDynamics sales force so we could further enhance the RITA team's ability to drive oncology product sales.

There were also significant strategic benefits. AngioDynamics' pipeline was crammed full of tremendous opportunities in the interventional oncology area, in which RITA was a market leader. For example, we feel our irreversible electroporation technology will prove to be the next generation of ablation technology. But AngioDynamics does not have a long history of developing oncology-focused ablation products. So our R&D team didn't have a history in that field, and AngioDynamics didn't have a historical track record of supplying oncology products to our customer base—but RITA did. Virtually the same customers buy AngioDynamics' and RITA's products.

RITA has demonstrated that its radio-frequency ablation products are the best-performing products in the marketplace. By handing our irreversible electroporation technology off to RITA's R&D team, we knew we would be lowering our risk profile for our new product rollout down the road.

Currently, how do you break out the segments in which AngioDynamics is operating, and what portion of the company's business is represented by each of them?

We break our business into the interventional products group and the oncology products group. Oncology represents approximately one-third of our business, with the interventional products group accounting for the other two-thirds.

Do you see that breakout changing in the future?

I do. For a number of reasons, I see our fastest-growing group being the oncology products group. For one, the interventional oncology marketplace is growing faster than the peripheral vascular marketplace. We are still just scratching the surface. In addition, we have some blockbuster products in our pipeline that are at least initially going to be focused on interventional oncology. They have peripheral vascular and cardiovascular applications as well, but those will come out after the interventional oncology applications are already well under way.

Growing Forward

AngioDynamics' organic R&D is already creating a very full pipeline of new products. Do you think that acquisitions will continue to be a part of the company's future growth, or will the company rely mostly on organic growth?

We are definitely looking to supplement our strong organic growth with tuck-in product acquisitions. By tuck-in, I mean acquisitions that enable us to take a product that's already on the market—or very close to being on the market—and put it into our sales forces' bags with little drama and quickly generate a strong revenue stream.

Having said that, we're pretty selective. We have a very strong pipeline, so any acquisitions have to make sense in that context. We're interested in growth on both the top line and the bottom line. We have a phenomenal sales franchise and customer base. Our goal is to leverage that sales franchise by adding more products to its bag.

Beyond their initial indications for use, some of the technologies AngioDynamics is developing have other potential applications in cardiology and peripheral vascular. When you're already committed to developing a product for one application, how long does it take to develop another one? How much interest does the company have in taking on those additional applications?

We're very interested in moving into those applications. The time needed to move to a full commercial rollout with supporting data and compelling reimbursement ranges from three years to five years. It's not that we wouldn't market the application as a work in progress—but data drive the medtech industry. And the generation of data takes time. And certainly reimbursement is driven by data. So there may be a case in which we can roll a product out and start generating revenues in as little as 18 months. But, again, to get the technology to the point at which it's fully baked with a compelling case for reimbursement can take three to five years.

What kind of clinical research activities did AngioDynamics inherit with its purchase of RITA Medical Systems?

We inherited quite a bit of clinical data generation capability from RITA. And again, those capabilities were well matched with AngioDynamics' needs in that our pipeline is full of next-generation ablation technologies that are going to be data driven.

To use a baseball analogy, we knew that prior to the RITA acquisition, AngioDynamics was more of a base-hit company that didn't require a tremendous amount of clinical data in order to market its products. RITA was on the other end of the spectrum. The company was very dependent on clinical data generation. These days, following the acquisition, AngioDynamics is much more of a data-driven company than in the past. It's now more of a home-run company than a base-hit company.

That transition has been driven by a number of factors. For one, our pipeline just happens to be full of potential home runs, which require a lot of data generation. And two, we're up against the law of big numbers now. When we were a $50 million company, growing the top line by 20% required us to come up with $10 million in incremental revenue. With three or four base hits, we could pull that off pretty handily. But AngioDynamics has grown. Next year, we'll need $33 million in incremental revenue to grow the top line 20%. And we're not going to be able to do that with base hits alone, that's for sure.

Protecting IP

AngioDynamics has a considerable portfolio of intellectual properties. Over the years, how has the company filed its patents, and what has it kept in-house? How well defended do you consider your products and technologies?

We always strive to have proprietary product positioning, and intellectual property is one of the cornerstones in doing that. AngioDynamics has been very successful in building a tremendous portfolio of intellectual property in terms of patents, trademarks, and know-how. In the United States, we have about 140 patents, with about 60 pending. If you add in our foreign patents and all pending filings, it adds up to about 400 patents.

On the U.S. patent side in particular, we've been very aggressive in pursuing solid patent protection and defending it. And I'm happy to say we've been successful in defending our IP without having to resort to litigation.

AngioDynamics hasn't launched litigation, but it has been dragged into quite a bit of litigation. In one case, such litigation probably contributed to the delisting and bankruptcy of a competitor whose assets Angio-Dynamics is looking to acquire. Such litigation can become a major interruption and strain on a company. How did AngioDynamics fall afoul of so much litigation, and what has been the outcome?

The two areas of litigation where we've been on the receiving end involved Diomed and VNUS. Diomed did not survive its own litigation, and AngioDynamics is pursuing a purchase of the majority of the bankrupt company's assets. The VNUS litigation is currently scheduled for trial in June. For both of those cases, we've positioned ourselves as preferring to settle rather than to litigate.

The moral of the Diomed story, which should educate all of us in business very effectively, is that litigation doesn't pay anyone except for the attorneys. The company received a positive jury verdict in one trial, and was awarded a total of $12 million—subject to appeal. But the company invested approximately $13 million in lawyers' fees in order to get that $12 million. And the reason that Diomed had to invest all that money into their lawyers' pockets was that the company wouldn't settle in a reasonable way.

How big of a distraction has litigation been to AngioDynamics? Has it forced the company to do anything in particular about the way it develops its product pipeline or business strategies?

Litigation is extraordinarily distracting. So yes, the knowledge of how distracting litigation can be has definitely influenced how we develop products. We do everything we can to ensure that we put ourselves in an intellectual property position where we have a right to practice. But also, we would rather pursue licenses or cross-licenses than potentially be drawn into litigation.

Money Matters

AngioDynamics' share price took a hit recently, after the company lowered its financial guidance for the full fiscal year of 2008 to a range of $165 million to $167 million from a range of $170 million to $175 million. What were the market conditions that caused such a reduction? How much of that is medtech specific and how much of it is related to general market conditions?

We did lower our guidance slightly—4% on the year. Frankly, we were shocked by the severity of the market reaction. Even with the lower guidance, we still have a thriving business with a healthy growth rate. And we have tremendous prospects as we begin to roll out some of the revolutionary products in our pipeline.

I think the overreaction of the market has to be considered in the context of an extremely bearish public market right now. The current market is intolerant of even the slightest miss. As with many events in a public market, the hit our stock took was just a transient speed bump. There are smart people in the stock market, and they figure it out. Our stock price has already made a considerable rebound.

Do you expect that the pricing pressure on AngioDynamics' legacy products will be reduced as the company's pipeline moves along toward the introduction of new products?

I do. I don't think it'll disappear. But it'll wane in significance as a relative revenue contributor. The pricing pressures that we've seen lately aren't anything new. They've been around for years. What has affected us is that we haven't rolled out our new products in a timely enough fashion to combat the pricing pressures.

For instance, in our third quarter this year, we cited pricing pressures on dialysis catheters as being a contributor to the slight shortfall we reported that quarter. We had anticipated that we would roll out our new Centros dialysis catheter during that quarter, which would've made up a lot of the difference and abated some of the pricing pressure. So the name of the game for us now and forever is to keep the innovations coming out of the pipe. That will keep us ahead of the commoditization pricing pressure game.

AngioDynamics boasts that 50% of the company's overall revenues comes from products that are less than five years old, and more than 50% of the company's growth is from products that are less than a year old.

That's a metric that we've lived by for years and plan to continue to use.

In the United States, AngioDynamics makes use of a direct sales force. Overseas, the company employs a mixture of direct sales and distributors. How do you see the company's overseas markets developing?

About 10% of our revenues are from outside the United States, and they are growing at a faster rate than in the United States. So we think that percentage is likely to increase over time.

We are direct in the United Kingdom, Germany, and France, and we're looking to continue to expand our direct presence in other foreign markets where it makes sense.

Community Service

As the incoming chairman of MDMA, what do you see as the chief issues that the association is focusing on and that you'll be pushing forward?

MDMA is the advocate for smaller, entrepreneurial medtech companies. The vast majority of innovations in the medical device arena come from companies with fewer than 50 employees—that's where the future is. Even for the big guys, that's where the future is. After all, the big guys end up acquiring these technologies down the road—either by purchasing the product itself or buying the entire company.

So it's critically important that we recognize the important work that MDMA does to make the smaller end of the medical device industry spectrum vibrant and minimally encumbered by government intrusion and obstacles.

Over its history, MDMA has taken on a number of issues that have special potential to harm small medtech companies. The behavior of healthcare group purchasing organizations (GPOs) and some of the issues around patent reform come to mind.

The GPO issue is an excellent example of where MDMA can provide tremendous value to smaller companies. Historically, GPOs have provided tremendous favor to mega-corporations because it is much more profitable for them to deal with a few vendors than a broad base of small vendors. MDMA has been instrumental in getting GPOs to play much more fairly with smaller companies.

In addition, the group continues to beat the drum to modify the safe harbor provision under which GPOs operate. Such a provision would infuse more fairness into the group purchasing organization value proposition. Achieving that goal is a multiyear project for MDMA.

Aside from your activities with MDMA, you also are a member of the board of directors for the Society of Interventional Radiology. What does that activity consist of? Are there other areas where you or AngioDynamics are particularly active?

Yes, I'm on the Society of Interventional Radiology board, and I am a member of the board's strategic planning committee. I'm also on the board of the American College of Phlebology—the vein doctor board—doing market development.

The reason I've taken an active role in medical society leadership is because our physician customer base consists of extremely bright and dedicated people who are sometimes not very well versed in the ins and outs of business. And medicine is the biggest business on the planet. We believe that what's good for our customers is good for us, so helping them improve their business model will trickle down into making our business even stronger.

This activity also gives us a lot of insight into where physicians think they're going to be down the road. That way, we can make sure our pipeline matches their crystal ball—producing the right product, at the right time, at the right price.

Copyright ©2008 MX