Monitored Growth 4030

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 op-portunity 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 excerpted 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: 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. 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).'

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.

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. That eagerness led me to drop out of the PhD program and found Aspect Medical Systems.

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.

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 Hewlett-Packard.'

Developing IP

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. 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 electroencephalogram processing technologies have not fared as well as Aspect has because their data can't stand up to those produced by our company.

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.

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?

Over the past 20 years, the company has experienced periods of great success and periods of even greater failure. 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.

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.

Ironically, during that time of financial struggle, the company was sitting on the best data in its almost- seven-year history. 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.

Clearing Regulatory Hurdles

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

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.

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.

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.

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?

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.

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. 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 United Kingdom, 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.

Public and Profitable

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

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. 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.

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 research and development 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.

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

Growing into the Future

Do you think large companies are now looking at Aspect as a potential acquisition? Is that a desirable outcome for the company?

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 such an offer appropriately.

Are you confident that Aspect can sustain its growth for a significant length of time?

You bet. 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.

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.

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.

Copyright ©2006 MX