Medical Device Link.

Big Ideas, Big Returns

CEOs of five of the industry's fastest-growing companies reveal their strategies for success.

Stacey L. Bell

Some companies just seem to do everything right. Regulators approve their products quickly, their market shares skyrocket, their profits soar. How do they do it?

MX recently asked U.S. Bancorp Piper Jaffray Inc. (Minneapolis) to determine which companies (with base sales of at least $30 million) had the largest growth in revenue for the years 1997 through 1999 (see Table I). Among the companies belonging to this select group, the top 15 companies' average compound annual growth rate (CAGR) was a staggering 117.6%—all the more impressive when you consider that the average growth rate in the medical device industry ranges from 7 to 10% per year for larger companies, according to Thomas J. Gunderson, managing partner and senior analyst for Piper Jaffray.

Table I. The medical device industry's fastest-growing companies, according to data compiled by U.S. Bancorp Piper Jaffray Inc. (Minneapolis). Those companies with base revenues of at least $30 million and the largest revenue growth from January 1997 through December 1999 are listed in descending order from highest CAGR. All sales growth data listed here include acquisitions. (Companies in bold are discussed in the article.)

What sets these companies apart? Their CEOs say it's their outstanding people, products, and marketing strategies. Gunderson says a number of these companies, including Cyberonics, Cytyc, and Perclose, have been among the first to hire direct sales forces to sell their first-to-market FDA-approved products. Following are the stories behind the great successes of five of these companies—straight from the company leaders.

Leverage Technology

It takes a fast-thinking, strategically minded company to take on large pharmaceuticals and make a dent in the market.

Epilepsy, which affects more than 2.5 million Americans, is typically treated with drugs or surgery. But more than 200,000 patients suffer from refractory epilepsy, experiencing unsatisfactory seizure control or intolerable treatment side effects. In July 1997, Cyberonics Inc. (Houston) won FDA approval of its NeuroCybernetic Prosthesis (NCP) system, the first—and still the only—FDA-approved medical device for the treatment of epilepsy. The system controls and reduces the severity of seizures without producing troubling side effects.

"Physicians are largely unfamiliar with using medical devices to treat anything—especially epilepsy," says Robert P. "Skip" Cummins, president and CEO of Cyberonics. "It is orders of magnitude more challenging to sell them on using a device, rather than a drug, to achieve better results. You have to sell them through education.

Robert P. "Skip" Cummins, president and CEO of Cyberonics.

"We learned quickly how to profitably sell high-tech medical devices to physicians. We showed proof of superior therapy benefits, helped them do the extra work required, and helped lower healthcare system costs."

Cyberonics's NCP system delivers vagus nerve stimulation (VNS) therapy through an implantable device similar to a cardiac pacemaker. A stopwatch-sized generator is implanted in the left chest and a nerve-stimulation electrode is attached to the vagus nerve in the neck in a 1- to 2-hour procedure typically done on an outpatient basis. Using an external programmer, the physician can set or reset the stimulation parameters of the device. The system delivers preprogrammed, intermittent (for example, 30 seconds on, 5 minutes off) electrical pulses to the vagus nerve 24 hours a day.

The NeuroCybernetic Prosthesis (NCP) system by Cyberonics Inc.

"We understand that treating a patient with VNS is more work for the physician, so we've done everything we can to alleviate that work," says Cummins. "It starts with patient education. When treating epilepsy with drugs, the physician talks to the patient for 10 minutes, and the patient understands the treatment and can make a decision. With VNS, it typically takes 1 to 2 hours to discuss. We currently have 25 clinical specialists—RNs—who act as VNS nurses for physicians, traveling to the physicians' offices and spending time educating their patients. We also mention that VNS treatment has been approved by the Epilepsy Foundation of America and endorsed by a number of leading physicians.

"Second, when physicians prescribe drug treatment, they are not required to get insurance verification or preauthorization. With VNS, they must," says Cummins. "So Cyberonics performs all the insurance verification and preauthorization work at no charge to the doctor.

The NCP system delivers vagus nerve stimulation through a pacemaker-like device implanted in the left chest.

"Third, physicians need to learn how to dose the NCP system. We provide training and consultation so they'll know how to dose. We've also started the first national registry of epilepsy patients. The registry tracks changes in patients' quality of life after the device is implanted so that physicians can know exactly how their patients are doing with a particular therapy in comparison with other patients with similar variables—age, medical history, etc.

"Finally, we also send in field reimbursement representatives to help physicians with their billing and coding procedures," says Cummins. "The reps explain how to code and bill, then return after 6 months to perform a billing and coding audit and ensure that the physician is being paid properly.

"We've made it as easy to use VNS as it is to use drugs for treating epilepsy," says Cummins.

Cummins expects his company to continue to see exceptional growth: 35 to 40% by June 30, 2001, then another 30% in 2002 and in 2003. Cyberonics is now turning its attention to other applications for its technology.

"We have a patent-protected technology that can be used for other products representing 75 times the size of the epilepsy market," says Cummins. "We foresee less than 30% of revenue growth in 2007 coming from epilepsy treatment."

In August 2000, Cyberonics began its final clinical study of the NCP system for use in the treatment of depression, a market 14 times the size of the epilepsy market. Also in August, Cyberonics announced implantation of the system into the first patient in a pilot study for the treatment of Alzheimer's disease. Cyberonics also plans to leverage its technology into treating the morbidly obese—14 million Americans could benefit. "If all goes according to plan, by 2006 or 2007 we'll have FDA approval for use of the NCP system in all of these indications," says Cummins. "Seven years from now, we could see $1.5 billion in revenues."

A New Standard of Care

Cardiovascular disease is the number one killer in the United States and the world, and consumes more U.S. healthcare dollars than any other disease. So while most hospital medical-supply markets are growing at about 1% annually, cardio is expanding by nearly 10% as companies strive to conquer the disease, says Sean Murphy, general manager of Perclose Inc. (a subsidiary of Abbott Laboratories, Abbott Park, IL).

Sean Murphy, general manager of Perclose Inc., a subsidiary of Abbott Laboratories.

For years, closing the arterial access site after a diagnostic or therapeutic catheterization procedure has presented challenges for both surgeons and patients. "The standard of care was compression," says Murphy. "A nurse would almost literally sit on the wound or use a clamp for 15 to 45 minutes to help the body form a clot. Then, because any movement could dislodge the blood clot and result in bleeding from the artery, the patient was required to remain immobile with a heavy sandbag in place over the wound for 4 to 8 hours after compression was completed. It sounds like something out of the Dark Ages, but it still occurs. This method is very costly for the doctor and very uncomfortable and painful for the patient.

"Other companies offer collagen plugs that are pushed into the puncture site to assist with clotting, but that method takes hours too," says Murphy.

The Closer by Perclose Inc. enables surgeons to close the arterial access site from the inside out.

Perclose designs, manufactures, and markets a suture-based technology that closes the access site from the inside out. One such device, appropriately named the Closer, and Perclose's other products enable surgeons to place a stitch around the artery and surgically close the access site. Perclose products are cleared by FDA for reducing the time a patient remains in the hospital after arterial catheterization.

Like Cyberonics, Perclose has worked to educate physicians about its device and make it easier for them to use it. "This is a very technique-dependent procedure," says Murphy. "Doctors must become certified in using our product before they can use it. Our field people train them and do 20 procedures with them."

Perclose has plans to enter other markets. Its current market offers great opportunities: the $250 million arterial-closure market is growing at an estimated CAGR of more than 40%, and while more than 7 million catheterization procedures are performed annually worldwide, fewer than 20% of those currently use closure devices. But Perclose also plans to expand into the cardiology, radiology, and neuroradiology sectors through other products. To make these plans a reality, Perclose became a subsidiary of Abbott Laboratories in November 1999.

"In many sectors, being large is crucial for success," says Murphy. "We realized that for Perclose to build up the necessary resources to access all the physicians in the world would be an overwhelming task.

"Instead, we decided to look for another company that could advance the Perclose business in this sector. We looked at several leading companies, but Abbott was the logical choice and an obvious partner for us. They have a great marketing and distribution network, they are very knowledgeable about the vascular market, they can fuel our R&D, and they can broaden our technological offerings by incorporating their other technologies into our products.

"Plus, we could keep our organization intact. Perclose had a talented team that could be the foundation for a leading vascular franchise. Perclose's strong allegiance to its people meant a regular merger per se wouldn't have worked.

"Perclose expects to expand its dollar sales and product lines even faster with Abbott resources behind it," says Murphy.

Direct-to-Consumer Approach

When asked what his company does better than anyone else, Patrick J. Sullivan, president and CEO of Cytyc Corp. (Boxborough, MA), blurts, "Everything!" and laughs. But no joke—the company's revenues have been rising by double digits each quarter for the past few years. Among the factors to which Sullivan attributes this growth is a "superior product."

Patrick J. Sullivan, president and CEO of Cytyc Corp.

"The ThinPrep Pap test is significantly more effective in detecting low-grade or more severe lesions than the traditional Pap test, and 300,000 patients in clinical trials support that finding," says Sullivan. The ThinPrep Pap test uses a sample of about 70,000 cells, which is mixed and then transferred to a slide, ensuring a more thorough viewing of the cells. Traditional Pap tests vary tremendously in the number of cells transferred for viewing, from as few as 4000 to as many as 300,000. When higher numbers of cells are on a slide, they can overlap or be obscured by inflammation, blood, or mucous.

To replace the nation's standard of care for the screening of cervical cancer (more than 50 million traditional Pap tests are performed each year), Cytyc first changed how laboratories are reimbursed for performing the test. "Pap smears are a loss leader for labs. We worked to make sure ThinPrep would let them make a profit," says Sullivan. "We worked with payers to convey two points. First, that ThinPrep is a much better test—it improves detection of lesions by 65% in screening populations and by 6% in high-risk populations and reduces the number of unsatisfactory or satisfactory-but-limited slides by as much as 50%. These capabilities help to reduce the number of return visits and repeat Pap smears, and, thus, also reduce healthcare system costs. Second, that validation from the laboratory community and from physicians demonstrated that the ThinPrep Pap test was of higher quality. Those two groups put pressure on insurance companies to set a higher reimbursement rate for ThinPrep than for the [traditional] Pap smear."

The ThinPrep 2000 processor, an automated slide-preparation unit used for cervical cancer screening, by Cytyc Corp.

Second-quarter 2000 revenues were up 78% over same-quarter revenues in 1999. Increased lab support for the test accounts for some of that growth as does Cytyc's movement into direct-to-consumer marketing. "Sales and marketing are a key competency for us," says Sullivan. "We're more adaptable and flexible than the bigger pharmaceutical companies. And we have tremendous focus because we're concentrating on selling one product rather than a basketful of products."

In addition to educating laboratories and insurers about its product, Cytyc has approached physicians and now consumers as well. A direct-to-consumer ad campaign conducted in New York City during April 1999 increased the percentage of ThinPrep tests a local Quest facility used from 12 to 50% over a 6-month period.

"You need three things for a good direct-to-consumer campaign," says Sullivan. "A good insurance reimbursement environment, good laboratory access, and physicians and obstetricians/gynecologists who are up to speed with the clinical benefits of the test. We made sure all three components were in place before we went to consumers."

The company is now looking at four other markets—Atlanta, Chicago, Philadelphia, and Jacksonville, FL—for its next direct-to-consumer events. "Our goal is to ensure all women know about and have access to this test," says Sullivan.

A New Product Every Month

"Our business strategy is based on a platform technology that is the focus of our large and growing technology base," reports Mike Baker, CEO of ArthroCare Corp. (Sunnyvale, CA). This platform technology goes by the name coblation, a term coined by ArthroCare from "controlled ablation" to describe a new way of using energy to perform surgery. Coblation employs multiple, small electrodes to remove tissue, using only a fraction of the energy required by traditional electrosurgical systems. The technique causes minimal damage to surrounding tissue, offering surgeons greater accuracy and patients faster healing and reduced postoperative pain.

Mike Baker, CEO of ArthroCare Corp.

ArthroCare's triple-digit CAGR is fueled by rapid adoption of this technology. "We looked for fields where the advantages of our technology—its precision, efficiency, and multifunctionality—would add the most clinical value," reports Baker. "Arthroscopy places a premium on precision; a premium on efficient, multifunctional instruments; and has accounted for the majority of our revenue to date."

The market promises continued strong growth. "So far, we have only penetrated about 25% of the arthroscopy market, which is continuing to expand by 10% each year, so we have tremendous opportunity yet," says Baker. But Baker is already looking to develop additional markets in cardiology; ear, nose, and throat (ENT) surgery; cosmetic surgery; and spinal and neurosurgery. "Other applications of our coblation technology are in the pipeline," says Baker. "Just 3½ years ago, we had one application; now we have six. In another 3½ years, we should have quite a few more."

To fuel its expansion, ArthroCare has looked to partner with market leaders "to speed commercialization of our technical ideas without overtaxing our resources," says Baker. Companies that meet the partner qualification have a strong focus, significant distribution network, and complementary products. ArthroCare has built partnerships with the SciMed Division of Boston Scientific Corp. (Natick, MA) in cardiology, Inamed Corp. (New York City) in cosmetic surgery, and LifeSciences Holdings Corp. (Plainsboro, NJ) in neurosurgery.

Partnerships have enabled ArthroCare to accomplish a great deal with a small staff. "At the end of the third quarter in 2000 we had 217 employees—125 of those in manufacturing," says Baker. "I'm a big believer in having a relatively small number of the very best people you can find versus a large number of average performers.

"Our small regulatory staff has gotten applications in five new fields approved within the past three years," says Baker. "Our extremely small, but very capable, R&D staff has developed one new product every month for the past 36 months in a row. That's an impressive track record for a company of any size—but particularly for a small company like ArthroCare."

Bigger Is Better, but Think Local

In 1861, J. E. Hanger lost his right leg to a bullet in the Civil War. Dissatisfied with the artificial leg the army provided, he crafted his own new limb from whittled barrel staves and the company that would become today's oldest and largest provider of orthotic and prosthetic (O&P) devices and services was born.

The $2 billion O&P market is composed mostly of small mom-and-pop operations, a fact that has been an advantage to the two largest players—Hanger Orthopedic Group (Bethesda, MD) and NovaCare (King of Prussia, PA). Like most sectors of the healthcare industry, O&P has seen intense consolidation. "Having a large geographic scope and coverage gives us the ability to contract broadly with the payers in today's healthcare environment," says Ivan Sabel, chairman of Hanger.

Ivan Sabel, chairman of the Hanger Orthopedic Group.

"Say a patient lives in Washington, DC, and winters in Florida. Maybe he has a problem with the device when he's in Florida," Sabel continues. "If he's a patient of a Hanger facility, it's no problem—the records are interchangeable among offices. But if he goes to a private facility, it's not so simple.

"We can service patients at a whole different level, which is very attractive to payers. Plus, we're geographically diverse. With us they have one contract that extends nationally, as opposed to having to have hundreds of contracts with hundreds of local, individual providers."

Hanger's double-digit growth is due to two factors: double-digit same-facility growth and major acquisition activity. In fact, in July 1999 Hanger bought out NovaCare, more than doubling its patient-care business (92% of Hanger's revenues flow from patient care, 6% from distribution centers that sell O&P componentry to other O&P companies, and the remaining 2% from manufacturing prefabricated and custom devices). Today, Hanger has more than 1000 orthotists and prosthetists serving patients in 600 locations throughout 45 states.

"We're now the only national provider of O&P devices and services and much larger than any competitor—we're better than 10 times the size of our closest competitor," says Sabel.

While Hanger's size enables it to benefit from sheer buying power and streamlined costs and procedures, the company is working overtime to ensure that the local flavor long associated with O&P care remains intact. "Despite all the talk about the nationalization of healthcare, it's the local market player and presence that really make a company go. When we acquire a facility, we do our best to keep the local manager," says Sabel, who himself ran a private practice for 22 years before selling it to Hanger.

"We offer managers incentives to stay—opportunities for financial and career growth—and we handle all the back-office activities that they generally don't want to take care of. Most of our managers do stay."

Hanger also maintains strong community ties through its charitable activities and support of several Paralympic athletes. "Our size and the unique things we do—like having amputee Dana Bowman parachute into the Paralympic opening ceremonies in Sydney [for the 2000 games]—give us a level of exposure the rest of the companies in the industry can't avail themselves of," says Sabel.

Double lower-limb amputee Dana Bowman shown here with the Hanger ComfortFlex socket system by the Hanger Orthopedic Group.

For the next few years, the target growth rate for the Hanger Orthopedic Group has been set at 20% per year, a goal the company expects to meet both by continuing to expand current patient-care facility business and by continued acquisitions. "We've been out of small-company acquisition for the past 10–12 months because of the NovaCare purchase, but I expect we'll be ready to make additional acquisitions next year," says Sabel. "After all, 75% of the industry is still made up of little mom-and-pop operations."

Stacey L. Bell is a contributing editor to MX and a former editor of Medical Device & Diagnostic Industry.

Photos courtesy Cyberonics Inc.; Perclose Inc.; Cytyc Corp.; Hanger Orthopedic Group

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