Medical Device Link.

Originally Published MX March/April 2004

COVERY STORY

OmniSonics president and CEO Robert A. Rabiner specializes in acoustics—and investors are listening.

Interview by Steve Halasey

In the medical technology industry, experienced investors pay attention to sectors whose technological advances promise to deliver extraordinary new products that could change the face of healthcare. Sometimes they pay a lot of attention.

That has certainly been the experience of OmniSonics Medical Technologies Inc. (Wilmington, MA), whose recently closed C round of funding has turned out to be one of the largest venture capital deals of the past year. Originally closed in October 2003 at $26 million, the round was reopened to take in oversubscription that eventually increased the company's total by about 60%. By the end of February 2004, the round's final tally had reached $43 million, making the company the top medical device VC fundraiser of the year.

Founded in 1998, OmniSonics is developing a patented technology that employs acoustic energy—sound waves—to eliminate blockages in arteries and veins. This OmniWave technology could have broad application for the rapid treatment of these conditions and the prevention of heart attacks and strokes. The company's Resolution system, based on the OmniWave technology, is already CE marked for the treatment of lower-limb thrombotic occlusions and thrombosed hemodialysis fistulae and grafts.

Making the company and its technology appealing to investors has been the challenge of OmniSonics cofounder, president, and CEO, Robert A. Rabiner. In this interview with MX editor-in-chief Steve Halasey, Rabiner recounts the distinctive—and successful—approach used by OmniSonics to find venture capital backing and earn the loyalty of early investors. He also discusses the course his company has taken toward U.S. market introduction of the first product based on its core technology and shares the thinking behind its strategic plans for entering related markets with other versions of the technology now under development.

MX: The earliest formation of your company's technology—so the story goes—involved you playing with your food. Can you clarify the details?

Robert A. Rabiner: As a child I was a fidgeter, and I always played with my food. But the truth of the matter is that I took an extremely early prototype of this technology to my folks, whom I was visiting for dinner; when I found out that we were having steak, I said "Don't cook mine." And I did spend that evening playing with the product. I convinced myself on at least a preliminary basis that it had application for the reduction of tissue volume. Its earliest indications and applications were in urology and general surgery. That meal was an excellent opportunity to prove out, on a very, very low-tech scale, that it had other applications.

Where did the prototype come from?

Originally, I used a product that had been designed for an orthopedic indication, where ultrasonic energy was driven at extremely high power to cause a thermal melting of plastics to assist in the removal of polymethylmethacrylate (PMMA) during hip revision.

Harnessing Acoustic Energy

Then where did you get the idea that this technology could pulverize clots?

All we had at first was a neat ultrasonic device that could burn through wood and heat up plastic. While it made us very popular with my son's friends—as it was a really impressive demonstration of acoustic power—our job was to come up with a different group of indications. We first looked toward a reduction in the size of the product, a reduction in the power levels, and an increase in the length of the probe.

We envisioned a flexible wand to apply in debulking the prostate in men older than, say, 45 who are starting to suffer from benign prostatic hyperplasia (BPH). Reducing the bulk of the prostate—decompressing the urethra—allows the BPH patient to urinate more normally. We had developed a means to deliver the energy through an acoustically sensitive slender wire. We took it from a probe, which is very rigid, to a very-thin-diameter wire that put out low power without generating heat, which could debulk the prostate.

How does the wire work? Is it customized for the patient?

The active portion of the wire is specific to the indication. Our dialysis wire has an area of 20 cm that is active. We have a deep vein thrombosis (DVT) wire that has a 10-cm active portion and a coronary wire that has an active section ranging from 1.5 to 3 cm. In addition to the active area, we define the total length and diameter of the wire as it relates to the indication.

These wires don't need customizing. They can be placed through standard guide catheters, introducers, and then the intervention radiologist or cardiologist has the ability to change the active section of the wire by sheathing or unsheathing the wire with the catheter. And the wires offer inordinate procedural flexibility.

When this is being used—the technology now is not ultrasound—does it operate in the audible frequency range?

It is just audible. We're at 20 kHz, plus or minus. The joke used to be that when we would run the system, all of the dogs in the neighborhood would come calling; but the reality is that, when the system is in use, the catheters and the body dampens the acoustic noise and signal considerably. There's just a low hum on the order of the sound an electric toothbrush makes.

Harnessing Financial Energy

Once convinced that the idea was going to work, how did you get the earliest funding for it?

Actually, we were a little different from the typical entrepreneur. Many people go out with an excruciatingly detailed story about what they're going to do, and they spend all of their time on the business plan. Since this was coming out of my COBA—cash on Bob account—we spent all of our time doing development work and proof of principle in the animal lab, building up prototypes, and proving that the products would work. So, when we were approaching the venture capitalists (VCs), we already had an active, working prototype that showed the product and its capabilities; we had histology done with animals; we had prototypes built—and this was even before we had raised any money.

So, we provided the original VCs with prototypes. We showed them a product that had a lot of proof points behind it in BPH, and with a trajectory toward cardiovascular. Those original funders, including John Brooks at Prism Venture Partners and Johnson & Johnson Development Corp., put $5.7 million into the organization. They were able to see the huge market potential, the prototypes, the proof of principle, and that a lot of the risk had been wrung out in our early work. They saw what they believe, and we believe, is a unique technology. And, at that time we probably had 12 patents already in with the intellectual property (IP) attorneys.

Now we have 13 issued patents, five additional notices of allowance, and more than 40 other patents pending, with each of those being both a U.S. and international application. I mean, it just becomes a multiplier.

With a working prototype, what was your elevator pitch on the A round? Did you need much of one?

Actually, in many ways we did, because it was an odd time for medical funding. That was 2000, and it was the dot-com boom. Nobody viewed us favorably, because we represented the old economy. Truth be told, when we showed one VC firm the product, they asked us what the Internet play was. To which we responded, "Well, if you can get your heart onto a hard drive, we'll fix it."

So, it was difficult because attention then was on the Internet play. We were very lucky that we were able to catch the eye of Prism Venture Partners and to work with them. They are great guys. Prism's cofounder, John Brooks, is greatly skilled at looking at medical devices. He knows devices, he understands the market space, and he was able to keenly understand what we did and how we did what we did. He put together a great syndicate.

That was the genesis of the company. In 2000, everybody who was working here was a consultant. We were in my basement at the time. We moved from there to a space of only 2500 sq ft, and we started hiring employees. We built the facility out. We proved that the product did have application in urology, but then we went a whole lot further with the technology. We improved the IP position. In addition, we improved the technical position of the organization by building out our quality systems and building out the infrastructure even though at a very early state. And then, in 2001, we raised our B round, which was $21 million.

When you came to your B round, were you getting more money from the same investors or different investors?

The B round was actually a host of new investors. We had Prism again participating, but the round was led by Canaan Partners and Domain Associates and featured the involvement of H&Q Capital Partners. They brought $21 million, as I said, and that came in April/May of 2001, just after the dot-com bubble burst.

Are there some new players again in the C-round group?

Yes, the C round is oversubscribed. We put out the original private placement memorandum book with a cover of $20 million. The first close took us to $26 million. There was a follow-on that came in for $7.4 million, and there was a final party that came in for $10 million. That made our total C round $43 million.

The round consisted of GE Pension Trust in the lead, very strong support from the insiders—Prism Venture Partners, Domain, Canaan, and H&Q Capital Partners—and some high-net-worth private investors, along with Mitsubishi, New England Partners, Phoenix Life Insurance, and the final individual who invested $10 million.

Technology Development

Through the B and C rounds you clearly weren't showing the same prototype as in the A round. How has what you have been able to show evolved?

The A-round gave us the cash, the capital, the wherewithal to build prototypes and prove out the technology. The B round gave us the ability to follow through on some of these things.

In 2001 and 2002 we completed all of our clinical trials, our preclinical trials, and the animal work and bench work on the product for the vascular indication. We were then able to start our feasibility trial in the United States for an investigational device exemption (IDE). We also submitted an application for, and were able to secure, a CE mark for the product internationally. Human use of the product for lower limb ischemia had already commenced in Australia and New Zealand. Also, in preclinical trials, we had done a huge amount of work on the coronary arteries in animals to show that the product was potentially safe for a coronary indication. I guess we were taking the show-me aspect out of the equation.

The European approval with the CE mark is for a relatively narrow peripheral vascular application. Was that intentional?

I would disagree; it's not as narrow as that. We have an indication for peripheral arterial thrombolysis, the removal of clots in the peripheral arterial system. The product has been used internationally in the arms, in the legs both upper and lower, and in the venous system. That's a lot of vascular real estate.

In fact, invoking compassionate and emergent use of the product, physicians successfully used the Resolution system to clear and resolve a bilateral pulmonary embolism in a patient that, save for the use of our device, was going to expire.

As you can imagine, documentation of that case will go straight into the product's premarket approval (PMA) application.

When you received the CE mark for the peripheral application, what then was your thinking in terms of your go-to-market timing, rolling out other applications, and so on?

Anybody who works at OmniSonics has heard the mantra: arms, legs, then heart; product that is first short, longer, longest; a wire that is thin, thinner, thinnest; and a regulatory process that is easy, harder, and then hardest. That's been our regulatory program, our development program, our product program from day one. We would do dialysis first, legs second, heart last. Thin, thinner, thinnest is an expression of the nuance.

So, we knew that we were going to take the product into the U.S. market for dialysis this year. Internationally, we'll have it working in both dialysis and peripheral arterial applications, as well as peripheral venous. There will be an IDE going on for a product for DVT. Internationally, we intend 2004 to see the first coronary application of the product in humans.

Building a Company

Early on, the investors weren't dictating your course of action. Has that changed over the years as the rounds have advanced? Is the pressure to go a certain direction, or to go faster in some direction, becoming heavier as the money goes up?

I think any investors would be foolish who were not watching their investment and trying to get as quickly as possible to market, to get a return. My fiduciary responsibility to both the organization and the shareholders is to try to give them a return on their investment as quickly as possible. At the same time, that needs to be balanced with the appropriate amount of control and responsibility over progress and events. Caution is necessary. Rush too quickly and you might find that that light at the end of the tunnel is the proverbial oncoming train. You've got to look both ways.

Being a privately held company, you don't have to respond to a board. But you also have a long history with some of the investors. Is it easy for you to get them to accept your sense of what needs to be done?

We have a seven-person board, effecting control of the company. Each of the major investors has a board seat. We have management representatives on the board, and we have a few outside observers as well as some independent representatives. The appropriate checks and balances are in place.

The beauty of the syndicates we have and of the people who are involved in the company is, number one, they're all experienced venture capitalists. Number two, they all understand the environment of medical devices—that there are no shortcuts, that you need to do the right thing. From the outset, it has been a collegial group of people all focused on the same goals: to bring a very important product, a very important technology, to market, and to bring the power of this technology to bear on an insidious disease, cardiovascular occlusive disease, which affects more than 40 million people annually.

IP attorneys aren't cheap, but they are absolutely fundamental. Did yours suggest any particular strategies for this technology that have proven especially useful?

We use the same law firm, Palmer Dodge LLC, for both corporate work and IP, which has enabled us to synchronize the corporate and IP goals. By virtue of a long-standing relationship with OmniSonics, these lawyers really understand the technology. They can write our patents relatively quickly. We have great rapport with them, so writing the patent disclosures is a back-and-forth didactic process.

We call it the picket fence. We want not only to protect the crown jewels but to put up barriers on the vertical, on the horizontal, and on some of the obliques. We thoroughly and energetically protect the IP around the product. All patents are filed abroad as well as in the United States.

The picket fence approach is designed to cover not just where we are but where we're going to be. We have indications that would apply to neurovascular conditions. We have indications in conjunction with drugs, and others for entry into the orthopedics market. So we've been looking at a variety of areas. We even have some plastic surgery and gynecological indications. This project offers a host of opportunities.

How important is the IP firm in advising on opportunities for filing?

Again, it's collaborative. They will look over some of our presentations, look at what we're doing, and they will comment that something might be a worthwhile area to protect. At some point, it does come down to money. We have to look and ask how much they are going to spend on filing a particular patent, and what the end value is going to be, but we have been pretty aggressive in our IP strategy.

Future Indications

What is the big picture for the company several years from now? Are there not just applications of the present technology but maybe other technologies that you are keeping your eye on, either as potential threats to monitor or as things you would be interested in developing?

I can't disclose some of the things that we're working on because we want to bring them out at the appropriate time. However, we are developing very-small-diameter wires that deliver low-power acoustic energy and have the ability to break down a variety of organic materials, including clots, arterial plaque, other occlusive material, and calcific materials and stones. We believe that product can reach all areas of the anatomy, and might have neurology, cardiovascular disease, urology, gynecology, and other applications. There are plastic surgery indications, too. So, I think we will be bringing forth a host of products in the next several years, all based on an acoustic platform.

With so many applications, you see no reason to go much further outside that area?

I think you do the one thing, and do it really well. We know acoustics really well.

Photo by STANLEY ROWIN

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