The tangible side of biotech: Small Northwest companies take a practical approach

Medical devices don’t score high in sizzle. Some biotech company is always overshadowing them with a wonder drug for cancer, and techies can bring DVDs to your front door with a mouse click.

By Luke Timmerman
Seattle Times business reporter

But slowly over the past couple of years, a new class of tiny medical-device companies has attracted venture capital and begun to emerge in the Northwest. One makes an elastic sleeve to prevent lungs from leaking after emphysema surgery. Another uses ultrasound waves to stop internal bleeding. One wants to fix the faulty valve in the esophagus that causes chronic heartburn.

None of the devices have cracked the U.S. health-care market, and some have years of tests ahead to determine safety and effectiveness.

But investors are gravitating to them because they can reach the market more quickly than biotech drugs; the odds of success are higher; and investors can cut losses early because it’s easier to spot a failure. Plus, their inventions treat the ills of baby boomers who want to live longer or have a higher quality of life.

That market could mean big money, research firm Frost & Sullivan says. It pegs the U.S. market for medical devices at $43 billion a year, growing 9 percent a year.

"Biotech is very sexy, and medical devices almost sound boring in comparison," said Stephanie Amoss, vice president of marketing for Spiration, a Redmond maker of devices for lung diseases. "They’ve always got the silver bullet. We know we don’t, but we do have something to get to the next level of health care. We’re practical people."

Reputation beyond region

Enough companies in the Northwest have made practical advancements in health technology to give the region a reputation for having seasoned entrepreneurs and engineers beyond its well-known geneticists and biochemists. Executives say Seattle is considered a second-tier hub of medical-device technology, behind the leaders in Boston, Minneapolis-St. Paul and the San Francisco Bay Area.

Much of the leading-edge work at the startups comes from biomedical engineers who cut their teeth at industry anchors. The family tree stems from Physio-Control, which makes heart defibrillators in Redmond and is owned by Medtronic; ATL Ultrasound, which makes diagnostic ultrasound machines in Bothell and is owned by Royal Philips Electronics; and a perennially top-ranked Department of Bioengineering at the University of Washington.

The companies don’t have household names, but Physio-Control employs 800 people locally, and Philips’ medical division, through a series of acquisitions, has 2,700 employees in the state. Siemens has 350 employees at its ultrasound division in Issaquah.

The new startup class is looking to follow a similar path: hone invention, raise capital, recruit engineering talent, develop a device that’s minimally invasive or gets people out of the hospital quicker, sell to a big company for multimillions, repeat. Most have no interest in making names for themselves with an initial public offering.

"The big companies would much rather have a venture-capital group spend the money to develop technologies and keep it off their balance sheet, eliminate risks and then pay a little extra for something that’s proven to be effective," said Rick Stewart, chief executive of Cardiac Dimensions in Kirkland. Stewart’s company raised $12 million last year to develop an implantable device for congestive heart failure.

Jim Fitzsimmons, chief executive of Archus Orthopedics in Redmond, said the medical-device business model calls for raising up to $40 million to steer a product through prototypes and development, which takes five to seven years. That’s compared with $500 million to $800 million and at least a decade of investment in a drug.

The Food and Drug Administration (FDA) still has to sign off on whether a device is safe and effective — just as it does with a new drug — but the regulatory path isn’t as risky because devices are more predictable in the body than drugs.

Once a device arrives on the market, most small companies have no desire to build a sales force to blanket the country to compete with big medical-device companies like Medtronic, Johnson & Johnson, Guidant or Boston Scientific. The small companies are content to be the "farm system," for inventions, Fitzsimmons said. To join the big leagues in sales and marketing, they would have to raise more money and go public, which most don’t want to do.

"Why (give away part of the company) and raise more money to put together a sales force?" Fitzsimmons said. "The world doesn’t need another sales force — it needs a new spinal product."

Fitzsimmons’ company, Archus, is developing an artificial spinal joint with full range of motion that it believes could supplant spinal-fusion surgery if it passes tests over the next five years. The company raised $18 million of venture capital in July.

Last year’s stellar spine company, Spinal Dynamics, of Mercer Island, sold its line of replacement spinal discs to Medtronic for $270 million — exactly the kind of end result that Fitzsimmons and others want to pull off.

One of the most advanced of the medical-device crop is Redmond-based Spiration. It was founded in 1999 by Bay Area venture capitalists and Clif Alferness, an engineer who used to work at Physio-Control.

The company was founded on a system to prevent lungs from leaking air after emphysema-related surgery. The device vacuums up a diseased part of lung where air gets trapped and clamps it off with a pressurized elastic sleeve. Spiration hopes its method will supplant current surgical techniques, in which emphysema patients have part of their lung cut off, and the rest is patched together with staples and buttressing materials, which can leak and cause complications.

The Spiration method attracted $22 million in venture capital last year, during a fund-raising drought. Later in the year, it attracted more money from Guidant.

This summer, Spiration got good news when the Center for Medicare and Medicaid Services said it would pay for the controversial $60,000-a-patient surgery to reduce lung volume. The news defied critics, who questioned whether the cost was worth the benefit.

Potential market

Spiration says if it can replace current techniques, it could tap a market of 350,000 to 400,000 patients with emphysema serious enough to make them candidates for the surgery.

The company’s next big step is to win FDA approval, which it expects late this year or early in 2004. A second device in an earlier stage of development would block off air from getting to the diseased part of a lung without the patient having to undergo surgery.

Spiration Chief Executive Rick Shea won’t rule out offering his company for sale, but he said it may be able to stand on its own. Spiration can build a sales force fairly cheaply because only about 50 centers in the U.S. perform lung-reduction surgeries and would be potential sales targets.

Shea said his company is moving into larger office space for a third time and intends to stay in the Northwest. The company has hired 90 percent of its employees locally, he said, and he’s heard similar tales from other medical-device companies.

Several of the emerging companies are likely to be successful, Shea said, even if they never make CNBC.

"All of the companies on the list are on a pretty steep growth curve," Shea said. "What we’re working on is for health care — it’s not trivial stuff. This region is one of the places that could make a huge impact for health care in the future."

Luke Timmerman: 206-515-5644 or [email protected]

Copyright © 2003 The Seattle Times Company

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