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Survey: Medical Device Industry Strong Here

Survey: Medical Device Industry Strong Here

Nearly 40% of Firms Are Public or Late-Stage

BY MARION WEBB

Drugs are sexy; heart stents are not.

Drugs developed by biotech firms have traditionally outshined their siblings in the medical device field.

Still, a recent survey suggests that despite their less-glamorous image, manufacturers of such life-enhancing devices as heart stents are loyal to the region. The executives confirm it.

“Gen-Probe continues to grow, and we look forward to a long future in San Diego,” said Henry Nordhoff, president and chief executive officer of publicly traded Gen-Probe Inc., the leader in the nation’s blood screening market.

In 2003, Gen-Probe generated $207 million in revenue from selling dozens of diagnostic tests, including tests to screen for HIV and the hepatitis C virus.

“Medical device companies are meeting a real need in the marketplace for better and more cost-effective products,” said David Pendarvis, general counsel at ResMed Inc.

ResMed is a leading seller of machines to diagnose and treat sleep disordered breathing.

In fiscal 2003, Poway-based ResMed posted $273.6 million in revenue, and $45.8 million in net income.

Gen-Probe and ResMed are among the industry giants in San Diego with 700 and 1,464 employees respectively.

Many of the 120 medical device makers located in San Diego are start-ups or small firms.

The same is true for Orange County which has 229 medical device firms making it the nation’s largest cluster of medical device companies, according to a 2002 California Health Institute (CHI) report.

Fullerton’s Beckman Coulter and Irvine’s Edward Lifesciences are both headquartered in Orange County with more than 1,000 workers.

Industry members located in Los Angeles, San Diego, and Orange County vary greatly in terms of product types, revenues, and classification, according to a Deloitte & Touche survey.

“The industry appears to be poised for growth,” found Theresa Drew, managing partner at Deloitte & Touche in San Diego.

The survey comprised senior executives from 37 medical device firms in Southern California, with 62 percent of respondents being from San Diego.

Most firms said they already sell products, but reported a wide range of revenues from as low as $300,000 to $200 million.

The majority reported having fewer than 50 employees, but are in an expansion and hiring mode. Nordhoff is among them.

The CEO said Gen-Probe has “outgrown its existing facility,” and plans to begin construction on a new facility near its Mira Mesa headquarters this summer.

Jobs have risen 8 percent on average every year since 1999, Nordhoff said.

And this year isn’t any different.

Both Nordhoff and Pendarvis agree that the industry is facing challenges.

In the report, executives listed launching, marketing, and selling products among their primary challenge, followed by raising capital and regulatory and reimbursement issues.

Pendarvis attributes ResMed’s marketing success to good quality products that meet a real need, adding “But it has to be designed and manufactured in a cost-effective manner so that its pricing meets the market need.”

Sniffing out the right audience is also key.

“The challenge is to spend your resources (wisely). I think it’s easy in broad terms to know who your target audience is, but identifying those candidates that are likely to accept a new product and listen to the pitch for a new product is a much tougher task,” he said.

ResMed relies on its own sales force rather than that of a partner for a reason.

“They understand the technology and customers,” the counsel said.

“A partner may not understand a product or the customer, and then it becomes one of many different products competing for attention and resources,” Pendarvis said.

Gen-Probe has a similar philosophy.

“We are not a huge company yet, so (by having our own sales force) it allows us to get closer to our customers,” said Michael Watts, a Gen-Probe spokesman.

Gen-Probe may not be huge, but with its cash cushion of $156.3 million (as of Dec. 31, 2003), the firm sits comfortably compared to many of its peers.

Forty percent of the polled companies said they are public or late-stage with one-third of them being in the “mezzanine stage,” or on the verge of going public, or having done a Series C round of financing.

About 25 percent of surveyed firms said they have completed their first round of financing, or are supported by grant or seed money.

Nearly half reported having raised funding between $1 million and $49 million to date; another 19 percent said they have raised $50 million to $99 million.

Overall, the financing climate especially for smaller biotechs and medical device companies has been difficult.

Investors tend to look at the industries differently.

Biotechnology investment is regarded as high-risk and long-term, but if it translates into a product, offers investors huge pay-offs.

Medical device makers tend to not have the same clinical and regulatory hurdles as drug makers, and thus, are expected to introduce products and generate revenue much faster.

“Medical device companies face a problem that is unique, in that their sales have to result in real profits in a short time frame, whereas biotechs and pure research companies can sustain operating losses for a longer period of time,” Pendarvis said.

With biotechs, “the market will put up with operating losses for longer periods of time, because of longer developments and larger potential pay-offs, medical device companies get measured every quarter,” he said.

But when it comes to the regulatory review process, drug companies and device makers often voice similar complaints.

“More than one-third of companies are dissatifisfied with the speed of reviews and approvals by the FDA,” found Drew.

Nearly half of respondents think that fees (for applications) are too high.

Most said they don’t expect the FDA review and approval process to change any time soon.

Nordhoff also expressed frustration from some of his FDA dealings.

“Any application with CBER (Centers for Biologics Evaluation and Research) takes an extremely long time,” he said.

He also disagrees with the FDA’s classification of Gen-Probe’s blood tests: “We are a device company, but are treated like a drug company that hurts us in terms of time.”

Reimbursement is also an issue for him.

Gen-Probe won the FDA’s blessing for a test to screen the nation’s blood supply for West Nile virus.

But Nordhoff said that while the test is making the blood supply safer, Gen-Probe, and its partner Chiron, can’t make a profit until the test is approved.

That’s because until then, the government reimburses only the cost to make the test.

“And that’s a little unfair from our point of view,” Nordhoff said.

He also doesn’t think that California offers necessarily the best business climate.

Neither did the respondents.

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