Boomers a Boon for Medical Tech

By James Flanigan

Dec. 16, 2001 12 AM PT

Advancing age, for Americans and people the world over, plus advancing technology are combining to make a potent growth industry in medical devices.

“Devices” is a mundane word for biomedical engineering wonders, such as valves and stents implanted in human hearts, acrylic lenses for eyes and manufactured cushions placed in human knees and spinal cords.

Medical devices is a segment --with about $18 billion in sales a year--of the vast health-care industry, which has $1.4 trillion in annual sales of everything medical, from pharmaceuticals to hospital services and physician and nursing care. Health care accounts for 13% of the U.S. economy.

With a mix of medium-size and start-up companies--plus the giant Johnson & Johnson--medical devices form a fast-growing corner of health care destined to play a larger role as the number of Americans age 55 and older rises 30%, to 75 million, in this decade. And the ranks of seniors are growing even faster in two dozen other nations.

The field is enjoying the attention of investors and venture capital players now because important technologies are evolving rapidly and entrepreneurs are the rule, not the exception. They are among the reasons the devices business is an important and promising industry for California, with dozens of up-and-coming companies supported by the state’s university research system and its venture capital prowess.

William Link, for example, an engineer with a doctorate from Purdue University, founded and sold two major companies in Lasik optical technology in the last 20 years and is now a partner in Versant Ventures, a venture capital fund that has backed more than 20 start-ups in medical technology.

“The cutting edge today is in improvements in products for the heart, such as defibrillators that shock the heart back into rhythm automatically,” Link says.

Versant, which raised $250 million in 1999 and an additional $400 million from institutional investors this year, is backing Cameron Health Inc., a San Clemente firm that is working on advancing the art of heart rhythm devices.

Venture capital has the same goals in health care as in other industries. “We invest with the hope of earning 10 times our money,” says Link, an Irvine resident who has given $1.5 million to endow a chair in biomedical engineering at UC Irvine.

One in five of Versant’s companies may earn that tenfold return by going public. Most of the others will be bought out by larger firms, such as Medtronic Inc., which are looking for fresh wrinkles in technology.

Minneapolis-based Medtronic, with $6 billion in annual sales, pioneered the medical-devices field when its founders invented the pacemaker in the late 1940s. Medtronic today makes the defibrillator that was implanted in Vice President Dick Cheney this year.

The company is the largest of a number of medical device firms concentrated in the Minneapolis area, including St. Jude Medical and Guidant Inc., which are major producers of heart valves, stents and defibrillators, and smaller ATS Medical, which is working on an advanced valve product.

Remarkably, all three companies were founded by Manuel Villafana, an inventor and entrepreneur who is about to step down as chief executive of ATS. He is starting a new company, Cabg Medical, to develop artificial veins for use in heart bypass patients. “That would eliminate the need for painful stripping of veins from patients’ legs and arms to graft onto the heart in bypass surgery,” Villafana says.

Villafana doesn’t use venture capital because he thinks the demands of such financing put too much pressure on small firms. “I’ve financed all my companies by investment from friends and associates and my own money,” says Villafana, who went to work for Medtronic after high school (in his native New York City) and never attended college.

For all the entrepreneurial presence, Johnson & Johnson, the $30-billion sales giant with products ranging from Tylenol to stents that keep heart arteries open, is about to introduce one of the most anticipated new products. It is a stent that automatically releases a drug to overcome rejection of the stent by the patient’s body, a major problem.

The product could significantly increase the size of the market for stent implant treatments, says analyst Keay Nakae of Wedbush Morgan Securities, a Los Angeles investment firm.

Johnson & Johnson will sell the product in Europe next year and bring it to the U.S. in 2003, after Food and Drug Administration approval. The two-phase FDA approval process is shorter for devices than for drugs, which must undergo three phases of trials, Nakae says.

The devices field is not restricted to heart applications. For arthritis patients, Sulzer Medica of Switzerland has introduced a Uni-Spacer that allows arthritic knee joints to function. “It’s a remedy that avoids whole knee replacement and allows arthritis sufferers a few relatively pain-free years,” says Dr. Marc Friedman of the Southern California Orthopedic Institute in Van Nuys.

Stryker Corp., of Kalamazoo, Mich., with $2.5 billion in annual sales, is a leader in orthopedic implants for hips, knees and spinal areas.

Medtronic also is reaching out to non-cardiac fields. In August, the firm paid $3.8 billion to acquire MiniMed Inc., a maker of insulin pumps for diabetes sufferers that was founded by Los Angeles-based entrepreneur Alfred Mann.

Mann, who has endowed a center of biomedical research at Cal State Northridge and contributed to another biomedical center at USC, has founded two new companies, Advanced Bionics, which makes hearing aid implants, and Mannkind, which is trying to develop vaccines for cancer.

The medical devices industry is no secret from investors, of course. Stock prices for such companies have been rising for the last two years and have remained firm even as other technology stocks have fallen dramatically.

The field is protected somewhat by the certainty of Medicare funding for treatments for the elderly, says analyst Jan David Wald of A.G. Edwards & Co.’s Minneapolis office. Medicare will cover expenditures of $35,000 to $50,000 for a heart operation. Cost of the valve, stent or other implant would be one-half to one-third of the total.

But the real support, Wald adds, is the pace of innovation and the growing needs.

A new Medtronic product, for example, can alleviate the effects of congestive heart failure. The implant can’t cure heart disease, Wald says, but “it can allow a bedridden patient to get out and walk around.”

Finally, the medical devices business has an important future in California. Already, many small firms in this region and in the Silicon Valley are pushing the technologies--imprinting entire laboratory procedures on a single microprocessor (Caliper Technologies Inc., of Mountain View) or developing body temperature controls to aid in brain surgery (Alsius Corp., of Irvine).

The roots of good fortune are clear. It’s because Southern California--and the entire state--enjoys an unparalleled number of research universities, a tradition of manufacturing know-how and an environment that attracts entrepreneurs that we have this industry with a future.

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Implants for Life

Investors see producers of medical devices--valves for the heart and orthopedic implants for the knee and back--as a growth industry catering to aging Americans. Here is a selection of companies making cardiovascular and orthopedic devices.

12-month 12-month Stock

sales earnings 52-week Friday

(billions) per share high low close

Medtronic Inc. $5.9 $1.13 $62.00 $36.64 $48.85

St. Jude Medical 1.3 2.13 77.25 44.45 74.56

Guidant Corp. 2.6 1.63 55.13 26.90 47.15

Edwards Lifesciences 0.72 1.02 28.00 14.75 26.69

Boston Scientific 2.6 0.82 27.89 12.75 24.86

Stryker Corp. 2.5 1.27 63.20 43.30 53.05

Biomet Inc. 1.1 0.83 34.36 20.46 28.81

Zimmer Holdings* 0.87 0.47 33.60 24.70 30.91

Johnson & Johnson** 10.28 0.55 60.97 40.25 56.30