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How Did Calypso Raise $50M? The Story Behind Seattle’s Biggest VC Deal of 2009

Xconomy Seattle — 

Word out of Calypso Medical Technologies the past year hasn’t been what most people would call positive. The Seattle-based medical device company cut one-fifth of its staff in December. Even in its third year on the market, it was still struggling to get Medicare to pay for its devices that pinpoint radiation in ways that are supposed to help minimize side effects of prostate cancer treatment.

So what enabled Calypso to corral $50 million, the Northwest’s biggest venture capital deal of the year so far? That’s what I asked CEO Eric Meier yesterday afternoon after his company dropped that bombshell.

To hear Meier tell the story, a number of small, but important things have been adding up behind the scenes. Calypso first won FDA approval for its technology in July 2006, and at last count, it has now sold its system to nine of the 33 top-ranked cancer centers in the U.S. Calypso cut a deal this summer with Varian Medical Systems—the dominant maker of radiation therapy machines with 70 percent U.S. market share—in which Varian will incorporate the Calypso technology into its machines. Data from clinical trials is starting to pile up that says the company’s technology works for other tumors in the pancreas and lungs. And Calypso has a chance to tap into some new markets, since it has recently received approval from regulators in Canada and the European Union.

“It’s really about execution for us,” Meier says. “The technology risk is behind us, the clinical risk is behind us.”

Calypso, for those new to the story, was founded in 1999 by Seattle-based Frazier Healthcare Ventures to develop an idea for what it now markets as “GPS for the Body.” The system is designed to make sure that beams of radiation are aimed exclusively at cancerous prostate glands, without harming healthy tissue nearby. The machine monitors movement of the prostate in real-time, meaning if a patient burps, twitches, or even has some gas buildup in the rectum while he’s lying on the table, technicians can see in real-time if the radiation beams are falling off track. If it’s hitting the bladder, they know. That’s important because it means they will likely turn off the machine or adjust the table, which could save the patient from impotence or having to wear adult diapers the rest of his life.

The system uses transponders that are about the size of a grain of rice, which get implanted in a patient’s prostate gland. That transponder sends a signal to a base receiver that processes the precise coordinates of the prostate in real-time, and displays it on a simple user interface for the technician. The base machine costs $400,000 to $500,000, and Calypso sells the implantable transponders for $1,200 apiece.

The company has been working hard for years to make this technology user-friendly for doctors and technicians, and it has apparently taken a big step in the past year. Earlier versions of the technology required technicians to turn off the radiation when the beams fell off track, so they could adjust the patient—which could be a time-consuming process. That hurts the bottom line of radiation therapy centers, because if they need to spend more time with a patient, that means they get to process fewer patients each day.

Knowing this, Calypso has found ways to integrate its technology into the radiation therapy machine itself. If the whole thing is integrated, then radiation beams can be adjusted on the go to keep them synchronized with the movement of the prostate. That means there’s no need to shut down the machine, and waste time adjusting patients on the table.

“We have instant feedback,” Meier says. “You can adjust the therapy on the fly.”

While doctors and patients are buying into the concept—at least 2,800 patients had gotten this therapy at the last available count in March—Calypso will have to show hard data that this improves patients’ quality of life if it’s going to persuade payers to reimburse for this work. Calypso isn’t saying much about what kind of results it has to support its goal of improving patients’ lives, although Meier says the company plans to present detailed findings at the American Society for Therapeutics Radiology and Oncology (ASTRO) meeting in early November in Chicago.

What exactly will Calypso do with the new money? The company will look to beef up its commercial presence in North America and Europe, keep investing in research against other tumor types, and work to incorporate its technology with radiation therapy machines, Meier says. The company has 136 employees now, down from almost 200 in early December, and he didn’t want to commit to specific growth numbers in terms of hiring.

The venture capitalists who are making this bet must think Calypso has absolutely stratospheric potential. The company has now raised more than $175 million since it’s founding, so by anybody’s math, it’s going to be awfully hard to achieve the classic 10-fold return on investment that VCs seek. But this wasn’t one of those cases we see of existing VCs pumping some money in to prop up a desperate loser in its portfolio. Two of the major investors in this $50 million round—Frazier Healthcare and Bay City Capital—are existing investors. Two of the other investors, Skyline Ventures and InterWest Partners, are making their first investments in Calypso.

Skyline has a particularly impressive record in medical devices. It invested in Sunnyvale, CA-based Intuitive Surgical (NASDAQ: ISRG), the developer of the da Vinci surgical robotic system. Its stock closed yesterday at $244 a share.

Calypso isn’t anywhere near that kind of valuation, and isn’t even profitable. One of its goals in this financing will be simply to turn profitable. But the company, and its investors, are obviously still daring to dream big.

“The investors believe in the vision, the team, the potential,” Meier says. “We’re fortunate to have a strong investor base.”

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One response to “How Did Calypso Raise $50M? The Story Behind Seattle’s Biggest VC Deal of 2009”

  1. Luke,

    As always, your stories are interesting and insightful. Thank you for your analysis. I am linking to your blog on the MedTech-IQ professional network dedicated to the 3C’s of “Content, Community & Collaboration” in translating medical technology from “Laboratory to Market”, http://medtechiq.ning.com/profiles/blog/show?id=2140535%3ABlogPost%3A24562&xgs=1

    Conrad Clyburn