Pathway Medical Grinds It Out, Seeks Profit Formula, Three Years After FDA Approval

Xconomy Seattle — 

Selling expensive new medical equipment to doctors today, no matter how good it may be, is no easy thing. Just ask Pathway Medical Technologies.

Almost three years have passed since the Kirkland, WA-based company won FDA approval for its first device, which drills through and sucks out tough-to-treat blockages in leg arteries. The company, founded in 1998, has raised $130 million of investment capital for this feat of engineering, and has a staff of 170 employees today.

Yet Pathway, stung once before by setting its own overly aggressive sales goals, has carefully watched its budgets the past couple years, and is taking a grind-it-out approach to get to the next level—sustained profitability.

“It’s not about growth at any cost. It’s about pursuing growth we feel we can afford,” Pathway CEO Paul Buckman said when I visited his office in Kirkland a couple weeks ago.

Pathway has had a lot of success with winning a series of FDA approvals for various versions of its device, which it markets under the Jetstream name. For those new to the story, Pathway’s device uses a tiny stainless-steel drill mounted on a catheter that slides inside clogged leg arteries, where it cuts through and vacuums out hard plaque blockages and squishier clot-like substances. It’s approved for patients with peripheral artery disease, a condition related to cardiovascular disease that has caused 2 million Americans to seek treatment, complaining of pain when they walk. Most people go undiagnosed, partly because there aren’t many good options for treatment.

The company showed some early signs of breakout potential in its first few months on the market, and raised $40 million in March 2009 during one of the worst stretches of the recession. But just a couple of months later, Pathway made a public admission that it had set overly aggressive sales goals, and had to cut 20 percent of its workforce to conserve cash, with an eye toward reaching break-even in mid-2011.

Paul Buckman

It’s mid-2011 now, and when I stopped by Buckman’s office for an update a few weeks ago, he said the company still isn’t profitable. Even though Pathway vowed two years ago that it wouldn’t raise more capital, Buckman now says the company will likely have to raise money next year.

Even though Pathway is falling short on those predictions, if there’s a word to sum up the company’s performance, it might be “stable.” The company still has 170 employees, the same as it did two years ago. Under constrained resources, it grew revenues by 50 percent in 2010, compared to the prior year, Buckman says. This year, Pathway expects to grow sales by another 30 percent, he says. About 15,000 patients in the U.S. have had a Pathway procedure done, and about 300 doctors are routinely using the device, Buckman says.

The hurdles here are numerous. Pathway doesn’t like to disclose what its drill sells for on average, but Buckman says all devices in its class sell for about $3,000 per procedure, and Pathway’s sells for a premium. This comes at a time when many hospitals and insurers are increasingly wary about adding costs. There are strong competitors like Dublin, Ireland-based Covidien and St. Paul, MN-based Cardiovascular Systems. And there is the inertia that comes from treating a form of cardiovascular disease in the legs that hasn’t traditionally been treated as seriously as blockages in the heart.

Pathway has focused on chipping away at this market a couple ways. It has continued to win FDA approval for a series of design modifications that don’t require long, expensive new trials, but that do improve the user experience for physicians, Buckman says. One example: Pathway recently won clearance for a new device with an improved guidewire system, which won’t get temporarily stuck during a procedure, even when a doctor is trying to remove a much bigger blockage than the Pathway device is designed to clear out. “It seems like a minor thing, but it was a nice improvement to the device,” Buckman says, because it saved time and hassle.

Like many device and drug companies, Pathway has learned about all kinds of nuances in its chosen market that weren’t totally understood when it was back in pure R&D mode. Pathway’s original device was designed to get rid of blockages in the thighs, where the arteries are like wide thoroughfares carrying blood, and its rotating drill was made to cut at two different diameters—2.1 millimeters and 3 millimeters. But that left a lot of the anatomy—the lower leg below the knee—and a lot of the potential market still untapped. So in the fourth quarter of last year, the company introduced a narrower drill, 1.85 millimeters, for those thinner vessels of the lower leg. Now it is miniaturizing even more, preparing to roll out a 1.6 millimeter drill. By going below the knee, Pathway is hoping to gain access to about 40 percent of the market it couldn’t sell into before.

The opportunity, to hear Buckman tell it, is open for the taking. Stents, the tiny wire mesh devices which cardiologists have used for years to prop open clogged up arteries around the heart, don’t work well in the legs because they twist and break. There’s interest among doctors in improving blood flow in the legs, and a system like Pathway’s, known as atherectomy, makes sense. Since no device gets implanted in the patient, this is a procedure that can be done repeatedly, if a patient needs it. Still, it’s a procedure that takes experience, and carries some significant risks of complications, like puncture wounds.

Pathway won its original FDA approval based on studies that showed it could get rid of big masses of arterial blockage, safely. What it lacked, and what the FDA typically doesn’t ask for, is long-term follow up data that health economists and insurers want to see. These are things like whether the treatment reduced heart attacks, strokes, hospitalizations, and repeat hospitalizations. Those kind of trials take time and money, and since there’s a risk of failure, many device companies aren’t inclined to sponsor them. But as insurers demand more justification for high-priced drugs and devices, Pathway has been listening. It is sponsoring a study in which 500 patients will have long-term follow up analysis done by an independent laboratory, Buckman says.

Getting more data to win over doctors and insurers, getting more engineering improvements out of the R&D team, and getting more productivity out of each salesperson is all part of the formula to get Pathway to the point where it’s profitable, and where it will have more attractive options than going back to the VCs and asking for more money.

“For the short term, it’s about blocking and tackling, gaining market share, expanding our ability to treat the entire leg,” Buckman says. “Those things alone will continue to grow our business. If we do that, it enables us to enlarge our footprint a bit, maybe add some attractive products. It could make us a more attractive acquisition candidate.”