Brian Farley knows a little something about building a successful medical device company from the ground up.
Back in 1995 Farley was the 1st employee of VNUS Medical Technologies, which developed a catheter-based treatment for venous insufficiency. During his tenure as VNUS CEO, the company went public in 2004 before being acquired by Covidien (NYSE:COV) for $440 million.
Farley joined Entellus Medical’s board in 2008 and took over the corner office 2 years ago this month, with co-founder Tom Ressemann stepping aside to become Entellus Medical’s chief business development officer. Entellus is developing a device to treat chronic sinusitis. More than half a million people wind up having some kind of endoscopic surgery procedure to treat the condition, which afflicts about 37 million people in the U.S., Farley told MassDevice.com.
The Maple Grove, Minn.-based company’s Xpress device (which won 510(k) clearance from the FDA in February 2011) uses a balloon catheter to dilate both the frontal and sphenoid sinus spaces during surgery for chronic sinusitis. The sphenoid sinuses are small cavities located deep within the skull. The device features a shape-able tip and allows for ear, nose and throat surgeons to enlarge narrowed sinus openings by inflating the balloon through the catheter.
We talked to Farley about Entellus Medical’s progress and its quest to bring sinusitis treatment out of the operating room and into the physician’s office.
MassDevice: You took over the reins at Entellus in 2010. What attracted you to the opportunity? What’s the value proposition?
Brian Farley: First of all, the company has a terrific staff of talented and dedicated employees, which made it quite easy to join them on the mission to provide sinus therapeutic technology, which allows patients to be treated minimally invasively in the physicians office.
All of our focus from a product development, design and clinical studies [standpoint] has been to validate that we can take patients who have chronic sinusitis and give them highly safe and effective treatment while they’re awake in the physician’s office.
The idea is, if we can treat the patient easily and effectively in that environment, then the technology and outcomes will be good, if doctors choose to use the products as a tool in conjunction with normal sinus surgery in the operating room. By doing that, we’re saving the healthcare system money, because the cost of performing sinus balloon dilation in the physician’s office is substantially lower than the cost of taking the same patient in the operating room and performing sinus surgery.
So, because it’s lower cost, it saves the system money, but it also saves the patients money, who are paying a 10% to 20% co-pay.
We think those 2 elements are in place. Our mission over the last 3 years has been to demonstrate that clinically. We’re now finishing our randomized trial, but the treatment does provide patients benefits compared to surgery and provides those savings.
MassDevice: Is the idea to eliminate surgery for chronic sinusitis, or provide an alternative for cases with lower severity?
Farley: Not at all, of the 37 million Americans who have chronic sinusitis, about 525,000 patients actually get an endoscopic surgery procedure. Of those patients who have extensive polyps, fungus growing in their sinus or underlying infections in the bones underneath the sinus, these patients all will continue to need surgery to open the sinus passages sufficiently to get long-term relief of symptoms.
However, for about half of the patients who today get endoscopic sinus surgery in the OR, those patients are suitable for an office sinus dilation procedure in which no cutting is required. By using a balloon device, we can open up the sinus drainage passages, preserve the sinus mucosa and allow these patients to have substantial relief of symptoms.
We’ve performed 7 clinical studies to date and have followed patients for up to 2 years. The results are consistent, that these patients have clinically meaningful reduction in sinus symptoms. It’s a nice win for everyone. The patients win, the system wins and physicians get reimbursement to support procedures getting done in the office.
MassDevice: So you’re looking at a potential patient pool of about 250,000 right now?
Farley: That’s right, although it’s hard to say whether or not patients who are exhibiting recurrent sinusitis might also come forward and get treated.
One of the things we’ve found in our survey of patients who have multiple sinus infections is that they’re very dissatisfied that they often times have to get 3 to 4 procedures per year for their sinus conditions. They’re getting multiple rounds of intra-nasal or systemic steroids to try and reduce the inflammation; they’re being asked to perform sinus irrigations nightly to keep the drainage passages open. They can get relief with medical care, but find themselves having a recurrence 3 to 4 months later and are at it again.
For some of these patients, we can offer an experience in the physician’s office, to be treated while they’re awake and in an hour walk out without any cutting of the sinus mucosa – and still get good relief of symptoms. I think this represents an opportunity to grow the market from 250,000 to 300,000 patients annually.
MassDevice: In order to tell that story, there must be a substantial investment in getting the word out. How are you telling the story on the marketing side?
Farley: We have a presence on the Internet, with patient education about the alternatives to sinus surgery. Through that and Google Adwords, which target patients searching for treatment of chronic sinusitis or sinus infections, it allows them to see some of Entellus’ options. That, along with some public relations work, really is the extent of our direct-to-consumer outreach.
Most of the patients learn about this through their physician, who explains the various therapeutic options available to them. Frankly, there are enough patients out there that [have had the procedure] to provide good word-of-mouth as well. In certain areas of the country where this has really caught on, this becomes a tailwind, which helps patients get educated quickly because they trust their family and friends, and allows that first step to patient sharing.
The physicians that use this are ear, nose & throat specialists, who routinely perform endoscopic sinus surgery. Some of them have opted to use balloon technology in their practice and an even smaller subset are using it in their office. The interest level is very high and I think we’ll see a significant number of ENT offices offer balloon sinus dilation in their practice for the next 10 years.
We’re at the infancy stages here. We have good insurance coverage, with 199 million lives, but we don’t yet have certain large players like Anthem or Blue Cross Blue Shield of Michigan, which still consider these procedures to be investigational procedures. Its our hope that our Remodel trial, which compares balloon procedure to standard sinus surgery, will provide the clinical evidence in the last part of the year to these insurance medical directors and hopefully provide the evidence they’re looking for.
MassDevice: Do ENTs think it’s more favorable to perform the in-house procedure because there is better reimbursement for it – does it help them build their practice?
Farley: We find that the ENTs are rather conservative in referring any patient for a procedure. They really want to try and solve the problem medically. However, once it’s time to acknowledge that the failure of medical therapy on multiple tries, then these same ENTs have a choice: Is he or she a good patient for balloon procedure, or do they need to go to the OR?
When they do opt for the office-based balloon treatment, it’s a win-win-win. The physicians are paid reasonably well, which covers the nursing staff in the room, the cost of the supplies, their own time and the facility use. Still, with all that, it’s a lower cost to the healthcare system than if the patient had been taken for an OR treatment in the hospital or ambulatory surgery center.
These are clinically based decisions, but the reimbursement is adequate enough to make it interesting for the physician to chose the office treatment option.
MassDevice: Tell me a little more about the technology itself.
Farley: Our XprESS product line is a multi-functional balloon dilation product. It uses a balloon to open up the sinus drainage passages in the frontal, sphenoid and maxillary sinuses all with 1 device, but it also enables palpation, suction and irrigation.
In other words, the doctor can take the device and palpate to try and find the opening of the sinus dilation passage, thread the device under endoscope view, advance the balloon, inflate the balloon for 5 seconds and all the while they can be suctioning out any mucus to keep the endoscopic image clear. After inflating the balloon for 5 seconds, the sinus drainage path is opened and the underlying boney structure is remodeled and the sinus mucosa preserved. The doctor will also irrigate and suction out any materials in the sinus at all times. This is all done with 1 device, with a tip that the physician can bend to shape to the individual patients anatomy.
MassDevice: In terms of the sales process, are you working with ENTs to do any practice-building?
Farley: We’re at the infancy of the marketplace and the physicians themselves are interested in growing their practices. However, our focus primarily is on the education of physicians and providing them great training to use the technology.
But then, if they want to grow their practice, we provide educational materials that they use to then educate patients directly. If they want to do advertising, we provide advertising pamphlets and so on that they can add their own practice information to. We provide tools and facilitate, but practice development is done by physicians and we provide content or tools to do it themselves.
MassDevice: Tell me about your funding situation a little bit. You’d raised $12 million by mid-2011 – have there been any rounds since then?
Farley: We raised a $35 million round in late 2011, which was led by Covidien Ventures and involved the current investor group as well. More recently, we took on some venture debt, which is designed to help us grow, expand the business, sales force and reach cash flow positive.
MassDevice: There’s a connection to Covidien there for you, isn’t there, having sold VNUS Medical to them in 2009?
Farley: Yes, but I actually didn’t have any connection to Dan Sheehan at Covidien Ventures, and others in that group were all new to me. But they had the advantage of seeing the quality of the company they purchased in VNUS in 2009. My understanding is that acquisition has done quite well for them.
MassDevice: How big a team do you have right now at Entellus?
Farley: The company is about 130 employees and we will have approximately 70 people in the U.S. sales organization very soon. We are strictly in the U.S. and will have some limited sales in Europe in 2013.
We’re very pleased with our ability to grow the office dilation market from scratch. We believe we’re the market leader in that respect. As far as in-office dilation procedures go, we think there are approximately 10,000 procedures done in the physician’s office in 2012 – that’s out of a potential of 250,000-300,000 that we’ll get to. But it will take 5-10 years to get to that level of usage. Our goal from the beginning has been to position ourselves with the right technology, that’s easy to use, multi-functional and priced correctly to make it a good option for physicians.
MassDevice: So, in essence, you’re pioneering the procedure. Who are you competing with right now?
Farley: Our principal competition is Acclarent. They were the first company in the market with balloon dilation and most of their sales tend to be balloons in the operating room as an adjunctive tool to go along with surgery. We also have a majority of our business in the operating room, at 60%, but the fastest-growing is that office-based segment. We anticipate half will be in the office and half will be in the OR by the end of 2013.
MassDevice: You were the 1st employee at VNUS. What key lessons did you take away from that experience that you’re using here?
Farley: One of the things I’ve always believed is that physicians and patients have a choice, so it’s imperative that, when we develop technology or perform clinical trials, we provide information and products that have an advantage.
When you have a product that provides excellent clinical results and provides an advantage for the doctor as an alternative, then you’re going to win in the marketplace from a business perspective.
But it all starts with getting the patient care, training and the device technology correct. However, it’s not just the device technology, it’s the procedural techniques. With any medical device procedure, it’s very possible to do these procedures incredibly well, but it’s also possible that with inadequate technique the results won’t be right. So we focus tremendously on the clinical certification and education of our sales team and clinical team and try to extend that to the physician.
We also try to manage the business efficiently. We try to invest our money as though it’s our own and not someone else’s. We also try to be sensitive to the cash burn rate until we become profitable.
MassDevice: Is the goal to ultimately sell the company to a larger strategic?
Farley: We have to look at building a company that is built with a solid foundation for any potential outcome. If the company is acquired, that would be something the original investors would be interested in if it’s the right time and the right price. Failing that, the company has to be prepared to go public if the other options aren’t available.
I don’t think companies go out and sell themselves. I think we build a strong business, have an advantage in the marketplace and build a high growth rate from that. If an acquirer comes along, that’s terrific, but we have to be prepared to run a stand-alone.
Companies are bought, they aren’t sold, and they’re usually bought by companies that have done a strategic planning process, identified a segment of the market they want to be in or amplify their growth rate in and want to go outside their walls to use some of the cash to make it happen. That’s driven by a strategic planning session. We can’t worry about that, we have to build the best business we can.