Sanovas seeks $25 million as it gears up to go commercial

Sanovas CEO Larry Gerrans

Most startup medical device companies raise 10s of millions to research and develop their products before they even get to the commercial stage. But for Sanovas and co-founder Larry Gerrans, the 12-year journey to that point required a scant $9 million – all raised from the pulmonary device firm’s founders, friends and family, Gerrans told last month.

"We’ve built the company with significant fiscal constraint. We’ve been very engineering-eccentric. I’ve been everything you can imagine, I’ve been in intellectual property, I’ve been operations, been managing the engineers," Gerrans told us. "We’ve grown strong, we’ve not grown fast. We’ve really paid attention to what the physicians have been asking for, getting good strong feedback from them."

The Sanovas Vas Zeppelin device is more like 5 devices in 1, involving imaging, catheter-based access and intervention, "smart" technology and drug delivery – all on a scale small enough to fit into the 1mm to 3mm commonly found in the lungs outer reaches. It’s designed to eliminate the need to crack open patients’ chests to access the lungs – and the 7-day in-hospital recovery time for such procedures.

Earlier this year Sanovas built out its Sausalito, Calif., headquarters to add administration and manufacturing space. Now, in anticipation of 510(k) clearance from the FDA, Sanovas is looking to drum up about $25 million to commercialize the Vas Zeppelin for the U.S. market, Gerrans told us at the AdvaMed 2012 convention in Boston in October. We asked Gerrans to bring us up to date on Sanovas, which we last profiled at AdvaMed 2011 in Washington last year. In the year since we last spoke, Sanovas has focused on developing the engineering behind its technology. Can you bring us up to date on the company?

Larry Gerrans: We’ve been very engineering-centric over the last year. We’ve spent a lot of time working with our engineers and our physician advisors, doing a lot of the physician preference testing and the human factors analysis, just getting the feedback that we need to make sure that the product that we’re delivering through the FDA process is going to be the "got-to-have product," not a "nice-to-have."

We’ve probably done about 10 pigs over the last year and have a ton of bench data, comparative effectiveness stuff. It’s been good. I think that what we’ve finally distilled it to is coming out 1st with the autonomous interventional bronchoscopy apparatus that can be done at the bedside.

When you’re looking at interventional bronchoscopy, you’ve got 47 million Americans out there with chronic pulmonary disease. You’ve got the National Lung Screening Trial , 1 of the seminal studies over the last decade that’s calling out a 300% increase in the detection of pulmonary disease.

When you’ve got a 300% increase in detection using low-dose helical CT, the era of pulmonary screening is now at hand. In fact WellPoint, which insures 35 million people, has just authorized elective reimbursement for pulmonary CT for those 50 and over.

We’ve been a lone voice in the forest for the last 10 years while we’ve been evaluating the technologies that are needed to go into the places and spaces in the pulmonary anatomy. As you know, it’s been an iterative process along the way, where we’ve developed the access technologies and the imaging technologies.

Then we introduce these physiologic metric technologies to make pulmonary intervention much safer and much more efficacious, to provide the doctor with an intuitive command in the operating environment that he doesn’t otherwise have, giving him the ability to acquire the special dimensions of the anatomy to better understand what the modulus of the airway is, what’s the diameter, what the density of the obstructions are.

Once they get their measurements, then be able to provide them with the tools that will enable them to diagnose the pathology that resides there. As you know, molecular genetics is the new rage in immuno-diagnostics. We’ve created some very robust and some very capable pressure-vacuum-actuated diagnostic biopsy devices to facilitate transbronchial needle aspiration and other biopsy capabilities within the airways themselves.

Then once you’ve accessed it, once you’ve imaged it and once you’ve measured it, now you can diagnose it and now, obviously, there’s pathology that certainly needs to be removed. We’ve got some elegant tools for the removal of that pathology. And all this – access, measurement, diagnosis and treatment – is done in a single sitting?

LG: One sitting or, in some cases, more than 1 sitting. With the significant increase that’s expected in pulmonary disease detection, there’s going to be a correlate to pulmonary intervention and the need for diagnostic bronchs, bronchial-alveolar brushings and lavage, and the ability to evaluate the pathology that’s in there and then to treat it.

One of the things we found was, as much as we wanted to go after a curative approach, if you can’t address the pathology that resides outside the airways, especially in the case of lung cancer patients, you’re going to be hard-pressed to do anything other than palliation. We came up with 12 to 15 patents drug-delivery patents that are pending.

We’re very excited about that, because that’s then going to allow us the ability to provide drug delivery to the submucosal and submural tumors, which are big, especially with low-dose helical CT. I think if you look at current interventional technologies at the current dimension where we’re at right now, most of the community physicians have the capability to go to the 6th or the 8th generation. But you’re looking at 23 generations of airways, 8,365,000 airways and, frankly, current technologies are hard-pressed to get past 100 airways.

So by getting from the 8th generation to the 13th or 14th generation, which is where we’re going, and then beyond, it’s going to enable the direct imaging and the direct interventional capability to catch up with the advances that have been made in indirect imaging in CT.

One of the things that’s been somewhat alarming is that now that you’ve got these diagnostic CTs and these other diagnostic radiologic imaging devices, now you can find the disease. But the question is, how do we get there, how do we get to it? So we’ve been pretty excited to create the world’s smallest surgical camera.

For us it’s just iterative at this point. We’ve grown strong, we’ve not grown fast. We’ve really paid attention to what the physicians have been asking for, getting good strong feedback from them. I guess for lack of better analogy, you’ve got to feed the dog what the dog wants to eat. You want to make sure that when you’re doing the objective evidence-based testing, you’re really acquiring good, strong feedback, but then you have to give way to the subjective feedback that will lend us the analysis that allows us to trend what these guys really want and what they really feel they’re going to use on a day-to-day basis and on a case-by-case basis.

Erhan Gunday, my co-founder, and I were on the ground floor in minimally invasive surgery. The companies that have really done well and have had the staying power and have brought significant shareholder value and improved patient care have been the Ethicon Endo-Surgeries, the U.S. Surgicals, the Strykers, the Olympuses. Those are the companies that brought either an access capability, be it ports or trocars, and ability to gain access to the anatomy that’s to be treated or have improved the imaging capability.

We’re pretty excited because nobody has ever really planted their flag on behalf of interventional pulmonary science and created technologies by doctors, for doctors. We feel we’re going to be the catalyst in the interventional pulmonary space that’s going to bring a significant and sophisticated set of tools that’s going to help these guys not only access and image anatomy, but then also bring on the next generation of therapy-enabling technologies to measure, diagnose, treat and deliver drugs. What’s your sense of the timeline for the 510(k)?

LG: That’s imminent. We’re going through it right now. We expect our submissions to be this 4th quarter and we expect FDA clearance in the 1st quarter of 2013. It’s been coming up fast, but it’s also been a long time coming. We wanted to make sure we had the appropriate data and the appropriate metrics and that when we do go through the FDA, we provide the FDA with everything they’re going to need to make the objective, evidence-based analysis and viability of the safety and efficiency of our products.

We’ve got a lot of experience on 510(k). We’ve got a lot of experience on technology development. The core team and the capability in the bench is strong. We want to get it through, get it done right the first time. Our model is one and done. Any plans for Europe?

LG: We’ve actually been talking to a couple of strategics in Europe about domiciling the European headquarters in a couple of economic development zones there. Pretty nice, quasi-non-dilutive financing coming in from Europe, which is prospectively going to be a nice shot in the arm. We’re definitely looking at Europe. We just got back from a couple of weeks in Asia and China, so we’ve got some vendor partners coming in from there.

One of the things about us and, in fact, 1 of the interesting things about being a medical device company today, and especially in this space, is you’re an international company right out of the gate. That’s what we’re prepping for. In addition to that, we look at not only the proliferation of the disease in the U.S., but the proliferation of the disease in the established markets, the European markets and even the Asian markets and Japan.

When you look at the emerging markets in China, in India, where everybody smokes but everybody also has access to healthcare and where the mentality is, "Health is wealth," people will pay for it and the governments are subsidizing it. Obviously the middle-class expenditure in Asian countries is up. There’s an enthusiasm for these technologies and for us, we’re looking to bring in very low-cost technologies that can be delivered by the rural or community-based doctor at the bedside.

We really want to able to get the technology in the hands of the community-based physician. When you look at pulmonary intervention, just in the U.S., 90% of the patients in the U.S. with a complex airway [disease] are only being treated by 10% of the facilities and the physicians, who have the capability, the confidence and the competence to manage complex airway.

From a business perspective, it’s a very short run for a big score, being able to work with these guys to bring the technology to a very focused location base. But at the same time, with this prospective 300% increase in detection, these guys are already slammed. The feedback we’re getting from the medical university and regional oncology physicians is, "This is a great idea, because you guys can get this technology into the community providers’ hands and take some of the burden off of us." The biggest factor is getting after these diseases early and especially pulmonary diseases early.

With early detection, early screening, that’s going to be a big solution and then us coming in thereafter with the interventional solutions, that can get in there with elegance and precision to remedy these diseases. We’re going to prolong survival and reduce mortality. How much money have you brought in so far and is it enough to carry you through the 510(k) and to commercialization?

LG: We’ve brought in – I think that’s one of the things that’s exciting about us is – we’ve brought in about $9 million now. But we’ve brought it all in through friends and family, and that’s in addition to the money that the founders put into the company. We’ve grown, we’ve got a very interesting cause-based initiative. We’ve built the company with significant fiscal constraint. We’ve been very engineering-eccentric. I’ve been everything you can imagine, I’ve been in intellectual property, I’ve been operations, been managing the engineers.

From an operational perspective, it’s been early mornings, late nights and covering all the loose ends. But we didn’t want to bring in the operations any sooner than we had to, because we wanted to respect the burn and we wanted to respect the technology. We’ve got 37 products in the pipeline and we wanted to bring all those closer to the doorstep of commercialization, before we filled out the operations.

Now that we’ve got that, we’ve put that apparatus in place and we’ve brought in some significant, major industry players. I think 1 of the underlying things of our company is that you don’t get to work for Sanovas if you don’t have what’s called the rite of passage – which is having brought a product from concept to commercialization. When you look at [CFO] Robert Farrell, [VP of regulatory affairs & quality assurance] Carlos Gonzalez, [co-founder & CTO] Erhan Gunday, [senior director of mechanical engineering]
Alex Hsia, [chief science officer] Charlie Wang, myself, [VP of clinical affairs & physician education] Mike Humason, [marketing VP] Steve Goldsmith, this is an experienced team of guys who have done this and done this twice over. We’ve tried to keep this thing on a slow burn. What’s the sales model after you land the 510(k)?

LG: We’re going to go direct sales. For me personally, having been a part of both of those models, if Sanovas and its shareholders are waking up every day concerned about the excellence of the company and driving revenue, we would need to make sure that the people that are out there representing the company are in it. Obviously markets dictate markets and certain situations will mandate maybe a modified approach. But I think for us, our entire governing approach to the company is to own the relationship with the physician and to own the relationship with the patient. We’ve got direct a direct consumer approach, we’ve got a direct physician approach, and we’ve got doctors training doctors. We’ve got a pretty sophisticated sales and marketing approach.

The first thing we’re doing is bringing on teams of clinical affairs guys to facilitate the clinical investigation, the clinical validation and the clinical publication of the efficacy and the outcomes of our technologies. Put that into the peer-reviewed literature so that these community-based doctors, when they are looking to validate the technology, they’re going to have to pearls which are at their fingertips need in the pubmed and the literature. Then our clinical affairs guys can train them up at regional training centers and then we’ll back-fill the sales support function.

But I think, for us as a company, we’re at the tip of the spear of innovation, these physicians want to be at the tip of the spear of innovation, we want to be ahead of the curve on training. Frankly, this has the look, feel and the taste of the lap-choli boom back in the 90s. I was that guy, walking into a general surgeon’s office, saying, "Hey, how do you do a gall bladder?" He’s like, "Well, I do a 6-inch midline incision. I evert the liver and resect the gall bladder off. Typically, I am skin-to-skin in 15 minutes." Then he says, "So what do you have for me?"

I say, "Well, I’ve a 10mm laparoscope. We’ll stick it into the belly button, inflate the abdomen with CO2 gas and then give you 2 ‘chopsticks’ and teach you how to pull the gallbladder out of the belly button. Initially, it’ll take you 4 hours. When you get good at it, it’ll take you 2." And he would say, "Okay, see you later." We had to overcome that paradigm. Now it’s the gold standard. I think this paradigm is analogous to that.

We had to overcome that paradigm and I think this paradigm is analogous to that. I think there are a lot of doctors out there who fear to tread, because of the procedural risk and the technological limitations. Having overcome the technological limitations, we have mitigated the procedural risks. I think there are going to be more guys who are going to dare to intervene and dare to intervene early. I know they want to. I know their patients want them to.

I also think that the National Lung Screening Trial for us was timely and has put GE (NYSE:GE), Siemens (NYSE:SI), Toshiba Medical Systems (TYO:6502) and Philips (NYSE:PHG) into high gear. They’re out there selling their low-dose CT machines and related CAD software. Then the hospitals are doing their co-marketing agreements, so they’re out there asking patients who’re getting a mammography or colorectal exam or colonoscopy or a prostate exam, "For an extra $100, we’ll give you a pulmonary CT."

That’s helping in the screening and then WellPoint and all the insurance companies and what they’re doing right now – right now we’ve got a rising tide, it’s been good. Having been the lone voice in the forest as long as we were, it’s great to see things coming around. You’re about 11 or 12 years in now, right?

LG: Yeah. I think Erhan and I shook hands in 2001, 2002. But we really didn’t get traction until probably 2006 or 2007. We only formed the company in 2010, after we won the Best Young Investigators Award at the World Congress of Oncology/Bronchology and we kind of knew we had a product. Then for us it was, "OK, having the tool is great," but when you’re looking at the complexities of the lung, you need a tool belt. You can’t just send in the guy with just a single tool and say, "Hope for the best." You need the tool belt. We recognized that if we’re going to be responsible about stewarding the technology and stewarding the advance of innovation, we were going to have to bring that tool belt. Looking ahead, you’ve got your 510(k) in hand, you’re commercialized and bringing in revenue. Are you looking to build this into a stand-alone or are you looking for some kind of an exit, perhaps to a strategic?

LG: I think the opportunity for us as a stand-alone is significant. Clearly, I think, we’re going to be the catalyst in the space. But when you look at [strategics’] management, these guys, they’ve all done this before. I think there’s a lot of enthusiasm for what this could prospectively mean. With the enthusiasm in the space, we’re already entertaining requests and offers and solicitations of sorts. I expect that someone’s going to come along as a strategic and that will inevitably lead to an acquisition.

The interesting thing about us is that, obviously having overcome the complexities of the lungs and having to work on a vital anatomy that’s breathing and moving, having to choreograph our devices to work in concert with the pulmonary rhythm and to work in concert with the motion, that’s a significant advance to the utility of these technologies in other tubular anatomy.

For urologic, gynecologic, GI, general surgery, pancreatic cancer, cardiovascular and neurovascular, our technologies have great utility. Simply because we have the ability to measure things such as the modulus of elasticity of the vessel, that’s got significant importance to the vasculature. I think that our technologies have great cross-pollination, I think there’s opportunities for us to license and there’s opportunities for us to facilitate asset sales in other sectors. So it’s really not just sort of a pulmonary platform, it’s a true platform technology?

LG: It’s a true platform to advance the miniaturization and the sophistication and the intelligence of interventional tools and capabilities. I think for us, we’re focused on pulmonary, but I think there’s a lot of other utility for our products elsewhere. So we’ll have to evaluate those as they come. But I think our focus right now in the short term is just to make sure we get out there on behalf of the pulmonary patients.

Pulmonary diseases are a $154 billion cost per annum on U.S. GDP today. That’s about 15% of the overall cost burden of chronic non-communicable diseases on the GDP of the country. There’s a significant opportunity to reduce the cost of health care as early as possible in pulmonary disease. What impact will the medical device tax have on you?

LG: Two-point-three percent [laughs]. I think it’s going to have 2.3% of the revenue. It’s frustrating. If the device tax had been in place in, say, 2009, when you formally started the company, would you have been able to do this on that $9 million if the device tax had been in place?

LG: I think we’d still be able to do it. The device tax comes in when the revenue’s in, so being pre-revenue, I don’t think that it’s going to have an impact on us now, but it will be showing an effect. It’s going to be painful, it’s going to be extraordinarily painful Year 1 as you start to develop those formidable sales.

It will take 2.3% right off the top. If you look at some of the analysis on this stuff, it’s going to take priority over EBIDTA, so that’s going to be painful. I think that, frankly, everybody thinks that it should be repealed, number 1. Number 2, if it’s not repealed, I think they need to evaluate that tax with certain sensitivities towards the emerging enterprises, because that 2.3% could make or break a company.

The 1st year or 2, you’re taking losses. The next year, the next 2 years, you’re capitalizing your initial investment. If you take a look at the capitalization over all, it’s probably much more than that.

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