Wednesday, November 21, 2007

Quite A Set of Lung (Companies)

Are the public markets ready for TWO interventional pulmonology companies?

With Tuesday's filing for an $86.25 million IPO yesterday, Broncus Technologies Inc. became the second company with a device that could treat serious emphysema to seek support from public investors. We reported on the first way back in September when Emphasys Medical Inc. filed for a near identical amounts. (Seriously, $86.25 million vs. $86.3 million? Who is cheating off of whom here?)

Technologically and clinically, this is exciting stuff. According to Broncus’ S-1, 3.8 million adults in the United States have reported that they had been diagnosed. The company suggests—as they should—that many people go undiagnosed. The filing cites a 2005 survey by the National Center for Health Statistics that states the “prevalence of emphysema in the U.S. increased at an average annual growth rate of 2.4% from 1997 to 2005, with approximately 675,000 new diagnoses between 2003 and 2005, the most recent years for which this data is available. We estimate that emphysema is responsible for approximately $5 billion in direct healthcare costs in the United States each year, comprised primarily of hospital and physician costs and oxygen use.”

Although their approaches are quite different, Broncus and Emphasys hope to treat people with the most serious—and most expensive—cases of emphysema. Today, severely sick people have very few options. Drugs and supplemental oxygen can help. Other than that you’re looking at highly invasive transplants or lung volume reduction surgery. The two companies developed products that can be delivered through the airways so no opening of the chest is required.

Broncus’ Exhale emphysema product line includes needles and stents that are used, respectively, to create new airways and prop them open, allowing trapped oxygen to escape. The company says as the air escapes, the diaphragm regains some of its normal range of motion, enabling the patient to breathe more easily. Broncus’ procedure takes one or two hours under general anesthesia or conscious sedation.

Emphasys Bronchial Valve is a one-way valve that, once inserted in airways, allows trapped air and fluids to escape during exhalation but prevents any air from entering the airway inhalation. The device provides the benefits of lung volume reduction surgery without the risk of open surgery. With airways leading to disease portions of the lung blocked off a patient is able to breathe more effectively. The entire procedure lasts between 20 and 40 minutes, according to the company’s S-1.

At this point, Emphasys would seem to have one distinct advantage. It’s further along in clinical testing than Broncus. As we noted in September, Emphasys has submitted the results of its pivotal trial to the FDA. It hopes to have market approval next year.

Broncus, meanwhile, has a longer road to hoe. According to the S-1, the company has enrolled more than 100 subjects worldwide in our studies and clinical trials, “including approximately 40 subjects treated in our pivotal Exhale Airway Stents for Emphysema, or EASE, Trial for the treatment of severe homogeneous emphysema.” The company hopes to complete enrollment by the end of next year and file for its PMA in 2009, with an eye on having a product on the market in 2010.

That might be too long a time horizon to interest IPO buyers, but stranger things have happened.

One of those stranger things happens to have happened to Broncus’ off-spring, Asthmatx Inc. That company, a spin off from Broncus, had filed to go public in 2005 only to withdraw the offering. CEO Glen French says the company, which is developing a device to treat severe asthma, was ready to go public at the price it wanted, but instead opted to sign a $50 million financing deal with Olympus Medical Systems Corp. French says Asthmatx got the money it wanted and sold a smaller stake than it would have during the IPO.

So perhaps Broncus will be able to tap into the thin vein of IPO buyers willing to gamble on unproven—albeit ingenious—devices. There can be huge upside there. But by filing an IPO the company also could be positioning itself to draw interest from significant corporate investors or, perhaps, even a potential acquirer.

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