Insightec, which is promising the world incisionless surgery, has been the most interesting company in the Israeli medical device industry for the past 20 years, but also has a reputation as a cash guzzler that failed to mature and realize its promise. In recent years, however, the company has seen a change for the better.
Insightec developed technology that makes it possible to focus heat rays from several directions on a single point, which are ablated without damaging the tissue on the way. A decade ago, the company, then controlled by Elbit Imaging Ltd. (Nasdaq: EMITF; TASE: EMIT) underwent a crisis following the commercial failure of its first product for treatment of benign uterine tumors. Insightec survived the crisis mainly due to the tenacity and faith of the late Motti Zisser, then the controlling shareholder in Elbit Imaging, whose main activity was in real estate. The company's fortunes have since taken a turn for the better with 50% growth in revenue between 2016 and 2017 and continued growth projected in 2018.
In the name of the share capital, the approval, and the CEO
Insightec owes its turnaround to three main factors. The first is large investments, initially $62 million by York Capital simultaneously with an investment in Elbit Medical, and a huge $150 million financing round this year at a company value of $610 million led by Koch Disruptive Technologies (KDT). The second is approval of its product for treatment of essential tremor by thermal ablation of brain tissue and the product's commercial success. The third is the recruitment of chairperson and CEO Maurice Ferré, cofounder and former CEO of robotics company MAKO Surgical, which dealt in orthopedic surgery. Under his management, the company grew to 500 employees and over $100 million in revenue. It was sold to orthopedics company Stryker Corporation in 2013 for $1.65 billion.
In an exclusive interview, Ferré tells "Globes" about what Insightec has been through and its future plans. "I knew Kobi Vortman, Insightec's first CEO, many years ago through Samuel Morry Blumenfeld (who was both an executive in GE Healthcare and an investor in Insightech). One day, Kobi came to me all excited and said, 'We're going to replace all of the operations in the world with non-invasive technology using focused ultrasound!' I nodded, but of course, I had no idea what he was talking about then," Ferre remembers.
Ferré: First the US, then Berlin
Ferré was involved with non-invasive surgery at the time. When he sold MAKO Surgical to Stryker, he was exposed again to Insightec and its progress with the product. Ferré later became a leader in surgical robotics. "When I sold MAKO, Morry invited me to see Insightec again. I spent a day with the team, and when I saw the progress over the years, I started to become enthusiastic. I had just sold the company, and I wasn't sure how much I wanted to start new activity immediately, but when I saw what Insightec was doing, my future path was set."
"Globes": The company's business situation was not great.
Ferré: "The company developed many apps for many groups of people. Its technology is very complex. Several attempts are necessary to properly develop each app, not to mention the difficulty of trials and getting approval for a product. When I came to the company, I immediately realized that we had to choose a focus for it."
In the brain segment
"It's not as if we're abandoning the other products; we're prioritizing. We've created a roadmap that I believe is creating value and leading the company from research to a real business entity."
What is the roadmap?
"The first market is movement disorders, and the most advanced product is the one for treatment of essential tremor (tremors not due to Parkinson's Disease). That is how we reached three achievements in the past three years. We obtained FDA approval after a very significant trial. Then we started the reimbursement process. We already have a code and value, and in November, we're getting an excellent code and value in 36 US states. We also got approval from Blue Cross Blue Shield, a leading private insurance company.
"2019 will be the year of commercialization for essential tremor. We see potential for placing 200 systems at $2 million a system. This is the size of the market in capital systems. I think we can reach this $400 million within 10 years or less in the US alone.
"We're upsizing our sales apparatus, because now's the time. We have marketing and reimbursement approval, we have a sales apparatus, and we also have proof of effectiveness from a various of studies we conducted that were published in respected journals and strong demand from patients. We have already identified 50,000 patients who waited for approval of reimbursement.
"Up until now, we've worked with hospitals linked to leading academic institutions, which are early adopters. More people are interested in the next article, not necessarily in treating as many patients as possible and seeing as much revenue as possible for the hospitals. Now we're moving to the next stage - the next tier of hospitals after the leaders, which are already interested in real commercialization. This is our task for 2019-2020, and this is what will support our growth in the coming years.
"At the same time, we're expanding from a partnership only with GE to also Siemens. This change will support our expansion, especially in Germany (where Siemens is established) and also in the rest of Europe. Italy and Spain can be significant markets for us. Now that we have Siemens, we expected growth in these markets.
"The third part of the growth strategy for the main product is China. We're preparing to enter this market soon, and believe that we'll get approval for the product in 2020-2021."
And the next product?
"Parkinson's Disease. We're in the middle of a Phase III trial, and we believe we'll finish it by the end of 2013 and get approval in early 2021, or even late 2020. We believe we'll be able to treat the disease earlier than it's treated now by surgery (in which electrodes are implanted that stimulate a specific area of the brain in order to encourage secretion of materials needed by the patient). Many patients are completely unsuitable for surgery, so we'll not only take market share from Medtronic, which performs the operation - and this is also interesting - we can also expand the market. This is another technology of the same capital equipment.
"The next step after that is epilepsy. An experiment is currently taking place to ablate tissue by laser in order to treat epilepsy, but for various reasons, this technology has not been established as a success. We think there is great potential here. A friend told me just a few days ago about a child who has 30 attacks a day. The drugs don’t work, and our product may change the situation for such patients."
Treatment without opening the skull
In the more distant future, Ferré sees potential for the product in drug delivery. Treatment using Insightec's device could make it possible to clear the "blood-brain obstacle." Many drugs do not reach the brain tissue through the blood vessels because brain tissue is based on the bloodstream. Temporarily opening the barrier can allow drug to pass from the bloodstream to the brain in the desired quantities, thereby improving treatment with these drugs with less damage to other body tissue.
In each of these markets, there is competition of various kinds, but is there competition with your core technology?
"This is one of the reasons why we chose the brain, because Kobi developed important intellectual property that continues to develop in this for years - not just patents, but also simply our know-how that was never published. The fact that we developed a closed feedback system gives us significant safety advantages. We believe that give the regulatory path we have traveled, if someone wants to imitate us, it will take at least 10 years.
"In movement disorders, we have competition from laser technology, but this requires opening the skull, and we do it without any opening of the skull and release from the clinic on the same day. There is no other technology that works non-invasively in the brain and to the best of my knowledge, nothing else like this is being worked on.
"We have the right product for a market that is waiting for us. All of the parts are in place - we have a ticket to the big game. The only missing part is commercial success. Now it's just execution."
Ferré says that in movement disorders alone, the potential market for the company is $1 billion. "I see us entering now a period of 25-30% annual growth for the next five, or even 10, years. There aren't many companies offering this. It's possible because of the competitive advantage we have created."
"It's the level of accuracy - up to half a millimeter"
Investments in Insightec to date total $440 million, more than the usually Israeli exit in medical devices.
"Insightec is a technology that changes the market. We see a $2 billion business before our eyes. The exit won't be like the sale of Mazor Robotics for $1.6 billion. It will be more in the direction of $30-50 billion. It will take time and hard work, but we want to break the records for exits in the Israeli medical sector," Ferré declares.
At the beginning, you had fruitful cooperation with GE, but this also restricted your market. Why did GE waive exclusivity in marketing?
"It wasn't easy to convince them, but they eventually realized that it would be the best thing for the platform. I think that GE understands that it actually helps them, because it improves adoption of the technology. They thought that if they had exclusivity, it would get them a market share, but they realized that an open platform was needed in order for the product to be adopted. When it's adopted, it brings GE deals, like it does for Siemens. Whey they buy our product, they sometimes also buy it with an MRI.
"At GE, they realized that they wouldn't be a therapeutic company, so they didn't need our product to be labeled GE. After we convinced them of that, we immediately went into partnership with Siemens, and that enabled us to be where we are today.
"Following this change, we also set up our direct sales team, and this was essential, because we're aiming mostly at surgeons, while they're aiming mostly at radiologists."
You did not mention destruction of malignant and benign brain tumors. It sounds like a perfect application of the technology, because there is no need to open the skull.
"Because it’s a large quantity of tissue, and intracerebral hemorrhage can occur. We don't think we'll do ablation of tumors; we'll treat cancer by very focused delivery of drugs. Our technology in the brain is suitable for things that are small and precise. In other places in the body, it's less critical if there's a little bleeding, so in those places, we do see ourselves as treating tumors in the future. Right now, we're oriented to the brain."
Will you hold an IPO?
"We'll leave our options open. As of now, we're focusing on our growth and carrying out our strategy. We have money for three years, and we'll see where that leads. We have enough money to reach profitability, but you never know, and it's necessary to act cautiously. A company like ours always needs money."
How do you see the medical device sector in general? It has recently been in a budgetary stranglehold.
"We're starting to see the return of this market. There were giant mergers, and now the giant companies have to build their portfolios. The giant companies are trading at multiples of 12-15, and medium-sized medical device companies are trading at even higher multiples, and have actually given a surplus return in recent years, in comparison with other medical companies and also with non-medical technology companies."
Who, for example?
"Novocure (an Israeli company that developed a medical device for treating brain cancer using an electrical field and has a $3.2 billion market cap on Nasdaq, G.W.) or Nevro (a paint treatment company with a $1.25 billion market cap). Large companies like Medtronic are also posting nice revenue and fine multiples, and this feeds their need to keep reporting growth, so they're starting to make acquisitions of medium-sized and small companies again.
"The challenge for Israeli companies is to develop sales. There are no more exits on the basis of development and intellectual property. They need to do a better job of obtaining reimbursement from medical insurance and building sales."
It looks like the Israeli managers are not sure how to do this. They feel remote and out of the loop. Is it really such a big death valley for an Israeli manager to market in Israel?
"No, not at all. I came to Insightec for exactly this, because I knew how to commercialize products in the US. I suggest that companies spend time with organizations of companies with advanced medical devices, such as Advamed. It's also important to know that there are double tracks in which you can get FDA approval and reimbursement from medical insurance, and this can be taken advantage of. All in all, we see more and more Israeli successes, and success breeds success. It's a matter of time."
Which Israeli companies do you regard especially highly?
"Besides Insightec, of course, I really like Gamida Cell. By 'coincidence,' it's also in Elbit Medical's portfolio, which has a 22% stake in it. I like BrainsWay (TASE: BRIN) and NovoCure. These are companies in which huge amounts were invested, but the proceeds are therefore also likely to be very high."
Published by Globes, Israel business news - en.globes.co.il - on November 18, 2018
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