Date: Aug 19, 2011 Author: Luke Timmerman Source: xConomy (
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Pathway Medical Technologies, the Kirkland, WA-based maker of a device that clears out blood vessel blockages in the legs, has agreed to be acquired for $125 million by Medrad, a Warrendale, PA-based medical device unit of Bayer Healthcare, Xconomy has learned.
The acquisition hasn't yet been announced by either company, and the deal is still pending, awaiting final regulatory and shareholder approval, sources say. The deal also includes a bonus pool of $6.3 million to retain certain members of Pathway's senior management team after the deal closes, according to a merger document reviewed by Xconomy.
Pathway CEO Paul Buckman declined to comment about the deal, as did chairman Tom Clement and director David Auth, when reached by e-mail. [Updated comment from Medrad.] Medrad spokeswoman Alicia Cafardi said "this transaction is pending and we cannot provide detail or comment at this time."
The deal appears to offer up a mixed bag of returns, depending on your point of view. All of the buyout returns will go to the Series D-2 preferred stockholders, while the holders of other classes of stock will not get any returns, according to the merger document. Pathway raised its Series D financing, worth $42.5 million in May 2009, from Forbion Capital Partners, Giza Venture Capital, HLM Venture Partners, Latterell Venture Partners, Oxford Bioscience Partners, WRF Capital, and individual investors. The company, according to the most recent tally Buckman offered in a June interview, had raised a total of about $130 million since its founding in 1998—meaning that a $125 million purchase price by definition doesn't offer much of a return for the total investment.
Tom Clement, Pathway Medical founder and chairman
Still, Pathway has been one of the bigger success stories of the Seattle medical device cluster of the past decade. The company, founded by Clement, originally intended to drill out plaque and clot buildups in vessels around the heart. But as the cardiology market showed a clear preference for stents, the tiny mesh devices that prop open clogged arteries, Pathway briefly shut down in late 2004 and early 2005. Clement went back to the drawing board to reinvent the device, and raise more money, to go after a more promising market niche of blockages in leg vessels—what's known medically as peripheral artery disease. That new opportunity was attractive for a couple reasons. About 2 million Americans are estimated to seek treatment every year for this condition, which causes leg pain when people walk. And stents don't work well in the legs, because they have a tendency to twist and break.
Pathway's current device, marketed under the trade name Jetstream, 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.
Pathway persevered through its lean times, and got its first device cleared for sale by the FDA in the summer of 2008. It showed some promising early signs in the market, signing up more than 100 physician customers in the first few months, and getting them to use it on more than 500 patients at about $4,000 apiece in the product launch phase. But Pathway, like a lot of medical device companies, struggled to live up to its projections, as hospitals became cautious during the recession and the uncertainty around federal healthcare reform. By May 2009, the company laid off one-fifth of its staff, as it fell short on its launch sales projections. By cutting costs at that time, Buckman said, Pathway set a goal of turning profitable by 2011.
The company never did turn profitable, at least based on the most recent interview Buckman gave to Xconomy in June. At that time, the company had made a couple of important iterations to its product to make it more competitive, and it had built its staff back up to 170 people, about the same headcount it had at the time of its layoffs two years earlier. Even while watching its expenses on sales and marketing carefully, and facing competition from Covidien and Cardiovascular Systems, Pathway grew its annual revenues by 50 percent in 2010, and was on pace to boost sales by another 30 percent this year, Buckman said. About 15,000 patients in the U.S. have had a Pathway procedure done, and about 300 doctors are routinely using the device, Buckman said in June.
Medrad is the kind of acquirer that certainly has the horsepower to exploit Pathway's Jetstream product line if it really wants to. The company is a global manufacturer and distributor of sophisticated medical devices, like CT scanners, MRI machines, and cardiovascular tools. The company was founded in 1964, and went public in 1992 when it had $65 million in revenues, according to a company history posted on Medrad's website. By 1995, it went private when it was acquired by Schering AG, and it was later absorbed into Bayer through Bayer's acquisition of Schering.
Pathway's acquisition ultimately isn't much of a surprise. Buckman signaled back in the June interview that he was interested in turning the company profitable, not in going back to the VCs to ask for more money to keep the ship afloat.
"For the short term, it's about blocking and tackling, gaining market share, expanding our ability to treat the entire leg," Buckman said in the June interview. "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."
