Date: Mar 09, 2011 Source: xConomy (
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Luke Timmerman
Calypso Medical Technologies, on the surface, looked like it was on the brink of breakout success in September 2009. The Seattle-based company raised $50 million in venture capital—the biggest investment that year in Washington state—to beef up R&D, hire more people, and take its system for precision-guided cancer radiation treatment beyond the U.S. market and onto the world stage.
But Calypso was actually struggling. Hospitals, stung by the stock market plunge of 2008, didn't see enough of a recovery in their endowments over the next year to replenish capital budgets they use to purchase new medical equipment. Medicare proposed a 40 percent reimbursement cut for radiation therapy providers, making some hospitals wonder if they ought to quit that work altogether. Many healthcare providers remained in wait-and-see mode on federal healthcare reform until it became law in March 2010.
"We were hit by a trifecta in the '08 and '09 time frame," says Calypso CEO Ed Vertatschitsch. "It all became apparent that our growth plans probably weren't aligned with the macroeconomic, and in some cases, specific microeconomic things that were going on. We had to make some adjustments."
Calypso is now looking to put its struggles into the past. Founding CEO Eric Meier left the company in August. One of Vertatschitsch's first tasks that month as his interim replacement was to carry out a 15 percent cut to the workforce, and to reorganize the company's sales force. Calypso has remained stable since then with a staff of about 125 employees, Vertatschitsch says.
The company is privately held and doesn't disclose detailed financials, so it's impossible to say for sure how much things have changed since then. While Calypso isn't yet profitable, and doesn't expect to operate in the black until another product line comes out for lung cancer in 2012, the company did set a quarterly sales record in the fourth quarter, Vertatschitsch says.
Enough progress was made that Vertatschitsch had his "interim" tag removed, and was named the permanent CEO in January.
The timing is certainly good for Vertatschitsch to take the helm. The stock market is up, so hospitals should feel a little more confident they can spend again. Medicare didn't carry out its threat to make a 40 percent cut in radiation therapy reimbursement. Healthcare reform has been the law for a year, and providers are figuring out how to live under the new system. And people who once thought of Calypso as a cool nice-to-have technology actually are considering buying it, Vertatschitsch says.
At a recent cancer radiation trade show, the American Society for Radiation Oncology, "We had people say to us ‘we have room for Calypso now in our budget, we'd like to talk to you.' That kind of thing didn't happen at the end of 2009," Vertatschitsch says.
For those new to the story, here's a little bit of the background. Calypso was founded in 1999 by Seattle-based Frazier Healthcare Ventures to develop an idea for what it now markets as "GPS for the Body." The system is designed to make sure that beams of radiation are aimed exclusively at cancerous prostate glands, without harming healthy tissue nearby. The machine monitors movement of the prostate in real-time, meaning if a patient burps, twitches, or even has some gas buildup in the rectum while he's lying on the table, technicians can see if the radiation beams are falling off track. If it's hitting the bladder, they know. That's important because it means they will likely turn off the machine or adjust the table, which could save the patient from impotence or having to wear adult diapers the rest of his life.
The system uses transponders that are about the size of a grain of rice, which get implanted in a patient's prostate gland. That transponder sends a signal to a base receiver that processes the precise coordinates of the prostate in real-time, and displays it on a simple user interface for the technician. The base machine costs $400,000 to $500,000, and Calypso sells the implantable transponders for $1,200 apiece.
Calypso's original technology required technicians to turn off the radiation when the beams fell off track, so they could adjust the patient-which could be a time-consuming process. Time is money at a radiation treatment center, and if you're spending time adjusting a patient, that's less time you have to run more patients through the system each day.
Knowing this, Calypso has found ways to integrate its technology into the radiation therapy machines made by companies like Siemens and Varian Medical Equipment. If the whole thing is integrated, then radiation beams can be adjusted on the go to keep them synchronized with the movement of the prostate in real-time. That means there's no need to shut down the machine, and waste time adjusting patients on the table.
Vertatschitsch came to this job with a technical background; specifically, a doctorate in electrical engineering. He first came to Calypso in 2003 to work on the technical side of signal processing, in which he oversaw teams that made sure the Calypso system sent a wireless signal that was compatible with other equipment in the hospital. It was a whole new industry to him—he used his electrical engineering and physics training in previous career stints at Boeing, and at a small R&D unit in Seattle for Palm, when that company was in its 1990s heyday with the original Palm Pilot.
Why leave aerospace, and then consumer electronics? Palm's original leadership team had moved on, so that was certainly part of the equation, but Vertatschitsch said he was intrigued by a new challenge in using his technical skills for healthcare. "I consider it noble work," he says. "It's great to be able to do something that has such an important impact on people's lives. It was important to me, and motivates a lot of people who work here."
Vertatschitsch worked his way up at Calypso on various projects, showing, he says that he could manage three critical parameters of all projects—cost, schedule, and quality. "You need all three to have a successful program," he says.
Climbing through the ranks of management, he got exposed to the business development side at Calypso, helping work on critical partnerships with Varian and Siemens, the companies that make machines that deliver radiation beams. Soon, investors and members of the board wanted to ask Vertatschitsch questions about those relationships—so he joined Meier in helping raise the last couple rounds of financing.
Calypso's future, Vertatschitsch says, will depend heavily on its ability to show its system is useful for more than just guiding radiation therapy for prostate cancer patients. Lung cancer is the next major use on the list, since the lungs move a lot when people breathe. Tumors of the liver and pancreas, which also move a lot because they are close to the diaphragm, are also on the list, Vertatschitsch says.
About 100 medical centers have installed the Calypso radiation-pinpointing system around the world, including three or four in Europe, Vertatschitsch says. While Calypso makes money on selling its base machine to each of those accounts, most of the value is in getting them to use the machine regularly and keep buying implantable transponders.
It almost goes without saying that it will be very hard for investors to realize a big return on their investment in Calypso, after 12 years and more than $175 million have gone into its R&D. Meier once talked about the possibility of doing an initial public offering, but given the sorry state of that market, and Calypso's tide of red ink, that must sound like a distant thought. Vertatschitsch definitely exuded enthusiasm for the new uses of the Calypso system, but even as a 12-year old company, it has a long way to go.
When I asked if Calypso could turn profitable on the basis of its technology for prostate cancer alone, he said it could, but that would be "marginal." The Calypso system, like most everything else in healthcare, is going to have to prove it is not only effective in helping treat disease, but that it offers a cost-effective solution that can win some of those hard-fought capital budget dollars at your average hospital. That means proving the platform is really versatile. But Vertatschitsch didn't blink when I asked him if he thinks this company still has potential to become a $100 million-a-year in revenue business.
"Yeah, oh yeah, sure we can," Vertatschitsch says. "Capital budgets are important to us, especially at this early stage. But we have three big recurring revenue streams. The transponders, the service associated with the system, and upgrades—selling of new capabilities into the installed customer base. In the long run, the business model has a great, high gross margin, and a recurring revenue stream."
