Credit Crunch Trips Small Stent-Maker Xtent

A tough financing environment caught up to development-stage medical company Xtent Inc. (XTNT), which has a novel heart stent in the works but said Friday it may lay off nearly all its workers while it looks for a strategic deal.

Xtent's struggles are familiar among the ranks of pre-revenue medical device and biotechnology companies, where expensive studies are needed to prove technology works but financing has become hard to find. There is little appetite among investors these days for high-risk, high-reward propositions; while big players could easily snap up these cheap companies, deal-making has yet to really take off.

"I'm surprised that it hasn't happened yet with Xtent, but then again I'm surprised it hasn't happened yet with a number of small and micro-cap names," said Thomas Gunderson, a Piper Jaffray analyst who covers Xtent and other device companies. The firm has had a banking relationship with Xtent.

Xtent's stock, which debuted in an initial public offering about two years ago at $16, closed Friday down 1 cent to 20 cents.

That puts the market valuation at less than $5 million, which would look like bus fare to the four big players in the stent business: Johnson & Johnson (JNJ), Boston Scientific Corp. (BSX), Abbott Laboratories (ABT) and Medtronic Inc. (MDT). For J&J and its $153.6 billion market cap, Xtent might represent a low-cost way to tap new technology and help an in-house stent business hurt by fresh competition.

All of the stent makers have been doing some deals lately. Among them, Medtronic and Boston Scientific have picked up some small companies that make devices to treat a heart-rhythm problem, J&J bought a breast implant-maker and Abbott is buying eye-care company Advanced Medical Optics Inc. (EYE).

Xtent Chief Executive Gregory Casciaro had a busy day working the phones Friday following the company's announcement, and said there has been a good reaction thus far regarding potential strategic options. He noted that Xtent's technology - which allows stents to be cut to size while in blood vessels - could also work for companies interested in long stents to treat clogged leg arteries.

Just announcing that the company plans to engage a bank to pursue options "has brought a lot of enthusiasm to us in terms of exploring what ifs," Casciaro told Dow Jones Newswires.

A deal in the near term could negate Xtent's announced plan for draconian layoffs - 112 of 121 employees will be gone effective March 23. Gaining approval to the European market, which has come more slowly than hoped, would send a positive signal to potential suitors.

Unfortunately for Xtent, it hasn't been able to woo financiers thus far, and it needs more money to operate in Europe even if regulators do approve its stent soon, Casciaro said. He declined to estimate how much money Xtent needs because it varies depending on what kind of distribution arrangement the company strikes, but he noted that Xtent has said ever since the IPO road show that it would need this financing.

Likewise, the company, which still has enough money now to take it through this year based on its current burn rate, will need additional cash to fund a big U.S. trial aimed at later domestic approval.

Coronary stents are tiny devices used to prop open clogged heart arteries, and devices like Xtent's use medication to combat renarrowing. Xtent's product, called "Custom NX," is different than current technology and "makes a lot of sense," according to Gunderson. Xtent studies have aimed the device at very tough and hard-to-treat cases.

The company, which also cut staffing last summer, announced in August that European officials were asking more questions that could significantly delay approval. The duration of the delay was uncertain then, but Casciaro said Friday that he thinks a favorable regulatory response could actually come very soon.

As Gunderson noted, European regulators have approved several drug-coated stents so far - including devices that use the same drug and polymer to attach the drug as Custom NX - but appear to have raised the bar and slammed the door to entry in Xtent's face. The U.S. Food and Drug Administration also boosted requirements for U.S. entry after safety-related stent concerns hit the market in 2006.

"Xtent happens to be the one that didn't make it in under the wire," Gunderson said.

The environment has also gotten tough for other development-stage medical companies. A third of the 370 public U.S. biotechnology companies are operating with less than six months of their needed cash, and only 10% of the companies in the sector are profitable, according to the Biotechnology Industry Association.

In the devices space, Northstar Neuroscience Inc. (NSTR), which makes a brain-stimulation device and was hurt last year when a major study backfired, said earlier this month that it plans to liquidate the company. The study, aimed at helping stroke patients, surprisingly failed, and the company had a long road ahead to prove the next potential technology application: for depressed patients. Major shareholders became disgruntled along the way.

There are very few small medical companies these days doing just OK, Gunderson noted. "There's nothing in the middle. Either you hit a home run or strike out."

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; [e-mail]

(Thomas Gryta contributed to this report.)

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