Interview with: J. Robert Paulson Jr., President, CEO and Director - featuring: their innovative medical devices to treat sleep disordered breathing, including their proprietary Pillar® Palatal Implant System, which is the only implantable device to treat the soft palate component of snoring and mild to moderate obstructive sleep apnea.

Restore Medical, Incorporated (REST-NASDAQ)

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Restore Medical Is Building On Their Vision Of Becoming A Market Leader In The Treatment Of Snoring And Obstructive Sleep Apnea



Healthcare
Medical Appliances & Equipment
(REST-NASDAQ)

Restore Medical, Incorporated

2800 Patton Road
St. Paul, MN 55113
Phone: 651-634-3111



J. Robert Paulson Jr.
President, CEO and Director

Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published – January 25, 2008

BIO:
J. Robert Paulson, Jr.
President, Chief Executive Officer & Director
J. Robert Paulson, Jr. was appointed President, Chief Executive Officer and a director of our company in April 2005. Prior to joining us, Mr. Paulson served as Chief Financial Officer and Vice President of Marketing for Endocardial Solutions, Inc. from August 2002 until January 2005, when it was acquired by St. Jude Medical, Inc. From 2001 to June 2002, Mr. Paulson was the Senior Vice President and General Manager of the Auditory Division of Advanced Bionics Corporation, and between 1995 and 2001, Mr. Paulson served in various capacities at Medtronic, Inc., including Vice President and General Manager of the Surgical Navigation Technologies business unit; Vice President of Corporate Strategy and Planning; and Director of Corporate Development. Mr. Paulson currently serves on the board of directors of two publicly held medical device companies, MedicalCV, Inc. and Vascular Solutions, Inc. Mr. Paulson received a Bachelor of Arts in Accounting, Economics and Political Science from Luther College; a Master of Business Administration from the University of St. Thomas and his Juris Doctorate from Vanderbilt University School of Law.

Company Profile:
Restore Medical develops, manufactures and markets innovative medical devices to treat sleep disordered breathing. The Company's proprietary Pillar® Palatal Implant System is the only implantable device to treat the soft palate component of snoring and mild to moderate obstructive sleep apnea that has been approved by the U.S. Food and Drug Administration and by Health Canada, and to have received the CE Mark for sale in the European Union. The Pillar Palatal Implant System is sold throughout the U.S. and Canada, and in various countries in Asia Pacific, Europe, South America and the Middle East.

CEOCFO: Mr. Paulson, what was your vision when you became CEO of Restore Medical and where are you today?
Mr. Paulson: “The vision was to be a market leader in the development of devices to treat snoring and sleep apnea. We are continuing our efforts to achieve that vision.”

CEOCFO: Please tell us about your basic products and services.
Mr. Paulson: “Our product is the Pillar Palatal Implant System – during the Pillar Procedure, three small braided polyester implants are placed into the soft palate to add structural support and stiffen the soft palate and stop it from fluttering or collapsing during sleep, which is a primary cause of both snoring and obstructive sleep apnea.”

CEOCFO: What is the actual product and what is your revenue model?
Mr. Paulson: “An implant is loaded into a single-use delivery tool. The Pillar Procedure involves placing three of those implants into the soft palate during an in-office procedure. The physician determines, following a physical examination, whether an individual is snoring or suffering from sleep apnea, and then decides if one of the factors contributing to that person’s snoring or OSA is a fluttering or collapsing of the soft palate. The implants are placed into the muscle of the soft palate at the junction of the hard and soft palate. The implants are made of a braided polyester and are 18 millimeters by 2 millimeters; they are stiff enough to provide structural support but flexible enough to allow full soft palate motion and function. The implants also induce the body’s natural fibrotic reaction; by placing a foreign substance (the implants) into the muscle of the soft palate, the body’s natural reaction is to induce tissue in-growth into and around the implants – this tissue encapsulation is in essence scar tissue that further stiffens the soft palate. It is important that the implants are placed at the junction of the hard and soft palate at that is the origin of the flutter or the motion that causes the soft palate vibration or collapse.”

CEOCFO: Are you selling the device?
Mr. Paulson: “Yes, we are selling the device. The implants are preloaded into a single-use delivery tool and the physician uses three devices, or three delivery tools, with implants during the Pillar Procedure. We sell the devices directly to physicians.”

CEOCFO: Do they come together?
Mr. Paulson: “Generally speaking everybody who has sleep apnea also snores. Not everybody who snores has sleep apnea. About 1 in 4 Americans suffers from chronic snoring. Within that group of 75 million people, about 38 million people have some form of sleep apnea and 37 million people suffer from snoring. Within the sleep apnea market, approximately 60% of people are estimated to suffer from mild sleep apnea, 25% of people suffer moderate sleep apnea, and 15% have severe sleep apnea.”

CEOCFO: Are there many competing procedures?
Mr. Paulson: “Understanding what procedures are competitive requires you to first understand the physiology of both snoring and sleep apnea. Sleep apnea is a multi-level disorder. Multiple areas of the upper airway can cause or contribute to snoring and obstructive sleep apnea, with the soft palate being a contributing factor in 80% or more of cases. Multi-level obstruction means that people have an obstruction of more than one area of the upper airway – these obstructions can include, for example, the nasal airway and the soft palate; big tonsils, a big tongue, and soft palate obstruction; or, a collapse of the pharyngeal walls along with soft palate obstruction. There is no diagnostic technology on the market today that can identify, with certainty, the site of upper airway obstruction that is causing snoring or OSA. Physicians rely on judgment and experience based on a physical examination to assess that the site of obstruction.”

CEOCFO: What choices do doctors have in treating patients, and why are the choosing the Pillar® Procedure?
Mr. Paulson: “Let’s talk about snoring and obstructive sleep apnea separately. In terms of obstructive sleep apnea, the diagnosis often begins when a patient presents to a physician and complains of excessive tiredness, the patient’s bed partner may complain of snoring and/or hearing the patient stop breathing during the night. After an initial assessment, Patients typically that are sent to a sleep center to undergo an overnight sleep study, or a polysomnography to determine the presence and/or severity of the suspected sleep disorder. Sleep centers are managed predominantly by physicians who are board certified in sleep, and typically include pulmonologists, neurologists or psychologists. After undergoing a sleep study, if a person in determined to have obstructive sleep apnea, the first line of therapy typically offered is continuous positive airway pressure (CPAP). CPAP creates a continuous flow of air through a nasal or full-face mask which, in essence, create a pneumatic stent to keep the airway open during sleep. CPAP therapy does not discriminate which part of the upper airway is obstructed, it just simply blows air at whatever pressure level is required to keep all of the upper airway tissues open while the person sleeps. While CPAP can be a very effective therapy, many people find it difficult to comply because it requires the patient to wear a mask over his/her face all night, every night for the rest of the patient’s life. For people who cannot comply with CPAP therapy, they must look to some combination of upper airway surgical procedures or other devices to treat their condition.

There are a number of different surgical procedures to treat the various types of upper airway obstruction. If somebody is suffering from nasal obstruction, they may have a enlarged turbinates (those mucosal membranes that swell when you have allergies or colds). Enlarged turbinates may need to be removed or shrunk through radiofrequency ablation. If the obstruction is the result of a deviated septum that is preventing airflow from moving smoothly through the nasal airway, the patient may need a septoplasty. Other patients may suffer from nasal valve collapse that will require a surgical procedure to provide structural support and prevent the collapse. Each of these types of nasal airway obstructions requires a different procedure to address the respective obstruction. If a person suffers from an obstruction caused by the soft palate, the two most common procedures include the Pillar Procedure where the palate is stiffened in a 20-minute in-office procedure where three palatal implants are placed into the soft palate. A more radical surgical procedure involves the removal of significant amounts of tissue the back of the person’s soft palate. This surgical excision of tissue is called a uvulopalotopharyngoplasty (UPPP). A UPPP is a very invasive procedure; patients typically take ten to fifteen days to recover and require a week or more of narcotic medications to manage the pain, while the efficacy rate of this procedure can vary significantly. If the obstruction is the results of enlarged tonsils, you may need a tonsillectomy; if the obstruction is the result of tongue base collapse, there are several invasive surgical procedures to advance, suspend or stiffen the tongue.

Most upper airway surgical procedures are performed by Otolaryngologists (Earn, Nose & Throat surgeons or ENTs) using a “single-level approach”.  As the clinical evidence has continued to evolve over the past several years, more and more ENTs are recognizing that in order for the efficacy rates of sleep apnea surgical approaches to improve, they need to address multi-level upper airway obstruction by performing combination or staged procedures to treat the multiple areas of obstruction.

The Pillar Procedure is well-suited for this combination procedure approach because it is so minimally invasive. Physicians have the option of performing the Pillar Procedure in their office, or in the operating room, on a stand-alone basis or in combination with one or more procedures to treat multi-level upper airway obstruction. For example, they could perform a turbinate reduction and a Pillar Procedure in the office under local anesthetics. Alternatively, the Pillar Procedure can be performed in the OR to stiffen the palate when done in combination with other more invasive upper airway surgical procedures that must be performed under general anesthesia.

The surgical treatment of sleep disorders is very much an evolving field in terms of approach. The number of patients that are diagnosed with obstructive sleep apnea or snoring continues to increase, due in no small part to the aging of our population. As we age, our tissue loses tone and elasticity, which can contribute to the fluttering or collapse of tissue that can cause or contribute to snoring and obstructive sleep apnea. In addition, conditions like obesity and excessive alcohol consumption can affect a person’s sleep and contribute to both obstructive sleep apnea and snoring.

For obstructive sleep apnea, health insurance typically covers both an overnight sleep study and CPAP therapy. Most health insurance policies require a patient to fail CPAP therapy before upper airway surgical procedures are covered. While Restore is in the process of working with the American Academy of Otolaryngology to obtain reimbursement for our Pillar Procedure to treat obstructive sleep apnea, the cost of the Pillar Procedure is not covered by most health insurance policies, and patients typically pay for the Pillar Procedure “out-of-pocket”.

The vast majority of medical plans consider snoring to be a cosmetic procedure, and, typically, the cost of snoring procedures is not covered by insurance. Therefore, if a sleep study determines a person does not have sleep apnea but merely snore, then any therapy they choose to receive, be it CPAP or a surgical procedure, is going to be considered cosmetic and they will have to pay for that therapy “out-of-pocket”. The Pillar Procedure is a clinically proven and effective, in-office procedure to treat the soft palate component of snoring and obstructive sleep apnea that can be performed in a physician’s office in approximately 20 minutes using only local anesthetic, allowing people to resume their normal diet and activities the same day. To date, we have completed 22 clinical studies on more than 850 patients, and the results of these studies consistently demonstrate both efficacy and sustained results.”

CEOCFO: With the aging of the population, are people seeking out treatment for snoring and are they willing to pay for it?
Mr. Paulson: “Yes, I think you consistently see that people are willing to pay for lifestyle medicine outcomes across a variety of products and procedures. Examples of this lifestyle medicine approach include Lasik to correct vision, cosmetic surgery to approve or change a person’s appearance, or a whole variety of cosmetic dentistry products and procedure to improve your smile or look. We are beginning to see this same type of lifestyle medicine approach come to the market for other procedures like surgical weight-loss. 

People are willing to pay for outcomes, and we consider the Pillar Procedure to be another example of a lifestyle medicine product that can help people to improve the quality of their lives. The key is how the Pillar Procedure is positioned with potential consumers - people are not paying for the procedure, they are paying for an outcome - the reduction or elimination of their (or their bed partner’s) snoring. In large part, the decision to seek treatment for snoring is driven by the bed partner. Often times, the person who snores is not bothered by their snoring but instead, it is the bed partner who is disturbed and loses an hour or more of sleep a night. Frequently, loud snoring can end up driving the bed partner to sleep in a different room, severely damaging the intimacy of a marriage or relationship.

One of the challenges of the snoring market is that many physicians do not consider snoring to be a medical condition. That position certainly is debatable as there is increasing clinical evidence that snoring is part of a continuum of sleep disorders, and continuous snoring over a period of years often evolves into sleep apnea. However, regardless of whether snoring is considered to be a medical condition, it clearly is a lifestyle and quality-of-life issue. If a bed partner is so disturbed by snoring that couples end up sleeping in different rooms, people are willing to pay for a procedure that can alleviate that condition and allow them to return to sleeping together as a couple.”

CEOCFO: Do you market to physicians or the public, and how does that work?
Mr. Paulson: “Awareness of the Pillar Procedure by both physicians and consumers is important, and we market to both. First, marketing to consumers alone in order to educate and raise awareness is not effective because people need to know where to go to have the procedure. In many lifestyle medicine markets the product or procedure marketing is done in collaboration with the physician performing the service. Marketing or advertising can raise awareness and cause somebody to take an action, but that action has to be to contact a physician and say ‘Hey, I think I have this problem, what you can do for me?’

The next step is this process requires the physician to have a practice that welcomes these potential patients, educates patients about their treatment options, and then convert this interest into procedures. One of our biggest challenges has been that historically, most of the procedures performed by ENTs are reimbursed under current health insurance policies. In contrast, patients are required to pay for the Pillar Procedure out-of-pocket, and in addition to educating patients about their treatment options, physicians must inform their patients that they will be required to pay for the procedure.

This evolution of practice has occurred in other lifestyle medicine markets.  Consider how dental practices have changed over the past ten years. Dental insurance coverage changed in a couple of ways; first, as reimbursement rates fell, patients were required to pay for all or a portion of their care; second, patients were required to pay the dentist directly, and wait for reimbursement from their insurance company. As a result, dentists were required to evolve their practice and not only learn to ask patients to pay for procedures, but they also began offering additional treatments or procedures to supplement their revenue streams. You go into most dental practices today, and you not only get your teeth cleaned or cavities filled, but you also have the option to purchase any number of different products or procedures to whiten or straighten your teeth, or improve your smile – all of which is paid 100% by the patient, out-of-pocket. Today, dentists generate a significant portion of their practice revenue from providing lifestyle/quality of life outcomes that people pay for out-of-pocket.

This same type of change that is underway in the treatment of sleep disorders that affect the quality of life for millions of people. For example, while CPAP, is a very effective therapy for obstructive sleep apnea, data demonstrates that 50% or more of the people who receive CPAP decide to not use the machine even though they are suffering from the significant disorder that affects their overall health. These patients are seeking alternative treatments, and are willing to pay for alternatives that provide effective outcomes. For example, some sleep dentists and Oral Maxillo Facial physicians offer oral appliances to treat sleep apnea for non-compliant CPAP patients. Oral appliances are orthodontic-like devices that advance the jaw and tongue to prevent the tongue-base collapse that can cause or contribute to obstructive sleep apnea.

Even with the various upper airway surgical procedures offered by ENTs to treat snoring and obstructive sleep apnea, there is a definite trend and desire on the part of both physicians and patients to seek procedures that are less invasive, and that is where the Pillar Procedure fits in very well. Because the soft palate is a primary contributing factor for more than 80% of people suffering from snoring and obstructive sleep apnea, a minimally invasive approach to treat the soft palate is important and desirable.”

CEOCFO: What is the financial picture like today?
Mr. Paulson: “2007 was a challenging year. The Pillar Procedure represents a change to the ENTs’ traditional clinical practice pattern to treat snoring and obstructive sleep apnea. This is still a market development effort, and we were not seeing our revenue grow at the rate that we originally expected. As we evaluated the results of our sales and marketing efforts over the past year, we learned we cannot simply approach a physician using a typical “product feature/benefit” sales product. We applied these results with what we learned from other successful lifestyle medicine products or procedures, and we believe there are three key elements necessary for success in the sleep disorders market – these three elements include a practice-wide commitment to: (i) make the treatment of sleep a focus of the practice; (ii) offer a minimally invasive option (the Pillar Procedure) to treat the soft palate component of snoring and obstructive sleep apnea, and (iii) embrace a self-pay, lifestyle medicine approach in the marketing and treatment of sleep disorders. The execution of this strategy requires a sales force with experience implementing this type of consultative approach, which we now have in place. 

These elements require the adoption of changes in both clinical algorithms as well as clinical practice patterns. It not enough simply to be interested in treating sleep; a physician must be committed to offering patients minimally invasive in-office treatment options. A successful practice also requires a mindset that embraces a “self-pay” approach and recognizes that people are willing to pay for outcomes. Other lifestyle medicine markets such as Lasik, cosmetic surgery and dentistry, have demonstrated a proven methodology that we are now bringing to the sleep market. Another element of a successful lifestyle medicine practices that physicians provide their patients with financing options to pay for elective procedures. Again, we do not have to “reinvent the wheel” – financing organizations like Care Credit provide physicians with “turn key” financing programs for their patients.

Our ability to provide physicians with these various elements of practice development requires a sales force that can effectively provide consultative support to individual practices. This consultative approach not only requires our sales reps to be knowledgeable about the clinical applications of the Pillar Procedure, but they also need to understand and be able to educate physicians on how the Pillar Procedure fits into a combination procedure approach to treat multi-level upper airway obstruction. These practice development skills also include educate physicians and their staffs on how to present treatment options to patients, how to set up their practices, and how to, consistently and effectively, convert patient interest into procedures.

Another important element of practice development is helping physicians to increase the flow of sleep patients into their practices. There are a number of different tools and programs that we use, including programs such as “community health talks” that are designed to raise awareness of sleep disorders, and treatment options, with potential patients and their bed partners, as well as screening current patients for sleep disorders. As an ENT, every patient they see has a condition that affects their upper airway – most ENTs do not ask their patients if they are suffering from a sleep disorder. By definition, if 25% of Americans suffer from some form of snoring or sleep apnea, then the percentage of patients coming into ENTs’ office will be even higher because everyone that goes into an ENT’s office has an upper airway issue between their head and their neck of one form or another. So while a patient may come in because they have a sinus infection, if properly screened, the physician also will have an opportunity to learn if they also snore, and if so, educate the patient about minimally invasive treatment options they offer that can be done in the physician’s office.”

CEOCFO: Are physicians are resistant to change?
Mr. Paulson: “Physicians, in general, are resistant to change; and the ENTs are no different. For example, consider interventional cardiology - it took a decade or more from introduction until balloon angioplasty or stents became commonplace to treat clogged arteries that caused heart conditions. However, once these treatments began to be utilized on a regular basis, interventional cardiologists became rapid adopters of other new minimally invasive cardiac technologies that were developed.

Historically, there has not been a lot of technology innovation in the ENT space practice; the basic practice of ENTs is to excise and remove tissue. While there have been advancements and improvements in cutting technology and tools used to remove tissue, there has not been a lot of innovation in procedures or approaches that involve implants. Our challenge then has been both to convince physicians to change their clinical practice pattern, as well as introducing an innovative implantable device in a market segment where there has not been much history of early adoption.”

CEOCFO: In closing, why should investors be interested now?
Mr. Paulson: “The Pillar Procedure is a proven, clinically effective approach that addresses a critical unmet need in the enormous sleep disorders market, using sales and marketing strategies that have demonstrated success in other lifestyle medicine markets. In addition, at our stock price we are a bargain relative to the market opportunity.

By way of example, approximately 2.5 million patients a year undergo sleep studies. Approximately 1.5 million of these individuals are diagnosed with obstructive sleep apnea and prescribed CPAP, and 50% of those people do not comply with their CPAP therapy. That means there are 750 thousand patients a year that are dropping out of CPAP therapy and looking for alternatives. On the other side of those 2.5 million sleep studies, one million people a year are told they don’t have sleep apnea and just snore or they have mild sleep apnea but aren’t willing to go on CPAP therapy. Capturing 20% of the people who are diagnosed annually and do not comply with their CPAP therapy represents a market opportunity of more than $100 million for Restore Medical. Similarly, those 1 million patients a year that are told they do not have sleep apnea and only snore, Pillar implants represent an opportunity to address a significant lifestyle issue. Capturing 15% of this group of these individuals that only snore or have mild obstructive sleep apnea represents a similar and incremental market opportunity of more than $100 million annually. No matter how you evaluate sleep disorders, the market opportunity is huge, and the Pillar Procedure is a proven, clinically effective, minimally invasive treatment option – the opportunity will be driven by increased awareness and market adoption.”

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“The Pillar Procedure is a clinically proven and effective, in-office procedure to treat the soft palate component of snoring and obstructive sleep apnea that can be performed in a physician’s office in approximately 20 minutes using only local anesthetic, allowing people to resume their normal diet and activities the same day.” - J. Robert Paulson Jr.