EPMedSystems, Inc. (EPMD)
2003 Interview with: Reinhard Schmidt, President and Chief Executive Officer
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products used to diagnose and treat certain cardiac rhythm disorders.

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EPMedSystems –bringing new and innovative diagnostic and therapeutic technology to cardiologists and electrophysiology labs worldwide

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Medical Equipment

EPMedSystems, Inc.

575 Route 73N – Bldg. D
West Berlin, NJ 08091
Phone: 856-753-8533

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Reinhard Schmidt
President and Chief Executive Officer

Interview conducted by:
Lynn Fosse

February 2003

Bio of CEO:
Reinhard Schmidt joined EPMD in August of 2001 as President and COO, and in August 2002 was named President and CEO.  In his first year he reduced costs by 28% and grew revenues 40% over prior year, while completing the product development and regulatory filing of key technologies.  His twenty years experience in the medical technology field includes senior level assignments at Siemens Medical and GE Medical.

Company Profile:
EPMedSystems, Inc. (NASDAQ: EPMD), develops and markets cardiac electrophysiology (“EP”) products used to diagnose and treat certain cardiac rhythm disorders. The Company’s EP product line includes the EP-WorkMateâ Electrophysiology Workstation, the ALERT® internal cardioversion system, the EP-3ä Stimulator, diagnostic electrophysiology catheters, internal cardioversion catheters, related disposable supplies, and the ViewMate™ intracardiac ultrasound catheter system.

Product Overview:

ALERT® System
The ALERT® system represents a platform of specialty catheters for the treatment of atrial fibrillation, which is an irregular rhythm of the heart that compromises the heart’s output of blood.  EPMedSystems received PMA approval from the FDA in November 2002 to market the ALERT® system in the U.S.  The first ALERT® platform utilizes the ALERT® PA catheter, which is employed to convert patients experiencing chronic atrial fibrillation (“AF”) to normal sinus rhythm.   EPMedSystems has also filed for regulatory approval for its ALERT® CS/RA diagnostic electrophysiology catheter, which replaces existing diagnostic electrophysiology catheter technology, allowing the EP physician to perform routine diagnostic procedures (over 400,000 of which are performed annually in the U.S. alone), and to easily convert AF to normal sinus rhythm during the procedure.  Additionally, the company will also seek regulatory approval in 2003 for its ALERT® TD catheter, used to treat AF in post-operative heart surgery patients.  The ALERT® system includes an energy source called the ALERT® Companion, which delivers the energy for cardioversion to the ALERT® catheters. 

EPMedSystems’ ViewMate intracardiac ultrasound catheter system consists of an advanced ultrasound imaging console with an image monitor and a thin disposable catheter with a 64-element phased-array transducer at the tip.  The system allows cardiologists and electrophysiologists to optimally view the interior anatomy of the heart, allowing these physicians to diagnose and treat a number of heart abnormalities. The ViewMate is also expected to be extremely useful outside of the electrophysiology lab, with possible uses including detailed diagnostic information on cardiac structural abnormalities, such as patent foramen ovale (PFO), which is believed to be a significant cause of stroke.

EP-WorkMate® Computerized EP Lab System Recording System:
The EP-WorkMate® is a computerized medical device that monitors, displays, records, and stores cardiac electrical activity and arrhythmia data.   With the EP-WorkMate®, the electrophysiologist can measure, annotate, and analyze critical cardiac data.  The EP-WorkMate® is the only EP monitoring system on the market that offers a fully integrated computerized stimulator, real-time interval analysis, recording capabilities of up to 192 intracardiac signals, and a powerful query engine.

EP-3i Computerized Stimulator
The EP-3i Programmable Computerized Stimulator is the most advanced system of its type for electrical stimulation of the heart during diagnostic cardiac electrophysiology studies. It uses state-of-art microprocessor technology, and its high speed processing capabilities enable system functions to be performed quickly and efficiently while insuring patient safety.

CEOCFOinterviews: Mr. Schmidt, please give us a brief history of EPMedSystems.

Mr. Schmidt: “EP Med started in 1993; its first product was a stimulator product used in the diagnosis of cardiac electrophysiology (“EP”) disorders, and the second product a few years later was an EP monitoring/pace/record system called the WorkMate®. The company went public in 1996 and today we are in over one thousand EP labs with our pace and recording platform worldwide, which is about 30% of electrophysiology labs in the world.”

CEOCFOinterviews: What is electrophysiology?

Mr. Schmidt: “Electrophysiology is an area of cardiac medicine that deals with the diagnosis and treatment of faulty electrical conduction systems within the heart.  These types of electrical conduction problems affect millions of people worldwide.  Irregularities in the heart’s conduction system create various problems for patients, and some are potentially fatal.  Atrial fibrillation, or AF, is chaotic electrical conduction affecting the atria of the heart that causes it to ineffectively pump blood, and can cause loss of consciousness, fatigue, dizziness, and the formation of clots within the heart that can be potentially very dangerous. Ventricular tachycardia, or VT, is an abnormally rapid heart rate that can be fatal.  In electrophysiology, the electrophysiologist tries to identify what part of the heart’s conduction system is contributing to the patient’s condition. Once the condition has been properly diagnosed, the electrophysiologist may elect to treat the patient with antiarrhythmic drugs, ablation, a pace maker, or an implantable defibrillator."

CEOCFOinterviews: Are the EP-Work Mate® and the EP-3i Stimulator your main products today?

Mr. Schmidt: “Those products currently represent approximately 80% of our revenues to date. We sell directly in the United States and through the distributor network in the rest of the world. For about three years now we have been working to expand from the present diagnostic EP-WorkMate® platform to more interventional technology. In November of 2002, we received PMA approval from the FDA for an internal cardioversion technology platform called the ALERT® system. We see significant promise with this. We also are working on regulatory approval, which we recently filed for our ViewMate™ intracardiac ultrasound catheter technology, which we think will positively affect our revenue results in 2003 as well.”

CEOCFOinterviews: What they are these two products used for and how they are different from what is out there now?

Mr. Schmidt: “During the diagnosis or treatment of cardiac electrophysiology disorders, the physician will try to reproduce the patient’s conduction problem.  This is similar to any engineer troubleshooting any type of problem, from you car mechanic to the person fixing an appliance in the home—you have to reproduce the problem to understand where it is and how to fix it.  In the case of a patient experiencing atrial fibrillation (AF), the electrophysiologist will use our computerized stimulator to stimulate the area of the heart that may contribute to AF.   By finding the exact spot within the heart that is producing the patient’s problem, the physician is then better able to treat the problem.  The current standard of care to get the heart to a normal sinus rhythm is drug therapy, which is successful up to about sixty percent of the time and this success often deteriorates over time, and these are very powerful and toxic drugs, which can cause significant harmful side effects. You can also cardiovert externally by putting defibrillation paddles on the patient’s chest and using about 360 joules of power; this is a procedure where the patient must have general anesthesia and afterwards will probably experience some traumatic muscle pain and possibly some skin burns.  This treatment is generally successful for a period of time for most patients.  Where this may not be as successful is in patients that are obese or have enlarged hearts, or have had previous unsuccessful external cardioversion treatment.

Our ALERT® system is a technology that uses about 3 to 15 joules of energy to convert a patient’s AF to normal sinus rhythm, rather than the 300+ joule energy used in external cardioversion methods.   The electrophysiologist introduces a balloon catheter into the patient’s circulatory system, floating it up to the proper position with the patient’s normal blood flow.  The ALERT® system can be used on a patient with only minimal levels of sedation, which mitigates the risks of general anesthesia.  EPMedSystems’ ALERT® PA catheter is used to cardiovert patients that generally have a history of chronic atrial fibrillation.  Our ALERT® CS/RA diagnostic electrophysiology catheters have the added ability to cardiovert lab-induced AF enables the physician to convert a patient’s heart rhythm back to normal during the EP exam.  We believe that the cardioversion properties of the ALERT® CS/RA system will be less traumatic to the patient, and speed up the diagnostic EP procedure, which can last from two to six hours.  Another advantage of the ALERT® system is in the case of the post cardiac surgical patient.  Where you have a patient that has just had open heart surgery, with the rib cage being opened and metal sutures in place, the physician would probably try to stay away from external cardioversion, which has the ability to significantly harm a patient already traumatized by major surgery.  In these patients, our ALERT® technology would be a very effective means of returning a heart to normal sinus rhythm. With PMA approval of EPMedSystems’ ALERT® technology, we have established a solution for patients who fail external cardioversion, or that have conditions that are better treated by internal cardioversion.

We have an extensive line of electrophysiology catheters that cover both diagnostic and therapeutic treatment of atrial fibrillation.  Our patented One-Piece diagnostic catheters connect directly with our EP-WorkMate® monitoring system, and can save the electrophysiology department significant money because they don’t have to purchase a separate connector.  Our ALERT® platform has three types of diagnostic and therapeutic catheters associated with it; the ALERT® PA, which was granted PMA approval by the FDA in November, is utilized in the treatment of chronic atrial fibrillation, a condition that affects approximately 5 million patients worldwide.  The ALERT® CS/RA catheters allows the EP physician to pace, record, and when lab-induced AF presents itself, cardiovert without introducing a new catheter or having to externally cardiovert the patient, which involves general anesthesia, trauma to the patient, and causes scheduling problems for the EP department.  The ALERT® TD cardioversion catheter is for patients who go into atrial fibrillation after heart surgery.  The ALERT® TD catheter performs thermodilution measurement, which is routinely done in patients that have had open heart surgery, but it also has the ability to cardiovert the patients that also experience atrial fibrillation, and approximately 30% of patients who have open heart surgery experience AF.  We see great promise for this technology and, in 2003, with FDA approval we will be able to begin marketing and selling that through the channels and alliances that we are developing.”

CEOCFOinterviews: What is the next step after market approval?

Mr. Schmidt: “As a PMA device that has been approved by the FDA, we are allowed to sell the ALERT® PA catheter in the United States, along with the Companion energy source. In Europe, we have had approval for the PA catheter and the Companion energy source for approximately two years. We have recently filed for approval for the CS/RA diagnostic and cardioversion catheters and we are expecting that approval early in the first quarter of this year. In Europe, we also have approval for the TD thermodilution/cardioversion catheter.  Both of the filings in the U.S. for the CS/RA and the TD catheters will be accomplished in early 2003, but we first had to get the PMA approval from the FDA for the ALERT® system, which was the base filing, and now we are filing supplements to the base PMA approval for those catheters.

CEOCFOinterviews: How do you reach your customers and who buy your products?

Mr. Schmidt: “Our sales force is very well versed on where every electrophysiology lab is geographically located, and they keep the professionals that staff the EP labs up-to-date on our current technology, which is unique in the field of EP.  The same people that utilize our EP-WorkMate® systems (we currently enjoy about 40% market share of new system sales) and our stimulator technology are the same professionals that will utilize cardioversion technology in the EP lab. The ALERT® TD catheter technology is utilized in the critical care arena, and we will be developing a distribution channel for that product through an alliance with a company that currently sells to the critical care segment, which is a call point that we do not address. Another technology that we have applied for approval on and are expecting in early 2003 is the ViewMate™ intracardiac ultrasound catheter system, which is a small catheter with an ultrasound transducer at the tip.  The ViewFlex™ catheter is placed inside the heart and validates catheter/tissue contact in ablation procedures, assists pacemaker lead placement removal, guides transeptal needle punctures, and identifies internal cardiac abnormalities that the physician is generally unable to visualize. We see the ViewMate™ as a significant technology for us in the second half of 2003. It will be made available in EP to the same people that currently buy and utilize our WorkMate® system, and outside of electrophysiology to the critical care market, an area that we will be working on with a distribution alliance with a major supplier in that particular clinical setting.”

CEOCFOinterviews: Am I correct is saying that your ALERT® system is not out there in any form?

Mr. Schmidt: “Not in the US.  The ALERT® system is a first-to-market kind of medical device, which required the FDA PMA approval process. In Europe, there are some manufacturers that have technology similar to this, and we are currently competing with them in that application. There is one other manufacturer of the intracardiac ultrasound technology, which has a similar application as ViewMate™. We have some characteristics regarding how our system works that are different from theirs as far as the efficacy of the technology, and we see significant growth for us in that segment because both platforms bring to our business consumable products, and not just a medical device. This is significant for a company of our size and position.”

CEOCFOinterviews: What is the market size for your products?

Mr. Schmidt: “The total market for cardiac rhythm disorders is a three-billion dollar industry, which includes pacemakers and other arrhythmia disorder devices and products. The diagnostic EP Recording market is about a twenty million dollar market worldwide and we currently enjoy almost forty percent of that today. We see the ALERT® platform with its three segments (PA, CS/RA, TD) we were talking about being a total available market of up to two hundred million dollars, and we see the intracardiac ultrasound market being a total market of two to three hundred million.”

CEOCFOinterviews: I would suspect that as the population of the U.S. continues to age, the market would increase.

Mr. Schmidt: “Yes.  Right now there are over four-hundred thousand diagnostic and ablation catheter procedures a year in the U.S.; there are five million patients with atrial fibrillation worldwide and about 350,000 new patients a year present themselves. The demographics and efficacy of these treatment patterns are all contributing to double-digit growth within the industry. Our revenues in the EP-WorkMate® and the stimulator business, in the past year before the new product approvals, have been growing twenty-five percent over the prior year.  We believe that the new products will drive significant expansion to accelerate that growth as we get our approvals in 2003.”

CEOCFOinterviews: Do you manufacture your products and if so could you tell us about your facilities.

Mr. Schmidt: “All of our products are manufactured and assembled in the U.S. We have a facility in West Berlin, New Jersey; it is a little over 15,000 square foot manufacturing facility and then we have another 5,000 square foot customer service facility. We are ISO 9001, GMP compliant. We have about seventy-five employees involved in the manufacturing of the electronics and the catheters at our New Jersey headquarters, and an additional twenty employees that staff our globally based service support organization."

CEOCFOinterviews: Do you need to maintain much inventory?

Mr. Schmidt: “The sales team wants more inventory and the finance team would want more efficient management; higher turns of inventory. Over the course of 2002, we were working toward a two million dollar inventory level at the close of the year, ranging from two million to 2.6 million during the course of the year, due to the cyclical nature of the market and the ordering process."

CEOCFOinterviews: With regard to the ALERT® system, how will you get it in wide use now that it is approved?

Mr. Schmidt: “There are three delivery applications for this technology.  One is for the treatment of patients who have a large body profile, or have failed external cardioversion (ALERT® PA), one is for patients undergoing EP procedures that may require cardioversion (ALERT® CS/RA), and the other is for patients developing atrial fibrillation after open heart surgery. The question is: what are the areas of clinical use that have that particular profile of patient.  Each of these types of applications requires a particular channel of delivery, and we will be addressing those channels ourselves, or through an alliance with a major manufacturer.

Basically, we believe that any facility that has an EP lab will be interested in our new ALERT® catheter technology.  We think that the CS/RA catheter set, with the added functionality of internal cardioversion, will be attractive to all EP labs because of its ability to convert the patient out of AF; current technology EP catheters can’t match this functionality.  Reaching those labs will require good marketing, good clinical papers and possibly some alliance with more established companies in that disposable business. The critical care segment, which we address with the ALERT® TD catheter, in the post surgical environment, is going to require a good channel alliance to deliver our technology into that market.

As a company, we have really been R&D focused up until 2003. We have been trying to bring new technology through the development stage to the regulatory stage, while having a medical device platform that was supplying cash flow. In 2003, the company will focus on channel distribution now that the product risk and the regulatory risk are behind us.”

CEOCFOinterviews: How does all of this get funded?

Mr. Schmidt: “We have been doing it the hard way by spending about thirty percent top line revenues on R&D, and we have been efficiently funded as far as our development efforts. If you compare what we have spent on expenditures to others in the industry, they have significantly less technology than we do. We have been very efficient, but we have also been burning our operating cash negatively for a number of years as we complete the technology rollout. We think 2003 will be the transition year when we can put our R&D budget in line with our revenues, and continue revenue growth as the final release of products come to market in the course of 2003, and contributes significant new growth. Each year we have done some partial funding through strategic partners. We have industry investors in our business: Medtronic (NYSE: MDT), Boston Scientific (NYSE: BSX), as well as institutional investors. The investment support has helped to fund the completion of the new products, and will help underwrite the cost of rolling them out to the market this year.”

CEOCFOinterviews: Do you have a need for new people as you transition from development into marketing, and how do you handle it all internally so that it goes as smoothly as possible?

Mr. Schmidt: “In the last sixteen months that I have been at EPMedSystems, we have made a significant investment in bringing in expertise. In early 2002, we brought in John Talarico to head up our regulatory group, and that has allowed us to accelerate the approval process on a number of things.   We brought in Richard Gibbons as director of operations to improve the manufacturing process and improve our customer service program. He continues to make contributions, which lower our costs of production. We have also brought in Matt Hill in July of 2002, to lead our financial operations.  We also recently hired Mark Adams to lead the sales and marketing departments, and he will head up the team that will successfully bring the new technologies that EPMedSystems has been working on for well over five years to the market."

CEOCFOinterviews: Are there things in the pipeline that we should know about?

Mr. Schmidt: “One of the big opportunities that we have as a business, and it is going to be the development project of 2003, is the technology called SilverFlex™.  This is a process that replaces metal electrode bands on catheters with a non-metal technology, which will allow catheters to be more flexible, lighter and softer. The SilverFlex™ process will save on production time and costs because the platinum and other materials used in catheter electrode bands are quite expensive. We see this as the most significant technology opportunity that the company has in its portfolio, and the application of that technology is very stable as it is utilized in EP. We will be beginning the necessary clinical trials, which will take a significant amount of time and effort. We see this being the project for 2003, which will contribute to revenues in 2004 even more so than 2003.”

CEOCFOinterviews: What should shareholders and future investors know that perhaps they don’t realize when they look at EPMed?

Mr. Schmidt: “I think what is lost on many people that are caught up in the big-name companies is that EPMedSystems has a significant installed base in the quickly growing field of electrophysiology. We are very well positioned with these multiple new products; they fit quite nicely into our installed base and this will help drive early acceptance. We are more in line to being viewed as an operating company today than we ever were in the past. Lastly, if you look at the valuation of EP Med and you look at the acquisitions that have occurred in our industry, you will see that we are very much undervalued.

Our WorkMate® business alone is worth more than the current market capitalization of the company based on historical values of other companies in the industry.  Our new technology, the ALERT® platform, the ViewMate™ intracardiac ultrasound catheter platform and the SilverFlex™ technology all have significant market value that is not reflected in the company share price today. Our goal through distribution of these products and their contribution to revenues, as well as new strategic alliances, is to bring the real value of the company to the shares and to our shareholders.

In addition to just building this technology, we have established a very strong intellectual property position, which assures we are well placed to stay in a strong position in EP. We are well protected at the top of our industry and won’t be pushed out of it by another company trying to emulate the technology, as they would have overwhelming issues with our IP on the ALERT® system, SilverFlex™, and our ultrasound technology. There is a huge foundation of proprietary innovation at EPMedSystems; there are over thirty-two patents that are uniquely developed around new emerging technologies that will sustain our space in the market.”


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