Medical Device Link.

Originally Published MX January/February 2002

COVER STORY

Building a (Bigger) Niche

American Medical Systems CEO Douglas W. Kohrs says that his company's public-market success comes down to two things: sales growth and profitability.

Interview by Steve Halasey

American Medical Systems (AMS; Minneapolis), a manufacturer and marketer of medical devices used in the areas of incontinence, erectile dysfunction, and prostate disease, has had a banner year. The company announced record-breaking results for the third quarter of 2001, reporting a 22% increase in sales and a 52% increase in earnings as compared with the same period in 2000. Such figures are staggering, especially with the recent downturn that the U.S. economy has taken, but Douglas W. Kohrs, president and CEO of AMS, doesn't consider the results surprising. After all, the company that AMS is today was built by a group of savvy investors and dedicated employees.

Founded in 1972, AMS was acquired by Pfizer (New York City) in 1985. In September 1998, a group of investors led by Warburg Pincus Equity Partners (New York City) acquired AMS from Pfizer. From there, Warburg Pincus built up a management team with Kohrs at the helm and focused on expanding AMS's product offerings and adding less-invasive medical devices for the treatment of the three major urological disorders-incontinence, erectile dysfunction, and prostate disease. In 1999, AMS expanded its commitment to the treatment of incontinence and prostate disease through the acquisition of several technologies from Influence Inc. These acquisitions have enabled AMS to diversify its product portfolio and offer an innovative product that is one of the fastest-growing surgical procedures for the treatment of female incontinence. In 1999, AMS also acquired exclusive worldwide distribution rights to an ethanol injection system for the treatment of benign prostatic hyperplasia (BPH).

Such acquisitions have enabled AMS to attain the number one market position in three areas: surgical incontinence treatments, penile prostheses for the treatment of erectile dysfunction, and permanent urethral stents for the treatment of BPH. AMS was also able to quickly become the number two market leader in sling fixation systems for women. This level of financial success led to an unanticipated initial public offering (IPO), which AMS completed on August 11, 2000.

In this interview with MX editor in chief Steve Halasey, Kohrs discusses the importance of both AMS's history and its new corporate culture, explaining the AMS product-development and -acquisition strategy that is bringing his company financial success.

MX: Although AMS has caught the attention of investors since going public in 2000, the company is not a new one. How did the company originate?

Kohrs: This summer AMS will celebrate its 30-year anniversary. The company was started here in Minneapolis by an engineer and a surgeon, Brantley Scott, MD, who invented the technologies for both the artificial urinary sphincter and the penile prosthesis, both of which we still sell today.

Many people think that the company was started to develop penile prostheses, but it actually started by treating male urinary incontinence, primarily following prostate cancer treatment. The artificial urinary sphincter was designed for that purpose, and has been improved significantly over the years.

In 1983, AMS was purchased by Pfizer, which went on to own the company for 15 years. Then, in September 1998, Pfizer decided to sell its four medical device companies and exit the business.

The other three companies are all familiar names, and they were all sold to existing companies. Howmedica (Rutherford, NJ), a large orthopedics company, was sold to Stryker Corp. (Kalamazoo, MI). Schneider (Minneapolis), a cardiovascular stent manufacturer, was sold to Boston Scientific (Natick, MA). And Valley Labs was also sold into a company with quite a large portfolio. AMS was the odd one out. Instead of being sold to another device company, it was sold to an investment group led by Warburg Pincus Equity Partners.

Was there a reason why AMS attracted a different type of buyer?

Not really. At the same time that AMS was being positioned to be sold, Pfizer was launching the so-called wonder drug, Viagra. So a lot of people think Pfizer sold AMS because of Viagra. In fact, the two events were unrelated.

After Warburg Pincus took over, how was the new management team brought on board?

Warburg Pincus bought the company in September 1998, and initially they didn't make a lot of changes. They brought me on board in April 1999, about six months after the purchase was completed.

I came to urology from the spinal surgery business, so I knew little about urology when I came to the company. But Warburg Pincus promised me that I could change the management team where I thought it was appropriate, and that they would invest more capital to support acquisitions that I believed made sense for the company. Moreover, they committed to doing this right away or over a long period of time. So that was enough for me to enthusiastically jump into the urology business.

But what attracted me most was my own due diligence, during which I figured out that the marketplace was very underserved. In other words, the number of procedures being done each year to cure people represented only a very, very small percentage of all those who could potentially benefit. I was confident that if the right things were done, I would have a good opportunity to change those penetration rates.

Did your engineering background make it easier for you to make the transition from the spinal surgery market to urology? Did that background enable you to grasp the potential of AMS's products more quickly?

Yes, I think my learning curve was very short. I've always been in medical devices, and my technical background shortened the learning curve to understand the business, understand the surgery, and figure out the right products that the market needed.

The two businesses were similar in that they were both surgical device businesses where the key relationships-both for product development and for marketing-are those with customers. Another interesting similarity is that the real franchise at both companies was embodied in their sales forces. At SpineTech, the direct sales force was about 100 people at various sites around the country. When I joined AMS the sales force was 50 people; we've since grown to 85 people.

An Appetite for IPOs

It was only a year after you joined AMS that you decided to take the company public. How did that develop?

When I started in April of 1999, we were not running the company with the intention of taking it public. We were growing the company to improve its top line and try and make the company profitable. Those were our main goals.

But in January and February of 2000, after about a two- to three-year hiatus from medical device companies going public, Aspect Medical and Oratec both issued IPOs and were very successful initially. So there seemed to be a renewed interest in medical device IPOs, which may have been a result of the early waning of the high-technology and dot-com markets. Over the next few months we kept our eye on the market as some other medical device companies went public, and finally in June we decided to test the public market's waters.

At the time we did it, we weren't going public because we needed the money to acquire something; we'd already made some key acquisitions. But the purchase of AMS from Pfizer had been a leveraged buyout that left the company with about $105 million worth of debt on the balance sheet and not a lot of cash. The company was generating cash as a business but we recognized the need to improve the capital structure. We felt that going public would improve the company's balance sheet and put us in a better position to make a strategic acquisition down the road. And the timing appeared right, because the market seemed to have an appetite for medical device companies like AMS.

By going public in August 2000, after the dot-com bubble had already burst, you missed the market enthusiasm connected with that phenomenon. How receptive were investors when you finally issued your IPO?

As we presented the deal to different investors in August 2000, there was significant interest in our cash flow and the fact that we had an established business. We were adding to the business, and we presented the vision that we could innovate internally and bring out the products necessary to grow the overall market. We hadn't really done that yet-we were just starting to turn the mechanics of the business around-but people believed that we could. And since then, we've been able to show that belief was justified.

What objections did you hear from the investors at that point? Were they wary of investing in anything after the dot-com bubble burst or were they looking for an alternative to dot-coms and thinking that medtech was the place?

In general, investors were interested not so much because we were AMS, but because we were a medtech company. But we also presented a very good demographic story that they could buy into. We played off the aging of the population and the fact that people are living longer, and we showed that we have a business that can be sustained for at least the next 20 years if we can just deliver the right cures along the way. Investors liked that, and they also liked the fact that we weren't a start-up.

In the past, investor confidence and interest in medtech companies has sometimes been soured by start-ups that have failed to deliver. What can start-up executives do to inspire investors in the public market?

A lot of start-up people have asked me that question. From what they observe, the public markets are good for established medical device companies, but they're not necessarily good for start-ups.

What I stress, and what we were able to do, is that companies should lay out a number of milestones for product development, growth, and profitability, and then create a compelling story that shows how the company's technologies and innovations will help it to meet those milestones. That's what it's really all about. Companies should set realistic but slightly aggressive goals, and then ensure that they meet those goals. By doing so, they can build investor confidence-and that works for a small company as well.

Your IPO raised $53 million, so that improved AMS's financial structure significantly by getting rid of about half of the company's debt. And then in July 2001, you went for a secondary offering. What was the purpose of that funding?

We raised the money, in part, to pay down our debt. As of the end of the third quarter of 2001, the company has a little over $50 million in cash and a little under $30 million in debt.

A lot of people have asked why we don't just pay the debt all the way down. We want to keep a significant cash balance because we have a number of acquisition opportunities that we are evaluating. We don't want to have to keep raising money and paying banking fees all the time. So our cash on hand exceeds our debt, but it gives us the flexibility that we need to move quickly.

Since July we have looked at and evaluated a number of opportunities, but we haven't yet acted on any of them.

Acquisition Strategies

In evaluating those companies, are you primarily looking to extend your product lines or do you have other strategic goals in mind?

What we're looking for is complementary products. We're not necessarily looking to acquire another penile implant or BPH company, so we place greater value on technology or on a company that doesn't compete with what we currently have.

We are very interested in the whole field of prostate cancer. Our products treat all the fallout from prostate cancer treatment-in other words, impotence and incontinence-but we don't actually have a prostate cancer treatment. So from an investment standpoint, that's an area that's very attractive to us. Obtaining such a product would provide us with something we don't yet have, so it would not be cannibalistic. Yet the product would be in a familiar market, where sales could be made to customers that we are already calling on. There are a number of market areas that meet similar criteria and would be a good fit for AMS.

Another concern for our acquisition and licensing activities is whether the effects will be immediately accretive or dilutive. We have gone to great lengths to turn the company profitable and make progress every quarter, and we don't want that progress to be stalled. So we ideally desire our acquisitions to be accretive in the year that we actually purchase them. Fortunately, there are a number of opportunities for us to do that.

How does AMS handle the integration of acquired companies? Do you physically move the acquired company, or do you leave it in place? And what do you do with the company's existing workforce?

Our history offers the best example. When we acquired our way into the female incontinence business in December 1999, we acquired a very nice product, but we also acquired a direct sales force. We retained all of the people from the acquired company-including the engineering and manufacturing staff-but the real jewel was the sales force.

Most of the salespeople from that acquisition are still with the company, and they are doing a fantastic job for AMS. They've been able to learn and grow with AMS, and they've merged very well into our existing sales force. In this case, the company had resources that were attractive beyond its technology, and we ended up keeping everything we wanted.

As we look forward, we recognize that talent is one of the keys to growth. So if we can add talent in the form of engineers or salespeople who are very experienced at their business, that's an additional attraction for us.

How do you incentivize employees of an acquired company to stay with the firm? Has that situation come up for AMS?

Yes, it has. And the way that we dealt with it was with head-on honesty.

So far as people are concerned, the acquisition process is like a courtship. Since Influence Inc. was a private company, our approach was to talk with all of its employees ahead of time. We told them we were thinking of acquiring the company, and we let them come to our facility and meet our people so we could gauge their interest in working with us in the future. That's a decision that often has a lot to do with the fit of the companies' cultures. So I believe in being honest and straightforward with the employees and letting them determine whether the company has the right feel for them.

We also incentivized those new employees by offering stock options that gave them an ownership stake in the new company. They all received stock in the private company, and they have benefited as the company went public and did a secondary offering. Today, the stock is trading at about a 75% premium to our IPO price. From the perspective of the acquired employees, this is how business is supposed to work.
It's also good for AMS and all our shareholders that this acquisition worked out as it did. Whenever a company is looking to attract new people, it always helps to be able to show that it has been successful with a transition like this in the past. The recently acquired staff can then offer positive observations about the company's culture and work ethic. This enables potential new employees to determine fairly quickly how they would fit into the new company.

Incentivizing employees shouldn't end when an acquisition is concluded. For instance, when we took the company public we made all our employees shareholders. We have 500 employees around the world, and they all own stock in AMS. When we did this, I thought it would be a very important motivational tool to help pull the team together. And it has turned out to work very well, because many employees have also bought additional stock in the company. That's how much they believe in the company.

Does it make a difference whether a potential acquisition has its own direct sales force that could be added to your own?

Not including sales management, we have about 85 direct salespeople on the ground in the United States. And the great thing about our current structure is that our sales management team believes those salespeople could handle anywhere from 30 to 50% greater capacity than they are currently delivering. So we can continue to add products into their sales portfolio without having to hire new people. At the moment we don't need incremental sales help, but we may in 2003.

So having a direct sales force is not necessarily an advantage for the companies you're looking to acquire.

No.

The Viagra Connection

Earlier, you mentioned that the launch of Viagra coincided with Pfizer's sale of AMS. What effects did that launch have on the company?

What happened after the launch of Viagra in April 1998 is very interesting. Viagra was launched as a cure-all for men with erectile dysfunction, and it caused AMS's erectile dysfunction business to drop off 28% from 1997 to 1998.

But as it has turned out, Viagra doesn't work for everyone. So what's happened over time is that Viagra has raised awareness of erectile dysfunction among men. Now, AMS targets patients who have failed Viagra therapy, and we're actually doing more business than we did before Viagra was launched.

Is that because of greater consumer consciousness about the availability of therapies?

Yes. In the United States prior to 1998 and the launch of Viagra, about a million men each year went to their doctor to learn about erectile dysfunction. But in 2000, that number grew to 15 million. And the reason for the rapid increase in two and a half years is that campaigns using print, media, educational programs, and in-office seminars have raised awareness that there are treatments for erectile dysfunction and that men don't have to live with this condition.

AMS has been able to benefit from this dramatic change in awareness by targeting patients whose condition is caused by mechanical problems for which Viagra won't work. For those patients, the ultimate solution for regaining normal function is an AMS device.

What percentage of Viagra patients fail that therapy?

Published reports average about 30%. And the reason they fail is that Viagra and similar drugs work simply by increasing the blood flow into the penis. But a significant number of our patients are postprostate cancer surgery patients who have had their prostate irradiated or removed, with consequent nerve damage. Nothing can fix that nerve damage, so it becomes a chronic mechanical problem.

Another group of patients who fail Viagra therapy are those with vascular disease. The same vascular disease that affects other parts of the body often presents itself first as erectile dysfunction. In fact, many experts believe that erectile dysfunction is the number one early indicator of vascular disease. About one third of all men who visit their family practitioner or urologist with erectile dysfunction symptoms are referred to a cardiologist because the doctor recognizes these symptoms as a potential precursor to cardiovascular disease. Just as arteries elsewhere in the body can become clogged with plaque, the arteries leading to the penis can also become clogged. But those arteries are relatively small in diameter, so they're impossible to stent or clean out. Viagra can't fix that condition in order to force more blood through, so again it becomes a mechanical problem.

A third category of Viagra failures are those patients whose blood flows in just fine, but then flows out just as fast. This occurs when there is a malfunction of the valve that is supposed to shut off and hold the blood in. And there's no drug that can consistently make the venous system occlude.

So while drugs may work for patients whose problems are more of a psychological nature, AMS's products are designed to fix mechanical problems. When patients take the drug first and it doesn't work, it's a great diagnostic for us. The key to our business is then to educate those men about how well our device performs over a long period, and getting them to make the decision to be cured.

Growing Technology

In addition to looking for potential acquisitions, AMS is also building its internal R&D facilities. Is product-line extension also the goal in that area?

Yes. Since I've been here, at any given time we have had about 15 very focused internal ongoing R&D projects. In 2001, we launched a number of products that were all internally generated.

Even so, we're not really a technology-driven company; we're still very much a marketing-driven company. The ideas that we work on internally have primarily come from our physician clients. In other words, we've become very good at listening to our customers, and when they come up with ideas, we try to act on them as quickly as possible. We screen the ideas, as most companies do, but once we decide to move on an idea we try to get it to the marketplace quickly.

In 2001 we launched some very interesting technologies, and all of them were driven by the marketplace. The best example is the Sparc system, a new minimally invasive female incontinence procedure that we launched last August. That system originated with a doctor's idea, which we worked through concept, regulatory approval, and market launch in only 12 months.

Assessing technology and market possibilities and then filing the regulatory paperwork can be time-consuming tasks, so you must have been acting very quickly. I suppose the Sparc system must be a 510(k) product?

Yes, it is a 510(k) product. Our first product in this area was the In-Fast female incontinence system, which began with a technology that we acquired from Influence Inc. In 1999 that product was used in 10,000 procedures. In 2000 that number grew to 15,000, and in 2001 it increased again to 20,000. Those sound like great growth rates, and it would be easy to be satisfied with them and become complacent. But that's not our habit.

Our practice is to listen closely to the marketplace, and in this case we learned that some physicians didn't agree with the philosophy underlying the In-Fast system. Consequently, we weren't reaching all of the physicians who might use the device-or their patients.

So even while we were continuing to grow our business with the In-Fast system, we also began listening to and working with those dissatisfied physicians to develop a next-generation version that they would be happy with. And that's how we arrived at the Sparc system, which offers another approach to doing the same thing that the In-Fast system does.

So in addition to the 20,000 procedures that will be done with the original system this year, you'll add all the Sparc procedures?

Right. In 2002 we'll be carrying both products. Over the next several years, we believe the Sparc system has the potential to ramp up to that same 20,000-procedure level.

So you're heading for 40,000 procedures on two systems over the next few years. Are you continuing to look for other such systems?

Yes, and there are others. Right now in product development we're working on the next-generation systems that we'll launch late this year and in 2003.

We're not a company that rests on its laurels. We're constantly innovating, because my engineering background tells me that if we don't do it, our competitor will. Companies need to be constantly improving their products-even if they don't have competition.

What percentage of revenues do you put into R&D?

It averages about 10% a year. That's a pretty high percentage, but we expect to continue investing at that level for at least the next several years.

Would that percentage be greater if AMS were more of a technology-driven company, as opposed to a market-driven company?

No. If you compare AMS with other companies our size or larger, the 10% level is considered high for R&D as a percentage of sales. Most established medical device companies spend about 5% a year, while younger ones like us average about 8% a year.

That 10% investment in R&D is another reason that people outside the company might see it as one that is very technology driven. But we're really marketing-driven with very good technology.

Is there a point at which acquisitions become more important than internally developed products?

I think they're both of equal importance and we put the same priority on both. If we can find a product outside that fits the complementary criteria I mentioned earlier, we'll move very quickly to get it.

Are most of AMS's recently released products 510(k)s?

No, they're a combination of both 510(k)s and PMAs. About half of them are PMA products or PMA supplements.

For example, one of the key products that we launched in 2001 was an antibiotic-coated penile prosthesis, which FDA approved as a PMA supplement. For that regulatory route the company uses data from its original PMA, supplemented with data from bench and animal testing, to demonstrate that an improved version of the product is safe and effective and does not require clinical trials. So instead of the three or four years that can be required by a completely new PMA, it only takes about 12 months to get through the process.

When a PMA supplement is approved, however, FDA usually requires the company to perform some amount of postmarket surveillance as a safety check. The agency will allow the modified product on the market, but it will also specify certain data to be collected-for instance, the performance of the device in a specific group of patients-and will require an annual report of that data.

On the penile implant side of our business, we've been able to leverage extensive data from existing PMAs to get PMA supplement approval for improved products. The female incontinence side of the business is predominantly a 510(k) business, and we released a number of 510(k) products last year.

As we speak, we are still anticipating FDA approval of the Acticon, a new PMA product for fecal incontinence. This is a product in which the company has invested significantly over the past five years. The FDA panel meeting took place last summer and unanimously recommended approval, so now we are just working through the details. [AMS received PMA approval for the Acticon system on December 18, 2001.-ed.]

Once the product is approved, how quickly will you go to market?

It will be virtually instantaneous because the product has already been on the market for about a year under a Humanitarian Device Exemption (HDE). Using a product under an HDE requires that the patient be provided informed consent, and the practitioner has to have the approval of the hospital and its institutional review board (IRB). It's a very cumbersome process for the doctor, but at least it allows patients to be treated.

On our side, we had to convince FDA that fecal incontinence is a sufficiently debilitating condition to warrant consideration for an HDE, that no other product of this kind existed on the market, and that our early clinical data were good enough that we should be granted the HDE. But we've continued with the process of getting full PMA approval because we want to eliminate the marketing restrictions that come with HDE status. Once the PMA is approved and the IRB and other restrictions are removed, it will be a lot easier for us to talk about the benefits of the product-and for patients to be treated with it.

So you've got a year's worth of clinical experience with that product?

Yes, plus the clinical study goes back several years prior to that. So there is a lot of successful experience with the product.

You've mentioned that AMS works closely with physicians around the country, not only listening to them as part of the product-development process, but also working with them during clinical studies and in the marketing phase. How do you consider physicians as partners in product development?

Urologists and urogynecologists are very easy to work with from a product development standpoint because they're looking out for the patient. There is a huge unmet need for technologies to treat patients, so the physician community provides us with an incredible number of ideas for innovations. In fact, because of our strong reputation in the clinical community, we receive many more ideas than we can act on. We therefore have to conduct a sorting process so that we can move quickly to develop the ideas that will bring the most benefit to physicians and their patients.

When you are sorting out your product-development priorities, what are the primary criteria that enable you to put one product ahead of another?

It starts with how many patients the product will be able to help. The more patients the product can help, the higher its priority.

Another thing that we watch out for is time to market. The importance of whether a product is a 510(k) or a PMA changes depending on how our product-development cycle is flowing. Since the PMA process takes longer, some years we will release several PMA products and other years we'll release none. To keep the product pipeline flowing on a consistent basis, those PMA products have to be supplemented with 510(k) products.

We also have to consider the probability of a product's commercial success, that is, will it work better than something else that's on the market. We always strive to produce devices that work better rather than those that are merely equivalent.

Where does cost of development fit in? Is that a lower-ranked consideration?

Yes, because in urology the cost of development is usually relatively small, especially for 510(k) products. The real cost is not the money spent in a research lab or on engineering, it's the money spent over a two- to three-year period studying the product in clinical trials. Where significant clinical research is required, those costs have to be factored in near the top of the list.

Room to Grow

AMS does all its own manufacturing, is that correct?

We outsource maybe 5% of what we ultimately deliver to the patient. So 95% is made in-house and with high yields. We've had lots of practice to hone our manufacturing skills. We run a continuous process improvement program here that has increased our gross margins to above 80%.

In the course of an acquisition, what manufacturing-related issues have arisen for AMS? Have you had to deal with especially tricky regulatory or quality issues, for instance?

Because of our high gross margins, we put a premium on products that we can manufacture in-house. People often think that we must be working three shifts at 100% capacity to produce our 80% gross margin. But in actuality we're only operating at about 25% capacity. We only run one shift, which is approaching capacity but isn't quite there yet. Consequently, we have plenty of room to grow, and the more devices processed through our plant, the better our gross margin is going to be.

An acquired product doesn't have to have an 80% gross margin, because we can make up for it in other ways. If we gain synergies that reduce our R&D, clinical, sales, or marketing costs, for instance, those can help to make up for a lower gross margin. We know that very few products achieve an 80% gross margin initially, so it wouldn't be reasonable to make that the litmus test for an acquisition. Instead, we look for opportunities to make gains between the gross margin and the bottom line.

You would then incorporate all of the manufacturing into your primary plants?

Yes.

Sales and Marketing Options

Aside from direct sales, are there other selling options that are worthy of consideration or have you looked at those and discarded them?

We have looked at other options, and we're very happy with the direct sales force model. Because we are selling high-end, usually high-cost surgical products, a certain high level of service is required both in the doctor's office and in the operating room. We feel that we have the premier sales force in the field of urology, so we want to make maximum use of that advantage.

During 2001, we've been able to add internally developed products into our sales mix, and our sales force has been able to sell both the earlier and the new products without missing a beat.

Does your sales force conduct a lot of seminars or other types of physician education programs?

We do, but we have an in-house professional education group that is responsible for training physicians. The salespeople help to set up those activities, but then they hand it off internally.

The professional education group conducts company-sponsored workshops to train physicians on our new products, but the sales representatives typically don't attend those meetings. The only AMS people there are the professional educators, who are based in Minneapolis and go on-site to help.

How big is your professional education group?

It has five dedicated individuals in it, and is expanded as needed with professional consulting staff to fit the specific training situation.

Do they move around the country?

Yes. It's really a mobile group that moves around the country to conduct training, because it's somewhat difficult to get surgeons to come to Minneapolis. We run our training courses in Phoenix and Florida and other places that health professionals frequent.

To become trained on an AMS product, the surgeons will take a weekend or a Friday and Saturday. They get a chance to learn what they need to know in a relaxing environment, and then take that knowledge back to their practice.

Some of the treatment areas that AMS deals with are very personal. Does direct-to-consumer marketing for the products used in those areas make sense now or in the future?

We're experimenting with a direct-to-consumer approach now, but not on a national basis. Our tests are being done on a regional basis, where the intent is to direct patients to a particular doctor's office. Used in this way, direct-to-consumer marketing does increase the number of patients coming to the doctor's office to ask about a specific health condition. In the future, as AMS gains even greater mass, this approach to marketing could play a bigger role.

The problem with direct-to-consumer marketing on a national basis is that it's very expensive. And at this point, the company is not in a position to take a chance on a major multimillion-dollar direct-to-consumer campaign and have it not work. So we're being fiscally responsible in our approach.

Our best direct-to-consumer piece is our Web site, where we have a lot of links to other medical Web sites. Patients sometimes find their doctors through our site, and they go in with a printout from the site asking the doctor to tell them about a particular product. That doesn't happen as often as we would like, but I think it'll become an important part of the business.

Eyeing the Future

How do you feel AMS is positioned relative to competing companies in the field? What do you think the company's future looks like?

AMS has a unique niche in that we're the largest company focused entirely on urology. There are a number of smaller companies that focus on urology, but usually their offerings consist of a single product. Those companies all tend to face a similar business-development pattern. They begin life as start-ups with good technologies, and they struggle to sustain funding while they complete their clinical studies and other regulatory requirements. Assuming they make it over those hurdles, they inevitably run into the same roadblock, which is how to build a sales force sufficient to deliver their product to the marketplace.

With a critical mass in excess of $100 million annually and a nationwide direct sales force of 85 people, AMS has already overcome those hurdles. Among urology companies smaller than AMS, the next-closest competitor probably does about $20 million in business each year, and has a much smaller scale and scope.

To find companies that offer urology product lines and are larger than AMS, you have to look among the large, diversified medical device companies. For example, Boston Scientific has a urology division called Microvasive that is larger than AMS, but obviously not as focused because it's part of a cardiovascular conglomerate. C. R. Bard has a urology division that is larger than AMS, but I don't believe it's as focused as we are and it doesn't have as broad a surgical product line as we do. It's devoted more toward commodity products.

Johnson & Johnson has a small female health division that carries several significant surgical products that we compete with. That division isn't as big as AMS now, but with J&J's significant financial resources, I expect it will rival AMS in the future.

So your strategy is to maintain focus as a method of increasing market share?

Correct. We focus on urology and urogynecology. And by continuing to add to our product line we'll maintain a breadth of product offerings that no one else can offer-not even larger companies.

Is AMS now getting a boost from the investment community and from the way it's spending its R&D dollars that it didn't get when it was part of a larger conglomerate?

Yes. When I arrived and started looking at what was in the R&D pipeline, I found an organization that was relying on old product lines and had not produced a significant new product for eight years. A lot of money was being spent on R&D, but it really just funded a lot of research churning. Products would get almost to the end, but they would never make it to market.

So one of the first things our team did was to halt work on several projects. That was a difficult task, because we had to overcome the emotional attachment of people who had been working on certain projects for years. It was hard to tell them, "I know this is your baby, but you have to stop because the project doesn't make sense for the current marketplace."

Under Pfizer, AMS had been a technology-driven company, so it had a lot of technologies that were looking for markets. We changed that by adopting our current market-driven approach, allowing our customers to tell us what they wanted. Once we did that, products made the journey all the way through development and onto the market.

How would you rate AMS's performance since becoming a public company?

We didn't go public during great economic times, but we're proud of our performance since we've been public. Compared with all the troubles and economic uncertainties that other companies are having, things have turned out very well for AMS.

We've exceeded expectations for five quarters in a row, and that has attracted significant attention. We've also leveraged that success internally with our own employees, proving to them that when they perform they will be rewarded.

What's your best guess about 2002?

This year we expect to grow even more than we did last year. Moreover, we think we can continue to grow organically and potentially add complementary products through licensing and acquisition. An additional challenge will be to improve on earnings-but that's also something we think we'll be able to achieve.

Photos courtesy of American Medical Systems.

Copyright ©2002 MX