Medical Device Link.

Originally Published MX July/August 2002

COVER STORY

Growing from Strength

Edwards Lifesciences chairman and CEO, Michael A. Mussallem, on the challenges of independence.

Interview by Steve Halasey

Over the past two-plus years, executives of the newly independent company have been working to strengthen the company even further, first by divesting nonstrategic business units, and then by increasing the company's investments in strategically important R&D. The goal has been to transform the once-disparate business units into a streamlined powerhouse of innovation in the company's four main disease areas: heart valve disease, coronary artery disease, peripheral vascular disease, and congestive heart failure. Along the way, the company also intends to build its profitability by achieving its long-term aspiration of double-digit sales growth.

Leading the charge at Edwards Lifesciences is Michael A. Mussallem, chairman and CEO, who was also the chief architect of its spin-off from Baxter. A chemical engineer by training, Mussallem joined Baxter in 1979 and progressed through a variety of positions in manufacturing, engineering, and product development to become president of the company's critical care division in 1993 and group vice president of its surgical group in 1994. He became responsible for the worldwide operations of Baxter's cardiovascular business in 1995, and in 1998 also took on leadership of its biopharmaceuticals business.

Today, Mussallem is focusing on the challenges of running the independent company that he helped to bring into being. In this interview with MX editor in chief Steve Halasey, Mussallem talks about the company's progress so far—and how he expects the company's increasing R&D investments to pay off in the future.

MX: You were on the senior management team at Baxter International when the decision to divest this business came up. What factors went into that decision, and how was it determined that there was actually enough of a business to go independent?

Michael A. Mussallem: I was fortunate enough to be able to lead the process. When we did an analysis of Baxter's cardiovascular business, we found that it had very strong franchises with global leadership and strong profitability, but very little growth. We reasoned that if there were a dedicated management team and an increased reinvestment rate, the business could be more valuable to Baxter shareholders than having it remain in its current structure.

And when we analyzed the cardiovascular business further, it quickly became apparent that there were few synergies with Baxter as a whole. There were dedicated R&D teams, sales forces, and manufacturing teams that had few points of contact with the rest of Baxter. So, reflecting on Baxter's history of successful spin-offs, divesting the cardiovascular business seemed like a very logical alternative.

Fortunately, history has proven that decision to be correct. In fact, taking today's combined values for Baxter and Edwards, Baxter shareholders would find their stock much more valuable today than it was at the time of our spin. And this is during a period of some very difficult market conditions overall.

When you evaluated Baxter's cardiovascular business units, were there particular elements of the business that you thought you had to have, just to make a go of it?

The question was never one of whether the business would be able to survive. It was whether the business would be able to prosper and excel. Everyone who was part of this business wanted to be part of something that had a great future with bright growth prospects.

The feeling was that the way we were managing the cardiovascular business within the Baxter structure, we weren't positioning it for good long-term growth.

After making the decision to take the business independent, what were the immediate challenges that came to the forefront?

At its heart, a company really is its employees, so focusing on them and preparing them for the journey was first and foremost. Quickly after that, came gaining the support of our loyal customer base, and finally, the support of shareholders. Having those constituencies fully committed and on board was the first order of business.

From an employee point of view, especially, a divestiture can be a bit nerve-racking. It's a little bit more than just a name change.

It certainly is. Employees wanted to know why this was going to be a better life for them than under the old scenario. Baxter had been a great employer, but we had a chance to develop very clear and high aspirations for the new company—and then to develop a plan that would take the company from where it was to the point of achieving those aspirations.

You have also taken the company through some internal reorganization, so that it is now structured according to a focus on disease states. What were the needs that brought about that reorganization, and how did the reorganization address those needs?

Our intention from the beginning was to transform Edwards Lifesciences by lifting the growth rate of the company. That meant that we would have to add some new platforms to the company—new therapies, new technologies. But in our past structure, almost all of the company's resources were dedicated to existing businesses.

We needed a structure that would enable us to launch new platforms. So we migrated to a more functional organization. That structure has enabled us to make far more out of our very talented resources, to help us enter and grow new platforms.

And that's where the company's technology investment is going now, into very focused areas?

Absolutely.

Did the reorganization allow you to deploy talent in a way different from the way that Baxter had done, and to streamline the use of that talent?

Yes. But the previous structure wasn't so much Baxter's doing as our own. We were previously organized more along the lines of global business units.

As we reflected on this structure and its utility for the future—and particularly as we divested businesses—we found that Edwards didn't need such complexity. Becoming a simpler, more focused company enabled us to adopt an organizational structure that emphasized our functional units. It permitted us to create a strong, centralized R&D organization that has specialties within it, and also to create a North American sales region. Being able to organize functionally unlocked a lot of the company's talent.

From Value to Growth

The initial stockholders for Edwards came from Baxter in a five-for-one stock trade. Have you been able to hang onto those investors?

Interestingly enough, the initial Baxter investors probably turned over very quickly. I would say that most of the shareholders changed over the first four to six weeks. In some cases, the changeover was as simple as a firm moving its holdings from a large-cap fund to a small- or midcap fund. But in other cases, shareholders saw such a difference between Edwards Lifesciences and Baxter that it caused them to change their holdings.

Key factors included the difference in market capitalization—Baxter is in the S&P 500, while Edwards is in the S&P Mid Cap 400—and the fact that Edwards didn't pay a dividend. But there were a number of issues that drove a very rapid turnover among shareholders.

Since then, have the people who decided to stay with Edwards stuck with you?

As with any publicly traded company, there is always some movement in our shareholder base. But by and large, there has been a very steady and loyal group of shareholders that have stayed with Edwards over the company's two-year-plus history.

What other kinds of investors were you initially able to attract?

We initially attracted investors who were most interested in companies that offered a good value proposition. Edwards's stock price and its multiple of price to earnings have been quite low compared with other companies in our peer group, so the company initially attracted value investors.

As we have been transforming the company, however, we have begun to attract more and more growth-oriented investors. I think that's the next stage of our transformation.

Edwards doesn't pay dividends, so the company's investors aren't currently seeing a return on their investment. With that approach, have you been able to attract the level of investment that you hoped and expected to have in support of the company?

Investors buy Edwards Lifesciences with the idea that they will get a return through stock price appreciation rather than dividends. And we have not found that practice to be a real obstacle for us as a medical technology company. We believe the best use of our cash is not to pay dividends, but to reinvest in growth opportunities, to attract innovation, or to pay down some of the company's debt load.

You have had some substantial appreciation in your stock price over the past year. Is that correct?

Yes, and we're very pleased with what's happened. We have seen stock price appreciation in the neighborhood of 25% in the year 2000 and more than 50% in 2001. So, compared with the pretty difficult time that most of our peer companies are having under current market conditions, Edwards and its shareholders have done pretty well so far. We're hopeful that we'll be able to repeat our recent performance in 2002 and beyond.

Planning for Technology Development

So far, your key business and technology areas have kept you clear of the stent wars that have affected other cardiology companies. But I understand you expect to launch a line of peripheral stents in 2003. Will that offering bring you into a more-competitive area?

Yes, our entry into the less-invasive treatment of peripheral vascular disease and, in particular, our introduction of peripheral stents will bring us into a very competitive environment. We're strong believers that the stents used in coronary arteries do not use the technologies that will prove most advantageous for treating peripheral vascular disease. By comparison, the technology for peripheral stents is relatively immature. So, considering that the peripheral vascular market is underserved and still technologically immature, we think there's room for Edwards to make a real contribution.

Do you see yourselves making use of some of the advanced technologies that have been developed for the coronary artery disease marketplace, or will the peripheral vascular market require entirely different technologies?

Obviously, a number of things have been learned in the coronary vasculature, but I'm sure there will be unique stent technology opportunities for the peripheral vasculature. And I wouldn't be surprised if there were a drug-eluting component to peripheral treatment. But we will avail ourselves of any technology necessary to successfully treat peripheral vascular disease.

Developing that field relies, again, on your R&D spending. Edwards has a very aggressive goal of increasing R&D spending by at least 10% each year. What percentage of sales do you eventually think you'll need to maintain the company and get a cutting advantage?

We don't have an absolute number in mind, but approximately 10% of sales seems like an appropriate spending level for a company like Edwards. We've actually been able to exceed our goal of increasing our R&D investment by 10% annually and are going to begin approaching that 10% of sales number in 2002.

Is that faster than you had expected?

Yes. We're a couple of years ahead of where we expected to be.

So, do you feel that R&D functions are now getting the support they need to make the company into an R&D–based company?

We've definitely elevated the importance of R&D inside Edwards Lifesciences. We're also aggressively adding talent and technologies that we think will build a strong base for the future.

What does Edwards's product development pipeline look like?

We have a pipeline that has more new products than at any time in recent history. In particular, we have developed a pipeline that's balanced, which we think of in three distinct ways.

First, there are activities that will extend and defend our current businesses. We're the world's number one heart valve company, and the global leader in hemodynamic monitoring. So we are aggressive spenders in the heart valve business.

Second, there are activities intended to build new platforms. Our product line for abdominal aortic aneurysms and our peripheral stents would be examples of new platforms that we are investing in.

And finally, there are activities related to very-long-term, game-changing technologies such as angiogenesis or tissue engineering. Those areas have a higher level of risk, but it's still important that we make investments if we see something that could be valuable to us in the long term.

So now, we're working to maintain balance in that portfolio.

Copyright ©2002 MX