Medical Device Link.

Originally Published MX September/October 2002

TOPSPIN

Diversification as a Recovery and Growth Strategy

Advance preparation can mitigate an unexpected blow and enable executives to lead their companies back to success.

Karen Gilles Larson

Karen Gilles Larson is president and CEO of Synovis Life Technologies (St. Paul, MN).

Through its regional intermediaries, CMS annually issues hundreds of local coverage decisions on whether or not Medicare will pay for certain medical procedures or devices in a specific region of the country. On rare occasions, CMS has issued national noncoverage decisions. Because of the national scope of these negative decisions, their impact can be momentous and far-reaching for all those affected.

For our medical device company, Synovis Life Technologies, one of these rare (and unexpected) national noncoverage decisions from CMS put the company in crisis mode. With sales of our main medical device product severely hobbled by a noncoverage decision, we had to create an entirely new foundation for the company. We worked to diversify the company—in an effort to increase revenue potential and regain lost profitability—to rebound from the brink of disaster and climb back to a highly promising future.

The lessons we learned during and after the recovery process are lessons that should be heeded by any medical device company operating today. Taking a few preventive steps can not only protect today's medical device companies from financial pitfalls, but may help ensure a firm's future strength and success.

Noncoverage Decision

Seven years ago, Synovis Life Technologies (then known as Bio-Vascular Inc.) was on the fast track to success, thanks largely to the acceptance and growth of Peri-Strips, our primary medical device product at the time. As a biologic patch used to reinforce fragile tissue, Peri-Strips greatly increase the effectiveness of lung volume reduction surgery (LVRS), a procedure that dramatically improves quality of life for a medically well-defined group of late-stage emphysema patients.

Peri-Strips sales grew more than tenfold in the first year the product was on the market. Investors, impressed by such rapid growth, provided strong support for Synovis. In 1995, the company's stock price more than tripled, rising to a peak of $18 a share, up from around $6.

Unexpectedly, CMS (then known as the Health Care Financing Administration) made one of its rare national noncoverage decisions, cutting off Medicare reimbursement for LVRS and mandating that the procedure instead be studied in clinical trials for seven years. Synovis's sales and stock price began a precipitous decline, and stockholders were left wondering what the company would do next. Our main growth and opportunity vehicle was effectively put on hold, indefinitely.

A New Path Forward

In the wake of the national noncoverage decision, we sought to develop strategies that would put our decelerating business on the path to recovery. We'd found out the hard way that we needed to reduce the business risks of basing the company's performance around the success or failure of a single medical device product—the corporate equivalent of putting all our eggs in one basket. So we used diversification as both a recovery strategy and as a way to build long-term growth and success.

During the rebuilding process, we relied on the company's strengths to grow revenue. We leveraged Synovis's existing expertise and knowledge of tissues. We expanded our surgical tool technology. And we put our focus on the specific market opportunities that represented the best chances for success. Knowing that a public company can't attract investors without showing growth potential, we adopted several key strategies, including diversification, to achieve our goal of revenue growth.

Build on Existing Technologies. We looked for unmet medical needs where our existing line of products could provide a clinically meaningful solution. For example, Synovis experts found that our Peri-Strips could also provide a significant benefit when used in gastric bypass surgery, a procedure used to treat morbid obesity. As a result, Peri-Strips have once again become a top-selling product, with product sales growing 50% in fiscal 2001 and 40% through the first half of fiscal 2002.

Develop New Technologies. The company worked to fill its research and development pipeline by developing new products to address needs within the marketplace. Through our interactions with surgeons, we identified areas of unmet need where our research and development team was suited to develop solutions. As one result of this process, we developed a unique biomaterial which the body remodels, adapting the tissue as if it were its own. Today, we have FDA marketing clearance to use this product in the surgical treatment of prolapse and stress urinary incontinence, and the product is on the market.

Manage Business Risk through Acquisitions. At Synovis, one of our first attempts to balance risk involved the purchase of a company that manufactured precision microwire components for interventional medical devices produced by other companies. The firm had a completely different risk profile from our original business, with device clearance and market risk borne by the customer company. Today, we have four distinct business operations: Synovis Interventional Solutions, Synovis Precision Engineering, Synovis Surgical Innovations, and Synovis Micro Companies Alliance. Together, these businesses provide a wide, diversified range of medical devices for the surgical and interventional treatment of disease.

Fiscal Responsibility

Before the CMS noncoverage decision was handed down, Synovis was focused on planning to commercialize its single successful product in a rapidly growing market.

After the noncoverage decision, we were fortunate to still have cash reserves to draw from during the recovery process. Without such reserves, Synovis would have been hard-pressed to develop and implement a workable solution before funds ran out. In part, the company's cash reserves came from funds raised to commercialize its main product. Because we had been fiscally responsible, however, much of that cash remained and could be redirected toward rebuilding the company.

Fiscal responsibility has long been a cornerstone for the company. Throughout our history, we've operated our business around three axioms of fiscal responsibility:

Remember That Cash Is King. Don't leverage the company unnecessarily. And don't buy the image before the business comes through the door. In other words, don't invest heavily in a marketing campaign or lavish office facility—as many dot-com companies did during the high-tech boom period—before establishing a solid business foundation.

Invest in Attracting and Retaining Quality Employees. Never forget that employees are the key to a firm's success. Even in times when available capital is slim, it's critically important to find methods that will attract new employees while motivating and empowering current employees (see sidebar).

Make Good Choices with Company Assets. Don't use your assets in a cavalier or arrogant manner. Adhere to the philosophy that throwing money at a problem won't necessarily solve it. Instead, be creative. Seek efficiencies and solutions that don't require large expenditures or a substantial buildup of debt.

Success through Diversification

Synovis has successfully repositioned itself in the years since the noncoverage decision. This success has come through our diversification efforts combined with a continued policy of fiscal responsibility, the efforts of a strong core management team and a committed, valued, and empowered workforce.

Synovis now has sustainable double-digit revenue growth, with good cash flow and increasing operating income, net income, and earnings per share. We expect consolidated revenues of more than $38 million for fiscal year 2002, compared with net revenue of more than $28.5 million in 2001—numbers that compare favorably with fiscal 1997 revenue of $9.7 million, in the wake of the noncoverage decision.

Perhaps more important than our recent successes, however, is the fact that Synovis is positioned for continuing success as a result of our diversification efforts. The company's product development pipeline is full and our businesses produce a wide range of devices addressing large, carefully targeted niche markets. Our diversification strategy has eliminated the risk of failing or succeeding based on the performance of a single product, and it has also opened the door to continued success.

Prepare for the Unexpected

Synovis's recovery process would likely have been quicker if we had already diversified our product offerings. And today's medical device company leaders would be well advised to ensure that their companies are prepared for similar pitfalls—even if the chances of such problems occurring seem extremely remote.

Effective, prudent leadership means taking a close look at the current state of the company and the market it competes in. A business that truly wants to manage risk should be driving toward multiple opportunities, not just focused on a single, promising product. The company should be diversified enough to handle various crises, such as a noncoverage decision, a competitor's patent infringement, or even a recall.

Fiscal responsibility is also key to success in today's market. In the wake of disaster, companies need to have the financial reserves required to start the recovery process. Advance planning can go a long way toward strengthening the company, shielding against unexpected troubles, and helping ensure future success.

Copyright ©2002 MX