Medical Device Link.

Originally Published MX July/August 2003

COVER STORY

To reach an ambitious sales goal, Invacare chairman and CEO Mal Mixon is creating consumer demand for his company's products.

Interview by Steve Halasey

The market potential for home medical equipment (HME) is great and growing, as the number of people surviving into old age or living with manageable chronic medical conditions continues to increase. This market is global, as is the reach of television and the Internet. What better way, then, for a thriving HME company to achieve ambitious sales goals than to exploit these media to reach consumers directly?

That is the approach being taken by Invacare Corp. (Elyria, OH) under the energetic and farsighted leadership of its chairman and CEO, Mal Mixon. Television and print ads, showroom displays, and additional marketing materials feature spokesman Arnold Palmer. A sophisticated Web site is packed with information available to prospective users of the company's wheelchairs, home medical beds, hydraulic lifts, and home oxygen generators. This direct-to-consumer campaign could well prove to be a model for other medical device manufacturing companies.

Invacare traces its origins to a company founded in 1885. But today's enterprise really began in the late 1970s when Mal Mixon, a corporate officer with a firm purchased by Johnson & Johnson, bought a subsidiary of that firm to fulfill a strong yen to own his own company. To meet J&J's asking price of $7.8 million, Mixon borrowed $4.3 million, raised $2 million by selling and leasing back a plant, and brought in another $1.5 million through the sale of stock to Cleveland-area investors. At the end of 1979, with a heavy debt load in an extraordinary environment of rising interest rates, and earnings of just $100,000 on sales of $19 million, the new company faced a dominant competitor and had no new products in development to supplement its limited existing line.

In this interview with MX editor-in-chief Steve Halasey, Mixon discusses what Invacare has done and is doing to sustain the upsurge of the past 24 years that has taken the company to more than $1 billion in sales and made its goals of doubling sales and reaching 50% market share within the easily foreseeable future quite reasonable. The company focus now is on building brand loyalty among Invacare product users and enlightening the U.S. Congress in matters of HME reimbursement. The complete transcript of the interview can be accessed via the MX Web site at http://devicelink.com/mx.

MX: How does the aging of the population, especially in the industrialized nations, rank as a driver for growth at Invacare?

Mal Mixon: It is the primary driver of our business. We have seen this trend for a long time, perhaps longer than the investment community has realized. But just as important as the trend that people are living longer is the fact that physicians are also encouraging older people to remain active, which leads to hip replacements, rotator cuff surgeries, and other operations.

Our products are about lifestyle, not just illness, because they enable people to remain very active. Some of our new motorized wheelchairs look more like Harley-Davidson motorcycles than a traditional wheelchair. Color, styling, and consumerism have come to our business. In addition, of course, we provide important medical products for older people who have chronic or acute illness, and are treated outside of the hospital.

As everyone knows, most medical expenditures occur in the last few years of life. So, as the application of diagnosis-related groups (DRGs) has pushed people out of hospitals much faster in America, the homecare market has greatly expanded. Studies done by Aetna and others indicate that home care is about a sixth to a third of the cost of institutionalized care. So if someone can be kept home—as opposed to performing the same protocol in an institutional setting—the system saves a lot of money. Unfortunately, Congress does not understand this. It frequently cuts reimbursement in home care and throws out the baby with the bathwater. But someday our government will understand that home care is a solution to the escalating costs of healthcare.

Do healthcare professionals who are treating patients and releasing them to home expect that more-sophisticated types of products will be available to those patients now than 10 years ago?

There is no question about that. When I began at Invacare, 24 years ago, some technologies available to the patient today did not exist.

Clearly, much more sophisticated medicine can be practiced in the home now. As physicians move patients from the hospital into that environment, opportunities to market other home-care medical devices and disposables are opened up.

Reimbursement Struggles

That expectation on the part of physicians may be on a collision course with Congress's intent to pay for advanced products under Medicare. How serious a problem is that for home medical equipment manufacturers in general?

It is a constant challenge, and every aspect of healthcare has been hurt by these cuts. Hospitals, nursing homes, home health agencies, homecare—everyone has been affected, particularly by the Balanced Budget Act of 1997.

Because of this, the home-care industry has increased its presence in Washington, DC. Today, we have a much more effective lobby. Home care still represents only about 5% of the Medicare budget, so when we lobby we are dealing with very powerful trade associations and organizations that have been in place for a long time: the American Medical Association, American Hospital Association, Nursing Home Association, and so forth.

Invacare has hired a full-time lobbyist as well as government affairs specialists. We think we are actually making some progress, but I am sure that as time goes on, we will have to deal with it constantly.

How optimistic are you?

Every industry has its challenges, of course, but I really feel like we are on the right side of the curve and more and more members of Congress are beginning to understand that home care can really help reduce costs. Unfortunately, there is no scoring for cost avoidance. If federal legislators understood that every home care patient costs the government about one-fifth as much money as that same patient in an institutional environment, I think they would have a tremendous appreciation for it. But it is a never-ending battle.

Which industry associations represent HME manufacturers?

We have the American Association for Homecare (Alexandria, VA).

For years I belonged to the Health Industry Manufacturers Association [HIMA; now AdvaMed]. Most of its focus is on dealing with FDA. But our major focus is reimbursement. So we migrated into that somewhat different area and carry out our own lobbying activities.

What do you see as the big stumbling blocks right now?

Well, we have been wrestling against competitive bidding for a long time. So far we have been successful in thwarting the efforts of Representative Bill Thomas (R–CA) to get this passed.

There is a healthcare bill building as we speak; the primary driver, of course, is prescription drug reimbursement. And a major issue is, how are they going to pay for it? I think they are going to take a lot of it from providers. As we speak, the Senate version of the bill has already pretty much been written. In lieu of competitive bidding there is a multiyear freeze on the cost-of-living escalation benefit that currently exists. We think competitive bidding would be a disaster for the government as well as the industry, and most importantly for the patient.

We are still arguing in the House and trying to persuade Representative Thomas not to include competitive bidding in his bill. But if that happens, the bill will go to conference where we are very hopeful the Senate version will prevail and substitute cost of living for competitive bidding.

Branding and Consumer Marketing

Invacare has an interesting marketing approach.

Yes, we have recently begun to brand our products. Until now, no company in our industry has been large enough to educate the consumer about this category of products. We at one time carried as many as 50 brand names because we bought 35 small companies. We have evolved them all into a single brand, Invacare. And we created the tag line "Yes, you can."

And to help us accelerate recognition of our brand and—we hope—expand the market, we hired Arnold Palmer about a year ago. Arnold is in our TV advertising, print advertisements, and so forth. Another thing we have done is to create a very informative Web site at www.invacare.com that gets a lot of hits from around the world.

I wish we could afford a lot more of this than we can, but it is a start. We hope to educate the world and make Invacare a household name for products needed in the home-care environment.

How much is the branding activity you have launched adding to the Invacare bottom line?

It's too early to tell, because we have spent the money to generate the marketing program, but the payoff will be over the long term. As my marketing head likes to say, "It is a journey; it is not a destination." It is something we have to be committed to. It will probably take years to get the brand well recognized.

It is probably too early to tell what the crossover sales will be once the branding really takes effect.

Right. What some call a crossover effect I call the halo effect: that is, in advertising one product, the company is creating brand awareness and interest in other products it makes that are perhaps not being advertised. We are the premier company with the best products. They outperform those of our competitors. Consumers, if they were fully informed, would choose our products.

It is a big proposition to spend the money necessary to educate the public to that, but we are on our way. We have set a goal to double our company sales to $2 billion in 2006. And with the cash we are generating—we generated over $100 million of free cash flow last year—we can spend $100 million a year on acquisitions and should grow $100 million a year. There is no question in my mind that we can achieve that; and of course when we are at $2 billion we could spend at least twice as much on marketing as we do today.

Again I emphasize, this is a journey. We are committed to it. We are going to build this brand, and someday I think people will recognize the logo and the brand. That is a major, major strategic advantage when we can achieve that goal.

Is there something about this time, or the way society has changed, that makes it more possible to do consumer-oriented marketing now?

Not necessarily. This industry has been characterized by many small companies. Today it is a $4.5 billion worldwide market, and Invacare has roughly 25% of the business in its field of enterprise. But to make an impact in marketing normally requires spending some dollars and having some mass. We just did not have the money in our budget to be able to begin to do what we are doing until we crossed the billion-dollar threshold. Then we were in a position where we could begin to educate the market about our category of products. But had we been able to do this 20 years ago, it would have had an impact.

But this kind of marketing is not useful for a lot of other categories of medical products, is it?

A company is not going to increase the number of heart valves sold by marketing them on TV. But our products clearly are different from certain medical devices—more like pharmaceuticals—in that they enable people to do things that they want to do and otherwise couldn't. They may not know a product exists to help them do it, or may not realize that it is an item that they could get reimbursement for if they have a certain medical condition and their physician writes a prescription for the product. So there is tremendous education that can go on in this field.

You mentioned that your strategy includes developing a sophisticated Web site.

The last I checked, we are doing 24% of transactions electronically with our 10,000 U.S. home-care providers. And of course a lot of consumers are coming onto the site to learn about our products, which is another great way for us to educate the public. Through a link to the Cleveland Clinic Foundation Web site, our Web site also provides detailed medical information about conditions that might cause people to need our products.

Do you find that consumers are no longer happy with what they have had in the past, but want to know about what is out there today?

That is absolutely true. And today's technology, I guarantee, will be replaced in the next five years. It is really exciting to have a disruptive technology or a new technology that totally changes how people do things. We have enjoyed offering the first real computerized, motorized wheelchair; we have a huge market in that area. We have a major share of the oxygen concentrator area for stationary oxygen in the home. This year Invacare expects to make a major entrance into the sleep market and also will introduce a breakthrough scooter design. So we get a lot of pleasure out of introducing products that enhance the life-style and improve the life of home-care patients.

Focus on R&D

Unlike traditional HME companies, Invacare seems to have a strong dedication to R&D and developing quite high-end products. How does that work as a business strategy?

Well, it stems from my belief that if you do not have the products, you have no company. You cannot fool people for very long. And if you really do have the best products and you understand how to market them, then you are going to be the market leader.

I have always believed that we need to obsolete our own products, not wait for a competitor to do it. Invacare is in the most aggressive product development phase it has ever attempted. In the fourth quarter of this year, 90% of our U.S. homecare sales will be products designed over the previous three years and introduced over the previous two years. We plan on obsolescence in the maximum range of about three years, so that we start working on a new product's replacement as soon as we introduce it to market.

We are now spending a little over 2% of sales on R&D, excluding sales from our distributed products. That does not sound like much in the medical field, but in the durable medical equipment industry it is quite a lot.

Does that message come across in your marketing as well?

I think so. Ours are not the lowest-priced products on the market, but our life-cycle costs are the lowest. For example, our rental products last longer than competitors' do. They may cost a little more on the front end, but when the cost is amortized over the life of the product, they are actually more cost-effective than competing products.

The difficulty comes when we have product improvements that are available for the patient but that the government will not pay for because it would say the enhancement is not medically necessary. After 10 years of work, we were able to get legislation passed as part of the Balanced Budget Act of 1997. This section was called the Consumer Choice Bill and it allows patients or consumers to pay the difference. But it remains an issue, because we have many features and improvements that we think really make life much better for the consumer but for which it is difficult to get reimbursement.

Do you see a collision coming when the government has to deal with a lot of aging baby boomers who will not be satisfied with a 50-pound chair if they can get an 18-pound one?

Yes. As both patients and caregivers become more vocal about what they want, and as we make the case for savings attributable to HME, then perhaps the reimbursement situation will change.

Growth Expectations

You mentioned that you hope to use some of your cash flow to acquire other companies. What sort of firms are you looking for?

There are many opportunities out there. We do not have a lot of competition right now to buy these companies. Most of our competitors are not on the acquisition trail primarily because of financial problems.

But we are looking for product line expansion—to acquire a product category that would be distributed through the same channel we now use. There are opportunities to consolidate by buying a competitor, and there are opportunities for further geographical expansion—in other words, purchasing companies in our field in other countries to strengthen ourselves strategically.

In all this, we are staying very closely aligned with the markets we are already in. We do not feel a need to expand into totally new areas.

What do you expect the total value of the HME market to be in 2006, your target year for $2 billion in sales?

We think the market will grow 6–8% a year from today's $4.5 billion. I might mention that about $150 million of our current $1.2 billion in sales is from home-care disposables sold in the United States only. That is a separate $2 billion market, of which we have approximately 7%. So equipment-wise, obviously we will grow share over the next three years. We have a long way to go, but we should be able to get to 50% market share at some point, I would think.

Shareholders would be very happy to hear that.

Well, I hope so. I am still the principal individual shareholder, and we have a lot of inside ownership; about 20% of the shares are owned by insiders or members of the board. So we are really driven to build a great company. We are long-term oriented. Investors that have held our stock over five-year periods have been pretty well rewarded. We have outperformed most U.S. companies over the past 15 years, including a lot of those everybody says are the best-run companies. We have done a good job for our shareholders, and I think we are going to continue to do that.

Photo by BILL PAPPAS

Copyright ©2003 MX