|Merit Medical CEO Lampropoulos: Foreign Markets are Friendlier|
Fred Lampropoulos also discusses Merit Medical's recent acquisition of Thomas Medical Products and what the Affordable Care Act means for the medical device industry.
Early on, Fred Lampropoulos, president and CEO of Merit Medical Systems, learned that there is always room for innovation. When talking to investors about one of Merit’s first products, they scoffed.
Merit Medical Systems presdient and CEO Fred Lampropoulos
“…[T]hey said, ‘You’ve got to be kidding me. You’re going to compete with this syringe against someone like Becton Dickinson or some of these bigger companies?’”
That syringe was a device designed to replace the glass and polypropylene models used at the time for cardiology procedures. That was more than 100 patents and billions of dollars in revenue ago.
To stay nimble, Lampropoulos continues to examine popular products with an eye toward finding opportunities where market share says there shouldn’t be any for the disposable cardiology, endoscopy, and radiology devices Merit manufactures.
The outspoken executive ran unsuccessfully for governor of Utah in 2004 and considered a run for the U.S. Senate in 2010. A board member of the Medical Device Manufacturers Association, Lampropoulos is no fan of the Affordable Care Act (ACA). In a recent interview with MD+DI, he discussed why he believes the ACA is bad for the industry, the advantages of foreign markets, the Thomas Medical acquisition, the new U.S. patent law, and other topics.
MD+DI: Merit recently purchased Thomas Medical Products. How long had you been eyeing Thomas, and how did the acquisition come about?
Lampropoulos: We’ve been well aware of Thomas for many years. At one time they had actually been a vendor and built a product for us. This is a situation where General Electric decided to sell. We were contacted by the investment banker, Moelis, and we then engaged our banker, Piper Jaffray. I think we made a very aggressive—I don’t want to call it preemptive for lack of a better word—[offer]. We liked this business because it fits so nicely into our vascular access [line].
MD+DI: Why did you pursue this so aggressively?
Lampropoulos: They are the market leader for peelable, splittable sheaths. These sheaths are used for the placement of pacemakers, defibrillators, and other types of catheters like dialysis catheters. Those are products Merit did not have, but we still call on the same point of sale so it was a natural fit for us.
MD+DI: Were there any other suitors?
Lampropoulos: I know they had at least one or two other strategics and three other private equity firms. When I said I know, that’s what the scuttlebutt was. I know there were other players, but you don’t worry too much about that kind of stuff. You make your best bid, and the other stuff doesn’t really matter. I guess it does for people who have an interest. For us, I don’t care. We were the best-looking guy on the block, so we got the date and we closed the deal.
MD+DI: You just returned from visiting Merit’s operations in Europe. How did that go?
Lampropoulos: Europe is one of the fastest-growing areas for Merit. We are particularly active in the [Persian] Gulf states and in Eastern Europe, including Russia. We grew in excess of 25% last year in Europe between dealers and our direct sales there. This is in spite of all the turmoil and the economic issues. I think we’ve been very effective with our sales and marketing programs in Europe, and on top of that we have five manufacturing facilities in Europe as well. So there are lots of reasons to go there.
MD+DI: Why are Merit’s sales doing so well in Europe?
Lampropoulos: Why Europe? One of the advantages you have as a smaller company is the ability to move and be decisive. With Russia, we’ve put some models in place where we have a more direct presence. By that I mean historically we had maybe a single distributor that owns your licenses. We’ve developed another model, which was very successful for us in China, [where] we go in and do the registrations of the products and then we put country managers and marketing support in the country. Then we decide where the distribution is in places like St. Petersburg or Moscow and in other places like Belarus or Ukraine. If someone does a good job with our products, we can decide to keep them, and we support them. But if someone’s not doing the job it gives us flexibility to adjust.
These models have allowed us to be more aggressive, and we’ve been able to simply select better distributors and better partners. And we have a preference there. We have [a mix of] Americans as well as Europeans on the ground. If you don’t mind [my saying it], Americans are somewhat aggressive, and the Europeans who are on our team help us to understand the cultural issues. Combine those together and it gives us a good approach.
MD+DI: Why is there such a demand for Merit’s products overseas?
Lampropoulos: I think there’s something more fundamental than just demand, and that is that we build great products. We have a lot of intellectual property. [There are also] the services that we provide—the stick-to-stitch approach. Rather than just having a stent or just having a device, Merit has a very broad line, so we can bring a lot of depth and a lot of products to a hospital. The Europeans are no different than we are in America. You’d like to minimize the number of people and the amount of paperwork you deal with, and you work with one company that has quality, innovative products. It’s been a very appealing model for Europeans who like the way we do business. We expect that we’ll continue to grow at those rates.
MD+DI: In its 2012 annual report, Merit says spreading the geographic risk may mitigate the effect of changes to the healthcare system. What healthcare changes do you see affecting Merit’s business?
Lampropoulos: Maybe that wasn’t quite in context. Merit has been in the international markets since the day we started this business. We’ve adjusted the models in various areas, but we’ve been in Japan for 25 years. We’ve had a presence in China for a long time, but we’ve adjusted the model to meet the needs that we have in terms of having more control of the distribution aspects.
In terms of our overall strategy [because of] the Affordable Care Act, the fact that you get taxed at 2.3%, the regulations in the U.S., and time-to-market with products, when we compare the CE mark with the FDA approach to things, we find that, very candidly, it’s more appealing and beneficial for us to look at these international markets. Not that we get away with anything, but it’s more streamlined and in some cases less costly [to operate in foreign markets].
Listen, we’re businessmen. What we try to do is figure out how to maximize our opportunities. Unfortunately, there are people in government who don’t understand that. They think they can tax and regulate and somehow that we’re just going to take it, and the answer is we’re not. This is getting into basic economics. Our capital will go where we can get the best return for our shareholders. It’s as simple as that.
MD+DI: What percentage of your business comes from repeat customers and what percentage comes from new customers?
Lampropoulos: I think you’ve hit on something. One of [our] other advantages is that we have a presence in almost all hospitals. We pick up new customers all the time, but I would say that we probably have three to one—maybe five to one—in terms of expanding our business with new products and new capabilities with existing customers.
MD+DI: Metric’s first product was a polycarbonate coronary syringe. What did you learn when you were designing that first device that has helped you after you started in ’87?
Lampropoulos: That was a long time ago, but the thing we learned is there’s always room for innovation. I remember talking to some investors, and they said, “You’ve got to be kidding me. You’re going to compete with this syringe against someone like Becton Dickinson or some of these bigger companies?”
I think it taught us that there are markets. You know, some people buy pickup trucks, some people buy luxury vehicles, and other people buy economy vehicles. It’s the same in the medical device area. There are markets.
There’s also always a concern for safety. What we replaced were essentially syringes that were made out of polypropylenes or made out of glass. Glass syringes would explode, they’d cut hands, they had to be resterilized. What it really did is tell us that we could compete and come up with good ideas, and this is a half-billion dollars ago. Billions of dollars of revenues have been generated and thousands of jobs have been created by doing things people said we couldn’t do.
In fact, it’s kind of interesting as I look back at that. What we were doing was revolutionary. No one had ever done it. No one had ever done a digital inflation device, no one had ever done a syringe that felt like glass but had the safety of a clear, tough plastic. Today they’re everywhere. But back in our day no one had ever done this stuff before. We were truly revolutionary in trying to bring out these products that created performance and safety characteristics.
MD+DI: You say that at that time these were revolutionary products, but how differentiated nowadays can a catheter, for example, be that would make it preferable over a competitor’s device? Are most of the device changes in your markets incremental now?
Lampropoulos: It’s a really good question. Let me give you an example. I was sitting in a product development meeting just the other day on a new product, a new balloon catheter. There were no fewer than 10 differentiating characteristics of this product over my competitor’s product. What I learned as a young businessman is that if you had one [new feature], you could make a living; if you had two, you could live above the standard; and if you [had] three, you were going to make a lot of money and do a lot of good things. This has 10, and this is a product that’s been in the marketplace for many years and is dominated by one of the big players.
For example, think about airplanes. They have wings. They have an engine. But for heaven sakes, you can land an airplane at zero-zero [ceiling and visibility] nowadays. That was unthought of 100 years ago. So the technology and the capabilities move on. When you combine what seem like relatively simple steps, but you have seven products that have simple steps and your competitors don’t have that, you give your customer many, many reasons to do business with you.
In fact, [what] I like to look at from time to time, mostly as an exercise, [are] things that no one has changed for a number of years and say, “Why haven’t they done this?” The big guys get lazy. The guys that have market share get lazy. We’re like a teenager. We’re just starting to fill out. We get those pudgy old-timers sitting out there doing business. If they want to come have an arm wrestle, we’re just the guys for them.
MD+DI: You’ve touched on the topic of Merit’s intellectual property (IP). I imagine that a successful device company needs to zealously protect its IP, wouldn’t you say?
Lampropoulos: I think that that’s important, but if you look at Merit’s history, you’ll find that we’ve hardly ever had to enforce patent. Mostly, people have just stayed out of the way. There are a lot of other factors in medical devices as to the barriers of entry, part of it being regulatory, and all those sorts of things factor more than they did in the past. At the same time, some of our biggest sellers are products that don’t have patents at all. But it goes back to this issue of breadth that we talked about and the combination of products to meet a customer’s needs.
Yes, we protect [patents], and we spend millions and millions of dollars every year creating new IP and keeping things that we invented years ago current. It’s a combination of a lot of things. I mean, I had five new things put in front of me today from 8:00 this morning till 11:20. In 3 hours and 20 minutes I had 5 new opportunities made available. All great technology, great opportunities, great ideas. Except for two things: first, they lacked capital, and second, they don’t have any way to sell this stuff. That’s why peddlers rule the world. Who’s going to sell it? [You need sellers] or nobody else has a job.
MD+DI: Who exactly was pitching these ideas? Are these visitors from outside the company?
Lampropoulos: No, no. These are investment bankers or businesses. These are new opportunities to acquire, purchase, or distribute.
MD+DI: Is half of Merit’s business still in custom products?
Lampropoulos: I don’t know that it’s quite that much anymore. I would say it’s closer to 40%. We’ve gotten into more therapeutic products and higher-value products. But it’s still an important part of our business overall, in which we combine products or packs or kits, and a lot of it [is] for the convenience of the customer. One of the great advantages [we have] is [what] we’re willing to do versus [what] some of the larger companies aren’t willing to do. It’s the old [saying], “You can have any one you want in any color you want as long as it’s black.” People like different ways to do things. I think it’s a huge advantage for us.
MD+DI: You’ve already touched on the Affordable Care Act. You’re a board member of MDMA. Do you think the medical device excise tax will be rescinded?
Lampropoulos: I just have to say that I don’t. I wish I could say that I did. In fact, I’m scheduled to head to MDMA for a board meeting tomorrow. Again, I think it’s one of the great travesties of our time, penalizing the creators of jobs and the creators of wealth. But it’s the law of the land, so, okay, get over it, deal with it.
MD+DI: How will companies deal with it?
Lampropoulos: It’s simple. They’ll start laying people off. Boston Scientific announced a thousand [layoffs]. Smith & Nephew. Stryker, a thousand. Cook’s not going to build five plants. This is simple economics. It costs Merit 20% to 25% of our net after-tax operating profits. So what do businesses do? You figure out how to get into an environment that’s not as restrictive and penalty-ridden, and you cut back in the areas that you would consider—I don’t want to call it arbitrary—but all businesses have areas they can cut. It means instead of being on our payroll, they’ll be on the government’s payroll now. That’s a sad commentary.
MD+DI: You don’t believe the main rationale for the tax will pan out, that there’ll be 30 million or so more device users?
Lampropoulos: That’s a bunch of….
MD+DI: You talked about running for the U.S. Senate in 2010.
Lampropoulos: I had considered it. Now I’m considering running for the presidency.
MD+DI: You did run for governor of Utah in 2004, correct?
Lampropoulos: Yeah, I’m just kind of a basic loser. [Laughs.] I can’t win anything. I ran for governor in 2004. It was really a great experience, and it really had to do with my displeasure with economic development in the state of Utah. Many of the things that we had discussed and many of the ideas have been adopted, so I think it was well worth it. Actually, one of the guys I ran against is on my board now. Another one I ran against is my vice president of sales and marketing. It was to our benefit—and certainly I didn’t see those benefits would be there—but as it all turned out many of these guys became good friends and business allies.
Q: Some people have argued that government fundamentally can’t be run the same way that a business is operated. What are some of the benefits and drawbacks of having business people in government?
Lampropoulos: I think there are a lot of [beneficial] things. I think the decision-making process [is one]. People [believe] that, somehow, if you’re the CEO, everybody just goes along with you. There’s a lot of persuasion [required]. There’s a lot of instruction. There’s a lot of bringing people along. And then just the whole leadership aspect: the fact that you have to have a budget, the fact that there are compromises. And maybe more important than all of that is the scope.
As an example, I would have no problem whatsoever—I mean, short of the rules of the Senate and of politics—in terms of the ability to understand the effects of policy decisions on international trade or on deficits or on the Fed or on energy policy. Those are things that we don’t just talk about; those are things that we deal with every single day. And I would put my experience against anybody in the Senate.
People say, “Well, have you thought about this?” We’re not about [being] armchair quarterbacks. We’re guys out there on the battle lines being shot at every day. I encourage people from the private sector. The problem is with any of this stuff is, of course, the cost. Some of the rules of the game—some of those things—you say, well, wait a second. Why am I going to take this pay cut? Why am I going to go out there and expose my family, and do all this and take all these potshots? That’s the challenge in politics. You want to serve. You think you can bring something to the party but then, boy, you’re the spear catcher. At least if someone wants to compete with me in a business sense, let’s go at it. Unfortunately, in politics you’ve got guys in front of you, but the guys behind you are throwing spears at you, too.
MD+DI: What if you had won the governorship? Who would run the company?
Lampropoulos: There are a lot of people here. We have a plan in place. There are probably no fewer than five people who could run this business today.
MD+DI: You’ve said you hire employees who have never done the job you hired them for. Is that true?
Lampropoulos: Yeah. I’m one of them. I was never in the medical device industry. I’ve never been formally trained. I’m not an engineer. I hired a guy a couple of years ago to be a trade rep. What’s a trade rep? You can go around to a lot of companies and when you think of trade rep you think of government. Here’s a guy we wanted to represent us in negotiating new products, new contracts, [and] helping out the purchasing department in terms of selling the company in the long term with the idea of saving money. Last year his contribution to the company in net savings was $3.4 million.
In fact, we’ve been so good at doing this that some of the companies we go to that are substantially larger than we are say no one has ever called on us and talked about these things. And a couple of the larger companies have actually adopted this method [of hiring]. I can give you names of people who have never done [the work they were hired for], but they have the fundamental skills of communication, dialog, and contracts. If this is experience, the rules apply across the board. I had somebody say to me: “Do you think you could run a utility company?” Of course I could. “Do you think you could run a movie company?” Well, of course I can. There are fundamental principles of business and of leadership.
MD+DI: So if the person has no experience for a specific opening, there are basic attributes that attract you.
Lampropoulos: The guy I hired as a trade rep, our kids played football together. He was in the mortgage business. He was well-thought-of in the community. I talked to people who were his neighbors. I watched him show up at his kid’s football games. I watched his aggressive nature. In other words, he had the desire to win. I learned about his background playing basketball and playing football in college, and these sorts of things. These [decisions] are not just done on a whim. They’re done after observing and listening. Maybe the more important factor is [candidates] were courteous when they approached me. They were looking for a job, and they never gave up. To me, that’s about as important a factor. They stuck with it. And then as I saw a need in the company, I hired them.
MD+DI: What major trends or watershed events in the device industry stand out for you since you launched Merit in 1987?
Lampropoulos: Clearly, when we started the business, [Percutaneous transluminal coronary angioplasty] was just emerging as a possible therapy. Along with that came stents, and then came coated stents. Now we have drug-eluting balloons and other prophylactic types of approaches to medicine today. I think it goes to an earlier question you asked, and that is these things progress. Technology is fundamentally built one brick at a time. We look at opportunities to say, “What do we have that we can now add another brick to and have another opportunity?” Those are things that you just kind of learn from doing. It’s the progression of technology.
On the other side is this global market. Clearly, back in 1987 the thought of going to Europe [was] maybe you’d go hire a distributor, and that would be it. What you learn is that you have to adapt culturally. You have to be in Ireland, you have to be in the Netherlands, you have to be in Russia. You have to have an office in Dubai. You have to have a presence in Russia. The watershed moment is there are great opportunities and there are great ways to communicate, but leadership requires presence, and you have to be there. If you look at Merit and compare it with a couple of my very worthy competitors like Vascular Solutions or Angiodynamics—those are the two that come to mind in terms of relative size—they’re smaller than we are, but Merit is doing 40–45% of our revenues in international markets versus 10–15% [for these companies].
In many ways we have a great advantage in having that global footprint. The U.S. market right now is the slowest growth market. When you can grow in the 20s or in the teens, and you’re in double digits in these other markets, trying to get established there today is much more difficult than it was when we started these things some time ago. Those watershed events—understanding it is going to be a global market and despite regulatory hurdles and those sorts of things that the markets were going to grow up and be opportunities—are one of the basic reasons we’ve had such a long sustained period of growth as a company.
MD+DI: That would be a trend you see over the next few years as well?
Lampropoulos: Yes. People talk about the BRIC countries, but there is still a lot of opportunity in the Middle East, China, Korea, Brazil, Central and South America. There are still a lot of emerging [markets]. Mexico, for instance, is becoming more of a factor for us.
MD+DI: Finally, this question is totally off-topic, but I understand that you were in a band that opened for The Doors back in the day?
Lampropoulos: Yeah. Also for Mitch Ryder and the Detroit Wheels, Bobby Vee, Buffalo Springfield. We used to do a lot of that stuff.
MD+DI: Where was this?
Lampropoulos: It was here in Utah. We were just a garage band, but we were a good garage band. We’re still trying to write a hit record. It’s been 40 years, but we’re working on it.
John Conroy is a frequent contributor to MD+DI. Contact him at email@example.com.