An Entrepreneurial Company Grapples With Rapid Growth

Medical Device & Diagnostic Industry Magazine
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An MD&DI April 1998 Column

VERBATIM

Colette Cozean, PhD, chair of the board, president, and CEO of Premier Laser Systems, Inc., shares the strategies behind her company's stellar advances.

A management buyout of Pfizer Laser Systems in August 1991 became the beginnings of Premier Laser Systems (Irvine, CA). Raising approximately $10 million, Colette Cozean, PhD, has successfully led the transition from a division of a large company in the surgical business to an entrepreneurial firm with leading technology and clinical applications in dentistry and ophthalmology. The company went public just three years after its inception, and it has overcome its growing pains to experience its first profits this quarter. MD&DI senior editor Sherrie Steward talked with Cozean about the challenges and rewards.

What distinguishes Premier from other laser technology companies?

Laser companies usually have one product and look for a single niche market geared around that single technology. Pfizer, our founder, and Premier both have a philosophy that focuses on clinical needs and finding the best technology to fit those needs. The technology must then have a competitive advantage in that large, rapidly growing market. That technology may or may not end up encompassing lasers. Obviously, we have a lot of experience with lasers; therefore, if a laser is needed for a clinical application, we may have a competitive advantage. But, our product development is driven by the needs in the marketplace.

Are you developing markets for products or finding products for markets? There's a little bit of a difference.

Actually there's a big difference, and I don't think that difference is appreciated by many laser companies. We find the market and the client needs, and we develop the product.

When you looked at buying Premier from Pfizer, you were dealing with patents and product development. Now you've moved on to acquisitions and strategic alliances. Did you have a strategy for ensuring that success would be there?

We're generating a solid series of product lines, both internally and by acquisition. I believe that by having multiple products and multiple marketplaces, we've insulated ourselves against market downturns. So, if we look hard at the risk-to-benefit ratio or risk-to-success ratio, I think our strategy was a good risk. We went through several periods where if we had not had multiple products on the market, we would not have survived. So, it hasn't been an easy step forward, but we have tried to insulate ourselves as much as possible by our strategy. I personally spend a lot of time studying the laser market and have a firm belief in the multilevel product line approach.

How do acquisitions fit in with the strategy you've set forth for the company?

Our most recent potential acquisition is at a standstill so that we can evaluate it more fully, looking to develop a mutually beneficial agreement. Having said that, Ophthalmic Imaging Systems, its management and its vision, fit a similar strategy to the one we employed in the acquisition of EyeSys. We believe that in the ophthalmic arena, one must have several different products to achieve critical mass in the market. While we have internally developed a wide range of lasers, we believe there is a narrow window of opportunity to reach the ophthalmic market, so we acquired a strong international distribution force through the acquisition of EyeSys International.

Ophthalmic Imaging Systems is a leader in the diagnostic retina and glaucoma fields with an excellent reputation for innovative products and market leadership in the retina area. These products will be combined with our laser systems to provide a complete diagnostic and surgical solution to the ophthalmic practitioner. Ophthalmic Imaging Systems, EyeSys, and our Data.Site joint venture focus on automatic data collection, storage, and retrieval in ophthalmic offices with a goal toward increasing productivity. The synergy between the Premier strategy and Ophthalmic Imaging Systems is excellent.

Do you plan to continue to integrate your laser products into these distribution networks?

That is correct. To date, Premier Laser Systems has been growing rapidly through internally developed products and markets. We are now seeking to expand our distribution capabilities and channels to partnerships and acquisitions. These acquisitions usually result in the acquired company's having a synergistic product, which provides a more complete solution to the customer. Although our origin is as a laser company, and we still have laser in our name, we believe in providing a full complement of high-tech products and disposables to the surgeon.

What has the company done to strengthen its distribution and manufacturing activities?

When a product is introduced, you have to hit the road with a lot of courses and missionary sales and training tapes. As a product achieves greater acceptance, in order to reach more practitioners and administrators, an established, respected distribution partner is necessary. Take Sullivan-Shein, for example. They have 500 salespeople out there. They call on more than half the dentists in the United States every week. They have about 50 high-tech salespeople and about 400 service people. Their strengths are key to our continued growth, because there's no way our distribution force of 30 people can address 120,000 dentists.

Is selecting the target markets for your products a deliberate strategy?

Very much so. The initial questions we address include whether there's a real clinical need, can we meet that need, and whether it's a good-sized market. We investigate whether we have the right technology. We have very firm criteria for looking at a market. If the opportunity is not there, we won't do it.

What is your strategy for increasing market acceptance of the laser applications you've developed?

Let's look at some strategies. A pivotal one is to increase overall market acceptance of lasers. Almost every area we're in has very little competition. So, our goal has to be to help dentists, physicians, and patients understand the benefits of laser surgery. We do that in a number of ways. The primary way is to inform the practicing dentists and physicians directly, but we also address messages to the general public so that patients can understand what those benefits are and discuss them with their practitioners. Of course, a number of different clinical research papers and articles have been published and are routinely distributed to practitioners.

Must dentists purchase a product in order to take the courses you offer?

No. I'll give you an example in dentistry that recently gave me pause. We put out a fax to about 15,000 dentists listing the series of courses that we are offering for the next quarter. Those range from courses and papers at conventions to three-hour courses in the evening to a full-day hands-on course. In none of these cases do you have to buy a system, but in most of the cases where you're taking a full-day hands-on course, you already have or are considering a system. What really caught my attention was the fact that the fax we had released the night before generated 2000 return faxes and phone calls by 9 a.m. the next morning.

Dentists are very conservative. On the other hand, we're finding they really want to understand the capabilities of the technology. We deal with a market that's exactly the opposite in ophthalmology. Ophthalmologists immediately understand the technology, and they're more concerned with whether they can make money. They're much earlier adopters.

Can you explain why that is?

I gave the extreme of the two segments. Dentists are essentially in private practice, not generally associated with hospitals. They are known for being conservative, and they study things thoroughly. The research that's published on a dentist's acceptance curve is that about 5% of dentists buy a new product in its first three to five years. Ophthalmologists in the same five years reflect a 90% acceptance. It's a very interesting scenario, and I find it especially interesting because in the ophthalmology area it's actually harder to convince that group of an attractive return on investment. Ophthalmologists, however, strongly focus on new technology that can bring a benefit to patients. Obviously, dentists are also very interested in the patient, but they just respond more slowly.

How does Premier plan to capitalize on aftermarket sales, and why is this an important part of the company's marketing plan?

Sales of disposables get you very close to your customers. It also provides recurring income, and in this case, for us as a company, disposable lasers are our way of changing the laser energy to produce the desired effect on tissue, whether that's cutting or coagulation or acousto-mechanical effect, as in hard-tissue dentistry. So the disposable for us takes on a much greater importance than it does for most laser systems. Now from a revenue point of view, I don't know of a product we make that does not have a disposable or semireusable component. Unit costs average anywhere from about $5 to $16 for hard-tissue components. Probably the top end for disposables is about $2000 a week for tissue melding. And many of our customers come back to buy other laser systems. For example, a dentist will buy a soft-tissue system after a hard-tissue system. In essence, marketing a disposable system offers the ongoing advantage of closer customer contact.

How do you see the direction the company is going now compared to your original business plan?

It's amazingly similar. The target markets were identified in our original business plan, although there were some questions as to the mechanisms of distribution inside those markets. We actually predicted, back when we went public, that now would be our first quarter to be profitable, and it was, although I had some moments when I wondered if that was really going to happen. That said, it doesn't mean that the technologies haven't advanced in those markets. We jumped in with new concepts and ideas for each market segment. But the basic core of what we projected we'd do has remained the same.

Does it give you a sense of stability that you're on target with what you set out to achieve?

It does, and I think it's a very important point. To know what the objectives are and to take focused, measurable steps in that direction.

How did going public affect the company, and what was the thinking behind that move in terms of your overall strategy?

We actually went public, I believe, very early in our development as a company. We had just completed the design of a number of laser products that did not have an effective distribution network. The Premier board believed that the benefits of going public at that time, namely the ability to use common stock for acquisition and consolidation, outweighed disadvantages such as public scrutiny by shareholders, pressure to achieve financial results, and loss of secrecy. We have received an additional benefit in the form of the increased publicity a public company gets when we have introduced products such as the Centauri, an erbium:YAG laser for hard-tissue dentistry.

Do you recommend that other companies your size make the same attempt? Was this a struggle for Premier?

It was very much a struggle. We went public in a year when there were no other medical device company IPOs [initial public offerings]. That was very difficult. I think the decision to go public depends on a company's goals and its rate of growth. In this case, we have the eye of the world focused on every step we take, demanding tremendous growth in sales. It is difficult for a small company to meet those expectations. In summary, I believe going public early in our development process was a very good decision because it afforded us the access to capital in common stock. But, in general, I would not recommend going public so early, nor would I do it often. The Premier board spent a long time making the decision to go public, and I believe it understood the risk and benefits of the decision very well.

Are there any growing pains as you make the transition from research and concentration on approvals of your technologies to becoming a manufacturing and marketing company?

Any time you grow this fast, you have two choices. You can restrict growth and limit focus or develop a strong management team capable of dealing with day-to-day crises encountered in a rapidly expanding business. We have an outstanding management team, and I have to say it has taken us over every possible hurdle. We had the problems of rapid growth and going to a second shift and the challenges that those changes presented, but in general our manage-ment team has solved every one of those problems.

From a manufacturing perspective, I couldn't ask for a better team. We acquired EyeSys last October, during its busiest season. But our team quickly developed two new EyeSys products, which were introduced at the Academy of Ophthalmology annual meeting in October 1997 and which have already been integrated into our production scheduling. In the marketing and sales area, we're still in the process of defining our joint distribution force.

We're growing businesses simultaneously in dentistry and ophthalmology, and now we're starting to put together a structure to include surgery. Any time you have all these activities under way at the same time, it's a challenge. But I think our management team does a good job of focusing, looking at where the issues are, and resolving them quickly—allowing us to grow.

Has that meant that you've had to increase the size of the company very quickly at times?

We have been growing very quickly. We've almost doubled our sales each quarter. We've also doubled our manufacturing, adding direct assembly labor to meet increasing demand, and we recently decided to increase our R&D capabilities.

You note that you've achieved 100 FDA clearances. Were these minor changes to the same technology?

There were 21 different lasers, about 1000 different disposables, and 3 surgical areas. The FDA submissions encompassed different product elements and different areas. We have lasers for use in dentistry, and we have a similar laser for ophthalmology and so on.

What changes did the company go through with the approval of the Centauri?

I think the company made a dramatic change following that clearance. First we were cast into a public spotlight that was very intense. From the perspective of having to answer questions, given that much publicity, everybody had a suggestion about what we were doing wrong, what we could do better. Some wanted to try to figure out if there was a fatal flaw in what we were doing. A company gets a tremendous amount of attention, especially when it's a publicly traded entity. Secondly, we had to deal immediately with a huge amount of inquiries. We have 20 phone lines here, and for a period of two weeks, no one could get through. We had more than 50,000 hits on our Web site within two weeks. Now we're better able to deal with this level of inquiry than we were six months ago.

What has been your strategy for designing and conducting clinical trials so that you would ensure they produced the data FDA required?

We were very careful about including our regulatory strategy early when conducting clinicals. The product is designed to meet regulatory requirements. We did a lot of early animal work. The work we did in our clinical trials was more quantitative. We focused our efforts on the clinical outcome and designed our studies to meet those objectives. There's a very deliberate focus on designing the clinical studies to support our marketing claims.

You've been involved with grant reviews for the National Institutes of Health and device reviews for FDA. Do you think FDA is wanting to look at new technologies?

My years of involvement with NIH grant reviews and my counseling with FDA's technical group have provided an in-depth appreciation of their respective mind-sets. There's no question that FDA is eagerly looking at new technology. They do, however, evaluate new technology carefully and look very long and hard at the safety of the device.

You hold 91 patents as of October 1997. What has that process been like?

The excitement of developing patents lies in the innovative and creative process. Waking up at night with a concept that resolves a perceived clinical need is very gratifying. At Premier, the product development process is very rapid, sometimes lasting only six to nine months. However, the process of developing a new application area, such as cavity preparation or tissue melding, can be long and sometimes frustrating because of changing FDA requirements. However, using an innovative technology to address a surgical procedure that eliminates pain provides the greatest rewards of all.

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