Advanced Neuromodulation Systems, Inc.

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Advanced Neuromodulation Systems, Inc.

6901 Preston Road
Plano, Texas 75024
U.S.A.
Telephone: (972) 309-8000
Toll Free: (800) 727-7846
Fax: (972) 309-8150
Web site: http://www.ans-medical.com

Public Company
Incorporated: 1979 as Medicor, Inc.
Employees: 529
Sales: $120.7 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: ANSI
NAIC: 339112 Surgical and Medical Instrument Manufacturing

Advanced Neuromodulation Systems, Inc. (ANS) is a medical device company that makes implantable spinal cord stimulators and drug pumps to help alleviate chronic pain. Neurostimulation products include Renew, an externally powered radiofrequency system that uses an implanted receiver to send electrical energy to relieve pain caused by damaged nerves; Genesis, an internally implanted, adjustable device that sends energy to the spine through a pulse generator; GenesisXP, offering a larger battery than the Genesis system; GenesisRC, and the Eon Neurostimulation System, rechargeable implantable pulse generator (IPG) systems; and Rapid Programmer, a handheld, easy-to-navigate programmer for clinicians, allowing them to test and program ANS devices. The company's implantable drug pump therapy line consists of the AccuRx, which delivers a measured amount of intraspinal drugs to key points on the spine. The device's precision allows doctors to cut back on the amount of drugs a patient is required to take, thus limiting side effects. ANS is a public company based in Plano, Texas, listed on the NASDAQ.

Beginnings in Late 1970s

ANS was incorporated in May 1979 as Medicor, Inc. by veterans of the medical device field, including its president, Thomas C. Thompson, who had earlier founded a company that made intravenous catheters. After the intravenous catheter company was sold to Baxter Travenol, Thompson joined forces with seasoned executives who had worked at Johnson & Johnson, Eli Lilly's IVAC unit, and IMDE, a Warner-Lambert subsidiary. The partners got into business in October 1979 through acquisition, picking up a four-year-old Dallas company called Med-Pro Ltd., which made its money selling surgical tape but harbored a great deal of potential in the intravenous (IV) tubes and electronic IV devices it had under development. A few months later, in January 1980, Medicor changed its name to Quest Medical, Inc. The company went public in April 1981 selling shares at $2. The timing of the offering proved to be propitious. The company's Intelligent Infusor IV device was unveiled to investors in 1982 at an ideal time, as the fast-growing intravenous market was receiving a great deal of attention on Wall Street, due in no small measure to Warner-Lambert's $468 million buyout of IMED. As a result, Quest's stock price approached $9 by the end of 1982.

Quest began selling the infusor in 1983 and appeared poised to enjoy a prosperous future, but changes in the marketplace derailed the company's plans. First, Medicare and Medicaid reimbursements became more stringent, causing hospitals, Quest's main customers, to become more cost-conscious and to turn to less expensive technologies. By making intravenous tubes and accessories, and blood pressure and electronic pulse rate measuring devices, the company was able to scrape by until hospitals became more comfortable with the government's tighter reimbursement policies and infusor sales picked up. Quest's revenues grew from $4.8 million in 1983 to $10.7 million in 1985, when the company turned a profit of nearly $200,000. Arguably, Quest offered the best infusion device in the industry, but the competition was larger and better funded. Both Abbott Laboratories and Baxter Travenol Laboratories Inc. brought out their own IV pumps, and what they may have lacked in quality they compensated for in pricing, bundling the devices with IV solutions and offering them at a discount. Quest continued to grow sales in 1986 to $13.7 million but posted a loss of $323,000.

Unable to compete against its much larger rivals, Quest decided in September 1987 to sell its IV infusion device business to Colgate Palmolive Co.'s subsidiary Kendall McGaw for $9 million. Additional payments were contingent upon the favorable outcome of a patent infringement suit brought by Minnesota Mining & Manufacturing Co. (3M). After a federal district court judge ruled in its favor in April 1989, Quest received another $2.8 million from Kendall McGaw. While Quest continued to manufacture surgical tapes and IV tubing sets, Thompson and his management team scouted for a good use for their reserve of cash—and executive experience—primarily targeting for acquisition medical companies that manufactured disposable products sold directly to hospitals. Ideally the manufacturing could be relocated and consolidated with Quest's Dallas operation.

Although it was keen on finding a new business as soon as possible, management was also determined to make sure an acquisition was a good fit. As a result, Quest's search lasted several years. Along the way, the company tried in 1988 and 1989 to acquire HemoTec Inc., a Colorado maker of blood coagulation products used during heart surgery. HemoTec rejected an initial offer, and after Quest improved the bid and acquired 23 percent of its stock, HemoTec merged with another company rather than be acquired by Quest. Still, the episode proved profitable to Quest, which pocketed $1.1 million after selling HemoTec stock. Ironically, in August 1990 Quest found itself the object of an unsolicited merger offer from Titan Holdings Inc., a San Antonio-based private insurance holding company that considered Quest, as currently configured, more of an investment company than a medical products company. Hence, Titan's management team believed it was more suited to optimizing shareholder value. From the point of view of Quest's management, however, Titan was simply looking for a chance to go public while picking up an attractive investment pool. The bulk of Quest's shareholders agreed, putting an end to the bid.

Early 1990s Acquisitions

Part of Quest's difficulties in finding suitable acquisitions were the high prices medical companies were seeking, but in the early 1990s Quest was finally able to buy appropriate assets at a desirable price level. In the fall of 1990 Quest bought certain assets of Clini-Therm Corp. out of bankruptcy. Also based in Dallas, Clini-Therm developed and manufactured hypothermia systems used to treat cancer and other diseases with heat. Quest was especially interested in Clini-Therm's Prostek 3000 system, a prostate treatment that relied on disposable catheters, an item that Quest was well suited to mass produce. Three more acquisitions followed in 1991 and 1992: the $2.3 million purchase of American Omni Medical and the $2 million purchase of Delta Medical Industries, both makers of heart surgery devices; and the addition of assets related to McGaw, Inc.'s activated clotting time instrument.

It was in 1995 that Quest became involved in the spinal cord stimulation (SCS) field with the acquisition of Neuromed, Inc. for $15.2 million in cash plus stock. It fit in well with Quest's competencies in medical device manufacturing, and was an attractive acquisition because of the key patents it held in a fast growing niche. Moreover, it would be difficult for other companies to enter the market, providing Quest with some assurance that it would not be easily nudged aside by larger players as had been the case with infusors a decade earlier.

Integrating Neuromed into Quest proved problematic, however. Neuromed's devices were not easily manufactured, forcing Quest to make a major investment in reengineering the products. The sales infrastructure also had to be beefed up in order to properly market the line. Quest experienced problems with some of its other units as well. The introduction of the company's Myocardial Protection System of hardware, software, and disposable products designed to offer protection to the heart during open-heart surgery was met with ongoing delays. By the time the $11 million project was ready for launch, the market had changed, with hospitals no longer interested in buying such systems, preferring instead to rent them. But such an arrangement offered little payoff to Quest. The company posted sizable losses in 1995 and 1996, leading to a drop in the price of the company's stock and pressure from some investors for Quest to seek a merger or sale.

In March 1997 Quest retained Smith Barney and Rauscher Pierce Refsnes to help it sort out strategic alternatives, whether it be a sale, merger, or joint venture. While management weighed the options, Quest rebounded somewhat in 1997, recording revenues of more than $14.7 million and returning to profitability, netting nearly $725,000. The main reason for the improvement was the performance of its Advanced Neuromodulation System business. It was no surprise that after a year of deliberation management decided to divest its cardiovascular and intravenous fluid delivery products division, selling the business to Atrion Corporation for about $23 million in January 1998. Quest kept the Advanced Neuromodulation Systems product and also changed its corporate name to Advanced Neuromodulation Systems, Inc. in June 1998.

Company Perspectives:

At Advanced Neuromodulation Systems, our goal is to improve the quality of life for millions of people around the world who suffer with disabling pain or nervous system disorders.

New Leadership in Late 1990s

While Quest was completing its transformation, Thompson retired in December 1997, replaced as president and CEO on an interim basis by Chief Financial Officer F. Robert Merrill III. A permanent replacement, Christopher G. Chavez, was hired in April 1998. A Harvard Business School graduate, Chavez had more than 20 years of experience in the medical device industry, 16 of which were at Johnson & Johnson Medical Inc., where he served stints as general manager of the Infection Prevention business unit, director of international marketing, and director of new business development. He was attracted to ANS because of its promise, telling Dallas Business Journal in 2004, "The company had a beautiful idea that was poorly executed." Moreover, he took over a company that was essentially debt-free, holding $19 million in cash.

Shortly after Chavez took over, ANS took steps to transfer its expertise in electrical stimulation technology to other markets. It forged an alliance with Sofamor Danek Group Inc. to develop a deep brain stimulation system to treat Parkinson's disease, epilepsy, and other conditions. A few months later, however, Medtronic, Inc. acquired Sofamor Danek and ANS completed a buyout of its contract with Sofamor Danek. ANS also became involved in the programmable intrathecal drug pump business through an alliance with a German company, Tricumed Medizintechnik Gmbh.

After three years of research and development, ANS launched the Renew RF stimulation system in the U.S. market in June 1999. Sales were so strong that by the end of the year ANS controlled a 50 percent share of the radio-frequency SCS market. Product sales grew by 21 percent to $20.6 million. Overall, revenues grew to $35.8 million and net income totaled $5.8 million. Also during the year, ANS opened a new, state-of-the-art facility to position the company to handle even greater levels of demand for its products.

ANS completed development of AccuRx, its implantable drug pump, in 2000. Much of the technology used in the device was licensed from Implantable Devices Limited Partnership (IDP). In January 2001, ANS acquired IDP, along with another company, ESOX Technology Holdings, LLC, to solidify the company's leading position in implantable drug pump technology. AccuRx began clinical trials in the United States in the first quarter of 2001, and during the second quarter of the year the company began selling the device in foreign markets.

While AccuRx was being launched internationally, ANS was also developing its Genesis IPG SCS system, working closely with a New Jersey company, Hi-tronics Designs, Inc. (HDI), which ANS also acquired in January 2001. Not only did HDI bring with it technology used in Genesis but also expertise in the design of energy-efficient electronic circuits that could be used in the design of products to help in the pain management of numerous conditions. Moreover, HDI was a contract developer and OEM supplier of electromechanical medical devices, thus adding an additional revenue stream. ANS began selling Genesis in Europe in 2001 and in the United States in 2002. After receiving FDA approval, GenesisXP was launched in the U.S. market in the fourth quarter of 2002.

Revenues increased to $37.9 million in 2001, $57.4 million in 2002, and topped $91 million in 2003. Net income during this period improved from $1.5 million in 2001 to more than $13.2 million in 2003. The company was expanding on a number of fronts. It was especially aggressive in building up its sales force, in an effort to switch from a distributor network to a direct sales force. In 2003 the company acquired the pain management system of three of its top distributors in the United States: Seattle-based Comedical, Inc.; Clifton, New Jersey-based State of the Art Medical Products; and Arlington, Texas-based Sun Medical, Inc. Combined they had done about one-third of ANS's business. As a result of these acquisitions, in just a matter of five years, ANS had gone from being a company that was 100 percent dependent on distributors to one that did just 10 percent of its business through independent distributors. To accommodate its growing business, ANS also moved into a new facility in Plano, Texas, in 2004. ANS looked to expand its product lines as well as markets. In November 2002 it acquired MicroNet Medical, Inc., adding spinal cord stimulation leads that might prove useful in the treatment of Parkinson's disease and migraines. ANS also teamed up with Boston Scientific to enter the Japanese market and established subsidiaries in Germany and Australia.

ANS received some unwanted publicity in 2005 when it announced that it was the subject of a federal investigation of certain of its sales and marketing practices. According to the Wall Street Journal in February 2005, "U.S. regulators are looking into past promotional practices at Advanced Neuromodulation Systems Inc., which several years ago offered doctors $1,000 if they implanted a pain-management device in certain patients for a five-day trial…. A question that investi gators have studied in prior cases has been whether payments to individual doctors constituted compensation for clinical trials, or inducement to use a medical device or drug." In fairness to ANS, it appeared that the federal government was targeting the industry as a whole. Within weeks, investigations were launched concerning the sales and marketing practices of numerous orthopedic spine companies and other medical device manufacturers.

Sales improved to $120.7 million in 2004 and net income grew to $18.2 million. Despite the cloud of investigation, ANS seemed well positioned for the future. Baby Boom patients, unlike their stoic parents, were not shy about demanding pain management products, an attitude that translated into continuing sales growth for ANS products. In addition, neuromodulation held great promise in a wide variety of applications, such as depression, obesity, Alzheimer's, Lou Gehrig's disease, stroke, and obsessive-compulsive disorder. Should ANS successfully apply its technologies to the treatment of some of these areas, its future was indeed promising.

Principal Subsidiaries

Advanced Neuromodulation Systems Australia Pty Limited; ANS Germany GmbH; Hi-Tronics Designs, Inc.; MicroNet Medical, Inc; SPAC Acquisition Corp.

Key Dates:

1979:: Company is founded as Medicor, Inc.
1980:: Name changes to Quest Medical, Inc.
1987:: IV infusion device business is sold.
1995:: Neuromed, Inc. is acquired.
1998:: Cardiovascular and IV product lines are divested; name changes to Advanced Neuromodulation Systems, Inc.
1999:: Renew is launched in U.S. market.
2002:: Genesis is launched in U.S. market.