ALARIS Medical Systems, Inc.

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ALARIS Medical Systems, Inc.

10221 Wateridge Circle
San Diego, California 92121
U.S.A.
Telephone: (858) 458-7000
Toll Free: (800) 854-7128
Fax: (858) 458-7760
Web site: http://www.alarismed.com

Public Company
Incorporated: 1988
Employees: 3,000
Sales: $533.9 million (2003)
Stock Exchanges: New York
Ticker Symbol: AMI
NAIC: 339112 Surgical and Medical Instrument Manufacturing

ALARIS Medical Systems, Inc. (Alaris) is a world leader in intravenous (IV) drug delivery systems, infusion devices, patient vital-signs monitoring instruments, and related software, disposables, consultations, and training. The company's motto is "Medication Safety at the Point of Care." To that end, Alaris offers the Medley Medication Safety System, the Signature Edition GOLD, Gemini, ASENA, and other infusion "smart pumps," the Guardrails Safety Software Suite, SmartSite and SmartSite Plus Needle-Free Valve systems, the VITAL•CHEC Vital Signs Monitor, electronic thermometers, docking systems, alternate site infusion systems, and other IV drug administration, monitoring, and safety systems. Alaris markets its products in the United States, Canada, Latin America, Europe, the Middle East, Asia, and Australia, and maintains manufacturing facilities in San Diego, California; Creedmoor, North Carolina; Hampshire, England; and Tijuana, Mexico.

Beginnings: Merger, Rightsizing, and Renaming

Alaris was formed in November 1996 when Advanced Medical Inc. merged its wholly owned subsidiary IMED Corporation with IVAC Medical Systems. IVAC and IMED were already major players in the intravenous drug delivery market, in operation since 1968 and 1972, respectively, and their merger created an opportunity to offer a wide selection of IV devices and customer care solutions to hospitals and healthcare purchasing organizations. Products included IMED's Gemini infusion and IVAC infusion and syringe pumps, and vital signs monitors. Important new products brought to the merged company included the Signature Edition Infusion System and the SmartSite Needle-Free Valve system. The SmartSite product proved to be one of the company's most significant, establishing it as a world leader in healthcare safety and anticipating needle-stick accident legislation.

Advanced Medical financed the $400 million acquisition of IVAC through a bank credit facility, subordinated notes, and a substantial equity contribution from Advanced Medical's chairman and principal stockholder, Jeffrey M. Picower. Advanced Medical reduced the labor force in December 1996 to eliminate redundancy in the two merged workforces, the cuts most directly affecting the corporate staff and the manufacturing workers. In total the layoffs included around 240 employees. In May of the following year the newly formed company took the name Alaris Medical Systems, Inc.

1997–99: Labor Dispute, Important Early Contracts, and New Products

In January 1997 Alaris, then still IMED-IVAC, entered into a five-year agreement with Premier Inc. to supply tympanic and electronic thermometers to Premier member hospitals. In March of the same year the companies agreed to another five year deal, in which IMED-IVAC would supply IV infusion pumps and related disposable administration sets. Premier was the nation's largest healthcare alliance enterprise at the time of the deals, and the agreements allowed IMED-IVAC to provide their infusion instruments and proprietary disposables to an alliance which comprised one-third of the hospitals in the United States.

Also that year, Alaris Medical Systems faced a work dispute with its maquiladora contracting firm, Cal Pacifico, based in Newport Beach. California. Alaris's agreement with Cal Pacifico provided the medical supply company with manufacturing facilities and more than 1,200 workers in Tijuana, Mexico, where disposable intravenous administration sets proprietary to Alaris's infusion systems were produced. The Tijuana workforce had for over two years voiced a desire to be directly employed by Alaris Medical Systems, and in April of that year Alaris notified Cal Pacifico that their agreement would be terminated and the medical supply company would hire the workers on directly, which they did on June 6, 1997. The dispute caused a two-week shutdown of the plants and interruption of work. The dispute was settled with Alaris making a payment of an undisclosed amount to Cal Pacifico and taking a related $4.1 million charge that quarter.

Alaris Medical Systems held a large portion of the infusion pump market share throughout Europe, the installed base of products placing it in the number one or two position in 11 countries, and third in Italy and Germany. The company also maintained the largest installed base of infusion pumps in Canada and Australia, and increasing shares of business in Latin America and Asia. In September 1997 Alaris entered into two agreements which reflected the company's desire to increase its international business. Alaris agreed to distribute the Rhythmic ambulatory pump manufactured by Micrel Microelectronic Application Centre, a private company based in Athens, Greece. An unrelated agreement gave Alaris the rights to market and distribute StatLock securement devices in Europe, Australia, and the Middle East. These improved, tape-free IV securement devices, developed and manufactured by VENETEC International, a private company based in Mission Viejo, California, reflected a commitment to safer and better care for patients and more convenience for healthcare workers, a commitment shared by both companies. In addition to thus nicely complementing Alaris Medical's existing product line, the agreement allowed VENETEC to enjoy much greater world market penetration than they would have been able to accomplish on their own.

The next month Alaris announced another major distribution agreement for a product which combined Alaris's P6000 intravenous syringe pump with Zeneca Limited's Diprifusor Target Controlled Infusion module, providing a solution for the safe and convenient administration of Diprivan, a general anesthesia shown to have less of certain side effects and a shorter recovery time.

In December 1997 Alaris announced the release of the IVAC Vital Signs Monitor, in collaboration with Criticare Inc. This product incorporated Alaris's advanced thermometry into Criticare's full-parameter vital signs monitors. Alaris Medical held the exclusive distribution rights to the new Vital Check 4400 in the United States hospital market and the entire Canadian markets. The small and portable unit combined electronic thermometry, digital pulse oximetry, and blood pressure into a single lightweight unit. Previous to the formation of Alaris, IVAC had introduced the world's first electronic thermometer.

The following July Alaris Medical completed the acquisition of Instromedix Incorporated for a total cash consideration of $51 million, the assumption of approximately $5.1 million in debt, and an additional $1 million for transaction expenses incurred by Instromedix. The acquisition allowed Alaris to add to its existing vital signs monitoring product line Instromedix's cardiac disease diagnosis and monitoring products and technologies, including arrhythmia event recorders, pacemaker monitors and the LifeSigns System, and a hardware and software system allowing remote monitoring and data reporting of vital signs.

In November 1998 Alaris launched a major new product, the ADVANTIS DL Infusion System, a small, lightweight pole-mounted infusion device designed to appeal to more cost-conscious international customers. It was the first infusion pump Alaris ever manufactured outside of the United States, and was intended exclusively for international markets. The infusion system incorporated many of Alaris's patented technologies for patient safety, including its proprietary anti-bolus, automatic site priming and free-flow protection.

Spending about $20 million per year on research and development, Alaris continually updated technology in its existing products. In 1999 the company introduced six products which improved on existing products. These included two new ASENA syringe pumps, the Turbo Temp Thermometer, the Signature Edition Gold Infusion System, and the MedSystemIII Multi-Channel Infusion Pump.

2000–02: Medley and Guardrails Becoming Central to Healthcare Strategy

In April 2000 Alaris's Instromedix Division signed an agreement with Quality Diagnostic Services Inc. (QDS) for the purchase of Instromedix's King of Hearts Express II recorder, a cardiac event monitor which detected and recorded heart arrhythmias. QDS, the nation's largest arrhythmia monitoring service, saw the agreement as a significant opportunity for growth for both companies. Instromedix had been manufacturing quality cardiac event monitors for 20 years, and the pager-sized King of Hearts Express II was designed not only to monitor and store a patient's ECG data and transmit it to doctors via telephone, but also automatically detect any unusually high or low heart levels, potentially catching dangerous events and saving lives.

Another important distribution agreement came in August 2000, with Alaris's Instromedix Division arranging to handle the United States and Canadian distribution of advanced electrocardiographs developed and manufactured by Nihon Kohden, Japan's leading medical electronic equipment manufacturer. Instromedix signed a separate three-year distribution agreement with Biomedical Systems for their Century line of Holter Scanning Systems, both in the United States and abroad. Both moves broadened Instromedix's already strong line of heart monitoring products, making the operation attractive to a potential buyer. Hence, later in August, Alaris announced its intention to sell Instromedix to Card Guard Scientific Survival Limited, an Israeli-based company specializing in telemedicine disease management.

Company Perspectives:

Our Mission is to develop "smart" technology, tools and services designed to help reduce the risks and costs of medication errors, and safeguard patients and clinicians at the point of care.

In November Alaris announced a major sales agreement with Novation LLC, the supply company for two major healthcare alliances, Veterans Health Administration and University Health Care Consortium. Under the terms of the agreement Alaris and one other company would provide large volume infusion pumps and accessories to Novation's two major clients as well as other healthcare organizations. The agreement also included Alaris's award-winning SmartSite needle-free valve system. In January of the following year Alaris announced that the same SmartSite system would be added to its existing supply agreement with Premier. SmartSite provided healthcare personnel needle-free access to IV lines, greatly reducing the number of needle-stick accidents and related problems among those personnel and helping their hospitals and healthcare providers to meet needle-free workplace regulations.

Around this time Alaris received a 54-page establishment inspection report (EIR) after a two-month inspection by an FDA investigator regarding previous inspections and complaints filed. Among other issues, the EIR concentrated on malfunctions in the Alaris's MSIII models of infusion pumps, specifi-cally regarding a report of a lithium battery rupturing in one of the pumps and three incidents of capacitors failing and pumps shutting down. These problems resulted in recalls, redesigned circuitry, and new systems of testing and verification of performance parameters.

In 2001 Alaris introduced its proprietary Guardrails Safety Software, an application designed to prevent medication administration errors, to be used with the company's Medley Medication Safety System. The important new product reflected the company's ongoing commitment to patient safety and care. At the time medical errors were the 8th leading cause of death in the United States, responsible for more than 50,000 deaths annually. Guardrails monitored the administration of IV delivered drugs, comparing the amounts and rates to preconfigured data profiles for each individual patient and warning healthcare personnel if doses were too high, given at too fast a rate, or otherwise deviated from those profiles. In the fall of 2002 Alaris announced that Guardrails would be made available to a second major line of IV infusion devices, the Signature Edition GOLD System. By making the technology available on this system Alaris realized significant new sales opportunities, as well as the potential to utilize the safety software system with an established base of 50,000 infusion instruments in service worldwide.

The Medley Medication Safety System and Guardrail Safety Software became conceptual centerpieces of Alaris's commitment to the finest healthcare and the safest administration of that care. Using the latest technology Alaris developed a system for the monitoring of patients and the delivery of their intravenous treatments that prevented error and injury at the point of the IV's delivery, prevented needle-stick injuries due to needle-free valves, monitored the actual fluids being administered, to prevent over-dosing or any treatment outside of or contrary to the patient's computer profile, and provided detailed reporting of deviations and errors. It was difficult to assess the large amount of human injury, and even death, Alaris had prevented through its commitment to safety. Alaris refined the Medley System even further. In October 2002 the company added the SpO2 module capable of accurately measuring arterial oxygen and pulse, even against significant interference or motion. This gave the Medley System unprecedented mobility and had an impact throughout the health profession. In 2003 Alaris introduced the Medley Syringe Module for the systems using syringe infusion. Alaris expanded customer contracts to include the new safety systems, including for AmeriNet, Premier, and Novation. AmeriNet and Premier extended their contracts to 2006 and 2009, respectively.

In late 2003 Alaris announced a three-year agreement to provide the Medley Medication Safety System, along with Guardrails Safety Software, to Magnet, a purchasing consortium with over 775 acute-care provider members. Safety products contributed to a 16 percent increase in sales in 2003, to $533.9 million; however, except for 2002, the company continued to operate at a loss.

2003 and The Future: Patent Rights, Recapitalization, and Overseas Business

In May 2003 Alaris settled a patent lawsuit with Filtertek relating to Alaris's needle-free products. The settlement gave Alaris the worldwide patent license for this technology and eliminated the danger of patent infringement litigation in the future. The license was fully paid up, irrevocable, and unrestricted. The weight of such ongoing legal action lifted, Alaris was free to sell its SmartSite needle-free valves. Alaris was a leader in implementation following the 2000 Needle Stick Safety and Prevention Act. Less than a month after the end of litigation Alaris was awarded the Gold Medal Design Excellence Award for the SmartSite valves at the Medical Design and Manufacturing Conference and Exposition.

In June 2003 Alaris announced its intention to sell 9.1 million shares of its common stock in a move to recapitalize. The company realized the sale on June 30, for $12.50 a share, and also sold $175 million worth of senior notes. Also, the company offered $200 million in bonds and established a bank loan in excess of $200 million and a $30 million revolving credit facility.

At this time Alaris launched its redesigned global web site, www.alarismed.com, showcasing the corporate philosophy and history, investor information, detailed product information, and much more.

Key Dates

1996:: IMED Corporation and IVAC Medical merge; SmartSite Needle-Free Valve is introduced.
1997:: Merged entity is renamed ALARIS Medical Systems, Inc. (Alaris).
1999:: Signature Edition GOLD Infusion System is introduced; sales exceed $400 million.
2001:: Medley Medication Safety System, Guardrails Safety Software are introduced.
2003:: Customer contracts include safety products.

In late 2003 Alaris announced a three-year agreement to provide its Medley Medication Safety System with its proprietary Guardrails Safety Software to the purchasing consortium Magnet and its over 775 acute care provider members. Alaris also began to seek more international business, announcing its attention at the beginning of 2004 to sell its "smart pumps" outside of the United States. Guardrails was added to the new ASENA CC Syringe Pump for sale outside the United States in 2003 and the company planned to add the software to other products sold overseas.

Alaris already obtained a third of its business from overseas customers, even without selling the Medley and Guardrails suite, and anticipated success for its established sales force abroad.

Principal Competitors

Abbott Laboratories; Baxter International, Inc.; B. Braun Medical, Inc.; Becton, Dickinson and Company; Fresenius Medical Care AG; Graseby Medical Limited; Sherwood-Davis & Geck; Welch Allyn, Inc.