Empi, Inc.

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Empi, Inc.

599 Cardigan Road
St. Paul, Minnesota 55126-4099
U.S.A.
(612) 415-9000
Fax: (612) 415-7447
Web site: http://www.empi.com

Public Company
Incorporated: 1977
Employees: 550
Sales: $73.5 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: EMPI
SICs: 3841 Surgical & Medical Instruments; 3845 Electromedical Equipment

Empi, Inc., one of the United States’ largest medical device companies in rehabilitative therapy, develops, markets, and manufacturers electrotherapy, iontophoretic drug delivery, or-thotic, and incontinence treatment products. The company, which began as a distributor of TENS (Transcutaneous Electrical Nerve Stimulation) devices, markets its products for both in-home and clinical use.

Man of Compassion Founds Empi in the 1970s

Empi, Inc. founder Donald D. Maurer did not begin his life with the dream of building a biotechnology business. “Don Maurer, a gent with a dozen patents to cement his reputation as a guru of biomedical engineering, grew up in a remote corner of the Black Hills convinced that he was ‘a real dumbbell,’” wrote Dick Youngblood in a 1992 Star Tribune article. When Maurer left his impoverished life for a stint in the Navy, beginning in 1954, he found opportunity to spread his wings: training in electronics led to a college education and bachelor’s degree in electric engineering and master’s in biomedical engineering.

While working for Medtronic, Inc., a pacemaker and medical device manufacturer, Maurer and his engineering team developed the first wearable Transcutaneous Electrical Nerve Stimulator or TENS device. A TENS unit provided non-drug pain therapy via the introduction of low-voltage pulses of electricity to the pain site. Initially, the product was used to pre-screen patients for their tolerance to the implantable pain control devices Medtronic manufactured. But it was so effective Medtronic began selling it instead. Maurer also developed Neu-romuscular Stimulation (NMS) products (later called Neuro-muscular Electrical Stimulation or NMES) used to stimulate muscles for purposes of physical therapy.

In 1977, shortly after Medtronic rejected what Maurer believed to be a viable and sorely needed product, a device to cure female incontinence, he left Medtronic’s neurological research division and established Empi, Inc. Through Empi, Maurer marketed a German-manufactured TENS unit. A sales manager handled the product while Maurer established an engineering program for Courage Center, a Twin Cities area rehabilitation services organization.

However, while Maurer fabricated devices such as adapted computer keyboards, the business was going under. A new investment group backed Maurer in designing his own TENS unit with the stipulation he would also run the company. A public stock offering funded production. Maurer took on the task of marketing his TENS device to clinics and built a reputation of being able to give relief to patients who had not been helped by other TENS products.

Nonetheless, Empi’s first decade was marked by inconsistent earnings, with the company losing money until 1982 and then again in 1986. While the TENS and NMS market in general surged in the 1980s, the gains were accompanied by a period of price cutting. In addition, when sales volume dropped off, the battle for market share heightened and industry consolidation was on the horizon.

Shift in Tactics in Late 1980s; Payoff in Early 1990s

In 1988, Empi brought on Michael Connoy, an ex-sales and marketing executive with American Hospital Supply Corp., as president and chief operating officer. Connoy shifted the company away from the dealer-sales system it had in place to direct sales to clinics and therapists. Connoy also established a central distribution system for the $12 million company which freed the sales force from deliveries and product service. A move to bring manufacturing in-house cut costs. Empi also began marketing products, such as strength testing devices and athletic braces, for other companies.

Nevertheless, Empi entered the 1990s essentially a two-product company with TENS and NMS sales producing from 80 to 85 percent of sales. Twin Cities-based companies 3M, Medtronic, and Medical Devices, Inc., produced similar units. In an effort to expand its proprietary product line, Empi entered into a joint venture with giant medical products company C.R. Bard to develop and sell an incontinence product. The device stimulated the bladder control muscles by means of electric pulses and thus aided in strengthening them.

Meanwhile, the New England Journal of Medicine (NEJM) published an article which challenged the effectiveness of TENS on chronic back pain and put the squeeze on Empi’s stock price. Maurer disputed the findings saying the study was flawed in terms of time and application. “Studies that followed patients for up to two years have reinforced our belief that TENS units are an effective, low-cost alternative to narcotic drug therapy and surgery for many pain sufferers,” he said in a June 1990 Star Tribune article by Anthony Carideo. While Empi’s revenues remained steady, analysts expressed concern over the potential impact of the study on Medicare and private insurance reimbursements for the use of the TENS units.

Empi received FDA approval in July 1991 for its female incontinence product—the C.R. Bard agreement had been dropped earlier when Maurer felt the larger company was taking too long to develop a proprietary electrode. Traditional treatment for involuntary loss of urine, which affected roughly nine million American women, included drugs, invasive surgeries, injectable products, and Kegel muscle control exercises. The Empi product stimulated the muscles controlling urinary flow by means of a tampon-like device attached to a pocket-sized microprocessor and treated urge, stress, and mixed incontinence.

The introduction of the incontinence device coupled with stabilized earnings helped Empi recover admirably from the TENS-related stock price drop: the company was the fourth biggest percentage gainer for the entire over-the-counter market in 1991. Stock price rose from $4 per share in the beginning of 1991 to $33.50 per share by year end. Net income for 1991 was $2 million on $22 million in revenues.

But Empi’s TENS sales growth slowed due to cuts in Medicare reimbursements in the early 1990s. Furthermore, the University of Texas study published by NEJM, which said the pain relief TENS patients received was due to a placebo effect, added to the debate already in progress regarding the product. One theory maintained the electrical pulses produced by the TENS unit interfered with pain messages being transmitted to the brain. A second theory said TENS stimulated the release of naturally occurring pain blocking substances called endorphins. Empi claimed to be the technological leader and was the number two seller of TENS following Medtronic.

A broad-based rollout of the incontinence product, Innova, was slowed by Empi’s nationwide study aimed at proving its effectiveness at a level above and beyond FDA standards. (The TENS technology was developed prior to the 1976 federal regulation requiring FDA approval of biomedical devices in terms of efficacy and safety.) Initial marketing targeted U.S. obstetricians, gynecologists, and urologists.

Empi brought out a non-invasive drug-delivery system called Dupel at the same time it introduced Innova. The device administered small molecule medications such as analgesics or anti-inflammatories through electrodes attached to the skin. Maurer improved on existing systems by adding a second electrode to increase speed of delivery, chemically buffering them to prevent injury to the skin. Dupel was marketed to physical therapists.

Expansion During the Mid-1990s

Empi landed on the Forbes list of America’s 200 best small companies in November 1992. The same month, the company announced the acquisition of Medtronic’s Nortech Division, the TENS unit Maurer helped start, for about $6 million in cash and warrants for shares, plus a contingent payment based on future sales. The $28 million business moved Empi’s share of the U.S. electrical stimulation device market, including both pain relief and rehabilitation, up to about 30 percent, according to a November 1992 Star Tribune article by Steve Gross. The Nortech purchase was a boon to Empi’s sales force and research and development budget, vastly improving their foothold in the important international TENS market, and pushing up sales, earnings, and ticker price. But about the same time as the sale, Aetna Insurance Company, Hartford, Connecticut, moved to restrict, but not eliminate, TENS reimbursements.

Thanks primarily to the Nortech purchase, Empi sales climbed to $66.4 million in 1993 compared with $33.4 million the previous year. Net income more than doubled, jumping to $9.3 million from 1992’s $4 million. The purchase of Physical Health Devices, Inc., a Florida-based biofeedback company, broadened the rehabilitation and incontinence product line, and was part of Empi’s ongoing diversification plan.

With sales and earnings gains back down to earth following the integration of Nortech, Empi’s stock price fell off as well. The $1,200 incontinence product, so well received by Wall Street, had proven to be a “tough sell” to insurance companies and Medicare for reimbursement, according to a September 1993 Forbes article by Zina Moukheiber. The lion’s share of female incontinence product spending continued to go to protective garments—a product which had come out of the closet through television ads featuring actress June Allyson.

Empi sought to gain product acceptance by establishing an education program which counseled women on incontinency options. The manufacturer’s effort was met with skepticism by some doctors who saw it merely as a marketing tool for their product. Empi countered that the measure was necessary since many women were reluctant to approach doctors about the problem and, in turn, many doctors were unaware of all the options available for treating the malady. An additional factor hindering the new product was the uncertainty surrounding healthcare reform legislation: insurers were delaying reimbursement decision-making as they waited for a definitive move by the federal government.

Joseph E. Laptewicz, Jr., came on board as the new president and CEO in the second half of 1994. Maurer continued as chairman and chief scientific officer. Both revenue and net income for 1994 dropped off from 1993 levels. Empi attributed the downturn to a weakness in the core rehabilitation market, pricing pressures related to cost-containment efforts among third party payers, and investments in sales, clinical, and marketing programs. On the up side the company completed the long-delayed incontinence study and the development of a proprietary line of dynamic splints (range-of-motion orthoses).

In 1995, Empi cut the Innova price by about half and sold the incontinence education aspect of the business in order to concentrate fully on marketing the product. Non-core products, which included Empi’s orthoses and iontophoreses system, as well as a cervical traction device manufactured by another company, grew to about one-third of sales in 1995, up from one-quarter a year earlier. During the year, Empi entered into an agreement to market Tennessee-based Rehab Med Equip, Inc.’s catalog line of more 200 rehabilitation products ranging from ice packs and whirlpool baths to orthotics. Both revenue and net income were up.

Empi experienced growth in all key business areas in 1996, especially in the incontinence and orthotics lines. The company continued to add new products through marketing agreements or expansion of proprietary lines. Public awareness and healthcare provider acceptance of the Innova incontinence product also progressed in 1996. But Empi’s Innova pelvic floor stimulator and biofeedback systems along with non-invasive treatment products by other manufacturers represented only a small part of the total incontinence market. The segment generated only $5 million in sales. In contrast, adult diaper products generated about $1 billion in sales, while $600 million was spent on surgery and another $50 million on drugs.

Prepared for the Future

In 1997, Donald Maurer retired as chairman of the board. The company he founded was once again named as one of Forbes ’s 200 top small American companies thanks to an average five-year growth of 17 percent in sales, 15 percent in earnings, and 15 percent in return on equity. For the year, net income was $10.5 million on net sales of $73.5 million. The company continued to broaden its product line, while fighting to make gains with Medicare reimbursement for the incontinence products—an act vital to future growth.

In general, the outlook for incontinence products was strong. Millions of baby boomers were aging, and in response more and more manufacturers were entering the incontinence business. Medtronic, which had sold an implantable incontinence device in overseas markets since 1994, launched the product in the United States in 1998. It seemed the times had finally caught up with Maurer, who had begun the push for incontinence products some two decades earlier.