Kinetic Concepts, Inc. (KCI)

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Kinetic Concepts, Inc. (KCI)

8023 Vantage Drive
San Antonio, Texas 78230
U.S.A.
(210) 524-9000
Fax: (210) 255-6993
Web site: http://www.kcil.com

Public Company
Incorporated: 1976
Employees: 2,106
Sales: $269.9 million (1996)
Stock Exchanges: NASDAQ
SICs: 8082 Home Health Care Services; 5047 Medical and Hospital Equipment; 7352 Medical Equipment Rental

Kinetic Concepts, Inc. (KCI), is a leading international provider of specialized hospital equipment to speed the recovery of immobilized patients. KCI has operations in Austria, Germany, the United Kingdom, Denmark, France, the Netherlands, Switzerland, Sweden, Italy, Canada, and Australia. Independent KCI equipment dealers penetrate 21 additional countries. With state of the art products ranging from surfaces that help burned skin heal, machines that speed wound recovery, and mattresses that turn patients automatically, KCI’s products aid recovery for everyone from the unknown indigent to the likes of Christopher Reeve and Boris Yeltsin.

Not only a manufacturer of hospital equipment, KCI is also a top-notch contender in research to improve the healing process. The company has authored three proprietary software programs that track patient rate of recovery with different therapies and follow patient outcome plotted against cost of care. KCI uses these results to develop new products, publishes its findings, and advises facilities on how to improve care while maintaining reasonable cost. One of KCI’s newest products, first introduced in Europe, is the V.A.C., which uses light suction and a sponge to help difficult wounds close. The new process has dramatic results, both for the patient and often for the hospital—Bowman Gray Hospital in its 1996 annual report cited the product as saving them over $170,000 in cost of wound care. The company also pioneered the practice of renting equipment to healthcare providers, a $500 million dollar industry, and guarantees a two-hour delivery.

A Dream and a Beginning: KCI 1976-84

The founder of KCI, Dr. Jim Leininger, came home from his 24-hour shift in the ER one night in 1975 to tell his wife Cecilia about an amazing bed—the Roto Rest. It seemed to solve something that had always disturbed the sympathetic physician—the fact that many of the critically injured patients he stabilized in the emergency room would lose their lives strapped to immobile hospital beds. Burned skin would break down through the constant pressure of the prone patient, and damaged pulmonary systems were subject to fluid build-up that could literally drown a sick person.

The couple seized the promise of the new bed, which rocked 80 degrees to gently reposition the injured person several times a day. In a one-bedroom apartment, they founded Kinetic Concepts in 1976.

The company’s first nine years were a constant struggle with bankruptcy. The fledgling enterprise moved into a 14,000-square-foot plant, acquired manufacturing rights and patent for the Roto Rest, and started production. But the demand did not seem to be there. Times were so tight, recalls long-time team member Terry Tejeda, that, ’ ’Everyone pitched in to help with what was needed. When I wasn’t sewing, I learned how to work on the lathe and drill press. I remember cutting the foam for Roto Rest cushions with a device John Vrzalik created and an electric carving knife.”

“We had to borrow money every year just to stay in business,” remembers Dr. Leininger, who continued to work the emergency rooms of three Baptist hospitals in San Antonio, Texas. “Then finally one day, I called my Dad for more money and he said, There isn’t any more. I’ve given you all I have.’ It was so hard for me to realize I had not only bankrupted myself, but my family, too.”

He prayed with his family and, miraculously, in the next few months more capital was raised and sales increased dramatically. The years 1979-84 marked a period of painstakingly slow growth, but the company was building a strong framework from which to rocket to success. In 1977, Kinetic Concepts made medical equipment history by renting—not selling—its product. In 1980, the first study on Kinetic Concepts’ process, Kinetic Therapy, was completed by Dr. Earth Green at the University of Miami, where Dr. Leininger had earned his M.D. in 1969. In 1983, the Roto Rest bed was further publicized by an appearance on network television and five more articles in medical journals.

From Dreams to Dollars: 1984-88

In 1984 the company had its first big break—the release of a product designed completely in-house, the KinAir bed. Demand for this product was unprecedented, and the company grew fast to meet the market—over 100 percent in 1985. In 1986, Kinetic Concepts grew 250 percent over the previous boom year. In 1987, the company introduced another new product, the Bio-Dyne bed, and grew another 100 percent. Kinetic Concepts incorporated as Kinetic Concepts, Inc. (KCI) in 1988 and is traded as KNCI on the NASDAQ. A landmark year, 1988 also saw the company enter an international arena with its high-end products.

Developing the Corporation: 1989-93

The years 1989-93 marked a period of development for KCI. No longer a struggling, semi-bankrupt vehicle for a dream, as it was in the beginning, and with the explosive growth of the late 80s behind it, the company settled into consolidating its corporate identity. For the first time, a strong mission statement was defined—”healing patients through the delivery of therapies, not just providing equipment.” The kind of culture the corporation wanted to foster was also established—”People with a Purpose.”

KCI created a list of core values, reproduced not only in the office but also in the marketing material. The KCI Core Values “guide our decisions and everyday activities,” the brochures state, and they include: the value of people; clear communication; teamwork; excellence in all endeavors; personal development; responsibility; stewardship; maintaining a servant’s heart; and, integrity. KCI also elected to call its employees Team Members to further promote a caring corporate culture.

This period of companywide identity building also saw KCI’s product expansion into lower-end, more affordable equipment. Hospitals and health care providers were beginning to feel the pinch of managed care, and cost containment became a priority. Under this onslaught, KCI made the strategic purchase of a company called Medirec, which became KCI Medical Services in 1990. In the next year, 1991, KCI continued acquisitions with Mediscus International, which brought KCI products into 10 countries and formed the KCI International (KCII) subsidiary.

Divisions

In the early 1990s, KCI began to detail its operations into what would become four divisions: KCI New Technologies, Inc. (Nutech), KCI Home Care, KCI Therapeutic Services, Inc. (KCTS), and KCI International (KCII). NuTech, organized in 1992, concentrates on lower-cost technologies and made its debut with PlexiPulse, a machine that improves circulation in the extremities. Immediately Novamedix Limited filed suit for patent infringement—Novamedix is the largest direct competitor for the PlexiPulse product. (By mid-1997, the lawsuit had not yet been resolved in favor of either party.) Nutech revenue accounts for approximately 6 percent of KCI’s overall earnings.

KCI Home Care rents and sells products to the home health care market, primarily by selling wholesale to home medical equipment providers. Organized in 1995, this division contributes approximately 5 percent of KCI’s total revenue.

KCTS accounted for 64 percent of the company’s overall revenue in 1996 and almost half the company’s workforce. This division rents specialty beds to patients or to hospitals and has a sales force of over 300. This arm of KCI provides continuous on-call service and delivers products within two hours, as well as picks up products when the patient is done with them, assists in product maintenance, and makes recommendations about the most effective use of KCI’s special medical equipment.

KCII provides the services and products of KCI to foreign countries, including most of western Europe, Scandinavia, and Australia. Also, this division maintains relationships with independent distributors in the Middle East, Asia, and Eastern Europe. The international division accounted for 25 percent of KCI’s total revenue in 1996.

Firmly established in the “big time,” in 1992 KCI took a strategic leap and sued its main competitor, Hill-Rom, for patent infringement. The first major legal proceeding entered by the company, the law suit bore fruit—KCI was awarded $85 million in damages and the competitor was admonished to remove its rotating bed product from the market.

Company Perspectives:

Kinetic Concepts develops and markets innovative therapeutic healing systems that address skin breakdown, circulatory problems, and pulmonary complications associated with patient immobility. The company’s healing systems include specialty beds, mattress replacement systems, and related medical devices. Kinetic Concepts services hospitals, long-term and home care settings both in the U.S. and abroad.

By the end of 1993, the company had indeed established itself on the forefront of medical equipment supplies. The corporate staff moved into a new setting—the crisp, elegant KCI Tower, sported a new, state-of-the-art show room, had organized into seven distinct operating units, and triumphed in its first major litigation. The company was poised to grow on a worldwide scale.

An Agile Competitor: KCI 1994-97

Ray Hannigan became CEO and president of KCI in 1994. Under his leadership, the Medical Services business was sold and the V.A.C. was brought into the fold, which is an innovative vacuum-assisted wound-closing device. In the late 1990s, KCI’s complete suite of products for sale or for rent included several specialty beds that rotate the patient to prevent pulmonary problems, mattress overlays that promote good skin care, air-surface mattresses and pulsating mattresses that promote the healing of skin grafts and skin ulcers, versions of these hospital beds that will fit in a home, and a full line of beds, chairs, and equipment to facilitate the treatment of morbidly obese patients (weighing up to 850 pounds).

In 1995, KCI filed a civil antitrust lawsuit against Hillenbrand Industries, Inc. and its subsidiary Hill-Rom Company, Inc. for using its monopoly on the standard hospital bed to gain advantage in the specialty hospital bed market. Hill-Rom, which ranks as KCI’s principal competitor, countersued, and then, in 1996, opened new litigation claiming that one of KCI’s latest products, the TriaDyne critical care recovery bed, infringes on the Hill-Rom patent for a similar purpose. Discovery and resolution in these cases may continue for years.

What is not in contention, however, is that KCI is strongly positioned in the specialty medical care niche, competing only with Hill-Rom, Kendall, Inc., and Invacare, Inc. on a national level. The year 1996 brought record growth for the company, which had $60 million in cash, no debt, and an 11 percent increase over 1995 profits. In early 1997, KCI swallowed the California-based company H.F. Systems, which held assets of $7 million, the ACCESS Patient Care Device formerly held by Trac Medical, Inc., and the Ethos Medical Group of Athlone, Ireland.

And KCI is still hungry. CEO Ray Hannigan announced: “We are actively looking for opportunities to enhance and extend our product line and geographic reach.” The company hired Boston-based financial advisor Alex, Brown, & Sons, Inc. in May 1997 to study the company’s flexibility on strategic moves ranging from seeking a buyer to an increased pace of acquisitions.

A Healthy Future

KCI recognizes that changing trends in patient demographics will continue to motivate a demand for new kinds of services and new products. The number of elderly patients is on the rise and these patients tend to need care in a nursing home or a home care setting. Another trend to watch is the health care cost crunch that began in the late 1980s and continues to propel hospitals and health care providers to seek ways to cut costs.

Keeping these in mind, the company is setting a goal of tripling its earnings by the year 2000 and increasing shareholder value by an aggressive policy of buying back its own stock. The first quarter of 1997 saw a 13.5 percent increase over operating earnings in fiscal 1996 and represented an all-time three-month high for the company of $73.2 million in revenue. KCI is doing everything it can to make sure its record-breaking success is just that—one more record to break.