STERIS Corporation

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STERIS Corporation

5960 Heisley Road
Mentor, Ohio 44060
U.S.A.
(440) 354-2600
(800) 548-4873
Fax: (440) 354-7043
Web site: http://www.steris.com

Public Company
Incorporated: 1987
Employees: 4,500
Sales: $719.7 million (1998)
Stock Exchanges: New York
Ticker Symbol: STE
NAIC: 339112 Surgical & Medical Instrument Manufacturing; 42199 Other Miscellaneous Durable Goods Wholesalers

STERIS Corporation develops, manufactures, and markets infection prevention, contamination prevention, microbial reduction, and surgical support systems, products, services, and technologies. It has a worldwide, diversified customer base in the areas of health care, science, research, food, and general industry. Infection prevention products—such as low- and high-temperature sterilization systems and washing, as well as decontamination products—make up the bulk of STERIS’ business, with surgical support products, such as surgical tables, examination lights, and other accessories, making up the second largest segment of annual revenues. Other products and services include scientific and industrial contamination prevention systems and contract sterilization and microbial reduction services to manufacturers of pre-packaged consumer and medical products. The company has manufacturing facilities in 13 states and in Germany, Finland, Sweden and Canada. Its products are sold and distributed through a network of 950 field sales and service representatives in North America and operations or support personnel in more than 15 other countries.

Early Success

Although STERIS Corporation was formed in 1987, it had its real beginning two years earlier in 1985. That year, an innovative researcher named Dr. Ray Kralovic left his employer, the Pittsburgh-based American Sterilizer Co., to develop his own technique for sterilizing surgical instruments used in minimally invasive surgeries such as endoscopy and arthroscopy. Traditionally, surgical equipment had been sterilized in a lengthy process that involved high temperatures and strong disinfectants. However, the delicate heat-sensitive instruments used in minimally invasive procedures could not withstand the intensive sterilization process used on the more durable instruments. Kralovic’s idea was to develop a rapid, low-temperature sterilization system that could be safely used on heat-sensitive equipment.

Kralovic first approached Primus Venture Partners, a Cleveland venture capital firm. Primus was unwilling to take on the concept, but suggested that Kralovic contact Bill Sanford, a health care consultant with a reputation for buying and selling medical technology. Kralovic was able to convince Sanford of the new sterilization system’s potential for success, and STERIS was formed with a venture capital investment of $1.2 million. Sanford became the new company’s CEO.

A year later, STERIS introduced what was to become its most successful product: the STERIS System 1. The System 1 was a complete low-temperature sterilization system that could be used at or near the site of the surgical procedure. The system included a tabletop computer-controlled central unit, a single-use sterilizing solution, and various sizes of containers and trays. The patented sterilizing solution contained a chemical biocide that killed microorganisms, along with an anti-corrosion formula that protected the instruments themselves. The whole sterilization process took fewer than 30 minutes, so healthcare professionals were able to sterilize and safely use the same surgical instruments several times per day. The efficient System 1 was well received, and as the trend toward minimally invasive surgeries continued to pick up steam, STERIS’ sales grew. In June 1992, the company made an initial public offering, which was followed by a secondary offering nine months later.

More innovative products followed the System 1. In 1993, STERIS entered into a joint venture with Indianapolis-based Ecomed, Inc., a manufacturer of hazardous waste disposal equipment. Together, Ecomed and STERIS developed the EcoCycle 10, a biohazard disposal system that ground up and decontaminated disposable medical equipment, such as syringes. The following year, the company acquired Medical & Environmental Designs, Inc., a St. Louis company with an FDA-approved system for collecting and disposing of fluid biohazardous wastes.

Meanwhile, the System 1 was rapidly growing in popularity. Between the company’s fiscal 1993 and 1994 years, sales climbed 70 percent to $45.8 million, and stock prices doubled. Because every one-time sale of a System 1 ensured continued sales of STERIS 20, the patented sterilizing solution, STERIS had a built-in stream of recurring revenue. By 1995, the company’s revenues were almost evenly split between capital equipment sales and recurring sales of consumables, such as chemicals and other accessories.

Mid-1990s Amsco Acquisition: A Giant Step

In December 1995, STERIS made the surprising announcement that it planned to acquire Pittsburgh-based Amsco International. What made this acquisition so unusual was that, with more than 2,000 employees and $400 million in sales, Amsco was at least five times the size of STERIS. The 100-year-old Amsco was the nation’s leading manufacturer of steam and gas sterilizers, surgical tables and lights, and related infection prevention products. Despite its strong market position, however, the company was plagued with FDA regulatory problems, diminishing sales numbers, and a too-rapid turnover in management. Amsco needed a boost—and STERIS needed to diversify its product line. “When we began STERIS 10 years ago, we knew we would always have to have a broader and deeper product line,” said STERIS CEO Bill Sanford in an article in the Akron Beacon Journal. “Amsco was a leader in some of the more traditional technologies, and the product lines were very complementary, with no overlap,” he explained. The acquisition, which was completed in May 1996, added some 300 items to STERIS’ product line. It also positioned the company as an industry leader in both the large-scale, heat-based sterilization systems traditionally used in hospitals and the smaller, low-temperature systems it pioneered, which were often used in outpatient and clinic settings.

After the Amsco addition, STERIS had 35,000 customers and major manufacturing operations in the United States, Germany, Finland, and Canada. As anticipated, revenues rose sharply—up to $587.8 million for the fiscal year ending March 31, 1997, a 544 percent increase from the previous year’s $91.2 million. However, after various acquisition costs, including $81.3 million to close Amsco’s Pittsburgh headquarters, STERIS was left with a net loss of $30.6 million for the year.

The Amsco buy also had negative short-term effects on the company’s stock. Analysts and investors predicted that Amsco’s bulk and baggage would drag down STERIS’ pace of growth. When the acquisition was announced in December 1995, the company’s stock dropped 22 percent in a single day. The worries continued in the months both before and after the deal closed. STERIS stock fluctuated throughout 1996, slowly gaining momentum only to drop sharply again in January 1997, when the company posted earnings below analysts’ expectations.

Further Expansion: 1996-97

Despite wobbly stock prices and Wall Street naysayers, STERIS proceeded undaunted to pursue an aggressive growth strategy. In September 1996, the company acquired Surgicot, Inc., a developer of sterility assurance technologies and products. Three months later, the company bought Calgon Vestal Laboratories, the infection and contamination control division of Bristol-Myers Squibb. With about 400 employees and annual sales of more than $50 million, Calgon Vestal was a market leader in developing and manufacturing instrument decontamination products, high-risk and routine skin care products, hard surface disinfectants, and surgical scrubs.

After a six-month lull, STERIS re-entered the acquisitions game in mid-1997. In July, the company purchased Joslyn Sterilizer Corporation, a Rochester, New York, manufacturer of steam and low-temperature gas sterilizers. Two months later, it purchased the New Jersey-based Isomedix Inc. for $130 million. With facilities in the United States, Canada, and Puerto Rico, Isomedix provided contract sterilization services to manufacturers of prepackaged medical equipment and consumer products. Its sterilization methods included irradiation, fumigation, and electron beam sterilization.

Shortly after it was acquired, STERIS’ new Isomedix division made news. On December 3, 1997, the U.S. Food and Drug Administration approved the company’s use of irradiation on red meat to reduce bacterial contamination and help protect consumers from food-borne illnesses. FDA approval of the petition, which Isomedix had prepared and submitted in 1994, opened up new business opportunities for STERIS. The company organized a Food Safety Initiative business unit to direct growth in the newly opened arena, and in a December 3, 1997 interview with the Meat Industry Insights News Service said that it planned to offer “a broad range of technologies, systems, products, and services to the food industry.”

Company Perspectives:

The mission of STERIS Corporation is to be the leading marketer, developer, manufacturer, and supplier of infection prevention, contamination prevention, microbial reduction, and surgical support systems, products, services, and technologies to healthcare, scientific, research, food, and industrial customers throughout the world.

STERIS ended its fiscal year on March 31, 1998 with net revenues of $720 million, a 22 percent increase from the previous year. The total revenues were evenly divided between sales of capital equipment and sales of recurring consumables, accessories, and services. The company posted net income of $65.5 million for the year, a vast improvement over the previous year’s $30.6 million loss.

1998: Gaining Momentum

In early June 1998, STERIS announced FDA approval of its new STERIS System 2S, a point-of-use steam sterilization system. Designed primarily for use in non-acute markets, the System 2S was marketed as a compact, cost-efficient alternative to the large and expensive steam sterilization systems typically used in hospital settings. The System 2S provided the same level of sterilization as these traditional steam sterilizers, but was faster, more flexible, and significantly less expensive—and therefore a sensible option for outpatient, ambulatory, and urgent care centers. Upon its FDA approval, STERIS immediately began marketing the System 2S in both domestic and international markets.

Three months after adding the System 2S to its line of sterilizers, STERIS took on a whole new product line when it acquired the Medina, Ohio-based Hausted, Inc. Hausted, a privately held company, developed and manufactured specialized mobile systems for surgical and diagnostic patient positioning and transport. Although a departure from the existing product portfolio, the Hausted line served as a complement to STERIS’ line of surgical support systems and services acquired from Amsco.

STERIS released results for the first half of its fiscal year on October 27, 1998. Net revenues for the six months were $364.9 million—an 11 percent increase from the same time period in the previous year. Net income and net income per share also showed improvements.

In the following quarter, the company expanded its contract sterilization business with the acquisition of Royal Sterilization Systems of Arizona. Royal Sterilization, located in Nogales, Arizona, provided contract sterilization and microbial reduction services to producers of medical devices in the Southwestern U.S. and in Mexico. STERIS also laid the groundwork for technological innovation and enhancement of its surgical products line by forming a strategic alliance with Computer Motion, Inc., of Goleta, California. Computer Motion had recently received FDA approval for its HERMES Control Center, a voice-controlled system that would allow surgeons to control operating room equipment using spoken commands.

Under the STERIS-Computer Motion agreement, the HERMES system was to be integrated with STERIS’ line of surgical tables, lights, and cameras. Computer Motion agreed to develop customized software and hardware for STERIS’ products; STERIS, in exchange, agreed to purchase the software and hardware on an OEM basis and to market it as a value-added option. “We believe that voice control will play a significant role in the operating room of the future,” said Paul Zamecnik, president of STERIS’ Product Systems group in a December 10, 1998 press release. He added, “Our agreement with Computer Motion reflects our intent to take a leadership position in the application of this technology.”

STERIS had spent a rocky few years on the stock market, beginning when its 1995 Amsco acquisition announcement was met with skepticism. The year 1998 was no exception. Despite the fact that the company drew positive recommendations from Wall Street pundits, stock prices continued to fluctuate. After starting the year at around $25, STERIS’ stock climbed to a high of more than $35 in mid-July—only to drop back to the mid-$20 range in December 1998. In November 1998, the company announced that its shares would begin trading on the New York Stock Exchange. STERIS management hoped that the increased international exposure gained by listing on the New York exchange would prove to be a boost.

1999 and Beyond

In late January 1999, STERIS released very positive results for its fiscal third quarter. Net revenues were $205 million—a ten percent increase from the previous year’s third quarter and the highest for any quarter in the company’s history. The quarter’s net income of $23 million was even more encouraging—up 26 percent from the previous year’s $23 million. For the nine months ending December 31, 1998, STERIS showed a net income of $56.1 million, a 24 percent increase from the previous year’s corresponding nine-month period.

STERIS entered 1999 with more than 4,500 employees; more than 20 sales offices in 17 countries; and 20 production and manufacturing facilities in Canada, Finland, Germany, Sweden, and the United States. In the 11 years since the introduction of the System 1, the company had gone from offering one product plus accessories to more than 2,500 products in 24 major categories.

Despite its diversified product portfolio, however, STERIS’ flagship product, System 1, remained central to total sales. At the beginning of 1999, the company had sold more than 16,000 System 1 units to more than 3,700 facilities. The company estimated the potential global market for these units to be at 100,000, with the expected increase of minimally invasive and outpatient surgeries around the world. As sales of the System 1 grew, STERIS experienced a corresponding increase in sales of the accompanying sterilant, STERIS 20. “Customer demand for STERIS 20 Sterilant Concentrate has increased every quarter since STERIS System 1, our site-of-use low temperature sterile processing system, was introduced in 1989,” said San-ford in a March 26,1999 press release, adding ’ The current rate of growth in STERIS 20 sales is well in excess of our overall business growth, and we expect to continue.” At the end of 1998, the company reported that sales of the concentrate—priced at around $5.00 per container—were at 2.6 million for the previous quarter.

The already-high sales of STERIS 20, in tandem with the expected growth in System 1 sales, led STERIS to make plans for expanding its sterilant production capabilities. In late March 1999, the company announced that it would add STERIS 20 production capabilities to an existing chemical facility in St. Louis. In addition, the company planned to establish a new sterilant production facility in Auburn, Australia. The two projected expansions would together more than triple the company’s production capacity.

In addition to the expansion of production facilities, STERIS also planned to grow through further acquisitions. During the quarter ending December 31, 1998, the company increased its line of credit from $215 million to $400 million, and in a January 26, 1999 press release, Sanford noted that the credit increase was for “business expansion purposes.” Possible markets for expansion included dental, extended care, home care, and other human health care areas, along with the company’s traditional hospital and outpatient markets. STERIS was also planning to aggressively grow its Food Safety Initiative operations, which it established with the 1997 acquisition of Isomedix.

Principal Operating Units

Anti-Microbial and Routine Skin Care Products; Biohazardous Waste Management Systems; Cleaning/Decontamination Systems; Contract Sterilization; Environmental Decontamination Products; Food Safety Products; High Temperature Sterile Processing Systems; Low Temperature Sterile Processing Systems; Microbial Reduction Services; Patient Positioning and Transport Systems; Pure Water Systems; Sterilands and Supplies; Sterility Assurance Products; Surgical Lights; Surgical Tables.