Utah Medical Products, Inc.

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Utah Medical Products, Inc.

7043 South 300 West
Midvale, Utah 84047
U.S.A.
Telephone: (801) 566-1200
Toll Free: (800) 533-4984
Fax: (801) 566-2062
Web site: http://www.utahmed.com

Public Company
Incorporated: 1978
Employees: 275
Sales: $29.4 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: UTMD
NAIC: 33911 Medical Equipment and Supplies Manufacturing; 339112 Surgical and Medical Instrument Manufacturing

Utah Medical Products, Inc. designs, manufactures, and dis-tributes disposable and reusable products mainly for women and babies. It sells fetal monitoring devices that allow physicians to track the condition of the fetus as well as products to assess the mother’s health status. The company also provides tools for electrosurgery, an innovation that first began in the early 1990s that allowed physicians in small clinics or their offices to take biopsy samples from the cervix. Its third main line includes breathing accessories, feeding tubes, and several other items for premature or critically ill babies. With facilities in Midvale, Utah; Athlone, Ireland; and Redmond, Oregon, that have a total of about 200,000 square feet, Utah Medical Products successfully competes in selected niche markets. It is one of the many companies that comprise Utah’s growing biomedical products industry.

Origin and Early History

On April 21, 1978, James Young, Ralph Walker, and Reed Chidester incorporated Utah Medical Products, Inc. under Utah law “to develop, manufacture and market medical devices and supplies, with principal interest directed toward disposable, unique and high volume products,” according to the firm’s 1982 annual report.

The firm’s initial product was the Delta-Flow Flush device, first sold in March 1979 for maintaining “catheter patency during invasive arterial pressure monitoring procedures.” In February 1980 it began producing and marketing its Dispiro Disposable Spirometer, a disposable device used by respiratory therapists to measure pulmonary function. The Disposa-Hood for giving oxygen to babies was first made and sold in May 1980. Two years later the company began making and selling its Arthroscopy Drainage Cannula Set for draining and collecting fluid discharges resulting from inserting an arthroscope into the knee joint.

In April 1982 Utah Medical Products reached an out-of-court settlement with Sorenson Research Company over a law-suit filed by Sorenson in January 1980. Sorenson charged Utah Medical Products with violating patent rights because the defendant’s Delta-Flow product closely resembled Sorenson’s Intra-Flow device. In February 1982 a jury in the U.S. District Court in Salt Lake City found Utah Medical Products guilty of patent violations, but during the appeal process the two firms settled. Utah Medical Products paid Sorenson $175,000 and dropped its appeal. In turn, Sorenson granted Utah Medical Products a nonexclusive license to continue making and selling Delta-Flow and also to pay Sorenson six percent of Delta-Flow net sales until the Sorenson patent expired in 1989.

More Developments in the 1980s

On July 21, 1983 UMED, Inc., Utah Medical Products’ wholly owned subsidiary, merged with Salt Lake City’s Medicor, with Medicor being the surviving entity. In September 1983 Utah Medical Products gained a new president when Fred P. Lampropoulos resigned as Medicor’s chairman to assume his new duties. By this time the original founders and officers had departed. In addition to Lampropoulos, who had become a company director in 1981, the other directors included Dr. William Dean Wallace, who had served as Medicor’s founding president before becoming the executive vice-president and a director of Utah Medical Products in 1983. Christopher A. Cutler, Ph.D., another Medicor founder and officer, became a director of Utah Medical Products in 1984 and vice-president of engineering a year later.

In 1984 Utah Medical Products sold Medicor’s Salt Lake City facility and also began leasing 32,000 square feet in a building in Midvale, a Salt Lake City suburb, where it set up its corporate offices, warehouse, and manufacturing facilities. In 1986 it still owned a Lehi building with a tool and die shop and injection molding capabilities but eventually sold that facility.

Utah Medical Products suffered through a bad financial year in 1983. According to its 1983 annual report, its net sales declined from $935,344 in 1982 to $701,257 in 1983, and its net income of $106,612 in 1982 slipped to a 1983 net loss of $1.1 million.

In 1984 the company’s net sales rebounded to $1.98 million and then in 1985 reached $3.3 million. The company remained unprofitable in both years, however, with net losses of $455,000 and $269,000, respectively.

In 1986 the company did much better, with net sales increasing to $5.7 million and a net income of $440,953. At the end of the year the firm employed 120 individuals. Two customers accounted for the majority of 1986 sales. Hewlett-Packard purchased $2.7 million worth of company products, mainly flush devices, transducer kits, and the firm’s disposable transducer; that brought in 47 percent of sales. Deseret Medical, another Utah medical products firm, bought products worth nine percent of 1986 sales.

Several key developments occurred in 1987. The company in June introduced its Intran device to monitor intrauterine pressure during difficult deliveries. In 1987 Fred Lampropoulos left the firm to start Merit Medical Systems, a move that would result in litigation. He was replaced as company president by Dr. William Dean Wallace.

In December 1987 the firm signed an important agreement with Baxter Healthcare in which Baxter invested $1.15 million in the company and loaned it another $1.15 million. Baxter also made a six-year supply agreement to buy Utah Medical Product devices, which the company estimated would bring in $40 million in revenue. Since Baxter supplied hospitals globally, this contract in effect represented Utah Medical Products’ entry into international markets. Later these agreements were amended and expanded. For example, in 1990 the company signed a three-year contract with Baxter’s Japanese Division to have exclusive distribution rights to UMP’s Deltran disposable blood pressure transducer.

The company at the end of 1989 reached $17.9 million in net sales and $2.6 million in net income. That solid financial performance, also seen in other indicators such as increasing total assets and decreasing long-term debt, continued into the 1990s.

Growth and Challenges in the 1990s and Beyond

In 1990 Utah Medical Products enjoyed a “successful year,” according to Chairman/President Dr. William Dean Wallace in the firm’s annual report. The company completed purchasing its property and building in Midvale. Business Week in its May 21,1990 issue ranked the Midvale firm as number 33 in its list of “Hot Growth Companies.” Forbes on November 12,1990 honored the company by ranking it as number 57 in the list of its “200 Best Small Companies in America.” In its November 1991 issue Forbes ranked Utah Medical number 26 in the same list, based on its average five-year annual return on equity of 29.4 percent.

Baxter Healthcare remained Utah Medical Products’ main customer as the new decade began, accounting for 41 percent of sales in 1991 and 37 percent in 1992. The agreement between the two firms was extended and amended in January 1993 for another three years. Utah Medical employed 393 individuals at the end of 1992, and its annual sales for that year increased to $36.1 million, while its 1992 net income was $6.9 million.

On December 31, 1992 Kevin L. Cornwell became Utah Medical Products’ president and CEO. With a B.S. in chemical engineering, an M.S. in engineering-economic systems, and an M.B.A., all from Stanford University, Cornwell had worked 21 years in management and investment positions before joining Utah Medical Products.

The departure of Dr. William Dean Wallace resulted in litigation. After a federal grand jury had charged him with 18 separate offenses, including five counts of tax evasion, he had resigned as the president of Utah Medical Products but remained on its board of directors. On December 23, 1992 U.S. District Judge David Sam ruled that Wallace was not guilty of insider trading and falsifying documents, and he dismissed Wallace’s five tax evasion charges.

In December 1992 Utah Medical Products said that it expected Wallace to continue working for the firm, mainly on re-search and development projects, but in April 1993 the company fired Wallace. In June 1993 Wallace filed a civil lawsuit against Utah Medical Products. In March 1994 seven of Wallace’s nine claims against Utah Medical Products were dismissed by Third District Judge David S. Young.

In 1992 Utah Medical Products and Merit Medical Systems settled patent litigation concerning Merit’s IntelliSystem and Monarch angioplasty inflation products. Utah Medical granted Merit a nonexclusive license to its angioplasty patents for a single licensing fee of $600,000. Merit committed to pay 5.75 percent annual royalties, not exceeding $450,000, to Utah Medical for annual sales of its products using the angioplasty patents.

Company Perspectives

With a particular interest in healthcare for women and their babies, Utah Medical develops, manufactures, and markets a broad range of disposable and reusable specialty medical devices designed for better health outcomes for patients and their care-providers.

In 1994 another lawsuit was filed concerning the relation-ship between the two Utah medical devices firms. Merit Medical stockholder David D. Bennett claimed that Merit and its founder Fred Lampropoulos committed fraud in the company’s initial stock prospectus by claiming that Merit had no products that competed with Utah Medical products. Bennett also charged that the 1992 patent litigation settlement between the two firms proved that Merit “owed its entire corporate existence to cannibalizing Utah Medical personnel, customers and technology.” In 1998 the Third District Court granted Merit a summary judgment that ended Bennett’s claim.

Although Utah Medical Products and Merit Medical Systems initially had a serious legal contest, the reality was that the two firms in the 1990s specialized in different kinds of medical de-vices. Merit continued to develop products for diagnosing and treating cardiovascular disease. Utah Medical specialized in items mostly for women and babies. Its winter/spring fact sheet listed three product lines for use in 1) neonatal intensive care, 2) labor and delivery, and 3) gynecology, urology, and electrosurgery.

Utah Medical began offering its third product line in 1991 when it entered the market for minimally invasive surgery (MIS). It started selling its trademarked Finesse electrical generators and disposable Prendiville Loops for a gynecological procedure to cut out precancerous tissues on the cervix. Done in doctors’ offices or clinics, this form of electrosurgery was less expensive than laser surgery and quicker and safer than traditional scalpel methods used in hospitals. In 1991 its generators and Loops brought in only three percent of total revenues but increased to 15 percent the following year.

Utah Medical’s electrosurgery products for office or clinical use was part of a general trend in medical care as high-tech items based on microelectronics and computers allowed many procedures to be done in decentralized settings. This was obvious from the decline in hospital occupancy rates that began in the 1980s and the increasing use of smaller surgical centers, clinics, and even more home healthcare.

Most hospitals had been started as centralized institutions, a key feature of the Industrial Revolution that began initially around 1750 in Great Britain. Hospitals gradually replaced home health-care, just as factories replaced home or small shop production. By the 1960s, however, the United States had entered the early phases of the so-called Postindustrial Society or Information Age characterized by decentralization. Alvin Toffler’s 1980 book The Third Wave described this ongoing transformation.

Starting in 1992, biomedical products companies like Utah Medical Products faced increased regulatory demands from the U.S. Food and Drug Administration (FDA). The time needed for initial product approvals by the FDA increased significantly. Established firms simply passed on higher FDA fees to the consumers, but smaller companies sometimes struggled to meet the tougher requirements.

Utah Medical Products was just one of Utah’s 145 biomedical companies that employed 7,891 workers and produced esti-mated revenues of $865.5 million, according to a study by the University of Utah’s Bureau of Economic and Business Re-search reported in the May/June 1994 Utah Business. The industry was aided by the state’s well educated workforce, research universities like the University of Utah and Brigham Young University, and low wages influenced by Utah’s rightto-work law, which made unions optional.

In May 1995 Utah Medical Products announced its plans to build a manufacturing plant in Athlone, Ireland. In 1995 the company enjoyed its best financial performance of the decade, with annual net sales reaching $42 million and a net income of $8.4 million.

When the firm’s Irish plant was completed in 1997, the new facility allowed the firm to save on distribution costs to European Community customers and take advantage of Europe’s less demanding government regulations, compared with the U.S. Food and Drug Administration.

The new Irish plant was important because 25 percent of Utah Medical Products’ revenues came from foreign sales. Only 25,000 square feet of the planned 75,000-square-foot plant were finished, however, because the company’s important contract with Baxter was collapsing in 1997. Thus Paul Richins, the company’s chief administrative officer, said in the November 11, 1998 Deseret News, “I wouldn’t call (the Ireland plant) a smashing success, because the volumes have been much lower, and we’ve had to work to try to get enough business there to keep that plant at a level where it can be profitable. But we’ve been able to do that.”

In 1997 Utah Medical Products’ financial performance declined after several years of expansion. Its net sales declined to $24.3 million from $38.7 million in 1996. In addition, the firm’s net income fell from $8.8 million in 1996 to $4.3 million in 1997. Sales and income increased over the next two years, with 1999 bringing in $29.4 million in net sales and net income of $5.5 million. It was clear that after the Baxter Healthcare agreements ended, Utah Medical Products in the late 1990s had to rely on other options to strengthen its market position.

Key Dates

1978:: Utah Medical Products, Inc. is incorporated and begins operating in Lehi, Utah.
1982:: Firm completes its IPO.
1983:: Firm acquires Medicor, Inc. of Salt Lake City; Fred P. Lampropoulos becomes new president.
1984:: Company moves most operations to a leased plant in Midvale, Utah.
1987:: Dr. William Dean Wallace becomes the firm’s new president; the company and Baxter Healthcare sign an investment and supply contract.
1992:: Patent litigation involving Merit Medical Systems is settled; in late December Kevin L. Cornwall is named president and chief executive officer.
1994:: Most charges are dismissed in lawsuit against the firm by former president Dr. Wallace.
1996:: Company switches from NASDAQ to the New York Stock Exchange.
1997:: Firm completes construction of its new facility in Athlone, Ireland; acquires Columbia Medical, Inc.
1998:: Company acquires the Gesco neonatal product line from C.R. Bard.
2000:: The company returns to the NASDAQ, effective March 8.

In 1999 Utah Medical Products received 47 percent of its revenues from its labor and delivery products, including devices for monitoring both the fetus and the mother, vacuum systems that replaced forceps in difficult deliveries, and other products for umbilical cord management.

The company’s blood pressure monitoring and other miscellaneous products brought in 25 percent of its 1999 revenues. These items for adult use included erectile dysfunction pumps. Subcontracting injection molding for other companies was also in this category.

Gynecology, electrosurgery, and urology products accounted for 15 percent of 1999 annual revenues. This third category included generators and tools for using electrosurgery to take biopsy samples from the cervix and also endoscopic irrigation devices used in urology.

The firm’s neonatal products, responsible for 13 percent of 1999 revenues, were designed to help premature and critically ill babies survive. Products in this line included disposable hoods to help babies get enough oxygen, blood filtering systems, spinal fluid sampling devices, feeding tubes, and several other items.

To face strong competitors in 2000, Utah Medical Products continued to be led by a strong management team headed by Kevin Cornwall, president, CEO, and chairman of the board. It seemed that the company finally had found a long-term leader, unlike its two former presidents who each had stayed about five years and then left under clouds of litigation.

Principal Subsidiaries

Utah Medical Products Ltd. (Ireland); Columbia Medical, Inc.

Principal Competitors

Abbott Laboratories; Argon Medical; Baxter Cardiovascular Group; Becton, Dickinson & Company; Clinical Innovations; Corometrics; GE Medical; Kendall International, Inc.; Marquette Electronics, Inc.; Medex; Prism Enterprises; Quest Medical; Spectramed; Tyco International Ltd.