Will U.S. Surgical's Cutting Edge Be Enough?Tim Smart
Marilyn Kusek entered the operating room at 10 a.m. on a Wednesday. By breakfast the next day, she was discharged. Two days later, she drove back to the hospital to tell a group of doctors about her successful surgery. The following week, the 49-year-old Stamford (Conn.) nurse was back at work, pulling a 12-hour shift. What's astonishing is that Kusek had undergone a full hysterectomy, an operation that normally requires a minimum of six weeks of painful recovery. Her doctors had used a "minimally invasive" technique in which they made a tiny incision in her body, placed a camera inside, and operated while watching a TV monitor. Surgeons call it laparoscopy, but Kusek has another term: "It's miracle surgery."
UNSTOPPABLE? It certainly has worked miracles for U.S. Surgical Corp. The manufacturer, which sells some of the key equipment used in laparoscopy, has lately been among the fastest-growing companies in America. Sales at the Norwalk (Conn.) company have climbed by 50% in each of the past two years, with profits up 98% in 1991, to $91 million. Wall Street's enthusiasm for miracles, real and otherwise, has propelled USS stock from 8 to more than 134 in just four years, making millionaires of founder Leon C. Hirsch and many of the company's employees.
But now, as USS reaches the milestone of $1 billion in annual sales, many wonder how it can possibly keep growing so fast. Once selling at 50 times earnings, its stock has become a favorite of short-sellers, plunging from around 120 to 74, or 30 times estimated earnings, in the past six months (chart). Many in the health care industry see dark clouds in USS's future: The company has a formidable new competitor in Ethicon Endo-Surgery, recently formed by Ethicon Inc., a subsidiary of health care giant Johnson & Johnson. On Sept. 9, Ethicon Endo-Surgery announced an alliance with Japan's Olympic Optical Co. to develop and market new laparo-scopic equipment. Meanwhile, some studies on laparoscopy show a number of procedural errors, which raise serious questions that could scare off potential patients.
CEO Hirsch, 65, dismisses the naysayers. Laparoscopy is no more dangerous than any other surgery, he says. He argues that the growth of the technique is unstoppable as his research and development labs engineer newer and better instruments: "The surface has barely been scratched," he says.
He may be right. In 1987, when USS introduced its Surgiport trocar, a tubular gadget through which other instruments are inserted in the body, laparoscopy was a paltry $10 million market. Last year, USS sold more than $300 million of laparoscopic instruments, and analysts now speak of a $2 billion market by 1995. Already used to remove gallbladders, hernias, and uteruses, the technique could soon be employed for more complicated procedures, such as lung surgery. Even if USS's share dipped to 50% from its present 80%, half of a $2 billion market would still be more than the company's entire 1991 sales.
If Hirsch is right--and there are many health care professionals who believe him--then USS could continue to soar. But competitors sense the same potential, and none of them wants to beat out USS more than mighty J&J. Hirsch cleaned J&J's clock in the 1960s with a surgical stapler that is the medical equivalent of the staple guns sold in hardware stores. The staples, which replace sutures in some applications, are now a $500 million business, growing at 20% a year. Hirsch commands some 75% of the market. USS left its rivals in the dust with laparoscopic stapling and cutting instruments, too. But now, J&J means business. Says Ethicon Endo-Surgery President William Weldon: "We set a target for ourselves to be the dominant player by the end of 1995."
The J&J unit has a U.S. sales force of 500, backed by 350 engineers, and it recently opened a state-of-the-art training facility for surgeons, in Ohio. Already, it is making inroads with hospital purchasing groups that have long been J&J customers. Ethicon, perennially dominant in sutures and other surgical supplies, "is not used to not being the market leader," says Kevin Weeks, operating-room program manager at Premier Hospitals Alliance Inc., which represents 150 hospitals. "They're throwing a lot of resources at it."
DOCTOR LOYALTY? Ethicon Endo-Surgery, backed by $12 billion-a-year J&J, has one important advantage over USS: price. Savings on its laparoscopic gear can average anywhere from 5% to 20% compared with USS, Weeks says: "For a small hospital of 200 beds, over a four-year period we can save upwards of $1 million with Ethicon."
Price isn't J&J's only selling point. Some health care administrators say USS became arrogant and unresponsive as it enjoyed a virtual monopoly in the laparoscopic marketplace over the past few years. "They feel their product is so superior," says Jonah Hughes, purchasing vice-president for Daughters of Charity National Health System, a 40-hospital chain. Frustrated at not getting discounts or concessions, Hughes signed an exclusive contract with Ethicon Endo-Surgery four months ago. Such complaints are hogwash, says Hirsch: "We're quite competitive on price, and we wouldn't have the market share we do if we were arrogant and didn't listen to ourcustomers."
USS sure doesn't look complacent these days. It is making a major push overseas, where it now gets about one-quarter of its sales, with a new sales and distribution center in France. Hirsch is also upping his R&D budget by 25% this year, to around $40 million. Along with Biomet Inc., USS has signed agreements to jointly develop and market a line of absorbable products for orthopedic surgery. And in a move that smacks of nose-tweaking, last year USS entered the $1 billion traditional suture business, which Ethicon has ruled for decades.
Hirsch's strategy is to sell a "package" of laparoscopic equipment and staples, plus sutures for those times when staples won't do the trick. Early reports from the field are encouraging. "The readings we are getting on the sutures are superb," says Robert P. Bowen, executive vice-president of Amerinet Inc., a buying group with 1,000 hospital customers. Analysts figure USS could sew up 10% of the sutures market within the next couple of years.
Still, that's a pinprick compared with the prospects in laparoscopy. To keep growing in the face of tough competition from Ethicon Endo-Surgery, Hirsch is counting on doctors to overrule cost-conscious bureaucrats: "No doctor is going to raise Cain over what bedpan you buy. However, when that patient is on the table, the doctor is personally responsible. It's a life-and-death decision."
Bonding with surgeons has always been a key part of the marketing strategy for USS's 1,100-person sales force. They have trained thousands of doctors in TV-age surgery--31,000 last year alone--and keep in almost constant touch with them through frequent follow-up visits. "With most of the physicians and professionals, U.S. Surgical has a substantial leadership position," says Earl Norman, chairman and CEO gf Health Services Corp., which sells equipment to 1,100 hospitals.
SCARCELY A SCAR. What many people think of Hirsch personally is another matter. Animal-rights activists, who accuse USS of treating dogs in its labs inhumanely, have been riding Hirsch for years. In 1988, a protester even placed a bomb near his parking spot, but the plan was thwarted by company security personnel who had infiltrated the animal-rights group.
More recently, Hirsch has taken some heat for becoming one of the highest-paid U.S. executives. His 1991 compensation totaled $23.3 million, and his wife, Executive Vice-President Turi Josefsen, made $23.6 million. Hirsch notes that the compensation mainly comes from stock options. Besides, he says, USS's top executives deserve their handsome rewards. Still, he irked some shareholders earlier this year by unloading thousands of his USS shares as they plunged in value--although, as he points out, he still owns some 5.3 million shares.
The stock might continue its slide if the medical community clamps down on laparoscopy. One fear, backed by studies showing high numbers of complications, is that too many doctors are performing the procedure without proper training. New York State is already talking of licensing doctors who perform laparoscopic procedures. But many doctors argue against such plans, insisting that the studies themselves are flawed.
Whatever the studies suggest, the real world experiences of patients such as Denis Niez are testimony to the procedure's success. A year ago, the 25-year-old pastry chef was rushed to a Miami hospital with intestinal bleeding. A week after a seven-hour operation to remove five feet of diseased colon, Niez was back at work. "I've got three little scars, and you can barely see them," he says. "The other way, they would have had to open me up about 10 inches." To U.S. Surgical, and now Johnson & Johnson, that difference could be worth billions.