Nearly Zapped, This Medical Laser Startup Now Zips
What would you do? Your six-year-old company has never come within millions of making a profit. Your stock price is falling, and you can't pay your staff. Your spouse, who had watched as your jointly owned home was mortgaged to the hilt, has visions of impending bankruptcy. Even your own auditors are questioning your company's continued viability.
That was the unenviable position that last fall faced Colette Cozean, a 39-year-old biomedical engineer and mother of two young children, who was determined to build the country's leading medical-laser firm. After soothing her husband, Cozean calmly ran up a $150,000 tab on nine different credit cards to pay her 40 employees.
NOVOCAIN MUTINY. Cozean is nothing if not fearless. A one-time college volleyball player, she only recently gave up hang gliding and skydiving at the insistence of her insurance company. But now her tenacity could pay off in a dramatic way. On May 7, the U.S. Food & Drug Administration gave Cozean's company, Premier Laser Systems Inc. in Irvine, Calif., the first approval to manufacture and market a dental laser that painlessly zaps cavities without anesthesia. The American Dental Assn., which until recently had dismissed the use of lasers to cut through teeth, stepped forward with a mild endorsement. By October, the FDA is also expected to approve the laser's use for kids, a potentially huge business. Cozean starts out with a two-year lead over her rivals in what some experts project could eventually be a $4 billion market overall for dental lasers.
The FDA approval won Premier headlines across the world, thanks in no small part to Cozean herself, who quickly made the media rounds in New York, doing 75 back-to-back interviews over three days on such shows as Good Morning America and NBC News. Knowing that dentists, notoriously conservative, might balk at spending $39,000 for a dental laser, Cozean targeted her appeal to their patients, emphasizing the universal dread of the dentist's drill. This approach quickly won approval on Wall Street, where her stock doubled in one week. That price runup has soothed the capital needs of the company for now, as the underwriter was able to call in $25 million in warrants. "I have never seen a tiny company get so much attention in my life," says John R. Doss, an analyst at Dominick & Dominick, a New York City investment bank.
Now Cozean has to prove she is as good at meeting demand as creating it. The company, slowed down by a few product design changes, has only been able to deliver about 40 of the new lasers so far. She has deposits on 87 more, and by the end of the year, plans to be shipping 100 a month. But if Premier can't ramp up production and has to extend delivery times, dentists will be less likely to put down deposits for the expensive machines. And, eventually, there will be competitors, including rivals Biolase Technology Inc. and American Dental Technologies Inc., which has claimed it owns patents for this new laser but has never filed a formal complaint. Cozean says Premier's patents are all in order. "I wouldn't trade our position with anyone," she says. "We are set up to lead the application of medical lasers across several markets."
To complicate matters even further, Premier's underwriter was D.H. Blair Co., a tiny Wall Street house specializing in tough-to-float initial public offerings. On Aug. 13, Blair agreed to pay $5 million to settle a National Association of Securities Dealers complaint that it overcharged on commissions, including Premier's. And daily and often hourly dispatches on an Internet investment site, techstock.com, have chronicled every problem Premier has encountered. Those two factors sparked a sharp sell-off in Premier's stock in mid-August, knocking its price down to a low of $8.50, more than 40% below the peak it reached right after FDA approval. It has since shown some improvement. "We knew D.H. Blair was being investigated when we did the secondary offering," explains Cozean. "But we had no choice. They were able to get the deal done."
To Cozean, who was horseback riding in the Sierras with her family during the stock dive, this was just another minor test of endurance. Her bold game plan is to become one of the country's largest medical-device companies. Premier is now the only company selling lasers for all four key dentistry procedures: cavity preparation and decay removal, gum reshaping, hardening composites for fillings, and teeth whitening. And the company is closing a $10.6 million acquisition of a small ophthalmology device company, Houston-based EyeSys Technologies Inc., which makes optical systems to measure the curvature in the cornea. Because EyeSys is now losing money, Premier is expected to take a big write-off next quarter. However, EyeSys will give Cozean worldwide distribution for her growing lineup of ophthalmology lasers. This October, she plans on debuting six to nine new products at the American Academy of Ophthalmology meeting. She is also in second-stage clinical trials for a laser for cataract removal, another potential blockbuster device. Next year, she expects to offer a laser for treating root canals. "No other company has the same depth of product or technology," says Scott Baily, an analyst who follows the company for Bluestone Capital Partners LP in New York. "She is a unique person running this company."
That she is. After picking up undergraduate degrees in natural sciences and biomedical engineering, Cozean married her high school sweetheart, Kim Cozean. For the next five years, they both attended graduate school at Ohio State University and scraped by on $8,000 a year. Kim completed master's degrees in math and computer science; he's now a math teacher, computer consultant, and figure-skating judge.
Meanwhile, Cozean racked up a master's in electronic engineering and a PhD in biomedical engineering. She also finished one semester short of a medical degree. "I was only going to medical school to learn more for my work as an engineer," she explains.
Cozean, the daughter of two CPAs, began her business education early in life--at age 7, when her parents made her help do filing at their Glendale (Calif.) firm. By the time she left for college she was doing the work of a senior accountant. "I hated it with a passion," she says. "But it turned out to be a tremendous advantage."
Cozean's real passion, it turned out, was for entrepreneurship. A four-year career as head of research at Pfizer Inc.'s laser-research unit in Irvine, a division she helped found, was cut short in 1991 when the drug giant decided to sell off the cash-draining subsidiary. Prodded by fellow managers to lead a buyout, Cozean, who had recently had a second child, wrote a 25-page business plan, detailing a complete change in strategy.
Pfizer challenged her to raise $10 million in 45 days to buy a controlling interest in the unit. With no time to sweet-talk venture capitalists, she threw together a mini-roadshow and raised $4.5 million from her father's friends and clients. Cozean and her husband rushed to buy a house in Lake Forest, just miles from the company, and closed right before the deadline so that they could quickly refinance and draw out $50,000 for the laser venture. Cozean's money gave the couple an initial 5% stake, while Pfizer kept 10% of the company and her father became a board director.
Cozean quickly set out to remake the company. Instead of marketing the few surgery-laser products she already had, she used all her capital to build Premier's technological base and focus on new applications in ophthalmology, dentistry, and surgery. That meant defying the prevailing industry wisdom. In particular, dentists had completely written off the possibility of using lasers on teeth because of incidents in which they had destroyed patients' pulp, the soft, sensitive tissue in the center of the tooth. In ophthalmology, no one yet had tried to use lasers inside the eye to treat cataracts or glaucoma.
Three years later, Premier had meager revenues, no cash, and losses were running more than $3 million annually. But Premier had also racked up 17 major FDA approvals, several times more than most players in the industry. Promoting its record with the FDA and its potentially diverse product mix, the company raised $9.5 million in a January, 1995, IPO. But the process, says Cozean, was hell, as most investors at the time were avoiding small companies, particularly those in health care. To make matters worse, Premier was embroiled in a lawsuit that's still pending with competitor Coherent Inc., the Santa Clara (Calif.)-based industry leader, and a fiber supplier that Cozean claimed had shipped product that was promised to her to Coherent instead. The supplier, Infrared Fiber Systems Inc., denied the charges and countersued.
Worried that Premier wouldn't survive the costly litigation, D.H. Blair nearly killed the offering but instead agreed to hold one-third of the shares in an escrow account that Cozean would surrender if her stock took a dive. In the interim, Cozean ran up an $80,000 tab on her credit card to pay her employees. "That was the hairiest financial moment," says Cozean. "We could have easily lost it all in a few days."
That was just the first scare. Eighteen months later, when Cozean had to raise money again, she arranged to do a secondary offering with Rodman & Renshaw Inc. But the NASDAQ market plunged in July, 1996, and Rodman lost its nerve and backed out. Cozean pulled out her credit cards once again, this time running up the $150,000 in debt that caused her husband to fret.
Having no choice, she returned to Blair, which managed to raise $10.2 million in the secondary offering. With that money, Cozean got Premier's ophthalmology line off to a solid start with the introduction of lasers for anterior capsulotomy--a procedure to open the capsule of the eye prior to cataract removal. It would have been more profitable short term to have concentrated just on the dentistry market, with 120,000 dentists in this country alone. But while dentists tend to be slow to adopt new technology, Cozean says, ophthalmologists, although fewer in numbers, are devoted technophiles, willing to pay steep prices for breakthrough devices. For example, the cataract-removal laser is expected to sell for $115,000--almost three times as much as a dental laser for cavity removal.
Working with a staff of 45 in leased offices above her lab and clean room in Irvine, Cozean now needs to transform Premier from a research house to a manufacturing and marketing company. She doesn't need to convert many dentists or ophthalmologists to succeed. If she sells just 360 dental lasers by March, 1998--and increases sales of her other lasers by 20%--she will have increased the company's current $5.5 million in revenue almost sixfold in this fiscal year, to $31 million. By fiscal 1999, analysts project Cozean will sell $80 million worth of lasers, finally clearing a profit.
SO LONG, SUTURES. Even then, Cozean will have her work cut out for her. First of all, she must prevent a tug of war for resources from developing between her ophthalmology and dental groups. To reassure investors, she's expected to name a president or chief operating officer for backup. She will also need to create an international distribution operation, and possibly outsource both training and some manufacturing. As her lawsuit demonstrates, obtaining supplies in this industry can be a constant battle.
Even with these challenges, Cozean is determined to move on to her third target market: surgeons. In 1998, she hopes to get approval for a surgery laser that will meld tissue together to replace sutures, a potential $2 billion business. "Most companies in this industry are one-product wonders. When the technology changes, they are gone," says Cozean. "A broad product base is crucial."
Despite a net worth on paper of more than $3 million, Cozean hasn't changed her lifestyle much. Three mornings a week at 5:30, she swims at the Y, and, she says, she hasn't bought clothes in three years. "It is all tied up in the company. I am as broke as when I started. I am the kind of person who won't change," she says.
One thing that has changed: Premier now has a cash cushion. It could get better still come November, when the company's underwriter may call in as much as $65 million in warrants, assuming Premier's stock stays above $9.10 a share. Class B warrants will be called in if the stock averages $11.20 for 30 or more trading days.
Not to worry if the stock price tumbles. Cozean will just pull out the MasterCards and Visas once more.
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