Executive Decision: Just what the doctor ordered for growing pains

The challenge: Derive greater profitability from your invention by making and marketing it on your own rather than through another party

The call: Simply stated: vertical integration, but with a bonus -- not only does acquired company make your products, but you add value to the products it already makes

By Leonard Zehr
The Globe and Mail
February 11, 2006

Turning a startup company into a meteoric star with a market value of $1-billion is one thing; getting to $10-billion is a whole other kettle of fish.

"That's where we were 18 months ago," admits Dr. William Hunter, president and chief executive officer of Angiotech Pharmaceuticals Inc., which last week nailed down a $785-million (U.S.) acquisition of American Medical Instruments Holdings Inc., based outside of Chicago.

In a single stroke, Angiotech transformed itself from a research and development boutique into a fully integrated medical devices company, with a strong growth potential.

"We hit a home run with our Taxus stent but the question we faced was how were we going to turn that success into a company that could do it again and again, especially since our business model was based on outsourcing" products to a marketing partner in return for royalties from their sales, he said.

"Having now been there, I can tell you it's a lot harder going from $1-billion to $10-billion than going from zero to $1-billion."

The Taxus drug-coated stent, launched in early 2004, has revolutionized the treatment to keep clogged coronary arteries clear.

The tiny mesh device, which is inserted with a balloon catheter, has chalked up sales of nearly $5-billion in the past two years for Angiotech's marketing partner Boston Scientific Inc. But by 2008, competition is expected to mushroom with the arrival of new stents, shrinking each player's piece of the pie.

Not surprisingly, that outlook has fuelled a slide in Angiotech's market value to $1.2-billion from about $3-billion over the past two years.

While Dr. Hunter said a recall of the Taxus stent 18 months ago didn't influence the drive to diversify, he admits Angiotech's business model left it vulnerable to how its marketing partners perform. "Our destiny was not in our own hands. If our partner performs well, everything's beautiful, but if our partner struggles, we struggle."

Angiotech's expertise is putting "drugs on stuff," so that biomaterials perform better. And it has a growing pipeline in testing and development.

"We know how to do it in a commercial way and we have the intellectual property [IP] and technology base to do it again," he said. What it didn't have was manufacturing and a sales staff to capture all of the profits from a commercial launch.

That led Dr. Hunter and his business development team to draft guidelines for an acquisition. It had to be big enough to counterbalance Taxus royalties, which were $47-million in the third quarter last year, and it had to have a diversified line of products, with no single one contributing more than 10 per cent of revenue.

"The barrier to entry had to be bricks and mortar, not IP because we provide the IP, and it had to sell to people we wanted to service, not in a new field." Those people are surgeons, and interventional cardiologists and radiologists because "they put our implant business into the body."

Dr. Hunter said the key was to get "synergies going in both directions." Angiotech had to be able to put its drugs on somebody else's devices and their sales channels had to be able to launch Angiotech's products.

"Twelve medical devices companies made our list, so we got on a plane and visited each one of them," he recalls. Near the bottom of the list was a company called Surgical Specialties Corp. of Reading, Penn., which makes and sells a broad line of needles, sutures and wound closing devices.

"We met with the folks there and the guy who runs Surgical, Pete Molinaro, got it right away. He immediately saw how we could add to what he does and how his firm could sell the stuff we have in our pipeline."

At the time, Angiotech didn't know that Surgical Specialties was only one arm of American Medical Instruments, which also owned another business called Inter-V. It makes and sells interventional diagnostics, including biopsy needles and devices used by radiologists and cardiologists.

"We couldn't believe our luck because we found everything we were looking for under one roof," Dr. Hunter said.

But at a meeting in November with AMI's owners, RoundTable Healthcare Partners and Marmon Group., Dr. Hunter found out that the company wasn't for sale -- yet. "But by the end of the meeting, we had a list between us of 40 things we could do together and, intellectually, everybody was on the same page." Moreover, there weren't any investment bankers at the meeting and "they were impressed that this was an internal Angiotech proposal."

Negotiations over the holidays to strike a deal were influenced by RoundTable and Marmon weighing what they could get by selling AMI versus the risk of waiting a few years, Dr. Hunter said.

"The final price was in a tight range right from the beginning. I have to give them high marks because they didn't shop AMI and there was no auction."

William Hunter, president and chief executive officer, Angiotech Pharmaceuticals Inc.

Age: 43

Birthplace: Toronto

Education: BSc (McGill), MSc (UBC), MD (UBC)

What you wanted to be as a kid: A physician

Management style: Hire great people and let them do their jobs -- but hold them accountable.

Management guru: Larry Bossidy on execution, Clay Christensen and Michael Raynor on strategy.

Qualities looked for in a new hire: Someone who hates to lose, is smart and is a self-starter.

Recent reading: The Blind Watchmaker by Richard Dawkins

Biggest challenge: Proving that company's first success, Taxus, wasn't a fluke.

Approach to a challenge: Hard work and thoughtful analysis -- to a point -- then make a decision, act, and live with the results. Remember the credo of the surgeon who must operate on a worsening patient even in the absence of perfect or complete diagnostic information -- "Sometimes wrong, but never in doubt."

Biggest win: The Taxus stent -- the most successful medical product launch in history.

Biggest mistake: Thinking the company could make a multiple sclerosis drug.

Hobbies: My wife, my family, cycling and reading.