Medical Device Daily Executive Editor

DANA POINT, California – For sheer entertainment value, one session during last week's annual meeting of the Advanced Medical Technology Association (AdvaMed; Washington) stood out.

The "Executives' Lessons Learned" session in the Monarch Ballroom of the St. Regis Beach Resort & Spa featured three well-known executives – and longtime AdvaMed members – who either already have or are about to leave their CEO positions:

• John Brown, who retired as CEO of Stryker (Kalamazoo, Michigan) as of the beginning of this year, while continuing as chairman of that orthopedics/medical products powerhouse.

• Ron Dollens, president and CEO of Guidant (Indianapolis), who has put off a planned year-end 2004 retirement in order to guide the company through its pending acquisition by Johnson & Johnson (J&J; New Brunswick, New Jersey).

• Jack Wareham, chairman and former CEO of leading diagnostics equipment provider Beckman Coulter (Fullerton, California).

Aptly described by session moderator Steve Halasay, group editor of MX: Business Strategies for Medical Technology Executives, as "masters of business," the trio spent a portion of each of their presentations in interesting descriptions of the development of their respective companies both prior to and during their own terms of service.

But it was both the quips and the byplay among the three that set the session apart.

Brown, for instance, set the tone for an hour and a half session that in truth seemed to fly past by noting that one of the modern wonders of the world "surely has to be convincing a couple of hundred folks to come in from this beautiful California day to listen to three retired guys."

Dollens noted that when he was working for Eli Lilly and Co. (also Indianapolis), which was planning to spin out its medical device business into a freestanding firm in 1994, among those in the industry whom he sought out for advice were both Brown and Wareham, whom he knew from AdvaMed (then known as the Health Industry Manufacturers Association).

"When I was getting ready to go up to Kalamazoo to visit with John, I asked him where I should stay," Dollens said. "He suggested Lee's Inn, which he said was located near his company's offices. I said I hadn't heard of it, but John said, 'You have them [in Indianapolis]; you just haven't stayed in them."

During a later question about whether big companies are facing a period of crisis of leadership, when Dollens followed Brown's response that he doesn't think med-tech firms are facing such a crisis with the statement "I take the opposite tack," Brown quipped:

"He's selling; we're not."

In a laconic reference to the rigors of serving as CEO of a major public company , the silver-haired Wareham referred to a picture of himself that was displayed on a big screen in the meeting room, showing him with considerably darker hair: "That picture was taken six months ago."

During his presentation, Brown outlined the growth of Stryker since the company's founding nearly 60 years ago by Dr. Homer Stryker, describing him as "a gifted orthopedic surgeon" practicing in Kalamazoo. He noted the company's foundation on a unique turning bed for hospital use and Stryker's invention of an oscillating saw for removal of casts and the fact that it took nearly two decades to reach the level of $1 million in sales.

Even by 1976, the year before Brown joined the company as CEO, sales totaled a relatively modest $17.3 million. After the death of Lee Stryker, son of the company's founder and then-president of the company, in a 1976 plane crash, the firm's board of directors offered the CEO post to Brown. He was apprehensive about going to a small, private company, "so I turned them down." But, he said, "they kept after me, so I finally relented."

One of the "musts" for Brown in eventually accepting the offer in 1977 was that the board would agree to take the company public, which it did in May of 1979, with an initial stock price of 8 cents a share. "We've done very well since then," he observed with his usual dry wit. Indeed. Those who put $2,000 into Stryker at its inception as a public company find that investment is worth $1 million today.

Almost immediately came a defining moment. Stryker had an opportunity to acquire orthopedic implants manufacturer Osteonics. When company directors talked about the deal, "the board said, 'We don't think it's a good idea,'" Brown noted. "But I told them, 'I've already given them [Osteonics] an advance of $50,000.' I bet my job on it, and fortunately it turned out to be a good bet – it got Stryker into the implants business."

Another key decision came in the early 1980s, when Stryker moved to "decentralize" its business, setting up divisions as separate units. That "went against what I liked to do," Brown said, "but it was a very important step for us."

In 1998, along came what Brown termed "a bet the company" kind of deal: Bidding to buy Howmedica. That acquisition, which essentially was a merger of same-sized companies, worked "because we kept the companies' accounts separate," he said. "That's how we made it work."

The Howmedica deal, Brown said, "put us into markets we had not previously been in."

Referring to the well-known Stryker mantra of 20% bottom-line growth, long attributed to Brown, he said it actually came from an analyst with the firm then known as Alex. Brown, who asked him what his goals were for the company. "I said I wanted to be a growth company, and he said, 'To do that, you've got to grow 20% a year.' That's where that came from."

The 20% mantra has resulted in a highly focused company, Brown said. "You've got to be good to hit 20% growth every year."

For Dollens, the challenge has been a little different. Spinning off a substantially sized group of businesses into a new public company that started with a valuation of some $860 million, he said, "was like giving birth to a teenager."

As he often does, even in investor presentations, Dollens devoted a portion of his presentation to larger issues such as national health policy. Referring to health policy as "THE strategic issue" of the day, he asked a rhetorical question: "Is the public tired of the U.S. driving global medical innovation?"

Maintaining that "we as an industry are at risk if health policy does not encourage innovation," Dollens added: "If that is the case, this is no longer an interesting business for investors." And "if dollars don't flow to the healthcare sector, neither does intellectual property and innovation."

He said successful medical technology companies need to share a common mantra: "New product flow, new product flow, new product flow."

Dollens said at Guidant, for example, 60% of the company's products at any one time are less than 12 months old.

The key to success within the industry, he said, could be put in the form of a simple question: "Are you in a good space?" Being in a good space, he said, "is awfully important."

As for the upcoming acquisition by J&J ("J&J calls it a merger," he said, "but if you're a $190 billion company buying a $25 billion company, it is not a merger"), said Guidant had to address three basic questions in deciding to be acquired:

1) Good price. At $25.4 billion, "that was the right number for us," Dollens said.
2) Opportunity and stability for the company's employees.
3) Product complexity and advantages of scale in terms of production, marketing and distribution.

Like Brown, Wareham described a "bet the company" move carried out by Beckman Instruments in the mid-1990s when, after several smaller acquisitions "that seemed to go well, we got brave and acquired Coulter Corp."

That $1.4 billion deal, was carried out by a company that had only $1 billion in sales at the time, but, as Wareham said, "we knew we were in the right place."

Via the Coulter deal, what had been an engineering company "became a diagnostics company," he said.

Noting that investors weren't happy about the deal, with Beckman stock falling by 25% on the day of the deal, Wareham said, "we knew we were in the right place. We had 100% customer overlaps, but 0% product overlap."

The key to future growth of the combined firm, he said, was that "we weren't buying sales; we were buying market share."

He said lessons learned from that and other deals included:

• Acquisitons should follow strategy. "I've seen mistakes where acquisitions were the strategy," Wareham noted.
• Selling more to the same customer "drives incredible efficiencies."
• Don't overpay. "When you overpay," he said, "you start doing things you shouldn't do in order to reach accretion."
• Public investors are impatient with an absence of sales growth.
• Integration must be customized. "I've seen integration of companies take everywhere from one day to one and a half years," Wareham said.
• Sensitivity to management retention is important to outcomes. "You need people who are committed to your vision, to your industry, and are passionate about the vision of the company."