Medical Device Link.

Originally Published MX May/June 2003

COVER STORY

Quinton Cardiology Systems president and COO John Hinson on growing a new company from deep roots.

Interview by Steve Halasey

Quinton Cardiology Systems (Bothell, WA) is no newcomer to the field of medical devices. Established 50 years ago when founder Wayne Quinton invented the first treadmill for cardiac stress testing, Quinton rapidly became a market leader in the emerging field of cardiovascular monitoring. Sold in turn to drug manufacturers A. H. Robins (1984) and American Home Products (1988), however, the company gradually lost its competitive edge and market advantage.

This all changed in 1998, when an investor group led by W. R. Hambrecht & Co. (San Francisco) bought the company. In the years since the buyout, Quinton has taken on a new management team, refocused its business on medical applications, and increased investment in R&D. The payoff has been a reinvigorated company with a will to recapture both technological leadership and market share in its fields of interest.

Since the end of 2000, the turnaround at Quinton has been led by the company's president and COO, John Hinson, an experienced hand at directing finance and operations at medical and technology companies. After completing his MBA in 1990, Hinson spent a short time in the banking industry and the computer sales division of Hewlett-Packard Co. before being hired as sales manager by insulin infusion pump developer MiniMed Inc. (Northridge, CA). Promoted to the role of interim chief financial officer, he played a key role in positioning the company for a successful $44 million initial public offering (IPO).

After a short stint as CFO of DeCrane Aircraft Holdings Inc. (El Segundo, CA), Hinson returned to the medical device industry in 1999 as CFO of Quinton. He was promoted to chief operating officer a year later, and became president in late 2000.

Seemingly swimming against the financial tide, Hinson led Quinton to becoming one of only seven medical technology companies to make an IPO during 2002. More calculated than risky, Quinton's move paid off in appreciated share prices during the course of 2002 (eroded since then by the general decline of the public markets) as well as profitability during the final quarter of the year.

In this excerpted interview with MX editor-in-chief Steve Halasey, Hinson discusses the strategic decisions that have gone into revitalizing his company, and the company's current outlook for future growth. The complete transcript of the interview can be accessed via the MX Web site at http://www.devicelink.com/mx.

MX: Quinton started in 1953, so it is far from being a brand-new company. Tell me about the first 30 years of the company's history.

John Hinson: Wayne Quinton, working with Dr. Robert Bruce of the University of Washington, developed a treadmill for medical stress testing. Prior to this invention, subjects jumped on boxes at different heights to elevate their heart rate, which was not the most scientific approach to stress testing. Quinton and Bruce developed a more clinically effective way to provide an elevated heart rate that was measurable, sustainable, and consistent. The Bruce protocol is still the most widely used stress protocol.

Wayne Quinton led the company for 30 years, expanding into various areas of diagnostic cardiology. In 1984 he sold it to A. H. Robins Co., which was merged into American Home Products Corp. (AHP; now Wyeth, Madison, NJ) around 1989. AHP owned the company until the 1998 buyout by W. R. Hambrecht & Co. (San Francisco).

How did the buyout by Hambrecht come about?

American Home Products is a multibillion-dollar holding company with hundreds of operating companies. As sometimes happens with marriages of companies in the healthcare sector—particularly between pharmaceutical and medical device companies—AHP made a strategic shift in 1996 or 1997. From that point they began to divest their medical device subsidiaries. Quinton was one of those holdings. An investment banking group was hired to market the company to potential investors, and W. R. Hambrecht put in the winning bid.

Looking at the long history of the company, Hambrecht certainly could see the potential there. In your view, what did Hambrecht feel needed to be done to bring Quinton back to market leadership?

A couple things were important. Clearly we needed to reclaim the entrepreneurial spirit of Wayne Quinton and address the evolving clinical needs of the cardiology community. Doing that would require restructuring the business so that it would be viable, bringing in a new management team to lead the process, and, perhaps most importantly, revitalizing the product development engine in the core areas where the company had been historically successful.

What management team did Hambrecht put in place? Were you part of it?

Over a few years it was a pretty complete change in the senior group. I joined the company in March 1999 as CFO, became COO a year later, and then became president in late 2000. My background is primarily finance and operations at medical and technology companies. Our chairman and CEO, Rudi Naumann, joined us shortly after I became COO. He was previously chairman and CEO at OEC Medical Systems. Mike Matysik, our CFO, came to us just prior to our IPO, and brought strong technology company experience.

Starting the Development Engine

Coming into the company, they must have felt there was a strong opportunity to get something done. What things did the team decide to tackle first after the buyout?

The first thing we needed to do was get the development engine going. The strategic decision we made was to revamp the entire product line with dramatic changes rather than incremental improvements. We saw the opportunity to develop PC-based technologies, and we recognized that Quinton's older, purpose-built products did not give us a suitable go-forward, sustainable product platform. It was simply too fragmented. We decided our best move was to replace our existing systems with PCs that, through software functionality, could become medical devices.

The other thing we needed to do was focus our business model. In the operations area, we distributed other companies' products and performed only minimal assembly in others. We also had multiple service and sales organizations. What we needed was one sustainable model. We decided to focus on our core technologies in diagnostic cardiology, streamline our service and sales organizations, and divest some noncore areas like fitness and imaging where we had no sustainable long-term business advantage.

Did the new PC-based technology take you into areas of telemetry and software development that Quinton and maybe others in the industry had not entered before?

We felt that our calling card needed to be unique. Not by simply making things software based—a lot of people make PC-based medical devices in our space—but making them extremely easy to use. We do this by modeling the user interface on the actual work flow of the clinical environment.

What a lot of companies have done when they have moved to PC-based technology is to take their old way of designing purpose-built devices, and then work back toward a PC-based user interface to build a clinical application. We start from the opposite end: we look at the user interface and at how users perform tasks in the clinical environment. We could take this approach because we were turning over the entire product portfolio. It has a dramatic impact on the way our products look and feel to our customers.

R&D Emphasis

So one of the first things you had to do was increase your investment in R&D. What was that increase in the first couple of years?

To accelerate our new product effort, we increased our spending on development dramatically. Where the typical run rate for companies in diagnostic cardiology might be in the 5 to 6% range of revenues, we spent double that. About 12% of our revenues went toward R&D over the first three years after the leveraged buyout.

Quinton had four product launches in 2001 and eight in 2002. What strategy determined what was launched first, and how has that product line developed as a result of the investment?

We went back to our roots in planning the initial launch strategy. We needed to reclaim leadership within cardiac stress testing because that was the origin of the company; we needed to have a competitive product there. So our strategy focused on first launching a cardiac stress product to regain market share where we had traditionally been successful, and then launching the cardiac rehabilitation line that is our other leading franchise, in order to assert leadership in that area as well.

Meanwhile, we had been making incremental changes in our cardiac catheterization technology. After we finished the first two launches, we made a concerted effort to move our Q-Cath system to the Windows environment and update it to have the same look and feel and ease of use that characterize the cardiac stress and cardiac rehab offerings.

You hold significant market leadership in cardiac rehab. Are you seeing improved market share in the other areas?

We are. We've been rewarded with a market-leading stress product, and we've dramatically reasserted our position in cardiac rehab. Cardiac stress and cardiac rehab have been the chief drivers of our revenue growth to date, but we just released the Q-Cath a few weeks ago. We anticipate that it will increase our revenues further and reassert our market position in that area as well.

A Good IPO in Bad Times

You decided to go IPO in 2002. What was your thinking going into making that decision?

Going public had always been part of the strategy. During the first couple of years we had turned the product portfolio and felt we had that process under control. We could use that to begin growing again and return to profitability. The thought process behind the IPO was that it was a means to accelerate our strategic plan.

We had not obtained any additional investor money since the 1998 leveraged buyout, and we had paid off all but a few million dollars of the buyout debt by 2002. So the IPO was not because we needed cash—we had even generated cash during 2001. We simply wanted to increase our possibilities by adding an acquisitions component to our organic growth strategy.

Did it help that the company's focus is cardiology? Companies in other sectors would not have considered an IPO in an absolutely horrible market, but cardiology has such a strong base right now.

Advances in treatment in areas such as stents, implantable cardiac defibrillators, drugs, and other innovations all need a front end, if you will, to qualify people for these therapies. Diagnostic cardiology is that front end, and as the population ages it will continue to expand. Diagnostic cardiology is already a large, established market; but it also has growth possibilities, particularly in the areas of telemetry and connectivity.

Another thing that was helpful was having a management team with experience in publicly held companies and the medical device sector —people who had managed restructurings, expansion, and growth, and had delivered shareholder value in previous turnarounds.

Finally, we were a different kind of public offering. People had lost a lot of money on fashionable offerings during the previous three years. So, the fact that Quinton came out with a very solid business proposition—an established distribution method, established brand recognition, an experienced management team, and a model that included 40% recurring revenues through service and consumables—strongly suggested that the company would be successful over the long term. I think that was appealing to investors.

When was your investment banker, Adams, Harkness & Hill (AHH; Boston) selected, and how did your conversations with them go leading up to the IPO?

We met with several investment banks during the latter half of 2001. AHH impressed us because several team members were medical doctors by training, as well as investment bankers. They clearly understood not only our value proposition, but our technology as well. We felt that was going to be very helpful for communicating our story to the world. So that was the primary reason we felt very comfortable with them.

We also thought that a smaller, more focused investment bank would work very hard to make our offering successful, despite its being smaller than some of the IPOs of 2002 and the years before. We thought they would be dedicated to its success and would work diligently for us. They delivered on all accounts.

Growth through Acquisition

Much of the investment received from the IPO went toward the acquisition of Burdick at the end of 2002. How did that come about?

Acquisitions were always a component of our original strategic plan. Burdick was attractive to us for a variety of reasons. It rounded out our technology portfolio. It gave us access to an alternate distribution channel into the doctor's office. And we thought it held unrealized opportunity.

While Burdick was a subsidiary of Spacelabs, it seemed unlikely we would have the opportunity to combine the two companies, as we were private and it was not a stand-alone company. Then Instrumentarium bought Spacelabs, determined that Burdick was not central to its business plan, and decided to spin it off. That strategic decision, combined with the fact that Quinton had gone public and we had some cash, gave us the opportunity during the summer of 2002 to start serious negotiations. We announced the transaction a few months later, on December 23.

With such a quick timetable, how were you able to perform significant due diligence?

It was helpful that Burdick was essentially in our same business, diagnostic cardiology, and had very similar product offerings. That enabled us to get up to speed quickly in understanding how we could make the combined company successful. We also dedicated a substantial portion of the management team to it. We put in the time, effort, and analysis necessary to make sure the acquisition would be worthwhile and valuable.

How do you see the pattern of R&D investment changing for the two entities?

The acquisition will allow us to optimize our technology portfolio. We can eliminate some product duplication and distribute some technology jointly. With the strong assets we now have in both locations, we can accelerate some projects, putting us ahead of where we'd be without the Burdick skills. It should be a net positive both for the company and our customers.

A Look Ahead

How do you see the marketplace for the technology developing over the next five years or so?

There will be increasing need for connectivity within these applications. We need the ability not only to do signal acquisition around the ECG waveform but to disseminate that information and help manage the data we create for our customers. I also see more of the devices becoming PC based and taking the form of a software kit. That already exists to a large extent in the Holter market, and will migrate to other areas.

Wireless applications should become even more prevalent. These capabilities will all come to be expected as part of the product portfolio because of productivity demands at the clinician level. We intend to be in a position to support these trends.

Could these be potential areas for advanced R&D spending?

I think so. We are looking at a whole host of things in areas related to and extended from our diagnostic cardiology base. Some of these will make sense in terms of alliance partnerships, some in terms of internal development efforts, and some in terms of acquisition possibilities.

So acquisition is still in the game plan?

Definitely. Our acquisition of Burdick is the first step in an effort to become the global leader in diagnostic cardiology. Obviously, we are going to drive a lot of our revenue growth organically through new product development and internationalizing the business, and by increasing our share of the connectivity portion of the market. But both alliances and acquisitions are core parts of our strategy. Given the nature of the industry and the number of competitors that exist, that is clearly a cost-effective way to extend a franchise.

What is the product development outlook for 2003?

We are providing enhancements in each of our five franchises: resting ECG, cardiac stress, Holter monitoring, cardiac catheterization, and cardiac rehabilitation. As in 2001 and 2002, we intend to launch new products or enhancements in each of these franchise areas. Already this year we have launched the Quinton Q-Cath version 5.0 and, under the Burdick brand name, a new electrocardiograph, the Atria 3000.

Product development will continue to be our focus for the next couple of years as we continue to grow and expand this business. We think we have an excellent opportunity to significantly influence the way healthcare is delivered, through the execution of our product strategy, the opening up of our architecture, and our connectivity to other healthcare technology players.

Copyright ©2003 MX