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A Struggling David in a Goliath World

Gish Biomedical Woes Show Challenges of Small Firms in Fast-Changing Field

November 16, 2000|MARC BALLON | TIMES STAFF WRITER

For years, Gish Biomedical Inc. enjoyed a profitable niche in the burgeoning field of open-heart surgery.

As surgeons opened up one chest after another, stopping the heart to perform life-saving bypasses for patients, they used Gish's elongated tubes and other medical devices to keep the blood flowing and the patients alive.

But in the last couple of years, the Irvine company has struggled with profound changes in the way open-heart surgery is performed, as well as a slowdown in the number of open-heart surgeries.

Surgeons increasingly are opting for a surgical procedure in which the heart no longer needs to be stopped, leaving Gish pondering its future as sales of its core products shrink.

The company has lost $4.5 million over the last two years, cut staff and experienced repeated top-level upheavals. The stock has lost nearly half its value this year, slumping below $2 a share. The shares closed Wednesday at $1.78, up 6 cents, in Nasdaq trading.

Gish's plight illustrates the perils faced by small, conservative health-care businesses in this age of supercharged technological change.

Unlike Gish, bigger medical device makers have "the access to financial and intellectual capital needed to innovate and respond quickly," said Paul Gertler, director of the graduate program in health management at the Haas School of Business at UC Berkeley.

Medtronic Inc., for example, rolled out its Octopus instrument nearly two years ago when the new open-heart surgery method was gaining adherents, said Dan Pelak, a company vice president. The instrument, which stabilizes the heart during surgery, could generate sales of $40 million this year. That's barely a blip on the radar screen for Minneapolis-based Medtronic, which logs $5 billion in annual revenue, but it's more than double Gish's annual sales of $17.7 million.

"If you're going to be in our business and survive, you've got to continually obsolete yourself," Pelak said.

That's not to say tiny businesses can't survive or even flourish. But small companies wedded to yesterday's products face an uncertain future.

In Gish's case, the company derives more than half its revenue from devices used in the heart-bypass procedure that is losing favor. It has no products for the new procedure and won't introduce any for at least 18 months, said Gish clinical specialist Daryl Kirby.

Kirby questioned whether the newer surgical procedure will become as popular as expected, noting that it is more difficult to perform.

Chief Executive Kelly D. Scott said he's optimistic that Gish cardiac devices, along with those in such areas as orthopedic surgery and cancer treatments, can attract new customers.

The number of patients undergoing open-heart bypass surgery in the U.S has leveled off at slightly more than 350,000 annually since 1995, further clouding the company's future.

That figure is expected to decline in upcoming years because of better drugs and heart therapies, including the increased use of angioplasty balloons and stents to clear debris from obstructed arteries, said Thom Gunderson, senior medical technology analyst at US Bancorp Piper Jaffray.

Gish also is being hurt by changes in the way customers buy cardiac medical devices. Hospitals and purchasing groups increasingly favor bigger companies that can offer a wider array of products and sometimes better deals, said Jon Katz, editor of Medical Device & Diagnostic Industry magazine.

"This company is not well-positioned," said John Calcagnini, a medical analyst at CIBC World Markets in Los Angeles. "The trends are against it."

As sales slowed and the bottom line deteriorated, the company also faced turmoil in the corporate suite. In less than two years, the company has had three chief executives and has lost three directors.

Gish embarked on two rounds of layoffs in 1999 and now employs 179 workers, a reduction of more than 15% in the last 18 months. The company has announced plans to move into smaller quarters.

To try to turn things around, Gish has tapped industry veteran Scott, 44, who became chief executive in May.

Scott has 20 years' experience in the field, most recently as managing director of Sorin Biomedica Asia. His extensive international contacts could help the company drum up new business, former director Howard F. Bovers said.

Foreign markets account for about 20% of Gish's sales, and Europe and Asia are "ripe for growth," Scott said.

The key to the company's future will depend on new products and ideas, said former Chief Executive James R. Yarter, who clashed with board members before departing in March after only four months on the job.

"If they continue doing what they're doing now, they're just going to continue going down," Yarter warned.

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