Richard Packer probably doesn’t get confused for Konosuke Matsushita very often (first off, Packer’s a lot taller), but listening to the CEO of Zoll Medical Corp. speak about his vision for the company can conjure images of the legendary founder of Panasonic and his 250-year business plan.
Packer, 52, doesn’t have anything close to a quarter-of-a-millennium blueprint for the Chelmsford, Mass.-based maker of resuscitation products, but he’s certainly looking at the big picture. In his ten years in the Zoll corner office, Packer has guided the company on a deliberate and methodical transformation that is just now starting to pay off. Through targeted acquisitions and a little patience, the company has transformed itself from a major competitor in the defibrillation market to carving out a new niche in what Packer calls the $3 billion resuscitation market.
MassDevice: Let’s talk about the big picture for a moment. You recently signed a letter written by MassMEDIC president Tom Sommer asking the Senate to consider eliminating a proposed tax on medical devices and diagnostics. How big an impact would that sort of tax have on a company like Zoll, from a nuts-and-bolts perspective?
Rick Packer: It all depends on the details, but you can look at that as 3 percent of revenue. So if we applied that tax to Zoll, I would say our fair share is $12 million. To put that into perspective, we’ll probably make $8 million this year.
On the surface, it makes no sense for companies like ours. Maybe it makes sense for some medical device companies that are hugely profitable, but if you look at most [device] companies, they aren’t like that. We’re not pharmaceutical companies. Our level of profitability doesn’t approach that level and that’s because the market for devices is much, much smaller, so you can only be so big, and so efficient and so profitable. I think they pick these numbers out of the air — they don’t tie them to the reality of the industry and certainly the numbers for Zoll aren’t right. Even if I thought it was the right way, morally and ethically, to pay for the reforms, it would be taking a company like Zoll to a loss position in order for us to pay our fair share. It makes no sense.
MassDevice: Is the healthcare debate in Washington hurting the medical device industry?
RP: I think the debate itself hurts the industry, because when things are uncertain people get conservative, they stop moving forward. They don’t make investments. So I’m looking forward to getting this grand argument settled one way or the other. When it is settled it will be good, at least for my business and the industry, because our customers will know what they’re dealing with and they’ll begin planning for that, and they’ll begin moving forward and adopting new technologies, whatever those are. So I’m looking forward to this getting settled. We’ve had plenty of time for debating, now let’s get on with it.
{IMAGELEFT:http://www.massdevice.com/sites/default/wp-content/uploads/headshots/Packer_Rick_100x100.jpg}But I’m very disappointed in the substance of the discussion. We’re playing around the edges of true healthcare reform. It is typical politics. Our politicians are telling us that we can have it all, we can cover everyone, we can have health insurance portability and we can reduce costs and still save Medicare. That’s not going to happen with the proposals on the table today. I’m very disappointed about where our political leaders are leading us on all sides of the aisle. We’re about to enact something that will balloon the deficit and that’s their escape hatch, because ultimately we’ll just bury it into the deficit and it’ll be something that has to be dealt with by some other administration 10 years down the line.
MassDevice: Let’s talk about your company. We’ve heard Zoll referred to as a resuscitation company, which is a little different from what we’ve known Zoll to be, a company that makes defibrillation products. Can you tell us the difference between the two labels and how this positioning will set Zoll apart in the future?
RP: If you’ve ever taken a CPR class they will have what is called the ‘chain of survival,’ which is the things you need to do in order to bring a person back from cardiac arrest. The first thing you need to do is recognize that [cardiac arrest] is what their problem is and that’s why they fell down. Then you need to call 911, and then, typically, you have to do some CPR and some defibrillation. That’s when the ambulance comes and the paramedics arrive with all the good drugs and supplies and hopefully they can save the person’s life. So that’s the chain of events.
Defibrillation has always been seen as the key link in that chain, but it turns out that [defibrillation] is necessary but it’s not sufficient. If you’re really going to get high resuscitation rates you need to look at that chain truly as a chain. It turns out that the chain is a little more complicated than the [American Heart Assn.]’s simplistic way of thinking about it. There are things you really ought to be doing in advance and there are things you have to do after you’ve got the heartbeat back, if you want to get a patient out of the hospital and back to being a productive member of society.
A number of years ago, as Zoll was climbing the ladder in terms of market share in the defibrillation industry, two things happened. Number one, we recognized that at some point we’d be so big in defibrillation that we wouldn’t be able to grow as fast as we would like, because we would be too big a part of that market. Second, we recognized from the statistics and science that even though we were putting a lot of defibrillators out in the world, generally we weren’t moving the rate of survival very much, very quickly. The science was saying you needed to do these other things equally as well as defibrillation in order to succeed.
We embarked on that mission back in the early 1990’s. We started making investments and bringing technologies into Zoll. By their nature, all of these things are startup technologies that need market development. We built a unique portfolio within Zoll that none of our competitors are even close to. These are technologies that deal with the chain of survival, everything from early intervention, to notification, to CPR and defibrillation. The latest thing we’ve added is technology for post-resuscitation care, which is therapeutic hypothermia so that you can get that heartbeat out of the hospital and get those good neurological outcomes, and we’ve tied that all together with best data system in the industry so that you can really see what you’ve done and what the effect is.
MassDevice: So these moves set Zoll apart because, in essence, they put you on a larger playing field with less direct competition?
RP: Correct. If you look at the potential for all of the stuff we have, it’s probably a $3 billion market potential. If you look at what’s actually being sold today, it’s about $1.4 billion, so a lot of it is potential. What’s being sold is dominated by the defibrillators, so here at Zoll where we’ll do roughly $380 million this year, $300 million of that is going to be defibrillators and $80 million is this other part of the resuscitation story; [those businesses] are growing much faster. The growth rate of that aspect of our company will be about 35 percent this year in a crummy economic environment, so obviously these things are starting to have an effect on the company, but those other bigger numbers are still in the future,
MassDevice: The company started this movement almost 13 years ago and you’re just now starting to see some return on it?
{IMAGELEFT:http://www.massdevice.com/sites/default/wp-content/uploads/featureArt/Packer_Rick_200x200.jpg}RP: Nothing moves quickly in the world of resuscitation. Here at Zoll we say you need to be built for the long term to succeed in resuscitation. It’s a very slow-moving science. It’s very hard to do clinical work, just the nature of how cardiac arrest comes about and your ability to get to that cardiac arrest to apply any science is very difficult. So the rate of adoption of technology is very slow, when you’re dealing with all of these situations that are life-or-death. People are highly conservative about doing something different, lest they take a step back. So we call it a bit of a grinding business, there’s not a bunch of waves we get to surf in the resuscitation business. It’s more grinding, month after month and year after year. We’re either building our company by market share or building these markets.
MassDevice: What would you say your market share is, in terms of the resuscitation industry? Are you the market leader?
RP: If you took all the technologies I just described we would be the market leader, because our two big competitors, Philips Medical and their defibrillation division and Physio-Control, which is a division of Medtronic, neither have automated CPR, they don’t have an early intervention product like the LifeVest, they don’t have a data business to tie it all together. We’re number two in the world of defibrillation, but if you put everything together we’d be number one.
MassDevice: So who is number one in the defibrillation market?
RP: It’s still Physio-Control. When I started with Zoll [in 1992], they were a virtual monopoly in this business. They totally dominated the hospital market. They dominated the ambulance market and HP, which over a few acquisitions became Phillips, was always number two in the industry. Over time, Zoll, which started from scratch in the mid-1990’s, when we got into this market, we are now number one in the hospital market in the United States. We’re a close second to Physio-Control in the ambulance market here in the U.S. Internationally, Physio-Control has quite a lead on us, but they’ve had quite a head start and we’re starting to catch up there as well.
MassDevice: In general, how do you attack such a market, that’s dominated by one big player?
RP: Well, there’s an actually an advantage to it because it crystalizes your thinking. You have a very clear person to beat and you also know that if you take a misstep they’re going to squash you. So it makes for clear thinking.
Early on in the life of this company we decided that we’d build Zoll on two pillars: One, because Dr. Zoll was the soul of the company, we recognized that ‘me too’ products were not going to do it. We decided we had to have clinically differentiated products. None of the stuff we have is a silver bullet; it’s all improving on an existing technology, but combined it makes for better products and we’ve always had better products.
The second thing we did was deciding that the only way to compete with Physio-Control and their dominance was to have our own direct sales force, which in the old days was a huge endeavor, very expensive and inhibited our profitability for many years. But having passionate salespeople that understood our differentiated technology very well was key to our long-term success against Physio-Control. Many bigger companies have taken Physio-Control on over the years, but none of them have focused on it like Zoll has, and each of them has fallen by the wayside. Nobody was ever been able to make a dent in them until Zoll came along. So it’s really about having a differentiated product and coupling that with people that are passionate about this business.
MassDevice: Zoll is in an interesting position, because while some are cutting back, you’re in the midst of nearly doubling your sales force. What have you had to do to get your company ready for this influx of new talent? Has the economic climate changed the way you hire? Are you seeing a lot of good talent out there?
RP: I wouldn’t say that adding to our sales force has changed anything, really. We spend more time recruiting and perhaps a little less time managing, from a sales management perspective. We’re still looking for the same kinds of people and they’re still tough to come by. This is a business that’s a little bit different; it’s somewhere between the diagnostics world and the therapeutic world. It has different elements. It’s not usually a fast-growing business, a lot of concept selling. It’s hard work. The people that are successful in this business get this I’m-gonna-bring-somebody-back-to-life thing in their blood, and probably the most important thing we look for is people that have passion in their life and can channel that passion into this business. There’s nothing glamorous about what we’re doing. We’re just doing more of it than we’ve ever done.
MassDevice: So even though there’s more candidates, it’s still tough to find the right fit?
RP: It hasn’t been easy, it’s not like companies are shedding a bunch of great people who are desperate to work for Zoll. We have not seen that effect. It’s work for us to go find the right good people and get them up to speed.
MassDevice: Speaking of the environment, it’s been a buyers market out there for companies with cash. How aggressive have you been in terms of seeking out bargains on the M&A market?
RP: I don’t think we’re aggressive in seeking out bargains because we have a set focus. We’re interested in building out the resuscitation platform and by its nature that means there is a limited number of options. Whether the market is strong or weak, or whether those companies were expensive or inexpensive, there would still only be a small number of entities that we’d be interested in. This is not a case where, given the environment, I’ve told my guys, “Go out and look harder to find some great things, because there are opportunities out there.” We know who these companies are and we’re the leading company, so people come to us.
It’s more of a matter of being able to pick and choose the companies that are of interest to us. And it’s more a matter of the timing of where they are in the development cycle, ideally where some of the risk is behind them and we’re now ready to take on the market development risk.
MassDevice: Is that were deals like the recent Alsius acquisition fit into the puzzle? How long was that in the works for before Zoll pulled the trigger?
RP: We acquired our first property in temperature control in a company called Radiant, which was a failed venture-backed company that I had been following for a year before it failed and that moved rather quickly. From the day we acquired that company we were talking with Alsius and it was a year-and-a half later that we acquired the company.
{IMAGELEFT:http://www.massdevice.com/sites/default/wp-content/uploads/featureArt/LifeVest_200x200.jpg}MassDevice: In our last interview, you said the LifeVest had the potential to be bigger than all of Zoll currently is. What does the future of Zoll Medical look like?
RP: It looks pretty bright. I’m more excited about Zoll than at any time since I’ve been here, even though and our capital business is going to be down this year. Even in the face of that, I’m excited about what’s happening. I know capital will come back; the question is, ‘How big will these other things be?’
What will happen to Zoll over the next few years is that the capital spending for core defibrillators will bounce back. There is a lot of product out in the field that’s overdue and will need to come back. We’re well positioned to continue to take market share in that space, and in the next five years I think we will pass Physio-Control in defibrillation to become number one. And around that time, those other resuscitation devices we talked about will grow, and in four or five years half of our business will be defibrillation and half will be those other things. If you look a decade out, it will look like a chain of survival company with defibrillation being one element of our company and not the dominant element within our company.
MassDevice: Another big picture question: Fundamentally, how do you see the health of the medical devices industry today? How are the vital signs?
RP: I think generally the industry is healthy. There’s an awful lot of innovation. I think we have to be careful to have one eye on the cost-effectiveness of what we’re doing. I think the days of, “It doesn’t matter how much it costs, as long as it saves a life or helps someone live an incremental year” may be starting to wane, just because of the cost of healthcare. I think it’s inevitable over the next decade that people are going to be much more interested in the cost-effectiveness of the products we put out.
I don’t think that’s a huge problem for our industry, because with focused effort the things we’re putting out can usually be shown to be cost-effective. But I think we’re well-positioned as an industry and when we look back 10 years, we’ll be shaking our heads and saying, “Wow, we’re making huge differences in the states of disease.”
MassDevice: This has been an unprecedented year in terms of upheaval, from the economic crisis to the ongoing healthcare reform issues in Washington. What’s the takeaway been for you as the CEO of a major healthcare company?
RP: In many ways it’s reinforced what we do on an every-day basis. We try to pride ourselves on consistency, stability, dependability. We’re a grinding company, not a surfing company. We don’t change management structures. We invest in markets that are going to take years to develop. We had a very distinct choice to make, going into a very difficult economic period, about slashing back and pulling back on the investments that we know will make a difference to our company, or bulling on through and taking our lumps. We chose to bull on through, not to say we didn’t say, “Let’s do what we can to lighten the load and spend wisely where we can through attrition,” but we decided not to sacrifice the future for some short-term gain.
So we stuck to our plan and if you look at our execution this year, it’s pretty much what we said we were going to do, with some adjustments, and as we come out of this period, if capital spending is going to come back, and if [Federal Reserve chairman] Ben Bernanke is right and the recession is over, we’ll come out of this period moving forward with the LifeVest, having acquired the best temperature management property on the market in Alsius, keeping our sales forces intact so we don’t have to go rebuild all that when the market begins to turn.
And we contrast very starkly with the approach of companies in our industry that have pared back mightily during this period and are now faced with rebuilding all those investments that they left behind. For us, it’s a lesson that our business model holds up and that consistency and reliability mean something.