Vascular Solutions CEO’s reputation precedes him

Thomas Lee

Howard Root wants you to know that he’s not an angry man. Really.

Yes, the CEO of Vascular Solutions Inc. (NSDQ:VASC) sued another company for product defamation (Vascular won $3.5 million), tangled with local reporters (not me, at least not yet), and threatened not to develop any new products with Minnesota doctors if the state passed a disclosure bill (the legislation died).

And yes, he says what he thinks (Root was a debater at University of Minnesota law school).

“You get put into a position when you come across as hostile,” Root said. “People think I yell when I use the same tone because the point is sharp. A lot of people in medical devices think that. I do get beat up for it.”

But Vascular has emerged in recent years as a successful maker of peripheral and coronary artery devices precisely because Root has shied away from confrontation. Almost obliterated by head-to-head competition with St. Jude Medical Inc. (NYSE:STJ) in 2001, the company shifted gears and introduced multiple “small” products in niche markets largely ignored by the big medical device manufacturers.

Last month, Vascular said its first-quarter revenue jumped 15 percent, to an all-time high of $18.2 million, compared to $15.8 million during the same period last year. Excluding the $3.5 million from the defamation lawsuit, profits grew 35 percent, to $1.27 million. Gross profit margins across all products lines was a whopping 66.7 percent.

“The company has a nice, profitable strategy,” said Ernest Andberg, an equity analyst with Feltl & Co. in Minneapolis. Out of all the emerging medical device companies he covers, Andberg said, Vascular displays the most consistent growth and profitability.

The company closed May 6 at $10.10 a share, about 47 percent higher than at this point in 2009. Andberg even thinks investors are undervaluing Vascular by a dollar or two a share.

Armed with $22.4 million in cash, Vascular is now looking to expand through acquisitions: Earlier this week, it paid $5.75 million to acquire two ultrasound-guided needle products from from Escalon Vascular Access Inc., a division of Escalon Medical Corp. (NSDQ:ESMC).

That the Vascular of today is shopping for assets is remarkable when you consider the company was on the verge of extinction nearly a decade ago. Back then the firm, which went public in 2000, was selling only one product: The Duett, a sealing device that stopped bleeding of the femoral artery during surgery. A year later, St. Jude acquired similar technology from Tyco and quickly grabbed 85 percent market share.

Root said the company faced a critical decision.

“We were locked into a minority [market] position,” he said. “I got one shot to make it. I couldn’t wait until we had the money.”

So the company expanded its portfolio by developing many products in small markets, such as varicose veins, bio-based anti-clotting devices and a variety of catheters, micro-inducer kits, snares and specialty guidewires. Vascular also targeted doctors like pediatric interventional cardiologists, even though there are only 100 such physicians in the world, Root said.

“The big companies will not do it,” he said. “You don’t pick a fight with a bruiser the first day of school. Better yet, pick a place where you don’t get beat up.”

Last November, Vascular launched its GuideLiner catheters, designed to help surgeons with deep intubations during procedures to unclog coronary arteries. The company also hopes to fix its Acolysis ultrasound thrombolysis system, which uses low frequency, high energy ultrasound to remove blood clots. Vascular paid $2 million for the technology in 2002 but technical problems hobbled the product, which is not yet approved for use in the U.S.

Root said Vascular has reached a point where it needs acquisitions to boost growth.

“We’re great innovators on products that won’t make us a lot of money,” Root said. “We do have to step up on scale.”

Vascular is looking for $5 million, $10 million, $20 million deals to acquire “orphans” — market-ready products neglected by other companies that need better sales and marketing. One of Root’s proudest feats is building a dedicated sales force.

“Having a dedicated sales force is huge,” Root said. “We get most of our ideas from 80 sales reps making 2,000 calls a week than consulting with doctors. The direct sales force is the only way I can get direct access” to customers.

Feltl’s Andberg said the orphan strategy makes sense in the short term, as long as the company generates enough cash to finance the deals. Vascular could get tied down with lawsuits, especially intellectual property disputes, he said.

Andberg would also like to see a succession plan at Vascular, since so much of the company’s fortunes rest with its CEO and founder. That could be a challenge, giving Root’s outsized, polarizing personality.

“People either love working for me or hate working for me,” Root said.