ALARIS Medical Systems,
Inc. (ALARIS Medical Systems or ALARIS) was formed by the merger of two
pioneers in infusion systems, IMED Corporation (then an ALARIS Medical, Inc.
subsidiary) and IVAC Medical Systems, Inc. on November 26, 1996
ALARIS Medical Systems, a wholly-owned subsidiary of
ALARIS Medical, Inc. (ALARIS Medical or Holdings), formerly Advanced
Medical, Inc., was incorporated on October 14, 1994 under the laws of the State
ALARIS Medical Systems and its
subsidiaries are collectively referred to as the Company, we, our and
We develop and provide practical solutions for Medication Safety at the Point of Care
We design, manufacture and market
intravenous (IV) medication delivery and infusion therapy devices, needle-free
disposables and related monitoring equipment in the United States and
internationally. Our proprietary
Guardrails safety software, our other smart technologies and our smart
services help to reduce the risks and costs of medication errors, help to
safeguard patients and clinicians and also gather and record clinical
information for review, analysis and transcription. Our intravenous infusion systems are used to deliver to patients
one or more fluids, primarily pharmaceuticals or nutritionals, and consist of
medication safety systems, single and multichannel large volume infusion
pumps, syringe pumps and dedicated and non-dedicated disposable administration
We have one
of the largest installed bases of large volume pump delivery lines in the
United States hospital market, representing approximately 32% of such installed
lines. We also believe that we have the
number one or number two market position in the large volume pump segment or
the syringe pump segment, or both segments, in Belgium, France, Italy, The
Netherlands, Norway, Spain, Sweden, the United Kingdom, Australia, Canada, New
Zealand and South Africa. In addition,
we are a leading provider of patient monitoring products that measure and
monitor temperature, with a substantial installed base of hospital thermometry
systems in the United States. We also
provide products which measure and monitor pulse, pulse oximetry and blood
pressure. We sell our products
primarily to the hospital market through a worldwide direct sales force of over
200 salespersons and more than 100 distributors to over 5,000 hospitals in more
than 120 countries worldwide. For the
year ended December 31, 2002, we had total sales of $460.3 million and net
income of $20.4 million.
intravenous infusion systems require the use of disposable administration sets,
which represent a significant portion of our sales. For the year ended December 31, 2002, we sold 112.4 million
disposable administration sets, representing sales of $281.0 million, or
61.1% of total sales. In North America,
each of our current large volume infusion pumps uses only dedicated disposable
administration sets, which consist of plastic tubing and pump interfaces,
designed and manufactured by or for us for that particular pump.
We generate a
recurring revenue stream from sales of our higher margin, dedicated, as well as
non-dedicated, disposable administration sets and components to customers using
our systems. Many of our disposable
administration sets feature our proprietary SmartSite Needle-Free System, which
is designed to reduce caregiver risks associated with accidental needlesticks.
through two geographical business units:
Our North American business unit
develops, manufactures and provides medication safety systems, infusion therapy
devices, patient vital signs monitoring products and related disposables,
primarily using a direct sales force for product distribution. Sales to North American customers generated
$317.7 million (69.0% of total sales) and $40.2 million of Income
from Operations (55.0% of total Income from Operations) for the year ended
December 31, 2002.
business unit develops, manufactures and provides infusion therapy devices,
patient vital signs
products and related disposables in Europe, Asia, the Middle East, Australia,
New Zealand, South Africa and Latin America using both a direct sales force and
product distributors in areas where we do not have a direct sales force. Sales to distributors accounted for 16.8% of
International sales in 2002. Sales to
International customers generated $142.6 million (31.0% of total sales)
and $32.9 million of
Income from Operations
(45.0% of total
Income from Operations
) for the year ended December 31, 2002.
therapy generally involves the delivery of one or more fluids, primarily
pharmaceuticals or nutritionals, to a patient through an infusion line inserted
into the circulatory system. Infusion
systems are differentiated based on a number of characteristics including size,
weight, number of delivery channels, programmability, and mechanism of
infusion, cost and equipment service.
Recently, embedded software that helps prevent medication errors has
systems sold in the markets in which we compete consist of single and multichannel
infusion pumps and disposable administration sets. Large volume pumps are volumetric devices that regulate flow by
electronically measuring a specific volume of a fluid. These pumps administer precise,
volumetrically measured quantities of fluids over a wide range of infusion
rates by using positive pressure to overcome the resistance of the infusion
tubing and the back pressure generated by the patient
s circulatory system. Syringe pumps operate by gradually
depressing the plunger on a standard disposable syringe, thereby delivering a
more concentrated dose of medication at a very precise rate of accuracy. Disposable pumps are single use products
designed for use primarily in alternate-site settings. Disposable administration sets act as the
interface between the pump and the patient.
They consist of plastic tubing and pump interfaces and are either
dedicated (designed and manufactured for use only with a particular pump) or
non-dedicated (usable with various pumps of one or more manufacturers), or for
IV procedures when pumps are not used.
addressable worldwide infusion therapy market is estimated to exceed
$1 billion annually, approximately $600 million of which represents
the current U.S. market. The U.S.
hospital market consists of over 5,000 hospitals with a total of over 950,000
beds. Within this market, cost
containment measures imposed and proposed by federal and state regulators and
private payers, combined with increased utilization review and case management,
have led to greater financial pressure on hospitals. In response to these cost-containment pressures, most hospitals
in the United States participate in group purchasing organizations (GPOs). GPOs typically enter into exclusive purchase
commitments with one or two providers of infusion systems and/or patient
monitoring products for a three to seven year term. We have long-term contracts with most major GPOs in the United
States. In addition, we have long-term
supply contracts with the U.S.
ederal government and other U.S. governmental
entities. Nearly 80% of our U.S. sales
are covered by such GPO and government contracts. The existence of GPOs limits the pricing flexibility of manufacturers
of medical products, including ALARIS.
alternate-site market encompasses all healthcare provided outside the hospital
and comprises primarily home healthcare, freestanding clinics, skilled nursing
facilities and long-term care facilities.
Growth in this market is primarily attributable to advances in
technology that have facilitated the provision of care outside of the hospital,
an increased number of illnesses and diseases considered to be treatable with
home infusion therapy and increased acceptance by the medical community of, and
patient preference for, non-hospital treatment.
International infusion systems market is much more regionalized and fragmented
than the U.S. market. We believe that
the International infusion therapy market, which includes infusion pumps,
controllers and disposable intravenous sets, is in excess of $500 million
annually. Unlike the U.S. market,
syringe pumps represent a significant share of total infusion pump placements
in the International market. We expect
the trend toward utilization of syringe pumps to continue internationally as
hospitals favor the use of syringe pumps for administering pharmaceuticals and
nutritionals to patients in higher concentrations and the associated lower
cost. The majority of revenues in the
International market are derived from hospitals, while the alternate-site
market is in a developmental stage.
Over the past
several years, the healthcare community, particularly in the U.S., has
increasingly focused on patient and caregiver safety involving intravenous
therapy and use of needles in hospitals.
Since the release of the Institute of Medicine Report in 1999 stating
that more than 50,000 people die annually in the United States from medical
errors, there has been a growing emphasis on preventing errors
the delivery of healthcare. A large percentage of the most costly
medical errors in the United States are medication errors related to powerful
drugs that are delivered, or infused, directly into a patient
A study published in 2002 in the Archives of Internal Medicine entitled,
Observed in 36 Health Care Facilities,
found that medication errors occur in nearly 1 of every 5
doses given to patients in the typical U.S. hospital.
As treatment regimens have become more complex and as
the critically ill constitute an increasing percentage of hospital patients,
the average hospital patient now requires a greater number of intravenous lines
and more potent therapeutics, thereby creating a greater need for
technologicallyadvanced infusion systems. As the reliance on intravenous therapy and the potency of the
drugs administered have increased in recent years, the need for precise
administration and monitoring of intravenous fluids has risen significantly and
the incidence of costly intravenous medication errors has become a significant
concern. According to a 1995
of American Medical Association
article, 51.4% of hospital
medication errors are administration errors.
In addition, research by David M. Bates, M.D. of Brigham and Womens
Hospital in Boston, Massachusetts, has shown that a significant portion of
preventable hospital medication errors that cause harm are associated with
intravenous administration of drugs.
errors at the point of administration is the most immediately available,
cost-effective solution to reducing harm from medication errors. We have pioneered the first and most
comprehensive solution to dramatically reduce IV medication errors with our
proprietary IV-infusion safety net, the Guardrails safety software. The Guardrails safety software helps protect
patients from infusion programming errors by allowing hospitals to configure
care-specific profiles with pre-defined drug dose limits and other parameters
to meet the particular needs of multiple patient care areas within the
to concerns about intravenous medication errors, there is increasing pressure
by regulatory agencies in the United States, such as the Occupational Safety
and Health Administration, or OSHA, and the United States Food and Drug
Administration, or FDA, as well as some states, for more stringent control of
needles in hospitals to reduce the risk to healthcare workers and patients
associated with the transmission of bloodborne diseases. OSHA requires hospitals to put in place
systems to reduce the potential for accidental needlesticks and the FDA
recommends using needle-free systems or protected needle systems to replace
hypodermic needles for accessing intravenous lines. Health care workers suffer from an estimated 590,000 needlestick
injuries each year resulting in 35 U.S. workers per
year contracting HIV and an additional
2,400 infected with the hepatitis B and C annually. Federal OSHA data suggests the cost of needlestick treatment to
be $1.3 billion to $2.3 billion, according to the Service Employees
International Union (1998).
Needlestick Safety and Prevention Act
is intended to increase protection for
health care workers against needlestick injuries by requiring that health care
facilities implement the use of
safer medical devices
to minimize accidental needlesticks. The legislation requires that frontline
workers be involved in the evaluation, selection and implementation of new safety
devices. Our SmartSite Needle-Free
System has a proven track record among clinicians and health care workers, with
over 1,330 acute care hospitals nationwide utilizing the SmartSite Needle-Free
technology, which helps protect against risks associated with accidental
We also offer
disposable administration sets with safety features designed to prevent the
unregulated flow of fluids into a patient
s blood stream.
monitoring instruments are used to measure temperature, pulse, blood pressure,
and other vital signs. Instruments sold
in this market have varying levels of technological sophistication and are used
in a variety of diagnostic and healthcare settings.
patient monitoring products compete in discrete market niches, each with
different competitive dynamics. We
operate primarily in two patient monitoring products markets:
hospital thermometry systems and standalone,
Products and Services
We manufacture and market medication safety systems, single
and multi-channel infusion pumps and dedicated and non-dedicated disposable
administration sets, many of which feature our proprietary SmartSite
Needle-Free System, for use with infusion applications. Our Medley Medication Safety System, with
its proprietary Guardrails safety software, represents the next generation of
medication safety technology at the
point of care. This system permits
integration of administration, monitoring and clinical best practice guidelines
from a single platform. Our infusion
pumps include large volume infusion pumps such as the Gemini series, Signature
Edition Family, MedSystem III, Asena GW, and syringe infusion pumps such as
P1000, P3000, PCAM, P6000, P7000 and Asena GS, GH and CC, which are sold
primarily in Western Europe, and disposable pumps such as the ReadyMED for use
in the alternate-site setting. Our
large volume infusion pumps usually require the use of higher margin dedicated
disposable administration sets. We also
sell non-dedicated disposable administration sets, including several needleless
devices, for use in many infusion applications. We also manufacture and market hospital thermometry instruments
and related disposable probe covers, and stand-alone, non-invasive,
multi-parameter instruments which measure and monitor a combination of
temperature, pulse and blood pressure and other vital signs. Aside from our extensive range of medication
safety and IV pump products and systems, we offer a comprehensive group of
and programs, including hardware and software technical services, clinical
education, implementation services, pharmacy facilitation of database
development and software maintenance programs.
offer a wide variety of infusion systems designed to meet the varying price and
technological requirements of our diverse worldwide customer base. For the year ended December 31, 2002, our
infusion systems sales (pumps, software licenses and disposable administration
sets) were $404.9 million, representing 88.0% of total sales. Of this amount, infusion pumps (including
related software licenses) and disposables accounted for $123.9 million
and $281.0 million of total sales during that period, respectively. Disposable administration sets for 2002 for
the North America and International business units were $197.3 million and
$83.7 million, respectively.
Our infusion systems include the
The Medley Medication Safety System, a
computer at the point of care.
Several years ago,
we and our customers identified the need for an integrated technology platform
that could redefine the accuracy and safety of drug infusion instruments, while
simultaneously improving documentation and capital asset utilization. We responded with the Medley System, the
first patient care system of its kind approved for use in the United
States. The Medley System is a modular medical
technology platform that utilizes a point-of-care computer to integrate infusion,
patient monitoring and an institution
s clinical best practice guidelines to achieve optimal
outcomes. We shipped the first Medley
System in May 2001 and we implemented full market release in January 2002.
System offers several key advantages over traditional infusion instruments:
The Guardrails safety software
is designed for the prevention of IV
medication errors. In effect, the
Guardrails safety software provides an automatic safety net for infusion
programming at the critical point of IV infusion delivery to the patient. The Guardrails safety software functions in
intravenous infusion devices as a
that performs a
test of reasonableness
at programming an IV infusion. The Guardrails Software alerts the clinician
that a dose is outside the pre-established dosage limits for that medication,
thus helping to prevent a wrong dose from being administered to the patient.
Modular medical technology
gives an institution an expandable,
integrated system to improve patient care.
The building blocks of the Medley System consist of a Point of Care Unit
for programming, one or more infusion pumps or other modules and related
dedicated disposables. The first module
approved for use with the Medley System was the large volume pump, which can be
configured, as needed, as a one to four channel infusion device. Unlike traditional infusion pumps which are
sold with a fixed number of channels (one to four), each of the Medley System
modules represents a single channel which can be added to other modules to
address particular needs in a hospital setting.
Advanced programming capabilities
allow product line extension, such as
the Medley Pulse Oximetry Module, which was launched in late 2001, and the
Medley Syringe Pump Module, which we plan to introduce in 2003. We are also in the process of developing
data management functionality and a patientcontrolled analgesia (PCA)
Improved hospital capital asset utilization
enabling a hospital to add to a Medley
Point of Care Unit only those modules and number of lines needed for a
care. Therefore, rather than investing
in fixed numbers of single and multichannel pumps, a hospital can
purchase a number of the Medley System modules which can be used with any of
its Medley Point of Care Units.
Additionally, standardized interfaces for multiple modules allow for
easier training of healthcare staff.
The Guardrails Continuous Quality Improvement (CQI) Standard
hospital to access and download the archived Guardrails Alerts from the Medley
Point of Care Unit. The resultant data
files are stored within the Guardrails CQI relational database and provide
query and reporting capabilities for the Guardrails safety software. This PC-based application provides the
hospital with a basic standard reporting package that can then be utilized in
the medication administration and quality improvement process to monitor events
outside best practice guidelines.
Medley System, our customers are able to tailor the treatment to the patient,
which should reduce the cost of care, improve patient outcomes, assure
compliance with customerestablished clinical practice guidelines and
of medical treatment.
Large Volume Pumps.
We sell various single channel and multichannel large volume
infusion pumps in North America and other markets where medical practice
requires large amounts of hydration
during infusion therapy. A single channel pump has only one fluid
delivery line to the patient, while a multichannel pump has two or more
fluid delivery lines. Our large volume
pumps service only a single patient and are used in both the general care and
critical care settings. We also offer
large volume pumps for alternate-site and hospital ambulatory use. Generally, when a patient requires more than
one fluid delivery line, purchasing a multichannel pump is more cost
efficient than purchasing an equivalent number of single channel pumps. A large volume pump module is also available
for the Medley System.
of large volume infusion pumps includes:
Edition Gold Infusion System line, a versatile, user-friendly line of infusion
pumps, which includes a single channel and dual channel pump and incorporates
intuitive user interface and advanced software capabilities, is designed for
use primarily in hospitals. This line
contains the following innovative features:
a patented AccuSlide flow regulator, designed to minimize unregulated
flow of fluids into a patient
s blood stream; precision
flow capability, designed to improve flow continuity and minimize hemodynamic
changes; and Advanced Infusion Management (AIM), designed to provide unique
early warning assessment tools for enhanced intravenous site management. Other standard features include an
easy-to-use drug library, which permits dose and/or rate calculation; a
multi-step feature, which allows the clinicians to pre-program up to nine steps
for drug delivery; and a patented
communication link capability for biomedical engineers.
In the fourth quarter of 2002, we expanded the market for our
Guardrails safety software by making it available to existing and new customers
of the Signature Edition Gold Infusion System.
As with our Medley System, the Guardrails safety software provides an
automatic safety net for infusion device programming by concentrating on
medication error-prevention at the critical point of intravenous delivery to
the patient. Institutions which choose
this option can configure unique care-specific profiles with pre-defined drug
dose limits and other delivery parameters to meet the particular needs of
multiple patient care areas.
The Gemini Series, which consists of
single, dual and four channel pumps, is based on a flexible hardware and
software technology platform and is designed for use in all hospital
settings. This technology platform has
enabled us over time to offer incremental feature enhancements based on
evolving customer needs. The Gemini
series currently offers the following features: the Flo-Stop mechanism which is designed to minimize unregulated
flow of fluids into a patient
s bloodstream; independent channel operation; ability to
switch from pump to controller mode without changing the disposable
administration set; programmability to automatically taper-up and taper-down
infusion rates to facilitate delivery of complex drug-dosing regimens;
capability to operate in either micro mode (0.1 to 99.9 mL/hr) for use with
neonatal patients, among others, or macro mode (1 to 999 mL/hr) for use with
adult patients; drug dose calculation; pressure monitoring; pressure history
and volume/time dosing; and nuisance alarm (alarms with no clinical significance)
The MedSystem III instrument is a
compact, lightweight, programmable, three channel infusion pump used primarily
in the critical care market and patient transport applications. The MedSystem III device is one of the
smallest, most versatile and most technologically advanced multichannel
pumps currently on the market.
The Asena GW instrument is a small,
lightweight single channel pump for nutritional and hydration therapy. It is intended to be used as part of the
Asena patient care system and as such can be mounted into the ALARIS Dedicated
Docking Station (ALARIS DDS) or the ALARIS Intelligent Docking Station (ALARIS
The 570 Series is a single channel pump
used for general and critical care use.
The 597/598 Series is a simple to use,
single channel pump with an easy-to-read control panel coupled with a large LED
display. The 597/598 Series is
lightweight, compact and robust enough to be used in any patient situation and
is frequently used for delivery of nutritional products, for general care and
alternate site use.
We also sell a broad range of syringe infusion pumps which are used
primarily in neonatal care, oncology, anesthesia and critical care. Syringe pumps deliver a smaller amount of
fluid in more concentrated amounts, and are used where medical practice does
not require large levels of hydration in connection with infusion therapy. While syringe pumps represent a relatively
small portion of the industry installed base in the U.S. market, they are
widely used in Western Europe, where they constitute approximately 60% of the
infusion pump market. Syringe pumps are
more widely used in Western Europe because of the general practice of administering
medications in smaller volumes of fluid.
We believe that we are one of the two largest suppliers of syringe pumps
in Western Europe
. We believe we hold a number one or number two
installed base market share in eight of the nine western European countries in
which we sell directly to end customers. In addition, we believe that we have a
number one or number two installed base market share in Australia, Canada, New
Zealand and South Africa.
of syringe pumps includes:
The Asena family of syringe pumps, the
introduction of which was begun in the third quarter of 1999, is a family of
compact, lightweight, high-featured pumps with modular mounting and
communications capability. In the
fourth quarter of 2001, we introduced the Asena patient care system, which
combines the ALARIS DDS, the Asena syringe pump and the Asena GW large volume
In 2002, we added
the ALARIS IDS which adds certain communication capabilities to the ALARIS DDS.
The docking stations feature a versatile mounting system, known as a
medical device interface, which allows a syringe pump to be mounted to a pole,
a Draeger bar, the ALARIS DDS or ALARIS IDS without adapters.
The P-Series syringe pumps may be used in
a variety of hospital settings, such as neonatal, non-critical care and
The PCAM pump, an analgesia infusion
pump, allows patients to control the delivery of pain medication. Designed for general care settings, the PCAM
syringe infusion pump is one of the most advanced patient controlled analgesia
infusion pumps on the European market today, with pre-programmed and user
programmable drug delivery protocols, comprehensive patient history logging and
an ergonomically designed handset with status indicator.
We also offer the ReadyMED ambulatory infusion pump for alternate-site
and hospital ambulatory use. The
ReadyMED infusion pump is a compact, lightweight and disposable pump used in
the intravenous administration of antibiotics in the alternate-site market,
offering several key advantages over traditional systems. Traditional systems are gravity driven and
require a patient to use a small intravenous bag and tubing set that must
remain on an intravenous solution pole during infusion, thereby restricting the
movement. In contrast, our ReadyMED
pump uses positive pressure and thereby allows the patient to carry the device
in a pocket or wear it on a belt. We
sell the ReadyMED pump through our alternate-site sales force and distribution
network in the United States.
Disposable Administration Sets and
Needle-Free Access Products.
infusion systems require the use of disposable administration sets, which
represent a significant portion of our sales.
For the year ended December 31, 2002, we sold 112.4 million disposable
administration sets, representing sales of $281.0 million, or 61.1% of
total sales. Sales of disposable
administration sets for the year ended December 31, 2002 for the North American
and International business units were $197.3 million and $83.7
the exception of certain models of the Asena GW family, all of our current
large volume infusion pumps use only dedicated disposable administration sets,
designed and manufactured by or for us for that particular pump. We manufacture and sell dedicated and
non-dedicated disposable administration sets for use with our infusion pump
systems. We generate a predictable and
recurring revenue stream from sales of our higher margin, dedicated, as well as
non-dedicated, disposable administration sets and components to customers using
needle-free products are designed to permit access to disposable administration
sets without the use of needles. The
Needle-Free System allows health care institutions to comply with
Needlestick Safety and Prevention Act,
signed into Federal Law in November
2000, and addresses health care workers
safety concerns by allowing them to access IV lines
Our disposable administration sets
utilizing our SmartSite Needle-Free System offer a fully integrated,
cost-effective design, which eliminates the need for separate caps and
additional cannula components. These safety
features help reduce the risk to healthcare providers of accidental
needlesticks, which can result in the transmission of diseases, such as AIDS
and hepatitis C. Our introduction of
the SmartSite needle-free system has provided us with an opportunity to compete
aggressively in the gravity extension set segment of the market with
innovative, cost-effective, needle-free gravity sets.
features continue to provide our customers with the latest cost-effective
technology for our installed base of infusion pumps. Our needle-free access products have received strong interest
from customers and provide us with an opportunity for incremental revenues.
ALARIS Patient Monitoring Products
primarily in two patient monitoring product markets: hospital thermometry systems and related disposables and stand
alone, non-invasive, multiparameter instruments. These products are widely used in hospital
and alternate-site settings. For the
year ended December 31, 2002, sales of our patient monitoring instruments and related
dedicated disposables were approximately $31.7 million or 6.9% of total
sales. Patient monitoring sales for
North America and International for the year ended December 31, 2002 were $26.2
million and $5.5 million, respectively.
We are a leader in hospital thermometry systems, which consist of
thermometers and disposable probe covers, and maintain a strong market position
in the United States. Our large
installed base of hospital thermometry instruments allows us to generate predictable
and recurring revenues from sales of our related dedicated disposable probe
covers, which are the only probe covers which can be used with our thermometry
instruments. For the year ended
December 31, 2002, we sold over 577 million dedicated disposable probe covers.
thermometry product is the electronic thermometer. Supplementing our TEMP
PLUS II product line, we introduced in 1999 the TURBO
TEMP thermometer, an improved, cost-effective and
technologically advanced electronic thermometer designed to provide a faster
temperature reading. We also
manufacture and market the CORE
CHECK system, a thermometer that measures
temperature by detecting the emission of infrared energy in the ear.
We also sell standalone,
non-invasive, multiparameter patient monitoring products which measure a
combination of pulse, pulseoximetry, temperature and blood pressure.
Since 1997, the VITAL
CHECK Vital Signs Monitor series has been marketed in U.S.
and Canadian hospitals under a private label agreement with its
manufacturer. The VITAL
CHECK 4400 series;
marketed in the United States through an exclusive license agreement, measures
blood pressure, pulse oximetry, pulse and
2001, we released the
Vital Signs Monitor series (successor to the VITAL
series) with non-invasive blood pressure, heart rate and temperature monitoring
features. Both monitor series utilize
our IVAC thermometer technology.
We provide repair service for our products at certain of our
facilities around the world or on-site at our customers
facilities and elsewhere through thirdparty contractors. Customers may elect to enter into service
agreements or to receive service on a time-and-materials basis. We also train customers as to the use of our
products and maintain a technical support help-line to answer customers
questions. We believe that the availability of such service helps maintain
strong customer relations. Repair and
other services represented approximately 5% of our sales for the year ended
December 31, 2002.
Marketing and Sales
historically focused our sales efforts on the hospital market, which is still
our primary market. We also sell to the
alternate-site market, which includes home healthcare, freestanding clinics,
skilled nursing facilities and long-term care facilities. Our sales strategy emphasizes increasing
instrument placements and the number of units installed in order to increase
sales of our proprietary disposable administration sets and probe covers. Sales representatives work closely with
on-site primary decisionmakers, which include physicians, pharmacists,
nurses, materials managers, biomedical staff and administrators. We have over 5,000 hospital customers
worldwide and sell our products through a combined direct sales force
consisting of over 200 salespersons and through more than 100
distributors. No single hospital customer
is material to our business or operations.
The International unit utilizes product distributors in areas where we
do not have a direct sales force.
Distributor sales accounted for 16.8% of International sales for the
year ended December 31, 2002.
marketing efforts are supported by a staff of nurses and pharmacists who
consult with customers and provide ongoing clinical support in the evaluation,
installation and use of our products.
We believe our sales force in the United States and internationally play
a vital role in the effective introduction of new products.
infusion device and patient monitoring product contracts with GPOs in the
United States, the U.S. federal government and other governmental entities,
including the following:
(Year in which contract
Purchasing Group, L.P. (f/k/a Columbia/
HSCA, Inc. (f/k/a HSCA, In
Health Care Associates, Inc. (f/k/a MedEcon).
LLC (VHA Inc.)
Purchasing Partners, L.P.
Health Systems Medical, Inc. (Owned Facilities)
Inc. (f/k/a Tenet Health Systems Medical, Inc.
Government/Federal Supplies Schedule
* On February 7, 2003, we submitted a contract renewal proposal at the
request of Premier Purchasing Partners,
are manufactured at plants in San Diego, California; Creedmoor, North Carolina;
Tijuana, Mexico; and Basingstoke, England.
The San Diego, California facility is the primary manufacturing facility
for infusion pumps and patient monitoring instruments. The service operation for installed infusion
pumps and patient monitoring instruments is also located in this facility. The Creedmoor, North Carolina facility
manufactures automated sub-assemblies used in our disposable products and is a
distribution center for disposable finished products. The Tijuana, Mexico facilities assemble a majority of the
disposable products distributed in North America, and the Basingstoke, England
facility manufactures syringe pumps and large volume pumps distributed to the
International market. Disposable
products for International markets are currently supported through our Tijuana,
Mexico and Creedmoor, North Carolina facilities, and a number of foreign
established procedures and other controls designed to ensure that manufactured
and purchased parts products perform as expected by our customer. We also have in place a system designed to
ensure timely and effective corrective and preventative action to manage
non-conformities reported by customers or detected within our operations.
purchase raw materials worldwide in the ordinary course of business from
numerous suppliers. The vast majority
of these materials are generally available, and although we have not
experienced any material delays in obtaining these materials we have, on
occasion, experienced temporary delays for certain materials due to supplier
shortages. In some situations, we have
long-term supply contracts, although we purchase a significant amount of our
requirements of certain raw materials by purchase order.
Research and Development
believe that a well-targeted research and development program constitutes an
essential part of our activities and is an integral part of our business. We are actively engaged in research and
development programs to develop and improve products. These activities are performed in the United
to a lesser extent, in the UnitedKingdom. For the year ended
December 31, 2002, we expended approximately $30.4 million on in-house
research and development. Substantially
all of such amount was dedicated to the development of new products.
Trademarks and Other Proprietary Rights
We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent they are covered by valid
and enforceable patents, trademarks and copyrights or are effectively
maintained as trade secrets.
Accordingly, we rely heavily on patented and other proprietary
technology to maintain our competitive position. We seek to protect our proprietary rights in a manner that
balances the costs of such protection against obtaining the greatest value for
Our policy is to file patent applications in the U.S. and foreign
countries in order to protect technology, inventions and improvements to
inventions that are commercially important to our business. As of December 31, 2002, we held more
than 230 patents in the United States and a comparable number of patents in
foreign countries, mainly in Europe, Canada, Japan and Australia.
We sell our products under various trademarks. We register those trademarks, in the U.S.
and foreign countries, which we believe to be of sufficient importance to our
business. In addition, we seek copyright
protection for the software and other original works we use in many of our products. We also rely on trade secrets, unpatented
know-how and continuing technological advancement to maintain our competitive
position and seek protection, in part, through confidentiality and proprietary
We operate in an industry susceptible to significant patent legal
claims. At any given time, we are
generally involved, either as a plaintiff or defendant, in one or more patent
infringement actions. Patent litigation
can result in significant payments or result in injunctions that can prevent
the sale of products. During 2002, we
were involved in one patent infringement lawsuit. (See Item 3.
information about that lawsuit.)
substantial competition in all of our markets.
Some of our competitors have greater financial, research and development
and marketing resources than we have.
We estimate that our infusion pumps represent approximately 32% of the
installed base of large volume infusion channels in the United States, with Baxter
International, Inc., Abbott Laboratories, Inc. and B. Braun
Medical, Inc., representing approximately 33%, 26% and 6% of such
channels, respectively. Our principal
competitors in the United States offer volume discounts based on bundled
purchases of a broader range of medical equipment, pharmaceuticals and supplies
than we sell, including infusion systems and intravenous solutions used with
such systems. In the International
market, our largest infusion system competitors include Graseby Medical Limited,
Fresenius Medical Care AG and B. Braun Melsungen AG. The patient monitoring products market is fragmented by product
type. Our key competitors in the North
American market include Welch Allyn, Inc. and SherwoodDavis &
Geck in electronic and infrared thermometers, respectively.
One of our
business strategies is to be recognized as the leader in intravenous medication
safety solutions by developing or licensing technologically superior products,
thereby providing customers with demonstrably superior clinical value through
better capital asset utilization and better patient outcomes. We expect that this approach will improve
our competitive position, as we believe that the competitive factors that are
most important in our markets are quality of products and services,
technological innovation and the value proposition of improving patient
outcomes while reducing overall costs associated with patient care.
Our medical devices are subject to extensive regulation by
numerous federal, state and other government agencies, both within and outside
the U.S. In the U.S., the federal
agencies that regulate our facilities, operations, personnel and products
include the Food and Drug Administration (FDA), the Environmental Protection
Agency, the Occupational Health and Safety Administration, the Customs Service,
the Department of Commerce, the Treasury Department and others. State agencies also regulate our facilities,
operations, personnel and products.
Government agencies outside the U.S. also regulate public health,
product manufacturing, environmental conditions, employment, export, customs
and other aspects of our global operations.
To varying degrees, each of these agencies requires us to comply with
laws and regulations governing the development, testing, manufacturing,
labeling, marketing and distribution of our medical devices.
Unless exempt, the FDA classifies medical devices into
three classes based on the regulatory control deemed necessary by the FDA to
reasonably ensure safety and effectiveness (from lowest to highest level of
regulatory control). Our medical
devices are Class II medical devices.
The three classes are:
: Subject to general controls, which
include: company registration; device
listing; manufacturing devices in accordance with the FDA
Good Manufacturing Practices Quality System Regulation (which cover quality
management and organization, device design, buildings, equipment, purchase and
handling of components, production and process controls, packaging and labeling
control, device evaluation, distribution, installation, complaint handling,
servicing and records); labeling devices in accordance with FDA labeling
regulations; and submission of a 510(k) premarket notification before marketing
: Subject to general controls (described in
Class I above) and special controls.
Special controls may include special labeling requirements, mandatory
performance standards and post-market surveillance.
: Subject to premarket approval, which
includes filing a premarket approval application (PMA) requiring the
independent demonstration that the new medical device is safe and effective,
typically by collecting human clinical data for the medical device.
Unless otherwise exempt, we must obtain marketing clearance under
the 510(k) premarket notification process before a new device can be marketed
in the U.S. A 510(k) premarket
notification is a marketing application submitted to the FDA to demonstrate
that the medical device is safe and as effective as, or substantially
equivalent to, a legally marketed device that was or is currently on the U.S.
market. In this process, we must submit
data that supports our equivalence claim.
We must receive clearance from the FDA finding substantial equivalence
before we can commercially distribute the new medical device. Not all modifications to approved medical
devices require a 510(k) submission.
Modifications that affect the intended use or significantly affect
safety or effectiveness require a 510(k) submission.
Both before and after a product is commercially released, we have
ongoing responsibilities under FDA regulations. The FDA has the ability to review design and manufacturing
practices, labeling and recordkeeping for medical devices, manufacturers
required reports of adverse experience and other information to identify
potential problems with marketed medical devices. If the FDA were to conclude that we are not in compliance with
applicable laws or regulations, or that any of our medical devices are
ineffective or pose an unreasonable health risk, the FDA could ban such medical
devices, detain or seize adulterated or misbranded medical devices, order
repair, replacement or refund of such devices and require us to notify health
professionals and others that the devices present unreasonable risks of
substantial harm to the public health.
The FDA may also enjoin and restrain certain violations of
pertaining to medical devices or initiate action for criminal prosecution of
such violations. The FDA also
administers certain controls over the export of medical devices from the U.S.
We export some
of our products to countries outside the U.S.
International sales of our medical devices which have not received FDA
approval are subject to the FDA
requirements. Failure to comply with
requirements could have a serious adverse effect on our ability to export such
products. In addition, each foreign
country where we export our medical devices subjects those devices to its own
regulatory and import requirements.
Our products are
subject to varying degrees of government regulation in the foreign countries in
which we have operations, ranging from stringent design, testing,
manufacturing, approval requirements and post-approval requirements to simple
registration of our products. However,
as a general matter, foreign regulatory requirements for medical devices are
becoming increasingly stringent. In the
European Union, a single regulatory approval process has been created and
approval is represented by the CE Mark.
The European Union does not require medical device companies to comply with
ISO 9001 in order to obtain a CE mark.
Instead, we have several compliance options, including having our
devices tested or having a quality system designed to comply with the quality
system standard of our choice. However,
since many of our customers (hospitals, clinics, doctors, etc.) have
historically wanted to know that they are buying medical devices from a
manufacturer that has an ISO 9001 certified quality system, we, like most
medical device manufacturers, often choose to use ISO standards to obtain a CE
The process of obtaining regulatory clearance to distribute
medical products can be costly and time consuming in virtually all of the major
markets where we sell medical devices.
We cannot assure that any new medical devices we develop will obtain
necessary clearance in a timely or cost-effective manner.
private sector initiatives to limit the growth of healthcare costs, including
price regulation, competitive pricing, coverage and payment policies and
managed care arrangements, continue in many countries where we do business,
including the U.S. These changes are
causing the marketplace to put increased emphasis on the delivery of more
cost-effective medical devices.
Government programs, including Medicare and Medicaid, private healthcare
insurance and managed care plans have attempted to control costs by limiting
the reimbursement levels for particular procedures or treatments. This has created an increasing level of
price sensitivity among our customers.
Some third-party payers must also approve coverage for new or innovative
devices before they will reimburse healthcare providers using those medical
devices. Even though a new medical
device may have been cleared for commercial distribution, we may find limited
demand for the device until reimbursement approval has been obtained from
governmental and private third-party payers.
Although we believe we are well-positioned to respond to changes
resulting from the worldwide trend toward cost containment as a result of our
manufacturing efficiencies and cost controls, uncertainty as to the nature of
any future legislation or changes makes it difficult for us to predict the
potential impact of these trends on future operating results.
The sale of our products is subject to the
provisions of the Social Security Act of
1935, as amended, which prohibit knowingly and willfully offering, paying,
soliciting or receiving any remuneration, whether directly or indirectly, in
return for purchasing or ordering items or services, or patient referrals to
providers of services, for which payment may be made in whole or in part by
Medicare, Medicaid or other federally funded healthcare programs. Violations of the statute are punishable by
civil and criminal penalties and the exclusion of the provider from future
participation in federally funded healthcare programs. The Social Security Act contains exceptions
to these prohibitions for, among other things, properly reported discounts, and
payments of certain administrative fees to GPOs. Because we sell some of our products to customers at prices below
list price, we are engaged in giving discounts within the meaning of the Social
Security Act. We also pay administrative fees to certain purchasing agents
within the meaning of the Social Security Act.
We believe that our discounts and arrangements with purchasing agents
are in compliance with
requirements. Nevertheless, we cannot
assure you that a court or regulatory body will agree with our interpretation.
Several states also have statutes or regulations prohibiting
financial relationships with referral sources that are not limited to services
for which Medicare, Medicaid or other state or federal healthcare program
payment may be made. A finding of
non-compliance with these anti-remuneration laws by federal or state regulatory
officials, including non-compliance with appropriate safe harbors, could have a
material adverse effect on our business, financial condition, results of
operations or prospects.
also subject to various environmental laws and regulations, both within and
outside the U.S. Like other medical
device companies, our operations involve the use of substances regulated under
environmental laws, primarily in manufacturing and sterilization
processes. While it is difficult to
quantify the potential impact of compliance with environmental protection laws,
we believe that we are in material compliance with current environmental
standards and that continued compliance will not have a material impact on our
financial position, results of operations or liquidity.
As of January
31, 2003, we employed 2,899 people, including 908 in the United States.
Executive Officers of the Registrant
David L. Schlotterbeck
, age 55,
has served as a member of our Board and as President and
Chief Executive Officer of ALARIS Medical and ALARIS Medical Systems since
November 1, 1999. From April 1999 to November 1999, Mr.
Schlotterbeck served as President and Chief Operating Officer of the Company
and ALARIS Medical Systems.
From 1997 to March 1998, Mr. Schlotterbeck served as
President and Chief Operating Officer of Pacific Scientific Company, an
international manufacturer of motion control, process measurement and safety
products that was formerly traded on the New York Stock Exchange. In March 1988, Pacific Scientific Company
was acquired by Danaher Corporation. From 1995 to 1997, Mr. Schlotterbeck
served as President and Chief Executive Officer of Vitalcom, Inc., a
medical network manufacturer. From 1991 to 1994, Mr. Schlotterbeck
served as Executive Vice President and Chief Operating Officer of Nellcor, Inc.,
a medical device manufacturer subsequently acquired by
Mallinckrodt, Inc. Mr. Schlotterbeck is a graduate of the
General Motors Institute with a B.S. in electrical engineering. He holds
an M.S. in electrical engineering from Purdue University and completed the
Executive Institute at Stanford University in 1984.
William C. Bopp
, age 59
has served as Senior Vice President and Chief Financial Officer of the Company
and ALARIS Medical Systems since November 1, 1999. From March 1999 to November 1999, Mr. Bopp
served as Vice President, Chief
Financial Officer and Treasurer of the Company and ALARIS Medical Systems. From 1995 to 1999, Mr. Bopp served as
Executive Vice President, Chief Financial Officer and a member of the
board of directors of C.R. Bard, Inc., a $1.2 billion developer,
manufacturer and marketer of healthcare products, including vascular,
urological and oncological and interventional products. From 1980 to 1995, Mr. Bopp held
positions of increasing responsibility with Bard. Mr. Bopp is a graduate
of Harvard College and holds an MBA, Finance, from the Harvard Business School.
, age 43
has served as the Vice President and
General Manager of the International Business Unit of ALARIS Medical Systems
since January 2001. From 1996 to
2001, Mr. Denerolle was Executive Vice President of the Infusion
Technology Division of Fresenius Vial.
Prior thereto, Mr. Denerolle held positions of increasing responsibility
with Becton Dickinson, including General Manager of its Infusion System
business from 1994 and 1996.
Mr. Denerolle is a graduate in Business Administration from Ecole
Supérieure de Commerce de Nantes.
Sally M. Grigoriev
, age 44, has
served as the Vice President of Operations of ALARIS Medical Systems since
December 2000. From January 1995
to December 2000, Ms. Grigoriev served as the Vice President of Quality and
Regulatory Affairs for ALARIS Medical Systems.
Prior to joining IVAC Medical Systems in January 1995, she served
as the Vice President of Quality and Regulatory Affairs at U.S. Medical
Instruments, Inc. and Block Medical, Inc. respectively. While at Block Medical, Ms. Grigoriev
established and implemented Block Medical
s quality and regulatory
systems. From 1982 to 1990, Ms. Grigoriev
held various management positions in operations and quality assurance at IMED
Corporation. Ms. Grigoriev holds a
B.S. degree, Chemical Engineering, from the University of California, Santa
Robert F. Mathews
, age 39, has
served as Vice President of Finance and Treasurer of ALARIS Medical and ALARIS
Medical Systems since February 2002.
From January 2001 to February
2002, he served
as Vice President
of Finance and
, and from July 1996 to January
2001, he served as Corporate Controller of ALARIS Medical and ALARIS Medical
From 1987 to 1996, Mr. Mathews held various positions of
increasing responsibility with PriceWaterhouse, LLP, including Senior Manager,
Business Advisory Services. Mr. Mathews
is a certified public accountant and holds a B.S. degree in business
administration from San Diego State University.
William H. Murphy
, age 50, has
served as Vice President of Quality and Regulatory Affairs of ALARIS Medical
Systems since December 2000. Mr. Murphy joined ALARIS Medical
Systems in February 2000 as Director of Regulatory Affairs. From 1996 to 1999, Mr. Murphy served as
Director of Regulatory Compliance of Nellcor Puritan Bennett Inc., which
has subsequently been acquired by Mallinckrodt, Inc. Previously, Mr. Murphy provided private
consulting services in the area of regulatory compliance, quality system
development and process validation. Mr. Murphy holds a B.S. degree
from Augusta College.
Stuart E. Rickerson,
age 54, has
served as Vice President, General Counsel and Secretary of ALARIS Medical and
ALARIS Medical Systems since July 2001.
In 1995, Mr. Rickerson founded Golden Triangle Ltd., a legal
management consulting firm, and served as its General Counsel until joining
ALARIS Medical. From 1991 to 1995, he
was Vice President, General Counsel and Secretary of Keene Corporation and
served as a member of its board of directors from 1991 to 1996. Previously, Mr. Rickerson served as
Associate General Counsel of Philip Morris, Inc.; Vice President, General
Counsel and Secretary of Cardiac Pacemakers, Inc., then a subsidiary of
Eli Lilly and Company and now part of Guidant Corporation; and in several legal
and management positions of increasing responsibility with Eli Lilly and
Company. Mr. Rickerson is a
graduate of Princeton University and holds a J.D. from Georgetown University.
Jake St. Philip
, age 50, has
served as Vice President and General Manager, North America of ALARIS Medical
Systems since July 1998. From
November 1996 to July 1998, he served as Vice President of Sales, North America
of ALARIS Medical Systems. From June
1994 to November 1996, Mr. St. Philip served as Vice President of Sales, North
America of IVAC Medical Systems. From 1981 to June 1994,
Mr. St. Philip held various sales and marketing positions with IVAC
Medical Systems. Previously, he held various sales positions of
increasing responsibility with Johnson & Johnson and
M&M/Mars. Mr. St. Philip holds a B.S. degree in Marketing from
the University of New Orleans and completed the Executive Program at Stanford
University in 1999.