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The following is an excerpt from a 10-K SEC Filing, filed by ALARIS MEDICAL SYSTEMS INC on 3/5/2003.
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ALARIS MEDICAL SYSTEMS INC - 10-K - 20030305 - BUSINESS

ITEM 1 BUSINESS

 

Background

 

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 of Delaware ALARIS Medical Systems and its subsidiaries are collectively referred to as the “Company”, “we”, “our” and “us.”

 

Overview

 

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 multi–channel large volume infusion pumps, syringe pumps and dedicated and non-dedicated disposable administration sets.

 

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.

 

Our 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.

 

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We operate 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.

 

                         Our International business unit develops, manufactures and provides infusion therapy devices, patient vital signs monitoring 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.

 

Our Industry

 

Infusion 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 become a significant differentiating feature.

 

The infusion systems sold in the markets in which we compete consist of single and multi–channel 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.

 

The total 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. F 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.

 

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The 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.

 

The 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 in 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 s vein.  A study published in 2002 in the Archives of Internal Medicine entitled, Medication Errors 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 technologically–advanced 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 Journal 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 Women’s 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.

 

Reducing 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 hospital.

 

In addition 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 blood–borne 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

 

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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).

 

The U.S. 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 needlesticks.  We also offer disposable administration sets with safety features designed to prevent the unregulated flow of fluids into a patient s blood stream.

 

Patient 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.   Our 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 stand–alone, non-invasive, multi–parameter instruments .

 

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 smart 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 value added services and programs, including hardware and software technical services, clinical education, implementation services, pharmacy facilitation of database development and software maintenance programs.

 

ALARIS Infusion Systems

 

We 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 following:

 

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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.

 

The Medley 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 our smart intravenous infusion devices as a computerized brain 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 patient–controlled analgesia (PCA) module.

 

                         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 particular patient s care.  Therefore, rather than investing in fixed numbers of single and multi–channel 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 Package allows a 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.

 

With the 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 customer–established clinical practice guidelines and promote best practice standards of medical treatment.

 

Large Volume Pumps.   We sell various single channel and multi–channel large volume infusion pumps in North America and other markets where medical practice requires large amounts of hydration

 

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during infusion therapy.  A single channel pump has only one fluid delivery line to the patient, while a multi–channel 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 multi–channel 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.

 

Our selection of large volume infusion pumps includes:

 

                         The Signature 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 learn–teach 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) reduction.

 

                         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 multi–channel 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 IDS).

 

                         The 570 Series is a single channel pump used for general and critical care use.

 

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                         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.

 

Syringe Pumps.   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.

 

Our selection 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 pump.  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 anesthesia applications.

 

                         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.

 

Ambulatory Pumps.   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 patient s 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.   Our 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.  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

 

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million, respectively.  With 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 our systems.

 

Our needle-free products are designed to permit access to disposable administration sets without the use of needles.  The SmartSite Needle-Free System allows health care institutions to comply with the 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 without needles.  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.

 

These safety 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

 

We operate primarily in two patient monitoring product markets:  hospital thermometry systems and related disposables and stand alone, non-invasive, multi–parameter 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.

 

Thermometry Systems.   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.

 

Our primary 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.

 

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Other Patient Monitoring Products.   We also sell stand–alone, non-invasive, multi–parameter patient monitoring products which measure a combination of pulse, pulse–oximetry, 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 non-invasive blood pressure, pulse oximetry, pulse and temperature. In August 2001, we released the VITAL · CHECK 4500 Vital Signs Monitor series (successor to the VITAL · CHECK 4200 series) with non-invasive blood pressure, heart rate and temperature monitoring features.  Both monitor series utilize our IVAC thermometer technology.

 

Customer Service

 

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 third–party 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

 

We have 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 decision–makers, 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.

 

Our domestic 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.

 

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We have 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:

 

Name

 

Drug
Infusion

 

Thermometry

 

Needle - Free

 

 

 

(Year in which contract expires)

 

AmeriNet, Inc.

 

2003

 

2003

 

2003

 

Healthtrust Purchasing Group, L.P. (f/k/a Columbia/ HCA Healthcare)

 

¾

 

2004

 

¾

 

Med Assets HSCA, Inc. (f/k/a HSCA, In - Source & Shared Services)

 

2005

 

2005

 

2005

 

Managed Health Care Associates, Inc. (f/k/a MedEcon).

 

2003

 

2003

 

2003

 

Novation, LLC (VHA Inc.)

 

2005

 

¾

 

2005

 

Premier Purchasing Partners, L.P.

 

2004*

 

2005

 

2004*

 

Magnet, Inc.

 

2003

 

2003

 

2003

 

Tenet Health Systems Medical, Inc. (Owned Facilities)

 

2007

 

¾

 

2007

 

Broadlane, Inc. (f/k/a Tenet Health Systems Medical, Inc. (Non-Owned Facilities)

 

2004

 

¾

 

2004

 

U.S. Government/Federal Supplies Schedule

 

2006

 

2006

 

2006

 

 


* On February 7, 2003, we submitted a contract renewal proposal at the request of Premier Purchasing Partners, LP.

 

Manufacturing

 

Our products 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 manufacturers.

 

We have 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.

 

We 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

 

We 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

 

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States and, 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.

 

Patents, 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 the company.

 

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 information agreements.

 

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.  Legal Proceedings, for information about that lawsuit.)

 

Competition

 

We face 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 Sherwood–Davis & 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.

 

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Government Regulation

 

Product Regulation .           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:

 

                  Class I :  Subject to general controls, which include:  company registration; device listing; manufacturing devices in accordance with the FDA s 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 a device.

 

                  Class II :  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.

 

                  Class III :  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

 

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applicable law 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 s export requirements.  Failure to comply with FDA s export 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 mark.

 

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.

 

Government and 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.

 

Anti-Remuneration Laws.   The sale of our products is subject to the anti-remuneration or anti-kickback 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

 

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applicable legal 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.

 

Environmental Regulation We are 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.

 

Employees

 

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.

 

Frederic Denerolle , 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.

 

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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 Barbara.

 

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 Corporate Controller , and from July 1996 to January 2001, he served as Corporate Controller of ALARIS Medical and ALARIS Medical Systems.   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.

 

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