Merging Alliance Medical Corporation and Vanguard Medical Concepts: Interview with John Grotting, CEO

What prompted these two companies to merge? Both companies were doing well on their own, and both had come through the FDA supplemental validation process to a point where their products were fully returned to the market, so this merger was not out of any weakness. We saw that both companies were making large investments and increasing their field service organizations to better service hospitals, and that there was a real economy of scale if we could do that together. We saw that both companies had products the other company did not have, and each company s customers were asking for them; therefore, by coming together, we could immediately create a bigger portfolio of products for our customers. The result is, of course, the more products they reprocess, the more savings they derive. The third reason was that in the Research and Development (R & D) area, it is very costly for us to bring a new product to market, and we found that both companies were making R & D investments to bring these products to market. In many instances, one company already had the product approved while the other was investing to get it approved. Related to that, the biggest challenge we have had is that once our customers begin reprocessing, they want to do a lot more of it, so they are bringing products to us, and asking if we can reprocess certain products. By having the combined capabilities of both companies, we should be better able to respond to customer demand and develop products more rapidly. When will the merger be complete? We are expecting the completion by mid to late fall 2005. We are filing an application with the government, which we believe is a fairly straightforward application, but ultimately it is up to that approval process. When did each company start out in the reprocessing industry? Vanguard began in the early 1990s; Alliance actually was a combination of several companies that had roots back to the late 1980s. However, both started right around 1990, which is really when the reprocessing industry began. Approximately how many medical devices are reprocessed each year by each company? The number of devices processed by Alliance is increasing every month, so it is difficult to say. Overall, they have safely reprocessed more than 12 million single-use medical devices (SUDs). Since 1991, Vanguard has safely reprocessed more than 7 million SUDs. What are some of the benefits customers will see from this merger? This gets back to the motivation for the merger that I previously mentioned. The principal immediate benefit is that there will be more products for hospitals to choose from. It is very clear that if a hospital does reprocessing, they want to save money; therefore, the more products they reprocess, the more money they save. It is also clear that a successful reprocessing partnership between a hospital and a company like Vanguard or Alliance is built around a level of service, so having more people in the field, having more people available to do training and to do servicing of the individual hospitals will increase the level of savings available to hospitals. Finally, the number of new products that we should be able to bring to market through an enhanced R & D and the responsiveness of bringing new products that are requested by customers continue to be consistent themes. There are some other economies of scale. We believe we should be able to specialize in some of our production, so for example, let s talk about your particular area of electrophysiology. We are looking at the potential of doing that in a particular location and really building the expertise of our team around EP products, so that it would be much stronger. Similarly, there are some situations in which simply by concentrating volume we should be able to lower our costs. We have some high-volume areas, such as compression sleeves and pulse oximeters, in which we should be able to get lower costs by focusing where we do production of those products. What will the new company name be? We are doing the market research right now to determine what we would want to do. I would say that there will be a change of some type, whether we look at blending the name or picking a brand new name. We are analyzing that right now, but we would make that announcement upon closing of the merger. Will a new headquarters be created? If so, where will that be located? We will keep both plants open, both in Lakeland, Florida, and Phoenix, Arizona. We will have the home office based in Phoenix this is where I will be located as the CEO, and we will have certain functions based here. However, the intent is to keep both plants open in order to retain all of our current employees. As I said earlier, we will see an immediate increase in our business simply by making the products that each company offers available to the other company s customers. We will have an increase in our volume, so we will need all of our current employees and will probably need to hire additional employees as well. What are some of the unique strengths of each company? Do Alliance Medical's and Vanguard Medical's reprocessing programs or services differ in any way? In general, both companies are full service in terms of reprocessed product offerings. Within that broad role, there are certain products that each company has developed. For example, in the EP area or ultrasonic catheter area, one of the companies acquired by Alliance had a specialty expertise in that area, and as a result, that is an area that has continued to be a real strength for Alliance. It tends to be an area where there is a broader array of products at Alliance than at Vanguard, but Vanguard certainly does EP catheters. The flip side is that Vanguard has done an excellent job at developing some of the high volume but lower cost kinds of products, as well as some surgical products and other kinds of products. Therefore, it is hard to completely distinguish either company around any particular array of products. Each company reprocesses some different products than the other, but it doesn t come down to Vanguard is an expert in these categories / Alliance is an expert in these categories; it is more distinguishable by specific product area. How many customers, combined, will the merged companies represent? The total of combined customers will be 1,700. What kind of cost savings can hospitals get with reprocessing medical devices? What would you say to those who have not tried reprocessing? It depends on the number of products a hospital chooses to reprocess and the size of the institution. If a hospital has an EP lab, those are higher cost products, so there is a higher level of savings. It is a continuum based on the mix of services the hospital has, which products they choose to reprocess and how committed they are to working in a partnership with reprocessing. Therefore, there is no single number that I can give you that tells how much they can save; however, it is very significant for a hospital of over 200 beds. There is a very meaningful opportunity for savings. I can tell you that as a hospital executive I spent 26 years as a hospital executive with two different systems this is something I would do before almost anything else, because it doesn t require you to change products, lay off people, eliminate programs, or limit services. Those are the normal choices that a hospital executive is faced with when trying to reduce costs. This is a situation that enables you to continue doing business as you have been doing it, and simply get a better value for the medical devices that you re purchasing because you are getting an extended life out of them through reprocessing. It is completely safe and effective, and those reprocessed devices are substantially equivalent to a brand new device. Lastly, describe the benefits reprocessing has to the environment. It is meaningful by individual institution, because the products that you are reprocessing you are not paying to have taken to a landfill. I can give you sort of an aggregate picture: our combined companies will eliminate or save over 7,000 tons of medical waste by virtue of reprocessing. Seven thousand tons represents a $12 million savings for hospitals. It is a meaningful number, and it s a very important motivator for hospitals.