After two decades, future bright for Catheter Research Inc.

February 23, 2009

Catheter Research Inc. should have disappeared a long time ago.

But the Indianapolis company has persevered through numerous challenges—17 straight profitless years, a bankruptcy reorganization, a stint as a subsidiary of Biomet Inc., and a dispute among its owners.

It now is flying high—even in the midst of a bad economy.

Catheter Research grew its sales 20 percent to 30 percent in each of the past two years, reaching $10 million in 2008.

In December, CEO and owner John Steen sold 30 percent of the company to his 100 employees to form an employee stock ownership plan—or ESOP.

"We've just kind of been struggling along," said Steen, a lanky 63-year-old dressed casually in a green sweater and open-collared shirt. But in 2007, he added, "We turned the corner."

Catheter Research makes plastic-based catheters on contract for other companies. It also directly sells some of its own catheters under the brand name Thomas Medical to OB/GYN doctors and to hospitals.

Catheters are tube-like devices inserted in the body for various purposes, from inserting balloons into clogged arteries to injecting contrast liquid needed for imaging tests. Among its clients is Suros Surgical Systems Inc., which uses the tubes in breast biopsy devices.

Companies that sell medical equipment to hospitals and doctors have been faring better than most in a recessionary economy that has been shedding jobs rapidly.

But operators of companies large and small are being cautious.

"Nobody's immune," said Greg Maurer, managing director of Indianapolis-based Heron Capital, which owns stakes in several small medical-device firms. For companies already producing revenue, Maurer said, "We're telling them to take a new look at their projections and keep a close eye on their cash position."

Michigan-based Stryker Corp. reported mixed sales results of its equipment for medical and surgical procedures.

"The challenging economic environment placed considerable pressure on hospital capital budgets during Q4, which translated into slower growth in two of our med-surge businesses," said Stryker CEO Stephen McMillan, during a Jan. 27 conference call with analysts. Overall sales of Stryker's medical-surgical products grew 6 percent in the fourth quarter.

His outlook for 2009 is murky, too.

"We are assuming hospital capital budget pressures will continue," McMillan said.

Catheter Research is more upbeat, however. It won't equal last year's torrid sales growth—which would have been difficult in any economy. Still, the company predicts a 10-percent surge this year.

"Medical products, it's not slowing down yet and we don't think it will," Steen said.

General Manager Christine Cook attributes Catheter Research's success to low turnover among its employees and reliable performance for its customers. Reputation has led to many of the company's recent sales wins, Cook said.

"You treat your employees right and you treat your customers right," she said. "The rest will come."

That's part of why Steen implemented the ESOP. Such programs are essentially retirement savings plans that transfer privately held shares of a company to employees over time.

In Catheter Research's case, it borrowed money from banks, then used the money to buy shares from Steen. The company is now holding the shares on behalf of employees.

In the last year, Indiana Treasurer Richard Mourdock has strongly promoted ESOPs as a way to keep Indiana companies locally owned and locally based. Indeed, Steen decided to do the ESOP only after rejecting two buyout bids.

He said both buyout deals would have ended Catheter Research's Indiana presence within five years.

Other Indianapolis companies that have an ESOP include accounting firm Katz, Sapper & Miller and manufacturer Wood-Mizer Products Inc.

Ups and downs

The goal of ESOPs is for employees to share in the profits and increasing value of the company. But for most of Catheter Research's life, there have been no profits.

The company incorporated in 1987, five years after Zionsville engineer William McCoy came up with an idea for a catheter made of a special metal that bent into a predetermined shape when heated. The feature allowed doctors to push the catheter through a patient's arteries, instead of pulling it through veins using wires.

Catheter Research raised $6 million in venture capital and private financing and won approval from the U.S. Food and Drug Administration in 1992.

But doctors never warmed to the new approach to catheters. There was little financial incentive for them to change their habits. And the catheter applied to fewer patients than McCoy had assumed.

Catheter Research's venture investors, led by San Francisco-based H&Q Ventures, pushed out McCoy in 1991 and made Steen CEO. He tried to keep the company afloat by branching into contract manufacturing and product development work.

But by 1995, Catheter Research declared Chapter 11 bankruptcy. Its investors lost much of their money, including such people as local surgeon Dr. Douglas Zipes and former Indianapolis City-County Councilor Thomas C. Hasbrook.

Warsaw-based Biomet Inc., which provided both money and sales personnel to help Catheter Research, bought it out of bankruptcy. Biomet's idea was for Catheter Research to serve as a development shop for a new line of surgical products.

But sales of those products never really took off, Steen said, reaching little more than $3 million a year.

"We weren't contributing to the bottom line or the top line," Steen said. So in May 2004, Biomet sold Catheter Research to three of its managers—Greg Walker, Jose Vazquez and Steen.

Nearly simultaneously, Catheter Research acquired one of its customers, Georgia-based Thomas Medical Inc. It paid $200,000 plus future royalties and the assumption of $160,000 in liabilities.

For the first time in its life, Catheter Research became a profitable company.

But those profits evaporated in 2006 after Walker became majority owner and took over as CEO from Steen. The loss of a big customer and heavy spending on marketing sent Catheter Research spiraling to a loss once more.

"We spent money we didn't have," Steen said. He bought out Walker and Vazquez in November 2006. Contact information could not be found for either of the former partners.

Steen credits his staff, especially Cook, for guiding the company back to profitability and paying down debts.

But Jim Coles, a Bose McKinney & Evans attorney who serves as Catheter Research's general counsel, credits Steen for righting the company more than once when it went astray.

"If they had continued down that [early] path, I think they probably wouldn't be here today," Coles said of Catheter Research. "Being agile and being able to identify the need to diversify was very helpful."

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