Sluggish growth plagues custom procedure tray market

Sluggish growth plagues custom procedure tray market

Curt Werner

By practically everyone’s appraisal, the U.S. custom procedure tray market is a mature market, one in which the most optimistic observers peg growth rates in the high single digits and the more pessimistic say there is no growth at all, either in units or in total dollars. This is in stark contrast to the “go-go” ’80s, where the lure of convenience and a near indifference to cost – brought neatly packaged kits and trays into hospitals by the truckload.

Today, as managed care begins to dominate the health care market, demand has fallen. Like the segment it serves, the number of players in the custom procedure tray, or CPT, market is in decline. There appear to be only three routes to growth: acquisition, development of new product lines separate from CPTs, and international sales, particularly in Europe.

There do not appear to be many more hospitals ready to adopt custom kits or trays than those that already have. Smaller hospitals may never bring in trays in large number. Before long, the U.S. CPT market will probably look a lot like other device segments populated by only two or three surviving companies. There’s little reason for new players to surface, either.

Today’s market is dominated by one company – Baxter Healthcare Corp., McGaw Park, Ill. – which has 51% of a market estimated at nearly $900 million. Depending upon whom one asks, trailing Baxter are Sterile Concepts, Richmond, Va., with about $148 million in sales; Maxxim Medical Inc., Sugar Land, Texas, with approximately $130 million; then DeRoyal Industries, Inc., Powell, Tenn., with about $100 million. DeRoyal is privately held and its revenue totals are estimates. Following those four are a slew of regional companies who vie for the remaining $70 million or so in annual business. Among them are Medline Industries, Inc., Mundelein, Ill., which, though not necessarily classified as a top tier CPT player, did manage to wrangle a lucrative contract with Columbia/HCA Healthcare Corp., Nashville, Tenn., that is the envy of the others, especially Baxter, the Columbia/HCA incumbent. Other lower-tier regional players are Med-Surg Isolyser, Herndon, Va., and MDC Co., Temecula, Calif.

Those who believe the market is growing slowly also are convinced there will be further consolidation in the industry. Prices are failing for CPTs, mostly due to competition. Witness growth in units that exceeds growth in dollars, even by the two largest competitors. Baxter, for example, says it is growing at the rate of between 8% and 10% in dollars, but by 10% to 12% in units. Sterile Concepts is expanding by 7% to 8% in units, but just 5% to 6% in dollars.

Hospitals and integrated health care systems alike are trying to reduce the number of vendors they deal with. The trend is moving steadily away from providers working with smaller companies in favor of deals with companies that offer a broader range of supplies.

Yet another factor is the unquestioned dominance of Baxter Healthcare in this market. No single company has pockets deep enough to give Baxter a run for its money by plucking away significant market share. Some, like consultant Rich Caffrey of R.F. Caffrey & Assoc., Inc., Brownsville, Vt., question whether the need for such a potentially costly rivalry even exists, given the current state of the segment. “Other companies cannot play a predatory role against Baxter,” he says. “Besides, no one can sustain the kind of one-year losses it would take to try.”

Here’s how the competition stacks up in the current custom pack market:

Baxter maintains command position

With about $450 million in annual CPT sales, 6 million units produced each year and approximately 1,000 full program customers (plus many more that use Baxter CPTs on a more limited basis), it’s easy to see why Baxter is the market leader, and why they take the most optimistic view of the state of the segment.

Jan McDonnell, vice president of marketing for Convertors and Custom Sterile, says that CPTs have reached the top five in line item expenditures in her customers’ operating room budgets, joining O.R. budget stalwarts such as pharmaceuticals, I.V. solutions and orthopedic implants. She estimates that between 60% and 70% of O.R. procedures utilize CPTs, up from just 30% to 40% in the late 1980s. The reason, she believes, is that CPTs allow hospitals to measure product costs per procedure, give them an opportunity to standardize product and cure some tough logistics problems along the way, including inventory reductions.

Service is the driver behind custom trays, McDonnell says. “The ability of a company to provide a high fill rate when a customer needs it is number one. It’s a cost vs. value issue.”

She points to Baxter’s BluePrint[TM] program, which was launched late last year, as Baxter’s latest innovation in the market. BluePrint allows a customer to look at a customer’s CPT usage, including component mix, optimization of sterilization costs, and the manner in which the kits are actually assembled with an eye toward cutting costs.

Baxter’s Procedure Based Delivery System[TM] (PBDS[TM]) is another new offering, though it takes a somewhat larger view of O.R. procedures. Basically, PBDS is an advanced CPT, “for customers ready to take the next step,” says McDonnell. About 75 hospitals use at least one PBDS module, which unites sterile custom packs with non-sterile components in a single unit. PBDS was officially launched in March at the Assn. of Operating Room Nurses congress in Atlanta.

McDonnell sees growth in CPTs for newer surgical procedures such as lap cholys, certain orthopedic procedures, angioplasty and interventional cardiac and ophthalmic procedures. Packs used in alternate site facilities like freestanding surgery centers is another area with potential for new Baxter sales.

Sterile Concepts number two, but trying hard

Like the market in general, Sterile Concepts’ business is growing, but less than it did five years ago. The company says it holds a 16% share of the overall market. Company CFO Randy Graham positions his company as “the low-cost provider of CPTs.” The difference, he says, is that while most of the other market players have at least some degree of vertical integration, custom trays are Sterile Concepts’ only business. The company entered the market in 1982 and today produces more than 2.5 million trays a year for its 1,300 customer accounts.

The recent (May 1) acquisition of Associated Medical Products, a regional tray assembler based in Minnetonka, Minn., boosted overall revenues to about $148 million from $132 million and gave the company a presence in the upper Midwest for the first time. Graham says one or two more acquisitions may soon follow. Longer term, however, the key to Sterile Concepts’ success may lie across the Atlantic in the European market, which has never before used CPTs to a large extent. To that end, an alliance was recently signed with a German distributor that carries, Graham believes, three-to-five-year potential for growth.

Sterile Concepts operates under the assumption that cost is the chief driver behind CPT sales. “In a managed care environment, hospitals need precise cost identification and want costs variable by procedure,” he says. Today’s hospital market, says Graham, depends on the direction that hospitals take. At one time it was in single-use products in a pack. But now CPTs are moving toward admission-to-discharge CPT packaging, including some non-sterile components.

In Graham’s view, three phases of CPTs currently exist. The first is a system of a pack for each procedure. The second is unitary or prepackaged kits of O.R. items that might include four to six different packs similar to PBDS that it calls Encompass. The third contains a predetermined mix of supplies used before and after surgery that includes care items and dressing sets, a system that requires the use of care maps.

Like many others, Sterile Concepts’ distribution channels experienced a shift in recent years. Today, about 70% of its packs are sold through distributors such as Owens, General Medical Corp., Richmond, Va., and Burrows Co., Wheeling, Ill., with the remainder sold direct to the customer. As recently as 1991, before the popularity of stockless and just-in-time programs took hold, that ratio was reversed.

Maxxim still in a whirlwind buying frenzy

This is another company that has grown through acquisition and is continuing strongly in that mode today, perhaps more than any other medical company. About $130 million worth of custom packs are now sold through Maxxim Medical’s case management division.

After its $6.7 million initial public offering in February 1990, a second offering two years later that netted $31.7 million and yet another stock sale that brought in $33.1 million, Maxxim acquired Argon Medical, a disposable products producer, from Bristol-Myers Squibb, New York. Then, it bought drape and gown maker Boundary Healthcare Products Co., Columbus, Miss., in December 1992. But the biggest buy came in July 1993, when Maxxim acquired CPT manufacturer Sterile Design Inc., Tampa, Fla., from Johnson & Johnson Medical Inc., Arlington, Texas., for $25 million.

There’s more. A kit packer, MedCare Packaging Inc., West Swanzey, N.H., was added recently. An alliance with Buffalo Grove, Ill.-based Medikmark, Inc., a producer of small (fewer than 12 component) trays, was signed in early June, just before Maxxim acquired Boyle Electrosurgical Systems, Charleston, S.C. At press time, still another major Maxxim deal – acquisition of a worldwide franchise to sell gloves manufactured by Becton Dickinson, Franklin Lakes, N.J. – was expected to close in late June.

Jack Cahill, Maxxim’s executive vice president of sales and marketing, places his company’s annual growth at between 4% and 8% in dollars, with unit growth “a little higher.” The company’s mission, he says, is to “help hospitals guard their costs,” and Maxxim is trying to reach that goal through both vertical and horizontal integration. “We want to provide our customers with one lead person who can offer a full range of products and help deliver the right mix of supplies.”

Maxxim sees growth in larger trays such as ones used in cardiovascular and orthopedic procedures. The company also has its eye on the growing alternate site market. As the company gravitates toward case management, its Custom Tray Management System is its latest product. Value Quote, a system that recommends functional equivalent products and provides a cost basis for annualized savings, is another. SmartCart, launched in March at AORN, combines sterile and non-sterile components.

The company has a 60-member sales force, a number that is actually trimmed down from recent years. However, more may soon be added as Becton glove sales pick up. The company is considering ways to restructure its rep compensation plans, possibly turning to compensation and payouts based on providing service to accounts rather than on sheer dollar volume driven through the system. Pay could also be based on maintaining base business or on increasing penetration in a given market.

DeRoyal’s DeBusk the CPT visionary

Though the company says it stands second – or at least no lower than third – in the CPT segment, most put DeRoyal Industries a solid fourth among the leaders. The Tennessee concern is privately owned, so accurate figures are unavailable. Little matter. This company is the undisputed market leader in innovation. Its president, Pete DeBusk, is an entrepreneur and dealmaker nonpareil who has earned near-universal respect from the rest of the pack.

If imitation is the sincerest form of flattery, DeBusk can easily live off the fumes of acclaim for years. DeRoyal was the first to recognize and react to changes in the hospital customer base when, in 1990, it introduced the TraceCart, the container of sterile and non-sterile components that everyone has aped in recent years. Baxter’s PBDS, Sterile Concepts’ Encompass, Maxxim’s Smart Cart, Medline’s Medical Procedure Costing Program and others all owe their success to DeRoyal’s TraceCan and its “open architecture.”

The company, says Bill Pittman, its group product director, sees no growth – only business swaps – in the core CPT sector. “There’s too much profit in large CPTs,” says Pittman. “Buying a CPT is like buying your dinner groceries at 7-11. It’s convenient, but very expensive.” Lower costs are the key, he says, along with allowing DeRoyal and its business partners to “strip out cost” by letting distributors place components in the TraceCart or in its newer cousin TracePak (also officially launched at AORN in March). DeRoyal targets regions with high managed care penetration, like Florida, California and Minnesota, in its efforts to sell its TraceCart/TracePak product, which, like the others, greatly assists in identifying and tracking product costs per procedure, a powerful aid in a competitive managed care district. In just its first three months since launch, nearly 100 hospitals and/or systems are involved in some stage of TracePak evaluation.

Medline on the rise

Though he says the company’s recent $40 million deal with Columbia/HCA started out “a little bit shaky,” Medline’s senior vice president of sales Dave Struve, believes the company’s just-opened, high-tech 100,000sf CPT facility in Waukegan, Ill., will refine service and ultimately triple Medline’s CPT sales to $100 million. Though closely held like DeRoyal, estimates are that, including revenue from the Columbia/HCA contract, the company today sells between $60 million and $70 million in CPTs a year. Medline has about 500 CPT customers (also including Columbia/HCA’s 318 hospitals) and makes more than 3,000 trays.

Struve sees the market moving toward procedure-based systems, and its Medical Procedure Costing Program (MPCP) does just that. Medline has made about 10 MPCP presentations to date. In his view, “The customer wants to identify guaranteed costs, add reusable products and then physician’s fees to track costs.”

Medline’s growth areas lie in heart trays and lap cholys, and Struve suggests that sales of emergency room trays will soon decline, pointing to today’s 11-year low in E.R. visits as proof.

Though Medline has had only a small presence in “doc in the box” operations, Struve says the company has just mobilized a five- or six-member sales force dedicated to working with dealers who supply such alternate sites.

COPYRIGHT 1995 J.B. Lippincott Company

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