Minntech Corporation

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Minntech Corporation

14605 28th Avenue North
Minneapolis, Minnesota 55447
U.S.A.
(612) 553-3300
Fax: (612) 553-3387

Public Company
Incorporated: 1974 as Renal Systems, Inc.
Employees: 350
Sales: $65.9 million (1997)
Stock Exchanges: NASDAQ
SICs: 3589 Service Industry Machinery, Not Elsewhere Classified; 3841 Surgical & Medical Instruments

Minntech Corporation, a leading producer and developer of dialysis solutions and sterilization systems, primarily markets to hospitals, clinics, and kidney treatment centers in the United States. Internally developed technologies generated an array of products used for open heart surgery and endoscopic procedures, as well as kidney dialysis. Minntech’s small but growing water filtration division, which serves medical and industrial markets, is set to expand into food and beverage markets.

An Uncertain Start in the 1970s

Louis C. Cosentino, a Brooklyn, New York native with a doctorate in biomedical engineering, joined Minnesota-based Medtronic, Inc. in 1972 as director of advanced research and development. One of his assignments involved improving kidney dialysis fluids, and Cosentino suggested that Medtronic extend their business into building better kidney dialysis equipment as well. When the idea was rejected, Cosentino started his own business with $700,000 from private investors. Renal Systems, Inc. was established in 1974; in the first year the company produced 60,000 gallons of hemodialysis concentrates, which were used to prepare a dialysate, or salt solution, for kidney dialysis treatments.

According to Carol Pine and Susan Mundale’s January 1989 Corporate Report Minnesota article, the company’s early days were marked by uncertainty. The country was in an economic recession, and an oil embargo jeopardized Minntech’s raw material supply. Demand for its products actually threatened the company’s survival in 1976, when expenditures for raw materials exceeded cash on hand. Pine and Mundale wrote, “Renal Systems survived thanks to a loan guaranteed by a friend and member of the company’s board of directors, and because of Cosentino’s persistence and ability to rally employees.”

Minntech developed electronic devices for hemodialysis, such as a blood pump and an air bubble detector, and added to its line of concentrates by 1978. An automatic dialyzer reprocessing system, which rinsed, cleaned, tested, and sterilized dialyzers for reuse, was introduced in 1982 and sold under the name Renatron. And in 1983 a cold sterilant, which replaced cleaners such as bleach and formaldehyde, joined the list of Minntech’s kidney dialysis products.

Move to Public Ownership in the Early 1980s

The company brought in $6 million through a public stock offering in 1983, after which the company changed its name to Minntech. Sales for the fiscal year were nearly $12 million, with hemodialysis concentrates bringing in about 53 percent of revenues. The combination of new products and influx of capital seemed to bode well for the company, but the United States was in an era of health care cost containment.

Federal control of payments for Medicare patients was extended by the Medicare Prospective Payment System in 1983. With treatment reimbursements based on procedure classification rather than actual costs, hospitals had to cut back. Minntech sales fell to $8.1 million in 1985 and losses approached $1 million. The company cut personnel by 34 percent. Cosentino directed the company toward nondialysis and nonmedical product development to turn the tide.

In response to the cost-cutting trend, Minntech introduced a concentrate manufacturing system, the Renapak, which allowed dialysis facilities to prepare and store concentrates on-site. The company entered the cardiosurgery market via a hemoconcentrator, a devise that removed excess fluid from the blood during open heart surgery. Medical product giant C.R. Bard, Inc., which had already agreed to fund the development of a coronary angioplasty catheter reprocessor, agreed to contribute $1 million toward development of a blood oxygenator, a device that replaced lung function during open heart surgery. Bard, the world’s largest supplier of both coronary angioplasty catheters and disposable oxygenators, agreed to market the Minntech oxygenator exclusively for five years.

Costs related to oxygenator manufacturing start-up and the development of an industrial water purification product resulted in fiscal year 1988 losses of about a half million on $13 million in revenues. But according to a July 1988 Minneapolis/St Paul CityBusiness article by Diane Beulke, local analysts remained optimistic about the company’s future, in part because of the number of products it had in the works. Beulke wrote, “Minntech is somewhat unique among small medical device companies in its vertical integration. Everything from research and development to machine tooling to manufacturing, assembly, and quality control, and marketing is done by Minntech’s 150 employees at its plant in Plymouth.”

Minntech’s game plan paid off in fiscal 1989 with record revenues of $18.7 million, a 43 percent increase over fiscal 1988. Dialysis growth exceeded industry averages for the year, and the reprocessing and sterilant business grew by 40 percent for the third consecutive year. Blood oxygenators sales rebounded from a shaky start—Minntech had voluntarily recalled 2,500 units—and the company set record earnings of 48 cents per share. The core hemoconcé;ntrate segment of the business continued to thrive as well; Minntech ranked second in the worldwide market. The company opened a European subsidiary in 1991 to increase sales and reduce manufacturing and transportation costs.

The Pleasures and Perils of the Early 1990s

Minntech earned a spot on Forbes magazine’s 200 best small publicly traded companies list in 1992, 1993, and 1994 with a five-year return on equity of 19 percent. But internal and external forces slowed its growth. The medical technology sector, which had soared in 1990 and 1991, was on the decline and further depressed by President Clinton’s health care reform proposals. In addition, Minntech found a number of its new products stalled in lengthy U.S. Food and Drug Administration (FDA) approval processes.

But Cosentino kept the company forging ahead. With its Bard blood oxygenator contract set to expire, Minntech moved to expand its cardiosurgery division. The sales force was bolstered and more than half the 1995 fiscal year research and development budget was targeted toward the $200-$300 million cardiosurgery market. Nearly 40 percent of Minntech’s fiscal 1994 revenues of $47.5 million had been derived from the cardiosurgery unit. The minimum purchase deal with Bard had been bringing in more than $10 million in oxygenator sales per year.

Minntech had become one of the top three oxygenator makers in the world. A second generation oxygenator, which was about half the size of the original and required less of the patient’s blood to prime for use, was in the works. Cardiosurgery competitors included Minnesota-based companies Medtronic and Avecor Cardiovascular Inc., Colorado-based Cobe Cardiovascular Inc., and California-based Bentley Laboratories.

New products, such as the Primus dialyzer, a second generation Minntech artificial kidney, and the Cathetron catheter reprocessor, which was sold only in Europe, helped drive up sales in fiscal 1995. By moving toward the creation of complete medical product systems—everything from machines to chemicals—Minntech was positioning itself to be competitive in a market that was cutting its number of vendors to cut costs.

Demand for the proprietary hollow fibers used in a number of products pushed Minntech to scale up production. The expansion took a bite out of the company’s fiscal 1996 earnings and drove down its stock price. Minntech’s woes were soon compounded when the company advised hospitals to stop using its Biocor oxygenator because of nine incidents of unexplained blood pressure drops during surgical procedures over a nine-month period. Although no injuries were reported, and competitors’ products had reported similar incidents, Minntech’s stock price took another beating.

The Biocor, Minntech’s second generation oxygenator, had been used outside the United States since November of 1995, but FDA approval for domestic use was pending. Minntech canceled the advisory a month later, in July 1996, and reported that the pressure drop was user related and the problem would be addressed through retraining and modifications in instructions and product labeling.

Pressure on the company continued in October 1996, when the FDA moved to investigate charges by former Minntech employees regarding violations of federal regulations in the manufacture and distribution of kidney dialysis filters. The kidney dialysis filters—bundles of thousands of hollow fibers encased in clear plastic and surrounded by a salt solution— remove blood impurities in patients with kidney failure. Defective filters can further jeopardize the health of patients.

Minntech had only one competitor for the polysulfone filter, which worked more quickly than the standard polypropylene filters, but that competitor held 99 percent of the market. German-based filter maker Fresenius Ag merged with National Medical Care, a chain of 625 U.S. kidney dialysis centers, and created the world’s largest kidney dialysis company in October 1996.

Judith Yates Borger wrote in an October 17, 1996 St. Paul Pioneer Press article, “To be sure, the company is facing the toughest test of its 22-year history. Within the past year, about one-third of its management-level employees—including two chief financial officers and two vice-presidents—resigned or were fired.” Although founder Cosentino had earned praise for his in-depth knowledge of engineering, he had been criticized for his management style as the company grew. Minntech’s stock price, which had fallen by half within the past six months, was trading around the $11 mark when the FDA reported that it found only minor administrative deviations during its investigation.

A Change in Leadership and Future Direction

Chairman and CEO Cosentino stepped down from his operating duties in February 1997. Executive Vice-President Thomas J. McGoldrick stepped in as acting president and CEO and officially succeeded Cosentino in March. Cosentino remained on the board and later received a three-year scientific consulting contract. McGoldrick, a 12-year Minntech veteran, worked for Cardiac Pacemakers, Inc. and Medtronic prior to joining the company.

McGoldrick halted kidney dialysis filter production in March 1997 and shifted Minntech’s focus back toward kidney dialysis reprocessing equipment and kidney dialysis solutions, which provided the majority of 1996 revenues. The Cathetron catheter reprocessing system, which had been marketed only outside the United States, was discontinued as well. Minntech cut its work force by 20 percent and restructured internal operations. Product discontinuation contributed to a net loss of $3.4 million or 51 cents per share for the year ending March 31.

During fiscal 1997 dialysis products contributed 32 percent and reprocessing products brought in 38 percent of sales. Cardiosurgery sales, which had declined with the phaseout of the second minimum purchase agreement with Bard, produced 26 percent of sales. Water filtration brought in the remaining four percent. International sales, with main markets in Western Europe and the Far East, accounted for about 18 percent of total revenues.

Fiscal 1997 marked the first full year of Minntech Japan Corporation, a joint venture with Japanese investors to move cardiosurgery products into the Asian Pacific market. The company had already established hemoconcentrator sales through a private label agreement with a major Japanese corporation. Minntech B.V., based in The Netherlands, was slated to begin manufacturing operations in fiscal 1998.

New markets emerged on the horizon when the U.S. Environmental Protection Agency (EPA) approved the Minncare cold sterilant as a sanitizer for nonporous food contact surfaces in fiscal 1997. The product could now be sold to beverage, food, dairy, wine, and beer manufacturers.

Minntech moved to improve hemofilter sales by tapping into an established distribution and marketing network in October 1997. Minntech announced a multiyear exclusive distribution agreement with Baxter Healthcare Corporation, the principal U.S. operating subsidiary of Baxter International, Inc., a world market leader in biotechnology, cardiovascular medicine, renal and intravenous systems/medical products.

The Biocor blood oxygenator, which received clearance for U.S. sales in fiscal 1997 but had been delayed for more than two years in the FDA approval process, entered a mature, highly competitive market. But Minntech’s reprocessing products were well positioned to support health care cost-cutting methods.