SonoSite, Inc.

21919 30th Avenue Southeast
Bothell, Washington 98021
U.S.A.
Telephone: (425) 951-1200
Toll Free: (888) 482-9449
Fax: (425) 951-1201
Web site: http://www.sonosite.com

Public Company
Incorporated: 1998
Employees: 350
Sales: $73 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: SONO
NAIC: 334510 Electromedical and Electrotherapeutic Apparatus Manufacturing

SonoSite, Inc. is the industry pioneer in point-of-care ultrasound devices, a new, technologically advanced breed of medical equipment that is far smaller than conventional ultrasound systems. Spun off from ATL Ultrasound in 1998, SonoSite produces and markets a line of ultrasound devices that weigh between 2.5 pounds and six pounds, which greatly increases the flexibility and cost-effectiveness of performing ultrasound examinations. The company sells its products on a worldwide basis, relying on a direct sales model that has improved its ability to articulate the advantages of its technological innovation.

Origins

SonoSite’s niche within the medical equipment industry—a niche it created through its pioneering work—is predicated on technological advancements achieved roughly 40 years before the company’s founding. During the late 1950s, ultrasound emerged as a safe and noninvasive method of medical diagnosis. By using low power, high frequency sound waves, ultrasound offered physicians real-time dynamic images of tissues and bodily fluids. A transducer placed on the skin or in a body cavity near the targeted area of a patient received sound waves reflected from the patient’s tissues and bodily fluid. Based on the reflections received by the transducer, the ultrasound system measured and organized the sound waves to produce an image for visual examination. At first, ultrasound was used to ascertain the general shape, size, and structure of internal soft tissues and organs. In later years, as the technology evolved, ultrasound was used in a variety of medical disciplines such as radiology, obstetrics, gynecology, and cardiology. Ultrasound grew to be an invaluable aid to medical practitioners, saving time, money, and lives.

During the 1990s, SonoSite sought to make a revolutionary change in ultrasound technology. The company aimed to make an ultrasound device drastically smaller than extant models, a goal, if achieved and if accepted by the medical community, that promised to radically alter the ultrasound market. The pursuit of this goal, however, began as a project undertaken by another company.

In 1994, a company named ATL Ultrasound began working on the design and specifications for a miniaturized ultrasound device for diagnostic imaging. The work by Bothell, Washington-based ATL eventually attracted the attention of the federal government, giving the project sufficient life to justify the formation of a division within ATL’s corporate structure. In February 1996, the U.S. Office of Naval Research, under a grant through the U.S. Government Defense Advanced Research Projects Agency (DARPA), selected ATL among a consortium of entities to pursue further work with miniaturized ultrasound devices. DARPA, which awarded to ATL a two-year matching grant, was interested in a portable ultrasound device for use on the battlefield or for use in catastrophic events to diagnose victims of severe trauma. Aided by the grant and driven by its own financial investment, ATL stepped up its research and development of a portable, or “point-of-care,” ultrasound device. In February 1997, exactly one year after the DARPA grant, ATL grouped its portable ultrasound activities into the Handheld Systems Business Group, the immediate predecessor to SonoSite.

The work performed under the DARPA contract was delivered to the U.S. Department of Defense on time and under budget in November 1998, yielding the first portable ultrasound prototype. By the time the Handheld Systems Business Group completed this project, however, it had moved on to other, potentially more lucrative work. It had, in fact, ceased to exist in name.

1998 Spin Off

Handheld Systems Business Group spent slightly more than a year within ATL’s fold before its potential warranted the formation of a separate company. The final step in the evolution from project to division to company was made on April 6, 1998, when a new entity, SonoSite, was spun off as a separate company. Under the terms of the spin off, which included the company’s initial public offering of stock at $11.75 per share, an arrangement was made between ATL and SonoSite. SonoSite entered into a cross-license agreement that gave it exclusive right to use certain ATL technology existing on April 6, 1998 or developed during the three-year period following April 6, 1998, but only in ultrasound systems weighing 15 pounds or less. For its part, ATL was given the exclusive right to use SonoSite technology existing on April 6, 1998 or developed by the company during the three-year period following April 6, 1998 in ultrasound systems weighing more than 15 pounds.

The management team that led SonoSite as it started out on its own was drawn from ATL’s ranks. Heading the team was Kevin M. Goodwin, who began his career in the medical products industry as a national distribution manager for a company called American Hospital Supply Corporation. Goodwin left American Hospital to work for Picker International, where he was employed as area manager for the southwestern United States. Next, he landed a sales position at Baxter Healthcare. Goodwin distinguished himself during his tenure at Baxter Healthcare, becoming the top sales representative during his first year at the company’s American General Healthcare division. Goodwin joined ATL in 1987 and continued to excel, earning a promotion to vice-president and general manager for ATL’s operations in Asia Pacific, Latin America, Australia, and Canada (APLAC). During Goodwin’s stint governing APLAC, the unit recorded growth at a rate eclipsing all other ATL units. In recognition of his performance, ATL’s senior executives selected Goodwin to serve as vice-president and general manager of the Handheld Systems Business Group when the division was formed in February 1997. Goodwin was appointed president and chief executive officer of SonoSite upon its formation.

On the technological side of SonoSite, the company’s principal executives were Blake Little and Dr. Juin-Jet Hwang. Little, who held a Bachelor of Science degree in electrical engineering from the University of Washington, joined ATL in 1988. While at ATL, Little served in various capacities, including presiding as senior manager of product development for the company’s Front-end Design group. In this position, Little was responsible for ultrasound system architecture, circuit board, and microchip design tasks. When the Handheld Systems Business Group was spun off, Little started as the director of ultrasound imaging development before being promoted to vice-president and director of engineering. Dr. Hwang earned his doctorate in electrical engineering from the University of Tennessee. In the years leading up to his involvement with SonoSite, Dr. Hwang authored more than 30 scientific publications and taught at several universities. In 1980, he joined a company called ADR Ultrasound, which was acquired by ATL three years later. At ATL, Dr. Hwang served as the principal project engineer and principal system architect for several ATL products. He first began working on the development of point-of-care ultrasound devices in October 1995. When the Handheld Systems Business Group was formed, Dr. Hwang was appointed its chief scientist. Concurrent with the formation of SonoSite, Dr. Hwang was named the company’s chief technology officer.

SonoSite began its corporate life with control over potentially valuable technology but with no marketable product. Management believed, however, that the company could achieve financial viability once it opened a new market within the medical equipment industry. The company’s survival, as was the case with most industry pioneers, depended on its ability not only to deliver a product to market but also on its success in convincing its potential customer base that the new technology was worth the investment. From its perspective, SonoSite’s management was confident that healthcare providers would see the advantages of a portable, point-of-care ultrasound device. The size and complexity of traditional ultrasound systems generally forced physicians to refer patients to an imaging center, such as a hospital’s radiology department, where a trained sonographer performed the examination. In contrast, SonoSite’s technology promised ultrasound devices weighing roughly six pounds, far less than the 300-pound devices found in imaging centers. There were cost advantages as well, with handheld devices targeted for a sales price of roughly $25,000, as opposed to the $100,000 price tag of a traditional ultrasound system. In the years ahead, SonoSite’s most difficult task would be convincing the healthcare industry that its portable devices were superior to the existing products on the market.

Company Perspectives:

Our corporate mission is to deliver revolutionary ultrasound-based visualization products and services that improve healthcare. Our goal is to lead in the design, development, and commercialization of high performance, all-digital ultrasound devices. We plan to reach this goal by maximizing the productivity of our U.S. and European direct sales forces, raising market awareness of the SonoSite brand name, maintaining product and technology leadership, providing education services to healthcare professionals, and expanding into new and existing ultrasound markets.

The process of preaching the advantages of a portable ultrasound device to the healthcare industry actively began not long after SonoSite’s formation. In May 1998, the company received pre-market clearance from the U.S. Food and Drug Administration (FDA) for its ultrasound prototype, the SonoSite 180. The following month, SonoSite forged a U.S. distribution agreement with Physicians Sales and Service (PSS), a subsidiary of PSS World Medical. Through this agreement, the foundation was laid for the distribution of the SonoSite 180 system to private physicians’ offices. In January 1999, the company opened up another distribution channel by signing an agreement with another PSS World Medical subsidiary, Diagnostic Imaging. Through the agreement with Diagnostic Imaging, a distribution channel was opened to market the SonoSite 180 system to hospitals, imaging centers, and radiologists. In March 1999, the company received another pre-market clearance for an improved version of the SonoSite 180 system. The FDA’s approval covered ten clinical applications for the commercial version of SonoSite’s handheld device, including obstetrical, gynecology, abdominal, and cardiovascular imaging.

In September 1999, SonoSite began shipping the SonoSite 180 system worldwide, marking the company’s maturation into a genuine going enterprise. Improvements in the SonoSite 180 system followed, incorporating features that were offered in next-generation product lines, such as the SonoSite 180PLUS, which debuted in April 2001. Sales of SonoSite’s devices were sluggish, however, falling short of the company’s expectations. At the same time, SonoSite’s losses mounted, forcing management to re-address the way in which it conducted its business. Belief in the technology had not waned, but the way in which the company promoted its products and broadcast the superiority of its technology had begun to become a topic of debate. SonoSite’s financial problems, in the eyes of Goodwin, did not stem from technological issues but from the efficacy of the company’s sales and marketing efforts.

Direct Sales Spurs Growth in the 21st Century

Goodwin’s noted success in sales helped SonoSite begin to improve its financial position. In late 2000 and early 2001, the company started to assume far greater responsibility in its marketing efforts by shifting away from its reliance on third-party distributors and assembling a direct sales network in its place. By doing so, the company gained greater control over its approach to potential customers in the healthcare industry. The advantages of SonoSite’s innovative technology could thereby be conveyed with greater persuasiveness than could be expected from third-party distributors, whose interests ran beyond focusing exclusively on marketing the SonoSite brand name.

The adoption of a direct sales model was credited with sparking SonoSite’s financial growth. By the end of 2002, the company employed 50 direct sales representatives in the United States and 27 clinical application specialists. Overseas, the company continued to rely on third-party distributors in some areas, but direct sales operations had been established in the United Kingdom, France, Germany, and Spain. As the new sales and marketing approach was put into place, the company’s financial status improved. In 2000, annual revenues more than tripled, rising to $32 million. In 2001, the final tally amounted to more than $45 million. In 2002, sales reached $73 million, 42 percent of which came from international sales. Profitability continued to be a nagging problem, however, but a glimmer of hope arrived at the end of 2002, providing justifiable cause for celebration at the company’s Bothell headquarters.

In 2002, SonoSite posted a net loss of $7.7 million, far less than the $21.6 million recorded in 1999 and the $19 million registered in 2000, but a significant loss, nevertheless. Despite the sour news, the company’s fourth fiscal quarter in 2002 marked a turning point in SonoSite’s history. For the quarter, the company generated $25 million in sales and a profit of $869,000, the first profitable quarter in the company’s history. Goodwin, in a February 14, 2003 interview with Knight-Ridder/Tribune Business News, explained the mood in Bothell. ‘’People are very focused,” he said, “and the intensity is high. There is an air of satisfaction that we passed through this gate, but don’t think for a second that we’ll rest on it.”

As SonoSite prepared for the future, there were many challenging “gates” to pass through. Widespread acceptance of its technology remained only a hope by the time the company’s fifth anniversary passed. By mid-2002, approximately 1,000 of the 5,000 hospitals in the United States had purchased a SonoSite product. A substantially smaller number of private-practice physicians had invested in the company’s devices. In a June 3, 2002 article in Business Week, the magazine described the medical community’s response to SonoSite’s portable ultrasound devices as “moderately enthusiastic.” On a more positive note, there was a rush of excitement about new products being produced by the company, a clamor that emanated from industry pundits. In 2002, SonoSite received regulatory approval for two new products, including an “imaging stethoscope” marketed under the name “iLook.” Weighing 2.5 pounds, the iLook was a battery -or DC-powered ultrasound device with a touch-screen user interface that promised to give physicians immediate access to visual, diagnostic information in a variety of clinical settings. The introduction of the iLook 15 and the iLook 25 marked the next step in the technological revolution initiated by SonoSite, a company with much to prove, but also a company with considerable promise in the years ahead.

Principal Subsidiaries

SonoSite, Ltd. (United Kingdom); SonoSite France SARL; SonoSite GmbH (Germany); SonoSite Iberica, S.L. (Spain); SonoSite (Asia) Limited (China).

Principal Competitors

Acuson Corporation; Esaote S.p.A.; GE Medical Systems.

Key Dates:

1994:

ATL Ultrasound begins work on a miniaturized ultrasound device for diagnostic imaging.

1997:

ATL forms the Handheld Systems Business Group.

1998:

The Handheld Systems Business Group is spun off as SonoSite, Inc.

1999:

SonoSite ships its first products in September.

2002:

SonoSite records its first profitable fiscal quarter.

Further Reading

“Bothell, Wash.-Based Medical Device Firm SonoSite Posts first Quarterly Profit,” Knight-Ridder/Tribune Business News, February 14, 2003.

“For SonoSight, a Strong Pulse,” Business Week, June 3, 2002, p. 97.

McGrath, Courtney, “Good Things in Small Packages: Tiny SonoSite Seeks to Change How Doctors Examine Patients,” Kiplinger’s Personal Finance Magazine, March 2002, p. 66.

Ozretich, Joel, “Profitability May Be in Sight for Bothell’s SonoSite,” Puget Sound Business Journal, November 9, 2001, p. 27.

——, “SonoSite Shifts Tactics for Ultrasound Sales,” Puget Sound Business Journal, February 9, 2001, p. 6.

Timmerman, Luke, “SonoSite Sees Big Rival Right Before Its Eyes,” The Seattle Times, February 15, 2002, p. D1.

—Jeffrey L. Covell